How credible is inflation targeting in Asia? A quantile unit root perspective

This article examines the dynamic behavior of the inflation rate for eight Asian countries using a quantile unit root test. We advocate a three-way definition of inflation targeting based on perfect, imperfect and zero credibility and advance the analysis by incorporating a fully-fledged adoption of inflation targeting. In doing so, we offer new insights by showing that the credibility of inflation targeting and the alternative monetary policy frameworks in Asia are imperfect, except for Malaysia and South Korea under a fully-fledged adoption of inflation targeting. In contrast to past studies that focus on the mean-reversion in inflation rates, we also consider trend-reversion and find that Asian inflation targeting countries have been building up their monetary policy credibility more than the non- inflation targeting countries in terms of a faster rate of decline in inflation rate changes. Our results generally indicate the presence of mean reversion at the lower quantiles only. Where stationarity is present, we find evidence of a varied speed of adjustment process across the quantiles. Finally, we determine the threshold levels whereby inflation becomes stationary and demonstrate that Asian inflation rates generally display stationary behavior during periods of inflation declining or slowing down.     

Macroeconomic effects of structural reforms and fiscal consolidations: Trade-offs and complementarities

This paper studies the impact of product and labour market structural reforms and the effects of their joint implementation with alternative debt consolidation strategies. The set-up is a dynamic general equilibrium model calibrated for the Greek economy. The results show that structural reforms produce important long-run GDP gains that materialize earlier, the faster the reforms are implemented. When implemented jointly with fiscal consolidations, structural reforms may amplify the short-run costs of fiscal tightening. The GDP dynamics depend on the fiscal instrument used for public debt consolidation. In the long run, however, there are complementarity gains irrespective of the fiscal instrument used.     

An adaptive approach to forecasting three key macroeconomic variables for transitional China

The macroeconomic forecasts for emerging economies often suffer from the constraints of instability and limited data. In light of these constraints, we propose the use of a local autoregressive (LAR) model with a data-driven estimation window, i.e., a local homogenous interval, that is adaptively identified to strike a balance between information efficiency and stability. When applied to three key macroeconomic variables of China, the LAR model substantially outperforms the alternative models for various forecast horizons of 3 to 12 months, with forecast error reductions of between 4% and 64% for the IP growth, and between 1% and 68% for the inflation rate. The one-quarter ahead performance of the LAR model matches that of a well-known survey forecast. The patterns of the identified local intervals also coincide with the characteristic evolution of the gradual reforms and monetary policy shifts in China. In short, the LAR model is suitable for not only forecasting, but also the real-time monitoring of the effects of regime and policy changes in emerging economies.     

Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis

This paper develops and estimates a new-Keynesian dynamic stochastic general equilibrium (DSGE) model for the analysis of fiscal policy in the UK. We find that government consumption and investment yield the highest GDP multipliers in the short-run, whereas capital income tax and public investment have dominating effect on GDP in the long-run. When nominal interest rate is at the zero lower bound, consumption taxes and public consumption and investment are found to be the most effective fiscal instruments throughout the analysed horizon, and capital and labour income taxes are established to be the least effective. The paper also shows that the effectiveness of fiscal policy decreases in a small open-economy scenario and that nominal rigidities improve effectiveness of public spending and consumption taxes, whereas decrease that of income taxes.     

DEFINING RELEVANT MARKETS FOR PHARMACEUTICALS

To identify the relevant product markets for Swedish pharmaceuticals, a spatial econometrics approach is employed. First, we calculate Moran's Is for different market definitions and then we use a spatial Durbin model to determine the effect of price changes on quantity sold of own and competing products. As expected, the results show that competition is strongest between close substitutes; however, the relevant product markets for Swedish pharmaceuticals extend beyond close substitutes down to products included in the same class on the four‐digit level of the Anatomic Therapeutic Chemical system as defined by the World Health Organization. The spatial regression model further indicates that increases in the price of a product significantly lower quantity sold of that product and in the same time increase the quantity sold of competing products. For close substitutes (products belonging to the same class on the seven‐digit level of the Anatomic Therapeutic Chemical system), as well as for products that, without being close substitutes, belong to the same therapeutic/pharmacological/chemical subgroup (the same class on the five‐digit level of the Anatomic Therapeutic Chemical system), increased competition is also visible after 1 July 2009 when the latest policy changes with regards to pharmaceuticals have been implemented in Sweden.     

WHOLESALE PRICES AND COURNOT‐BERTRAND COMPETITION

This note considers the competing vertical structures framework with Cournot‐Bertrand competition downstream. It shows that the equilibrium wholesale price paid by a Cournot (Bertrand)‐type retailer is above (below) marginal costs of a corresponding manufacturer. This result contrasts with the one under pure competition downstream (i.e., Cournot or Bertrand), where the wholesale price is set below (above) marginal costs in case of a Cournot (Bertrand) game at the retail level.     

Dynamic R&D choice and the impact of the firm's financial strength

ABSTRACT

This article investigates how a firm's financial strength affects its dynamic decision to invest in R&D. We estimate a dynamic model of R&D choice using data for German firms in high-tech manufacturing industries. The model incorporates a measure of the firm's financial strength, derived from its credit rating, which is shown to lead to substantial differences in estimates of the costs and expected long-run benefits from R&D investment. Financially strong firms have a higher probability of generating innovations from their R&D investment, and the innovations have a larger impact on productivity and profits. Averaging across all firms, the long-run benefit of investing in R&D equals 6.6% of firm value. It ranges from 11.6% for firms in a strong financial position to 2.3% for firms in a weaker financial position.     

Experts,firms, consumers or even hard data? Forecasting employment in Germany

In this article, we forecast employment growth for Germany with data for the period from November 2008 to November 2015. Hutter and Weber (2015) introduced an innovative unemployment indicator and evaluated the performance of several leading indicators, including the Ifo Employment Barometer (IEB), to predict unemployment changes. Since the IEB focuses on employment growth instead of unemployment developments, we mirror the study by Hutter and Weber (2015). It turns out that in our case, and in contrast to their article, the IEB outperforms their newly developed indicator. Additionally, consumers’ unemployment expectations and hard data such as new orders exhibit a high forecasting accuracy.     

The nonobserved economy in the European Union

To better understand the share of the nonobserved economy (NOE) in the European Union, especially on the PIIGS, we estimate, through the multiple indicators multiple causes model, the path between 1980 and 2013. The model includes (i) the tax burden (disaggregated into direct and indirect taxes), a proxy of regulation burden, the unemployment rate and self-employment as causes of the NOE economy; (ii) the GDP and the labour force participation ratio as indicators of the NOE economy. In particular, the estimated weight of NOE as a percentage of official GDP was always higher in the PIIGS group.     

Value at risk forecasting for volatility index

Forecasts of values at risk (VaRs) are made for volatility indices such as the VIX for the US S&P 500 index, the VKOSPI for the KOSPI (Korea Stock Price Index) and the OVX (oil volatility index) for crude oil funds, which is the first in the literature. In the forecasts, dominant features of the volatility indices are addressed: long memory, conditional heteroscedasticity, asymmetry and fat-tails. An out-of-sample comparison of the VaR forecasts is made in terms of violation probabilities, showing better performance of the proposed method than several competing methods which consider the features differently from ours. The proposed method is composed of heterogeneous autoregressive model for the mean, GARCH model for the volatility and skew-t distribution for the error.