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Testing for linear and Markov switching DSGE models

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  • Marian Vavra

    ()
    (National Bank of Slovakia)

Abstract

This paper addresses the issue related to testing for non-linearity in economic models using new principal component based multivariate non-linearity tests. Monte Carlo results suggest that the new multivariate tests have good size and power properties even in small samples usually available in practice. The empirical results indicate that the use of linear economic models is unsuitable for policy recommendations.

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File URL: http://www.nbs.sk/_img/Documents/PUBLIK/WP_3-2013_Vavra.pdf
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Bibliographic Info

Paper provided by Research Department, National Bank of Slovakia in its series Working and Discussion Papers with number WP 3/2013.

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Length: 29 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:svk:wpaper:1024

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Keywords: DSGE model; Markov-switching; Monte Carlo method; principal components; nonlinearity testing;

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References

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  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  3. Chen, Xiaoshan & MacDonald, Ronald, 2011. "Realised and Optimal Monetary Policy Rules in an Estimated Markov-Switching DSGE Model of the United Kingdom," SIRE Discussion Papers 2011-21, Scottish Institute for Research in Economics (SIRE).
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  5. Bianchi, Francesco, 2008. "Regime switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," MPRA Paper 24251, University Library of Munich, Germany, revised 19 Jan 2010.
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  16. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
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  18. Deschamps, P. J., . "Monte Carlo methodology for LM and LR autocorrelation tests in multivariate regression," CORE Discussion Papers RP -1234, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  21. Peres-Neto, Pedro R. & Jackson, Donald A. & Somers, Keith M., 2005. "How many principal components? stopping rules for determining the number of non-trivial axes revisited," Computational Statistics & Data Analysis, Elsevier, vol. 49(4), pages 974-997, June.
  22. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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