Weak Instrument Bias in Impulse Response Estimators
Abstract: We approximate the finite-sample distribution of impulse response function (IRF) estimators that are just-identified with a weak instrument using the conventional local-to-zero asymptotic framework. Since the distribution lacks a mean, we assess bias using the mode and conclude that researchers prioritizing robustness against weak instrument bias should favor vector autoregressions (VARs) over local projections (LPs). Existing testing procedures are ill-suited for assessing weak instrument bias in IRF estimates, and we propose a novel simple test based on the usual first-stage F-statistic. We investigate instrument strength in several applications from the literature, and discuss to what extent structural parameters must be restricted ex-ante to reject meaningful bias due to weak identification.
DOI: https://doi.org/10.24149/wp2601