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on Econometric Time Series |
| By: | Chaohua Dong (Institute for Fiscal Studies and Southwestern University of Finance and Economics, China); Oliver Linton (Institute for Fiscal Studies and University of Cambridge) |
| Abstract: | This paper considers nonparametric additive models that have a deterministic time trend and both stationary and integrated variables as components. The diverse nature of the regressors caters for applications in a variety of settings. In addition, we extend the analysis to allow the stationary regressor to be instead locally stationary, and we allow the models to include a linear form of the integrated variable. Heteroscedasticity is allowed for in all models. We propose an estimation strategy based on orthogonal series expansion that takes account of the different type of stationarity/nonstationarity possessed by each covariate. We establish pointwise asymptotic distribution theory jointly for all estimators of unknown functions and also show the conventional optimal convergence rates jointly in the L2 sense. In spite of the entanglement of different kinds of regressors, we can separate out the distribution theory for each estimator. We provide Monte Carlo simulations that establish the favourable properties of our procedures in moderate sized samples. Finally, we apply our techniques to the study of a pairs trading strategy. |
| Keywords: | Additive nonparametric models, deterministic trend, pairs trading, series estimator, stationary and locally stationary processes, unit root process |
| Date: | 2017–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:59/17&r=ets |
| By: | Maximilian Podstawski; Thore Schlaak; Malte Rieth |
| Abstract: | We develop a vector autoregressive framework for combining the information in an external instrument with the information in the second moments of the data to identify latent monetary shocks in the United States. We show that the framework improves the identification of the structural model and allows testing the validity of instruments proposed in the literature. Using a valid instrument, we then document that surprise monetary contractions lead to a medium-sized significant decline in economic activity, that the contractionary effect is also present during the great moderation, and that the role of monetary shocks in driving real and financial fluctuations is small in low and big in high volatility regimes. |
| Keywords: | Monetary policy, structural vector autoregressions, identification with external instruments, heteroskedasticity, Markov switching |
| JEL: | E52 C32 E58 E32 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1749&r=ets |
| By: | Fiorentini, Gabriele; Galesi, Alessandro; Pérez-Quirós, Gabriel; Sentana, Enrique |
| Abstract: | We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960's and peaks around the end of the 1980's. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall. |
| Keywords: | demographics; Kalman filter; Natural rate of interest; observability |
| JEL: | C18 C32 E43 E52 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13042&r=ets |
| By: | Weshah Razzak |
| Abstract: | We show that the Purchasing Power Parity (PPP) puzzle, whereby the half-life of the shock to the real exchange rate is long and unjustifiable by monetary and financial shocks, is a result of specification and estimation issues. We provide an alternative specification for PPP and show that the half-life of the shock could be as short as 6.8 months and as long as 2 years, which is considerably shorter than what have been reported in the literature. |
| Keywords: | PPP, unit root, half-life of shocks |
| JEL: | C13 C18 F31 |
| Date: | 2018–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2018_05&r=ets |
| By: | Andrew Phiri |
| Abstract: | In this paper, we challenge the traditional assumption of a linear relationship between exchange rate volatility and economic growth in South Africa. By using data collected from 1970 to 2016 applied to a smooth transition regression (STR) model, we are able to prove that the exchange rate-economic growth correlation is indeed nonlinear within the sampled time period. In particular, we find that regime switching behaviour is facilitated by government size in which exchange rate volatility positively and significantly influences economic growth when growth in government spending is below 6 percent. Above this 6 percent threshold, volatility exerts an insignificant effect on economic growth. In light of the adoption of a free floating exchange rate regime by the Reserve Bank, our results emphasize the importance of the role which fiscal authorities play on the extent to which exchange rate movements affect economic growth. |
| Keywords: | Exchange rates; economic growth, smooth transition regression (STR) model; thresholds; nonlinearity; volatility; South Africa; monetary policy; fiscal policy. |
| JEL: | C01 C22 C52 E52 F31 O40 |
| Date: | 2018–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2018_08&r=ets |
| By: | Erasmo Papagni; Amedeo Lepore; Emanuele Felice; Anna Laura Baraldi; Maria Rosaria Alfano |
| Abstract: | This paper analyses the contribution of public investment to growth in southern Italy in the second half of the twentieth century (1951-1995). The period saw the only convergence in modern times of the Mezzogiorno towards the Italian average (1951-1973), followed by divergence (1974-1995). Using cointegration analysis we find a statistically significant positive effect of public investment on the growth of the Mezzogiorno in the period 1951-1995. The Bai-Perron tests suggest that economic growth followed two distinct regimes, the first regime of accelerated growth in the years 1951-1973 (average growth rate 5.3%), and the second regime of low growth in the period 1974-1995 (average growth rate 1.6%). This result is confirmed by the testing procedure of Hansen (1992) which indicates a break in the determinants of GDP per unit of labour in 1974. The estimates of the model on time series of the two periods show statistically significant parameters of public investment in the first regime, but not in the second regime, when economic growth is sustained by business investment and technical change. The paper suggests that public capital may have a significant positive role in episodes of growth accelerations if the quality of the institutional environment is high, but it can lose its effectiveness if bureaucratic corruption and rent-seeking strongly affect public policy. |
| Keywords: | Public Investment, Growth Instability, Cointegration, Structural breaks, Southern Italy. |
| JEL: | H54 O14 O18 O47 |
| Date: | 2018–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2018_10&r=ets |
