Taylor rules and the Canadian–US equilibrium exchange rate

This paper identifies the Canadian–US equilibrium exchange rate based on a simple structural model of the real exchange rate, in which monetary policy follows a Taylor-rule interest rate reaction function. The exchange rate is explained by relative output and inflation as observable variables, and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974–2009 we jointly estimate the unobserved components and the structural parameters using the Kalman filter and Bayesian technique. We find that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate, resulting in few but prolonged periods of currency misalignments.     

Habit formation and the present-value model of the current account: Yet another suspect

In a recent paper, Gruber (Gruber, J.W., 2004. A present value test of habits and the current account. Journal of Monetary Economics 51, 1495-1507) claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations.     

Research & development and growth: A Bayesian model averaging analysis

We examine the effect of research and development (R&D) on long-term economic growth using the Bayesian model averaging (BMA) to deal rigorously with model uncertainty. Previous empirical studies, which applied BMA, investigated the effect of dozens of regressors on long-term growth, but they did not examine the effect of R&D due to data unavailability. We extend these studies by proposing to capture the investment in R&D by the number of Nobel prizes in science. Using our indicator, the estimates show that R&D exerts a positive effect on long-term growth. This result is robust to many different parameter and model prior structures as well as to alternative definitions of R&D indicator.     

OUTPUT FLUCTUATIONS PERSISTENCE: DO CYCLICAL SHOCKS MATTER?

The aim of this paper is to identify the different sources of persistence of output fluctuations. We propose an unobserved components model that allows us to decompose GDP series into a trend component and a cyclical component. We let the drift of the trend component switch between different regimes according to a first‐order Markov process. To calculate an appropriate p‐value for a test of linearity we propose a bootstrap procedure, which allows for general forms of heteroscedasticity. The performance of the bootstrap is checked by means of a Monte Carlo simulation. Our study concerns the USA. We find that cyclical shocks appear to play an important role on the observed persistence of output.     

Cross‐Country Evidence on Labor Market Institutions and Young Adult Employment through the Financial Crisis

I develop and analyze a set of cross‐country facts regarding employment and wage setting institutions over the decade surrounding the 2008 financial crisis. Among long‐industrialized countries, young adult employment declined more than prime age employment over this time period. I show that differences in countries' wage setting institutions strongly predict variations in the magnitude of declines in young adult employment. Both unconditionally and conditional on changes in macroeconomic conditions, young adult employment declined 5 percentage points less in countries where wage setting is driven by collective bargaining arrangements than in countries with statutory wage floors. Evidence on the evolution of legislated minimum wage rates and of an asymmetry in the relationship between growth and young adult employment suggest an important role for a standard “wage rigidity” mechanism.     

Determining the cointegrating rank in nonstationary fractional systems by the exact local Whittle approach

We propose to extend the cointegration rank determination procedure of Robinson and Yajima [2002. Determination of cointegrating rank in fractional systems. Journal of Econometrics 106, 217–242] to accommodate both (asymptotically) stationary and nonstationary fractionally integrated processes as the common stochastic trends and cointegrating errors by applying the exact local Whittle analysis of Shimotsu and Phillips [2005. Exact local Whittle estimation of fractional integration. Annals of Statistics 33, 1890–1933]. The proposed method estimates the cointegrating rank by examining the rank of the spectral density matrix of the d$d$th differenced process around the origin, where the fractional integration order, d$d$, is estimated by the exact local Whittle estimator. Similar to other semiparametric methods, the approach advocated here only requires information about the behavior of the spectral density matrix around the origin, but it relies on a choice of (multiple) bandwidth(s) and threshold parameters. It does not require estimating the cointegrating vector(s) and is easier to implement than regression-based approaches, but it only provides a consistent estimate of the cointegration rank, and formal tests of the cointegration rank or levels of confidence are not available except for the special case of no cointegration. We apply the proposed methodology to the analysis of exchange rate dynamics among a system of seven exchange rates. Contrary to both fractional and integer-based parametric approaches, which indicate at most one cointegrating relation, our results suggest three or possibly four cointegrating relations in the data.     

Trending time-varying coefficient time series models with serially correlated errors

This paper studies a time-varying coefficient time series model with a time trend function and serially correlated errors to characterize the nonlinearity, nonstationarity, and trending phenomenon. A local linear approach is developed to estimate the time trend and coefficient functions. The asymptotic properties of the proposed estimators, coupled with their comparisons with other methods, are established under the α$\alpha$-mixing conditions and without specifying the error distribution. Further, the asymptotic behaviors of the estimators at the boundaries are examined. The practical problem of implementation is also addressed. In particular, a simple nonparametric version of a bootstrap test is adapted for testing misspecification and stationarity, together with a data-driven method for selecting the bandwidth and a consistent estimate of the standard errors. Finally, results of two Monte Carlo experiments are presented to examine the finite sample performances of the proposed procedures and an empirical example is discussed.     

New evidence on the convergence of international income from a group of 29 countries

This paper updates and extends the time-series evidence on the convergence of international incomes using a set of 29 countries over the period 1900–2001. Time-series tests for stochastic convergence are supplemented with tests which provide evidence on the notion of “β-convergence” predicted by the Solow model. The evidence indicates that the relative income series of 21 countries are consistent with stochastic convergence, and that β-convergence has occurred in at least 16 countries at some point during the twentieth century. Further examination of the properties of the β-convergence test provides anecdotal evidence of conditional convergence in three additional countries for which the convergence hypothesis was initially rejected. Consideration of convergence clubs strengthens the evidence in favor of convergence. Analysis of the cross-country dispersion of incomes over time also suggests that convergence has occurred over the 1900–2001 period, particularly within certain clubs, with structural breaks associated with World War II in many countries causing a break in the convergence process.      

Why do parents make their children work? A test of the poverty hypothesis in rural areas of Burkina Faso

It is often argued that child labour is caused by poverty. However,much child labour takes place in rural areas characterized bysubstantial labour market imperfections. A model of rural householdlabour supply is developed that provides testable implicationsfor two versions of the poverty hypothesis: that child labouris due to a binding subsistence constraint and that child leisureis a luxury good. We find that in rural Burkina Faso childrendo not provide labour to meet households' subsistence needsand that child leisure is a normal good. The evidence suggeststhat labour market imperfections are a main reason for usingchild labour.     

EXCHANGE RATE,EXPECTED PROFIT AND CAPITAL STOCK ADJUSTMENT: JAPANESE EXPERIENCE

This paper empirically investigates the impact of exchange rate shocks on capital stock adjustment in the Japanese industry. An intertemporal optimization model is developed, in which an individual corporation in an open economy adjusts its capital stock according to Tobin's q. By explicitly considering the marginal q, the transmission mechanism from real exchange rate shocks to investment dynamics is examined based on the Vector Autoregressive model. Empirical evidence suggests that the depreciation of the Japanese yen increases the expected profitability of the firm and stimulates investment, especially in the machinery sector.