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Misspecification Testing: Non-Invariance of Expectations Models of Inflation

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  • Jennifer L. Castle
  • Jurgen A. Doornik
  • David F. Hendry
  • Ragnar Nymoen

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 (IV) or Generalized Method of Moments (GMM). 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.

Suggested Citation

  • Jennifer L. Castle & Jurgen A. Doornik & David F. Hendry & Ragnar Nymoen, 2014. "Misspecification Testing: Non-Invariance of Expectations Models of Inflation," Econometric Reviews, Taylor & Francis Journals, vol. 33(5-6), pages 553-574, August.
    • Handle: RePEc:taf:emetrv:v:33:y:2014:i:5-6:p:553-574
    DOI: 10.1080/07474938.2013.825137
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    Cited by:

    1. Hendry, David F., 2018. "Deciding between alternative approaches in macroeconomics," International Journal of Forecasting, Elsevier, vol. 34(1), pages 119-135.
    2. Mariano Kulish & Adrian Pagan, 2016. "Issues in Estimating New Keynesian Phillips Curves in the Presence of Unknown Structural Change," Econometric Reviews, Taylor & Francis Journals, vol. 35(7), pages 1251-1270, August.
    3. Philip Hans Franses, 2019. "Model‐based forecast adjustment: With an illustration to inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 38(2), pages 73-80, March.
    4. Castle, Jennifer L. & Doornik, Jurgen A. & Hendry, David F., 2023. "Robust Discovery of Regression Models," Econometrics and Statistics, Elsevier, vol. 26(C), pages 31-51.
    5. Jennifer L. Castle & David F. Hendry & Andrew B. Martinez, 2022. "The Historical Role of Energy in UK Inflation and Productivity and Implications for Price Inflation in 2022," Working Papers 2022-001, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    6. Andrew B. Martinez, 2020. "Extracting Information from Different Expectations," Working Papers 2020-008, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    7. Jennifer Castle & David Hendry, 2013. "Semi-automatic Non-linear Model selection," Economics Series Working Papers 654, University of Oxford, Department of Economics.
    8. Haraldsen, Kristine Wika & Ragnar, Nymoen & Sparrman, Victoria, 2019. "Labour market institutions, shocks and the employment rate," Memorandum 6/2019, Oslo University, Department of Economics.
    9. Melnick, Rafi & Strohsal, Till, 2017. "Disinflation in steps and the Phillips curve: Israel 1986–2015," Journal of Macroeconomics, Elsevier, vol. 53(C), pages 145-161.
    10. David F. Hendry, 2020. "A Short History of Macro-econometric Modelling," Economics Papers 2020-W01, Economics Group, Nuffield College, University of Oxford.
    11. Kristine Wika Haraldsen & Ragnar Nymoen & Victoria Sparrman, 2019. "Labour market institutions, shocks and the employment rate," Discussion Papers 901, Statistics Norway, Research Department.

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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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