Federal reserve monetary policy and the non-linearity of the Taylor rule

We propose and estimate a generalized Taylor rule for the monetary policy of the US Federal Reserve (Fed) to find out how the Fed funds rate is sensitive to changes in inflation and output gap variables in the post war period. We find that Fed's monetary policy has only reacted significantly to changes in inflation when they were between approximately 6.5–8.5%. However, the policy stance change on these changes was relatively small. The findings suggest that the US Fed has been too averse to change from its current monetary policy stance, and that it has not reacted noticeably to changes in the US economic activity, as measured by the output gap. The generalized functional form for the monetary policy rule suggests that similar non-linearity exists in the directional change of the Fed rate.     

More powerful threshold cointegration tests

Threshold cointegration tests have made a big splash in the literature by allowing for asymmetric adjustment in linear cointegration tests. This paper contributes to this literature by proposing new tests to improve the power of the conventional threshold cointegration tests. The new tests intuitively resolve one of the possible reasons that attribute to the low power of existing threshold cointegration tests and are easy to implement since they do not require any additional information outside of the system. Our simulation results show that the proposed tests improve the power of the existing threshold cointegration tests, especially as the signal-to-noise ratio increases, in contrast to other considered procedures. The efficiency gains are achieved regardless of sample size, the number of cointegrated variables, and the types of threshold specifications. The newly developed tests are applied to examine long-run purchasing power parity in the Pacific nations. In contrast to conventional cointegration tests, the proposed tests found long-run PPP holds in 5 out of 7 countries with appropriate asymmetric adjustments.     

A panel cointegration approach to estimating substitution elasticities in consumption

This paper investigates the relationship between government spending and private consumption. The general framework is a cointegration approach of Ogaki (1992) used to estimate the intratemporal elasticity of substitution between government and private consumption in a panel of 15 European countries. Recently developed non-stationary panel methodologies that assume cross-section dependence are applied. Results indicate an Edgeworth substitutability between private and public spending.     

Firm-specific capital, nominal rigidities, and the Taylor principle

In the presence of firm-specific capital the Taylor principle can generate multiple equilibria. Sveen and Weinke [New perspectives on capital, sticky prices, and the Taylor principle, J. Econ. Theory 123 (2005) 21-39] obtain that result in the context of a Calvo-style sticky price model. One potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates. In the present paper we show that if nominal wages are not fully flexible (which is an uncontroversial empirical fact) then the Taylor principle fails already for some minor degree of price stickiness. We use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules.     

New perspectives on capital, sticky prices, and the Taylor principle

Our main result is that dynamic new-Keynesian (DNK) models with firm-specific capital feature a substantial amount of endogenous price stickiness. We use this insight to assess the desirability of alternative interest rate rules, and make the case for combining active monetary policy with interest rate smoothing and/or some responsiveness of the nominal interest rate to real economic activity. The key mechanism behind our results is also useful from a positive point of view: the feature of firm-specific capital increases the empirical appealingness of DNK models, as documented by a growing body of literature.     

Non-linear causality between the stock and real estate markets of Western European countries: Evidence from rank tests

Using the non-parametric rank tests proposed by Breitung (2001), we set out in this study to determine whether any non-linear long-run equilibrium relationship exists between the stock and real estate markets of Western European countries. We go on to adopt the threshold error-correction model (TECM) to determine whether a similar relationship is discernible possibly non-linear functions of the log-price of these two markets. The findings clearly point to the existence of long-run unidirectional and bidirectional causality between the real estate market and the stock market in regions both above and below the threshold level. Finally, we find the existence of both wealth and credit price effects in the real estate markets and stock markets of Western European countries, which thereby offer financial institutions and individual investors in their construction of long-term investment portfolios within these two asset markets.     

Comovements among U.S. state housing prices: Evidence from fractional cointegration

This study investigates the relationship between U.S. state housing prices and overall U.S. housing prices as well as the relationship among state housing prices using fractional integration and cointegration techniques. The results based on parametric and semiparametric estimators reveal that some states contain unit roots though we fail to find cointegrating relations between U.S. states housing prices and the overall U.S. housing prices as well as among state housing prices. The results raise doubts regarding the long-run convergence in U.S. state housing prices and the presence of the ripple effect.     

The FMLS-based CUSUM statistic for testing the null of smooth time-varying cointegration in the presence of a structural break

In this paper we extend the FMLS-based CUSUM cointegration test (Xiao and Phillips, 2002) for testing the smooth time-varying cointegration null hypothesis. For this purpose we use Chebyshev time polynomials to specify time-varying coefficients under the null. We derive the limiting distribution of the statistic, which is pivotal with the order of the Chebyshev time polynomials, and we provide the critical values to conduct the proposed test.     

Dynamic pricing and asymmetries in retail gasoline markets: What can they tell us about price stickiness?

Theoretical explanations for price stickiness used in businesses cycle models are diverse (e.g., information processing delays, rational inattention and fair pricing), with each theory resulting in a different implication for inflation dynamics. Using an autoregressive conditional binomial model and a data set consisting of daily observations of price and cost for 15 Philadelphia retail gasoline stations, we test which of these theories is most consistent with the observed pattern of price adjustment. Our findings of time dependence, asymmetry and the role of cost volatility are consistent with a combination of fairness considerations and rational inattention by producers.     

