Macroeconomic transitions and the transmission mechanism: Evidence from Turkey

This paper investigates changes to the macroeconomic transmission mechanism in Turkey following a major reform of monetary policy in the early 2000s. We use a Threshold VAR (TVAR) framework to test for and then estimate a model with endogenous transitions between regimes. We detect two regimes, with a clear transition between them in 2003–4. The pre-reform regime is characterized by high inflation, passive monetary policy and persistent responses to shocks. The post-reform regime is characterized by low inflation, active and credible monetary policy and markedly less persistent responses to shocks. Using a model that contains sufficient variables to capture diverse transmission mechanisms, working through the real exchange rate, domestic credit and monetary policy, we find evidence of sharp changes in transmission mechanisms. Post-reform, the response of Turkey to macroeconomic shocks has changed to be similar to those in other modern, market-orientated economies.     

The NIRCU and the Phillips curve: an approach based on micro data

Abstract In this paper we propose a straightforward method to derive a non‐inflationary rate of capacity utilization (NIRCU) based on micro data. We condition the current capacity utilization of firms on their current and planned price adjustments. The non‐inflationary capacity utilization rate is then defined as the rate where a firm feels no price adjustment pressure. One of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with – often rather arbitrary – statistical filters. We show that our aggregate NIRCU performs remarkably well as an indicator of inflationary pressure in a Phillips curve estimation.     

On the permanent effect of an aggregate demand shock: Evidence from the G-7 countries

This paper extends the work of Cover, Enders and Hueng (2006) to examine the idea that an aggregate demand shock may have permanent effect on the output level by indirectly shifting the aggregate supply curve. We utilize the bivariate SVAR modeling and adopt an identification scheme, which allows for the possibility that a shift in the aggregate demand curve may induce the long-run aggregate supply curve to shift. We have shown that aggregate supply shocks are positively affected by the demand shocks in each of the G-7 countries. It is found that a one-time positive aggregate demand shock increases the output level permanently in these industrialized economies. We have also shown that our decomposition strategy can help resolve anomalies in the responses of inflation to a positive aggregate supply shock observed in a simple Blanchard-Quah decomposition.     

Output gap measurement and the New Keynesian Phillips curve for China

The New Keynesian Phillips curve implies that the output gap, the deviation of the actual output from its natural level due to nominal rigidities, drives the dynamics of inflation relative to expected inflation and lagged inflation. This paper exploits the empirical success of the New Keynesian Phillips curve in explaining China's inflation dynamics with a new measure of the output gap. We estimate the output gap using the Bayesian multivariate Beveridge–Nelson decomposition method, based on a multivariate dynamic model featuring distinct interactions among inflation, money, and real output in China. The empirical results using quarterly data spanning 1979–2010 show that the new measure of the output gap outperforms the traditional measures in fitting the New Keynesian Phillips curve. This result provides useful insights for inflation dynamics and monetary policy analysis in China.     

Phillips curve in US: New insights in time and frequency

The paper explores the co-movement between unemployment and inflation rates in US by using a battery of wavelet tools. The dataset covers the period 1945Q1–2017Q4, having quarterly frequency.The main findings reveal a not stable Phillips curve in US, depending on economic context, seasonality and time-persistence. The Phillips curve is not validated during economic turbulences, while it works over expansion economic periods. Even so, the trade-off between unemployment and inflation is unstable under seasonal growth components and time-persistence, running from short- to medium-term. No link between unemployment and inflation is found in the long-term.     

Health care expenditure and income in the OECD reconsidered: Evidence from panel data

This paper reconsiders the long-run economic relationship between health care expenditure and income using a panel of 20 OECD countries observed over the period 1971–2004. In particular, the paper studies the non-stationarity and cointegration properties between health care spending and income. This is done in a panel data context controlling for both cross-section dependence and unobserved heterogeneity. Cross-section dependence is modelled through a common factor model and through spatial dependence. Heterogeneity is handled through fixed effects in a panel homogeneous model and through a panel heterogeneous model. Our findings suggest that health care is a necessity rather than a luxury, with an elasticity much smaller than that estimated in previous studies.     

