Estimating Forward Looking Euler Equations with Gmm Estimators: An Optimal Instuments Approach

33 Pages Posted: 19 Nov 2004

See all articles by Jeffrey C. Fuhrer

Jeffrey C. Fuhrer

Federal Reserve Bank of Boston; Harvard University - Harvard Kennedy School (HKS)

Giovanni Olivei

Federal Reserve Bank of Boston

Date Written: July 30, 2004

Abstract

This paper compares different methods for estimating forward-looking output and inflation Euler equations and shows that weak identification can be an issue in conventional GMM estimation. The authors propose a GMM procedure that imposes the dynamic constraints implied by the forward-looking relation on the instruments set. This "optimal instruments" procedure is more reliable than conventional GMM, and it provides a robust alternative to estimating dynamic macroeconomic relations. Empirical applications of this procedure suggest only a limited role for expectational terms.

Keywords: Consumption, Keynesian Economics

JEL Classification: C1, C15, E3

Suggested Citation

Fuhrer, Jeffrey C. and Olivei, Giovanni, Estimating Forward Looking Euler Equations with Gmm Estimators: An Optimal Instuments Approach (July 30, 2004). FRB of Boston Research Paper Series No. 04-2. Available at SSRN: https://ssrn.com/abstract=593470 or http://dx.doi.org/10.2139/ssrn.593470

Jeffrey C. Fuhrer (Contact Author)

Federal Reserve Bank of Boston ( email )

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Giovanni Olivei

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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