Working Paper
Estimating forward looking Euler equations with GMM estimators: an optimal instruments approach
Abstract: This paper compares different methods for estimating forward-looking output and inflation Euler equations and shows that weak identification can be an issue in conventional GMM estimation. The authors propose a GMM procedure that imposes the dynamic constraints implied by the forward-looking relation on the instruments set. This ?optimal instruments? procedure is more reliable than conventional GMM, and it provides a robust alternative to estimating dynamic macroeconomic relations. Empirical applications of this procedure suggest only a limited role for expectational terms.
Keywords: Keynesian economics; Macroeconomics;
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Bibliographic Information
Provider: Federal Reserve Bank of Boston
Part of Series: Working Papers
Publication Date: 2004
Number: 04-2