Issue Information

Much research studies US inflation history with a trend‐cycle model with unobserved components, where the trend may be viewed as the Fed's evolving inflation target or long‐horizon expected inflation. We provide a novel way to measure the slowly evolving trend and the cycle (or inflation gap), by combining inflation predictions from the Survey of Professional Forecasters (SPF) with realized inflation. The SPF forecasts may be treated either as rational expectations (RE) or updating according to a sticky information (SI) law of motion. We estimate RE and SI state‐space models with stochastic volatility on samples of consumer price index and gross national product/gross domestic product deflator inflation and the associated SPF inflation predictions using a particle Metropolis–Markov chain Monte Carlo sampler. The trend converges to 2% and its volatility declines over time—two tendencies largely complete by the late 1990s.     

Estimating the U.S. output gap with state‐level data

This paper develops a method to estimate the U.S. output gap by exploiting the cross‐sectional variation of state‐level output and unemployment rate data. The model assumes that there are common output and unemployment rate trend and cycle components, and that each state's output and unemployment rate are subject to idiosyncratic trend and cycle perturbations. I estimate the model with Bayesian methods using quarterly data from 2005:Q1 to 2018:Q2 for the 50 states and the District of Columbia. Results show that the U.S. output gap reached about negative 4.6% around the years of the Great Recession and was about 0.9% in 2018:Q2.     

Growth Trends and Systematic Patterns of Booms and Busts‐Testing 200 Years of Business Cycle Dynamics

We study the dynamic pattern of business cycles using US GDP data between 1790 and 2015. To address difficulties in trend and cycle decomposition, we introduce a semiparametric estimation approach with an iterative plug‐in (IPI) algorithm for endogenous bandwidth selection. This algorithm identifies continuously moving growth trends with trend‐supporting growth periods. A simulation study demonstrates the value‐added of our trend identification. Afterwards, nonlinear SETAR models are fitted parametrically. Further, we test the trend using a recently developed test and the estimated SETAR models against their linear alternatives. The results indicate asymmetric characteristics during booms and busts.     

Decentralised bargaining of working time in the German automotive industry

The article addresses the question whether or not the trend towards the decentralisation of collective bargaining on working time in Germany entails a loss in the binding power of industry‐level agreements. To this end, both working‐time agreements and practices are examined at the firm or establishment level in the automotive industry. Additionally, the article examines the extent to which workplace micro‐level changes are reflected in official statistics. The findings indicate that unions and works councils have taken on new roles preventing a widespread erosion of collective regulations.     

Market Power,Efficiencies, and Entry Evidence from an Airline Merger

We investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic US airline industry. Applying fixed‐effects regression models, we find that the transaction led to short‐term price increases of about 11% on overlapping routes and about 10% on routes that experienced a merger‐induced switch of the operating carrier. Over a longer period, however, our estimation results are consistent with the hypothesis that both merger efficiencies and postmerger entry by competitors initiated a downward trend in price, leaving consumers with a small net price increase of about 3% on the affected routes. Copyright © 2014 John Wiley & Sons, Ltd.     

Accounting for the trend in trade union recognition in Ireland

Considerable controversy surrounds the issue of union recognition in Irish industrial relations. Academic commentators have sought to identify and explain the trend in recognition since the 1980s. Their arguments are examined and tested. No secular rise in non‐recognition is evident, and ‘individualisation’ and ‘union substitution’ are shown to add little to explaining the trend. No evidence is found that the trend reflects Irish employers pursuing union suppression and US‐employers pursuing union substitution. The significant development is a sharp rise in non‐recognition among new US employers. Their anti‐union animus does not, however, appear to be coupled with any distinctive or generalised union avoidance strategy.     

The stochastic implications of rent maximization: an application to stumpage rates for timber in British Columbia

We construct a model of rent‐maximizing behaviour by a single seller of timber in the absence of a formal market, deriving the stochastic implications of rent maximization for timber prices (stumpage rates) when other input and output (lumber) prices are random. Subsequently, we examine the model's ability to describe monthly, time‐series, stumpage‐rate data from British Columbia, Canada between January 1979 and October 1999. Deviations of stumpage rates from their long‐run trend are also structured by an error‐correction model which suggests that between 13 and 20% of period‐to‐period changes in stumpage rates can be explained by an equilibrium adjustment term. Copyright © 2004 John Wiley & Sons, Ltd.     

