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Factor analysis in a model with rational expectations

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  • Andreas Beyer
  • Roger E. A. Farmer
  • Jér�me Henry
  • Massimiliano Marcellino

Abstract

DSGE models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack or weakness of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the implications of using inappropriate instruments to achieve identification. In this paper, we analyze the practical relevance of these problems and we propose to combine factor analysis for information extraction from large data sets and generalized method of moment to estimate the parameters of systems of forward-looking equations. Using these techniques, we evaluate the robustness of recent findings on the importance of forward-looking components in the equations of a standard New-Keynesian model. Copyright � 2008 The Author(s). Journal compilation � Royal Economic Society 2008

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Bibliographic Info

Article provided by Royal Economic Society in its journal Econometrics Journal.

Volume (Year): 11 (2008)
Issue (Month): 2 (07)
Pages: 271-286

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Handle: RePEc:ect:emjrnl:v:11:y:2008:i:2:p:271-286

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References

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Cited by:
  1. Scheufele, Rolf, 2010. "Evaluating the German (New Keynesian) Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 145-164, August.
  2. Lanne, Markku & Luoto, Jani, 2013. "Autoregression-based estimation of the new Keynesian Phillips curve," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(3), pages 561-570.
  3. Dees, Stephane & Pesaran, M. Hashem & Smith, L. Vanessa & Smith, Ron P., 2008. "Identification of New Keynesian Phillips Curves from a Global Perspective," IZA Discussion Papers 3298, Institute for the Study of Labor (IZA).
  4. Norkute, Milda, 2013. "Assessing the New Keynesian Phillips Curve in the Euro Area Using Disaggregate Data," Working Papers, Lund University, Department of Economics 2013:31, Lund University, Department of Economics.
  5. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-88, March.

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