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Estimating and Testing Multiple Structural Changes in Models with Endogenous Regressors

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Author Info
Pierre Perron () (Department of Economics, Boston University)
Yohei Yamamoto () (Department of Economics, Boston University)

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Abstract

We consider the problem of estimating and testing for multiple breaks in a single equation framework with regressors that are endogenous, i.e., correlated with the errors. First, we show based on standard assumptions about the regressors, instruments and errors that the second stage regression of the instrumental variable (IV) procedure involves regressors and errors that satisfy all the assumptions in Perron and Qu (2006) so that the results about consistency, rate of convergence and limit distributions of the estimates of the break dates, as well as the limit distributions of the tests, are obtained as simple consequences. More importantly from a practical perspective, we show that even in the presence of endogenous regressors, it is still preferable to simply estimate the break dates and test for structural change using the usual ordinary least-squares (OLS) framework. It delivers estimates of the break dates with higher precision and tests with higher power compared to those obtained using an IV method. To illustrate the relevance of our theoretical results, we consider the stability of the New Keynesian hybrid Phillips curve. IV-based methods do not indicate any instability. On the other hand, OLS-based ones strongly indicate a change in 1991:1 and that after this date the model looses all explanatory power.

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Publisher Info
Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2008-017.

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Length: 33
Date of creation: Oct 2008
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Handle: RePEc:bos:wpaper:wp2008-017

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Related research
Keywords: structural change; instrument variables; two-stage least-squares; parameter variations;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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  1. Perron, Pierre & Qu, Zhongjun, 2006. "Estimating restricted structural change models," Journal of Econometrics, Elsevier, vol. 134(2), pages 373-399, October. [Downloadable!] (restricted)
  2. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02. [Downloadable!] (restricted)
  3. Kurmann, Andre, 2007. "VAR-based estimation of Euler equations with an application to New Keynesian pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 767-796, March. [Downloadable!] (restricted)
  4. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22. [Downloadable!]
    Other versions:
  5. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    Other versions:
  6. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pierre Perron & Jing Zhou, 2008. "Testing Jointly for Structural Changes in the Error Variance and Coefficients of a Linear Regression Model," Boston University - Department of Economics - Working Papers Series wp2008-011, Boston University - Department of Economics. [Downloadable!]
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