Detecting multiple breaks in long memory the case of U.S. inflation

Multiple structural change tests by Bai and Perron (Econometrica 66:47–78, 1998) are applied to the regression by Demetrescu et al. (Econ Theory 24:176–215, 2008) in order to detect breaks in the order of fractional integration. With this instrument we tackle time-varying inflation persistence as an important issue for monetary policy. We determine not only the location and significance of breaks in persistence, but also the number of breaks. Only one significant break in U.S. inflation persistence (measured by the long-memory parameter) is found to have taken place in 1973, while a second break in 1980 is not significant.     

It's all the miners' fault: On the nonlinearity in U.S. unemployment rates

The U.S. unemployment rate is generally regarded as nonlinear. In this study, we show that if there had been no miners' general strike in October of 1949, and if the aggregate unemployment rate had been 0.3% lower during that month, the 1948–2002 U.S. unemployment rate would have been linear. Hence, just a single alteration of past events would have resulted in significantly different findings regarding the linearity in the U.S. unemployment rate. This finding illustrates a need for linearity tests to be developed that are robust against the effects of outliers.     

Fractional integration and structural breaks in U.S. macro dynamics

This article identifies structural breaks in the post-World War II joint dynamics of U.S. inflation, unemployment and the short-term interest rate. We use a structural break-date procedure which allows for long-memory behavior in all three series and perform the analysis for alternative data frequencies. Both long-memory and short-run coefficients are relevant for characterizing the changing patterns of U.S. macroeconomic dynamics. We provide an economic interpretation of those changes by examining the link between macroeconomic events and structural breaks.     

How has empirical monetary policy analysis in the U.S. changed after the financial crisis?

During the Great Recession, the Federal Reserve lowered the federal funds rate nearly to zero and began using unconventional monetary policy. A fed funds rate near zero is no longer a proper representation of policy. Thus, empirical models of monetary policy cannot be estimated as usual. We use a linear empirical model to investigate whether alternative instruments such as the balance sheet or shadow rates can replace the fed funds rate to capture unconventional policy. Our objective is to determine whether adding to or replacing the policy instrument can preserve linearity or whether one must allow structural breaks. We include data for both normal and unconventional periods and find that shadow rates preserve linearity better than using a bounded federal funds rate alone, adding the balance sheet, or adding long rates. When short rates are bounded, shadow rates produce similar responses to the unbounded period and alleviate the need for structural breaks. [JEL codes: E43, E44, E52] Keywords: zero lower bound, affine term structure.     

Analysis on structural changes in the macroeconomic data series with the empirical evidence from China

Analysis on structural changes in macroeconomic data series has been the key issue for studying data quality. This paper studies the structural changes in China’s 36 macroeconomic time series using joint estimation model, and we find out the characteristics and movement pattern for the outliers. Our results show that most outliers show up more or less in groups, indicating that there is a significant correlation between them. The isolated outliers are not the main characteristic of China’s macroeconomic time series. Nearly all the original series contain the obvious skewness and kurtosis; hence, the hypothesis of normality is significantly rejected. Most original and outlier correction series show the non-autoregressive conditional heteroskedasticity (ARCH) characteristic, but the p value for ARCH2, ARCH4, and ARCH8 is very different. __________ Translated from Economic Research Journal (经济研究), 2005, (1) (in Chinese)     

Extreme observations and non-normality in ARCH and GARCH

Most studies employing ARCH and GARCH models document the existence of severe excess kurtosis in the estimated residuals. This non-normality may be due to model misspecifications, structural changes, or outliers. We conduct simulation experiments to examine the impact of extreme observations on the estimated parameters and residuals in the ARCH models. Then, we propose an iterative algorithm to detect and correct for the non-normality generated by extreme observations and additive outliers. Results for the simulated data, US equity returns and $/£ exchange rates are presented. Correcting outliers dramatically reduces the non-normality and bias in the estimated coefficients for small samples.     

Predicting stock realized variance based on an asymmetric robust regression approach

This paper introduces an asymmetric robust weighted least squares (ARLS) approach to improve the forecasting performance of the heterogeneous autoregressive model for realized volatility. The ARLS approach down-weights extreme observations to limit the bad influence of outliers on the estimated parameters. Compared with existing robust regression methods, our model further takes into account the asymmetry of outliers using a class of kernel functions. Out-of-sample results show the ARLS approach can generate more accurate forecasts of the S&P 500 index realized volatility in the statistical and economic senses. The model that considers the asymmetry of outliers gains superior performance among various robust regression competitors. The forecasting improvements also hold in other international stock markets. More importantly, the source of the predictive ability of the ARLS model comes from the less biased and more efficient parameter estimation.     

