nep-ets New Economics Papers
on Econometric Time Series
Issue of 2018‒07‒23
eleven papers chosen by
Jaqueson K. Galimberti
KOF Swiss Economic Institute

  1. Variational Bayes inference in high-dimensional time-varying parameter models By Korobilis, Dimitris; Koop, Gary
  2. State-Varying Factor Models of Large Dimensions By Markus Pelger; Ruoxuan Xiong
  3. An Output Gap Measure for the Euro Area : Exploiting Country-Level and Cross-Sectional Data Heterogeneity By Manuel Gonzalez-Astudillo
  4. The natural rate of interest and the financial cycle By Krustev, Georgi
  5. Testing for time-varying stochastic volatility in Bitcoin returns By Afees A. Salisu; Idris Adediran
  6. Revisiting effectiveness of interest rate as a tool to control inflation: evidence from Malaysia based on ARDL and NARDL By Hamzah, Nurrawaida Husna; Masih, Mansur
  7. Unobserved structural shifts and asymmetries in the random walk model for stock returns in African frontier markets By David De Villiers; Natalya Apopo; Andrew Phiri
  8. Trade Revenue Implications of Trade Liberalization in Pakistan By Ahmad, Khalil; Ali, Safdar; Ali, Amjad
  9. Is the oil price pass-through to domestic inflation symmetric or asymmetric? new evidence from India based on NARDL By Abu-Bakar, Muhammad; Masih, Mansur
  10. Exchange Rate Pass-through to Consumer prices: Nigerian experience from 1986-2013 By Musti, Babagana Mala; Siddiki, Jalal Uddin
  11. Financial Development, Economic Growth, and Electricity Demand: A Sector Analysis of an Emerging Economy By Roubaud, David; Shahbaz, Muhammad

  1. By: Korobilis, Dimitris; Koop, Gary
    Abstract: This paper proposes a mean field variational Bayes algorithm for efficient posterior and predictive inference in time-varying parameter models. Our approach involves: i) computationally trivial Kalman filter updates of regression coefficients, ii) a dynamic variables election prior that removes irrelevant variables in each time period, and iii) a fast approximate state-space estimator of the regression volatility parameter. In an exercise involving simulated data we evaluate the new algorithm numerically and establish its computational advantages. Using macroeconomic data for the US we find that regression models that combine time-varying parameters with the information in many predictors have the potential to improve forecasts over a number of alternatives.
    Date: 2018–07
  2. By: Markus Pelger; Ruoxuan Xiong
    Abstract: This paper develops an inferential theory for state-varying factor models of large dimensions. Unlike constant factor models, loadings are general functions of some recurrent state process. We develop an estimator for the latent factors and state-varying loadings under a large cross-section and time dimension. Our estimator combines nonparametric methods with principal component analysis. We derive the rate of convergence and limiting normal distribution for the factors, loadings and common components. In addition, we develop a statistical test for a change in the factor structure in different states. Applying the estimator to U.S. Treasury security data, we find that the systematic factor structure differs in times of booms and recessions as well as in periods of high market volatility.
    Date: 2018–07
  3. By: Manuel Gonzalez-Astudillo
    Abstract: This paper proposes a methodology to estimate the euro-area output gap by taking advantage of two types of data heterogeneity. On the one hand, the method uses information on real GDP, inflation, and the unemployment rate for each member state; on the other hand, it jointly considers this information for all the euro-area countries to extract an area-wide output gap measure. The setup is an unobserved components model that theorizes a common cycle across euro-area economies in addition to country-specific cyclical components. I estimate the model with Bayesian methods using data for the 19 countries of the euro area from 2000:Q1 through 2017:Q2 and perform model comparisons across different specifications of the output trend. The estimation of the model preferred by the data indicates that, because of negative shocks to trend output during global the financial crisis, output remained slightly above potential in that period, but an output gap of about negative 3½ percent emerged during the European debt crisis. At the end of the sample period, output is estimated to be about 1 percent above potential.
