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

  • 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)

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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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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  12. Castle, Jennifer L. & Doornik, Jurgen A. & Hendry, David F., 2012. "Model selection when there are multiple breaks," Journal of Econometrics, Elsevier, vol. 169(2), pages 239-246.
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  17. Skrove Falch, Nina & Nymoen, Ragnar, 2011. "The accuracy of a forecast targeting central bank," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 5, pages 1-36.
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