| By: | Frank Adusah-Poku; William Bekoe |
| Abstract: | Empirically, results from time series and cross country studies have identified foreign capital inflows to play a pivotal role in the growth process of host countries. The goal of this article is to examine the impact of three of the four forms of foreign capital inflows (which include foreign aid, foreign direct investment and personal remittances) on economic growth in Ghana. The study employs the ARDL Bounds testing approach to cointegration on an annual time series data for Ghana from 1980-2012. The results of the study indicate that all the three forms of foreign capital inflows have positive and significant impacts on economic growth both in the short and long run. The results also show that of all the three forms of foreign capital inflows, foreign aid is the main driver of economic growth in Ghana both in the short and long run. The study recommends the design and implementation of good fiscal, monetary and trade policies to complement the flow foreign aid to the country for the realization of its full impact on growth. |
| Keywords: | Economic growth, foreign capital inflows, ARDL, Ghana. |
| JEL: | C1 F43 N17 |
| Date: | 2018–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2018_07&r=ets |
| By: | Odhiambo, Nicholas M.; Nyasha, Shiella |
| Abstract: | In this study, the dynamic causal relationship between oil price and economic growth in Kenya has been explored during the period from 1980 to 2015. A trivariate Granger-causality framework that incorporates oil consumption as an intermittent variable ??? in an effort to address the omission-of-variable bias ??? has been employed. Using the newly developed ARDL bounds testing approach to co-integration and the Error-Correction Model-based Granger-causality framework, the results of the study reveal that there is distinct unidirectional Granger-causality flowing from economic growth to oil price in the study country. These results were found to apply both in the short run an in the long run. Thus, it can be concluded that in Kenya, it is the real sector that pushes oil prices up. Further, it is possible to predict oil price changes in Kenya ??? given the changes in economic growth. |
| Keywords: | Kenya, Oil Prices, Energy Consumption, Economic Growth, Granger-Causality |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:uza:wpaper:24411&r=ets |
| By: | Malefane, Malefa R; Odhiambo, Nicholas M |
| Abstract: | This paper examines the dynamic impact of trade openness on economic growth in Lesothousing the autoregressive distributed lag (ARDL) bound testing approach. The study employsfour indicators of trade openness, which include three trade-based proxies and an index oftrade openness. The empirical results of this study show that when the ratio of exports andimports to GDP is employed, then trade openness has a significant negative impact oneconomic growth in both the short run and the long run. When the ratio of export to GDP isused as a proxy for trade openness, the results show that trade openness only has a negativeshort-run impact on economic growth. The results also reveal that when the ratio of imports toGDP is used in the analysis, trade openness has a significant negative impact on economicgrowth in the long run, but not in the short run. Moreover, the results indicate that tradeopenness index has no significant impact on economic growth in Lesotho. These empiricalresults have important policy implications for Lesotho. Among other things, the policy makersshould revisit their trade policies and implement policies that will enable the country???seconomic growth to benefit from trade openness that emanates from the imports. The policymakers should also pursue policies that enable the expansion in both international trade andeconomic growth, such that beneficial growth effects can be realized from trade with noexclusions. |
| Keywords: | Trade Openness, Economic Growth; ARDL; Exports; Imports; Lesotho |
| Date: | 2018–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:uza:wpaper:23787&r=ets |
| By: | Malefane, Malefa Rose; Odhiambo, Nicholas M. |
| Abstract: | In this paper, the dynamic relationship between trade openness and economic growth in Botswana is examined using the Autoregressive Distributed Lag (ARDL) bounds testing approach. In order to test the robustness of the results, four proxies of trade openness were used in the estimation. Three of the four proxies were constructed from trade ratios, while the fourth proxy was a composite index of trade openness. The idea behind the use of different proxies was to ascertain whether the impact of trade openness in Botswana depends on the type of trade openness taken into consideration. The empirical results of this study reveal that, when the ratio of exports plus imports to GDP is used, and when the ratio of exports to GDP is used as a proxy for trade openness, then, trade openness has a significant positive impact on economic growth in Botswana, both in the short run and in the long run. Likewise, when the trade openness index is employed in the empirical investigation, the results show that in both the short run and the long run, trade openness has a significant positive impact on economic growth. The overall results of this study, therefore, have important policy implications for Botswana. Among other things, Botswana???s policy makers should pursue policies that boost the country???s exports and total trade. |
| Keywords: | ARDL; Botswana; economic growth; exports; imports; trade openness |
| Date: | 2018–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:uza:wpaper:24493&r=ets |
| By: | Lettau, Martin; Pelger, Markus |
| Abstract: | We develop an estimator for latent asset pricing factors that fit the time-series and cross- section of expected returns. Our estimator generalizes Principal Component Analysis (PCA) by including a penalty on the pricing error in expected returns. We show that our estimator strongly dominates PCA and finds weak factors with high Sharpe-ratios that PCA cannot detect. Studying a large number of characteristic sorted portfolios we find that five latent factors with economic meaning explain well the cross-section and time-series of returns. We show that out-of-sample the maximum Sharpe-ratio of our five factors is more than twice as large as with PCA with significantly smaller pricing errors. Our factors are based on only a subset of the stock characteristics implying that a significant amount of characteristic information is redundant. |
| Keywords: | Anomalies; Cross Section of Returns; expected returns; high-dimensional data; Latent Factors; PCA; Weak Factors |
| JEL: | C14 C52 C58 G12 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13049&r=ets |