Nowcasting causality in mixed frequency vector autoregressive models

This paper introduces nowcasting causality as the mixed-frequency version of instantaneous causality. We analyze the relationship between nowcasting and Granger causality in a mixed-frequency VAR and illustrate its impact on the significance of high-frequency variables in mixed-frequency conditional models.     

On testing for nonlinearity in multivariate time series

This paper considers a multivariate extension of the test for neglected nonlinearity proposed by Tsay (1986) that uses principal components to overcome the problem of dimensionality that is common with tests of this type. Monte Carlo experiments reveal that the modified multivariate test provides a significant dimensional reduction without suffering from any systematic level distortion or power loss, and is more powerful than univariate nonlinearity tests.     

A simple unit root test against asymmetric STAR nonlinearity with an application to real exchange rates in Nordic countries

Existing tests of the unit root hypothesis against the alternative hypothesis of exponential smooth transition autoregressive (ESTAR) nonlinearity implicitly assume symmetry under the alternative. This paper proposes a simple unit root test against the alternative of symmetric or asymmetric ESTAR nonlinearity. In the event that the unit root hypothesis is rejected, a simple test of symmetric versus asymmetric ESTAR nonlinearity is also proposed. The asymptotic distributions of the test statistics are straightforward to establish and finite-sample performance is studied with Monte Carlo simulations. An empirical application involving the real exchange rates of four Nordic countries against the U.S. dollar illustrates the usefulness of the new tests.     

Econometric applications of positive rank-one modifications of the symmetric factorization of a positive semi-definite matrix

We present an algorithm for updating the symmetric factorization of a positive semi-definite matrix after a positive rank-one modification, which works even if the matrices involved do not have full rank. Recursive least squares and factor analysis provide two important econometric applications. An illustrative simulation shows that it can be potentially very useful in recursive situations.     

Testing for structural break in Japanese demand system after the bubble era

The aims of this paper are two: to define the structural break in the Japanese demand system after the bubble era and to apply the structural break test developed by Andrews et al. (1996) within the framework of the cointegrated demand system. Our test results reject the null hypothesis of no structural break for March 1994 and then demonstrate the structural break after the bubble era. We define the concept of structural break as the time-series change in preference having the following two aspects: the change in preference for commodity prices by the decline in personal income and the change in preference regarding goods in the course of aging effect, with the improvement of living standards.     

On the application of the rank tests for nonlinear cointegration to PPP: The case of Papua New Guinea

Much interest has been paid recently to the nonlinear cointegrating relations existing among economic variables. Various testing procedures are already available to test for the existence of nonlinear cointegration. For example, Breitung (2001) proposes rank tests and his testing procedure has been broadly applied. In this study, we warn against a blind application of the rank cointegration tests, particularly to economic variables that evidence certain behavior. As an illustration, we employ the nominal exchange rates and relative prices of Papua New Guinea against her major trading partners with the objective of testing the validity of purchasing power parity for the country. Our simulation results also confirm our warnings. Additionally, we provide some simple solutions to the problem we encounter herein.     

Macroeconomic forecasting in the Euro area: Country specific versus area-wide information

This paper compares several time series methods for short-run forecasting of Euro-wide inflation and real activity using data from 1982 to 1997. Forecasts are constructed from univariate autoregressions, vector autoregressions, single equation models that include Euro-wide and US aggregates, and large-model methods in which forecasts are based on estimates of common dynamic factors. Aggregate Euro-wide forecasts are constructed from models that utilize only aggregate Euro-wide variables and by aggregating country-specific models. The results suggest that forecasts constructed by aggregating the country-specific models are more accurate than forecasts constructed using the aggregate data.     

The information content of the neutral rate of interest

The concept of the neutral rate of interest has recently received much attention from economists. In this paper, we estimate the neutral rate of interest in Poland. We show how it can yield important information for a central banker. In particular, estimation of the neutral rate can be helpful for monetary authorities seeking to stabilize inflation after a long process of disinflation. We also suggest possible explanations for the relatively high level of the neutral rate in Poland.     

Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models

This paper studies the nonlinear adjustment between industrial production and carbon prices – coined as ‘the carbon-macroeconomy relationship’ – in the EU 27. We model carbon price returns and industrial production as nonlinear and state-dependent, with dynamics depending on the sign and magnitude of past realization of returns and the growth of industrial production. Our findings show that (i) macroeconomic activity is likely to affect carbon prices with a lag, due to the specific institutional constraints of this environmental market; (ii) the joint dynamics of industrial production and carbon prices seem adequately captured by two-regime threshold vector error-correction and two-regime Markov-switching VAR models compared to linear models as main competitors. The regime-switching models proposed are profoundly checked for their economic content and statistical congruency, and are found to provide a sound statistical framework for a comprehensive analysis of the carbon-macroeconomy relationship.     

Improving consumption measurement and other survey data through CAPI: Evidence from a randomized experiment

This paper reports on a randomized survey experiment among 1840 households, designed to compare pen-and-paper interviewing (PAPI) to computer-assisted personal interviewing (CAPI). We find that PAPI data contain a large number of errors, which can be avoided in CAPI. Error counts are not randomly distributed across the sample, but are correlated with household characteristics, potentially introducing sample bias if dubious observations need to be dropped. We demonstrate a tendency for the spread of total measured consumption to be higher on paper compared to CAPI, translating into significantly higher measured inequality. Investigating further the nature of PAPI's measurement error for consumption, we fail to reject the hypothesis that it is classical: it attenuates the coefficient on consumption when used as explanatory variable and we find no evidence of bias when consumption is used as dependent variable. Finally, CAPI and PAPI are compared in terms of interview length, costs and respondents' perceptions.     

