The decline in German output volatility: a Bayesian analysis

Using Bayesian methods, we analyze whether a volatility reduction as documented for growth of U.S. gross domestic product (GDP) in the mid-1980s can also be detected for German GDP growth. Our analysis is based on different time series models allowing for alternative characterizations of output stabilization. Across all models we find empirical evidence for a decline in the output volatility around 1993. Furthermore, we assess competing explanations for reduced output volatility. Our empirical results suggest that the main source for the volatility reduction is an ongoing structural shift accelerated by the German reunification and accompanied by changes in the correlation structure between individual GDP components.     

Decentralization and macroeconomic performance in China: regional autonomy has its costs

We give an empirical examination of the impact of fiscal and economic decentralization in China on the country's economic growth and inflation, using a vector autoregressive (VAR) model with latent variables. Our econometric investigation offers strong evidence that there is a connection between decentralization and macroeconomic performance in China. Economic decentralization appears to be positively related to growth in real output for the entire postwar period in China. Fiscal decentralization seems to have adverse implications for the rate of inflation, especially after the late 1970s. Decentralization would therefore seem to be good for growth and bad for price stability.     

Global slack and domestic inflation rates: A structural investigation for G-7 countries

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of “global”, rather than domestic, economic conditions, as postulated by closed-economy Phillips curves.This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods.The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.     

The geography of output volatility

This paper examines the structural determinants of output volatility in developing countries, and especially the roles of geography and institutions. We investigate the volatility effects of market access, climate variability, the geographic predisposition to trade, and various measures of institutional quality. We find an especially important role for market access: remote countries are more likely to have undiversified exports and to experience greater volatility in output growth. Our results are based on Bayesian methods that allow us to address formally the problem of model uncertainty and to examine robustness across a wide range of specifications.     

The geography of output volatility

This paper examines the structural determinants of output volatility in developing countries, and especially the roles of geography and institutions. We investigate the volatility effects of market access, climate variability, the geographic predisposition to trade, and various measures of institutional quality. We find an especially important role for market access: remote countries are more likely to have undiversified exports and to experience greater volatility in output growth. Our results are based on Bayesian methods that allow us to address formally the problem of model uncertainty and to examine robustness across a wide range of specifications.     

Macroeconomic Uncertainty and Performance in Asian Countries*

We use a very general bivariate GARCH‐M model and quarterly data for five Asian countries to test for the impact of real and nominal macroeconomic uncertainty on inflation and output growth. We conclude the following. First, in the majority of countries uncertainty regarding the output growth rate is related negatively to the average growth rate. Secondly, contrary to expectations, inflation uncertainty in most cases does not harm the output growth performance of an economy. Thirdly, inflation and output uncertainty have a mixed effect on inflation. Consistent results are found using the VAR‐GARCH‐M approach to investigate the dynamic relationship between inflation and output growth using impulse response functions. This evidence implies that macroeconomic uncertainty may even improve macroeconomic performance, i.e. raise output growth and reduce inflation. Our empirical results highlight important differences with those for industrialized countries.     

Trade efficiency and economic development: evidence from a cross country comparison

Economic theory suggests that development is enhanced through income growth, which is driven through increased trade. However, the empirical evidence of such a relationship most of the times is proved to be weak. In this study we try to determine the factors influencing this relationship by measuring ‘trade efficiency’. Using the data envelopment analysis (DEA) window method for a sample of 16 OECD countries, we obtained the efficiency scores and the optimal output levels for the inefficient countries for a time period of 5 years under consideration. Results drawn from the broadly used ratio analysis were also compared to the results derived from the DEA model. Our empirical findings show that ‘trade efficient’ countries have clear characteristics like low-exchange rates for exports, low R&D intensity, high-value intra industry trade and positive impact of net trade on their gross domestic product.     

