The 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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Paper provided by Duke University, Department of Economics in its series Working Papers with number
97-14.
Length: Date of creation: 1997 Date of revision: Publication status: Published in REVIEW OF ECONOMICS AND STATISTICS, Vol. 80, 1998, pages 389-398 Handle: RePEc:duk:dukeec:97-14
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