US bilateral trade equations: forecasts and structural stability

In this paper actual recent US trade values are compared with out-of-sample forecasts using a standard specification for real bilateral trade value equations. Though fairly accurate on average, there are large bilateral errors. A battery of coefficient stability tests indicates significant instability more often for imports over the forecast period and more often for exports over the latter part of the estimation period. Thus, standard bilateral trade equations appear to violate the basic regression assumption of stability and may be of little use for forecasting.     

Late Start with Extra Schooling: The Effect of Increase in School Entry Age and Preschool Provision

This paper analyses the combined effect of school entry‐age increase and the changes in preschool provision on educational achievement using a difference‐in‐difference specification. Achievement is assessed using the score on national standardised tests across a range of subjects. The analysis uses the changes in policy in different years across two states in Australia. I find positive effects for several subjects across different grades. Results are robust to falsification tests. In one state, however, cohorts starting school during the policy transition period are adversely affected, possibly due to disruption in preschool education.     

A linear demand system within a seemingly unrelated time series equations framework

A seemingly unrelated time series equations framework for the linear almost ideal (AID) demand system is considered. The framework is applied to a consumer demand system covering nine non-durable commodities. Within a specification where the static linear AID system is augmented by latent variables representing stochastic trends and seasonality, demand homogeneity is tested; both in each equation and in the system as a whole. Income and own-price elasticities are calculated under homogeneity restrictions. Although the homogeneous model is formally rejected by statistical tests, it performs well with respect to interpretability, parameter stability and forecasting.     

Productivity growth of the cities of Jiangsu province,China: a Kaldorian approach

This paper considers the determinants of economic growth of the cities of Jiangsu province, China, adopting a Kaldorian approach. It is found that there is a close correlation between the growth of non-industry and industry (Kaldor’s first law) that provides indirect evidence for the export-base theory. The paper discusses two competing explanations of the foundations of the Verdoorn law (Kaldor’s second law), which, in its simplest form, is the relationship between industrial productivity and output growth. It also considers the static–dynamic Verdoorn law paradox. This arises from the fact that estimating the Verdoorn law in log-levels often gives statistically insignificant estimates of the Verdoorn coefficient while the use of growth rates gives significant values of around one half. The results show that this does not occur when data for the cities are used. A plausible explanation for the paradox is that it results from spatial aggregation bias. It is also found that inter-province urban productivity disparities first increase, but subsequently decrease over the period considered.     

The big problem of forecasting small change

The United States Mint recently reviewed approaches to forecasting the demand for new coin. This paper reports on methods used to determine fundamental attributes of the data, and uses these to help better determine appropriate model specification in order to better plan coin production. In particular, the debate regarding trend versus difference stationarity in macroeconomic trending data is considered. The interest in the present paper is limited to applying a well known unit root test procedure to an untested macrodata set – changes in US Coin demand – to see whether the test is useful in guiding the specification to improved forecast performance. It is found that the forecast results are somewhat sensitive to the way in which the data are seasonally adjusted, and lessons learned from this ‘case study’ indicate that unit root tests are useful in guiding model specification.     

Monetary transmission in Spain: a structural cointegrated VAR approach

This paper analyses the monetary policy channels in Spain using a cointegrated structural VAR approach which explicitly accounts for endogenous policy reactions in a small open economy. Evidence is found of one cointegrating relation which is identified as a long-run money demand function. In addition, stability tests are applied to this relationship to assess whether there has been a change of monetary regime. The impulse-responses for the non-monetary shocks as well as the absence of the puzzles traditionally found in the empirical literature, suggest that the model specification identifies the monetary policy shocks correctly. Thus, according to our results, a monetary contraction causes a weak downward response in the price level, as well as an increase in both short and long-run nominal interest rates, a decrease in aggregate output and an exchange rate appreciation.     

Inflation and savings: testing Deaton's hypothesis

A ‘money illusion’ savings function in which unanticipated inflation affects the savings ratio positively is tested. This is strongly supported by Finnish data. Goodness-of-fit statistics are quite high and the coefficient estimates are of the expected sign and are highly significant. Standard stability tests of both the Brown-Durbin-Evans type and of the VPR type are generally rather favourable. Finally, cross-country evidence from ten OECD countries gives further support for the suggested specification.     