Enhancing the local power of IVX-based tests in predictive regressions

IVX estimation is used increasingly often in predictive regressions with regressors of unknown persistence. While not exhibiting the second-order bias the OLS estimator has in this setup, IVX estimators have reduced rates of convergence when the regressors are highly persistent. The reduced convergence rates may sometimes lead to power losses in finite samples when testing for no predictability, for instance. The note discusses a simple way of improving the local power of IVX-based tests, consisting of augmenting the predictive regression with the lagged dependent variable. This implies a feed-back loop which strengthens the signal of the IVX instrument without changing its dynamic properties. The proposed augmentation works best when the power loss of IVX would have been maximal compared to the infeasible OLS-based test.     

What drives housing price dynamics in Greece: New evidence from asymmetric ARDL cointegration

In this paper, we study the dynamics between house prices and selected macroeconomic fundamentals in Greece. The empirical analysis applies the asymmetric ARDL cointegration methodology proposed by Shin, Yu and Greenwood-Nimmo (2011) over the period from January 1999 to May 2011. The evidence suggests that ignoring the intrinsic nonlinearities may lead to misleading inference. In particular, the results reveal significant differences in the response of house prices to positive or negative changes of the explanatory variables in both the long- and short-run time horizons. The obtained evidence of asymmetry could be of major importance for more efficient policymaking and forecasting in the Greek house market.     

Taylor Rules for the ECB using Expectations Data*

We estimate Taylor rules for the euro area using Consensus Economics data for expected inflation and output growth, and compare these estimates with more conventional specifications in which actual outcomes are used. We find that the ECB takes expected inflation and expected output growth into account in setting interest rates, while in the more conventional model specification, the coefficient of realized inflation is not significantly different from zero.     

Multi-country tests for the oscillator model with slowly varying coefficients

This paper applies Ramsey's (1992) forced oscillator model discovered with US data to Canada, Japan, UK, Belgium, France, Germany, and Italy. We also examine the aggregate production index for consumer goods in the US. Thus, the model is applied to and the results checked against data that were not involved in the discovery of the model in the original paper. The adequacy of the model is evaluated and international comparisons are made. The similarity of the estimates for all of the data sets examined suggest that the model may be widely applicable for consumer goods production indices, although France and Italy provide partial exceptions to this statement.     

Goods and Services Tax Effects on Goods and Services Included in the Consumer Price Index Basket*

This paper quantifies the magnitude and duration of the goods and services tax (GST) effect on the quarterly growth rate of the 11 groups of the consumer price index (CPI) in Australia using the Box and Tiao intervention analysis. It was found that prices did not increase significantly before or after the introduction of GST, beyond what could have been expected on the basis of the discernible systematic pattern of fluctuation in the data. Furthermore, the varying one-off effect of GST on prices was significant in seven out of 11 CPI groups; the effect was found insignificant for the other four CPI groups.     

Inflation persistence in the Euro area before and after the European Monetary Union

This paper provides new evidence on inflation persistence before and after the European Monetary Union (EMU). Taking into account fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area, probably as a result of the more effective monetary policy of the ECB.     

Markov-switching models and the unit root hypothesis in real US GDP

I find that real US GDP is better characterized as a trend stationary Markov-switching process than as having a (regime-dependent) unit root. I examine the effects of both assumptions on the analysis of business cycle features and their implications for the persistence of the dynamic response of output to a random disturbance.     

High yield spreads,real economic activity,and the financial accelerator

We study the leading properties of 30 US high yield spreads for economic growth between 1996 and 2012 and show that they disappeared in the second half of the 2000s. Our empirical findings demonstrate the unreliability of high yield spreads as leading indicators and cast doubts on the existence of a strong and functioning financial accelerator in recent years.     

Further evidence regarding nonlinear trend reversion of real GDP and the CPI

This paper examines whether the CPI and real GDP for the US exhibit nonlinear reversion to trend as recently concluded by Beechey and Österholm [Beechey, M. and Österholm, P., 2008. Revisiting the uncertain unit root in GDP and CPI: testing for nonlinear trend reversion. Economics Letters 100, 221-223]. The wild bootstrap is used to correct for non-normality and heteroscedasticity in a nonlinear unit root test. The use of ‘wild bootstrapped’ critical values affects test conclusions in some cases. Results also are sensitive to the sample period examined.     

Unit roots and persistence in the nominal interest rate: a confirmatory analysis applied to the OECD

Abstract.  This paper investigates the stochastic properties of long-term and short-term nominal interest rates for the OECD over the post-war era. For that purpose, we employ univariate unit root tests as well as panel unit root and stationarity tests that explicitly allow for cross-sectional dependence. Overall, we find overwhelming evidence that the nominal interest rate contains a unit root, which may be driven by a stochastic common factor. The computation of half-lives through impulse-response functions also points to a high degree of persistence. This has important implications for the cointegration analysis of the Fisher equation, the uncovered interest parity, and the term structure.     

Using Taylor Rules to Understand European Central Bank Monetary Policy

Abstract. Over the last decade, the simple instrument policy rule developed by Taylor has become a popular tool for evaluating the monetary policy of central banks. As an extensive empirical analysis of the European Central Bank's (ECB) past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB to shed some light on actual monetary policy in the euro area under the presidency of Wim Duisenberg and answer questions like whether the ECB has actually followed a stabilizing or a destabilizing rule so far. Looking at contemporaneous Taylor rules, the evidence presented suggests that the ECB is accommodating changes in inflation and hence follows a destabilizing policy. However, this impression seems to be largely due to the lack of a forward-looking perspective in such specifications. Either assuming rational expectations and using a forward-looking specification, or using expectations as derived from surveys result in Taylor rules that do imply a stabilizing role of the ECB. The use of real-time industrial production data does not seem to play such a significant role as in the case of the United States.