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on Central Banking |
| By: | David Andolfatto; Scott Hendry; Kevin Moran |
| URL: | http://d.repec.org/n?u=RePEc:dnb:staffs:121&r=cba |
| By: | Lars Peter Hansen |
| Abstract: | This paper explores two perspectives on the rational expectations hypothesis. One perspective is that of economic agents in such a model, who form inferences about the future using probabilities implied by the model. The other is that of an econometrician who makes inferences about the probability model that economic agents are presumed to use. Typically it is assumed that economic agents know more than the econometrician, and econometric ambiguity is often withheld from the economic agents. To understand better both of these perspectives and the relation between them, I appeal to statistical decision theory to characterize when learning or discriminating among competing probability models is challenging. I also use choice theory under uncertainty to explore the ramifications of model uncertainty and learning in environments in which historical data may be insufficient to yield precise probability statements. I use both tools to reassess the macroeconomic underpinnings of asset pricing models. I illustrate how statistical ambiguity can alter the risk-return tradeoff familiar from asset pricing; and I show that when real time learning is included risk premia are larger when macroeconomic growth is lower than average. |
| JEL: | C11 C32 C52 E21 E44 G1 G12 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12948&r=cba |
| By: | Jeffery D. Amato; Hyun Song Shin |
| URL: | http://d.repec.org/n?u=RePEc:dnb:staffs:117&r=cba |
| By: | Ricardo J. Caballero; Eduardo M.R.A. Engel |
| Date: | 2007–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:321307000000000856&r=cba |
| By: | Klaus Adam |
| URL: | http://d.repec.org/n?u=RePEc:dnb:staffs:116&r=cba |
| By: | George W. Evans; Seppo Honkapohja; Kaushik Mitra |
| Abstract: | We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks. |
| Keywords: | Taxation, expectations, Ramsey model |
| JEL: | E62 D84 E21 E43 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0705&r=cba |
| By: | Karsten Staehr |
| Abstract: | This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995-2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Autonomous fiscal policy has little or no effect on cyclical variability in either of the two groups of countries. Counter-cyclical fiscal policy appears to be effective in Central and Eastern European countries, but largely ineffective in eurozone countries |
| Keywords: | fiscla policy determinants, fiscal policy effects, eurozone expansion |
| JEL: | E62 E63 E32 |
| Date: | 2007–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2007-03&r=cba |
| By: | Enrique G. Mendoza; Jonathan D. Ostry |
| Abstract: | This paper looks at fiscal solvency and public debt sustainability in both emerging market and advanced countries. Evidence of fiscal solvency, in the form of a robust positive conditional relationship between public debt and the primary fiscal balance, is established in both groups of countries, as well as in the sample as a whole. Evidence of fiscal solvency is much weaker, however, at high debt levels. The debt-primary balance relationship weakens considerably in emerging economies as debt rises above 50 percent of GDP. Moreover, the relationship vanishes in high-debt countries when the countries are split into high- and low-debt groups relative to sample means and medians, and this holds for industrial countries, emerging economies, and in the combined sample. These findings suggest that many industrial and emerging economies, including several where fiscal solvency has been the subject of recent debates, appear to conduct fiscal policy responsibly. Yet our results cannot reject the hypothesis of fiscal insolvency in groups of countries with high debt ratios, where the response of the primary balance to increases in debt is not statistically significant. |
| JEL: | E62 F34 F41 H6 H68 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12947&r=cba |
| By: | Carin van der Cruijsen; Sylvester Eijffinger |
| Abstract: | We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its e¤ects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: - the empirical research resolves all theoretical question marks, -how the endings of the literature match the actual practice of central banks, and - where there is scope for more research. |
| Keywords: | Central Bank Transparency; Monetary Policy; Surve |
| JEL: | E31 E52 E58 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:132&r=cba |
| By: | Baeriswyl, Romain |
