Econometric Issues in Forward-Looking Monetary Models.Report as inadecuate

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Reference: Sophocles Mavroeidis, (2002). Econometric Issues in Forward-Looking Monetary Models.Citable link to this page:


Econometric Issues in Forward-Looking Monetary Models.

Abstract: Recently, single equation approaches for estimating structural models have become popular inthe monetary economics literature. In particular, single-equation Generalized Method Momentsestimators have been used for estimating forward-looking models with rational expectations. Twoimportant examples are found in Clarida, Galí, and Gertler (1998) for the estimation of forward-looking Taylor rules and in Galí and Gertler (1999) for the estimation of a forward-looking model for inflation dynamics. In this thesis, we address the issues of identification which have beenoverlooked due to the incompleteness of the single-equation formulations. We provide extensionsto existing results on the properties of GMM estimators and inference under weak identification,pertaining to situations in which only functions of the parameters of interest are identified, andstructural residuals exhibit negative autocorrelation. We also characterize the power of the Hansentest to detect mis-specification, and address the issues arising from using too many irrelevantinstruments as well as from general corrections for residual autocorrelation, beyond what is impliedby the maintained model.In general, we show that the non-modelled variables cannot be weakly exogenous for theparameters of interest, and that they are informative about the identification and mis-specificationof the model. Modelling the reduced form helps identify pathological situations in which thestructural parameters are weakly identified and the GMM estimators are inconsistent and biasedin the direction of OLS.We also find the OLS bias to be increasing in the number of over-identifyinginstruments, even when the latter are irrelevant, thus demonstrating the dangers of using too manypotentially irrelevant instruments. Finally, with regards to the New Phillips curve, we concludethat, for the US economy, this model is either un-identified or mis-specified, casting doubts on itsutility as a model of inflation dynamics.

Bibliographic Details

Issue Date: 2002Identifiers

Urn: uuid:e342d49d-14e9-40d3-a1e0-1ed5ff917efe Item Description

Type: info:eu-repo/semantics/doctoralThesis;

Language: en


Author: Sophocles Mavroeidis - - - - Bibliographic Details Issue Date: 2002 - Identifiers Urn: uuid:e342d49d-14e9-40d3-a1e0-1ed5ff917efe



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