A structural VAR business cycle model for a volatile small open economy

New Zealand is a small economy exposed to a volatile climate, relatively volatile international trade prices, and its exposure to international financial markets has increased markedly since economic reforms in the 1980s. This paper applies identification techniques suggested by Cushman and Zha [Cushman, D.O. and Zha T.A., 1997. Identifying monetary policy in a small open economy under flexible exchange rates, Journal of Monetary Economics, 39, pp. 433–448.], Zha [Zha, T.A., (1999). Block recursion and structural vector autoregression, Journal of Econometrics, 90, pp. 291–316.] and Dungey and Pagan [Dungey, M. and Pagan, A., 2000. A structural VAR model of the Australian economy, The Economic Record, 76, pp. 321–342.] to develop a large four block structural VAR model of the New Zealand business cycle to capture these features. The model reveals that climate and international trade price shocks have been more important sources of business cycles fluctuations than international or domestic financial shocks. Furthermore, the model does not encounter the price and exchange rate puzzles that have bedevilled attempts to identify monetary policy shocks in small open economy SVAR models.     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Bias correcting adjustment coefficients in a cointegrated VAR with known cointegrating vectors

The maximum likelihood estimator of the adjustment coefficient in a cointegrated vector autoregressive model (CVAR) is generally biased. For the case where the cointegrating vector is known in a first-order CVAR with no intercept, we derive a condition for the unbiasedness of the maximum likelihood estimator of the adjustment coefficients, and provide a simple characterization of the bias in case this condition is violated. A feasible bias correction method is shown to virtually eliminate the bias over a large part of the parameter space.     

A spectral decomposition for structural VAR models

Based on structural VARs, this paper proposes a spectral decomposition which allows to infer the effects of changes in one variable on the other variables in the frequency domain. It is shown that there is a close relationship between this concept and conventional forecast error variance decomposition techniques for VARs. An empirical example demonstrates the usefulness of this additional tool in analyzing the relationships among time series.     

A structural Bayesian VAR for model-based fan charts

Inflation forecast uncertainty is of importance for a wide range of agents in the economy, central banks in particular. Ways to describe and account for this uncertainty in a consistent manner have received increasing attention of late, in part due to the growing number of inflation-targeting central banks. This article develops a large structural VAR for the Swedish economy and estimates it in a Bayesian framework. The methodology permits not only structural interpretation and analysis but offers a natural way to formalize forecast uncertainty, as the posterior predictive density from the model has the interpretation of a fan chart.     

A structural model of price and exchange rate dynamics in a small open economy

Conclusions A major result following from the analysis of ourstructural model of inflation under flexible exchange rates is that there is no such thing asstructural inflation in the long run. Long-run inflation rather becomes a purely monetary phenomenon if exchange rates are flexible and if on an international level functioning capital markets are postulated. While, in the light of the assumptions made in Part III, this finding is not nearly as paradoxical as it may appear at first sight, it can hardly be overemphasized considering the ongoing theoretical discussion and the empirical research on the Scandinavian approach to inflation and recalling that the Scandinavian model is basically intended to picture equilibrium dynamics.The results concerning equilibrium price and exchange rate dynamics also apply to the equilibriumlevels of prices and the exchange rate, i. e., the equilibrium price level depends exclusively on monetary factors while the equilibrium exchange rate is determined by a purchasing power parity element and the structural productivity gap component.Turning to the results of our analysis of disequilibrium dynamics, the overall picture does not change very much. Here the qualitative pattern of adjustment of both prices and the exchange rate is again completely independent of structural variables, but is exclusively determined by four adjustment coefficients. However, the particular quantitative values assumed by prices and the exchange rate during the adjustment process do indeed reflect the impact of the productivity gap.No conclusions can be derived from our model on the amount of time it takes to return to the neighbourhood of equilibrium once the economy has been subjected to some kind of external shock. A casual examination of post-1973 developments and especially the Swiss experience suggest, however, that in the case of a disturbance as, e. g., in the form of a monetary contraction (relative to the rest of the world), the economy may take so long to return to the neighbourhood of long-run equilibrium that the negative real consequences of the overvaluation of the domestic currency during the adjustment process provide a momentous rationale for short-run stabilization interventions in the foreign exchange market.We should like to thank Peter Bernholz and an anonymous referee for helpful comments on a previous version of this paper.     

