Are heterogeneous FOMC forecasts consistent with the Fed’s monetary policy?

Yes, they are! We find that although there is a surprisingly high dispersion of individual forecasts and some dissent on the Federal Funds target, the FOMC’s individual behavior is well described by a Taylor-type rule.     

FAITH and SCHOLARSHIP IN ABORIGINAL and ISLANDER HISTORY: A REPLY TO RALPH SHLOMOWITZ

The Fabrication of Aboriginal History , does not, as Shlomowitz contends, circumvent standard criteria of traditional historical enquiry. In fact, it insists upon them. It applies those criteria to the work of historians who have exaggerated the degree of frontier conflict and the Aboriginal death toll far beyond what the credible evidence supports. Shlomowitz should have applied those standards to the works that Fabrication critiques. He also misrepresents Windschuttle's case about Melanesian labourers in Queensland's sugar industry, which is based on the same sources that Shlomowitz uses himself. The article argues those labourers were genuine victims of the White Australia Policy.     

FORECASTING CURRENCY CRISES: WHICH METHODS SIGNALED THE SOUTH AFRICAN CRISIS OF JUNE 2006?

In this paper we test the ability of three of the most popular methods to forecast South African currency crises with a special emphasis on their out‐of‐sample performance. We choose the latest crisis of June 2006 to conduct an out‐of‐sample experiment. The results show that the signals approach was not able to forecast the out‐of‐sample crisis correctly; the probit approach was able to predict the crisis but only with models, that were based on raw data. The Markov‐regime‐switching approach predicts the out‐of‐sample crisis well. However, the results are not straightforward. In‐sample, the probit models performed remarkably well and were also able to detect, at least to some extent, out‐of‐sample currency crises before their occurrence. The recommendation is to not restrict the forecasting to only one approach.     

Habit formation in state-dependent pricing models: Implications for the dynamics of output and prices

This paper examines the role of habit formation in a standard state-dependent pricing (SDP) model. Incorporating habit formation helps the SDP model to generate hump-shaped and more persistent output responses under a monetary shock. More importantly, incorporating habit formation causes dramatic changes in firm-level pricing behaviors and, as a result, the aggregate price index.     

The ADR shadow exchange rate as an early warning indicator for currency crises

We develop an indicator for currency crisis risk using price spreads between American Depositary Receipts (ADRs) and their underlyings. This risk measure represents the mean exchange rate ADR investors expect after a potential currency crisis or realignment. It makes crisis prediction possible on a daily basis as depreciation expectations are reflected in ADR market prices. Using daily data, we analyze the impact of several risk drivers related to standard currency crisis theories and find that ADR investors perceive higher currency crisis risk when export commodity prices fall, trading partners’ currencies depreciate, sovereign yield spreads increase, or interest rate spreads widen.     

Contagion as a domino effect in global stock markets

This paper shows that stock market contagion occurs as a domino effect, where confined local crashes evolve into more widespread crashes. Using a novel framework based on ordered logit regressions we model the occurrence of local, regional and global crashes as a function of their past occurrences and financial variables. We find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Besides this form of contagion, interdependence shows up by the effect of interest rates, bond returns and stock market volatility on crash probabilities. When it comes to forecasting global crashes, our model outperforms a binomial model for global crashes only.     

Predictable dynamics in implied volatility surfaces from OTC currency options

Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.     

Inflation forecast uncertainty

We study the inflation uncertainty reported by individual forecasters in the Survey of Professional Forecasters 1969-2001. Three popular measures of uncertainty built from survey data are analyzed in the context of models for forecasting and asset pricing, and improved estimation methods are suggested. Popular time series models are evaluated for their ability to reproduce survey measures of uncertainty. The results show that disagreement is a better proxy of inflation uncertainty than what previous literature has indicated, and that forecasters underestimate inflation uncertainty. We obtain similar results for output growth uncertainty.     

New Evidence on Export Price Elasticity from China and Six OECD Countries

This paper provides new evidence on export price elasticities by analyzing the cases of China, France, Germany, Italy, Japan, UK and the USA over the period 1990–2012. Estimates have been made using panel data techniques for non‐stationary data. After demonstrating that long‐run relationships are stable to any structural break, it is found that exports are significantly determined by foreign demand, with long‐run income elasticity significantly higher than unity for China, Japan, Germany, the UK and the USA. Conversely, exports are price inelastic for most of the countries in the sample, in both the long run and the short run. The exception is France, whose export price elasticity is lower (higher) than unity in the short run (long run).     

A recession‐and‐state forecasting model

The state forecasting model (SFM) developed herein predicts the probability that a recession will begin or end within the next quarter. It is also important to forecast the state, as models prone to false alarms are not useful. The model combines parsimony, predictive accuracy, and ease of estimation using readily available data. No regressor is benchmark‐revised, and only one is seasonally adjusted. The SFM correctly forecasts, out‐of‐sample, the binary state in 163 of 164 quarters for an overall proportion of correct forecasts of 0.994. The results demonstrate the discriminating ability, longevity and striking forecasting ability of the model. A benchmark model based on the newly revised Leading Economic Index of the Conference Board has zero marginal predictive power in the presence the SFM.