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Efficient estimation of macroeconomic equations with unobservable states

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  • Morrisy, Stephen D.

Abstract

Macroeconomic equations, such as the consumption Euler equation, New Keynesian Phillips curve, and Taylor rule, are regularly estimated on an individual basis. However, such relations also jointly determine equilibrium, which may contain unobservable states. This paper shows how to utilize such an equilibrium model to improve the efficiency of individual estimators. In comparison with existing related approaches, this simple framework lends itself naturally to modern medium scale dynamic stochastic general equilibrium models. Not only does the derived estimator exhibit smaller asymptotic variance than equation-by-equation GMM, it also tends to be less prone to small sample distortions from weak identification.

Suggested Citation

  • Morrisy, Stephen D., 2017. "Efficient estimation of macroeconomic equations with unobservable states," Economic Modelling, Elsevier, vol. 60(C), pages 408-423.
    • Handle: RePEc:eee:ecmode:v:60:y:2017:i:c:p:408-423
    DOI: 10.1016/j.econmod.2016.10.010
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    More about this item

    Keywords

    DSGE; GMM; Phillips curve; Weak identification;
    All these keywords.

    JEL classification:

    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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