| Abstract: | This paper contributes to the ongoing debate about the welfare effect of public information. In an environment characterized by imperfect common knowledge and strategic complementarities, Morris and Shin (2002)argue that noisy public information may be detrimental to welfare because public information is attributed too large a weight relative to its face value since it serves as a focal point. While this argument has received a great deal of attention in central banks and in the financial press, it considers communication as the sole task of a central bank and ignores that communication usually goes with a policy action. This paper accounts for the action task of a central bank and analyzes whether public disclosure is beneficial in the conduct of monetary policy when the central bank primarily tries to stabilize the economy with an instrument that is optimal with respect to its perhaps mistaken view. In this context, it turns out that transparency is particularly beneficial when central bank’s information is poorly accurate because it helps reducing the distortion associated with badly suited policies. |
| Keywords: | differential information; monetary policy; transparency |
| JEL: | D82 E52 E58 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:1381&r=cba |
| By: | Marco Hoeberichts; Mewael Tesfaselassie; Sylvester Eijffinger |
| URL: | http://d.repec.org/n?u=RePEc:dnb:staffs:122&r=cba |
| By: | Maral Kichian; Oleksiy Kryvtsov |
| Abstract: | We assess the implications of price indexation for estimated frequency of price adjustment in sticky price models of business cycles. These models predominantly assume that non-reoptimized prices are indexed to lagged or average inflation. The assumption of price indexation adds tractability although it is not likely reflective of the price practices of firms at the micro level. Under indexation firms have less incentive to adjust their prices, which implies downward bias in the estimated frequency of price changes. To evaluate the bias, we generate data with Calvo-type models without indexation. The artificial data are then used to estimate the frequency of price changes with indexation. Considering different assumptions about the degree of price rigidity and the level of trend inflation in the data-generating model, we find that the estimated indexation bias can be substantial, ranging up to 12 quarters in some cases. |
| Keywords: | Inflation and prices; Economic models; Econometric and statistical methods |
| JEL: | E31 E37 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-15&r=cba |
| By: | Nelson, Edward |
| Abstract: | This paper considers the Great Inflation of the 1970s in Japan and Germany. From 1975 onward these countries had low inflation relative to other large economies. Traditionally, this success is attributed to stronger discipline on the part of Japan and Germany’s monetary authorities - for example, more willingness to accept temporary unemployment, or stronger determination not to monetize government deficits. I instead attribute the success of these countries from the mid-1970s to their governments’ and monetary authorities’ acceptance that inflation is a monetary phenomenon. Their higher inflation in the first half of the 1970s is attributable to the fact that their policymakers over this period embraced non-monetary theories of inflation. |
| Keywords: | Germany; Great Inflation; incomes policy; Japan; monetary targeting |
| JEL: | E52 E58 E64 E65 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6156&r=cba |
| By: | Francesco Lippi; Stefano Neri |
| URL: | http://d.repec.org/n?u=RePEc:dnb:staffs:120&r=cba |
| By: | Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University); Stanislav Radchenko (University of North Carolina, Charlotte) |
| Abstract: | In this paper we take an agnostic view of the Phillips curve debate, and carry out an empirical investigation of the relative and absolute efficacy of Calvo sticky price (SP), sticky information (SI), and sticky price with indexation models (SPI), with emphasis on their ability to mimic inflationary dynamics. In particular, we look at evidence for a group of 13 OECD countries, and we consider three alternative measures of inflationary pressure, including the output gap, labor share, and unemployment. We find that the Calvo SP and the SI models essentially perform no better than a strawman constant inflation model, when used to explain inflation persistence. Indeed, virtually all inflationary dynamics end up being captured by the residuals of the estimated versions of these models. We find that SPI model is preferable because it captures the type of strong inflationary persistence that has in the past characterized the economies of the countries in our sample. However, two caveats to this conclusion are that improvement in performance is driven mostly by the time series part of the model (i.e. lagged inflation) and that the SPI model overemphasizes inflationary persistence. Thus, there appears to be room for improvement via either modified versions of the above models, or via development of new models, that better “track” inflation persistence. |
