ECON321Economic Analysis

Tutorial 6

Time series issues: Structural breaks

Introduction• The lecture on chapter 10 explains that it is

important to make sure that your data do not contain structural breaks.

• A structural break implies that there are multiple regression relationships between the dependent and independent variables with different intercepts and/or slopes.

• You need to identify possible structural breaks and control for them by using dummies.

• A first step is to plot your variables. If a series shows a displacement over time, you have to be concerned.

• We continue with the example of interest rates, inflation and the budget deficit in the U.S.

Adding a dummy to your time series analysis can be very useful, but do not go overboard looking for breaks everywhere. Having more than one dummy becomes difficult to interpret. Only identify the break that you are able to explain with the history that goes with the series you are looking at.In ECON617 you will use dummies more sensibly to deal with seasonality in time series data. In 618 dummies are used to identify categories in cross-section data.Save your workfile and continue…