Marco Mazzali | Searcharxiv

arXiv2026

Global factors for local shocks in a data-scarce environment: with an application to regional fiscal multipliers in Italy

We propose a novel econometric methodology for Structural Vector Autoregressions with external instruments (`proxy-SVARs' or `SVAR-IVs') in panel data characterized by strong cross-sectional dependence, dynamic heterogeneity, and limited availability of direct external instruments for the shocks of interest. For each unit, we specify a Factor-Augmented proxy-SVAR (`proxy-FA-SVAR') that incorporates factors summarizing cross-sectional information from the non-policy variables of the system. The effects of the policy shocks are then recovered indirectly by estimating unit-specific policy reaction functions through a Minimum Distance approach. Identification relies on global instruments for the non-policy shocks; that is, proxies common to all units in the panel, internally constructed from a separate SVAR estimated on factors for the policy and non-policy variables. These global instruments can be complemented with local (idiosyncratic) instruments constructed from auxiliary unit-level SVARs. Their joint use renders the proxy-FA-SVARs overidentified and therefore statistically testable. We illustrate the methodology by estimating government spending multipliers for Italian NUTS-2 regions using annual data. The global and local instruments for the regional output shocks are obtained from Blanchard-Perotti-type SVARs.

econ.EM↗

arXiv2023

Robust Impulse Responses using External Instruments: the Role of Information

External-instrument identification leads to biased responses when the shock is not invertible and the measurement error is present. We propose to use this identification strategy in a structural Dynamic Factor Model, which we call Proxy DFM. In a simulation analysis, we show that the Proxy DFM always successfully retrieves the true impulse responses, while the Proxy SVAR systematically fails to do so when the model is either misspecified, does not include all relevant information, or the measurement error is present. In an application to US monetary policy, the Proxy DFM shows that a tightening shock is unequivocally contractionary, with deteriorations in domestic demand, labor, credit, housing, exchange, and financial markets. This holds true for all raw instruments available in the literature. The variance decomposition analysis highlights the importance of monetary policy shocks in explaining economic fluctuations, albeit at different horizons.

econ.EM↗