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The External-Instrument SVAR-IV (Proxy-SVAR) framework is extended to accommodate
non-invertible and non-recoverable shocks, with formal tests provided
for recoverability and invertibility. The approach allows the estimation of unitvariance
shocks, absolute impulse responses, and variance decompositions for recoverable
shocks, and it coincides with the standard method when shocks are invertible.
Simulations demonstrate that it outperforms the Internal-Instrument approach due
to greater flexibility. Application to a monetary policy VAR uncovers substantial
effects of monetary policy on prices, differing from previous findings.
