TY  - SER
AU  - Gabaix, Xavier
AU  -  Koijen, Ralph S. J.
TI  - Granular Instrumental Variables
SN  - 0022-3808
PB  - Journal of Political Economy
KW  -  Economic Activity
KW  -  Economic Environments
KW  -  Granular Instrumental Variables
KW  - Idiosyncratic Shocks
N2  - We develop a new method to construct instruments in a broad class of economic environments. In the economies we study, a few large firms, industries, or countries account for an important share of economic activity. Idiosyncratic shocks to these large players significantly affect aggregate outcomes and are valid instruments. We provide a methodology to extract these idiosyncratic shocks to create granular instrumental variables (GIVs), which are size-weighted sums of idiosyncratic shocks. We show how GIVs enable us to estimate causal parameters, such as elasticities and multipliers, and are applicable in a broad range of empirically relevant settings
UR  - https://www.journals.uchicago.edu/doi/10.1086/728743
ER  -