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Simulation-Based Finite-Sample Inference in Simultaneous Equations

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  • Lynda Khalaf
  • Jean-Marie Dufour

Abstract

In simultaneous equation (SE) contexts, nuisance parameter, weak instruments and identification problems severely complicate exact and asymptotic tests (except for very specific hypotheses). In this paper, we propose exact likelihood based tests for possibly nonlinear hypotheses on the coefficients of SE systems. We discuss a number of bounds tests and Monte Carlo simulation based tests. The latter involves maximizing a randomized p-value function over the relevant nuisance parameter space which is done numerically by using a simulated annealing algorithm. We consider limited and full information models. We extend, to non-Gaussian contexts, the bound given in Dufour (Econometrica, 1997) on the null distribution of the LR criterion, associated with possibly non-linear- hypotheses on the coefficients of one Gaussian structural equation. We also propose a tighter bound which will hold: (i) for the limited information (LI) Gaussian hypothesis considered in Dufour (1997) and for more general, possibly cross-equation restrictions in a non-Gaussian multi-equation SE system. For the specific hypothesis which sets the value of the full vector of endogenous variables coefficients in a limited information framework, we extend the Anderson-Rubin test to the non-Gaussian framework. We also show that Wang and Zivot's (Econometrica, 1998) asymptotic bounds-test may be seen as an asymptotic version of the bound we propose here. In addition, we introduce a multi-equation Anderson-Rubin-type test. Illustrative Monte Carlo experiments show that: (i) bootstrapping standard instrumental variable (IV) based criteria fails to achieve size control, especially (but not exclusively) under near non-identification conditions, and (ii) the tests based on IV estimates do not appear to be boundedly pivotal and so no size-correction may be feasible. By contrast, likelihood ratio based tests work well in the experiments performed

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 239.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:239

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Keywords: Simultaneous Equation; Weak Instruments; Monte Carlo test; Identification;

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Cited by:
  1. Khalaf, Lynda & Kichian, Maral, 2003. "Are New Keynesian Phillips Curved Identified?," Cahiers de recherche, GREEN 0312, GREEN.
  2. DUFOUR, Jean-Marie, 2005. "Monte Carlo Tests with Nuisance Parameters: A General Approach to Finite-Sample Inference and Nonstandard Asymptotics," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2005-03, Universite de Montreal, Departement de sciences economiques.
  3. Jean-Marie Dufour & Lynda Khalaf & Maral Kichian, 2005. "Inflation Dynamics and the New Keynesian Phillips Curve: an Identification Robust Econometric Analysis," CIRANO Working Papers, CIRANO 2005s-30, CIRANO.

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