Determinants of land value volatility in the U.S. Corn Belt

ABSTRACT

Understanding land value volatility and its reaction to exogenous shocks helps land owners, investors, and lenders assess risk. Land value volatility, the variance of the unpredictable component of land value growth rates, is modelled for each of the Corn Belt states in the U.S. using EGARCH. A pooled VAR system is then estimated to capture the interactions between land value determinants and land value volatility. The variables of the pooled VAR are split into negative and positive vectors to allow for asymmetric impacts. Impulse response functions are mapped. All states exhibit land value volatility clustering. Inflation, cash rent and population growth rates granger cause land value volatility. Land value volatility responses to negative shocks are greater than those to positive shocks. Lenders and investors should expect greater swings in land values after negative shocks to land value growth rates, but not an overreaction of land values from shocks to cash rent growth rates. Positive shocks to changes in interest rates increases land value volatility, but unexpected shocks to population growth rates do not have statistically significant impact on land value volatility.     

International Spillovers of Output Growth and Output Growth Volatility: Evidence from the G7

This paper examines the transmission of GDP growth and GDP growth volatility among the G7 countries over the period 1960Q1 – 2010Q4, using a multivariate GARCH model and volatility impulse response functions (VIRFs) to identify the source, magnitude and the duration of volatility spillovers. Results indicate the presence of positive own-country GDP growth spillovers in each country and cross-country GDP growth spillovers among most of the G7 countries. In addition, the large number of significant own-country output growth volatility spillovers and cross-country output growth volatility spillovers indicates that output growth shocks in most of the G7 countries affect output growth volatility in the other remaining countries. An additional finding is that the duration of output growth volatility spillovers has increased over time from some seven quarters in the 1970s to some ten quarters during the recent crisis, which is likely to be due to the increased integration of goods and financial markets.     

Cyclical and causal patterns of inflation and GDP growth

Empirical foundations for the view that high inflation impairs GDP growth are examined using annual data for 115 countries over the period 1960–1995. Taking into account country heterogeneity and time-specific symmetric shocks, as well as endogeneity of inflation and dynamics of GDP growth, dynamic panel-data models of the effects of inflation on growth are estimated. No evidence is found supporting the view that inflation is in general harmful to GDP growth. On the other hand, there is a negative correlation between contemporaneous intra-country inflation and growth for periods characterized by positive oil-price shocks.     

CROSS-COUNTRY EVIDENCE ON OUTPUT GROWTH VOLATILITY: NONSTATIONARY VARIANCE AND GARCH MODELS

This paper revisits the issue of conditional volatility in real gross domestic product (GDP) growth rates for Canada, Germany, Italy, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the six countries became noticeably less volatile over the past few decades. In this paper, we employ the modified iterated cumulative sum of squares (ICSS) algorithm to detect structural change in the variance of output growth. One structural break exists in each of the six countries after identifying outliers and mean shifts in the growth rates. We then use generalized autoregressive conditional heteroskedasticity (GARCH) specifications, modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada and Japan, and disappears entirely in Germany, Italy, the United Kingdom and the United States, once we incorporate the break in the variance equation of output for the six countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary variance. Moreover, we also consider the possible effects of our more correct measure of output volatility on output growth as well as the reverse effect of output growth on its volatility. The conditional standard deviation possesses no statistical significance in all countries, except a significant negative effect in Japan. The lagged growth rate of output produces significant negative and positive effects on the conditional variances in Germany and Japan, respectively. No significant effects exist in Canada, Italy, the United Kingdom, and the United States.     

The structural transformation between manufacturing and services and the decline in the US GDP volatility

I construct a two-sector growth model to study the effect of the structural transformation between manufacturing and services on the decline in GDP volatility in the US. In the model, a change in the relative size of the two sectors affects the transmission mechanism that relates sectoral TFP shocks to endogenous variables. I calibrate the model to the US and show that, for given stochastic sectoral TFP processes in manufacturing and services, structural change generates a decline in the volatility of both aggregate TFP and GDP, in the volatility of each broad component of GDP (manufacturing consumption, services consumption and investment) and in the volatility of labor. Numerical results suggest that the structural transformation can account for 28% of the reduction in the US GDP volatility between the periods 1960–1983 and 1984–2005.     

