Estimating and testing multiple structural changes in models with endogenous regressors
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Citation (published version)Pierre Perron, Yohei Yamamoto. "Estimating and Testing Multiple Structural Changes in Models with Endogenous Regressors."
We consider the problem of estimating and testing for multiple breaks in a single equation framework with regressors that are endogenous, i.e., correlated with the errors. First, we show based on standard assumptions about the regressors, instruments and errors that the second stage regression of the instrumental variable (IV) procedure involves regressors and errors that satisfy all the assumptions in Perron and Qu (2006) so that the results about consistency, rate of convergence and limit distributions of the estimates of the break dates, as well as the limit distributions of the tests, are obtained as simple consequences. More importantly from a practical perspective, we show that even in the presence of endogenous regressors, it is still preferable to simply estimate the break dates and test for structural change using the usual ordinary least-squares (OLS) framework. It delivers estimates of the break dates with higher precision and tests with higher power compared to those obtained using an IV method. To illustrate the relevance of our theoretical results, we consider the stability of the New Keynesian hybrid Phillips curve. IV-based methods do not indicate any instability. On the other hand, OLS-based ones strongly indicate a change in 1991:1 and that after this date the model looses all explanatory power.