| Keywords: | empirical distribution, model selection, sticky information, sticky price |
| JEL: | C32 E12 E3 |
| Date: | 2006–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200617&r=cba |
| By: | Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University) |
| Abstract: | In this paper we construct output gap and inflation predictions using a variety of DSGE sticky price models. Predictive density accuracy tests related to the test discussed in Corradi and Swanson (2005a) as well as predictive accuracy tests due to Diebold and Mariano (1995) andWest (1996) are used to compare the alternative models. A number of simple time series prediction models (such as autoregressive and vector autoregressive (VAR) models) are additionally used as strawman models. Given that DSGE model restrictions are routinely nested within VAR models, the addition of our strawman models allows us to indirectly assess the usefulness of imposing theoretical restrictions implied by DSGE models on unrestricted econometric models. With respect to predictive density evaluation, our results suggest that the standard sticky price model discussed in Calvo (1983) is not outperformed by the same model augmented either with information or indexation, when used to predict the output gap. On the other hand, there are clear gains to using the more recent models when predicting inflation. Results based on mean square forecast error analysis are less clear-cut, although the standard sticky price model fares best at our longest forecast horizon of 3 years, and performs relatively poorly at shorter horizons. When the strawman time series models are added to the picture, we find that the DSGE models still fare very well, often winning our forecast competitions, suggesting that theoretical macroeconomic restrictions yield useful additional information for forming macroeconomic forecasts. |
| Keywords: | model selection, predictive density, sticky information, sticky price |
| JEL: | C32 E12 E3 |
| Date: | 2006–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200615&r=cba |
| By: | Norman Swanson (Rutgers University); Oleg Korenok (Virginia Commonwealth University) |
| Abstract: | In this paper, we add to the literature on the assessment of how well RBC simulated data reproduce the dynamic features of historical data. In particular, we evaluate a variety of new Keynesian DSGE models, including the standard sticky price model discussed in Calvo (1983), the sticky price with dynamic indexation model discussed in Christiano, Eichenbaum and Evans (2001), Smets and Wouters (2003), and Del Negro and Schorfheide (2005), and the sticky information model of Mankiw and Reis (2002). We carry out our evaluation by using standard impulse response and correlation measures and via use of a distribution based approach for comparing all of our (possibly) misspecified DSGE models via direct comparison of simulated inflation and output gap values with corresponding historical values. In this sense, our analysis can be thought of as an empirical model selection exercise. In addition, and given that one of our objectives is to choose the model which yields simulation distributions that are closest to the historical record, our analysis can be viewed as a type of predictive density model selection, where the “best” simulated distributions can be used as predictive densities whenever the starting values for the simulations correspond to those actual historical values which are most recently available. Some important precedents to our approach to accuracy assessment include DeJong, Ingram, and Whiteman (1996) and Geweke (1999a,b). One of our main findings is that for a standard level of stickiness (i.e. annual price or information adjustment), the sticky price model with indexation dominates other models. However, when models are calibrated using the lower level of information and price stickiness, there is much less to choose from between the models. |
| Keywords: | empirical distribution, model selection, sticky information, sticky price |
| JEL: | C32 E12 E3 |
| Date: | 2006–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200612&r=cba |
| By: | Andrea Carriero (Queen Mary, University of London) |
| Abstract: | We propose a way to test the New Keynesian Phillips Curve (NKPC) without estimating the structural parameters governing the curve, i.e. price stickiness and firms’ backwardness. Using this strategy we can test the NKPC avoiding the identification problems related to the GMM approach. We find that it does not exist a combination of the structural parameters which is consistent with US data. This result does not necessarily imply that the idea of a forward looking price setting behaviour should be entirely disregarded, as the rejection might be due to the failure of the joint hypothesis of rational expectations. Thus further research should be aimed at providing alternative models for agents’ expectations. |
