Structural change in the United States' social preference function, 1953–88

Many studies have used Gallup Poll data to estimate the relationship between presidential popularity, and inflaion and unemployment. Typically these estimates are made over the terms of several presidents. The only time-varying effect included in these studies is an intercept dummy. No account is taken of the possibility that there may be changes in the positions or slope of the indifference curves between inflation nd unemployment. Within this paper, we estimate the US public's social preference function between inflation and unemployment as a quadratic within a sets of equations framework. A series of F-tests leads us to believe that there is structural change in the economic variables as well as in the intercepts over time. Thus, estimating each administration individually or in the sets of equations format is superior to constraining slope coefficients to be equal across administrations by simply estimating the function over the entire time period. We hypothesize that the public has become somewhat more accustomed to high rates of inflation; this hypothesis is consistent with the observed changes in the social preference function.     

An Estimated Australian Macroeconomic Misery Index

The degree of community satisfaction with alternative macroeconomic outcomes is of considerable interest to policy makers. Ad hoc measures of community macroeconomic welfare, so-called Misery Indexes, are commonly used as proxies of such welfare These indexes are very rudimentary and make implicit restrictive assumptions about the community's marginal rates of substitution among different macroeconomic outcomes. The current paper demonstrates a framework for statistically estimating the relative responsiveness of community welfare to such variables as unemployment, inflation, interest rates, real wages and measures of Australia's external performance. Morgan Gallup Poll data are used to proxy levels of community (dis)satisfaction .     

System estimates of potential output and the NAIRU

This paper proposes a new approach for estimating potential output and the NAIRU. The methodology models these key unobservable economic variables as latent stochastic trends within a trivariate system of observables comprising information on unemployment, GDP, and inflation. Identification is achieved through the use of a standard version of Okun's law and a Phillips curve. The performance of the procedure is investigated using Swedish quarterly data covering the time period 1970:1–1996:3. First version received: June 1997/final version received: September 1998     

Inequality and the business cycle: A consumption viewpoint

Using Consumer Expenditure Survey data, we obtain summary measures of the distributions of income and consumption for each quarter between 1980 and 1994. We find that the trends in the distribution of income and consumption and the response of these trends to changes in inflation and unemployment were similar during this period. We find that unemployment does not significantly affect the inequality measures and that inflation has a progressive effect, i.e., that a decrease in inflation is associated with an increase in inequality. Finally, we find that the relationship between inequality and macroeconomic variables during the 1990s may be similar to the relationship that existed prior to 1980. First version received: September 1996/final version received: September 1997     

The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.     

NAIRU Estimates for Germany: New Evidence on the Inflation–Unemployment Tradeoff

Meaningful estimates of the non‐accelerating inflation rate of unemployment (NAIRU) within a Phillips curve framework require an identified tradeoff between inflation and unemployment. However, observations of inflation and unemployment are equilibrium points giving rise to a simultaneity problem. We assess conventional identifying assumptions in the literature on the German NAIRU in a general bi‐variate equations system of inflation and unemplyoment. We use a data‐driven method for identification based on shifts in the relative volatility of shocks to unemployment and inflation to identify the tradeoff for Germany. Our results support models which estimate a contemporaneous effect of unemployment on inflation and those which model inflation and unemployment jointly.     

Okun's Law Does the Austrian unemployment–GDP relationship exhibit structural breaks?

Okun's Law postulates an inverse relationship between movements of the unemployment rate and the real gross domestic product (GDP). Initial empirical estimates for US data indicate that a two to three percent GDP growth rate above the natural or average GDP growth rate causes unemployment to decrease by one percentage point and vice versa. In this investigation we check whether this postulated relationship exhibits structural breaks by means of Markov-Chain Monte Carlo methods. We estimate a regression model, where the parameters are allowed to switch between different states and the switching process is Markov. As a by-product we derive an estimate of the current state within the periods considered. Using quarterly Austrian data on unemployment and real GDP from 1977 to 1995 we infer only one state, i.e. there are no structural breaks. The estimated parameters demand for an excess GDP growth rate of 4.16% to decrease unemployment by 1 percentage point. Since only one state is inferred, we conclude that the Austrian economy exhibits a stable relationship between unemployment and GDP growth. First version received: January 2000/Final version received: October 2000     

Is there a Core of Macroeconomics that Euro Area Forecasters Believe In?

