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Analysis of Vector Autoregressions in the Presence of Shifts in Mean

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  • Serena Ng

    ()
    (Boston College)

  • Timothy J. Vogelsang

    (Cornell University)

Abstract

This paper considers the implications of omitted mean shifts for estimation and inference in VARs. It is shown that the least squares estimates are inconsistent, and the F test for Granger causality diverges. While model selection rules have the tendency to incorrectly select a lag length that is too high, this over-parameterization can reduce size distortions in tests involving the inconsistent estimates. The practical issue of how to remove the breaks is shown to depend on whether the mean shifts are of the additive or innovational type in a multivariate setting. Under the additive outlier specification, the intercept in each equation of the VAR will be subject to multiple shifts when the break dates of the mean shifts to the univariate series do not coincide. Conversely, under the innovative outlier specification, the unconditional means of the univariate time series are subject to multiple shifts when mean shifts to the innovation processes occur at different dates: Techniques designed to detect multiple shifts are recommended when break dates do not coincide.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 379.

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Length: 33 pages
Date of creation: 01 Sep 1997
Date of revision:
Handle: RePEc:boc:bocoec:379

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Keywords: trend shift; structural change; causality tests; lag length selection.;

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Cited by:
  1. Thierno Balde & Gabriel Rodriguez, 2005. "Finite sample effects of additive outliers on the Granger-causality test with an application to money growth and inflation in Peru," Applied Economics Letters, Taylor & Francis Journals, vol. 12(13), pages 841-844.
  2. Salamaliki, Paraskevi K. & Venetis, Ioannis A., 2013. "Energy consumption and real GDP in G-7: Multi-horizon causality testing in the presence of capital stock," Energy Economics, Elsevier, vol. 39(C), pages 108-121.
  3. Alfredo M. Pereira & Martin B. Schmidt, 2007. "Structural Breaks in Public Infrastructure Investment in the U.S," Working Papers 55, Department of Economics, College of William and Mary.
  4. Robin L. Lumsdaine & Serena Ng, 1998. "Testing for ARCH in the Presence of a Possibly Misspecified Conditional Mean," Boston College Working Papers in Economics 370, Boston College Department of Economics.
  5. Yang Fan & Teng Jianzhou, 2011. "Studying on the monetary transmission mechanism in China in the presence of structural changes," China Finance Review International, Emerald Group Publishing, vol. 1(4), pages 334-357, August.
  6. Erdenebat Bataa & Denise R. Osborn & Marianne Sensier & Dick van Dijk, 2009. "Structural Breaks in the International Transmission of Inflation," Centre for Growth and Business Cycle Research Discussion Paper Series 119, Economics, The Univeristy of Manchester.

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