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Full-versus limited-information estimation of a rational-expectations model: Some numerical comparisons

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  • West, Kenneth D.

Abstract

This paper compares numerically the asymptotic distributions of parameter estimates and test statistics associated with two estimation techniques: (a)a limited information one, which uses instrumental variables to estimate a single equation (Hansen and Singleton (1982)), and (b)a full information one, which uses a procedure asymptotically equivalent to maximum likelihood to simultaneously estimate multiple equations (Hansen and Sargent (1980)). The paper compares the two with respect to both (1)asymptotic efficiency under the null hypothesis of no misspecification, and (2)asymptotic bias and power in the presence of certain local alternatives. It is found that: (l)Full information standard errors are only moderately smaller than limited information standard errors. (2)When the model is misspecified, full information tests tend to be more powerful, and its parameter estimates tend to be more biased. This suggests that at least in the model considered here, the gains from the use of the less robust and computationally more complex full information technique are not particularly large.
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  • West, Kenneth D., 1986. "Full-versus limited-information estimation of a rational-expectations model: Some numerical comparisons," Journal of Econometrics, Elsevier, vol. 33(3), pages 367-385, December.
    • Handle: RePEc:eee:econom:v:33:y:1986:i:3:p:367-385
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    1. Hansen, Lars Peter & Sargent, Thomas J., 1982. "Instrumental variables procedures for estimating linear rational expectations models," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 263-296.
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    7. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    8. Kenneth D. West, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 553-580.
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    2. Fanelli, Luca, 2012. "Determinacy, indeterminacy and dynamic misspecification in linear rational expectations models," Journal of Econometrics, Elsevier, vol. 170(1), pages 153-163.
    3. Sènakpon F.A. Dedehouanou & Dugassa Aichatou Ousseini & Abdoulaziz Laouali Harouna & Jabir Maimounata, 2015. "Spillovers from Off-farm Self-Employment Opportunities in Rural NIGER," Working Papers 2015/03, Maastricht School of Management.
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    7. Fuhrer, Jeffrey C. & Moore, George R. & Schuh, Scott D., 1995. "Estimating the linear-quadratic inventory model Maximum likelihood versus generalized method of moments," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 115-157, February.
    8. Kenneth D. West, 1993. "Inventory Models," NBER Technical Working Papers 0143, National Bureau of Economic Research, Inc.
    9. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
    10. Nikolay Iskrev, 2013. "On the distribution of information in the moment structure of DSGE models," 2013 Meeting Papers 339, Society for Economic Dynamics.

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