Is there an asymmetric effect of monetary policy over time? A Bayesian analysis using Austrian data.

The present paper assesses whether monetary policy effects are asymmetric over the business cycle by estimating a univariate model for GDP including additionally the first difference of the 3-month Austrian interest rate as a measure for monetary policy. The asymmetry of the effects is captured by allowing for state-dependent parameters where the latent state variable follows a Markov switching process. The model is estimated within a Bayesian framework using Markov Chain Monte Carlo simulation methods. Model selection and specification tests are performed by means of marginal likelihood. The results document significant negative effects of monetary policy during periods of below-average growth, while the effect seems insignificant during periods of normal or above-average growth. These results corroborate those derived in theoretical models assuming price rigidities and implying a convex supply curve. Additionally, the concern of using appropriate state-identifying restrictions is raised to obtain an unbiased posterior inference. Finally, the analysis concludes by assessing the robustness of the results with respect to alternative measures of monetary policy. First Version Received: December 2000/Final Version Received: May 2001     

The Stability of the Relation Between the Stock Market and Macroeconomic Forces

This paper identifies the macroeconomic factors that influence Italian equity returns and tests the stability of their relation with securities returns. The relation between stock returns and the macroeconomic factors is found to be unstable: not only are the factor loadings of individual securities virtually uncorrelated over time, but a high percentage of the shares experience a reversal of the sign of the estimated loadings. This result is not confined to single periods or to a small group of shares, but holds in different sub–periods and for securities in all risk classes. These findings suggest that research should carefully investigate the specification of the return generating process and the stability of the risk measures.
(J.E.L.: G12, E44).     

Purchasing power parity and dynamic error correction: Evidence from Asia Pacific economies

This study investigates the validity of purchasing power parity (PPP) hypothesis as a long run equilibrium condition for thirteen Asia Pacific economies using a generalized error correction model. The results of the generalized dynamic specification appear to support PPP for more countries than do standard tests for unit roots. Out of the thirteen bilateral exchange rates, evidence of PPP is found for only one (the Mexican peso/U.S. dollar rate) under traditional tests for unit roots, while seven of them support PPP under the generalized dynamic error correction model. It appears that one of the factors that lead standard tests for unit roots to fail to detect evidence of PPP may be the undue restrictions imposed on the model specification.     

A note on the Wald,LR and LM tests and misspecification

In this note, we investigate sensitivity of the Wald, LR and LM tests to specification error. It is shown that these three tests are very sensitive to specification error, but the LM test is relatively superior to other two tests under certain situations.     

Semi-Parametric Comparison of Stochastic Volatility Models using Realized Measures

This paper proposes a procedure to test for the correct specification of the functional form of the volatility process within the class of eigenfunction stochastic volatility models. The procedure is based on the comparison of the moments of realized volatility measures with the corresponding ones of integrated volatility implied by the model under the null hypothesis.
We first provide primitive conditions on the measurement error associated with the realized measure, which allow to construct asymptotically valid specification tests.
Then we establish regularity conditions under which the considered realized measures, namely, realized volatility, bipower variation, and modified subsampled realized volatility, satisfy the given primitive assumptions.
Finally, we provide an empirical illustration based on three stocks from the Dow Jones Industrial Average.     

Difference or Ratio: Implications of Status Preference on Stagnation

We consider a dynamic macroeconomic model where households derive utility from wealth comparisons. Measure of relative affluence can be the ratio to, or the difference from, the social average. These two specifications lead to quite different equilibrium consequences: under the ratio specification full employment is always realised, whereas under the difference specification persistent shortage of aggregate demand can result. Using data of an experiment on status concern, we empirically find that the difference specification of relative affluence fits the data better than the ratio specification. Our work may help in understanding mechanisms behind recent stagnation in developed economies.     

