Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks

Trend GDP and output gaps play an important role in fiscal and monetary policy formulation, often including the need for forecasts. In this article, we focus on forecasting trend GDP and output gaps with Beveridge-Nelson trend-cycle decompositions trend-cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks. We evaluate expanding window, one-step-ahead forecasts indirectly for the G-7 countries on the basis of real GDP growth rate forecasts. We find that correlated innovations affect real GDP growth rate forecasts positively, while allowing for structural breaks works for some countries but not for all. In the face of uncertainty, the evidence supports that in making forecasts of trends and output gap policy-makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks.     

Re-examination of convergence hypothesis among Indian states in panel stationarity testing framework with structural breaks

This article examines the conditional income convergence hypothesis for 17 major states in India for the period of 1960–2012. Univariate stationarity tests without structural breaks provide evidence against the convergence hypothesis. However, when two or more structural breaks are applied in per capita income series, the incomes of around 11–13 states are found to stochastically converge to the national average. This finding supports the convergence hypothesis for the panel as a whole after accounting for two data features, cross-sectional dependence and structural breaks in incomes, using a unified panel stationarity testing framework.     

Plucking models of business cycle fluctuations: Evidence from the G-7 countries

Friedman's `plucking' model, in which output cannot exceed a ceiling level but is occasionally plucked downward by recessions, is tested using Kim and Nelson's formal econometric specification on output data from the G-7 countries. Considerable support for the model is obtained, leading us to conclude that during normal periods, output seems to be driven mostly by permanent shocks, but during recessions and high-growth recoveries, transitory shocks dominate. During these periods macroeconomic models that emphasise demand-oriented shocks, rather than real business cycle type models, may thus be more appropriate. First Version Received: September 2000/Final Version Received: May 2001     

The convergence of least squares learning in stochastic temporary equilibrium models

Summary. This paper provides conditions for the almost sure convergence of the least squares learning rule in a stochastic temporary equilibrium model, where regressions are performed on the past values of the endogenous state variable. In contrast to earlier studies, (Evans and Honkapohja, 1998; Marcent and Sargent, 1989), which were local analyses, the dynamics are studied from a global viewpoint, which allows one to obtain an almost sure convergence result without employing projection facilities. Received: April 7, 2001; revised version: September 5, 2001     

Price convergence of peripheral European countries on the way to the EMU: A time series approach

This paper examines price and inflation convergence between three European countries (Italy, Spain and the U.K.) and a European average and, alternatively, between them and Germany from the beginning of the 80's.  For this purpose the long-run stochastic relationships on prices derived from the convergence criteria agreed in the Maastricht Treaty are analyzed. In order to do this, some recent unit root tests have been applied as well as time-varying parameters models.  The results reject the long-run convergence hypothesis in all the cases but allow us to accept the existence of catching-up with the European average and Germany in some cases depending on the nature of the prices and on the countries considered. First version received: March 1997/final version received: May 1999     

Stochastic convergence in per capita energy consumption and its catch-up rate: evidence from 26 African countries

Using annual data from 1971 to 2014, we examine stochastic conditional convergence in per capita energy consumption for 26 low income, lower middle-income and upper-middle-income African countries. To do so, we use panel unit root tests that allow for cross-sectional dependence and structural breaks as well as the recently developed univariate Residual Augmented Least Squares-Lagrange multiplier (RALS-LM) unit root test with structural breaks. Although for most countries our evidence suggests stochastic conditional convergence, we find divergence for four countries including DR Congo, Senegal, Egypt and Botswana. Consistent with the neoclassical growth models we also examine the catch-up rate between energy consumption levels of African economies and that one of China and investigate its convergence properties. As African economies continue to grow, regional energy consumption disparity narrows, African energy consumption levels will catch up to the ones in China.     

Monetary policy shocks and productivity measures in the G-7 countries

An implication of two-country international real business cycle models is that total factor productivity should be an exogenous stochastic process. Economic theories which feature labor hoarding, variable capacity utilization, and increasing returns predict that measured productivity shifts are not exogenous; instead, expansionary aggregate demand shocks should lead to an increase in measured productivity. For each of the G-7 countries, this paper measures quarterly aggregate total factor productivity for the domestic country and its rest-of-world (G-6) counterpart. In each case the domestic productivity measures are not strictly exogenous: expansionary U.S. monetary policy shocks, as well as other G-6 monetary policy shocks, lead to productivity expansions. The evidence indicates that international business cycle models are misspecified unless they feature endogenous productivity mechanisms.Received: June 2001, Accepted: December 2001, JEL Classification: E5, F4Correspondence to: Charles L. EvansFor their helpful comments, we thank Mario Crucini, Patricia Reynolds, and Steve Strongin. The views expressed in this paper do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.     

