Boosting Your Instruments: Estimation with Overidentifying Inequality Moment Conditions

54 Pages Posted: 5 Jul 2006

See all articles by Hyungsik Roger Moon

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

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Date Written: April 2006

Abstract

This paper derives limit distributions of empirical likelihood estimators for models in which inequality moment conditions provide overidentifying information. We show that the use of this information leads to a reduction of the asymptotic mean-squared estimation error and propose asymptotically valid confidence sets for the parameters of interest. While inequality moment conditions arise in many important economic models, we use a dynamic macroeconomic model as data generating process and illustrate our methods with instrumental variable estimators of monetary policy rules. The assumption that output does not fall in response to an expansionary monetary policy shock leads to an inequality moment condition that can substantially increase the precision with which the policy rule is estimated. The results obtained in this paper extend to conventional GMM estimators.

Keywords: Empirical likelihood estimation, generalized method of movements, inequality moment conditions, instrumental variable estimation, monetary policy rules

JEL Classification: C32

Suggested Citation

Moon, Hyungsik Roger and Schorfheide, Frank, Boosting Your Instruments: Estimation with Overidentifying Inequality Moment Conditions (April 2006). CEPR Discussion Paper No. 5605, Available at SSRN: https://ssrn.com/abstract=913078

Hyungsik Roger Moon

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089-0253
United States
213-740-2108 (Phone)
213-740-8543 (Fax)

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

Frank Schorfheide (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

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