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Examining bias in estimators of linear rational expectations models under misspecification

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  • Jondeau, Eric
  • Le Bihan, Hervé

Abstract

Most rational expectations models involve equations in which the dependent variable is a function of its lags and its expected future value. We investigate the asymptotic bias of generalized method of moment (GMM) and maximum likelihood (ML) estimators in such models under misspecification. We consider several misspecifications, and focus more specifically on the case of omitted dynamics in the dependent variable. In a stylized DGP, we derive analytically the asymptotic biases of these estimators. We establish that in many cases of interest the two estimators of the degree of forward-lookingness are asymptotically biased in opposite direction with respect to the true value of the parameter. We also propose a quasi-Hausman test of misspecification based on the difference between the GMM and ML estimators. Using Monte-Carlo simulations, we show that the ordering and direction of the estimators still hold in a more realistic New Keynesian macroeconomic model. In this set-up, misspecification is in general found to be more harmful to GMM than to ML estimators.

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  • Jondeau, Eric & Le Bihan, Hervé, 2008. "Examining bias in estimators of linear rational expectations models under misspecification," Journal of Econometrics, Elsevier, vol. 143(2), pages 375-395, April.
  • Handle: RePEc:eee:econom:v:143:y:2008:i:2:p:375-395
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    Cited by:

    1. Giovanni Angelini & Luca Fanelli, 2016. "Misspecification and Expectations Correction in New Keynesian DSGE Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 623-649, October.
    2. Joseph P. Byrne & Alexandros Kontonikas & Alberto Montagnoli, 2013. "International Evidence on the New Keynesian Phillips Curve Using Aggregate and Disaggregate Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 913-932, August.
    3. Giesen, Sebastian & Scheufele, Rolf, 2016. "Effects of incorrect specification on the finite sample properties of full and limited information estimators in DSGE models," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 1-18.
    4. Scheufele, Rolf, 2010. "Evaluating the German (New Keynesian) Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 21(2), pages 145-164, August.
    5. Sophocles Mavroeidis & Mikkel Plagborg-Møller & James H. Stock, 2014. "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 124-188, March.
    6. Jean Imbs & Eric Jondeau & Florian Pelgrin, 2006. "Aggregating Phillips curves," 2006 Meeting Papers 640, Society for Economic Dynamics.
    7. Hervé Le Bihan, 2009. "1958-2008, avatars et enjeux de la courbe de Phillips," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(4), pages 81-101.
    8. Fanelli, Luca, 2012. "Determinacy, indeterminacy and dynamic misspecification in linear rational expectations models," Journal of Econometrics, Elsevier, vol. 170(1), pages 153-163.
    9. Luca Fanelli, 2009. "Estimation of quasi-rational DSGE monetary models," Quaderni di Dipartimento 3, Department of Statistics, University of Bologna.

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