Total factor productivity convergence across the Kazakh regions

This article examines total factor productivity (TFP) convergence across the regions of Kazakhstan over the period of 1997–2013. Using a growth accounting methodology we found that the average level of TFP fell by almost 40% over the period under consideration. Several panel unit root tests confirm that the whole set of Kazakh regions and the group of non-oil regions converged in terms of TFP, while the group of oil-rich regions diverged. This result explains sigma-divergence of the GRP per capita across the regions of Kazakhstan by divergence in capital intensity.     

The Stability of the Demand for Money in Monetary Unions: Some Empirical Evidence from WAEMU

Previous studies of the stability of the demand for money have been largely conducted in the context of individual countries. To the extent that these countries have control over their monetary policies, such an approach is well justified. However, for monetary unions, where the control over monetary policy is usually vested in a central or outside authority, it is more appropriate to examine the stability of the money demand for the union as a collective entity. This paper follows this approach with respect to a West African monetary union, the WAEMU, whose monetary policies are largely dictated by the French authorities. Using cointegration theory and CUSUM stability tests, we find evidence that the demand for broad money is stable in this union. Given the empirical results, the paper draws inferences regarding their implications for the formulation of optimal monetary policy for the WAEMU.     

Happiness convergence in transition countries

The “transition happiness gap” has been one of the most robust findings in the literature on life satisfaction. Until very recently, scholars using various datasets have shown that residents of post-communist countries were significantly less satisfied with their lives than their counterparts in non-transition countries (controlling for income and other socio-economic characteristics). The literature has explained this finding by the great macroeconomic instability of the 1990s, by a substantial decrease in the quality and accessibility of public goods, by the major increase in inequality, and by the rapid depreciation of pre-transition human capital. All these factors were expected to subside over time – at least after the post-Great-Recession recovery. In this paper, we consider two most recent datasets – the third wave of the Life in Transition Survey (administered in 2015–16) and the 2010–2016 waves of the annual Gallup World Poll. We find that by 2016 the transition happiness gap had closed. This convergence has taken place both due to a “happiness recovery” in post-communist countries after the Great Recession and due to a decrease in life satisfaction in comparator countries in recent years. We also find that the convergence in life satisfaction was primarily driven by middle-income young, educated individuals, regardless of gender.     

Price convergence across regions in India

The paper attempts to examine whether there is price convergence across various regions in India. Using panel unit root tests that are robust to cross-sectional dependence, it is found that relative price levels among various regions in India are mean-reverting. Further, we decompose each series into a set of common factors and idiosyncratic components. The decomposition enables us to test stationarity and estimate half-lives of the common factors and the idiosyncratic components separately. Both these components are found to be stationary. Idiosyncratic price shocks, however, are found to be more persistent as compared to the common factor. Results also indicate that transportation cost proxied by distance can explain a part of the variation in prices between two locations in India. The authors would like to thank Dibyendu Bhaumik for arranging the data for this study. Views expresed in the paper are personal and do not reflect the views of the organizations.     

Determinants of household saving in the G-7 countries: recent evidence

This paper employs data from the last four decades to analyse major determinants of household saving for the Group of Seven (G-7) nations. Particular attention is paid to the effects of interest rates, government saving, and social security contributions. Regression analysis is used to control for the effects of both the level and changes in income per capita and inflation.     

Growth convergence and local steady states across Chinese prefectures

This article investigates how economic growth paths diverge across Chinese prefectural cities. Based on the conditional convergence hypothesis, the analysis includes inward foreign direct investments and patent applications to the European Patent Office as additional proxies of steady-state income levels and allows the convergence parameter to vary across groups. The results show that within-convergence rates are different across groups, but growth drivers positively affect both intraregional and interregional catching up.     

Real convergence: empirical evidence for Latin America

This article investigates the real convergence of 17 Latin American countries to the US economy for the period 1950 to 2011. Time series methods are used to test stochastic and β-convergence. These methods include the possibility of one or two structural changes. The results show that when endogenous structural changes are considered several Latin American countries exhibit stochastic convergence. Nevertheless, real convergence to the US is found only for three Latin American countries: Chile, Costa Rica and Trinidad and Tobago, with these countries also presenting evidence of stochastic and β-convergence.     

