Publication Type

Working Paper

Publication Date

9-2025

Abstract

While max-share identiffcation has become increasingly popular in a wide range of applications, we show that its validity requires necessary and suffffcient conditions that are rarely satisffed in practice—the target variable’s response to the target shock must be (i) orthogonal to its responses to untargeted shocks and (ii) larger than combinations of those responses. Imposing additional restrictions on the target shock weakens but does not fully eliminate these conditions. We show that in practice, the weight max-share places on an identiffed untargeted shock can be obtained by projecting the response to that shock on the max-share response. We also theoretically characterize consequences of local and global violations to the identiffcation conditions. Empirically, the TFP news and main business cycle shocks identiffed by Kurmann and Sims (2021) and Angeletos et al. (2020) are, respectively, at least a third and a quarter contaminated.

Keywords

max-share identification, forecast error variance, impulse responses, single horizon approach, structural shocks, transitory shocks, news shock application, demand-and-supply example, variance decomposition, econometric methods

Discipline

Econometrics

Research Areas

Econometrics

Publisher

Singapore Management University

Embargo Period

1-22-2025

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Included in

Econometrics Commons

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