Sectoral Survey‐based Confidence Indicators for Europe*

We analyse a novel dataset of Business and Consumer Surveys, using dynamic factor techniques, to produce composite coincident indices (CCIs) at the sectoral level for the European countries and for Europe. Surveys are timely available, not subject to revision, and fully comparable across countries. Moreover, the substantial discrepancies in activity at the sectoral level justify the interest in sectoral disaggregation. Compared with the confidence indicators produced by the European Commission we show that factor‐based CCIs, using survey answers at a more disaggregate level, produce higher correlation with the reference series for the majority of sectors and countries.     

P-star in times of crisis – Forecasting inflation for the euro area

In this paper we present three empirically testable versions of the common p-star model and evaluate their forecasting performance using conventional techniques. We try to answer the question if the p-star approach is preferable to achieve a reliable short-run inflation forecast and with regard to the latter we incur the need for a stable demand for money function. Our findings indicate the recurrence of the relevance of the monetary pillar of the ECB's two-pillar framework. In addition, we check for the effects of the current financial and economic crisis that started in 2007 on the forecasting performance, using two sub-sample periods, one excluding and one including the latter, and analyze the impact of the applied filter technique to compute the required equilibrium values.     

Loss-leader pricing and upgrades

A new theory of loss-leader pricing is provided in which firms advertise low (below cost) prices for certain goods to signal that their other unadvertised (substitute) goods are not priced too high. The theory is applied to the pricing of upgrades. The results contrast with most existing loss-leader theories in that firms make a loss on some consumers (who buy the basic version of the good) and a profit on others (who buy the upgrade).     

Quantile spillovers and dependence between Bitcoin,equities and strategic commodities

This paper has two aims. We first examine the dynamic spillovers between Bitcoin and 12 developed equities, gold, and crude oil for different market conditions using a Bayesian Time-Varying Parameter Vector Autoregressive (TVP-VAR) model with daily spot prices. Our econometric approach enables us to capture the left and right tails as well as the shoulders of the return distribution corresponding to volatility spillovers under the bear, normal, and bull market states among these financial assets. We quantify and trace the dependence and directional predictability from Bitcoin to other assets using the sample cross-quantilogram. Our key findings offer convincing evidence of time variation in the level of volatility. Spillovers between Bitcoin and other financial assets intensify during extreme global market conditions. Secondly, results from the cross-quantilogram indicate strong dependence and positive directional predictability between Bitcoin and most equities and crude oil when market returns are bullish. However, during the bearish market period, there is negative dependence and predictability from Bitcoin to stocks in Finland, the Netherlands, the U.S.A, and the crude oil market only. This implies that Bitcoin can act as a hedge to stocks in Finland, the Netherlands, the U.S.A, and the crude oil market. However, insignificant dependence and directional predictability from Bitcoin to the remaining assets indicate that Bitcoin may act as a safe-haven to these assets during bearish markets. Our findings hold important implications for both international investors and portfolio managers who consider Bitcoin as part of their portfolio diversification and other investment strategies.     

An Empirical Investigation of the Effects of Rounding on the SPF Probabilities of Decline and Output Growth Histograms

I consider the possibility that respondents to the Survey of Professional Forecasters round their probability forecasts of the event that real output will decline in the future, as well as their reported output growth probability distributions. I make various plausible assumptions about respondents’ rounding practices, and show how these impinge upon the apparent mismatch between probability forecasts of a decline in output and the probabilities of this event implied by the annual output growth histograms. I find that rounding accounts for about a quarter of the inconsistent pairs of forecasts.     