Unit roots,postwar slowdowns and long-run growth: Evidence from two structural breaks

This paper provides evidence on the unit root hypothesis and long-term growth by allowing for two structural breaks. We reject the unit root hypothesis for three-quarters of the countries – approximately 50% more rejections than in models that allow for only one break. While about half of the countries exhibit slowdowns following their postwar breaks, the others have grown along paths that have become steeper over the past 120 years. The majority of the countries, including most of the slowdown countries, exhibit faster growth after their second breaks than during the decades preceding their first breaks. First version received: May 2001/Final version received: January 2002     

Commodity prices and growth: An empirical investigation

Whereas empirical evidence on the effect of higher commodity prices on the long-run growth of commodity exporters is ambiguous, time series analyses using vector autoregressive (VAR) models have found that commodity booms raise income in the short run. In this paper we adopt panel error correction methodology to analyze global data for 1963 to 2008 to disentangle the short and long run effects of international commodity prices on output per capita. Our results show that commodity booms have unconditional positive short-term effects on output, but non-agricultural booms in countries with poor governance have adverse long-term effects which dominate the short-run gains. Our findings have important implications for non-agricultural commodity exporters with poor governance, especially in light of the recent wave of resource discoveries in low-income countries.     

On the Time‐Varying Relationship between Unemployment and Output: What shapes it?

This paper revisits, by means of both time series and panel data analyses, the empirical regularity popularized by Okun's (Proc Bus Econ Sect, 98‐103, 1962) seminal paper focusing on a sample of 20 advanced economies between 1978 and 2015. Not only do we provide arguably better estimates of the Okun's Law coefficient (OLC) (using the gap version) by employing a new filtering technique, but more importantly, we also contest the hypothesis that the OLC has been static over time. By estimating country‐specific time‐varying Okun coefficient models, we confirm that the unemployment‐output responsiveness has been changing over time. The dispersion between countries’ OLCs has been determined by some (structural) characteristics. The starting level of unemployment and the phase of the business cycle increase the estimated OLCs, while informality and certain labour and product market policies lower them. Our evidence sustains the fact that aggregate demand policies aiming at increasing output growth can equally contribute to the recovery in labour markets.     

Long-term growth and persistence with obsolescence

Previous research has shown a strong positive correlation between short-term persistence and long-term output growth as well as between depreciation rates and long-term output growth. This evidence, therefore, contradicts the standard predictions from traditional neoclassical or AK-type growth models with exogenous depreciation. In this paper, we first confirm these findings for a larger sample of 101 countries. We then study the dynamics of growth and persistence in a model that renders a positive link between embodied technological progress, depreciation and output growth. We find that the model's predictions appear consistent with the empirical evidence on persistence, long-term growth and depreciation rates. In addition, we provide evidence of a unit root in output with a large battery of second-generation panel unit root tests. This supports the general validity of the endogenous growth model proposed.     

Inflation-output trade-off: Old measures,new determinants?

This study analyses the determinants of the sacrifice ratio; i.e., the output cost of disinflation. The empirical literature so far has used several model specifications, indicating the degree of model uncertainty. Even for those factors where consensus on their significance has been reached, such as trade openness and central bank independence, considerable uncertainty still surrounds their estimated sign. Motivated by the above, we estimate the most important drivers of the sacrifice ratio based on Bayesian model averaging, for a panel data set of 42 countries. Our findings confirm part of the evidence reported in the prior empirical literature, while it sheds light on the importance of other factors.     

A look at jobless recoveries in G7 countries

We study changes in the plucking behavior of employment growth, as well as changes in its relationship with the output cycle in the G7 countries. Using both revised and real-time data, we consider several popular measures of the output cycle. For most countries, we see significant evidence in favor of structural changes in the response coefficients of employment growth to its own gap, suggesting much slower recoveries in labor markets, consistent with the jobless recoveries hypothesis. However, we also find evidence in favor of heterogeneity across countries, both in the responses of employment to employment gaps and in the responses of employment to the output cycle.     

TESTING CATCHING‐UP BETWEEN THE DEVELOPING COUNTRIES: “GROWTH RESISTANCE” AND SOMETIMES “GROWTH TRAGEDY”

This paper provides empirical evidence that there is no convergence between the GDP per‐capita of the developing countries since 1950. Relying upon recent econometric methodologies (non‐stationary long‐memory models, wavelet models and time‐varying factor representation models), we show that the transition paths to long‐run growth (the catch‐up dynamics) are very persistent over time and non‐stationary, thereby yielding a variety of potential steady states (conditional convergence). Our findings do not support the idea according to which the developing countries share a common factor (such as technology) that eliminates per‐capita output divergence in the very long run. Instead, we conclude that growth is an idiosyncratic phenomenon that yields different forms of transitional economic performance: growth tragedy (some countries with an initial low level of per‐capita income diverge from the richest ones), growth resistance (with many countries experiencing a low speed of growth convergence), and rapid convergence.     

