fiscal policy coordination with demand spillovers and unionised labour markets we explore the incentives for governments to cooperate by expanding expenditure we have three countries two are in a monetary union the emu the labour markets of both the emu countries are unionised and there is involuntary unemployment in equilibrium we explore the intra and intercountry effects of changes in bargaining power we then examine optimal government expenditures in each emu country we find that there is a positive spillover and that expenditures are strategic complements the coordinated equilibrium involves higher expenditure than the uncoordinated equilibrium

international fiscal policy transmission the paper examines international transmission of stochastic fiscal policy disturbances in a two country general equilibrium framework with possible excess supply equilibria with underutilization o

a simple model of sectoral adjustment despite the significance of limited labour mobility across sectors few attempts have been made to produce dynamic models of sectoral adjustment which are consistent with perfect foresight and yet flexible enough to allow for a variety of dynamic experiments this paper proposes a simple perfect foresight model of two sector economies in which aggregate sectoral movement of labour takes place through the process of demographic change the model is tractable enough that one can easily examine the effects of intertemporally complicated relative price shocks both exogenous and endogenous under a variety of assumptions on technology

inflation capital taxation and housing the long run in a small open economy this paper deals with the consequences of inflation and capital income taxes for the accumulation of wealth in a small open economy with a housing sector particular attention is paid to the incentive and intergenerational redistribution effects stemming from the interaction of inflation and capital income taxation and to portfolio shifts between housing assets and other assets the authors find that the intergenerational distribution effects and the incentive effects on overall savings tend to offset and sometimes even to dominate several of the expected interasset substitution effects of a change in inflation and capital taxes

household debt and fiscal multipliers we study the size of government spending multipliers in a general equilibrium model with search and matching frictions in which we allow for different levels of household indebtedness the main results are a the presence of impatient households and private debt helps to generate government spending multipliers greater than 1 b as financial conditions worsen the size of the government spending multiplier falls c conversely employment vacancies and unemployment multipliers are larger in a credit crunch d the model explains the observed pattern of responses of labour market variables housing prices and private debt to a fiscal shock reasonably well

intertemporal price speculation and the optimal current account deficit abstract the paper studies the effects of terms of trade fluctuations in an infinite horizon optimizing model of a small open economy while the current account response to a transitory terms of trade shock is in part explicable by intertemporal smoothing an important additional factor is the effect of anticipated future terms of trade shifts on the ral value of the external debt in terms of the home consumption basket when foreign borrowing is indexed to the import good a temporary worsening of the terms of trade creates the expectation of a decline in the real value of external debt this fall in the relevant real interest rate leads households to increase consumption while export prices are low and to decrease consumption sharply once the terms of trade recover if an adverse price shock is of sufficiently brief duration instantaneous utility will rise initially

the terms of trade and the international coordination of fiscal policy this paper develops an example of a noncooperative game between fiscal authorities in two countries the key strategic link between countries is the terms of trade an equilibrium without cooperation is characterized by excessive tax rates and public spending levels in each country the outcome is analogous to the nash equilibrium of the static optimal tarif game in trade theory but in this model there is also a dynamic distortion caused by noncooperative behaviour this dynamic distortion depresses capital accumulation and reduces the equilibrium capital stock in each country numerical examples suggest a significant welfare benefit of cooperation

on exchange rate stabilization abstract this paper extends calvo s 1986 and obstfeld s 1985 analyses of stabilization policies through predetermined exchange rates in a few directions the graphic and analytical techniques used here make it possible to perform a variety of policy experiments under a general utility function and in the presence of a consumer durable good or under time nonseparable preferences it also shows that the dynamic process of exchange rate stabilization exhibits hysteresis effects that is the steady state behavior of the economy depends on the initial condition and a temporary stabilization policy has a permanent effect on the economy

habits and durability in consumption and the dynamics of the current account abstract a model in which consumption exhibits durability and habits develop over the flow of services provided by them is used to study current account dynamics durability leads to adjacent substitutability in consumption while habits are assumed to lead to adjacent complementarity the adjustment of the current account may be non monotonic if habit effects are dominant in the short run and durability effects in the long run then after a terms of trade deterioration we will have a current account deficit followed by a surplus the j curve in the opposite case a surplus will be followed by a deficit 1998 elsevier science b v

