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ML vs GMM Estimates of Hybrid Macroeconomic Models (With an Application to the "New Phillips Curve")

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  • Eric JONDEAU

    (Banque de France; ERUDITE, Université Paris 12 Val-de-Marne)

  • Hervé LE BIHAN

    (Banque de France)

Abstract

Many macroeconomic models (including the NKPC - "New Keynesian" Phillips Curve) involve hybrid equations, in which some variables depend on both their lags and leads. Hybrid models have produced conflicting empirical results: GMM (respectively ML) estimation find the forward- looking component to be large (small). A rationalization for this conflict is provided, allowing for two kinds of misspecifications (omitted dynamics and measurement error): we show analytically in a simple DGP that the GMM (ML) estimator overstates (understates) the size of the forward-looking component. Monte-Carlo experiments indicate this result has some generality. We use these findings to rationalize discrepancies observed in NKPC estimates.

Suggested Citation

  • Eric JONDEAU & Hervé LE BIHAN, 2003. "ML vs GMM Estimates of Hybrid Macroeconomic Models (With an Application to the "New Phillips Curve")," Econometrics 0303004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpem:0303004
    Note: Type of Document - Scientific Workplace; prepared on IBM PC ; to print on ; pages: 43; figures: included. This paper does not necessarily reflect the views of the Banque de France.
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    Cited by:

    1. Beyer, Andreas & Farmer, Roger E. A. & Henry, Jérôme & Marcellino, Massimiliano, 2005. "Factor analysis in a New-Keynesian model," Working Paper Series 510, European Central Bank.
    2. James M. Nason & Gregor W. Smith, 2008. "Identifying the new Keynesian Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(5), pages 525-551.
    3. André Kurmann, 2004. "Maximum Likelihood Estimation of Dynamic Stochastic Theories with an Application to New Keynesian Pricing," Cahiers de recherche 0421, CIRPEE.
    4. Michael T. Kiley, 2007. "A Quantitative Comparison of Sticky-Price and Sticky-Information Models of Price Setting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 101-125, February.
    5. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    6. Sophocles Mavroeidis, 2006. "Testing the New Keynesian Phillips Curve Without Assuming Identification," Working Papers 2006-13, Brown University, Department of Economics.
    7. Pascale Duran-Vigneron, 2006. "Interactions des politiques monétaire et budgétaires: évaluation dans un cadre nouveau keynésien," Working Papers hal-03551474, HAL.
    8. 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.
    9. Jondeau, Eric & Le Bihan, Herve, 2005. "Testing for the New Keynesian Phillips Curve. Additional international evidence," Economic Modelling, Elsevier, vol. 22(3), pages 521-550, May.
    10. Florian PELGRIN & Alain GUAY & Richard LUGER, 2004. "The New Keynesian Phillips Curve: An empirical assessment," Econometric Society 2004 North American Summer Meetings 418, Econometric Society.
    11. Bakhshi, Hasan & Khan, Hashmat & Rudolf, Barbara, 2007. "The Phillips curve under state-dependent pricing," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2321-2345, November.
    12. Fabio Rumler, 2007. "Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries," Open Economies Review, Springer, vol. 18(4), pages 427-451, September.
    13. Andreas Beyer & Roger E. A. Farmer & Jérôme Henry & Massimiliano Marcellino, 2008. "Factor analysis in a model with rational expectations," Econometrics Journal, Royal Economic Society, vol. 11(2), pages 271-286, July.
    14. repec:onb:oenbwp:y::i:102:b:1 is not listed on IDEAS
    15. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Working Papers 050607, University of California-Irvine, Department of Economics.
    16. Luca Fanelli, 2008. "Testing the New Keynesian Phillips Curve Through Vector Autoregressive Models: Results from the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(1), pages 53-66, February.
    17. Peter Tillmann, 2009. "The New Keynesian Phillips curve in Europe: does it fit or does it fail?," Empirical Economics, Springer, vol. 37(3), pages 463-473, December.
    18. Ieva Rubene & Paolo Guarda, 2004. "The new Keynesian Phillips curve: empirical results for Luxembourg," BCL working papers 11, Central Bank of Luxembourg.
    19. Alain Guay & Florian Pelgrin, 2007. "Using Implied Probabilities to Improve Estimation with Unconditional Moment Restrictions," Cahiers de recherche 0747, CIRPEE.

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    More about this item

    Keywords

    Rational-expectation model; GMM estimator; ML estimator; Inflation; New Phillips curve.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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