Simulation-Based Tests of Forward-Looking Models Under VAR Learning Dynamics
AbstractIn this paper we propose simulation-based techniques to investigate the finite sample performance of likelihood ratio (LR) tests for the nonlinear restrictions that arise when a class of forward-looking (FL) models, typically used in monetary policy analysis, is evaluated with Vector Autoregressive (VAR) models. We consider both `one-shot' tests and sequences of tests under a particular form of adaptive learning dynamics, where `boundedly rational' agents use VARs recursively to update their beliefs. The analysis is based on the comparison of the likelihood of the unrestricted and restricted VAR, and the p-values associated with the LR statistics are computed by Monte Carlo simulation. We also address the case where the variables of the FL model are approximated as non-stationary cointegrated processes. Application to the New Keynesian Phillips Curve in the euro area shows that the FL model of inflation dynamics is not rejected once the suggested simulation-based tests are applied. The result is robust to specification of the VAR as a stationary (albeit highly persistent) or cointegrated system. However, in the second case the imposition of cointegration restrictions changes the estimated degree of price stickiness.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali in its series Working Papers with number 298.
Date of creation: Sep 2007
Date of revision:
Monte Carlo test; VAR; adaptive learning; cross-equation restrictions; forward-looking model; new Keynesian Phillips curve; simulation techniques;
Other versions of this item:
- Luca Fanelli & Giulio Palomba, 2011. "Simulation‐based tests of forward‐looking models under VAR learning dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(5), pages 762-782, 08.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-30 (All new papers)
- NEP-CBA-2007-09-30 (Central Banking)
- NEP-ECM-2007-09-30 (Econometrics)
- NEP-MAC-2007-09-30 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fanelli, Luca, 2008.
"Evaluating the New Keynesian Phillips Curve under VAR-Based Learning,"
Economics Discussion Papers
2008-15, Kiel Institute for the World Economy.
- Fanelli, Luca, 2007. "Evaluating the New Keynesian Phillips Curve under VAR-based learning," MPRA Paper 1616, University Library of Munich, Germany.
- Mavroeidis, Sophocles, 2005. "Identification Issues in Forward-Looking Models Estimated by GMM, with an Application to the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 421-48, June.
- Binder,M. & Pesaran,H.M., 1995.
"Multivariate Rational Expectations Models and Macroeconomic Modelling: A Review and Some New Results,"
Cambridge Working Papers in Economics
9415, Faculty of Economics, University of Cambridge.
- Michael Binder & M. Hashem Pesaran, 1994. "GAUSS and Matlab codes for Multivariate Rational Expectations Models and Macroeconometric Modelling: A Review and Some New Results," QM&RBC Codes 74, Quantitative Macroeconomics & Real Business Cycles.
- Yamada, Hiroshi & Toda, Hiro Y., 1998. "Inference in possibly integrated vector autoregressive models: some finite sample evidence," Journal of Econometrics, Elsevier, vol. 86(1), pages 55-95, June.
- Dufour, Jean-Marie, 2006.
"Monte Carlo tests with nuisance parameters: A general approach to finite-sample inference and nonstandard asymptotics,"
Journal of Econometrics,
Elsevier, vol. 133(2), pages 443-477, August.
- Jean-Marie Dufour, 2005. "Monte Carlo tests with nuisance parameters: a general approach to finite-sample inference and non-standard asymptotics," CIRANO Working Papers 2005s-02, CIRANO.
- DUFOUR, Jean-Marie, 2005. "Monte Carlo Tests with Nuisance Parameters: A General Approach to Finite-Sample Inference and Nonstandard Asymptotics," Cahiers de recherche 2005-03, Universite de Montreal, Departement de sciences economiques.
- Rossi, Barbara & Inoue, Atsushi, 2003.
"Recursive Predictability Tests for Real-Time Data,"
03-24, Duke University, Department of Economics.
- Sargent, Thomas J., 1979.
"A note on maximum likelihood estimation of the rational expectations model of the term structure,"
Journal of Monetary Economics,
Elsevier, vol. 5(1), pages 133-143, January.
- Thomas J. Sargent, 1978. "A note on maximum likelihood estimation of the rational expectations model of the term structure," Staff Report 26, Federal Reserve Bank of Minneapolis.
- Luca Fanelli, 2008.
"Testing the New Keynesian Phillips Curve Through Vector Autoregressive Models: Results from the Euro Area,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 70(1), pages 53-66, 02.
- Luca Fanelli, 2006. "Testing the New Keynesian Phillips Curve through Vector Autoregressive models : Results from the Euro area," Quaderni di Dipartimento 0, Department of Statistics, University of Bologna.
- Fanelli, Luca, 2005. "Testing the New Keynesian Phillips curve through Vector Autoregressive models: Results from the Euro area," MPRA Paper 1617, University Library of Munich, Germany, revised Jan 2007.
- Johansen, Soren & Swensen, Anders Rygh, 1999. "Testing exact rational expectations in cointegrated vector autoregressive models," Journal of Econometrics, Elsevier, vol. 93(1), pages 73-91, November.
- Geert Bekaert, 2001.
"Expectations Hypotheses Tests,"
Journal of Finance,
American Finance Association, vol. 56(4), pages 1357-1394, 08.
- Campbell, John Y & Shiller, Robert J, 1987.
"Cointegration and Tests of Present Value Models,"
Journal of Political Economy,
University of Chicago Press, vol. 95(5), pages 1062-88, October.
- John Y. Campbell & Robert J. Shiller, 1988. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
- Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
- Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
- Dufour, Jean-Marie & Jouini, Tarek, 2006. "Finite-sample simulation-based inference in VAR models with application to Granger causality testing," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 229-254.
- Hansen, Lars Peter & Sargent, Thomas J., 1980.
"Formulating and estimating dynamic linear rational expectations models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 2(1), pages 7-46, May.
- Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
- Ugo FRATESI, 2010. "The National and International Effects;of Regional Policy Choices: Agglomeration Economies, Peripherality and Territorial Characteristics," Working Papers 344, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
- Fabio FIORILLO & Agnese SACCHI, 2010. "I Want to Free-ride. An Opportunistic View on Decentralization Versus Centralization Problem," Working Papers 346, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
- Nymoen, Ragnar & Rygh Swensen, Anders & Tveter, Eivind, 2011. "Interpreting the evidence for New Keynesian models of inflation dynamics," Memorandum 23/2011, Oslo University, Department of Economics.
- Gunnar Bårdsen & Luca Fanelli, 2013. "Frequentist evaluation of small DSGE models," Working Paper Series 14113, Department of Economics, Norwegian University of Science and Technology.
- Luca RICCETTI, 2011. "A Copula-GARCH Model for Macro Asset Allocation of a Portfolio with Commodities: an Out-of-Sample Analysis," Working Papers 355, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
- Fanelli, Luca, 2008. "Evaluating New Keynesian Phillips Curve under VAR-Based Learning," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(33), pages 1-24.
- Elena AMBROSETTI & Eralba CELA & Tineke FOKKEMA, 2011. "The Remittances Behaviour of the Second Generation in Europe: Altruism or Self-Interest?," Working Papers 368, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
- Luca RICCETTI, 2010. "Minimum Tracking Error Volatility," Working Papers 340, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maurizio Mariotti).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.