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Testing the ‘Inaction Corridor’ in a Three‐Regime Threshold Error Correction Model with an Application to a Buffer‐Stock Model for US Money Demand
Author(s) -
Krishnakumar Jaya,
Neto David
Publication year - 2011
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/j.1468-0300.2011.00231.x
Subject(s) - economics , portfolio , econometrics , stock (firearms) , error correction model , wald test , statistic , limiting , test statistic , buffer stock scheme , statistical hypothesis testing , cointegration , mathematics , financial economics , statistics , microeconomics , mechanical engineering , engineering
In this paper, we develop a test for the existence of a middle ‘band of inaction’ in a three‐regime threshold vector error correction model (TVECM). A Wald statistic is proposed for this purpose, its limiting distribution is derived (which is non‐standard) and critical values calculated through simulations. Our methodology is applied to estimate a buffer‐stock model for the US money demand and to test for the existence of an inaction middle range within which the money balance is free to fluctuate without portfolio adjustments. Our data seem to corroborate this hypothesis .