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Bayesian Inference in Regime-Switching ARMA Models with Absorbing States: The Dynamics of the Ex-Ante Real Interest Rate Under Structural Breaks

Author

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  • Chang-Jin Kim

    (Department of Economics, University ofWashington, and Department of Economics, Korea University)

  • Jaeho Kim

    (Dept. of Economics, Univ. of Washington, Seattle, WA)

Abstract

One goal of this paper is to develop an efficient Markov-Chain Monte Carlo (MCMC) algorithm for estimating an ARMA model with a regime-switching mean, based on a multimove sampler. Unlike the existing algorithm of Billio et al. (1999) based on a single-move sampler, our algorithm can achieve reasonably fast convergence to the posterior distribution even when the latent regime indicator variable is highly persistent or when there exist absorbing states. Another goal is to appropriately investigate the dynamics of the latent ex-ante real interest rate (EARR) in the presence of structural breaks, by employing the econometric tool developed. We argue Garcia and Perron’s (1996) conclusion that the EARR rate is a constant subject to occasional jumps may be sample-specific. For an extended sample that includes recent data, Garcia and Perron’s (1996) AR(2) model of EPRR may be misspecified,and we show that excluding the theory-implied moving-average terms may understate the persistence of the observed ex-post real interest rate (EPRR) dynamics. Our empiricalresults suggest that, even though we rule out the possibility of a unit root in the EARR, it may be more persistent and volatile than has been documented in some of the literature including Garcia and Perron (1996).

Suggested Citation

  • Chang-Jin Kim & Jaeho Kim, 2013. "Bayesian Inference in Regime-Switching ARMA Models with Absorbing States: The Dynamics of the Ex-Ante Real Interest Rate Under Structural Breaks," Discussion Paper Series 1306, Institute of Economic Research, Korea University.
    • Handle: RePEc:iek:wpaper:1306
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    References listed on IDEAS

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    Cited by:

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    2. Manopimoke, Pym, 2019. "The Output Euler Equation And Real Interest Rate Regimes," Macroeconomic Dynamics, Cambridge University Press, vol. 23(1), pages 420-447, January.
    3. Kim, Jaeho, 2015. "Bayesian Inference in a Non-linear/Non-Gaussian Switching State Space Model: Regime-dependent Leverage Effect in the U.S. Stock Market," MPRA Paper 67153, University Library of Munich, Germany.
    4. Pym Manopimoke, 2016. "The Output Euler Equation and Real Interest Rate Regimes," PIER Discussion Papers 33, Puey Ungphakorn Institute for Economic Research.
    5. Roberto Casarin & Domenico Sartore & Marco Tronzano, 2018. "A Bayesian Markov-Switching Correlation Model for Contagion Analysis on Exchange Rate Markets," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(1), pages 101-114, January.

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    More about this item

    Keywords

    ARMA model with Regime Switching; Multi-move Sampler; Single-Move Sampler; Metropolis-Hastings Algorithm; Absorbing State; Ex-Ante Real Interest Rate;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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