Ml vs GMM Estimates of Hybrid Macroeconomic Models (with an Application to the New Phillips Curve)

57 Pages Posted: 21 Dec 2010

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Hervé le Bihan

Banque de France - Centre de Recherche

Date Written: September 1, 2003

Abstract

Many macroeconomic models involve hybrid equations, in which some variables are a function of both their lags and their expected future value. The hybrid "New Keynesian" Phillips Curve is a prominent example. Estimates of such hybrid models have produced conflicting empirical results: Studies which use ML estimation tend to find the forward-looking component to be small, while those using GMM have reported the inflation dynamics to be predominantly forward-looking.

This paper provides a rationalization for this empirical conflict. Allowing for two alternative and straightforward mis-specifications (measurement error and omitted dynamics) in a hybrid model, we show that the ML estimator tends to undervalue the weight of the forward-looking component, while the GMM estimator tends to overstate it. This result is shown to hold analytically in a simple DGP. Monte-Carlo experiments indicate that it remains valid in a wide range of more plausible DGPs. Simulations also suggest that the gap obtained between the two estimators in the context of the new Phillips curve can more readily be accounted for by mis-specification, than by the finite-sample biases.

Keywords: Rational-expectation model, GMM estimator, ML estimator, Inflation, New Phillips curve

JEL Classification: C10, C22, E31

Suggested Citation

Jondeau, Eric and Le Bihan, Herve, Ml vs GMM Estimates of Hybrid Macroeconomic Models (with an Application to the New Phillips Curve) (September 1, 2003). Banque de France Working Paper No. 103, Available at SSRN: https://ssrn.com/abstract=1728692 or http://dx.doi.org/10.2139/ssrn.1728692

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

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HOME PAGE: http://people.unil.ch/ericjondeau/

Swiss Finance Institute ( email )

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+41 21 692 33 49 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Herve Le Bihan

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
Room 41-1391
75049 Paris Cedex 01
France

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