Are Apparent Findings of Nonlinearity Due to Structural Instability in Economic Time Series?

24 Pages Posted: 21 Jul 1999

See all articles by Gary Koop

Gary Koop

University of Leicester - Department of Economics

Simon Potter

Peter G. Peterson Institute for International Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 1998

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.

Keywords: bayes factor, markov chain monte carlo, threshold autoregressive model, time varying parameter model

JEL Classification: C11, C22, E30

Suggested Citation

Koop, Gary M. and Potter, Simon, Are Apparent Findings of Nonlinearity Due to Structural Instability in Economic Time Series? (December 1998). FRB of New York Staff Report No. 59, Available at SSRN: https://ssrn.com/abstract=163151 or http://dx.doi.org/10.2139/ssrn.163151

Gary M. Koop

University of Leicester - Department of Economics ( email )

University Road
Leicester LE1 7RH
United Kingdom

Simon Potter (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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