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IV threshold cointegration tests and the Taylor rule

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  • Enders, Walter
  • Im, Kyung So
  • Lee, Junsoo
  • Strazicich, Mark C.

Abstract

The usual cointegration tests often entail nuisance parameters that hinder precise inference. This problem is even more pronounced in a nonlinear threshold framework when stationary covariates are included. In this paper, we propose new threshold cointegration tests based on instrumental variables estimation. The newly suggested IV threshold cointegration tests have standard distributions that do not depend on any stationary covariates. These desirable properties allow us to formally test for threshold cointegration in a nonlinear Taylor rule. We perform this analysis using real-time U.S. data for several sample periods from 1970 to 2005. In contrast to the linear model, we find strong evidence of cointegration in a nonlinear Taylor rule with threshold effects. Overall, we find that the Federal Reserve is far more policy active when inflation is high than when inflation is low. In addition, we reaffirm the notion that the response to counteract high inflation was weakest in the 1970s and strongest in the Greenspan era.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 6 (November)
Pages: 1463-1472

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:6:p:1463-1472

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Taylor rule Threshold cointegration IV tests;

References

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Cited by:
  1. Frederick Wallace, 2013. "Cointegration tests of purchasing power parity," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 149(4), pages 779-802, December.

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