LINKAGES BETWEEN EXCHANGE RATE POLICY AND MACROECONOMIC PERFORMANCE

Using a sample of 104 countries, we study macroeconomic performance from 1973 to 2007. We examine GDP growth, inflation rate, growth volatility and inflation volatility, and their response to a ‘words versus deeds’ measure of exchange‐rate policy, which is obtained by interacting a country's de jure and its de facto policy. For non‐industrialized countries, the highest growth rates and the lowest inflation volatility are associated with countries that pursue fear of floating policy, whereas countries that pursue a matched float policy (de jure and de facto floating) have the highest inflation rates but the lowest GDP volatility.     

Has the EMS reduced member-country exchange rate volatility?

Using tests for unit roots, serial correlation, and conditional heteroskedasticity, we find that the stochastic structure of the percentage changes in both the Franc/DM and Lira/DM rates is well described by a low order autoregression with ARCH disturbances. While this assertion is not rejected in either the Pre-EMS or the EMS period, we present evidence indicating a structural shift between sub-periods. In particular, while ARCH is present in each sub-period, its explicit parameterization changes dramatically.Likelihood-ratio tests indicate the desirability of a bivariate analysis, and significant ARCH effects are found in the conditional variances and covariances over both subperiods. Likelihood ratio tests also indicate substantial structural change between the subperiods. The conditional variances of exchange rate innovations are used as natural measures of exchange rate volatility; it is found that volatility decreases substantially for both rates in the EMS period. Furthermore, the Franc shows a relatively greater volatility decrease with the move to the EMS, a result consistent with the narrower parity bands established for the Franc. Finally, the covariation of shocks to the two intra-EMS rates is shown to decrease between the Pre-EMS and EMS periods.     

Determinants of housing price volatility in Canada: a dynamic analysis

This article tries to identify the determinants of housing price volatility and to examine the dynamic effects of these determinants on volatility using quarterly data for Canada. The Generalized Autoregressive Conditional Heteroskedastic (GARCH) and the Vector Autoregressive (VAR) models have been employed to analyse possible time variation of the housing price volatility and the interactions between the volatility and the key macroeconomic variables. We find the evidence of time varying housing price volatility for Canada. Our VAR, Granger causality and variance decomposition (VDC) analyses demonstrate that housing price volatility is affected significantly by gross domestic product (GDP) growth rate, housing price appreciation rate and inflation. On the other hand, volatility affects GDP growth rate, housing price appreciation and volatility itself. The impulse response analysis reveals the asymmetric of the positive and negative shocks. The findings of this article have important implications, particularly for those seeking to develop derivatives for housing market prices.     

Does industrial concentration impact on the relationship between policies and volatility?

It is usually recommended that countries diversify their economies to guard against any negative shocks that might impact on one industry. However, previous research has not identified how concentration can impact on the effectiveness of macroeconomic policies. This paper attempts to evaluate the relationship between industrial concentration, policies and economic volatility for a sample of 147 countries for the period 1970 to 2005. The study reports that less concentrated countries tend to have lower rates of output, consumption and investment growth volatility. In addition, while trade and capital account openness variables alone tend to diminish economic volatility, in concentrated economies opening both the capital and trade account can increase economic volatility.     

Sources of employment fluctuations in Taiwan's industries and regions

This empirical study explores the sources of employment fluctuations in Taiwan's industries and regions over the period 1978 to 2004. The quarterly growth rates of employment in nine industries and four regions are modelled with a structural vector autoregression (VAR), and the employment shocks are measured by VAR residuals. The covariance matrix of the VAR residuals is decomposed using system estimation method that selects the parameters to make the error model close to the covariance matrix and, in turn, to estimate the relative importance of national as well as industry-specific and region-specific shocks. The empirical results show that industry-specific shocks account for the major fluctuations in industries and regions. On average, about 83.95% of an industry's cyclical variations and 56.28% of the volatility in a region may be attributed to industry-specific shocks. National shocks account for little employment volatility in industries. Only the finance and personal service industries are highly sensitive to national shocks.     

