Review of Proxy Vector Autoregressive Analysis

Abstract

In structural vector autoregressive analysis, it has become quite popular to identify some structural shocks of interest by external instruments or proxies. This study points out a variety of areas where such proxies have been used and sketches the way the proxies have been constructed. It reviews identification and estimation methods that have been considered in this context. Moreover, it points out some features, such as heteroskedasticity, nonfundamentalness of the shocks, and violations of the standard assumptions for proxies that might result in complications.