OPTIMAL FORECAST COMBINATION UNDER REGIME SWITCHING*

This article proposes a new forecast combination method that lets the combination weights be driven by regime switching in a latent state variable. An empirical application that combines forecasts from survey data and time series models finds that the proposed regime switching combination scheme performs well for a variety of macroeconomic variables. Monte Carlo simulations shed light on the type of data‐generating processes for which the proposed combination method can be expected to perform better than a range of alternative combination schemes. Finally, we show how time variations in the combination weights arise when the target variable and the predictors share a common factor structure driven by a hidden Markov process.     

Applying Burke’s Dramatic Pentad to scenarios

Describing the evolution of possible futures in the narrative form is widely practised. However, while stories are intuitively recognized, the ability to compose a comprehensible story is often difficult. Ambiguities or inconsistencies within a scenario-as-story are not simply aesthetic faults, but are failings which can weaken the use of the technique in a learning or decision-making process. This paper provides a working understanding of narrative as a particular kind of knowledge and proposes an adaptation of Kenneth Burke’s Dramatic Pentad as a way to explicitly capture this kind of knowledge within a scenario construction process.     

The Greenspan years: an analysis of the magnitude and speed of the equity market response to FOMC announcements

We examine the impact of monetary policy on the S&P 500 using intraday data. The analysis shows an economically and statistically significant relationship between S&P 500 intraday returns and changes in the Fed funds target rate. The significance and magnitude of the response is dependent on whether the change was expected or unexpected. An expected change in the Fed funds target rate has no impact on prices in the broad equity market; however, an unexpected change of 25 basis points in the Fed funds target rate results in an approximate 48 basis points decline in the broad equity market’s return. The speed of these market reactions is rapid with the equity market reaching a new equilibrium within 15 minutes.

Population growth and food supply in sub-Saharan Africa

It is argued in this article that sub-Saharan Africa, given its present institutions and endowments of capital and technology, is already dangerously close to overpopulation. The rapid growth of its population projected for the next decades will greatly increase human misery and depress economic development. Specifically, rapid population growth will have disastrous effects on the region's ability to increase exports and provide people with food. There must be a search for new ways in which these effects could be mitigated. In sub-Saharan Africa fertility either continues to be very high or is increasing, in part due to some decline in traditional practices that reduce fertility, such as prolonged breastfeeding. This situation and the expectation of declining mortality imply that African population growth may increase further. Currently, population in sub-Saharan Africa is about half that of India and a third of China. There are 2 main reasons why reduced fertility in the next few decades is unlikely in sub-Saharan Africa as a whole: Africa has low literacy, high infant and child mortality, and low urbanization; and average African fertility rates may even increase for the next 20 years or so. The question that arises is what are the implications of continuing and rapid population growth for the African food supply. The region's cereal production is largely restricted to 4 grains, i.e., millet, sorghum, maize, and rice. The volume of grain production is less, by weight, than 60% of the production of roots and tubers. There are 2 main differences between the output of these crops in sub-Saharan Africa and the rest of the world: yields/hectare are lower in Africa than in elsewhere; and yields have generally been decreasing or largely constant in Africa. The low productivity has several causes. Today, population pressure has brought diminishing returns to traditional agriculture in much of the Sahel and the savanna, in parts of East Africa, Southern Africa, and parts of the West African forest belt. There is also the absence of the Green Revolution, i.e., the use of new high yielding seeds and new technologies in agriculture that has led to marked increases in yields in most other parts of the world. A totally different and more productive agriculture might evolve if African governments were to fundamentally change their vision. Existing production technology could allow substantial increases in the yields of many crops if some basic changes were made in the policies affecting agriculture. A way to achieve such change would be to make farming profitable. The effect of population growth in diminishing returns to agriculture also lends urgency to the need for family planning. Generally, population policy in Africa badly needs strengthening.     

Examining bank SEOs: Are offers made by undercapitalized banks different?

Despite extensive monitoring, banking operations are often considered opaque, and despite explicit capital adequacy regulation, banks may have substantial discretion in their financing. Both monitoring and capital regulation have changed substantially over time, with the adoption of FDICIA being one important breakpoint. This article empirically studies seasoned equity offerings (SEOs) by banks to understand how opacity and capital regulation interact to determine the timing of bank SEOs and their market valuation. SEOs both by banks that are undercapitalized relative to regulatory standards and also well-capitalized banks are fully discretionary when it comes to SEOs, even before FDICIA. Both undercapitalized and well-capitalized banks experience similar and significantly negative stock price reactions to SEO announcements, and also have similar prior patterns of insider trading and similar economic drivers of the issuance decision. Moreover, post-SEO abnormal stock returns are similar to benchmark returns for both types of issuers in the long run, suggesting that, contrary to the well-documented evidence for industrial SEOs, investors understand the value implications of bank SEOs upon announcement. The evidence implies that undercapitalized banks' SEOs are more discretionary and that all bank SEOs are less opaque than implied by earlier studies.     

Income inequality and education revisited: persistence,endogeneity and heterogeneity

This article presents new results on the relationship between income inequality and education expansion – that is, increasing average years of schooling and reducing inequality of schooling. When dynamic panel estimation techniques are used to address issues of persistence and endogeneity, we find a large, positive, statistically significant and stable relationship between inequality of schooling and income inequality, especially in emerging and developing economies and among older-age cohorts. The relationship between income inequality and average years of schooling is positive, consistent with constant or increasing returns to additional years of schooling. While this positive relationship is small and not always statistically significant, we find a statistically significant negative relationship with years of schooling of younger cohorts. Statistical tests indicate that our dynamic estimators are consistent and that our identifying instruments are valid. Policy simulations suggest that education expansion will continue to be inequality reducing. This role will diminish as countries develop, but it could be enhanced through a stronger focus on reducing inequality in the quality of education.     

Accidental,unprepared, and unsupported: clinical nurses becoming managers

To what extent have hospitals developed their skilled clinicians to perform the administrative and human resources (HR) manager role of the ward manager? We consider this research question through an analysis of an acute hospital called ‘The Hospital’ where the executive team is aiming to adopt a form of high-performance work system (HPWS). We focus primarily on explanations in terms of conditions, rather than the personalities of individual managers, which are most powerful in shaping their behaviour. There has long been a failure of hospitals (and other employing organisations) to develop fully the skills required by employees before they become line managers. Line managers are a critical link in the high-performance chain and this study illustrates that, despite their rhetoric, hospitals may still have much potential for implementing schemes to develop nurses further to prepare them for line-manager positions and to support them after they move into such roles. We infer from this study that such hospitals may not yet have completed the journey to having HPWS. Hence, there is still much scope for such hospitals to progress and enjoy the benefits that proponents claim for HPWS.