Mis-specification Testing: Non-Invariance of Expectations Models of Inflation

Jennifer L. Castle (), Jurgen A. Doornik, David F. Hendry () and Ragnar Nymoen
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Ragnar Nymoen: Economics Department, Oslo University, Norway

Working Paper Series from The Rimini Centre for Economic Analysis

Abstract: Many economic models (such as the new-Keynesian Phillips curve, NKPC) include expected future values, often estimated after replacing the expected value by the actual future outcome, using Instrumental Variables or Generalized Method of Moments. Although crises, breaks and regime shifts are relatively common, the underlying theory does not allow for their occurrence. We show the consequences for such models of breaks in data processes, and propose an impulse-indicator saturation test of such specifications, applied to USA and Euro-area NKPCs.

Keywords: Testing invariance; Structural breaks; Expectations; Impulse-indicator saturation; New-Keynesian Phillips curve (search for similar items in EconPapers)
JEL-codes: C5 E3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-mac
Date: 2012-07
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