Browse > Article
http://dx.doi.org/10.5762/KAIS.2014.15.11.6565

Marginal Propensity to Consume with Economic Shocks - FIML Markov-Switching Model Analysis  

Yoon, Jae-Ho (Senior Economist, POSCO Research Institute)
Lee, Joo-Hyung (Graduate School of Urban Studies, Hanyang University)
Publication Information
Journal of the Korea Academia-Industrial cooperation Society / v.15, no.11, 2014 , pp. 6565-6575 More about this Journal
Abstract
Hamilton's Markov-switching model [5] was extended to the simultaneous equations model. A framework for an instrumental variable interpretation of full information maximum likelihood (FIML) by Hausman [4] can be used to deal with the problem of simultaneous equations based on the Hamilton filter [5]. A comparison of the proposed FIML Markov-switching model with the LIML Markov-switching models [1,2,3] revealed the LIML Markov-switching models to be a special case of the proposed FIML Markov-switching model, where all but the first equation were just identified. Moreover, the proposed Markov-switching model is a general form in simultaneous equations and covers a broad class of models that could not be handled previously. Excess sensitivity of marginal propensity to consume with big shocks, such as housing bubble bursts in 2008, can be determined by applying the proposed model to Campbell and Mankiw's consumption function [6], and allowing for the possibility of structural breaks in the sensitivity of consumption growth to income growth.
Keywords
FIML; LIML; instrumental variable; simultaneous equation; Markov switching; Hamilton filter; consumption; income; bubble burst;
Citations & Related Records
연도 인용수 순위
  • Reference
1 C. J. Kim, "Markov-switching models with endogenous explanatory variables", Journal of Econometrics, 122, 1, pp.127-136, 2004. DOI: http://dx.doi.org/10.1016/j.jeconom.2003.10.021   DOI
2 C. J. Kim, "Markov-switching models with endogenous explanatory variables II: A two-step MLE procedure with standard-error correction", Journal of Econometrics, 148, 1, pp.46-55, 2009. DOI: http://dx.doi.org/10.1016/j.jeconom.2008.09.023   DOI
3 F. Spagnolo, Z. Psaradakis, M. Sola, "Testing the Unbiased Forward Exchange Rate Hypothesis Using a Markov Switching Model and Instrumental Variables", Journal of Applied Econometrics, 20, 3, pp.423-437, 2005. DOI: http://dx.doi.org/10.1002/jae.773   DOI
4 Jerry A. Hausman, "An instrumental variable approach to full information estimators for linear and certain nonlinear econometric models", Econometrica, 43, pp.727-738, 1975 DOI: http://dx.doi.org/10.2307/1913081   DOI
5 J. D. Hamilton, "A new approach to the economic analysis of nonstationary time series and the business cycle", Econometrica, 57, 2, pp.357-384, 1989. DOI: http://dx.doi.org/10.2307/1912559   DOI   ScienceOn
6 John Y. Campbell, N. Gregory Mankiw, "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence", In National Bureau of Economic Research Macroeconomics Annual 1989, eds. Oliver J. Blanchard and Stanley Fisher, MIT Press, Cambridge MA, pp.185-216. 1989.
7 Jerry A. Hausman, Whitney K. Newey, William E. Taylor, "Efficient Estimation and Identification of Simultaneous Equation Models with Covariance Restrictions", Econometrica, 55, pp.849-874, 1987. DOI: http://dx.doi.org/10.2307/1911032   DOI
8 Miles S. Kimball, "Precautionary savings and the marginal propensity to consume", NBER Working Paper No. 3403, 1990.
9 S, Radchenko, H. Tsurumi, "Limited Information Bayesian Analysis of a Simultaneous Equation with an Autocorrelated Error Term and its Application to the U.S. Gasoline Market", Journal of Econometrics, 133, pp.31-49, 2006. DOI: http://dx.doi.org/10.1016/j.jeconom.2005.03.008   DOI