Chapter 8

Models With Breaks, Recurrent Regime Switching, and Nonlinearities

Abstract

This chapter describes how to deal with the case in which otherwise linear models are subject to one more nonrecurrent, structural breaks. This chapter also builds econometric models with recurrent shifts and nonlinearities caused by regime switching (RS) behavior of threshold type. Section 8.1 explains why these types of models are used, how they can be tested against the time homogenous models analyzed before in the book, and characterizes the sources and nature of the nonlinear dynamics induced by either thresholds or breaks. Section 8.2 specifically deals with linear models that are subject to one or more structural breaks and describes the tests that can ...

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