Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations

This paper introduces a limited-information two-step estimator for models with rational expectations and serially correlated disturbances. The estimator greatly extends the area of applicability of McCallum's (1976) instrumental variables approach to rational expectations models. Section I reviews McCallum%s method and discusses in detail the problems surrounding its use in many empirical c/ntexts. Section II presents the two-step two-stage least squares estimator (2S2S1) and demonstrates its efficiency relative to that of McCallum (1979). Section III provides a comparison nf several estim!tors for a two equation macroeconomic model with rational expectations due to Taylor (1979).

[1]  Takeshi Amemiya,et al.  The Maximum Likelihood and the Nonlinear Three-Stage Least Squares Estimator in the General Nonlinear Simultaneous Equation Model , 1977 .

[2]  E. J. Hannan,et al.  Central limit theorems for time series regression , 1973 .

[3]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[4]  John B. Taylor.  ESTIMATION AND CONTROL OF A MACROECONOMIC MODEL WITH RATIONAL EXPECTATIONS , 1979 .

[5]  C. Sims,et al.  NEARLY EFFICIENT ESTIMATION OF TIME SERIES MODELS WITH PREDETERMINED, BUT NOT EXOGENOUS, INSTRUMENTS , 1983 .

[6]  T. Sargent,et al.  FORMULATING AND ESTIMATING DYNAMIC LINEAR RATIONAL EXPECTATIONS MODELS , 1980 .

[7]  Chris Chatfield,et al.  Introduction to Statistical Time Series. , 1976 .

[8]  Albert Madansky,et al.  ON THE EFFICIENCY OF THREE-STAGE LEAST-SQUARES ESTIMATION , 1964 .

[9]  N. S. Revankar,et al.  Analysis of Regressions Containing Serially Correlated and Serially Uncorrelated Error Components , 1980 .

[10]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[11]  T. Sargent,et al.  Instrumental variables procedures for estimating linear rational expectations models , 1981 .

[12]  Takeshi Amemiya,et al.  The nonlinear two-stage least-squares estimator , 1974 .

[13]  Kenneth F. Wallis,et al.  Econometric Implications of the Rational Expectations Hypothesis , 1980 .

[14]  Craig F. Ansley,et al.  On the structure of moving average processes , 1977 .

[15]  M. Wickens,et al.  The Efficient Estimation of Econometric Models with Rational Expectations , 1982 .

[16]  L. Hansen.  Large Sample Properties of Generalized Method of Moments Estimators , 1982 .

[17]  Ray C. Fair,et al.  The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors , 1970 .

[18]  H. White.  Maximum Likelihood Estimation of Misspecified Models , 1982 .

[19]  L. Hansen,et al.  Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis , 1980, Journal of Political Economy.

[20]  John Kennan,et al.  The Estimation of Partial Adjustment Models with Rational Expectations , 1979 .

[21]  P. Dhrymes.  Econometrics : statistical foundations and applications , 1971 .

[22]  J. Hausman.  Specification tests in econometrics , 1978 .

[23]  H. White,et al.  Instrumental Variables Regression with Independent Observations , 1982 .

[24]  H. Theil,et al.  Economic Forecasts and Policy. , 1959 .

[25]  K. Berk.  Consistent Autoregressive Spectral Estimates , 1974 .

[26]  Robert P. Flood,et al.  A pitfall in estimation of models with rational expectations , 1980 .

[27]  Dynamic factor demand schedules for labor and capital under rational expectations , 1980 .

[28]  L. Hansen,et al.  Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models , 1982 .

[29]  Shlomo Maital,et al.  What Do Economists Know? An Empirical Study of Experts' Expectations , 1981 .

[30]  C. Sims.  MACROECONOMICS AND REALITY , 1977 .

[31]  B. Mccallum.  Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates , 1976 .