8 Nonlinear time series and macroeconometrics

Publisher Summary This chapter discusses recent advances in econometric techniques that have allowed economists to assess both the validity of the assumption of linear stochastic dynamics and the requirement of exogenous driving forces, and examines two potential types of nonlinear economic time series. The first type is time series generated by a nonlinear map with chaotic properties. The output of the nonlinear map may be observed through an “observer” function which is, perhaps, buffeted with measurement noise. The map itself may be perturbed by exogenous noise. The second type is time series generated by a nonlinear difference equation propagated by additive noise that satisfies a martingale difference property. The chapter emphasizes on testing for nonlinear structure of both types, and on a testing methodology with its origins in the deterministic chaos concept of correlation integrals.

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