In this article, the identi¯cation of instrumental variables and generalised
method of moment (GMM) estimators is discussed. It is common
that representations of such models are derived from the solution to linear
quadratic optimisation problems. Here, it is shown that even though
the rank condition on the Jacobian and the instrument set is valid, that
the transversality condition may not be satis¯ed by the estimated model.
Further, acceptance of the transversality condition does occur when identi
¯cation fails or the forward model vanishes. As a result the parameters
of such models irrespective of any correction for serial correlation may not
be identi¯ed in a fundamental sense. This suggests that either forward
looking models should be estimated directly or more complex non-linear
restrictions should be imposed
