Transformations for an exact goodness-of-fit test of structural change in the linear regression model

This paper considers testing for structural change of unknown form in the linear regression model as a problem of testing for goodness-of-fit. Transformations of recursive (or other LUS) residuals that reduce the problem to one of testing independently distributed uniform variables are presented. Exact empirical distribution function tests can then be applied without having to estimate unknown Parameters. The tests are illustrated by their application to a money demand model.     

A modification of the CUSUM test in the linear regression model with lagged dependent variables

We consider testing for structural change in a dynamic linear regression model, and show that the well known CUSUM test, which has been initially devised only for the standard static model, can easily be modified such as to remain asymptotically valid also in this nonstandard situation.     

FINANCIAL LIBERALISATION, CONSUMPTION AND WEALTH EFFECTS IN SEVEN OECD COUNTRIES

We estimate the impact of financial liberalisation on consumption in seven major industrial countries, and find a marked shift in behaviour, notably a decline in short‐run income elasticities and a rise in short‐run wealth and interest rate elasticities. A corollary is that consumption equations estimated over both pre‐ and post‐liberalisation regimes may be misleading, and either a form of testing as presented here or a shortening of the sample period may be appropriate for accurate forecasting and simulation.     

Regime types,ideological leanings,and the natural resource curse

While many consider institutional quality as a central explanatory variable when finding what causes the variance in per capita GDP growth performance of resource-abundant countries, this paper attempts to focus on more structural factors: regime type and its ideological approaches to economic policy. Several joint effects of natural resource abundance and regime type on growth are found. The natural resource curse is likely to be more severe in authoritarian regimes than democratic regimes. Among democracies, it is found that the natural resource curse is more salient in presidential regimes than in parliamentary regimes. This paper also suggests that the natural resource curse is more likely when a certain type of democratic regime coincides with a particular ideological orientation of the regime with respect to economic policy. Presidential democracies with left-wing economic policy are found to be least growth enhancing among the combinations between regime type and its economic ideology offered, given similar levels of natural resource abundance.     

Tests of the CAPM under structural changes

Abstract

In accordance with the empirical regularity of time-varying betas we estimate and test for the Sharpe–Lintner CAPM by allowing for structural change(s) in betas. Empirical applications using BM- and size-sorted decile portfolios suggest the following interesting results. Firstly, there exists at least one break for all the portfolios under consideration. Secondly, the estimated break dates are quite similar for some of the portfolios, indicating the possible existence of a common break using multivariate time series. Finally, we find the CAPM can be consistent with the data in some regimes but may appear to be inconsistent with the data in some other regimes. This particularly appealing feature has been completely ruled out under the conventional single-equation framework.     

House price dynamics,conditional higher-order moments,and density forecasts

Most studies on housing price dynamics are only concerned with the conditional mean and variance, but overlook other higher-order conditional moments and the structural change characteristics inherent in housing prices. In order to take into account these two important issues, this study utilizes the generalized Markov switching GARCH model to explore house price dynamics and conditional distribution for US market over 1975Q1–2007Q4. The housing return follows two distinct dynamics: the bust regime and the boom regime. The volatility pattern is different in the bust and boom regimes. In addition, the conditional densities derived by the regime-switching model change dramatically over time and are significantly different from normal distribution. More importantly, the regime-switching model can detect in advance a weak US housing market such as the one that occurred in the middle of 2007. The in-sample fitting ability of regime-switching model, which incorporates higher-order moments, has significant improvements compared to the single-regime AR and AR-GARCH models. For the out-of-sample Value-at-Risk forecasting performance, the ability of regime-switching AR-GARCH model to forecast one-step-ahead density is better compared to the single-regime AR-GARCH model.     

A sequential approach to testing for structural change in econometric models

The paper shows that the sequential approach to testing econometric models, particularly testing for structural change, is both feasible and potentially very useful. In fact, this paper makes clear the possibility of using the sequential approach as suggested by Dhrymes et al. (1972) and shows that the statistical dependence between successive tests can be overcome in some cases.Helpful comments by David Hendry, Grayham Mizon and Jan Kiviet, on an earlier version of a related Paper, are gratefully acknowledged.     

An empirical investigation of lawn mower safety regulation

This paper tests for switching market conduct in an oligopsonistic industry. The model adopts Bresnahan's procedure for identifying the oligopoly solution and integrates the procedure with a switching regression model. Applied to the US beef slaughter industry, two distinct regimes of conduct in the industry were identified. The two regimes are consistent with the time periods during which the industry has undergone major structural change.     

