Are apparent findings of nonlinearity due to structural instability in economic time series?

Gary Koop, Simon M. Potter

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Abstract

Many modelling issues and policy debates in macroeconomics depend on whether macroeconomic times series are best characterized as linear or nonlinear. If departures from linearity exist, it is important to know whether these are endogenously generated (as in, e.g., a threshold autoregressive model) or whether they merely reflect changing structure over time. We advocate a Bayesian approach and show how such an approach can be implemented in practice. An empirical exercise involving several macroeconomic time series shows that apparent findings of threshold type nonlinearities could be due to structural instability.
Original languageEnglish
Pages (from-to)37-55
Number of pages19
JournalEconometrics Journal
Volume4
Issue number1
DOIs
Publication statusPublished - Jun 2001

Keywords

  • bayes factor
  • markov chain monte carlo
  • threshold autoregressive model
  • time varying parameter model

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