Assessing Generalized Method of Moments Estimates of the Federal Reserve Reaction Function

Details

Serval ID
serval:BIB_E33165CBBA59
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
Assessing Generalized Method of Moments Estimates of the Federal Reserve Reaction Function
Journal
Journal of Business and Economic Statistics
Author(s)
Jondeau E., Le Bihan H., Gallès C.
ISSN
0735-0015
Publication state
Published
Issued date
2004
Peer-reviewed
Oui
Volume
22
Number
2
Pages
225-239
Language
english
Abstract
Estimating a forward-looking monetary policy rule by the Generalized Method of Moments (GMM) has become a popular approach since the influential papers by Clarida, Gali, and Gertler (1998, 2000). We re-examine estimates of the Federal Reserve reaction function using several GMM estimators and a Maximum Likelihood (ML) estimator. First, we show that, over the baseline period 1979-2000, these alternative approaches yield substantially different parameter estimates. Using Monte-Carlo simulations, we show that the finite-sample GMM\ bias can only account for a small part of the discrepancy between estimates. We find that this discrepancy is more plausibly rationalized by the serial correlation of the policy shock, causing mis-specification of GMM estimators through lack of instrument exogeneity. This correlation pattern is related to a shift in the reaction-function parameters in 1987. Re-estimating the reaction function over the 1987-2000 period produces GMM estimates which are very close to the ML estimate.
Keywords
Continuous-updating GMM, Finite-sample properties, Forward-looking model, Maximum Likelihood estimator, Monetary policy reaction function
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Create date
19/11/2007 10:51
Last modification date
20/08/2019 16:07
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