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Identification and Structural Inference of Dynamic Causal Effects: Theory and Applications

Final Report Summary - ISIDCE (Identification and Structural Inference of Dynamic Causal Effects: Theory and Applications)

This project studied the problem of identification of causal effects in dynamic macroeconomic models using observational data. The project’s overall objective was to study the robustness of existing methods of inference to the problem of weak identification and to develop and apply new methods to specific macroeconomic questions of interest. The work was organized into several concurrent lines of inquiry.

The first line of inquiry looked at the problem of inference on subsets of the coefficients in linear instrumental variable regression models that is robust to weak instruments. A major contribution was published in the beginning (Guggenberger, Kleibergen, Mavroeidis and Chen, 2012), which improved upon the state of the art by greatly increasing the scope of a well-known weak-instrument robust test. The results in that paper were further refined to produce even more efficient tests under weak instruments in Mavroeidis (2015). These results contributed to the preparation of a successful research proposal by the fellow for a European Research Council Consolidator grant.

The second line of inquiry developed a new method of identification that is applicable to models estimated using time-series data, and applied the results to two important macroeconomic models. This method proposes to use variation induced by structural change as instruments to identify causal effects that are stable over time. This work produced one major publication, Magnusson and Mavroeidis (2014) and one working paper, Ascari, Magnusson and Mavroeidis (2015). Magnusson and Mavroeidis (2014) contains all of the methodological innovations and a substantive application to the estimation of the New Keynesian Phillips curve, which is the key equation (on the supply side) of the canonical macroeconomic model used around the world for academic discussion and policy analysis. The second paper, Ascari, Magnusson and Mavroeidis (2015), applies the new methods to the analysis of the Euler equation model for consumption and output, which is the key equation on the demand side.

The third line of inquiry looked at problems caused by weak identification in Bayesian analysis of macroeconomic models, which have been overlooked in the literature. This work produced one publication, Kleibergen and Mavroeidis (2014). This paper demonstrated commonly used “uninformative” priors produce spurious posterior inference because the posteriors tend to pile up at points of the parameter space where the likelihood is flat (points of non-identification). This problem can be avoided by using the Jeffreys prior. The paper provides an algorithm and advice on how to implement those robust priors to estimate structural vector autoregressions.

A fourth line of inquiry looked at the vast and growing literature on the empirical evidence on the New Keynesian Phillips curve, a model of inflation that is based on the Keynesian idea that prices are sticky. It produced a comprehensive review of the literature published as Mavroeidis, Plagborg-Moller and Stock (2014). No empirical consensus has emerged on the role of expectations in the inflation process or the empirical validity of the model. This paper provides a systematic review of the evidence, offers new insights that help us understand the empirical puzzles in the literature, and gives ideas for future research.

A fifth line of inquiry concerns applied robust methods of inference to the study of an important model of unemployment due to matching frictions. This work produced a working paper, Malcomson and Mavroeidis (2015).

Finally, a sixth line of inquiry studied the effect of learning on macroeconomic dynamics. It produced two papers, Chevillon and Mavroeidis (2015) and Chevillon, Lauderdale and Mavroeidis (2015). The former paper studies learning dynamics in a prototypical representative-agent forward-looking model in which agents’ beliefs are updated using linear learning algorithms. It shows that learning in this model can generate long memory endogenously, without any persistence in the exogenous shocks. Thus, it provides a new explanation for a phenomenon that has been well-documented for several economic time series. Chevillon, Lauderdale and Mavroeidis (2015) proposes a new type of economic shock, “doubts”, which induces changes to agents’ confidence in their beliefs about fundamentals. This shock has the potential to produce business cycle fluctuations similar to those produced by news and noise shocks.

The work has been disseminated through publication at peer-reviewed academic journals, producing a total of 9 publications and working papers, as well as through research presentations at numerous international academic conferences, and research and teaching seminars at universities and policy-making institutions.

All in all, this project has had a strong impact on the career reintegration of the fellow and his professional development. It is also likely to have a strong impact on current and future research in the area of macro-econometrics.

References

• Ascari, Guido, Leandro M. Magnusson and Sophocles Mavroeidis, (2015). “Empirical evidence on the Euler equation for consumption and output in the US”. Unpublished paper.
• Chevillon, Guillaume and Sophocles Mavroeidis, (2015). “Learning can generate long memory.” Unpublished paper.
• Chevillon, Guillaume, Katharine Lauderdale and Sophocles Mavroeidis, (2015). “The shadow of a doubt: the dynamic effects of expectational uncertainty.” Unpublished paper.
• Guggenberger, Patrik, Frank Kleibergen, Sophocles Mavroeidis and Linchun Chen, (2012). "On the Asymptotic Sizes of Subset Anderson–Rubin and Lagrange Multiplier Tests in Linear Instrumental Variables Regression," Econometrica, Econometric Society, vol. 80(6), pages 2649-2666.
• Kleibergen, Frank and Sophocles Mavroeidis (2014). "Identification Issues In Limited‐Information Bayesian Analysis Of Structural Macroeconomic Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(7), pages 1183-1209, November.
• Magnusson Leandro M. and Sophocles Mavroeidis, (2014). "Identification Using Stability Restrictions," Econometrica, Econometric Society, vol. 82, pages 1799-1851.
• Malcomson, James and Sophocles Mavroeidis, (2015). "Bargaining and Wage Rigidity in a Matching Model for the US," IZA Discussion Papers 8806, Institute for the Study of Labor (IZA).
• Mavroeidis, Sophocles, Mikkel Plagborg-Møller and James H. Stock, (2014). "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88.
• Mavroeidis, Sophocles, (2015). “New results on subvector testing in linear instrumental variables regression.”