Slow but stable(ish) house price growth lies ahead

• ? UK house price growth is running out of steam. And with household incomes squeezed and the affordability of housing stretched, we think a prolonged period of very modest growth lies ahead. But the prospect of a crash is remote.
• ? At 2.6% in Q2 2017, annual house price growth is presently running at a four‐year low. This is a step change down from the recent peak of nearly 10% in mid‐2014 and average growth of 4% over the current economic expansion.
• ? Three developments are likely to lie behind this slowdown. The first is weak growth in households' real income, cutting the ability to save for a deposit or finance a move up the housing ladder. That said, past periods of sluggish income growth have not always been associated with low house price inflation.
• ? The second is the consequence of recent tax hikes imposed on buy‐to‐let investors and second‐home owners, which theory suggests should be capitalised in lower property prices.
• ? The third and perhaps most important reason is the increasing unaffordability of housing to an ever‐widening sub‐set of the population. The ratio of house prices to earnings is almost back at its pre‐crisis record. And the income of the average mortgage borrower is close to £60,000, more than double the average annual wage.
• ? This third factor has implications beyond price growth, suggesting both a permanently lower level of transactions and a further decline in the number of households with mortgages, continuing a trend which began at the beginning of the century.
• ? But set against these headwinds is the cushion provided by record lows for both mortgage rates and mortgage affordability. Overall, house prices are caught between a lack of traditional drivers of accelerating growth, but equally an absence of forces which have typically caused prices to fall. Hence, our expectation of a period of sluggish, but relatively stable, growth.

     

Bradford Smith: An Econometrician Decades Ahead of His Time*

This article attempts to rehabilitate Bradford Smith, who in 1926 published a short article in the Journal of the American Statistical Association in which he considered the implications of detrending time series by either deviations‐from‐trend or first‐differencing prior to regression. His discussion covers such topics as the permanent‐transitory innovation distinction inherent in difference and trend stationary processes, common factor restrictions and general‐to‐specific modelling. These have all become mainstays of modern time‐series econometrics, yet there does not appear to be even one reference to Smith's paper in all the years since its publication.     

Eurozone

All the signs are that Q2 will see Eurozone GDP growth exceed Q1's well above‐trend rise of 0.6%. In addition to the business surveys continuing to rise, quarterly industrial production and retail sales growth also probably accelerated in Q2, closing the previous gap between the surveys and hard data. This points to a robust rise in GDP of 0.7% to 0.8% in Q2     

Urban Geographies of Hesitant Transition: Tracing Socioeconomic Segregation in Post‐Ceauşescu Bucharest

Scholars have raised concerns about the social costs of the transition from state socialism to capitalism in Central and Eastern Europe, and geographers are particularly interested in the spatial expressions and implications of these costs, including apparently increasing residential segregation. Applying a range of segregation measures to 1992 and 2002 census data, this contribution studies socio‐occupational residential segregation in Bucharest. The conclusion is that Bucharest was relatively socio‐spatially mixed at both times; in fact, a modest, yet fully legible, decreasing overall trend is observable. This is at odds with many popular assumptions of the past 20 years.     