Inflation before and after central bank independence: The case of Colombia

In this paper we model the Colombian inflation rate in terms of excess demand effects from asset, goods and factor markets. In contrast to previous results for a group of industrial economies, we find that domestic factors are a far more powerful influence on inflation than are external factors. The paper pays particular attention to the potential effects of the Constitutional Reform of 1991, which created a Central Bank independent from other parts of government. We find that the creation of an independent Central Bank did change some of the parameters of the model, as the disequilibria in goods and monetary markets were found to have a smaller effect on inflation after Central Bank independence was granted.     

Monetary shocks,exchange rates and trade balances: Evidence from inflation targeting countries

This paper investigates the relationship among monetary policy shocks, exchange rates and trade balances in five Inflation Targeting Countries (ITCs). The investigation is based on Structural Vector Error Correction Models (SVECMs) with long run and short run restrictions. The findings reveal that a contractionary monetary policy shock leads to a decrease in price level, a decrease in output, an appreciation in exchange rate, and an improvement in trade balance in the very short run. Our findings contradict the findings of price, output, exchange rate and trade puzzles that have been found in many empirical studies. Furthermore they are consistent with the theoretical expectations regarding the effect of a contractionary policy. The only long run restriction that we imposed on our models is that money does not affect real macroeconomic variables in the long run, which is consistent with both Keynesian and monetarist approaches.     

Testing for efficiency in selected developing foreign exchange markets: An equilibrium-based approach

This paper proposes an alternative way of testing FOREX efficiency for developing countries. The FOREX market will be efficient if fully reflects all available information. If this holds, the actual exchange rate will not deviate significantly from its equilibrium rate. Moreover, the spot rate should deviate from its equilibrium rate by only transitory components (i.e. it should follow a white noise process). This test is applied to three Central and Eastern European Countries — members of the EU. Considering an LSTAR model we find no evidence of nonlinear adjustment in the misalignment series. So, linear unit root tests imply that the Poland/Euro FOREX market is efficient, the Czech/Euro FOREX market is not, while the Slovak/Euro FOREX market is quasi-efficient.     

New Phillips curve under alternative production technologies for Canada, the United States, and the Euro area

This paper shows that alternative production technologies imply two modifications to the New Phillips Curve (NPC): A specific ‘strategic complementarity parameter’ that affects the relationship between real marginal cost and inflation and a specific modification to the labour share measure of real marginal cost. Estimates of average duration of nominal price stickiness obtained conditional on the strategic complementarity parameter are substantially smaller, and therefore more plausible, relative to when this parameter is ignored. Modifications to the marginal cost measure alone have little effect on the NPC estimates. The empirical fit of the NPC under alternative production technologies is similar.     

The vanishing role of money in the macro-economy: An empirical investigation for India

The recent de-emphasizing of the role of “money” in both theoretical macroeconomics as well as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a monetary phenomenon. Empirical evidence has, however, been accumulating pointing to an important leading indicator role for money and credit aggregates with respect to long term inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal anchor for inflationary expectations, from their influence on the term structure of interest rates and from their affecting transaction costs in markets. Our paper attempts to assess the informational content role of money in the Indian economy by a separation of these effects across time scales and frequency bands, using the techniques of wavelet analysis and band spectral analysis respectively. Our results indicate variability of causal relations across frequency ranges and time scales, as also occasional causal reversals.     

Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short‐run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time‐series and cross‐sectional regressions are estimated. Cross‐sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.     

Global stability of dynamic models

A necessary and sufficient condition for global stability of dynamic models is summability to one of the long-run elasticities and cointegration. The short-run coefficients automatically satisfy the homogeneity condition. A relevant restriction has to be imposed in the parameter estimation process; otherwise, the ratios of variables appearing in the model will tend to either infinity or zero, which is economic nonsense in most cases. This conclusion is particularly important for the ECM or VEC (SVEC) models that decompose behavior into long and short-run parts.     

