Inference on the New Keynesian Phillips Curve with Very Many Instrumental Variables

Max-Sebastian Dovì

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arXiv · 2101.09543

Inference on the New Keynesian Phillips Curve with Very Many Instrumental Variables

Max-Sebastian Dovì

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Abstract

Limited-information inference on New Keynesian Phillips Curves (NKPCs) and other single-equation macroeconomic relations is characterised by weak and high-dimensional instrumental variables (IVs). Beyond the efficiency concerns previously raised in the literature, I show by simulation that ad-hoc selection procedures can lead to substantial biases in post-selection inference. I propose a Sup Score test that remains valid under dependent data, arbitrarily weak identification, and a number of IVs that increases exponentially with the sample size. Conducting inference on a standard NKPC with 359 IVs and 179 observations, I find substantially wider confidence sets than those commonly found.

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Max-Sebastian Dovì. 2021-01-23. Inference on the New Keynesian Phillips Curve with Very Many Instrumental Variables. https://arxiv.org/abs/2101.09543

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