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On the Estimation of Euler Equations in the Presence of a Potential Regime Shift

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Author Info

  • Saikkonen, Pentti

    ()
    (University of Helsinki)

  • Ripatti, Antti

    ()
    (Bank of Finland Research)

Abstract

The concept of a peso problem is formalized in terms of a linear Euler equation and a nonlinear marginal model describing the dynamics of the exogenous driving process. It is shown that, using a threshold autoregressive model as a marginal model, it is possible to produce time-varying peso premia. A Monte Carlo method and a method based on the numerical solution of integral equations are considered as tools for computing conditional future expectations in the marginal model. A Monte Carlo study illustrates the poor performance of the generalized method of moment (GMM) estimator in small and even relatively large samples. The poor performance is particularly acute in the presence of a peso problem but is also serious in the simple linear case.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/9906.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 6/1999.

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Length: 36 pages
Date of creation: 03 Jun 1999
Date of revision:
Handle: RePEc:hhs:bofrdp:1999_006

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: peso problem; Euler equations; GMM; threshold autoregressive models;

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References

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  1. repec:cup:etheor:v:11:y:1995:i:2:p:258-89 is not listed on IDEAS
  2. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  3. Tauchen, George, 1986. "Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained from Financial Market Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(4), pages 397-416, October.
  4. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
  5. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
  6. Clements, Michael P. & Smith, Jeremy, 1997. "The performance of alternative forecasting methods for SETAR models," International Journal of Forecasting, Elsevier, vol. 13(4), pages 463-475, December.
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Cited by:
  1. Markku Lanne, 2000. "Testing The Expectations Hypothesis Of The Term Structure Of Interest Rates In The Presence Of A Potential Regime Shift," Computing in Economics and Finance 2000 294, Society for Computational Economics.
  2. Christian Julliard & Anisha Ghosh, 2008. "Can rare events explain the equity premium puzzle?," LSE Research Online Documents on Economics 4808, London School of Economics and Political Science, LSE Library.
  3. Daniel G. Swaine, 2001. "Are taste and technology parameters stable? a test of "deep" parameter stability in real business cycle models of the U.S. economy," Working Papers 01-05, Federal Reserve Bank of Boston.

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