| Keywords: | VARs, Inflation, Phillips curve |
| JEL: | C32 E31 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp592&r=cba |
| By: | Stefano Siviero (Banca d'Italia); Giovanni Veronese (Banca d'Italia) |
| Abstract: | Although the concept of core inflation is apparently well defined and intuitively appealing, its practical usefulness has often been questioned on at least two accounts: first, existing core inflation measures are by and large exclusively based on statistical criteria and thus lack a firm theoretical justification; second, there appears to be no generally accepted and plausible criterion to assess the empirical performance of competing measures. Both criticisms are indeed justified. In this paper we propose an approach to build a benchmark measure of core inflation that aims to overcome those drawbacks. Our measure is based on a criterion that explicitly treats core inflation as a wholly artificial concept whose usefulness rests only on its role in defuse inflationary pressures that may be in the pipeline. Our measure is obtained by conveniently combining disaggregate information coming from price sub-indices, as is the case for the most popular core inflation measures. However, we depart from all other approaches by combining the information available in price sub-indices in such a way so as to provide the best guidance to a forward-looking monetary policy-maker. Accordingly, our measure of core inflation is based on the solution of a standard monetary policy optimisation problem. We illustrate our approach using a simple estimated model of the euro-area economy and appraise the performance of a few of the most popular core inflation measures in use. We find, generally speaking, that one cannot recommend that those measures be used to support monetary policy-making. |
| Keywords: | core inflation, optimal monetary policy rules, Eurosystem |
| JEL: | C53 E52 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_617_07&r=cba |
| By: | Oscar Mauricio Valencia |
| Abstract: | This paper explores the welfare effects of a reduction in the inflation rates in an environment of incomplete markets. We built a dynamic heterogeneous agent model that features idiosyncratic risks in the labor supply and liquidity frictions. The model shows that a disinflation policy results in an income reallocation among debtors and lenders. The changes in the capital returns conveys variations in the precautionary savings and hence, an intertemporal redistribution of wealth and income. The welfare implications are develop according to the incomplete market features and the money plays a role of smoothing consumption when the agents faces income variability without state contingent insurance. The model is calibrated for the Colombian economy in such a way that disinflation episodes are replicated. Early results show that the disinflation monetary policy leads to improvements of liquidity in the economy because the money holdings are used by the agents for wealth transfer over time. This paper shows quantitative evidence in which disinflation facts are associated with increments in the average real money holdings and average consumption. In addition, the volatility of consumption is reduced as the inflation rate falls, while the volatility of money holdings increases (i.e. precautionary demand for money balance). |
| Date: | 2006–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:col:001049:002838&r=cba |
| By: | Urzúa, Carlos M. (Tecnológico de Monterrey, Campus Ciudad de México) |
| Abstract: | Vector autoregressive models are often used in Macroeconomics to draw conclusions about the effects of policy innovations. However, those results depend on the researcher’s priors about the particular ordering of the variables. As an alternative, this paper presents a simple rule based on the Maximum Entropy principle that can be used to find the “most likely” ordering. The proposal is illustrated in the case of a VAR model of the U.S. economy. It is found that monetary policy shocks are better represented by innovations in the federal funds rate rather than by innovations in non-borrowed reserves. |
| Keywords: | VAR, impulse-response functions, varimin, maximum entropy, monetary policy shocks |
| JEL: | C32 C51 E52 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:ega:docume:200703&r=cba |
| By: | Andrea Carriero (Queen Mary, University of London); Massimiliano Marcellino (IEP-Bocconi University, IGIER and CEPR) |
| Abstract: | In this paper we provide an overview of recent developments in the methodology for the construction of composite coincident and leading indexes, and apply them to the UK. In particular, we evaluate the relative merits of factor based models and Markov switching specifications for the construction of coincident and leading indexes. For the leading indexes we also evaluate the performance of probit models and pooling. The results indicate that alternative methods produce similar coincident indexes, while there are more marked di.erences in the leading indexes. |
