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Bayesian Inference about the Types of Structural Breaks When There are Many Breaks

  • Eo, Yunjong

I propose a Bayesian approach to making an inference about complicated patterns of structural breaks in time series. Structural break models in the literature are mainly considered for a simple case in which all the parameters under the structural changes are restricted to have breaks at the same dates. Unlike the existing literature, the proposed method in this paper allows multiple parameters such as intercept, persistence, and/or residual variance to undergo mutually independent structural breaks at different dates with the different number of breaks across parameters. To estimate the complex structural break models considered in this paper, structural breaks in the multiple parameters are interpreted as regime transitions as in Chib (1998). The regime for each parameter is then indicated by a corresponding discrete latent variable which follows a first-order Markov process. A Markov-chain Monte Carlo scheme is developed to estimate and compare the complex structural break models, which are potentially non-nested, in an efficient and tractable way. I apply this approach to postwar U.S. inflation and find strong support for an autoregressive model with two structural breaks in residual variance and no break in intercept and persistence.

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Paper provided by University of Sydney, School of Economics in its series Working Papers with number 2012-05.

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Date of creation: Feb 2012
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Handle: RePEc:syd:wpaper:2123/8149
Contact details of provider: Postal: Sydney, NSW 2006
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Web page: http://sydney.edu.au/arts/economics
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  1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  2. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  3. Rapach, David E & Wohar, Mark E, 2005. "Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 887-906, October.
  4. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall.
  5. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  6. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
  7. Albert, James H & Chib, Siddhartha, 1993. "Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 1-15, January.
  8. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
  9. Chib, Siddhartha, 1996. "Calculating posterior distributions and modal estimates in Markov mixture models," Journal of Econometrics, Elsevier, vol. 75(1), pages 79-97, November.
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