The quantity theory of money, Okun's law, and the Phillips curve are cornerstones of macroeconomic theory. But are they also of practical relevance? Using survey data for the euro area, we found that professional economists’ forecasts are consistent with a version of the quantity theory in which forecasts of the growth rate of money supply correlate in a proportional way with forecasts of the inflation rate. We also found that forecasts of changes in the unemployment rate and forecasts of the growth rate of real output are consistent with Okun's law. Evidence of a systematic link between forecasts of the inflation rate and forecasts of the unemployment rate, however, is not strong.     

Unemployment hysteresis and the natural rate of vacancies

On the basis of macro data from 10 OECD countries, I find that the job vacancy rate outperforms the unemployment rate as a reliable measure of domestic inflationary pressure. Moreover, while the rate of unemployment affects inflation primarily through its difference, the vacancy rate operates through a level effect as well. In most countries, a unique equilibrium rate of vacancies seems to coexist with a drifting equilibrium rate of unemployment. I show that this result is consistent with existing theories of unemployment hysteresis that focus on depreciation of human capital and search activity during unemployment spells. First version received: October 1997/Final version received: June 2001     

The long-run Phillips curve and non-stationary inflation

Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and unable to test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results also provide some evidence that the trade-off between inflation and the rate of unemployment in the short-run worsens as the mean rate of inflation increases.     

Is the importance of religion in daily life related to social trust? Cross-country and cross-state comparisons

We look at the effect of importance of religion in daily life on social trust, defined as the share of a population that thinks that people in general can be trusted. We make use of new data from the Gallup World Poll for 109 countries and 43 U.S. states. Our empirical results indicate a robust, negative relationship between this measure of religiosity and trust, both internationally and within the U.S. The size of this association increases with the degree of religious diversity.     

Estimating Europe’s natural rates

This article estimates potential output, the natural rate of unemployment, and the core inflation rate using aggregated euro area data. The empirical model consists of a Phillips curve linking inflation to unemployment. An Okun-type relationship is used to link the output gap to cyclical unemployment. The model further accounts for new developments in unobserved component models by allowing (i) for correlation between shocks to the natural rates and the corresponding gaps and (ii) structural breaks in the drift of potential output and the natural rate of unemployment.     

Money demand, the Cagan model, testing rational expectations vs adaptive expectations: The case of Turkey

This paper estimates the Cagan type demand for money function for Turkish economy during the period 1986:1–1995:3 and tests whether Cagan's specification fits the Turkish data using an econometric technique assuming that forecasting errors are stationary. This paper also tests the hypothesis that monetary policy was implemented in aiming to maximize the inflation tax revenue. Finally, the Cagan model is estimated with the additional assumption of rational expectations for Turkey for the considered period. First version received: March 1998/final version received: October 1998     

Stable cointegrating regressions: Fully-modified estimates for inflation and employment cost indices

This paper investigates the stability of relationships between inflation and changes in employer cost for labor using tests based on the null hypothesis of no cointegration (Gregory and Hansen (1996a)) as well as tests based on the null hypothesis of cointegration (Hansen (1992)). In addition to specifications which include wages or unit labor cost, employment cost indices for compensation and wages are used to eliminate composition bias over the business cycle. Empirical results support stability and fully-modified estimates are obtained using the semiparametric approach of Phillips (1995). In contrast to studies which have found only one-way causality, this paper presents empirical evidence of feedback between inflation and employer cost for labor, consistent with an expectations-adjusted Phillips's Curve. First version received: July 1997/final version received: September 1998     

