nep-bec New Economics Papers
on Business Economics
Issue of 2008‒09‒13
28 papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. The Impact of Macroeconomic Uncertainty on Firms' Changes in Financial Leverage By Christopher F. Baum; Atreya Chakraborty; Boyan Liu
  2. Distance to Frontier and Appropriate Business Strategy By Alex Coad
  3. Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach By Thomas Borek; Stefan Bühler; Armin Schmutzler
  4. Asymmetric Treatment of Identical Agents in Teams By Debashis Pal; Arup Bose; David Sappington
  5. A Note on the Determinants and Consequences of Outsourcing Using German Data By John T. Addison; Lutz Bellmann; André Pahnke; Paulino Teixeira
  6. The Shadow of Death: Analysing the Pre-Exit Productivity of Portuguese Manufacturing Firms By Carlos Carreira; Paulino Teixeira
  7. What Determines the Growth Ambition of Dutch Early-Stage Entrepreneurs? By Ingrid Verheul; Linda van Mil
  8. Wage Posting Without Full Commitment By Matthew Doyle; Jacob Wong
  9. A Statistical Equilibrium Model of Competitive Firms By Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
  10. Businesswomen in Germany and Their Performance by Ethnicity : It Pays to Be Self-Employed By Amelie Constant
  11. R&D Investment and Financing Constraints of Small and Medium-Sized Firm By Czarnitzki, Dirk; Binz, Hanna L.
  12. Econometric Analysis of Irreversible Investment with Financial Constraints: Comparison of Parametric and Semiparametric Estimations By ASANO Hirokatsu
  13. Effects of Intra-corporate Policies on the Work of Female Employees By Mamiko Takeuchi; Hisakazu Matsushige
  14. Exports and Firm Characteristics – First Evidence from Fractional Probit Panel Estimates By Joachim Wagner
  15. Bank competition - When is it Goog? By Christa Hainz;
  16. Managerial Ownership and Accounting Conservatism: Empirical Evidence from Japan By Akinobu Shuto; Tomomi Takada
  17. International Stock Return Predictability Under Model Uncertainty By Schrimpf, Andreas
  18. Entrepreneurial Competition and Its Impact on the Aggregate Economy By Katsuya Takii
  19. Equal Pay for Unequal Work: Limiting Sabotage in Teams By Debashis Pal; Arup Bose; David Sappington
  20. The Prevalence and Effects of Occupational Licensing By Kleiner, Morris M.; Krueger, Alan B.
  21. Business Volatility, Job Destruction, and Unemployment By Steven J. Davis; R. Jason Faberman; John Haltiwanger; Ron Jarmin; Javier Miranda
  22. Setup Cost Reduction and Supply Chain Coordination in Case of Asymmetric Information By Karl Inderfurth; Guido Voigt
  23. Bank competition and financial stability By Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
  24. "Financial Imperfection and Outsourcing Decision" By Noriyuki Yanagawa
  25. Corporate governance quality By Bocean, Claudiu George
  26. Which kind of transparency and when? Career Concerns, and Incentives for Acquiring Expertise By Heski Bar-Isaac
  27. Trust and Adaptive Learning in Implicit Contracts By Christian Lukas; Jens Robert Schöndube
  28. Has models’ forecasting performance for US output growth and inflation changed over time, and when? By Tatevik Sekhposyan; Barbara Rossi

  1. By: Christopher F. Baum (Boston College; DIW Berlin); Atreya Chakraborty (University of Massachusetts-Boston); Boyan Liu
    Abstract: We investigate the relationship between a firm’s measures of corporate governance, macroeconomic uncertainty and changes in leverage. Recent research highlights the role of governance in financing decisions. Previous research also indicates that macroeconomic uncertainty affects a firm’s ability to borrow. In this paper we investigate how both these channels of influence affects firms' financing decisions. Our findings show that macroeconomic uncertainty has an important role to play, both by itself and in interaction with a measure of corporate governance.
    Keywords: macroeconomic uncertainty, corporate governance, leverage
    JEL: D81 G32 G34
    Date: 2008–08–18
  2. By: Alex Coad
    Abstract: This paper is an empirical test of the hypothesis that the appropriateness of different business strategies is conditional on the firm’s distance to the industry frontier. We use data on four 2-digit high-tech manufacturing industries in the US over the period 1972-1999, and apply semi-parametric quantile regressions to investigate the contribution of firm behavior to market value at various points of the conditional distribution of Tobin’s q. Among our results, we observe that innovative activity, measured in terms of R&D expenditure or patents, has a strong positive association with market value at the upper quantiles (corresponding to the leader firms) whereas the innovative efforts of laggard firms are valued significantly less. Laggard firms, we suggest, should instead achieve productivity growth through efficient exploitation of existing technologies and imitation of industry leaders. Employment growth in leader firms is encouraged whereas growth of backward firms is not as well received on the stock market.
