Heterogeneity-robust granular instruments

Granular instrumental variables (GIV) has experienced sharp growth in empirical macro-finance. The methodology’s rise showcases granularity’s potential for identification across many economic environments, like the estimation of spillovers and demand systems. I propose a new estimator–called robust granular instrumental variables (RGIV)–that enables studying unit-level heterogeneity in spillovers. Unlike existing methods that assume heterogeneity is a function of observables, RGIV leaves heterogeneity unrestricted. In contrast to the baseline GIV estimator, RGIV allows for unknown shock variances and does not require skewness in the size distribution. I find evidence of unit-level heterogeneity in applications to sovereign yield spillovers and the inelastic markets hypothesis.