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GMM estimation with noncausal instruments under rational expectations

Author

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  • Lof, Matthijs
Abstract
There is hope for the generalized method of moments (GMM). Lanne and Saikkonen (2011) show that the GMM estimator is inconsistent, when the instruments are lags of noncausal variables. This paper argues that this inconsistency depends on distributional assumptions, that do not always hold. In particular under rational expectations, the GMM estimator is found to be consistent. This result is derived in a linear context and illustrated by simulation of a nonlinear asset pricing model.

Suggested Citation

  • Lof, Matthijs, 2011. "GMM estimation with noncausal instruments under rational expectations," MPRA Paper 35536, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:35536
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    References listed on IDEAS

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    1. Hansen, Bruce E & West, Kenneth D, 2002. "Generalized Method of Moments and Macroeconomics," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 460-469, October.
    2. Hansen, Lars Peter & Sargent, Thomas J., 1982. "Instrumental variables procedures for estimating linear rational expectations models," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 263-296.
    3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    4. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
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    6. Lanne, Markku & Luoto, Jani & Saikkonen, Pentti, 2012. "Optimal forecasting of noncausal autoregressive time series," International Journal of Forecasting, Elsevier, vol. 28(3), pages 623-631.
    7. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-396, March.
    8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    9. Matthijs Lof, 2014. "GMM Estimation with Non-causal Instruments under Rational Expectations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(2), pages 279-286, April.
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    Cited by:

    1. Matthijs Lof, 2014. "GMM Estimation with Non-causal Instruments under Rational Expectations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(2), pages 279-286, April.
    2. Lof, Matthijs, 2013. "Essays on Expectations and the Econometrics of Asset Pricing," MPRA Paper 59064, University Library of Munich, Germany.
    3. Lof, Matthijs & Nyberg, Henri, 2017. "Noncausality and the commodity currency hypothesis," Energy Economics, Elsevier, vol. 65(C), pages 424-433.

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    More about this item

    Keywords

    generalized method of moments; noncausal autoregression; rational expectations;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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
    • 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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