On microfoundations of the city

This paper considers the spatial structure of a city subject to final demand and vertical linkages. Individuals consume differentiated goods (or services) and firms purchase differentiated inputs (or services) in product (or service) markets where firms compete under monopolistic competition. Workers rent their residential lots in an urban land market and contribute to the production of differentiated goods and inputs. We show that firms and workers co-agglomerate and endogenously form a city. We characterize and discuss the spatial distribution of firms and consumers in such cities on one- and two-dimensional spaces. We show that final demand and vertical linkages raise the urban density and reduce the city spread.     

Transition probabilities in a problem of stochastic process switching

Extant solutions for state-contingent process switching use first-passage time densities or differential equations. We alternatively employ transition probabilities. These conditional likelihood functions also have obvious appeal for econometric analyses as well as derivative pricing and decision making under absorption and extinction.     

The ‘Puzzles’ methodology: En route to Indirect Inference?

We review the methods used in many papers to evaluate DSGE models by comparing their simulated moments with data moments. We compare these with the method of Indirect Inference to which they are closely related. We illustrate the comparison with contrasting assessments of a two-country model in two recent papers. We conclude that Indirect Inference is the proper end point of the puzzles methodology.     

Dynamic modelling of real estate investment trusts and stock markets

Taiwan launched the first case of real estate securitization in 2005. The interrelationship between Taiwan Real Estate Investment Trusts (T-REITs) and the aggregate equity markets and segmented industries has drawn the interests of both investors and academia. This paper employs Toda and Yamamoto's (1995) procedure and the generalized impulse response approach to uncover the extent and the magnitude of the relationship between T-REITs and aggregate and segmented stock prices. We collected daily data of the first two issued T-REITs, Fubon No.1 and Cathay No. 1, from March 2005 to March 2010 and October 2005 to March 2010, respectively, to examine their causal relationships with aggregate stock markets, the financial sector, and the construction sector. The empirical results indicate that all variables have break points, reflecting shocks from the Subprime Mortgage Crisis or deregulation of the Qualified Domestic Institutional Investors (QDII) for Mainland Chinese to invest in Taiwan. We also discover that an individual T-REIT may lead or lag behind stock price indices due to its capitalization scale or business type. The transitory initial impacts of innovations in T-REITs on stock price indices are observed herein.     

Default and liquidity regimes in the bond market during the 2002–2012 period

Using a real‐time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002–2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain the predictive power of credit risk on the 2007–2009 NBER recession, whereas the default regime drives the persistence of credit spreads over the same recession. Our results complement the recent dynamic structural models as well as monetary and credit supply effects models by empirically supporting two important patterns in credit spreads: the persistence and the predictive ability toward economic downturns.     

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.     

International macroeconomic dynamics: A factor vector autoregressive approach

In this paper international comovements among a set of key real and nominal macroeconomic variables in the US, UK, Canada, Japan and the Euro area have been investigated for the 1980–2005 period, using a factor vector autoregressive approach. We present evidence that comovements in macroeconomic variables do not concern only real activity, but are an important feature also of stock market returns, inflation rates, interest rates and, to a smaller extent, monetary aggregates. Both common sources of shocks and similar transmission mechanisms explain international comovements, with the only exception of Japan, where the idiosyncratic features seem to dominate. Finally, concerning the origin of global shocks, evidence of both global supply-side and demand-side disturbances is found.     

On winning forecasting competitions in economics

To explain which methods might win forecasting competitions on economic time series, we consider forecasting in an evolving economy subject to structural breaks, using mis-specified, data-based models. ‘Causal’ models need not win when facing deterministic shifts, a primary factor underlying systematic forecast failure. We derive conditional forecast biases and unconditional (asymptotic) variances to show that when the forecast evaluation sample includes sub-periods following breaks, non-causal models will outperform at short horizons. This suggests using techniques which avoid systematic forecasting errors, including improved intercept corrections. An application to a small monetary model of the UK illustrates the theory.     

Innis Lecture: Inference on income distributions

Abstract This paper attempts to provide a synthetic view of varied techniques available for performing inference on income distributions. Two main approaches can be distinguished: one in which the object of interest is some index of income inequality or poverty, the other based on notions of stochastic dominance. From the statistical point of view, many techniques are common to both approaches, although of course some are specific to one of them. I assume throughout that inference about population quantities is to be based on a sample or samples, and, formally, all randomness is due to that of the sampling process. Inference can be either asymptotic or bootstrap based. In principle, the bootstrap is an ideal tool, since in this paper I ignore issues of complex sampling schemes and suppose that observations are IID. However, both bootstrap inference and, to a considerably greater extent, asymptotic inference can fall foul of difficulties associated with the heavy right‐hand tails observed with many income distributions. I mention some recent attempts to circumvent these difficulties.     

Purchasing power parity and the long memory properties of real exchange rates: Does one size fit all?

This paper examines the time series behavior of monthly bilateral real exchange rates (RER) on a comprehensive sample of 78 industrialized and developing countries, using the US Dollar, the UK Pound and the German Deutsche Mark as numeraires. We suggest a three step testing procedure based on recently introduced econometric techniques, in order to assess the mean-reverting properties of the RER and to address the question of whether real exchange rates follow a non linear process or a long memory process.The main results are as follows. Firstly, most of the bilateral real exchange rates under study are not mean-reverting. Secondly, the nonlinear ESTAR type adjustment is far from being prominent. Finally, only few bilateral RER exhibit true long memory mean-reverting properties.