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on Forecasting |
| By: | Chengsi Zhang; Denise R. Osborn; Dong Heon Kim |
| Abstract: | Estimating the micro-founded New Keynesian Phillips Curve using rational inflation expectation proxies has often found that the output gap is not a valid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation, using observed measures of inflation expectations and taking account of serial correlation in the stylized NKPC. Contrary to recent results indicating no role for the GDP gap, we find it to be a statistically significant driving variable for inflation while labor income share is generally insignificant. The paper also develops an extended model in which serial correlation is absent and the output gap remains a valid inflation driving force. In most of our estimations, however, lagged inflation dominates the role of inflation expectations, casting doubt on the extent to which price setting is forward-looking over the period 1968 to 2005. From an econometric perspective, the paper uses GMM estimation to account for endogeneity while also addressing concerns raised in recent studies about weak instrumental variables used in estimating NKPC models. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:79&r=for |
| By: | Erdenebat Bataa; Dong H. Kim; Denise R. Osborn |
| Abstract: | Empirical studies often find that the spread between longer and shorter rates does not have predictive power for future longer rates, violating the Expectations Theory (ET). Although the predictive power of the spread for future shorter rates is largely in accordance with the ET, especially when the forecast period is long, researchers often find this holds to varying degrees across samples (country-wise or time-wise). We show this pattern may be due to the powers of all tests depending on interest rates’ maturities and their persistency in small samples. This paper also compares the powers of tests of the ET against the under/overreaction and the time varying term premium alternatives across various maturity combinations, levels of persistency and sample sizes. Tests perform best and are comparable to each other at the shortest end of the term structure, but deteriorate as the distance between maturities of longer and shorter rates increase. However, this deterioration is of varying degrees for different tests and its speed diminishes as we depart from the shortest end. In general Lagrange multiplier and distance metric tests emerge as being the most powerful and least sensitive to interest rate maturities and their persistency. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:85&r=for |
| By: | Erdenebat Bataa; Dong H. Kim; Denise R. Osborn |
| Abstract: | Empirical studies often find that the spread between longer and shorter rates does not have predictive power for future longer rates, violating the Expectations Theory (ET). Although the predictive power of the spread for future shorter rates is largely in accordance with the ET, especially when the forecast period is long, researchers often find this holds to varying degrees across samples (country-wise or time-wise). We show this pattern may be due to the powers of all tests depending on interest rates’ maturities and their persistency in small samples. This paper also compares the powers of tests of the ET against the under/overreaction and the time varying term premium alternatives across various maturity combinations, levels of persistency and sample sizes. Tests perform best and are comparable to each other at the shortest end of the term structure, but deteriorate as the distance between maturities of longer and shorter rates increase. However, this deterioration is of varying degrees for different tests and its speed diminishes as we depart from the shortest end. In general Lagrange multiplier and distance metric tests emerge as being the most powerful and least sensitive to interest rate maturities and their persistency. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:84&r=for |
| By: | Ralf Becker; Stan Hurn; Vlad Pavlov |
| Abstract: | During periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes, therefore, is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models, that assume normality of the prices in each state, the model presented here uses a generalized beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes. |
| Keywords: | electricity prices, regime switching, time-varying probabilities, beta |
| JEL: | C22 C53 Q49 |
| Date: | 2007–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2007-4&r=for |
| By: | Arnold, Ivo J.M.; Galakis, John (Nyenrode Business Universiteit) |
| Abstract: | Since long the auto industry has been a valued source of leading business cycle indicators. While practitioners continue to use data on new car registrations to forecast economic activity, the predictive performance of auto industry related stock returns has deteriorated in the past decades. For the US this can be traced to the advent of Japanese manufacturers. The increased US market penetration by Japanese automakers coincides with a decline in the predictive ability of domestic auto returns. We are, however, able to recover a role for auto returns in business cycle forecasting by employing Japanese data. No such result can be found for European countries. We do conclude, however, that what’s good for Toyota, is good for the world economy |
| Keywords: | Forecasting, Business Cycle, Financial Markets |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:nijrep:2006-12&r=for |