Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations

Maurice Obstfeld, Robert E. Cumby, John Huizinga

NBER Technical Working Paper No. 11*
Issued in July 1983
NBER Program(s):   ITI    IFM

---- Abstract -----

This paper introduces a limited-information two-step estimator for models with rational expectations and serially correlated disturbances. The estimator greatly extends the area of applicability of McCallum's (1976) instrumental variables approach to rational expectations models. Section I reviews McCallum's method and discusses in detail the problems surrounding its use in many empirical contexts. Section II presents the two-step two-stage least squares estimator (2S2S1S) and demonstrates its efficiency relative to that of McCallum (1979). Section III provides a comparison of several estimators for a two equation macroeconomic model with rational expectations due to Taylor (1979).

*Published: Cumby, Robert E., John Huizinga and Maurice Obstfeld. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations." Journal of Econometrics, Vol. 21, (1983) pp. 333-355.

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