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Identification Using Stability Restrictions

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  • Leandro M. Magnusson

    ()
    (Department of Economics, Tulane University)

  • Sophocles Mavroeidis

    (Brown University)

Abstract

Structural change, typically induced by policy regime shifts, is a common feature of dynamic economic models. We show that structural change can be used constructively to improve the identification of structural parameters that are stable over time. A leading example is models that are immune to the well-known Lucas (1976) critique. This insight is used to develop novel econometric methods that extend the widely used generalized method of moments (GMM). The proposed methods yield improved inference in a leading macroeconomic policy model.

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File URL: http://econ.tulane.edu/RePEc/pdf/tul1116.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1116.

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Length: 42 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:tul:wpaper:1116

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Keywords: GMM; identification; structural stability; Lucas critique; new Keynesian models;

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References

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  1. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  2. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
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  5. Donald W. K. Andrews & Marcelo J. Moreira & James H. Stock, 2006. "Optimal Two-Sided Invariant Similar Tests for Instrumental Variables Regression," Econometrica, Econometric Society, vol. 74(3), pages 715-752, 05.
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  7. Rossi, Barbara, 2002. "Optimal Tests for Nested Model Selection with Underlying Parameter Instability," Working Papers 02-05, Duke University, Department of Economics.
  8. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
  9. Pierre Perron, 2005. "Dealing with Structural Breaks," Boston University - Department of Economics - Working Papers Series WP2005-017, Boston University - Department of Economics.
  10. Hendry, David F. & Massmann, Michael, 2007. "Co-Breaking: Recent Advances and a Synopsis of the Literature," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 33-51, January.
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  15. James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues 94-13, Federal Reserve Bank of Chicago.
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  17. Barbara Rossi & Raffaella Giacomini, 2010. "Model Comparisons in Unstable Environments," Working Papers 10-29, Duke University, Department of Economics.
  18. Kleibergen, Frank & Mavroeidis, Sophocles, 2009. "Weak Instrument Robust Tests in GMM and the New Keynesian Phillips Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(3), pages 293-311.
  19. Sowell, Fallaw, 1996. "Optimal Tests for Parameter Instability in the Generalized Method of Moments Framework," Econometrica, Econometric Society, vol. 64(5), pages 1085-1107, September.
  20. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
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  22. Arthur Lewbel, 2003. "Using Heteroskedasticity to Identify and Estimate Mismeasured and Endogenous Regressor Models," Boston College Working Papers in Economics 587, Boston College Department of Economics, revised 15 Dec 2010.
  23. Fabio Canova, 2009. "Comment to "Weak instruments robust tests in GMM and the New Keynesian Phillips curve" by Frank Kleibergen and Sophocles Mavroeidis," Economics Working Papers 1159, Department of Economics and Business, Universitat Pompeu Fabra.
  24. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
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Cited by:
  1. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, . "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Working Paper 84656, Harvard University OpenScholar.
  2. Bertille Antoine & Otilia Boldea, 2014. "Efficient Inference with Time-Varying Identification Strength," Discussion Papers dp14-03, Department of Economics, Simon Fraser University.

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