Abstract
The maximum likelihood estimation of a Markov-switching regression model based on the Hamilton filter is not valid in the presence of endogenous explanatory variables. However, we show that there exists an appropriate transformation of the model that allows us to directly employ the Hamilton filter. The transformed model explicitly allows for a vector of bias correction terms as additional regressors, and the new disturbance term is uncorrelated with all the regressors in the transformed model. Within this framework, a quasi maximum likelihood estimation procedure is presented. A procedure to test for endogeneity based on the Wald statistic or the likelihood ratio statistic is also presented.
Original language | English |
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Pages (from-to) | 127-136 |
Number of pages | 10 |
Journal | Journal of Econometrics |
Volume | 122 |
Issue number | 1 |
DOIs | |
Publication status | Published - 2004 Sep |
Keywords
- Bias correction
- Endogeneity
- Forward-looking monetary policy rule
- Hausman-Wu test
- Markov switching
ASJC Scopus subject areas
- Economics and Econometrics