Germany before and after unification: A structural VAR analysis

Recent theoretical research in business cycle modelling has aimed at putting forward a unified framework for studying both short-term cycles and long-term growth. Empirical research based on structural vector-autoregression has established that the same factors which drive long-run growth also explain a large proportion of the movements of key macro variables at business cycle frequencies. The present paper aims at applying this approach to study the determinants of the post-unification downturn in Germany. The results suggest that German business cycles were not all alike. Whilst adverse supply shocks clearly matter before unification, it is primarily adverse aggregate demand shocks and a too tight monetary policy which dominate the German post-unification decline in output growth rates.     

A forecasting model of the Kenyan economy

A demand-oriented macroeconometric model of the Kenyan economy is developed and estimated in line with the cointegration technique. The estimated structure of the model is used to perform policy simulation experiments to determine the sensitivity of key macroeconomic variables to changes in exchange rate, net government current expenditure and nominal interest rate. The results of policy simulation experiments reveal that the exchange rate and fiscal policies are relatively more effective than the monetary policy, i.e. changing the nominal interest rate, in influencing the level of economic activity. The results point to the possibility of devaluation improving the international trade balance.     

Illegal trade in the Iranian economy: Evidence from a structural model

This study investigates the causes and consequences of import and export smuggling and estimates its relative size in Iran from 1970 to 2002. Multiple Indicators–Multiple Causes (MIMIC) modeling and trade misinvoicing are used to compute the latent variable of smuggling. The results indicate that the penalty rate for smuggling and the quality of economic and political institutions reduce smuggling, while tariffs and black market premia increase the incentives for illegal trade. More trade openness is associated with greater illegal trade in the case of Iran. On average, smuggling in Iran has been approximately 13% of total trade.     

The forecasting ability of a cointegrated VAR system of the UK tourism demand for France, Spain and Portugal

This paper uses the vector autoregressive (VAR) methodology as an alternative to Deaton and Muellbauer’s Almost Ideal Demand System (AIDS), to establish the long-run relationships between I(1) variables: tourism shares, tourism prices and UK tourism budget. With appropriate testing, the deterministic components and sets of exogenous and endogenous variables of the VAR are established, and Johansen’s rank test is used to determine the number of cointegrated vectors in the system. The cointegrated VAR structural form is identified and the long-run structural parameters are estimated. Theoretical restrictions such as homogeneity and symmetry are tested and not rejected by the VAR structure. The fully restricted cointegrated VAR model reveals itself a theoretically consistent and statistically robust means to analyse the long-run demand behaviour of UK tourists, and an accurate multi-step forecaster of the destinations’ shares when compared with unrestricted reduced form and first differenced VARs, or even with the structural AIDS model.     

A coopetitive model for the green economy

The paper proposes a coopetitive model for the Green Economy. It addresses the issue of the climate change policy and the creation and diffusion of low-carbon technologies. In the present paper the complex construct of coopetition is applied at macroeconomic level. The model, based on Game Theory, enables us to offer a set of possible solutions in a coopetitive context, allowing to find a Pareto solution in a win–win scenario. The model, which is based on the assumption that each country produces a level of output which is determined in a non-cooperative game of Cournot-type and that considers at the same time a coopetitive strategy regarding the low technologies, will suggest a solution that shows the convenience for each country to participate actively to a program of low carbon technologies within a coopetitive framework to address a policy of climate change, thus aiming at balancing the environmental imbalances.     

A short-term analytical model of the Singapore economy

The rapid economic transformation of the ‘newly industrializing countries’ has aroused considerable interest in their economic structure and functioning. This paper contributes to the discussion by seeking to anatomise the Singapore economy. The economy's dynamism is reflected by the fact that, although our model is a short-term one, capital investment, both foreign and domestic, plays a central role in it. The model is also characterized by a novel specification of the export function, the inclusion of non-traded goods and of a sectorally segmented labor market, and a fairly comprehensive treatment of the financial system. The general equilibrium response of the model to various parameter shifts is investigated, and the factors responsible for the economy's rapid development thereby elucidated.     

A macroeconomic rationing model of the belgian economy

This paper presents a small macroeconometric model that allows explicitly for the existence of rationing on the goods and labour markets and clearly distinguishes the three well-known regimes: Keynesian unemployment, classical unemployment and repressed inflation. The basic structure of the model contains two equations that can be estimated by single equation techniques. Estimation on Belgian postwar data establishes both the feasibility and the usefulness of the quantity rationing approach. Empirical results also reveal after 1972 an increasing discrepancy between the amount of labour supplied and the potential employment level determined by existing production capacities.     