Public Investment and Economic Performance in Highly Indebted Poor Countries: An Empirical Assessment

Understanding how public investment affects economic performance in highly indebted low‐income countries is crucial in order to implement effective fiscal policies for adjustment with growth. In this paper we provide an empirical analysis to investigate the relationship between public investment, private investment and output. A dynamic econometric procedure is implemented on a selected group of Highly Indebted Poor Countries (HIPCs). Our results provide empirical support for the crowding‐in hypothesis and a positive relation between public investment and output.     

Evidence on inflation–output trade-off in developing and industrial countries

This paper subjects Lucas's output–inflation trade-off study to further empirical investigation. The cross-country study divides the 111 countries covered into 90 developing countries and 21 advanced countries. Lucas's proposition is that volatility of aggregate demand growth should reduce the impact of aggregate demand growth on the cyclical output and the implication of this is that there is no output–inflation trade-off in line with the natural rate theory. We employ annual data over periods that fall between 1958 and 1985 in order to conduct the test. Our findings suggest that Lucas's proposition is valid for developed economies but not for developing economies.     

Tax decentralization,labour productivity,and employment in OECD countries

Tax decentralization should improve the efficiency of local governments and ultimately boost output growth. However, the empirical evidence is mixed. Decomposing output growth into labour productivity and employment growth, we show that the ultimate effect of fiscal decentralization on growth depends on which factor prevails, thus rendering the direct estimation of tax decentralization on growth ambiguous. Using an instrumental variable approach, with instruments based on institutional similarities and geographic distance, the empirical analysis on a sample of 20 OECD countries shows that the positive and significant effect of tax decentralization on the employment growth rate is offset by the reduction of labour productivity growth, resulting in the absence of any statistically significant effect on output growth.     

Macroeconomic idiosyncrasies and European monetary unification: A sceptical long run view

This study questions the empirical assessment of asymmetries in currency areas based on structural vector auto-regressions that describe the price–output dynamics in reference to the Aggregate Supply–Aggregate Demand (AS–AD) diagram. Our contribution is both methodological and empirical. First, we propose a way to rotate the innovations resulting from the Bayoumi–Eichengreen (1992) decomposition of the VAR residuals to ensure that their properties remain identical to the properties of the well-known Blanchard–Quah (1989) factorization. In addition, we derive the slope coefficients of the AS–AD curves from the impulse responses to demand shocks and thereby reveal structural heterogeneities across countries. Second, we study fifteen euro and non-euro countries using quarterly data over 1960–2012. Bootstrap simulations reveal that: 1) the Bayoumi–Eichengreen decomposition yields the same conclusions as the Blanchard–Quah one in terms of shock sizes and asymmetry; 2) the long-run neutrality of demand shocks on output is often not decisive in assessing shock asymmetry; and 3) the estimated structural and stochastic asymmetries are imprecise, which has been often disregarded in the literature. Thus, one should be cautious about the empirical relevance of macroeconomic idiosyncrasies with regard to the suitability of a currency area.     

Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks

Trend GDP and output gaps play an important role in fiscal and monetary policy formulation, often including the need for forecasts. In this article, we focus on forecasting trend GDP and output gaps with Beveridge-Nelson trend-cycle decompositions trend-cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks. We evaluate expanding window, one-step-ahead forecasts indirectly for the G-7 countries on the basis of real GDP growth rate forecasts. We find that correlated innovations affect real GDP growth rate forecasts positively, while allowing for structural breaks works for some countries but not for all. In the face of uncertainty, the evidence supports that in making forecasts of trends and output gap policy-makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks.     

The Magnitude of the Task Ahead: Macro Implications of Heterogeneous Technology

The empirical growth literature is dominated by accounting and regression methods that assume common production technology across countries. Our empirical model relaxes this assumption and further allows unobservable determinants of output (total factor productivity, TFP) to differ across countries and time, while accounting for endogeneity and cross-section correlation arising from global shocks. Using manufacturing sector data for 48 economies, we show that the assumption of common technology is rejected in our regressions. We illustrate that the erroneous choice of homogeneous technology has a substantial impact on the patterns and magnitudes of the resulting TFP estimates.