Asymmetric impacts of insurance premiums on the non-oil GDP: some new empirical evidence

ABSTRACT

In this paper, we study the influence of insurance premium on the non-oil gross domestic product in Saudi Arabia. We implement the nonlinear autoregressive distributed lags. The results show that the relationships between insurance premiums and non-oil gross domestic product manifest a nonlinear behaviour. In other words, insurance premiums via positive and negative shocks lead to an increase of growth in the non-oil sector in the long term, whereas the lagged level shocks negatively affect the non-oil GDP in the short run. In addition, the examination of the multiplier effect suggests that positive cumulative changes in insurance premiums and inflation can effect much larger changes in non-oil GDP, while shocks in government spending have a symmetric effect on non-oil GDP growth.     

Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation

This paper assesses how regional trade agreements (RTAs) impact on growth volatility for a sample of 170 countries over the period 1978–2012. Notwithstanding concerns that trade openness through RTAs might heighten exposure to shocks, RTAs through enhanced policy credibility, improved policy coordination and reduced risk of conflicts can also ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility. In addition, smaller economies benefit more from the reduced growth volatility associated with RTAs than larger ones. The nature of the RTA also matters as shallow agreements such as partial‐scope preferential trade agreements do not appear to have a significant effect on growth volatility, whereas free trade areas and customs unions do. Finally, in investigating the drivers of RTAs, the regression results confirm that countries that are more prone to shocks are more likely to join an RTA, in particular with countries with relatively less volatile growth.     

Spillover Effects of Real and Nominal Uncertainties in India

This paper examines the spillover effects and the causality between inflation, output growth and its uncertainties for India. Using monthly data for the period from April 1980 to April 2011, we estimated a bi-variate GARCH in mean with BEKK representations. This study differs from the earlier works where the parameters in the BEKK representations are estimated individually and the inferences are drawn on the basis of the individual lagged variance, covariance, and error terms from the respective equations. The empirical evidence suggests that inflation uncertainty seems to have significant negative impact on output growth and positive impact on output uncertainty and there is a positive influence of output uncertainty on the inflation. More importantly, there are spillovers and volatility transmission effects between the macroeconomic uncertainties where the volatility in output growth is significantly influenced by the shocks and volatility in inflation.

     

Measuring asymmetry and persistence in conditional volatility in real output: evidence from three East Asian tigers using a multivariate GARCH approach

We search for evidence of conditional volatility in the quarterly real Gross Domestic Product (GDP) growth rates of three East Asian tigers: Singapore, Hong Kong and Taiwan. The widely accepted Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH)-type model is used to capture the existence of asymmetric volatility and the potential structural break points in the volatility. We find evidence of asymmetry and persistence in the volatility of GDP growth rates. It is noted that the structural breakpoints of volatility correspond reasonably well to the historical economic and political events in these economies. Policy implications from our findings are discussed.     

Why have business cycle fluctuations become less volatile?

This paper shows that a standard Real Business Cycle model driven by productivity shocks can successfully account for the 50% decline in cyclical volatility of output, its components, and labor input that has occurred since 1983. The model is successful because the volatility of productivity shocks has also declined significantly over the same time period. We then investigate whether the decline in the volatility of the Solow Residual is due to changes in the volatility of some other shock operating through a channel that is absent in the standard model. We therefore develop a model with variable capacity and labor utilization. We investigate whether government spending shocks, shocks that affect the household’s first order condition for labor, and shocks that affect the household’s first order condition for saving can plausibly account for the change in TFP volatility and in the volatility of output, its components, and labor. We find that none of these shocks are able to do this. This suggests that successfully accounting for the post-1983 decline in business cycle volatility requires a change in the volatility of a productivity-like shock operating within a standard growth model. We thank Stephen Parente, Ed Prescott, John Taylor, and two anonymous referees for helpful comments and suggestions.     

