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

Author

Listed:
  • 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.

Suggested Citation

  • Jennifer L. Castle & Jurgen A. Doornik & David F. Hendry & Ragnar Nymoen, 2012. "Mis-specification Testing: Non-Invariance of Expectations Models of Inflation," Working Paper series 50_12, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:50_12
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    References listed on IDEAS

    as
    1. Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 119-139, March.
    2. Hendry, David F. & Mizon, Grayham E., 2014. "Unpredictability in economic analysis, econometric modeling and forecasting," Journal of Econometrics, Elsevier, vol. 182(1), pages 186-195.
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    Cited by:

    1. repec:eee:intfor:v:34:y:2018:i:1:p:119-135 is not listed on IDEAS
    2. Jennifer Castle & David Hendry, 2013. "Semi-automatic Non-linear Model selection," Economics Series Working Papers 654, University of Oxford, Department of Economics.
    3. Franses, Ph.H.B.F., 2018. "Model-based forecast adjustment; with an illustration to inflation," Econometric Institute Research Papers EI2018-14, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    4. repec:eee:jmacro:v:53:y:2017:i:c:p:145-161 is not listed on IDEAS
    5. Hendry, David F., 2018. "Deciding between alternative approaches in macroeconomics," International Journal of Forecasting, Elsevier, vol. 34(1), pages 119-135.

    More about this item

    Keywords

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

    JEL classification:

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

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