Adam Smith Business School

Dr Simon Lloyd, Bank of England

"Controls, Not Shocks: Estimating Dynamic Causal Effects in Macroeconomics"
Friday, 12 April. 15:00
Room 381 ASBS PGT

Abstract

A common approach to estimating causal effects in macroeconomics involves constructing orthogonalised `shocks' then integrating them into local projections or vector autoregressions. For a general set of estimators, we show that this two-step `shock-first' approach can be problematic for identification and inference relative to a one-step procedure which simply adds appropriate controls directly in the outcome regression. We show this analytically by comparing one- and two-step estimators without assumptions on underlying data-generating processes. In simple OLS settings, the two approaches yield identical coefficients, but two-step inference is unnecessarily conservative. More generally, one- and two-step estimates can differ due to omitted-variable bias in the latter when additional controls are included in the second stage or when employing non-OLS estimators. In monetary-policy applications controlling for central-bank information, one-step estimates indicate that the (dis)inflationary consequences of US monetary policy are more robust than previously realised, not subject to a 'price puzzle

Bio

Simon is a Research and Policy Advisor in Monetary Analysis. He joined the Bank in June 2017 after completing his Ph.D. at the University of Cambridge, and has worked in the Bank's International Directorate, as well as Financial Stability Strategy and Risk.

Simon’s research interests span international and monetary economics, and macro-finance. He has a particular interest in open-economy macroeconomics, international finance and the modelling of macroeconomic tail risks.

 

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First published: 6 February 2024