Level and dynamics of financial depth: consequences for volatility of GDP

The existing literature documents positive but potentially non-linear relationship between financial depth measured as private credit to GDP ratio and volatility of GDP. In this paper, we extend the analysis by considering also the role of financial depth dynamics. We use dynamic spatial panel models to address the issue of cross-sectional dependence of errors obtained from the standard dynamic panel models. We confirm the non-linear impact of the financial depth level but also find that higher growth rates of financial depth are significantly associated with higher volatility of output. The role of the latter factor is considerably more important in terms of explained variance compared to the impact of the private credit level. These results are robust to changes in the sample range, specification of the model, and measurement of the key variables. We also document considerable differences between the estimates obtained from the standard GMM and the spatial models.     

The changing international transmission of U.S. monetary policy shocks: Is there evidence of contagion effect on OECD countries

We study the changing international transmission of U.S. monetary policy shocks to 14 OECD countries over the period 1981Q1–2010Q4. The U.S. monetary policy shock is defined as unexpected change in Effective Federal Funds Rate (FFR). We use a time varying parameter factor augmented VAR approach (TVP-FAVAR) to study the EFFR shocks together with a large data set of 265, major financial, macroeconomic and trade variables for U.S., Canada, France, Germany, Italy, UK, Japan, Australia, Spain, Norway, Sweden, Switzerland, Finland and New Zealand. Our main findings are as follows. First, negative U.S. monetary policy shocks have considerable negative impact on GDP growth in the U.S., Canada, Japan and Sweden while most of the other member countries benefits. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. We also detect a more depressed GDP over medium term in the U.S., Canada, Japan, Australia, Norway and Sweden over the recent global financial crisis. Third, the size of U.S. monetary policy shocks during financial turmoil periods were unusual than normal periods and varies overtime. The financial crisis (2008–2009) is evidenced by decline in residential investment in the U.S. and propagation of this shock to Canada, Germany, Japan, Switzerland and New Zealand over the recent period. U.S. monetary policy shocks reduce share prices in most of the OECD countries; this impact is more pronounced over the turmoil period. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.     

Stock and Industry Return Characteristics Around Price Shocks

The author investigates positive and negative price shocks in individual securities and the degree to which they affect related firms in the same industry. This price contagion effect is significant with initial price shocks leading to substantial long-term abnormal returns across firms in the same industry over time. Price shocks also have predictive value regarding future earnings and revenues for the firm in question and its industry overall. Positive (negative) price shocks that are continued over time are associated with higher (lower) Sharpe ratios suggesting that abnormal returns are not simply a form of compensation for greater expected future volatility.     

Identifying terms of trade shocks in a developing country using a sign restrictions approach

Using annual data for Botswana from 1960 to 2012, we examine the responses of macroeconomic variables to four generalized positive terms of trade shocks – global demand, globalizing, sector-specific and global supply. A sign-restricted structural vector autoregression model with a penalty function is estimated to identify the four possible shocks. While positive global demand and globalization shocks are both expansionary, they have opposite effects on inflation. A positive commodity market specific shock dampens real GDP growth and is inflationary, suggesting a possible Dutch disease response. A negative global supply shock suppresses both output growth and inflation. All but the last shock leads to a significant declining interest rate. Monetary policy contraction is recommended for the first shock and expansion for the others.     

Accounting for Growth and Output Gaps: Evidence from New Zealand

We evaluate New Zealand's macroeconomic performance over the 1967–1996 period, which witnessed numerous economic reforms. Using both index–number and econometric techniques, we decompose nominal GDP growth and the output gap into contributions from price level changes, productivity growth and changes in factor utilisation. Changes in domestic prices accounted for four–fifths of the growth in nominal GDP, while capital accumulation and employment growth were the most important factors determining real–output growth. Deviations in the domestic price level around its long–run trend contributed most heavily to changes in the nominal output gap. The real gap was influenced in any year variously by deviations of the terms of trade and labour input from their long–run trends, as well as by productivity shocks.