| Keywords: | Forecasting, Business cycles, Leading indicators, Coincident indicators, Turning points |
| JEL: | E32 E37 C53 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp590&r=cba |
| By: | Óscar J. Arce (Banco de España) |
| Abstract: | Motivated by a strong degree of hysteresis in the stock of monetization observed after the end of hyperinflations, I provide a cash-and-credit model in which the use of money exhibits some persistence because individuals can establish long-lasting credit relationships. This feature helps to account for the main stylized facts of extreme hyperinflations and reconcile some conflicting views on their causes, development and end without departing from rational expectations. Unlike the existing literature, I show that when hysteresis is possible, an orthodox fiscal-monetary reform that successfully stops a speculative hyperinflation may not be sufficient to prevent it. |
| Keywords: | hyperinflation, fiscal-monetary reform, multiple equilibria, hysteresis |
| JEL: | E31 E41 E63 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0607&r=cba |
| By: | John Geweke; Joel Horowitz; M. Hashem Pesaran |
| Abstract: | As a unified discipline, econometrics is still relatively young and has been transforming and expanding very rapidly over the past few decades. Major advances have taken place in the analysis of cross sectional data by means of semi-parametric and non-parametric techniques. Heterogeneity of economic relations across individuals, firms and industries is increasingly acknowledged and attempts have been made to take them into account either by integrating out their effects or by modeling the sources of heterogeneity when suitable panel data exists. The counterfactual considerations that underlie policy analysis and treatment evaluation have been given a more satisfactory foundation. New time series econometric techniques have been developed and employed extensively in the areas of macroeconometrics and finance. Non-linear econometric techniques are used increasingly in the analysis of cross section and time series observations. Applications of Bayesian techniques to econometric problems have been given new impetus largely thanks to advances in computer power and computational techniques. The use of Bayesian techniques have in turn provided the investigators with a unifying framework where the tasks of forecasting, decision making, model evaluation and learning can be considered as parts of the same interactive and iterative process; thus paving the way for establishing the foundation of “real time econometrics”. This paper attempts to provide an overview of some of these developments. |
| Keywords: | History of econometrics, Microeconometrics, Macroeconometrics, Bayesian Econometrics, Nonparametric and Semi-parametric Analysis |
| JEL: | C1 C2 C3 C4 C5 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0655&r=cba |
| By: | Stephane Dees; Sean Holly; M. Hashem Pesaran; L. Vanessa Smith |
| Abstract: | This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence pro.les. We .nd strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets. |
| Keywords: | Global VAR, interdependencies, Fisher relationship, Uncovered Interest Rate Parity , Purchasing Power Parity, persistence profile, error variance decomposition |
| JEL: | C32 E17 F47 R11 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0703&r=cba |
| By: | Adrian Pagan; M. Hashem Pesaran |
| Abstract: | This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the in.uential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side e¤ects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information. |
| Keywords: | Permanent shocks, structural identification, error correction models, IS-LM models. |
| JEL: | C30 C32 E10 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0704&r=cba |
| By: | Fabio Busetti; Andrew Harvey |
| Abstract: | Quantiles provide a comprehensive description of the properties of a variable and tracking changes in quantiles over time using signal extraction methods can be informative. It is shown here how stationarity tests can be generalized to test the null hypothesis that a particular quantile is constant over time by using weighted indicators. Corresponding tests based on expectiles are also proposed; these might be expected to be more powerful for distributions that are not heavy-tailed. Tests for changing dispersion and asymmetry may be based on contrasts between particular quantiles or expectiles. We report Monte Carlo experiments investigating the e¤ectiveness of the proposed tests and then move on to consider how to test for relative time invariance, based on residuals from fitting a time-varying level or trend. Empirical examples, using stock returns and U.S. inflation, provide an indication of the practical importance of the tests. |