Numeraire choice in agricultural supply analysis

Should the choice of numeraire price for modelling profit functions be arbitrary, or is more careful study needed? Here, the choice of numeraire is examined using tests for models specification and out-of-sample predictive accuracy based on the crop and livestock data obtained from Iowa. The results of this study indicate that, for this data set and functional form, it does indeed make a difference which numeraire you choose. This is in contrast to previous studies which, in general, indicated that the choice of numeraire equation is arbitrary or, more commonly, offered no justification for the netput chosen.     

A generalized specification test

In a non-linear parametric setting, a class of specification tests developed by Hausman (1978) is extended to accomodate a singular covariance matrix. An application to limited information tests for the exogeneity of instrumental variables is presented.     

Goodness-of-fit techniques for count data models: an application to the demand for dental care in Spain

This paper compares the practical performance of alternative goodness-of-fit techniques for count data models in the context of a study of the determinants of demand for dental care in Spain. We apply alternative goodness-of-fit techniques to different specifications. In particular, we implement recently proposed specification tests which are consistent in the direction of general nonparametric alternatives. The analysis suggests that a negative binomial model is an appropriate specification for dental care demand. Dental health and income are identified as important predictors of individuals' behavior. First version received: April 2000/Final version received: March 2001     

MACROECONOMETRIC MODEL EVALUATION,WITH SPECIAL REFERENCE TO THE NIF88 MODEL*

This paper has argued that a mixture of procedures is required for the evaluation of a macroeconomic model. Both individual equations and overall model properties are involved, while both formal tests and an informal understanding of the model are needed. The procedures advocated reflect the need for evaluation to be informative and manageable. The bulk of the statistical testing is best conducted at the single equation stage. Evaluation of single equations involves:

• (i) employing a battery of diagnostic tests;
• (ii) specification and stability tests should be designed, where possible, to enhance the power of the test conducted, including by making use of external information;
• (iii) procedures designed to detect influence of particular observations can provide
• (iv) comparison with other information, both from other empirical investigations and from theoretical priors, is necessary to ensure sound results.

     

Tourism revenues and residential foreign investment flows in Spain: a simultaneous model

The aim of this work is to analyse the determinants of the tourism revenues and the residential foreign investment, in Spain, during the period 1967–1998. To do so, a two equation simultaneous model is proposed to be estimated. The specification highlights the simultaneous and direct interdependence of the tourism revenues and the residential foreign investment flows. This result contrasts with the traditional standard specification of the international tourism demands in Spain. Nonlinear simultaneous estimations, cointegration techniques and a battery of specification tests are the econometric tools applied in the work.     

Gaussian estimation of a second order continuous time macroeconometric model of the UK

This paper describes the first application to an economy-wide macroeconometric model of recently developed methods for the exact Gaussian estimation of higher order continuous time dynamic models. The new model is formulated as a system of second order differential equations, thus providing a much richer dynamic specification than the predominantly first order continuous time macroeconometric models developed during the last 15 years. It also makes intensive use of economic theory to obtain a parsimonious parametrization, is designed in such a way as to permit a rigorous mathematical investigation of its steady state and asymptotic stability properties, and makes systematic use of the assumption of long-run rational expectations. In addition to the exact Gaussian estimates of the structural parameters, the paper includes the first set of continuous lag distributions derived from estimates that take account of the exact restrictions on the distribution of the discrete data implied by a continuous time model. It also includes the first estimates of the coefficient matrices of the exact discrete model, in its VARMAX form, satisfied by the discrete stock and flow data generated by a higher order continuous time dynamic model.     

Economic development and CO2 emissions: A nonparametric panel approach

We examine the empirical relation between CO₂ emissions per capita and GDP per capita during the period 1960–1996, using a panel of 100 countries. Relying on the nonparametric poolability test of Baltagi et al. [Baltagi, B.H., Hidalgo, J., Li, Q., 1996. A nonparametric test for poolability using panel data, Journal of Econometrics 75, 345–367], we find evidence of structural stability of the relationship. We then specify a nonparametric panel data model with country-specific effects. Estimation results show that this relationship is upward sloping. Nonparametric specification tests do not reject monotonicity but do reject the polynomial functional form which leads to the environmental Kuznets curve in several studies.