Journal of Econometrics N 165, P 100-111, 2011

Michael McAller, Marcelo Medeiros, Waldyr Dutra Areosa.

Nonlinear regressionmodels have been widely used in practice for a variety of time series and cross-section datasets. For purposes of analyzing univariate and multivariate time series data, in particular,smoothtransitionregression (STR) models have been shown to be very useful for representing and capturing asymmetric behavior. Most STR models have been applied to univariate processes, and have made a variety of assumptions, including stationary or cointegrated processes, uncorrelated, homoskedastic or conditionally heteroskedastic errors, and weakly exogenous regressors. Under the assumption of exogeneity, the standard method of estimation is nonlinear least squares. The primary purpose of this paper is to relax the assumption of weakly exogenous regressors and to discussmoment-based methods for estimating STR models. The paper analyzes the properties of the STR modelwith endogenousvariables by providing a diagnostic test of linearity of the underlying process under endogeneity, developing an estimation procedure and a misspecification test for the STR model, presenting the results of Monte Carlo simulations to show the usefulness of the model and estimation method, and providing an empirical application for inflation rate targeting in Brazil. We show that STR models withendogenousvariables can be specified and estimated by a straightforward application of existing results in the literature.