Outlier detection and seasonal adjustment

By analysing three macroeconomic time series, namely retail sales, purchases of durables and of cars, we show the consequences of the presence of outliers in the data on the outcome of model-based seasonal adjustment. For all three series, we detect substantial negative effects for the resulting seasonally adjusted figures.In a recent paper,Thury — Wüger (1992) demonstrated that the presence of outliers in economic data has serious negative effects for time series modelling. Poorly estimated ARIMA models with an unsatisfactory forecasting performance are the consequence. Beyond that, we suspect that outliers may also cause problems for seasonal adjustment. Since seasonally adjusted data play a prominent role in applied economic research, it seems worthwhile to investigate this problem more deeply. Analysing the same three series as in the above mentioned paper, namely retail sales, purchases of durables and of cars which, as we know, are severely contaminated by outliers, we try to derive the consequences of the existence of outliers in the data for seasonal adjustment. Where monthly observations of our considered data exist, we also enclose calendar effects in the modelbased seasonal adjustment procedure.

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Zusammenfassung Die Existenz von Ausreißern in ökonomischen Zeitreihen führt zu schlecht spezifizierten Zeitreihenmodellen mit verzerrten Parameterschätzwerten. Verwendet man solche Modelle als Ausgangspunkt für eine auf Modellansatz basierende Saisonbereinigung, so erhält man sehr unverläßliche, mit starken Zufallsschwankungen behaftete Ergebnisse.

     

LM cointegration tests allowing for an unknown number of breaks: implications for the forward rate unbiasedness hypothesis

This article extends the Lagrange multiplier (LM) cointegration test proposed by Westerlund and Edgerton (WE 2007) by allowing for an unknown number of breaks. Monte Carlo simulations provide two main results. First, a loss of power in the LM cointegration tests is detected when potential multiple breaks are ignored. Second, the modified testing procedures do not affect the asymptotic distribution and major properties of the tests of WE under the null, but noticeably increase their testing power in presence of multiple breaks. We also provide empirical applications of the proposed tests for the forward rate unbiasedness hypothesis (FRUH). The results reveal that the FRUH does hold when the effects of the multiple structural breaks are taken into account.     

Tax policy and investment in major U.S. macroeconomic econometric models

In an analysis of six major U.S. quarterly models, the predicted results of tax incentives for investment are found to vary widely. Differences are traced to critical specifications in investment equations. When appropriately revised investment equations are reestimated the role of tax parameters is much reduced, particularly among the high outliers, and the variance among the models is narrowed decidedly. Full model simulations of revised equations suggest that current and proposed incentives such as the investment tax credit and accelerated depreciation are not cost-effective. Increases in investment approximate only half of static tax losses, and budget deficits widen.     

宏观经济统计数据结构变化分析及其对中国的实证

对于宏观经济统计数据的结构变化进行分析已成为研究数据质量的核心内容之一。本文从经济系统的角度运用联合估计诊断模型对我国 3 6个宏观经济时间序列的结构变化进行了全面的分析 ,发现了数据异常的特点和规律。研究结论表明 :大部分异常点的出现或多或少都是以聚集成堆的形式出现的 ,它们之间存在深刻的内在联系 ,孤立的异常点不是我国宏观经济时间序列的主要特征 ;几乎所有的原始序列都有显著的偏度 ,过多的峰度也是明显的 ,因此它们被显著地拒绝认为服从正态分布 ;大部分变量的原始序列和异常点修正后序列虽然都呈现出非ARCH特征 ,但是ARCH2、ARCH4、ARCH8的P值却有一定程度的不同。     

Some empirics of the bivariate relationship between average subjective well-being and the sustainable wealth of nations

The World Bank's Millennium Capital Assessment (MCA) has provided per capita estimates of total wealth and its major subcategories for a large number of countries. In this article, these macro-level estimates are used to explore bivariate cross-country ‘wealth–happiness’ relationships, focussing on issues of appropriate functional form, parameter stability and outliers. For comparative purposes, ‘income–happiness’ relationships are also explored. Total wealth turns out to be strongly related to Gross National Income (GNI) per capita, due to the importance of produced and intangible capital, but not to natural capital. In contrast, when the most natural capital intensive countries are excluded as outliers, a strong relationship emerges between Subjective Well-Being (SWB) and natural capital, especially amongst high income countries. In these countries, natural capital seems to be an important wealth correlate of SWB, despite accounting for only a very small proportion of total wealth.     