    Keywords: Distance to frontier; Strategy; Market value; Innovation; Firm growth
    JEL: L25 L21 D21 O31
    Date: 2008
  3. By: Thomas Borek; Stefan Bühler; Armin Schmutzler
    Abstract: This paper provides a simple reduced-form framework for analyzing merger decisions in the presence of asymmetric information about firm types, building on Shapiro's (1986) oligopoly model with asymmetric information about marginal costs. We employ this framework to examine what types of firms are likely to be involved in mergers. While we give sufficient conditions under which only low-type firms merge, as a lemons rationale would suggest, we also argue that these conditions will often be violated in practice. Finally, our analysis shows how signaling considerations affect merger decisions.
    Keywords: merger, asymmetric information, oligopoly
    JEL: D43 D82 L13 L33
    Date: 2008–06
  4. By: Debashis Pal; Arup Bose; David Sappington
    Abstract: We investigate when identical agents will be treated asymmetrically in a simple team setting. Asymmetric treatment is optimal when the agents individual contributions to team performance are complements. Symmetric treatment of identical agents is optimal when the agents contributions are substitutes or when they are independent.
    Date: 2008
  5. By: John T. Addison (Department of Economics, University of South Carolina, GEMF/University of Coimbra, and IZA Bonn); Lutz Bellmann (Institut für Arbeitsmarkt- und Berufsforschung der Bundesagentur für Arbeit, Nürnberg); André Pahnke (Institut für Arbeitsmarkt- und Berufsforschung der Bundesagentur für Arbeit, Nürnberg); Paulino Teixeira (GEMF and Faculty of Economics of the University of Coimbra)
    Abstract: Using German data from the Institute for Employment Research Establishment Panel, this paper constructs two main measures of outsourcing and examines their determinants and consequences for employment. There are some commonalities in the correlates of the two measures of outsourcing, as well as agreement on the absence of adverse employment effects across all industries. For one specification, however, some negative effects are reported for manufacturing industry, balanced by positive effects for the services sector for another. But there are no indications of survival bias. This is because the association between outsourcing and plant closings is predominantly negative, albeit poorly determined.
    Keywords: outsourcing, organizational change, employment change, plant closings, value added
    JEL: F16 J23
    Date: 2008
  6. By: Carlos Carreira (GEMF and Faculdade de Economia, Universidade de Coimbra); Paulino Teixeira (GEMF and Faculty of Economics of the University of Coimbra)
    Abstract: In this study, we examine the pre-exiting productivity profile of mature firms relatively to survivors. We also evaluate how the observed productivity pattern affects the probability of exit. Our approach is an empirical one, and it is based on an unbalanced panel of Portuguese manufacturing firms covering the period of one decade. Our findings confirm that market selection forces low-productivity firms to exit, but we also found that there is a sizeable portion of firms located at the bottom of the distribution that do not shut down. Conversely, there is a non-negligible fraction of high-productivity firms that do actually fail. In line with some key theoretical predictions, exiting firms reveal a falling productivity level in a number of years prior to exit. Finally, our results from the probit model on the likelihood of exiting show that low productivity firms are much more likely to shut down.
    Keywords: Exit pattern, Productivity, Firm survival, Portugal
    JEL: L25 D24 D21 L60
    Date: 2008
  7. By: Ingrid Verheul; Linda van Mil
    Abstract: This paper investigates the determinants of the ambition to grow among Dutch early-stage entrepreneurs (nascents and young business owners). We use Adult Population Survey data of the Global Entrepreneurship Monitor (GEM) for the Netherlands. Merging cross-sectional data of the years 2002 to 2007, we arrive at a sample of 409 nascents and 336 young business owners. Growth ambition is measured by asking the respondent which statement fits him or her best: (1) I want my company to be as large as possible, or (2) I want a size I can manage myself or with a few key employees. We find that nascent entrepreneurs and young business owners are equally likely to strive after business growth. For nascent entrepreneurs we find that fear of failure and entrepreneurial self-efficacy are important factors explaining growth ambition. Starting a business because of perceiving and exploiting a business opportunity (as opposed to starting a business out of necessity) is an important driver of growth ambition for both nascents and young business owners, although it is more important for nascents.
