Testing for a Threshold in Models with Endogenous Regressors

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Abstract

We propose two new parametric tests for an unknown threshold in models with endogenous regressors. They are both based on unconventional 2SLS estimators
that use additional information about the linearity of the first stage. This information leads to more accurate residuals and therefore tests with better size properties than the Wald GMM test in Caner and Hansen (2004), which we show exhibits severe size distortions in small samples pertinent to empirical applications. We prove the bootstrap validity of our tests and evaluate their empirical relevance by revisiting the question whether government spending multipliers are larger in recessions. As Ramey and Zubairy (2018), we cannot rule out that they are the same in recessions or expansions.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages32
Volume2019-030
Publication statusPublished - 31 Oct 2019

Publication series

NameCenter Discussion Paper
Volume2019-030

Fingerprint

Endogenous regressors
Testing
Recession
Multiplier
Linearity
Information use
Small sample
Size distortion
Bootstrap
Government spending

Keywords

  • 2SLS
  • GMM
  • threshold
  • bootstrap
  • government spending

Cite this

Rothfelder, M., & Boldea, O. (2019). Testing for a Threshold in Models with Endogenous Regressors. (Center Discussion Paper; Vol. 2019-030). Tilburg: CentER, Center for Economic Research.
Rothfelder, Mario ; Boldea, Otilia. / Testing for a Threshold in Models with Endogenous Regressors. Tilburg : CentER, Center for Economic Research, 2019. (Center Discussion Paper).
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Rothfelder, M & Boldea, O 2019 'Testing for a Threshold in Models with Endogenous Regressors' Center Discussion Paper, vol. 2019-030, CentER, Center for Economic Research, Tilburg.

Testing for a Threshold in Models with Endogenous Regressors. / Rothfelder, Mario; Boldea, Otilia.

Tilburg : CentER, Center for Economic Research, 2019. (Center Discussion Paper; Vol. 2019-030).

Research output: Working paperDiscussion paperOther research output

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N2 - We propose two new parametric tests for an unknown threshold in models with endogenous regressors. They are both based on unconventional 2SLS estimatorsthat use additional information about the linearity of the first stage. This information leads to more accurate residuals and therefore tests with better size properties than the Wald GMM test in Caner and Hansen (2004), which we show exhibits severe size distortions in small samples pertinent to empirical applications. We prove the bootstrap validity of our tests and evaluate their empirical relevance by revisiting the question whether government spending multipliers are larger in recessions. As Ramey and Zubairy (2018), we cannot rule out that they are the same in recessions or expansions.

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Rothfelder M, Boldea O. Testing for a Threshold in Models with Endogenous Regressors. Tilburg: CentER, Center for Economic Research. 2019 Oct 31. (Center Discussion Paper).