Convergence across industrialised countries (1890–1989): new results using time series methods

Augmented Dickey Fuller (ADF) and Kalman filter convergence tests are applied to annual GDPs per head to 16 industrialised countries from 1890 to 1989. Results favour convergence towards the US with a structural break following the Second World War. Estimates suggest that steady-states were higher after the war and that speeds of convergence are different across countries. The Kalman filter method dismissed the no convergence hypothesis more often than its ADF counterpart. This could explain the apparent contradiction in earlier empirical work on similar data sets (cross-section methods tended to favour convergence while time series methods were unable to dismiss the no convergence hypothesis.) First version received: February 1996/final version received: September 1997     

The election cycle in the inflation bias: evidence from the G-7 countries

This paper derives and evaluates empirical implications which separate the naive voters view [Nordhaus, W.D., 1975. The political business cycle. Review of Economic Studies 42, 169–190.] from the rational-voters view [Barro R., Gordon, D., 1983. Rules, discretion, and reputation in a model of monetary policy. Journal of Monetary Economics 12, 101–121.] under rational expectations. The observational equivalence of the two approaches obtained under a natural rate vanishes as output persistence is introduced. An analysis of inflation in the G-7 countries reveals election patterns supporting the joint hypothesis that demand shocks persist and that monetary policy courts retrospective voters. Patterns turn weaker as central banks become more independent, but do not disappear. Reducing inflationary bias not only requires more central bank independence, but as well less persistence.     

Per capita output convergence across Asian countries: Evidence from covariate unit root test with an endogenous structural break

This study investigates long-run convergence of per capita output across ten Asian countries over 1960 to 2014 by taking advantage of possible economic growth determinants, which may be responsible for setting Asian countries on a long-term steady-state growth path. We simultaneously examine the presence of output convergence in the region, as well as the statistical significance of these economic growth determinants, by using a unit root test with a stationary covariate. In addition, the study allows for the presence of endogenous structural changes in the time series under investigation in order to capture sharp drops in per capita outputs, which may be brought about by influential economic events, such as serious economic slumps in domestic economies or the global financial crises in 1997–98 and 2008–09. The limiting distribution of the covariate unit root test that permits structural breaks is also derived. The results show significant evidence to support the convergence hypothesis. In particular, asymptotically absolute convergence holds among Hong Kong, Korea, Singapore, and Taiwan. In addition, Thailand shows a convergence tendency in terms of asymptotically relative convergence toward Singapore. Malaysia, Indonesia, and India also turn out to converge toward Hong Kong in an asymptotically relative sense. Certain potential growth determinants, such as the trade/GDP ratio, inflation rate, government expenditure/GDP ratio, and quality of human capital, may help these countries achieve and maintain the long-run convergence process toward the reference countries in the region.     

Stochastic convergence of per capita carbon dioxide emissions and multiple structural breaks in OECD countries

This research applies an innovative panel data stationarity testing procedure developed by Carrion-i-Silvestre et al. [Carrion-i-Silvestre, J.L., Barrio-Castro, T.D. and Lopez-Bazo, E., 2005. Breaking the panels: An application to the GDP per capita, Econometrics Journal 8, 159–175.], which has the advantage of recognizing multiple structural breaks and the presence of cross-section dependence in order to re-investigate the hypothesis that per capita carbon dioxide (CO₂) emissions stochastically converge for 21 OECD countries from 1950 to 2002. Remarkably, the evidence clearly indicates that the panel dataset of relative per capita CO₂ emissions is stationary after the structural breaks and cross-sectional dependence are introduced into the model. These findings offer strong policy implications for governments, regardless of whether they are in “convergent group” or “divergent group” countries. We also find that the structural breaks in the 1960s and over the 1970–1982 period are associated with time periods of fossil fuel becoming the main source of productivity, higher oil prices, and the development of nuclear power.     

Testing for fiscal sustainability: New evidence from the G-7 and some European countries

Whether or not a government deficit is sustainable has important implications for policy. If the debt of a nation is sustainable, then it implies that the government should have no incentive to default on its internal debt. In this article we examine whether or not the debt-GDP ratios of the G-7 and some European countries can be characterized by a unit root process with the non-linear trend and asymmetric adjustment. The econometric methodology allows us to determine whether the stationarity holds for the government's debt–GDP ratio after considering the non-linear trend. Among the main results, it is found that it is very likely that the debt–GDP ratios of Canada, Germany, the US and Italy are stationarity after taking account of the non-linear trend in the long run. Nevertheless, it is model-dependent for the debt–GDP ratios of these countries to be asymmetrically adjusted after taking the non-linear trend into consideration.     

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.