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

Posted: 27 Sep 2001

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

Abstract

Many modelling issues and policy debates in macroeconomics depend on whether macroeconomic time 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. In this paper, we discuss a model comparison methodology which addresses these issues. 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?. Available at SSRN: https://ssrn.com/abstract=281989

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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