    Keywords: Okun's law ; Output gap ; Phillips curve ; Unobserved components model ; Euro area
    JEL: C13 C32 C52 E32
    Date: 2018–06–22
  4. By: Krustev, Georgi
    Abstract: I extend the model of Laubach and Williams (2003) by introducing an explicit role for the financial cycle in the joint estimation of the natural rates of interest, unemployment and output, and the sustainable growth rate of the US economy. By incorporating the financial cycle – arguably an omitted variable from the system – the model is able to deliver more plausible estimates of business cycle dynamics. The sustained decline in the natural rate of interest in recent decades is confirmed, but I estimate that strong and persistent headwinds due to financial deleveraging have lowered temporarily the natural rate on average by around 1 p.p. below its long-run trend over 2008-14. This may have impaired the effectiveness of interest rate cuts to stimulate the economy and lift inflation back to target in the immediate aftermath of the GFC. JEL Classification: C32, E43, E44, E52
    Keywords: financial cycle, Kalman filter, monetary policy, natural rate of interest, output gap
    Date: 2018–07
  5. By: Afees A. Salisu (Department for Management of Science and Technology Development, Ton Duc Thang University, Ho Chi Minh City, Vietnam Faculty of Business Administration, Ton Duc Thang University, Ho Chi Minh City, Vietnam Centre for Econometric and Allied Research, University of Ibadan); Idris Adediran (Department of Economics, Obafemi Awolowo University, Nigeria.)
    Abstract: The study will be the first to offer empirical justification for time-varying stochastic volatility in Bitcoin returns. Specifically, it tests for time variation in both the trend and transitory components of the stochastic volatility using the unobserved components model that accounts for same. Thereafter, it calculates the Bayes factor using the approach of Chan (2018) which involves the Savage-Dickey density ratio in order to avoid the computation of the marginal likelihood. The results overwhelmingly support at least one time-varying stochastic volatility component in Bitcoin returns and the transitory component is favoured in this regard. These results are robust to different data frequencies.
    Keywords: Bitcoin returns, Time-varying stochastic volatility, Bayes factor
    JEL: C11 C53 G17
    Date: 2018–07
  6. By: Hamzah, Nurrawaida Husna; Masih, Mansur
    Abstract: Public policy remains a paradox and a challenging pursuit in finding a delicate balance between conflicting economic goals and outcomes. Nevertheless, interest rate is a commonly used monetary policy tool to maintain a low and stable inflation. However, the effectiveness of interest rate in controlling inflation remains unanswered conclusively. Undertaking a wrong policy stance will lead to huge costs to the economy and society as a whole. Therefore, the purpose of this study is to investigate the lead-lag relationship between inflation and interest rate, and whether the relationship between the two variables is linear. These will determine whether interest rate is an effective tool in the context of Malaysia. This study extends prior literature by using a more recent monthly time series data and advanced techniques known as NARDL and ARDL. Based on this study, it is found that inflation rate is the most exogenous variable while interest rate is the most endogenous variable, hence policy makers have no influence over inflation. A crucial policy implication is policy makers should not use interest rate to control inflation but instead, they should focus on supply side policies to manage inflation.
    Keywords: Monetary policy, NARDL, ARDL, Inflation, Interest rate
    JEL: C22 C58 E4
    Date: 2018–06–15
  7. By: David De Villiers (Department of Economics, Nelson Mandela University); Natalya Apopo (Department of Economics, Nelson Mandela University); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: The purpose of this study is to examine the weak-form market efficiency hypothesis (EMH) for 8 African Frontier markets (Nairobi Securities Exchange of Kenya, the Nigerian Stock Exchange of Nigeria, Botswana Stock Exchange of Botswana, Zimbabwe Stock Exchange of Zimbabwe, Johannesburg Stock Exchange of South Africa, Egyptian Exchange of Egypt, Casablanca Stock Exchange of Morocco, the Tunis Stock Exchange of Tunisia). To achieve this purpose we employ unit root testing procedures which are robust to both nonlinearities and smooth structural breaks. To further allow for vigorousness in our empirical analysis we employ two time series datasets for each of the capital markets, namely daily and weekly time series. To the best of our knowledge, our study becomes the first, to investigate the weak-form EMH for all 8 African frontier markets whilst simultaneously accounting for asymmetries and smooth structural breaks. Our empirical findings suggest that most African frontier markets are not market efficient, in the weak sense form, with the exception of the Kenyan stock market and to a very much lesser extent the Botswana and South African stock series. Important policy and investor implications are drawn in our study.
    Keywords: Africa, efficient market hypothesis (EMH), unit roots, nonlinerities, Fourier approximation.