    Date: 2008–09–05
  8. By: Matthew Doyle (Department of Economics, University of Waterloo); Jacob Wong (School of Economics, The University of Adelaide)
    Abstract: Wage posting models of job search typically assume that firms can commit to paying workers the posted wage. This paper investigates the consequences of relaxing this assumption. Under "downward" commitment firms can commit only to paying at least their advertised wage. We show that wage posting is always an equilibrium, although in special cases other equilibria can exist. Surprisingly, the wage posting equilibrium in our economy is identical to the equilibrium when firms can commit to paying exactly their posted wage. When firms cannot even commit to paying at least their advertised wage, equilibrium exhibits job auctions with wage dispersion which generally are not constrained efficient.
    Keywords: directed search, wage posting, job auctions, commitment
    JEL: C78 D40 J64
    Date: 2008–08
  9. By: Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
    Abstract: We argue that the complex interactions of competitive heterogeneous firms lead to a statistical equilibrium distribution of firms’ profit rates, which turns out to be an exponential power (or Subbotin) distribution. Moreover, we construct a diffusion process that has the Subbotin distribution as its stationary probability density, leading to a phenomenologically inspired interpretation of variations in the shape parameter of the statistical equilibrium distribution. Our main finding is that firms’ idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin.
    Keywords: Statistical equilibrium, maximum entropy principle, diffusion process, stochastic differential equation, competition, profit rate
    JEL: C16 D21 E10 L10
    Date: 2008
  10. By: Amelie Constant
    Abstract: In this paper I assert that the entrepreneurial spirit can also exist in salaried jobs. I study the determinants of wages and the labor market success of two kinds of entrepreneurial women in Germany - self-employed and salaried businesswomen - and investigate whether ethnicity is important in these challenging jobs. Employing data from the German Socioeconomic Panel I estimate selection adjusted wage regressions for both types of businesswomen by country of origin. I find that self-employment offers businesswomen a lucrative avenue with higher monetary rewards, albeit for a shorter spell. If salaried businesswomen went into self-employment, they would receive considerably higher wages and for at least 30 years. However, if self-employed businesswomen went into salaried jobs, their wages would decline, suggesting that it is the self-employment sector that offers better opportunities and monetary success. Self-employed women in Germany fare well and most importantly, success does not depend on their ethnicity.
    Keywords: Businesswomen; Entrepreneurship; Self-employment; Economics of Minorities; Immigrants wage differentials
    JEL: M13 J23 J15 J61 J31
    Date: 2008
  11. By: Czarnitzki, Dirk; Binz, Hanna L.
    Abstract: This study tests for financial constraints on R&D investment and how they differ from capital investment. To identify constraints in the access to external capital, we employ a credit rating index. Our models show that internal constraints, measured by mark-ups, are more decisive for R&D than for capital investment. For external constraints, we find a monotonic relationship between the level of constriction and firm size for both types of investment. Thus, external constraints turn out to be more binding with decreasing firm size. On the contrary, we do not find such monotonic relationships for internal constraints. Differentiation by firms’ age does not support lower constraints for older firms.
    Keywords: R&D Investment, Capital Investment, Financial Constraints, Panel Data, Censored Regression Models
    JEL: O31 O32
    Date: 2008
  12. By: ASANO Hirokatsu
    Abstract: This analysis investigates irreversible investment with financial constraints by parametric and semiparametric estimations. The analysis examines four U.S. industries, employing a sample selection model as it develops its econometric model in accordance with real options theory. The analysis finds that liquidity positively affects capital investment, which is compatible with the theory. In addition, while investment is insensitive to sales revenue and operating costs, capital stock negatively affects investment. The analysis also finds that the sample selection bias is large and that a biased OLS estimator underestimates the coefficients of interest. The analysisf model selection is inconclusive.
    Date: 2008–08
  13. By: Mamiko Takeuchi (Research Fellow, Japan Society for the Promotion of Science); Hisakazu Matsushige (Professor, Osaka School of International Public Policy, Osaka University)
    Abstract: On the basis of a survey performed at Japanese pharmaceutical companies, we analyze the processes and the influence that family-friendly policies exert on the promotion of women employees and corporate performance through womenfs activities. In particular, Structural Equation Modeling is used to clarify complex causality between the promotion of women employees and personnel policies. The results of our analysis indicate that even if complex relations between the variables are taken into account, productive improvements due to family-friendly policies are not observed. Although family-friendly policies do not have a direct effect on the promotions or wages of women, they have an indirect effect on womenfs promotions and wage increases through the length of their tenure.