An analysis of the informational content of New Zealand data releases: The importance of business opinion surveys

We examine the informational content of New Zealand data releases using a parametric dynamic factor model estimated with unbalanced real-time panels of quarterly data. The data are categorised into 21 different release blocks, allowing us to make 21 different factor model forecasts each quarter. We compare three of these factor model forecasts for real GDP growth, CPI inflation, non-tradable CPI inflation, and tradable CPI inflation with three different real-time forecasts made by the Reserve Bank of New Zealand each quarter. We find that, at some horizons, the factor model produces forecasts of similar accuracy to the Reserve Bank's forecasts. Analysing the marginal value of each of the data releases reveals the importance of the business opinion survey data—the Quarterly Survey of Business Opinion and the National Bank's Business Outlook survey—in determining how factor model predictions, and the uncertainty around those predictions, evolve through each quarter.     

The dependence structure between the Canadian stock market and the USD/CAD exchange rate: a copula approach

Abstract This paper investigates the dependence structure between the real Canadian stock returns and the real USD/CAD exchange rate returns, using the Symmetrized Joe‐Clayton (SJC) copula function. We estimate the SJC copula with monthly data over the period 1995:1 to 2006:12. Our results show significant asymmetric static and dynamic tail dependence between the real stock returns and the real exchange rate returns, such that the two returns are more dependent in the left than in the right tail of their joint distribution. We explain this asymmetric dependence in terms of an asymmetric interest rate policy by Canadian monetary authorities in response to changes in the real exchange rate during sub‐periods of falling and rising commodity prices.     

New models of trader beliefs and their application for explaining financial bubbles

One challenging and exigent problem in behavior finance is how to establish verifiable models describing the appearance and burst of price bubbles. Current results are enhanced in this paper through a series of improvement as follows: new models are proposed for describing the return and dividend processes, especially the trader's behavior with the adaptive expectation belief and the bounded rational expectation belief, respectively; with these models, we establish dynamical systems in terms of the price-to-earnings ratio and the forecast-to-earnings ratio; the detailed solution and asymptotic analysis of these equations provide new, elaborate and quantitative explanations for both the formation and disappearance of different price bubbles; inspired by the herd behavior framework, a new random belief evolutionary mechanism is devised to model the belief change between two beliefs; a specific genetic algorithm is designed to efficiently estimate model parameters; simulation and empirical studies are carried out to illustrate the application of new methods. Both theoretical and empirical results sufficiently show the reasonability, practicality, efficiency and robustness of our new models and methods for properly explaining the appearance and burst of different kinds of price bubbles.     

Unemployment and inflation persistence in Spain: Are there Phillips trade-offs?

This paper studies the dynamic behavior of inflation and unemployment in Spain during the period 1964–1997. In particular, we analyze the implications of high persistence in both unemployment and inflation dynamics for inference regarding the size of Phillips trade-offs and sacrifice ratios in the Spanish economy, in response to a demand shock. To do so we use a Stuctural VAR approach with several identification outlines which give rise to alternative interpretations of the joint unemployment-inflation dynamics. When using a bivariate VAR we cannot reject the existence of a permanent output loss of one-half of one percentage point for each percentage point of permanent disinflation. However, when the VAR is augmented with a third variable, in order to disentangle monetary from non-monetary shocks within the demand class, the evidence favours a lower and marginally permanent trade-off with an output loss of about one-fourth of one percentage point.     

Bayesian estimation of the output gap for a small open economy: The case of Canada

We introduce a novel approach for estimating output gaps for small open economies. Identification is based on a multivariate trend-cycle decomposition in which transitory exchange rate movements are linked to the output gap and inflation. The model is then applied to Canadian data.     

Nonlinear adjustment in US bond yields: An empirical model with conditional heteroskedasticity

Starting from the work by Campbell and Shiller (Campbell, J.Y. and Shiller, R.J. (1987). Cointegration and tests of present value models. Journal of Political Economy, 95(5):1062–1088.), empirical analysis of interest rates has been conducted in the framework of cointegration. However, parts of this approach have been questioned recently, as the adjustment mechanism may not follow a simple linear rule; another line of criticism points out that stationarity of the spreads is difficult to maintain empirically.