World Economic Prospects

Overview: Markets rally but risks still to the downside

• Our growth forecast for 2016 is steady this month at 2.3% but the forecast for 2017 has been cut again, to 2.7% from 2.9%.
• The near‐term growth outlook has been supported by a decent rally in financial markets. Since mid‐February, world stocks have gained around 8%, US high yield spreads have narrowed around 140 basis points and a number of key commodity prices – including oil – have also risen.
• Another supportive trend is still‐healthy consumer demand in advanced economies including the US and Eurozone. Although there has been some slippage in consumer confidence, it has been modest compared to either 2012–13 or 2008–09.
• So overall, the global economy still looks likely to avoid recession and strengthen a touch next year. But risks to the outlook remain skewed to the downside.
• Despite the recent market rally, world stocks still remain below their levels at end‐2015 and well below last May's peak. Financial conditions more broadly also remain significantly tighter than in mid‐2015, and inflation expectations somewhat lower.
• And there are still negative signals from incoming data. The global manufacturing PMI for February showed output flat while the services PMI showed only very modest growth – both were at their lowest since late 2012.
• Economic surprise indices for both the G10 and emerging markets also remain in negative territory, and our world trade indicator suggests no improvement from the dismal recent trends.
• Notable growth downgrades this month include Germany, Japan, the UK, Canada and Brazil.
• In our view, policymakers still have scope to improve the outlook. The latest ECB moves – more negative rates and more QE – will help a little. Widening of QE to corporate bonds also hints that more radical policy options are coming into view. But policies such as central bank equity purchases or money‐financed fiscal expansions will probably require global growth to weaken further before they become likely.

     

UK inflation set to tumble below target by autumn

• ? We expect CPI inflation to slow markedly this year, dropping below the 2% target by the autumn. The inflationary impulse from the 2016 depreciation is fading and should partially reverse, while global food and energy prices are expected to stabilise. Base effects will become increasingly important.
• ? CPI inflation reached a five‐and‐a‐half‐year high of 3.1% in November, up from a little over 1% a year earlier. The 2017 pick‐up in inflation was the result of a perfect storm of a weaker pound, higher oil prices and sharp rises in domestic electricity bills. But inflation has subsequently slowed, reaching 2.5% in March. And, after a brief hiatus, we expect the downward trend to continue as we move through the year.
• ? The key driver of lower inflation will be weaker core pressures. In line with the literature, there is already evidence that the impact of sterling's depreciation is fading, and we think that the pressures could partially reverse if sterling continues to strengthen. We see little prospect of an offsetting escalation in domestic cost pressures. The recent pick‐up in wage growth has been muted and a further acceleration above 3% looks unlikely while there remains slack in the labour market.
• ? The food, petrol and energy categories contributed 0.8 ppt to CPI inflation last year, compared with a drag of 0.5 ppt in 2016, as stronger global pressures combined with the weaker pound. But as global prices have been more subdued of late, by the end of 2018, we expect these categories to be contributing 0.5 ppt to CPI inflation.
• ? The final element behind the expected slowdown in inflation is base effects. The comparison with last year's strong price pressures will depress the 2018 inflation rate, and we see the base effects being at their strongest mid‐year.
• ? We think it unlikely that such a slowdown in inflation would derail the MPC from hiking interest rates twice this year. But it could temper its hawkishness in 2019.

     

Can inflation data improve the real‐time reliability of output gap estimates?

Potential output plays a central role in monetary policy and short‐term macroeconomic policy making. Yet, characterizing the output gap involves a trend‐cycle decomposition, and unobserved component estimates are typically subject to a large uncertainty at the sample end. An important consequence is that output gap estimates can be quite inaccurate in real time, as recently highlighted by Orphanides and van Norden ( 2002 ), and this causes a serious problem for policy makers. For the cases of the US, EU‐11 and two EU countries, we evaluate the benefits of using inflation data for improving the accuracy of real‐time estimates. Copyright © 2004 John Wiley & Sons, Ltd.     

POPULATION AND THE ECONOMY DURING THE DEMOGRAPHIC TRANSITION

The changes in population structure currently taking place in both developed and less‐developed nations are part of a very long‐term trend of demographic change that has yet to run its full course. The starting point of this trend is the complete rearrangement of demographic regimes characterised by significant declines in mortality coupled with widespread fertility control. This process started in a small group of European and non‐European societies during the nineteenth century and by the second half of the twentieth century had spread to much of the world. It has brought with it significant economic and social implications for societies affected which have differed by the timing of the transition but not in their basic thrust. Eventually the demographic transition promises to bring with it very rapid and widespread ageing and, within a few decades, world population decline. Some of the long‐term economic implications of this entire process are discussed in this article.     