    JEL: C21 C22 C51 G14
    Date: 2018–07
  8. By: Ahmad, Khalil; Ali, Safdar; Ali, Amjad
    Abstract: This study attempts to investigate the effect of free trade on trade tax revenue in case of Pakistan during 1972-2014. For time series analysis, Autoregressive Distributed Lag (ARDL) model has been used for examining the long run co-integration among the variables and Vector Error-Correction model is used for short run dynamics of the variables. The empirical results show that quantitative trade restriction is positively linked with trade tax revenue. On the basis of empirical findings, this study suggests that trade liberalization has negative impact on trade tax revenue. We improve the volume of average tariff rate; it may cause to increase the trade tax revenue for Pakistan in both short run and long run.
    Keywords: Trade liberalization, Tariff rate, Trade tax revenue
    JEL: F10 F13 H2
    Date: 2018–05
  9. By: Abu-Bakar, Muhammad; Masih, Mansur
    Abstract: With 80% oil dependence, which is expected to further increase in coming years due to rapid expansion, and the reforms initiated to deregulate domestic oil market, the association between global oil prices and inflation in India has increased. Using the autoregressive distribution lag (ARDL) and the nonlinear and asymmetric autoregressive distribution lag (NARDL) framework, we investigate the association between global oil prices and inflation. The ARDL results indicate no association between the two, whereas NARDL findings not only point to long term association but also indicates asymmetric pass-through. Precisely, domestic prices increase with the increase in global oil prices but the decrease in global oil prices has no significant association with the domestic prices. These results are robust to the inclusion of additional variables, different proxy of oil prices (WTI crude) and different time period (January 2003 to January 2018). The contrasting results obtained from the ARDL and the NARDL modelling highlight the importance of using non-linear framework, especially in high oil dependence country with non-competitive market structure. The results have implications for welfare assessment and the effectiveness of monetary policy.
    Keywords: Oil Price; Inflation; asymmetry; India; non-linear ARDL
    JEL: C22 C58 Q43
    Date: 2018–06–12
  10. By: Musti, Babagana Mala (Kingston University London); Siddiki, Jalal Uddin (Kingston University London)
    Abstract: This paper examines the level and speed of exchange rate pass-through (ERPT) to consumer prices in Nigeria using a partial equilibrium microeconomic mark-up model with quarterly time series data from 1986 to 2013 applying the vector error correction model (VECM) incorporating structural breaks in exchange rates. It assesses the level of long-run ERPT, the speed of adjustments to the long-run equilibrium and the level of short-run ERPT. The results show high and statistically significant ERPT in the long-run in Nigeria. However, the short-run results show slow and insignificant adjustments of prices to its long-run equilibrium trend. The impulse response analyses also support the cointegration results showing the near zero response of consumer prices to exchange rate shocks. The variance decomposition results demonstrate the contribution of external shocks whereby the exchange rate shocks made some modest contribution to the domestic prices. The strong policy implication of these empirical results is that exchange rate stability plays a crucial role in controlling domestic consumer price inflation in Nigeria and comprable economies.
    Keywords: Exchange rate pass-through; Consumer prices; Nigeria.
    JEL: F30 F40
    Date: 2018–07–05
  11. By: Roubaud, David; Shahbaz, Muhammad
    Abstract: We employ an augmented production function to examine the association between electricity consumption and economic growth at the aggregate and sectoral levels for the period 1972-2014 for Pakistan. We posit that financial development is an important driver of electricity consumption and economic growth. The unit root test, combined cointegration framework, and VECM Granger causality approach are applied. There is a long-term association between the variables at the aggregate and sectoral levels. Electricity consumption and financial development stimulate economic growth. The causality analysis validates the presence of the feedback effect between economic growth and electricity consumption. Bidirectional causality exists between financial development and electricity consumption in the agriculture and services sectors. Financial development drives electricity consumption in the industrial sector. Policies have to be implemented to maintain sufficient electricity supply for economic growth. The financial sector should incentivize investment in renewable energy to reduce Pakistan’s heavy reliance on oil imports.
    Keywords: Financial development, Electricity consumption, Economic growth, Energy policy, Bidirectional causality, Feedback effect, Electricity demand–supply gap, Non-renewable energy, Carbon Emissions, Pakistan
    JEL: E0
    Date: 2018–06–01

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