Publication Type

Journal Article

Publication Date

6-2009

Abstract

This paper develops a regression limit theory for discrete choice nonstationary panels with large cross section (N) and time series (T) dimensions. Some results emerging from this theory are directly applicable in the wider context of M-estimation. This includes an extension of work by Wooldridge [Wooldridge, J.M., 1994. Estimation and Inference for Dependent Processes. In: Engle, R.F., McFadden, D.L. (Eds.). Handbook of Econometrics, vol. 4, North-Holland, Amsterdam] on the limit theory of local extremum estimators to multi-indexed processes in nonlinear nonstationary panel data models. It is shown that the maximum likelihood (ML) estimator is consistent without an incidental parameters problem and has a limit theory with a fast rate of convergence N T (in the stationary case, the rate is N T) for the regression coefficients and thresholds, and a normal limit distribution. In contrast, the limit distribution is known to be mixed normal in time series modeling, as shown in [Park, J.Y., Phillips, P.C.B., 2000, Nonstationary binary choice. Econometrica, 68, 1249-1280] (hereafter PP), and [Phillips, P.C.B., Jin, S., Hu, L., 2007. Nonstationary discrete choice: A corrigendum and addendum. Journal of Econometrics 141(2), 1115-1130] (hereafter, PJH). The approach is applied to exchange rate regime choice by monetary authorities, and we provide an analysis of the empirical phenomenon known as "fear of floating".

Keywords

Brownian local time, Discrete choice model, Exchange rate regime, Fear of floating, Fixed effects, Joint limits

Discipline

Econometrics | Finance

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

150

Issue

2

First Page

312

Last Page

321

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2008.12.009

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1016/j.jeconom.2008.12.009

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