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Mis-specification Testing: Non-Invariance of Expectations Models of Inflation

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Author Info

  • Jennifer L. Castle

    (Institute for New Economic Thinking, Oxford Martin School, University of Oxford, UK)

  • Jurgen A. Doornik

    (Institute for New Economic Thinking, Oxford Martin School, University of Oxford, UK)

  • David F. Hendry

    (Institute for New Economic Thinking, Oxford Martin School, University of Oxford, UK)

  • Ragnar Nymoen

    (Economics Department, Oslo University, Norway)

Abstract

Many economic models (such as the new-Keynesian Phillips curve, NKPC) include expected future values, often estimated after replacing the expected value by the actual future outcome, using Instrumental Variables or Generalized Method of Moments. Although crises, breaks and regime shifts are relatively common, the underlying theory does not allow for their occurrence. We show the consequences for such models of breaks in data processes, and propose an impulse-indicator saturation test of such specifications, applied to USA and Euro-area NKPCs.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 50_12.

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Date of creation: Jul 2012
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Handle: RePEc:rim:rimwps:50_12

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Related research

Keywords: Testing invariance; Structural breaks; Expectations; Impulse-indicator saturation; New-Keynesian Phillips curve;

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Cited by:
  1. Jennifer Castle & David Hendry, 2013. "Semi-automatic Non-linear Model selection," Economics Series Working Papers 654, University of Oxford, Department of Economics.

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