GMM Estimation with Non-causal Instruments

• Autores: Markku Lanne, Pentti Saikkonen
• Localización: Oxford bulletin of economics and statistics, ISSN 0305-9049, Vol. 73, Nº. 5, 2011, págs. 581-592
• Idioma: inglés
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• Resumen

  • This note provides a warning against careless use of the generalized method of moments (GMM) with time series data. We show that if time series follow non-causal autoregressive processes, their lags are not valid instruments, and the GMM estimator is inconsistent. Moreover, endogeneity of the instruments may not be revealed by the J-test of overidentifying restrictions that may be inconsistent and has, in general, low finite-sample power. Our explicit results pertain to a simple linear regression, but they can easily be generalized. Our empirical results indicate that non-causality is quite common among economic variables, making these problems highly relevant.