The Objective Function of Simulation Estimators Near the Boundary of the Unstable Region of the Parameter Space
AbstractThe paper examines the role of stability constraints in estimation by dynamic simulation. In particular, it analyzes the behavior of the objective function on either side of the boundary of the stability region of the parameter space. The main finding is that stability constraints may be ignored because the simulation-based objective function contains a built-in penalty to enforce stability. A key caveat, however, is that the dynamic stability of the auxiliary model that defines the moment conditions must be checked and enforced. An attempt to fit via simulation to moments defined by a dynamically unstable auxiliary model can be expected to lead to an ill-behaved objective function.
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Bibliographic InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 97-14.
Date of creation: 1997
Date of revision:
Publication status: Published in REVIEW OF ECONOMICS AND STATISTICS, Vol. 80, 1998, pages 389-398
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Other versions of this item:
- George Tauchen, 1998. "The Objective Function Of Simulation Estimators Near The Boundary Of The Unstable Region Of The Parameter Space," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 389-398, August.
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