Estimating forward looking Euler equations with GMM estimators: an optimal instruments approach

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  • 1 January 2004
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      • Published in RePEc
Abstract
This paper compares different methods for estimating forward-looking output and inflation Euler equations and shows that weak identification can be an issue in conventional GMM estimation. The authors propose a GMM procedure that imposes the dynamic constraints implied by the forward-looking relation on the instruments set. This ?optimal instruments? procedure is more reliable than conventional GMM, and it provides a robust alternative to estimating dynamic macroeconomic relations. Empirical applications of this procedure suggest only a limited role for expectational terms.
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