Research Discussion Papers, Bank of Finland
No 6/1999:
On the Estimation of Euler Equations in the Presence of a Potential Regime Shift
Pentti Saikkonen ()
and Antti Ripatti ()
Abstract: The concept of a peso problem is formalized in terms of a
linear Euler equation and a nonlinear marginal model describing the
dynamics of the exogenous driving process. It is shown that, using a
threshold autoregressive model as a marginal model, it is possible to
produce time-varying peso premia. A Monte Carlo method and a method based
on the numerical solution of integral equations are considered as tools for
computing conditional future expectations in the marginal model. A Monte
Carlo study illustrates the poor performance of the generalized method of
moment (GMM) estimator in small and even relatively large samples. The poor
performance is particularly acute in the presence of a peso problem but is
also serious in the simple linear case.
Keywords: peso problem; Euler equations; GMM; threshold autoregressive models; (follow links to similar papers)
36 pages, June 3, 1999
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