Handbooks of Research Methods and Applications series
Edited by Nigar Hashimzade and Michael A. Thornton
Chapter 14: Generalized Method of Moments
Generalized Method of Moments (GMM) estimation provides a computationally convenient way of estimating parameters of economic models. It can be applied equally in linear or non-linear models, in single equations or systems of equations, and to models involving cross-section, panel or time series data. This convenience and generality has led to the application of GMM in many areas of empirical economics, and the method is used frequently in macroeconomics. In fact, the emergence of GMM can be argued to be one of the most important developments in the econometric analysis of macroeconomic models over the last 35 years. The method was first introduced in a seminal paper by Lars Hansen published in Econometrica in 1982. While GMM had its origins in work on financial economics, it was also soon recognized that the method offered a relatively simple method for estimating the parameters of rational expectations models in macroeconomics. Early applications involved models for: business cycles (Singleton, 1988), consumption (Miron, 1986), interest rates (Dunn and Singleton, 1986), inventory holding (Miron and Zeldes, 1988) and labour demand (Pindyck and Rotemberg, 1983).
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