Rational expectations estimation of macroeconomic models: some Monte Carlo results

Abstract

This paper analyzes the relative performance of alternative estimation methods for rational expectations macroeconomic models using a Monte Carlo approach. The methods studied include a single equation instrumental variable method most often attributed to McCallum, a full information substitution method proposed by Taylor and an efficient full information technique developed by Wickens. In general, the results of our Monte Carlo experiments indicate that although the full information methods tend to perform bettern than the single equation techniques, the gains of efficiency are relatively modest. However, in some experiments involving misspecification errors, the single equation method outperforms the full information estimators.