Time-series model forecasts and structural breaks: evidence from Spanish pre-EMU interest rates

Analysis of the future behaviour of economic variables can be biased if structural breaks are not considered. When these structural breaks are present, the in-sample fit of a model gives us a poor guide to ex ante forecast performance. This problem is true for both univariate and multivariate analysis and can be extremely important when co-integration relationships are analysed. The main goal of this article is to analyse the impact of structural breaks on forecast accuracy evaluation. We focus on forecasting several interest rates from the Spanish interbank money market. In order to carry out the analysis, we perform two forecasting exercises: (a) without structural breaks and (b) when structural breaks are explicitly considered. We use new sequential methods in order to estimate change-points in an endogenous way. This method allows us to detect structural breaks in all four rates in May 1993. However, the effects of these breaks are not very strong, since we found scarce gains in forecasting accuracy when the structural breaks are included in the models.     

Panel cointegration and the monetary exchange rate model

This paper re-examines the validity of the monetary exchange rate model during the post-Bretton Woods era for 18 OECD countries. Our analysis simultaneously considers the presence of both cross-sectional dependence and multiple structural breaks, which have not received much attention in previous studies of the monetary model. The empirical results indicate that the monetary model emerges only when the presence of structural breaks and cross-country dependence has been taken into account. Evidence is also provided suggesting that the breaks in the monetary model can be derived from the underlying purchasing power parity relation.     

Rethinking Long Memory and Structural Breaks in the Forward Premium

This paper documents new results that the ability of structural breaks to explain away non‐stationary long memory in the forward premium weakens considerably with higher‐frequency data. For daily data, removing structural breaks does not make non‐stationary long memory stationary, contrary to the evidence for monthly data reported in the recent literature. Simulating data on a daily basis, we show that using monthly data tends to overstate the importance of structural breaks, and obfuscate the true nature of persistence, in the forward premium. Our results thus corroborate earlier findings that long memory bears primary responsibility for the forward premium anomaly.     

Tests for cointegration allowing for an unknown number of breaks

This paper introduces cointegration tests allowing for an unknown number of breaks. The introduced tests assume that the unspecified number of breaks is smaller than or equal to the maximum number of breaks set a priori. Monte Carlo simulations provide two main results. First, the proposed tests perform as well as the tests of Gregory and Hansen (1996a) and Hatemi-J (2008), which assume one or two breaks a priori, when the cointegration relationship has one or two breaks. Second, the proposed tests perform better than the tests of Gregory and Hansen (1996a) and Hatemi-J (2008) when the cointegration relationship has more than three breaks or persistent Markov switching shifts. We also provide empirical applications for the money demand of the U.S. The empirical results show that the proposed tests reject the null hypothesis of no cointegration as compared to other tests.     

Nonstationarity,cointegration and structural breaks in the Australian term structure of interest rates

This article examines the unit-root property of the Australian short- and long-term interest rates using unit-root tests that accommodate a single or two breaks under the null and/or alternative hypothesis. Two breaks in interest rates are found to coincide with the 1982/83 and 1990/91 recessions or the 1993 inflation targeting period. We further investigate the implications of these structural breaks on the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates. While there is evidence that the data are consistent with the expectations hypothesis at the shorter end of the term structure, breaks in interest rates generate a shift in the cointegrating relationship, thus altering the information content of the term structure. Failing to account for a regime shift in the cointegration regression, the data erroneously supports the expectations hypothesis at the longer end of the term structure. These results have profound implications for policy makers who may inadequately exploit the information content of the term structure to predict future changes in inflation.     

Testing for trends in the terms of trade between primary commodities and manufactured goods

This paper joins the statistical debate on the terms of trade between primary commodities and manufactured goods by contributing to the methodological discussion and presenting new evidence using data series covering almost the whole of the 20th century. Using statistical tests that take into account breaks in the series, it is found that over the 20th century the relative prices of primary commodities dropped to nearly one-third of their level at the beginning of the century in two “installments”, when random shocks led to structural breaks, and not in a gradual way as implied by either a deterministic or stochastic trend. Possible reasons for the structural breaks and their policy implications are discussed.