Long-run matching relationship in the Japanese labor market

This paper investigates the long-run relationship among new hiring, unemployment (job seekers), and unfilled vacancies in Japan, using an annual panel data on 47 prefectures for 1972-1999. We find that these three variables are I(1) processes, and are cointegrated in our panel data. Further, we estimate the panel cointegration equation derived from a Cobb-Douglas matching function by the heterogeneous fully modified OLS and heterogeneous dynamic OLS. The estimation results reveal that conventional within estimates could have non-negligible biases.First version received: November 2002/Final version received: October 2003All correspondence to Shigeki Kano. The authors are grateful to the associate editor and two anonymous referees of this journal for helpful comments. Doctor Stephen J. Turnbull (University of Tsukuba) is also acknowledged for correcting English errors in this paper. Remaining errors are due to the authors. The data set and GAUSS programming code used in this paperare available upon request.     

The inflation bias when the central bank targets the natural rate of unemployment

This paper studies the proposition that an inflation bias can arise in a setup where a central banker with asymmetric preferences targets the natural unemployment rate. Preferences are asymmetric in the sense that positive unemployment deviations from the natural rate are weighted more (or less) severely than negative deviations in the central banker's loss function. The bias is proportional to the conditional variance of unemployment. The time-series predictions of the model are evaluated using data from G7 countries. Econometric estimates support the prediction that the conditional variance of unemployment and the rate of inflation are positively related.     

Rational expectations and fixed-event forecasts: An application to UK inflation

This paper tests a version of the rational expectations hypothesis using ‘fixed-event’ inflation forecasts for the UK. Fixed-event forecasts consist of a panel of forecasts for a set of outturns of a series at varying horizons prior to each outturn. The forecasts are the prediction of fund managers surveyed by Merrill Lynch. Fixed-event forecasts allow tests for whether expectations are unbiased in a similar fashion to the rest of the literature. But they also permit the conduct of particular tests of forecast efficiency - whether the forecasts make best use of available information - that are not possible with rolling-event data. We find evidence of a positive bias in inflation expectations. Evidence for inefficiency is much less clear cut.First version received: June 2002/ Final version received: November 2003We would like two anonymous referees and an editor for comments that have significantly improved the paper. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of England.     

Measuring inflation expectations: a survey data approach

Measures of expected inflation from consumer surveys are derived using a modification of the Carlson-Parkin probability approach, which does not assume unbiasedness of expectations, makes use of survey data on expected future as well as perceived past price developments and allows for time varying response thresholds. We apply this method to the normal, central-t and noncentral-t distributions, thereby investigating the effects of nonnormal peakedness and asymmetry. We find that the effects on expected inflation of the former are small and of the latter are substantial, without increasing the accuracy of the expectations, however. Expected and actual inflation show substantial persistence, and, for most of our expectations measures, are cointegrated. Furthermore, the forecast error is stationary, implying weak-form rationality. The co-movement of currently observed expected inflation measures and the unobserved 12-months-ahead inflation rate is of interest for policy makers, for example in the direct inflation targeting strategy. Notwithstanding this, caution is warranted in using them as information variables because the inflation expected by consumers is no causal determinant of actual future inflation.     

Implementing and interpreting indicators of core inflation: the case of France

This paper presents a comparison of alternative indicators of underlying or “core” inflation in the French case. Four broad measures are considered and implemented. The first two are inflation excluding food and energy, and the trimmed inflation indicator. We then implement two methods relying on time-series models: the Dynamic Factor Index and the structural VAR approach.  Each indicator stresses on a particular type of shock on the inflation rate, so that no simple ranking of the measures emerges. Combining the various indicators conveys valuable information for appraising short term inflation developments. As regards theoretical interpretation, no indicator is fully satisfactory, lacking an explicit representation of monetary policy. However, comparing forecast performance with respect to inflation provides some specific support in favor of trimmed mean indicators. First version received: January 2000/Final version received: March 2001     

UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.