Lecture notes in Empirical Macroeconomics

The main contents of the lecture consist of 9 chapter: Instrumental variable method, non-spherical errors, vector autoregression (VAR), monetary policy in VAR systems, microfoundations of monetary policy models, solving linear expectational difference equations, a menu of different policy rules, estimation of new keynesian models. | Contents 1 Instrumental Variable Method Consistency of Least Squares or Not? . . . . . . . . . . . . . . . . . Reason 1 for IV: Measurement Errors . . . . . . . . . . . . . . . . . Reason 2 for IV: Lagged Dependent Variable + Autocorrelated Shocks Reason 3 for IV: Simultaneous Equations Bias (and Inconsistency) . . Definition of the IV Estimator—Consistency of IV . . . . . . . . . . Hausman’s Specification Test . . . . . . . . . . . . . . . . . . . . . . Tests of Overidentifying Restrictions in 2SLS∗ . . . . . . . . . . . . 3 3 3 5 5 9 15 16 2 Non-Spherical Errors Summary of Least Squares . . . . . . . . . . Heteroskedasticity . . . . . . . . . . . . . . . Autocorrelation . . . . . . . . . . . . . . . . Variance of a Sample Average (more details) . The Newey-West Estimator . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . 18 18 19 19 22 25 27 Lecture Notes in Empirical Macroeconomics (MiQEF, MSc course at UNISG) Paul S¨ derlind1 o January 2005 (with some corrections done later) 3 1 University of St. Gallen. Address: s/bf-HSG, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland. E-mail: . Document name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vector Autoregression (VAR) 29 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Canonical Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Moving Average Form and Stability . . . . . . . . . . . . . . . . . . 30 Granger Causality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Forecasts Forecast Error Variance . . . . . . . . . . . . . . . . . . . 34 Forecast Error Variance Decompositions∗ . . . . . . . . . . . . . . . 35 Structural VARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 .