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Measurement with minimal theory

  • Ellen R. McGrattan

Applied macroeconomists interested in identifying the sources of business cycle fluctuations typically have no more than 40 or 50 years of data at a quarterly frequency. With sample sizes that small, identifi cation may not be possible even with correctly specifi ed representations of the data. In this article, I investigate whether small samples are indeed a problem for some commonly used statistical representations. I compare three—a vector autoregressive moving average (VARMA), an unrestricted state space, and a restricted state space—that are all consistent with the same prototype business cycle model. The statistical representations that I consider differ in the amount of a priori theory that is imposed, but all are correctly specifi ed. I fi nd that the identifying assumptions of VARMAs and unrestricted state space representations are too minimal: the range of estimates for statistics of interest for business cycle researchers is so large as to be uninformative.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2010)
Issue (Month): July ()
Pages: 2-13

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Handle: RePEc:fip:fedmqr:y:2010:i:july:p:2-13:n:v.33no.1
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  1. Burmeister, Edwin & Wall, Kent D & Hamilton, James D, 1986. "Estimation of Unobserved Expected Monthly Inflation Using Kalman Filtering," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(2), pages 147-60, April.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?," NBER Working Papers 14430, National Bureau of Economic Research, Inc.
  3. Hannan, E J, 1976. "The Identification and Parameterization of ARMAX and State Space Forms," Econometrica, Econometric Society, vol. 44(4), pages 713-23, July.
  4. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
  5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Business cycle accounting," Working Papers 625, Federal Reserve Bank of Minneapolis.
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