THE SOURCES OF AGGREGATE PRODUCTIVITY GROWTH: US MANUFACTURING INDUSTRIES, 1958–1996

The sources of aggregate productivity growth are explored using detailed data for four‐digit US manufacturing industries during 1958–96 and a decomposition formula that allows us to quantify the contribution of structural change. Labour productivity as well as total factor productivity are considered with either value‐added or employment shares serving as aggregation weights. It is shown that structural change generally works in favour of industries with increasing productivity. This effect is particularly strong in the years since 1990, in high‐tech industries and in durable goods producing industries. The impact of the computer revolution can be clearly identified.     

Does growth cause structural change, or is it the other way around? A dynamic panel data analysis for seven OECD countries

In economic development, aggregate economic growth is accompanied by structural change among the three main sectors of an economy. Nevertheless, the question whether economic growth causes structural change, or changes in the economic structure cause aggregate growth is still unanswered. To shed more light on this question, this article examines a Granger causality test in a panel environment to determine the relationship of economic growth and structural change, measured either in terms of employment shares or real value added shares. Estimation and analysis of the annual data of seven OECD countries, covering the period from 1960?C2004, show that although the causality appears to be heterogeneous among these countries, some general conclusions can be drawn. Aggregate economic growth decelerates structural change in the very short run but accelerates it with some lag in time. The aggregate effect depends on whether structural change is measured in terms of employment or in terms of real value added. Conversely, structural change supports aggregate economic growth, irrespective of which measure of structural change chosen.     

Confronting the Trilemma: Culture,Institutions, and Macroeconomic Disequilibria

Abstract

Although the fundamental trilemma of open-economy macroeconomics has been a popular framework for analyzing the effects of various policy combinations, it ignores how policy regimes change. Drawing from Post-Keynesian Institutionalist theory, this article considers this process in democracies as a type of technological change in which progress may be limited by insufficient knowledge and actions by vested interests. A case study of interwar France shows that these barriers often delay or weaken stabilization programs, which increase both political and economic uncertainty that further lowers aggregate demand and inhibits the attainment of macroeconomic equilibria. Although we should not generalize these observations, they suggest that understanding and addressing cultural and institutional factors may be necessary for successful countercyclical policymaking.     

Coding economic dynamics to represent regime dynamics. A teach-yourself exercise

Much of the recent economic history of various countries, regions and/or sectors in the world economy can usefully be reconstructed as sequences of repeated, basically endogenously induced, changes of growth regimes. Coded dynamics (CD) is proposed hereafter as the appropriate tool for the analysis of such multi-regime dynamics, i.e. dynamics where switches between growth regimes represent structural changes, or in other words, abrupt alterations in an economy's qualitative dynamics. On a theoretical tone, one of our arguments in favor of the adoption of a CD approach derives from the lesson that can be drawn from the complex dynamics literature. Often, some form of regularity, while it cannot be found in the punctual analysis of motion across states, can be recovered from the system's dynamics over a partition of its state space. This dynamics can be represented by strings of symbols (instead of real numbers), or symbolic trajectories. The 2-fold purpose of this paper is to introduce the formalism and terminology of multi-regime dynamics, and to try our hand with the technique of coding through a set of simple exercises. In fact, we consider only cases with two and three regimes, instead of the six of the Framework Space introduced in the Preface. Via such exercises, we also trace the origins of the multi-regime framework in the tradition of classical macrodynamics.     

Markov-switching models,rational expectations and the term structure of interest rates

In order to evaluate the efficiency of the monetary transmission mechanism, we develop the formulas for testing rational expectations theory in the term structure of interest rates with VAR models of stochastically switching regimes in which all the parameters are regime dependent. These formulas are obtained for the strict version of rational expectations as well as for the case where measurement errors are assumed in the expectations relationship. They are extensible to other contexts that involve variables linked by rational-expectations behaviours. The testing procedure is implemented on interest rates of the Spanish inter-bank money market. Measurement errors must be assumed to find signs favourable to the theory.     

Fourier ADL cointegration test to approximate smooth breaks with new evidence from Crude Oil Market

Economic data is typically subject to a number of different forms of structural breaks. Ignoring structural breaks in a model can lead to misspecification issues and false conclusions. This paper proposes a new Autoregressive Distributive Lag (ADL) cointegration test in the presence of nonlinear breaks approximated by a Fourier function. The test offers a simple way to capture smooth structural change in time series data. Exact break dates are not required, and the suggested methodology can accommodate unknown number and form of gradual structural change. The testing procedure circumvents the potential power loss which can result from adding more dummy variables in the testing equation. Simulation results show that our procedure has good size and power properties. We demonstrate our test on the empirical example of real oil prices, oil production, and real economic activity, which are subject to structural breaks. The new test suggests that variables are cointegrated, while a conventional ADL test ignores structural breaks and concludes the opposite. This result casts some doubt on conventional oil price models.     