The effectiveness of the ECB’s unconventional monetary policy: Comparative evidence from crisis and non-crisis Euro-area countries

During the European financial crisis, the European Central Bank implemented a series of unconventional monetary policy measures. We argue that these programs lowered the bond yield spreads of Euro-area countries. This hypothesis is tested using pooled OLS estimations and two different datasets: monetary policy event dummies and the purchase volumes of the Securities Markets Programme (SMP). Overall, we find significantly negative effects on bond yield spreads for both datasets, leading us to accept the hypothesis. While the OMT reduces the spreads of both crisis and non-crisis countries, LTROs and the lowering of the deposit rate to 0 percent are mainly effective in non-crisis countries. The SMP lowers the spreads of crisis countries, but it has the opposite effect on non-crisis countries. This converse effect is explained by the risk that increasingly accumulates on the ECB’s balance sheet through the SMP and that way constitutes a fiscal risk for non-crisis countries. The results are confirmed by pooled OLS estimations that measure the effect of unconventional monetary policy on central government debt.     

New Methods for Forecasting Inflation,Applied to the US*

Models for the 12‐month‐ahead US rate of inflation, measured by the chain‐weighted consumer expenditure deflator, are estimated for 1974–98 and subsequent pseudo out‐of‐sample forecasting performance is examined. Alternative forecasting approaches for different information sets are compared with benchmark univariate autoregressive models, and substantial out‐performance is demonstrated including against Stock and Watson's unobserved components‐stochastic volatility model. Three key ingredients to the out‐performance are: including equilibrium correction component terms in relative prices; introducing nonlinearities to proxy state‐dependence in the inflation process and replacing the information criterion, commonly used in VARs to select lag length, with a ‘parsimonious longer lags’ parameterization. Forecast pooling or averaging also improves forecast performance.     

The reliability of real-time estimates of the euro area output gap

This paper provides evidence on the reliability of euro area real-time output gap estimates. A genuine real-time data set for the euro area is used, including vintages of several sets of euro area output gap estimates available from 1999 to 2010. It turns out that real-time estimates of the output gap tend to be characterised by a high degree of uncertainty, much higher than that resulting from model and estimation uncertainty only. In particular, the evidence indicates that both the magnitude and the sign of the real-time estimates of the euro area output gap are very uncertain. The uncertainty is mostly due to parameter instability and model uncertainty, while data revisions seem to play a minor role. Some euro area real-time measures, based on multivariate components models and capacity utilisation, are relatively less uncertain, but do not appear to be fully reliable along some dimensions. To benchmark our results, we repeat the analysis for the US over the same sample. It turns out that US real-time estimates tend to be revised to a lesser extent than euro area estimates. However, euro area real-time output gap estimates tend to display a higher correlation with the final estimates and the sign of the level of US real-time estimates tends to be revised more often compared to the corresponding euro area estimates. In addition, the data revision component of the revision error is larger for US estimates than for the euro area. Overall, the unreliability in real-time of the US output gap measures detected in earlier studies is confirmed in the more recent period.     

Co‐movements in commodity prices: a note based on network analysis

This article analyses co‐movements in a wide group of commodity prices during the time period 1992–2010. Our methodological approach is based on the correlation matrix and the networks inside. Through this approach we are able to summarize global interaction and interdependence, capturing the existing heterogeneity in the degrees of synchronization between commodity prices. Our results produce two main findings: (a) we do not observe a persistent increase in the degree of co‐movement of the commodity prices in our time sample, however from mid‐2008 to the end of 2009 co‐movements almost doubled when compared with the average correlation; (b) we observe three groups of commodities which have exhibited similar price dynamics (metals, oil and grains, and oilseeds) and which have increased their degree of co‐movement during the sampled period.     

THE EFFECT OF GOVERNMENT POLICY ON TOBACCO ADVERTISING STRATEGIES

This paper contributes to the very limited literature examining the factors determining tobacco companies' advertising strategies. The paper explores whether firms in the UK tobacco market significantly changed their advertising expenditure in the face of proposed changes to the UK and European Commission tobacco advertising legislation. The results suggest that changes in legislation have little impact on firms' advertising strategies for existing brands, but that legislative changes impact upon product launch dates. Our results also offer some information on the nature of firm interdependencies in the UK tobacco industry.