Identification Using Stability Restrictions
60 Pages Posted: 6 Mar 2015
Date Written: July 30, 2013
This paper studies inference in models that are identified by moment restrictions. We show how instability of the moments can be used constructively to improve the identification of structural parameters that are stable over time. A leading example is macroeconomic models that are immune to the well-known Lucas (1976) critique in the face of policy regime shifts. This insight is used to develop novel econometric methods that extend the widely used generalized method of moments (GMM). The proposed methods yield improved inference on the parameters of the new Keynesian Phillips curve.
Keywords: GMM, identification, structural stability, Lucas critique
JEL Classification: C22, E31
Suggested Citation: Suggested Citation