Economics, Department of

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Efficient Inference with Poor Instruments: a General Framework

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

We consider a general framework where weaker patterns of identifcation may arise: typically, the data generating process is allowed to depend on the sample size. However, contrary to what is usually done in the literature on weak identification, we do not give up the efficiency goal of statistical inference: even fragile information should be processed optimally for the purpose of both efficient estimation and powerful testing. Our main contribution is actually to consider that several patterns of identification may arise simultaneously. This heterogeneity of identification schemes paves the way for the device of optimal strategies for inferential use of information of poor quality. More precisely, we focus on a case where asymptotic efficiency of estimators is well-defined through the variance of asymptotically normal distributions. Standard efficient estimation procedures still hold, albeit with rates of convergence slower than usual. We stress that these are feasible without requiring the prior knowledge of the identification schemes.

Document type: 
Report

Efficient Minimum Distance Estimation with Multiple Rates of Convergence

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper extends the asymptotic theory of GMM inference to allow sample counterparts of the estimating equations to converge at (multiple) rates, different from the usual square-root of the sample size. In this setting, we provide consistent estimation of the structural parameters. In addition, we define a convenient rotation in the parameter space (or reparametrization) to disentangle the different rates of convergence. More precisely, we identify special linear combinations of the structural parameters associated with a specific rate of convergence. Finally, we demonstrate the validity of usual inference procedures, like the overidentification test and Wald test, with standard formulas. It is important to stress that both estimation and testing work without requiring the knowledge of the various rates. However, the assessment of these rates is crucial for (asymptotic) power considerations. Possible applications include econometric problems with two dimensions of asymptotics, due to trimming, tail estimation, infill asymptotic, social interactions, kernel smoothing or any kind of regularization.

Document type: 
Report

A Critique of Ng's Third-Best Theory

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

The theory of second best established that the effect on community welfare of any one policy change varies with the specific context in which that change occurs. In paper that has been frequently quoted to justify specific policies, Ng argues that fulfilling firstbest conditions piecemeal is an optimal policy under quite general conditions when neither full first nor second best optima are achievable. This paper first argues that Ng's conclusion does not follow from his own assumptions, which imply instead that the status quo should be maintained, whatever it might be. Next it gives one illustrative example showing how much damage can be caused by following Ng's advice. It then argues that when Ng's key assumption is replaced by one that is closer to the facts, there is no general a priori presumption for adopting any specific policy, including maintaining the status quo. The paper closes with some observations on the usefulness of welfare economics even when the full implications of second best theory are accepted.

Document type: 
Report

Robustness and Exchange Rate Volatility

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2012
Abstract: 

This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can easily explain observed exchange rate volatility.

Document type: 
Report

Conditional Moment Models under Weak Identification

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2011
Abstract: 

We consider models defined by a set of conditional moment restrictions where weak identification may arise. Weak identification is directly defined through the conditional moments that are allowed to flatten as the sample size increases. We propose a minimum distance estimator of the structural parameters that is robust to potential weak identification and that uses neither instrumental variables nor smoothing. Hence, its properties only depend upon identification weakness, and not on the interplay between some tuning parameter, as the growth rate of the number of instruments, and the unknown degree of weakness. Our estimator is consistent and asymptotically normal, and its rate of convergence is the same as competing estimators based on many weak instruments. Heteroskedasticity-robust inference is possible through Wald testing without prior knowledge of the identification pattern. In simulations, we find that our estimator is competitive with estimators based on many instruments.

Document type: 
Report

Bounding a Linear Causal Effect Using Relative Correlation Restrictions

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2011
Abstract: 

This paper describes and implements a simple approach to the most common problem in applied microeconometrics: estimating a linear causal effct when the explanatory variable of interest might be correlated with relevant unobserved variables. The main idea is to place restrictions on the correlation between the variable of interest and relevant unobserved variables relative to the correlation between the variable of interest and observed control variables. These relative correlation restrictions allow a researcher to construct informative bounds on parameter estimates, and to assess the sensitivity of conventional estimates to plausible deviations from the identifying assumptions. The estimation method and its properties are described, and two empirical applications are demonstrated.

Document type: 
Report

Estimation of Equicorrelated Diffusions from Incomplete Data

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2011
Abstract: 

The paper derives maximum likelihood parameter estimators for symmetrically correlated Weiner processes observed at discrete intervals. Such processes arise when pricing and determining Value-at-Risk for portfolio derivatives. Cases of driftless and mean-reverting state variables are considered. The procedure is applicable to samples with missing data of any pattern and to high dimensional systems. The estimation procedure is illustrated using a sample of stock prices.

Document type: 
Report

Theoretical and Empirical Evidence of Timing-to-Market and Lead Market Strategies for Successful Environmental Innovation

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2011
Abstract: 

In environmental policy first mover advantages for environmental technologies are often taken for granted. It is a popular view to see the state as a political entrepreneur who introduces a certain environmental policy instrument, e.g. feedin tariffs for renewable energies, and thus becomes the world market leader or the lead market for the respective technology. Against this background, this paper wants to find out if the idea of first mover advantages can be justified by theories and empirical evidence from industrial organization and business management studies. After a review of theoretical and empirical papers we see that first mover advantages are not confirmed by empirical evidence. Thereby the successful innovator is not necessarily the first but very often one of the early movers within the competition of different innovation designs. We show that the success of a timing strategy depends on country-specific lead market potentials, on market and technology characteristics and on the regime of the country-specific regulation. On this basis we derive options for environmental innovation strategies for firms under different circumstances of markets, technologies and regulations. We will see different implications for practical innovation management and innovation policy.

Document type: 
Report

Government Policy in Monetary Economies

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2010
Abstract: 

I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with trading frictions. Although intitutions/frictions are shown to have a significant structural impact in the determination of policy, the calibrated artificial economies are observationally equivalent in steady state. The policy response to aggregate shocks is qualitatively similar in the variants considered. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of money demand. The variants with no trading frictions display the best fit to U.S. post-war data.

Document type: 
Report

“Multilateral Versus Regional Trading Arrangements: Substitutes Or Compliments?”

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2010
Abstract: 

We summarise salient developments in the interaction of the multilateral trading system and multilateral trading agreements (MTAs) on the one hand and regional trading agreements (RTAs) on the other. We then consider the economic effects of RTAs, comparing customs unions with free trade agreements. We argue, contrary to much received wisdom, that either may produce more economic benefits than the other, depending on the specific context in which they are introduced. There follows a discussion of the political economy effects of RTAs. Some of these have unfavourable, some neutral and some favourable effects on the progress of further MTAs. We conclude that the case against RTAs as eroding the MTS and inhibiting further MTA negotiations, as expounded by such economists as Krueger and Bhagwati, is not well founded. There remain grounds for optimism that the process of competitive liberalisation in RTAs will lead eventually to further multilateral liberalisation.

Document type: 
Report