I thank Markku Lanne, Pentti Saikkonen and an anonymous referee for constructive comments. The Academy of Finland and the OP-Pohjola Research Foundation are gratefully acknowledged for financial support.
GMM Estimation with Non-causal Instruments under Rational Expectations*
Article first published online: 7 JAN 2013
© 2013 The Department of Economics, University of Oxford and John Wiley & Sons, Ltd.
Oxford Bulletin of Economics and Statistics
Volume 76, Issue 2, pages 279–286, April 2014
How to Cite
Lof, M. (2014), GMM Estimation with Non-causal Instruments under Rational Expectations. Oxford Bulletin of Economics and Statistics, 76: 279–286. doi: 10.1111/obes.12017
- Issue published online: 7 MAR 2014
- Article first published online: 7 JAN 2013
- Final Manuscript Received: October 2012
Lanne and Saikkonen [Oxford Bulletin of Economics and Statistics (2011a) Vol. 73, pp. 581–592], show that the generalized method of moments (GMM) estimator is inconsistent, when the instruments are lags of variables that admit a non-causal autoregressive representation. This article argues that this inconsistency depends on distributional assumptions, that do not always hold. In particular under rational expectations, the GMM estimator is found to be consistent. This result is derived in a linear context and illustrated by simulation of a nonlinear asset pricing model.