Generalized Method of Moments and Inverse Control

Gregory Givens and Michael K. Salemi

No 200603, Working Papers from Middle Tennessee State University, Department of Economics and Finance

Abstract: This paper presents a Generalized Method of Moments algorithm for estimating the structural parameters of a macroeconomic model subject to the restriction that the coefficients of the monetary policy rule minimize the central bank's expected loss function. The algorithm combines least-squares normal equations with moment restrictions derived from the first-order necessary conditions of the auxiliary optimization. We assess the performance of the algorithm with Monte Carlo simulations using three increasingly complex models. We find that imposing the optimizing restrictions when they are true improves estimation accuracy and that imposing those restrictions when they are false biases estimates of some of the structural parameters but not of the policy rule coefficients.

Keywords: GMM; optimal monetary policy; simple rules; policy objectives (search for similar items in EconPapers)
JEL-codes: C32 C61 E31 E32 E52 E61 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-mac
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http://capone.mtsu.edu/berc/working/givens&salemi.pdf (application/pdf)

Related works:
Journal Article: Generalized method of moments and inverse control (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:mts:wpaper:200603

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