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Simulation-Based Tests of Forward-Looking Models Under VAR Learning Dynamics

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  • Luca FANELLI

    (Universit… di Bologna, Dip. di Scienze Statistiche)

  • Giulio PALOMBA

    ([n.a.])

Abstract

In this paper we propose simulation-based techniques to investigate the finite sample performance of likelihood ratio (LR) tests for the nonlinear restrictions that arise when a class of forward-looking (FL) models, typically used in monetary policy analysis, is evaluated with Vector Autoregressive (VAR) models. We consider both `one-shot' tests and sequences of tests under a particular form of adaptive learning dynamics, where `boundedly rational' agents use VARs recursively to update their beliefs. The analysis is based on the comparison of the likelihood of the unrestricted and restricted VAR, and the p-values associated with the LR statistics are computed by Monte Carlo simulation. We also address the case where the variables of the FL model are approximated as non-stationary cointegrated processes. Application to the New Keynesian Phillips Curve in the euro area shows that the FL model of inflation dynamics is not rejected once the suggested simulation-based tests are applied. The result is robust to specification of the VAR as a stationary (albeit highly persistent) or cointegrated system. However, in the second case the imposition of cointegration restrictions changes the estimated degree of price stickiness.

Suggested Citation

  • Luca FANELLI & Giulio PALOMBA, 2007. "Simulation-Based Tests of Forward-Looking Models Under VAR Learning Dynamics," Working Papers 298, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  • Handle: RePEc:anc:wpaper:298
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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. Gunnar Bårdsen & Luca Fanelli, 2015. "Frequentist Evaluation of Small DSGE Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 33(3), pages 307-322, July.
    3. Ugo FRATESI, 2010. "The National and International Effects;of Regional Policy Choices: Agglomeration Economies, Peripherality and Territorial Characteristics," Working Papers 344, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    4. Fabio FIORILLO & Agnese SACCHI, 2010. "I Want to Free-ride. An Opportunistic View on Decentralization Versus Centralization Problem," Working Papers 346, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    5. Frédérique Bec & Patrick Kanda, 2019. "Is inflation driven by survey-based, VAR-based or myopic expectations?," Working Papers hal-02175836, HAL.
    6. Nymoen, Ragnar & Swensen, Anders Rygh & Tveter, Eivind, 2012. "Interpreting the evidence for New Keynesian models of inflation dynamics," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 253-263.
    7. Luca RICCETTI, 2011. "A Copula-GARCH Model for Macro Asset Allocation of a Portfolio with Commodities: an Out-of-Sample Analysis," Working Papers 355, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    8. Fanelli, Luca, 2008. "Evaluating New Keynesian Phillips Curve under VAR-Based Learning," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-24.
    9. Luca Fanelli, 2009. "Estimation of quasi-rational DSGE monetary models," Quaderni di Dipartimento 3, Department of Statistics, University of Bologna.
    10. Giray Gozgor, 2013. "The New Keynesian Phillips Curve in an Inflation Targeting Country: The Case of Turkey," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 6(1), pages 7-18, April.
    11. Elena AMBROSETTI & Eralba CELA & Tineke FOKKEMA, 2011. "The Remittances Behaviour of the Second Generation in Europe: Altruism or Self-Interest?," Working Papers 368, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    12. Bec, Frédérique & Kanda, Patrick, 2020. "Is inflation driven by survey-based, VAR-based or myopic expectations? An empirical assessment from US real-time data," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    13. Luca RICCETTI, 2010. "Minimum Tracking Error Volatility," Working Papers 340, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.

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    More about this item

    Keywords

    Monte Carlo test; VAR; adaptive learning; cross-equation restrictions; forward-looking model; new Keynesian Phillips curve; simulation techniques;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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