Unanticipated money, ‘disequilibrium’ modelling and rational expectations

This paper provides a synthesis of two recent approaches to macroeconomics, rational expectations and disequilibrium macromodelling. The unifying theme of the two approaches is the emphasis on the effects of the difference between actual and anticipated (or equilibrium) values of important variables such as the money supply.     

Protection and commercial policy: Experiments with a general equilibrium econometric model

This paper analyzes the incidence of commercial policy by simulating the effects of an import tariff in the context of a general equilibrium econometric model of the U.S. It is found that in the long run the tariff protection given to importables is mainly at the expense of exportables, rather than the nontraded goods sector. The simulations also provide the general equilibrium responses of a number of other variables to changes in commercial policy, which may be of interest from a policy perspective.     

Forecasting by factors,by variables,by both or neither?

We consider forecasting with factors, variables and both, modeling in-sample using Autometrics so all principal components and variables can be included jointly, while tackling multiple breaks by impulse-indicator saturation. A forecast-error taxonomy for factor models highlights the impacts of location shifts on forecast-error biases. Forecasting US GDP over 1-, 4- and 8-step horizons using the dataset from Stock and Watson (2009) updated to 2011:2 shows factor models are more useful for nowcasting or short-term forecasting, but their relative performance declines as the forecast horizon increases. Forecasts for GDP levels highlight the need for robust strategies, such as intercept corrections or differencing, when location shifts occur as in the recent financial crisis.     

Inflation and relative prices: A decomposition analysis

The variability of relative prices is decomposed into a component due to real effects (technical change, real income growth and so on) and a component due to inflation. Using quarterly Australian data, inflation is shown to account for 24 percent of the total relative price variability.     

A note on exchange rate dynamics

A solution to a model designed to study how exchange rates respond to policy changes is obtained. The solution may be used to predict the effect of an anticipated increase in the money supply.     

Uncertainty in currency mispricing

Declaring a currency to be mispriced is fraught with uncertainties. In this article, these uncertainties are explicitly recognized in a model of pricing a homogeneous commodity around the world. This allows for a common driver of prices, due to a base-currency effect, and country-specific factors that lead to departures from absolute PPP on account of income differences, local taxes and charges, etc. This approach leads to estimates of currency mispricing whose significance can be tested in the usual way. Using Big Mac prices, we show that the approach has advantages over the popular Big Mac Index to currency valuation.     

More on stochastic index numbers

There are three major approaches used to estimate index numbers. The first is Fisher's test approach whereby indexes are judged on their ability to satisfy certain criteria. The economic theory of index numbers is the second approach and this deals with their foundations in utility theory. The third approach is a less well-known methodology, but one which is now attracting considerable attention, the stochastic approach which is a new way of viewing index numbers in which uncertainty and statistical ideas play a central role. While providing a point estimate for the index number like the other two approaches, the stochastic approach additionally provides the SE of the point estimate. This article enhances understanding of stochastic index numbers by showing that they are formally equivalent to the familiar optimal combination of forecasts with the individual prices playing the role of n forecasts of the overall rate of inflation. This leads to new analytical results on the impact of adding additional information within the stochastic approach framework. We provide two concrete examples of the sources of such additional information: (i) the quantity theory of money; and (ii) the use of quantity data in addition to price data. We also illustrate some of these theoretical results using real data.     

First announcements and real economic activity

The recent literature suggests that first announcements of real output growth in the US have predictive power for the future course of the economy while the actual value of output growth does not. We show that this need not point to a behavioural relationship, whereby agents respond to perceptions instead of the truth, but may instead simply be a by-product of the data revision process. The revisions to the initial estimates which define the final values of the observations are shown to be key in determining any relationship between first announcements and the future course of the economy.     

A Monte Carlo study of the forecasting performance of empirical SETAR models

In this paper we investigate the multi-period forecast performance of a number of empirical self-exciting threshold autoregressive (SETAR) models that have been proposed in the literature for modelling exchange rates and GNP, among other variables. We take each of the empirical SETAR models in turn as the DGP to ensure that the ‘non-linearity’ characterizes the future, and compare the forecast performance of SETAR and linear autoregressive models on a number of quantitative and qualitative criteria. Our results indicate that non-linear models have an edge in certain states of nature but not in others, and that this can be highlighted by evaluating forecasts conditional upon the regime. Copyright © 1999 John Wiley & Sons, Ltd.