Otilia Boldea

Testing for a Threshold in Models with Endogenous Regressors

Using 2SLS estimation, we propose two tests for a threshold in models with endogenous regressors: a sup LR test and a sup Wald test. Here, the 2SLS estimation is not conventional because it uses additional information about the first-stage being linear or not. Because of this additional information, our tests can be more accurate than the threshold test in Caner and Hansen (2004) which is based on conventional GMM estimation. We derive the asymptotic distributions of the two tests for a linear and for a threshold reduced form. In both cases, the distributions are non-pivotal, and we propose obtaining critical values via a fixed regressor wild bootstrap. Our simulations show that in small samples, the GMM test of Caner and Hansen (2004) can be severely oversized under heteroskedasticity, while the 2SLS tests we propose are much closer to their nominal size. We use our tests to investigate the common claim that the government spending multiplier is larger close to the zero lower bound, and therefore that the governments should have spent more in the recent crisis. We find no empirical support for this claim.

Testing structural stability in macroeconometric models

Since the earliest days of macroeconometric analysis, researchers have been concerned about the appropriateness of the assumption that model parameters remain constant over long periods of time; for example see Tinbergen (1939). This concern is also central to the so-called Lucas (1976) critique which has played a central role in shaping macroeconometric analysis in the last thirty years. Lucas (1976) emphasizes the fact that the decision models of economic agents are hard to describe in terms of stable parameterizations, simply because changes in policy may change these decision models and their respective parameterization. These arguments underscore the importance of using structural stability tests as diagnostic checks for macroeconometric models. A large body of empirical macroeconomic studies provides evidence for parameter instability in a variety of macroeconomic models. For example, considerable evidence exists that the New Keynesian Phillips curve has become flat and/or less persistent in recent years; see for example Alogoskoufis and Smith (1991), Cogley and Sargent (2001), Zhang et al. (2008), Kang et al. (2009). Similarly, there is evidence that the interest rate reaction function is asymmetric over the business cycle; see for example Boivin and Giannoni (2006), Surico (2007), Benati and Surico (2008), Liu et al. (2009).

Structural Versus Matching Estimation: Transmission Mechanisms in Armenia

Opting for structural or reduced form estimation is often hard to justify if one wants to both learn about the structure of the economy and obtain accurate predictions. In this paper, we show that using both structural and reduced form estimates simultaneously can lead to more accurate policy predictions. Our findings are based on using new information criteria whose econometric properties allow us to pick for both methods the impulse responses that are valid and relevant for prediction. We illustrate our findings in the context of analyzing the monetary transmission mechanism for Armenia. Based on picking valid and relevant information from both structural and reduced form matching estimation, our findings suggest that the interest rate targeting and the exchange rate channel are well specified and strongly reinforce each other in promoting the recent double-digit growth Armenia experienced before the crisis.