Normalization in Econometrics

@inproceedings{Hamilton2006NormalizationIE,
  title={Normalization in Econometrics},
  author={James D. Hamilton and Daniel F. Waggoner and Tao Zha},
  year={2006}
}
The issue of normalization arises whenever two different values for a vector of unknown parameters imply the identical economic model. A normalization implies not just a rule for selecting which among equivalent points to call the maximum likelihood estimate (MLE), but also governs the topography of the set of points that go into a small-sample confidence interval associated with that MLE. A poor normalization can lead to multimodal distributions, disjoint confidence intervals, and very… CONTINUE READING

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