The Euro Effect on Trade is not as Large as Commonly Thought*

Existing studies on the impact of the euro on goods trade report increments between 5% and 40%. These estimates are based on standard panel gravity models for the level of trade. We show that the residuals from these models exhibit upward trends over time for the euro countries, and that this leads to an upward bias in the estimated euro effect. To correct for that, we extend the standard model by including a time trend that may have different effects across country‐pairs. This results in an estimated euro impact of only 3%.     

SOCIAL SECURITY AND RETIREMENT DECISION: A POSITIVE AND NORMATIVE APPROACH*

Abstract Social insurance for the elderly is judged responsible for the widely observed trend towards early retirement. In a world of laissez‐faire or in a first‐best setting, there would be no such trend. However, when first‐best instruments are not available, because health and productivity are not observable, the optimal social insurance policy may imply a distortion on the retirement decision. The main point we make is that while there is no doubt that retirement systems induce an excessive bias towards early retirement in many countries, a complete elimination of this bias (i.e. a switch to an actuarially fair system) is not the right answer for two reasons. First, some distortions are second‐best optimal. This is the normative argument. Second, and on the positive side, the elimination of the bias might be problematic from a political perspective. Depending on the political process, either it may not be feasible or alternatively it may tend to undermine the political support for the pension system itself.     

DISTRIBUTION DYNAMICS AND CONVERGENCE AMONG 75 CITIES AND COUNTIES IN YANGTZE RIVER DELTA IN CHINA: 1990–2005

This paper applies the distribution dynamics method to study the per capita income disparity from 1990 to 2005 among the 75 cities and counties in the Yangtze River Delta (YRD). The main conclusions are as follows: Firstly, the distribution of per capita income across the YRD has changed from being bi‐modal to being positively skewed over the period 1990–2005; the income disparity lessened in the 8th Five‐Year Plan, increased in the 9th Five‐Year Plan, and then reduced again somewhat in the 10th Five‐Year Plan. Secondly, the main contribution to disparity comes from the intra disparity of the Jiangsu region which is bi‐modal over the period. Thirdly, the rich and poor cities developed independently and steadily at different speeds. Fourthly, convergence in the YRD is caused by the decline of the rich cities rather than progress by the poor cities. Finally, there is relative independence in the region's development, but over the long‐term, the YRD indicates a trend of convergence.     

Estimating the Competitive Storage Model with Trending Commodity Prices

We present a method to estimate jointly the parameters of a standard commodity storage model and the parameters characterizing the trend in commodity prices. This procedure allows the influence of a possible trend to be removed without restricting the model specification, and allows model and trend selection based on statistical criteria. The trend is modeled deterministically using linear or cubic spline functions of time. The results show that storage models with trend are always preferred to models without trend. They yield more plausible estimates of the structural parameters, with storage costs and demand elasticities that are more consistent with the literature. They imply occasional stockouts, whereas without trend the estimated models predict no stockouts over the sample period for most commodities. Moreover, accounting for a trend in the estimation implies price moments closer to those observed in commodity prices. Our results support the empirical relevance of the speculative storage model, and show that storage model estimations should not neglect the possibility of long‐run price trends. Copyright © 2016 John Wiley & Sons, Ltd.     

A Bounded Model of Time Variation in Trend Inflation,Nairu and the Phillips Curve

In this paper, we develop a bivariate unobserved components model for inflation and unemployment. The unobserved components are trend inflation and the non‐accelerating inflation rate of unemployment (NAIRU). Our model also incorporates a time‐varying Phillips curve and time‐varying inflation persistence. What sets this paper apart from the existing literature is that we do not use unbounded random walks for the unobserved components, but rather bounded random walks. For instance, NAIRU is assumed to evolve within bounds. Our empirical work shows the importance of bounding. We find that our bounded bivariate model forecasts better than many alternatives, including a version of our model with unbounded unobserved components. Our model also yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips curve. Copyright © 2015 John Wiley & Sons, Ltd.