    Keywords: Structural Equation Modeling, Family-friendly Policy, Career Advancement of Women, Corporate Performance, Pharmaceutical Company
    JEL: J16 J17 J24 J31 J81
    Date: 2008–07
  14. By: Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg)
    Abstract: Using recently released nationally representative data and a new estimator for fractional probit panel models, this paper reconsiders the relationship between the fraction of exports in total sales and firm characteristics in West and East German manufacturing. Controlling for unobserved firm characteristics no impact of human capital and R&D intensity on export performance is found, while firm size is positively related to exporting in West Germany only.
    Keywords: Exports, firm characteristics, fractional probit panel model, Germany
    JEL: F14
    Date: 2008–08
  15. By: Christa Hainz; (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany; )
    Abstract: The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms’ access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.
    Keywords: Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium
    JEL: D82 G21 K00
    Date: 2008–09
  16. By: Akinobu Shuto (Research Institute for Economics and Business Administration, Kobe University); Tomomi Takada (Graduate School of Business Administration, Kobe University)
    Abstract: We examine the effect of managerial ownership on the demand for accounting conservatism as measured by the asymmetric timeliness of earnings (Basu, 1997). The separation of ownership and control as reflected by the levels of managerial ownership induce two agency problems between managers and shareholders: the incentive alignment effect and the management entrenchment effect. Since accounting conservatism is expected to mitigate agency problems between managers and shareholders, we predict that these agency problems increase the demand for accounting conservatism. We empirically test the relationship between managerial ownership and the asymmetric timeliness of earnings using a cubic form model for Japanese firms. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. Our results hold after controlling the market-to-book ratio, leverage, firm size, and year. These evidences support our prediction and suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders.
    Keywords: Managerial ownership; accounting conservatism; alignment effect; entrenchment effect
    JEL: M41 G32
    Date: 2008–08
  17. By: Schrimpf, Andreas
    Abstract: This paper examines return predictability when the investor is uncertain about the right state variables. A novel feature of the model averaging approach used in this paper is to account for finite-sample bias of the coefficients in the predictive regressions. Drawing on an extensive international dataset, we find that interest-rate related variables are usually among the most prominent predictive variables, whereas valuation ratios perform rather poorly. Yet, predictability of market excess returns weakens substantially, once model uncertainty is accounted for. We document notable dierences in the degree of in-sample and out-of-sample predictability across different stock markets. Overall, these findings suggests that return predictability is not a uniform and a universal feature across international capital markets.
    Keywords: Stock Return Predictability, Bayesian Model Averaging, Model Uncertainty, International Stock Markets
    JEL: E44 G12 G14 G15
    Date: 2008
  18. By: Katsuya Takii (Associate Professor, Osaka School of International Public Policy, Osaka University)
    Abstract: This paper models entrepreneurship as the entrepreneur's information processing activity in order to predict changes in demand and reallocate resources. The results show that allocative efficiency---and therefore aggregate productivity---increases through intensified competition by entrepreneurs grasping at opportunities. This fierce competition leads to price reductions that result in the improvement of measured aggregate productivity. The price reduction also forces relatively less able entrepreneurs to become workers. As resources are then dealt with only by relatively talented entrepreneurs, this selection effect also increases aggregate productivity. The paper also discusses how the selection effect influences the distribution of firm size.
    JEL: D21 D61 D83 L25 L26
    Date: 2008–09
  19. By: Debashis Pal; Arup Bose; David Sappington
    Abstract: We demonstrate the value of equal pay policies in teams, even when team members have distinct abilities and make different contributions to team performance. A commitment to compensate all team members in identical fashion eliminates the incentive that each team member otherwise has to sabotage the activities of teammates in order to induce the team owner to implement a more favorable reward structure. The reduced sabotage benefits the team owner, and can secure Pareto gains under plausible circumstances.
    Date: 2008
  20. By: Kleiner, Morris M. (University of Minnesota); Krueger, Alan B. (Princeton University)
    Abstract: This study provides the first nation-wide analysis of the labor market implications of occupational licensing for the U.S. labor market, using data from a specially designed Gallup survey. We find that in 2006, 29 percent of the workforce was required to hold an occupational license from a government agency, which is a higher percentage than that found in studies that rely on state-level occupational licensing data. Workers who have higher levels of education are more likely to work in jobs that require a license. Union workers and government employees are more likely to have a license requirement than are nonunion or private sector employees. Our multivariate estimates suggest that licensing has about the same quantitative impact on wages as do unions – that is about 15 percent, but unlike unions which reduce variance in wages, licensing does not significantly reduce wage dispersion for individuals in licensed jobs.