Real exchange rate volatility,financial crises and exchange rate regimes

This article examines real exchange rate (RER) volatility in 80 countries around the world, during the period 1970 to 2011. Two main questions are raised: are structural breaks in RER volatility related to changes in exchange rate regimes or financial crises? And do these two events affect the permanent and transitory components of RER volatility? To answer these, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. Our results suggest that structural breaks in RER volatility coincidence with financial crises and certain changes in nominal exchange rate regimes. Moreover, our findings confirm that RER volatility does increase with the global financial crises and detect that the more flexible the exchange rate regime, the higher the volatility of the RER using a de facto exchange rate classification.     

League Structure and Match Attendances in English Rugby League

This paper investigates the effects of actual and hypothetical changes in league structure on match attendances for English rugby league. An empirical match attendance model is used to generate simulated attendances under various alternative structural regimes.The simulations are used to compare the effects on attendances of having larger and smaller divisions, and of having regionalised lower divisions or divisions whose membership is determined solely by playing quality. A limited form of regionalisation emerges as a positive recommendation. The model is also used to decompose the changes in average attendance, following the 1996 reorganisation, into components attributable to the change of structure, changes in team performance, and other factors.     

Empirics of hills,plateaus, mountains and plains: A Markov-switching approach to growth

Most economic growth research has been aimed at explaining cross-country differences in average growth rates. However, it is well known that growth experiences differ over time within a country almost as much as they differ among countries. This paper builds on Pritchett's (2000) [Pritchett, Lant, Understanding patterns of economic growth: searching for hills among plateaus, mountains, and plains, World Bank Economic Review, May 2000, 14 (2), 221–250.] observation that the growth process can be thought of as transitions between different growth regimes and proposes a framework for systematic analysis of such regimes and the dynamics of the transitions. I estimate a Markov-switching regression to characterize four distinct growth regimes and transitions between them. The results show that countries switch among regimes of stable growth, “miracle” catch-up, stagnation and crisis with the transition probabilities determined by the quality of institutions. Better institutions appear to improve long-run growth by making episodes of fast growth more persistent. Low average growth rates in countries with weak institutions are a result of these countries spending more time in stagnation regimes rather then being incapable of fast growth at all. Weak institutions do not rule out growth takeoffs but limit their sustainability. The approach directs attention to shifts in growth performance and highlights the fact that identical average growth rates can mask very distinct growth paths.     

On the short-run relationship between the income distribution-growth and debt-growth regimes

This paper examines the short-run relationship between the income distribution-growth and debt-growth regimes using a simple, post-Keynesian, demand-driven model. While mechanisms of wage-led and profit-led growth have been revealed, their relationship with debt-led and debt-burdened growth is yet to be clarified, because arguments on these growth regimes were developed separately. This paper shows that the growth regimes transform as the regime-switching parameters in the IS balance change. By way of theoretical analysis, this paper presents some important implications for (i) the possibility of the combination of growth regimes; (ii) the features of post-Keynesian economic analysis of income distribution, debt, and demand-led growth, which sharply contrast with the basic neo-classical theory; and (iii) theoretical validation of recent empirical results. Moreover, this paper also suggests some policy implications or lessons for the combination of economic growth regimes.     

Strategic monetary and fiscal policy interactions: An empirical investigation

This paper identifies leadership regimes in monetary-fiscal policy interactions in three countries, the UK, the US and Sweden. We specify a small-scale, structural general equilibrium model of an open economy and estimate it using Bayesian methods. We assume that the authorities can act strategically in a non-cooperative policy game, and compare different leadership regimes. We find that the model of fiscal leadership gives the best fit for the UK and Sweden, while in the US the Nash or non-strategic regime dominates. We assess the extent to which policy maker preferences reflect microfounded social preferences.     

Emerging search regimes: measuring co-evolutions among research,science, and society

Scientometric data is used to investigate empirically the emergence of search regimes in biotechnology, genomics and nanotechnology. Complex regimes can emerge when three independent sources of variance interact. In our model, researchers can be considered as the nodes that carry the science system. Research is geographically situated with site-specific skills, tacit knowledge and infrastructures. Second, the emergent science level refers to the formal communication of codified knowledge published in journals. Third, the socio-economic dynamics indicate the ways in which knowledge production relates to society. Although biotechnology, genomics and nanotechnology can all be characterised by rapid growth and divergent dynamics, the regimes differ in terms of self-organisation among these three sources of variance. The scope of opportunities for researchers to contribute within the constraints of the existing body of knowledge are different in each field. Furthermore, the relevance of the context of application contributes to the knowledge dynamics to various degrees.