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Testing under non-standard conditions in frequency domain: with applications to Markov regime-switching models of exchange rates and federal funds rate
We propose two test statistics in the frequency domain and derive their exact asymptotic null distributions under the condition of unidentified nuisance parameters. The proposed methods are particularly applicable in unobserved components models. Also, it is shown that the tests have considerable power when applied to a class of Markov regime switching models. We show that, after transforming the Markov regime switching model into the frequency domain representation we only have to face the issue of unidentified nuisance parameters in a nonlinear context. The singularity problem disappears. ...
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Regime-switching monetary policy and real business cycle fluctuations
This paper investigates the implications of a regime switching monetary policy on real business cycle fluctuations. In a Cash-in-Advance model, a regime switching monetary policy with the typical observed business cycle durations could cause sizable fluctuations in real variables such as consumption, and to a lesser extent, investment. The correlations of these real variables with output matched those in the data very well. It is also found that the expected durations of the monetary policy in each regime have a significant effect on the fluctuation of real variables such as consumption and ...