    Keywords: occupational licensing, regulation, wages
    JEL: J8
    Date: 2008–08
  21. By: Steven J. Davis; R. Jason Faberman; John Haltiwanger; Ron Jarmin; Javier Miranda
    Abstract: Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in the job destruction rate and the volatility of firm-level employment growth rates. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of unemployment. According to these models, a lower intensity of idiosyncratic shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate the importance of this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove big declines in the incidence and rate of unemployment. This evidence implies that the unemployment rate has become much less sensitive to cyclical movements in the job-finding rate.
    JEL: E24 E32 J60
    Date: 2008–09
  22. By: Karl Inderfurth (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Guido Voigt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Screening contracts are a common approach to solve supply chain coordination problems under asymmetric information. Previous research in this area shows that asymmetric information leads to supply chain coordination deficits. We extend the standard framework of lotsizing decisions under asymmetric information by allowing investments in setup cost reduction. We find that asymmetric information leads to an overinvestment in setup cost reduction. Yet, the overall effect on supply chain performance is ambiguous. We show that these results holds for a wide variety of investment functions.
    Date: 2008–06
  23. By: Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
    Abstract: Under the traditional"competition-fragility"view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative"competition-stability"view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional"competition-fragility"view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the"competition-stability"view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,,Markets and Market Access
    Date: 2008–08–01
  24. By: Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: The relation between productivity level and the mode of organi- zation remains on unsolved puzzle in international trade theory. As pointed out by Antras and Helpman (2004), while some studies in- dicate that low productivity .rms choose to outsource, other studies have derived results to the contrary. This paper attempts to solve the puzzle by taking into account the imperfections of .nancial markets. If the enforcement level of the .nancial market in the South country is low, only low productivity .rms choose outsourcing in the South. On the other hand, if the enforcement level is su‘ ciently high in the South country, high productivity .rms choose outsourcing in the South and low productivity .rms choose integration in the North country. Thus, we demonstrate that the di?erence in the empirical results of previous studies arises from the di?erent degrees of .nancial imperfections in the host country. Furtheremore, we extend this model to a multi-country model.
    Date: 2008–09
  25. By: Bocean, Claudiu George
    Abstract: Corporate governance quality in most countries has overall improved, although to varying degrees and with a few notable exceptions. Corporate governance issues are especially important in emerging countries, since these countries do not have the long-established financial institution infrastructure to deal with corporate governance issues. This paper discusses how emerging countries are dealing with corporate governance quality issues. In emerging countries the impact of improvements in corporate governance quality on traditional measures of real economic activity was positive, significant, and quantitatively relevant, and the growth effect is particularly pronounced for industries that implemented principles and codes of corporate governance.
    Keywords: corporate governance quality; corporate governance principles; emerging country
    JEL: G38 G30
    Date: 2008–03–08
  26. By: Heski Bar-Isaac
    Date: 2008
  27. By: Christian Lukas (Faculty of Law, Economics and Politics, University of Konstanz); Jens Robert Schöndube (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We study e¤ects of trust in implicit contracts. Trust changes whenever the principal honors or dishonors an implicit contract. Usually a higher discount rate lowers the value of trade in an agency. We show that a su¢ ciently high level of (ex ante) trust can o¤set this ef- fect. Strategies of principals representing unique equilibria are endogenously derived given di¤erent levels of agents’bounded rationality. These strategies mirror a subset of the class of trigger strategies which is exogenously entered into previous implicit contracting models. Therefore our results o¤er some justi…cation for using that conventional approach. Implications for performance evaluation are discussed.
    Keywords: trust, implicit contracts, bounded rationality, adaptive learning, trigger strate- gies, game theory
    JEL: D8 D81 M12 M
    Date: 2008–06
  28. By: Tatevik Sekhposyan; Barbara Rossi
    Abstract: We evaluate various models’ relative performance in forecasting future US output growth and inflation on a monthly basis. Our approach takes into account the possibility that the models’ relative performance can be varying over time. We show that the models’ relative performance has, in fact, changed dramatically over time, both for revised and real-time data, and investigate possible factors that might explain such changes. In addition, this paper establishes two empirical stylized facts. Namely, most predictors for output growth lost their predictive ability in the mid-1970s, and became essentially useless in the last two decades. When forecasting inflation, instead, fewer predictors are significant (among which, notably, capacity utilization and unemployment), and their predictive ability significantly worsened around the time of the Great Moderation.
    Keywords: Output Forecasts, Inflation Forecasts, Model Selection, Structural Change, Forecast Evaluation, Real-time data. Evaluation
    JEL: C22 C52 C53
    Date: 2008

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