| Keywords: | Dispersion; expectiles; quantiles; skewness; stationarity tests; stochastic volatility, value at risk. |
| JEL: | C12 C22 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0701&r=cba |
| By: | Fabio Busetti (Bank of Italy); Andrew Harvey (Cambridge University) |
| Abstract: | The paper examines various tests for assessing whether a time series model requires a slope component. We first consider the simple t-test on the mean of first differences and show that it achieves high power against the alternative hypothesis of a stochastic nonstationary slope as well as against a purely deterministic slope. The test may be modified, parametrically or nonparametrically to deal with serial correlation. Using both local limiting power arguments and finite sample Monte Carlo results, we compare the t-test with the nonparametric tests of Vogelsang (1998) and with a modified stationarity test. Overall the t-test seems a good choice, particularly if it is implemented by fitting a parametric model to the data. When standardized by the square root of the sample size, the simple t-statistic, with no correction for serial correlation, has a limiting distribution if the slope is stochastic. We investigate whether it is a viable test for the null hypothesis of a stochastic slope and conclude that its value may be limited by an inability to reject a small deterministic slope. Empirical illustrations are provided using series of relative prices in the euro-area and data on global temperature. |
| Keywords: | Cramér-von Mises distribution, stationarity test, stochastic trend, unit root, unobserved component. |
| JEL: | C22 C52 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_614_07&r=cba |
| By: | Elliott, Graham; Timmermann, Allan G |
| Abstract: | Forecasts guide decisions in all areas of economics and finance and their value can only be understood in relation to, and in the context of, such decisions. We discuss the central role of the loss function in helping determine the forecaster's objectives and use this to present a unified framework for both the construction and evaluation of forecasts. Challenges arise from the explosion in the sheer volume of predictor variables under consideration and the forecaster's ability to entertain an endless array of functional forms and time-varying specifications, none of which may coincide with the `true' model. Methods for comparing the forecasting performance of pairs of models or evaluating the ability of the best of many models to beat a benchmark specification are also reviewed. |
| Keywords: | economic forecasting; forecast evaluation; loss function |
| JEL: | C53 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6158&r=cba |
| By: | Roberto Blanco (Banco de España); Fernando Restoy (Banco de España) |
| Abstract: | This paper analyses the behaviour of real interest rates in the Spanish economy over the last 15 years. Since inflation-indexed-bonds are not available, changes in implicit real interest rates are estimated using several approaches suggested by macroeconomic and financial theory. In particular, we employ equilibrium conditions of a representative agent under several specifications of preferences. Moreover, we exploit no-arbitrage conditions in securities markets. The evidence we report indicates that inflation uncertainty could account for a notable part of the observed decrease in nominal rates. Consequently, the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest. |
| Keywords: | real interest rates, intertemporal marginal rate of substitution |
| JEL: | E43 G12 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0704&r=cba |
| By: | Harrison , Barry (BOFIT); Vymyatnina, Yulia (BOFIT) |
| Abstract: | Currency substitution, the use of foreign money to finance transactions between domestic residents, is a common feature of emerging market economies. Currency substitution re-duces the stability of money demand functions in ways that can seriously undermine cen-tral bank credibility and its efforts to implement monetary policy. Most transition econo-mies, including Russia, experienced widespread currency substitution in the early phase of transition. Following Russia’s financial meltdown in 1998, its monetary authorities intro-duced a raft of changes that substantially improved the stability and performance of the macroeconomy and reduced currency substitution. This paper investigates currency substi-tution in the Russian economy in the post-crisis period of 1999–2005. Several measures of currency substitution and different modelling frameworks consistently suggest an on-going decline in currency substitution, a shift that has important implications for Russian mone-tary policy. |
| Keywords: | currency substitution; transition economies; de-dollarization |
| JEL: | E58 F31 F41 |
| Date: | 2007–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2007_003&r=cba |