This paper considers a factor-augmented regression model in the presence of structural change. We propose a two-step procedure to estimate the coefficients of explanatory variables. We show that when the number of units (N) and the number of periods (T) are large and comparable, the proposed...

In this paper we extend the semiparametric varying coefficient model to contain non-stationary I(1) and time trend as covariates. We show that the local constant kernel estimation method leads to a consistent estimation result. This is in contrast to the semiparametric varying coefficient model...

The mean reversion of real exchange rates in G5 countries depends on both countries’ fiscal deficits/surplus in a nonlinear way. When the fiscal policy pushes the real exchange rate to be deviated further away from the equilibrium level, the mean reversion process is faster.