France in the global economy: a structural approximate dynamic factor model analysis

This study identifies the main shocks that cause fluctuations in French output and their channels of transmission. It uses a large-dimensional structural approximate dynamic factor model. There are three main findings. First, common shocks, especially demand shocks, which seem to originate from the U.S., play an important role in explaining French economic activity. While international trade, relative prices, and foreign direct investment (FDI) flows are the main channels of transmission, the stock market, consumer confidence, and interest rates also matter. Second, France’s integration with the rest of the world has increased over time. Third, there is some tentative evidence of regional components in explaining French output fluctuations; country-specific components also contribute. The predominance of exogenous factors affecting French output, the asymmetry in the transmission of shocks, and France’s participation in a currency area argue for making French goods, services, and labor markets as flexible as possible.     

A small-scale DSGE-VAR model for the Romanian economy

This paper describes the theoretical structure and the estimation results for a DSGE-VAR model for the Romanian economy, an inflation targeting country since 2005. Having as benchmark the New-Keynesian model of Rabanal and Rubio-Ramirez (2005), the main additional feature introduced refers to the extension to a small open economy setting in order to account for this specific aspect of the Romanian economy.Within the inflation targeting monetary policy regime, forecasts of central macro variables, inflation in particular, play an important part. Because inflation reacts to monetary measures with a considerable lag, the central bank's policy has to be forward-looking. Based on univariate measures of forecast performance, it is shown that the VAR with DSGE model prior produces forecasts that improve on those obtained using an unrestricted VAR model and the popular Minnesota prior in case of inflation, real exchange rate and nominal interest rate. Moreover, the DSGE-VAR model is informative about the structure of the economy and can help the “story-telling” in the central banks.     

A vector error-correction forecasting model of the US economy

Any research or policy analysis in economics must be consistent with the time-series properties of observed macroeconomic data. Numerous previous studies reinforce the need to specify correctly a model’s multivariate stochastic structure. This paper discusses in detail the specification of a vector error correction forecasting model that is anchored by long-run equilibrium relationships suggested by economic theory. The model includes six variables––the CPI, the GDP price index, real money balances (M1), the federal funds rate, the yield on long-term (10-year) government bonds, and real GDP––and four cointegrating vectors. The accuracy of VECM model forecasts for individual, univariate time series during for the 1990s is comparable to forecasts made by government agencies and private forecasters, perhaps because many forecasters share a similar implicit, long-run steady-state growth model of the economy. Judged by multivariate statistics that account for forecast-error covariance, VECM forecasts are found to be somewhat more accurate than a naïve random-walk alternative.     

A dynamic simulation model of the world jute economy

This paper investigates both the sources of jute supply instability and the potential impact of an internationally managed buffer stock to stabilize market prices. The analysis is carried out utilizing a rather simple dynamic model of the markets for raw jute and jute goods. The model combines econometric estimates of the relevant parameters with a priori information derived from industry studies. It integrates the behavior of jute farmers in the principal jute growing countries with that of jute goods manufacturers and consumers using a series of region-specific demand and supply functions. Expected price variance is an explicit factor in determining jute acreage.     

A New Keynesian SVAR model of the Australian economy

We estimate an SVAR model for the Australian economy based on an open economy New Keynesian model that accounts for the forward-looking behaviour exhibited by economic agents. Deep structural parameters are identified by placing exclusion restrictions on the VAR residuals and the covariance matrix. Dynamic responses show no price and exchange rate puzzles and indicate that the Reserve Bank of Australia (RBA) stabilises output fluctuations in the short run while maintaining a medium-run inflation target since 1984. Aggregate demand shocks are found to be driven by external demands. The RBA exercises caution in responding to aggregate supply shocks.     

Estimating the size of the shadow economy in Spain: a structural model with latent variables

There has recently been a revival of international interest in measuring the size of the shadow economy. The current study adopts an approach to the Spanish case that is based on the theory of unobservable variables. This methodology involves the estimation of structural models (MIMIC) which analyses a set of causes of the shadow economy while simultaneously taking into account its influence upon a series of indicators. The proposed model permits the determination of a relative evolution over time of the size of the shadow economy, which requires the calibration of the model with an exogenous estimation in order to obtain real values. The exogenous estimation employed is that obtained by a monetary method based on a money demand function. The results show a considerable shadow economy, measuring between 8 and 18.8% of GDP in the period 1976–2002, and demonstrate that the shadow economy is significantly influenced by the tax burden, the degree of regulation and unit labour costs. A positive correlation is obtained between GDP, money demand and the level of the shadow economy.