There is hope for the generalized method of moments (GMM). Lanne and Saikkonen (2011) show that the GMM estimator is inconsistent, when the instruments are lags of noncausal variables. This paper argues that this inconsistency depends on distributional assumptions, that do not always hold. In particular under rational expectations, the GMM estimator is found to be consistent. This result is derived in a linear context and illustrated by simulation of a nonlinear asset pricing model.
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