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

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Document pages: 31 pages

Abstract: Limited-information inference on New Keynesian Phillips Curves (NKPCs) andother single-equation macroeconomic relations is characterised by weak andhigh-dimensional instrumental variables (IVs). Beyond the efficiency concernspreviously raised in the literature, I show by simulation that ad-hoc selectionprocedures can lead to substantial biases in post-selection inference. Ipropose a Sup Score test that remains valid under dependent data, arbitrarilyweak identification, and a number of IVs that increases exponentially with thesample size. Conducting inference on a standard NKPC with 359 IVs and 179observations, I find substantially wider confidence sets than those commonlyfound.

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