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Examining bias in estimators of linear rational expectations models under misspecification

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  • Jondeau, Eric
  • Le Bihan, Hervé

Abstract

Most rational expectations models involve equations in which the dependent variable is a function of its lags and its expected future value. We investigate the asymptotic bias of generalized method of moment (GMM) and maximum likelihood (ML) estimators in such models under misspecification. We consider several misspecifications, and focus more specifically on the case of omitted dynamics in the dependent variable. In a stylized DGP, we derive analytically the asymptotic biases of these estimators. We establish that in many cases of interest the two estimators of the degree of forward-lookingness are asymptotically biased in opposite direction with respect to the true value of the parameter. We also propose a quasi-Hausman test of misspecification based on the difference between the GMM and ML estimators. Using Monte-Carlo simulations, we show that the ordering and direction of the estimators still hold in a more realistic New Keynesian macroeconomic model. In this set-up, misspecification is in general found to be more harmful to GMM than to ML estimators.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 143 (2008)
Issue (Month): 2 (April)
Pages: 375-395

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Handle: RePEc:eee:econom:v:143:y:2008:i:2:p:375-395

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Web page: http://www.elsevier.com/locate/jeconom

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Citations

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Cited by:
  1. Imbs, Jean & Jondeau, Eric & Pelgrin, Florian, 2007. "Aggregating Phillips curves," Working Paper Series 0785, European Central Bank.
  2. Luca Fanelli, 2009. "Estimation of quasi-rational DSGE monetary models," Quaderni di Dipartimento 3, Department of Statistics, University of Bologna.
  3. Fanelli, Luca, 2012. "Determinacy, indeterminacy and dynamic misspecification in linear rational expectations models," Journal of Econometrics, Elsevier, vol. 170(1), pages 153-163.
  4. Le Bihan, Hervé, 2008. "1958-2008, avatars et enjeux de la courbe de Phillips
    [The Phillips curve at fifty]
    ," MPRA Paper 12119, University Library of Munich, Germany.
  5. Rolf Scheufele, 2008. "Evaluating the German (New Keynesian) Phillips Curve," IWH Discussion Papers 10, Halle Institute for Economic Research.

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