present value tests of the current account with durables consumption abstract the present value tests of the intertemporal model of the current account usually assume that all goods are traded and that aggregate consumption decisions can be closely approximated by a random walk process this paper extends these models by explicitly introducing durables and nontraded goods into an intertemporal model of the current account and tests the model using canadian data since aggregate consumption expenditures on durables do not exhibit random walk behavior even when the aggregate consumer has a quadratic utility function the model that includes durables makes predictions that differ from those of the basic approach when nontraded goods are also incorporated into the model the most appropriate income variable becomes output net of nontraded production these implications are examined using present value tests the results suggest that in the annual data introduction of both durables and nontraded goods improves upon the model with traded nondurables only this seems to be due to the combination of durables and nontraded goods as durables alone do not sufficiently refine the basic model

tax subsidies to owner occupied housing an asset market approach inflation reduces the effective cost of homeownership and raises the tax subsidy to owner occupation this paper presents an asset market model of the housing market and estimates how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock simulation results suggest that the accelerating inflation of the 1970s which substantially reduced homeowners user costs could have accounted for as much as a 30 percent increase in real house prices persistent high inflation rates could lead ultimately to a sizable increase in the stock of owner occupied housing

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

forecast comparisons in unstable environments we propose new methods for comparing the out of sample forecasting performance of two competing models in the presence of possible instabilities the main idea is to develop a measure of the relative local forecasting performance for the two models and to investigate its stability over time by means of statistical tests we propose two tests the fluctuation test and the one time reversal test that analyze the evolution of the models relative performance over historical samples in contrast to previous approaches to forecast comparison which are based on measures of global performance we focus on the entire time path of the models relative performance which may contain useful information that is lost when looking for the model that forecasts best on average we apply our tests to the analysis of the time variation in the out of sample forecasting performance of monetary models of exchange rate determination relative to the random walk copyright 2010 john wiley sons ltd

the carry trade and fundamentals nothing to fear but feer itself the carry trade is the investment strategy of going long in high yield target currencies and short in low yield funding currencies recently this nave trade has seen very high returns for long periods followed by large crash losses after large depreciations of the target currencies based on low sharpe ratios and negative skew these trades could appear unattractive even when diversied across many currencies but more sophisticated conditional trading strategies exhibit more favorable payos we apply novel within economics binary outcome classication tests to show that our directional trading forecasts are informa tive and out of sample loss function analysis to examine trading performance the critical conditioning variable we argue is the fundamental equilibrium exchange rate feer expected returns are lower all else equal when the target currency is overvalued like traders researchers should incorporate this information when evaluating trading strategies when we do so some questions are resolved negative skewness is purged and market volatility vix is uncorrelated with returns other puzzles remain the more sophisticated strategy has a very high sharpe ratio suggesting market ineciency

residential investment and the current account abstract residential investment is an important driving force in the current account this paper first builds the model to show that residential investment for the empirically relevant case where demand for housing services has nonzero income elasticity is fundamentally different from nonresidential investment owing to this income effect the dynamics of housing are subject to the additional integral constraint as well as the standard stock adjustment and euler equations the model is used to examine the effects of changes in government purchases on the tradeable good housing subsidies and productivity shocks on the current account

structural distortions and decentralized fiscal policies in emu the combination of discretionary monetary policy labor market distortions and nominal wage rigidity yields excessive inflation as monetary policy tries to exploit nominal wage contracts to address labor market distortions an inflation target reduces inflation but creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are preventing the associated excessive accumulation of public debt calls for debt ceilings if countries differ substantially in terms of structural distortions uniform debt ceilings must be complemented by country specific debt targets in order to prevent decentralized fiscal authorities from employing debt policy strategically

forecast rationality tests in the presence of instabilities with applications to federal reserve and survey forecasts summary this paper proposes a framework to implement regression based tests of predictive ability in unstable environments including in particular forecast unbiasedness and efficiency tests commonly referred to as tests of forecast rationality our framework is general it can be applied to model based forecasts obtained either with recursive or rolling window estimation schemes as well as to forecasts that are model free the proposed tests provide more evidence against forecast rationality than previously found in the federal reserve s greenbook forecasts as well as survey based private forecasts it confirms however that the federal reserve has additional information about current and future states of the economy relative to market participants copyright 2015 john wiley sons ltd

testing long horizon predictive ability with high persistence and the meese rogoff puzzle a well known puzzle in the international finance literature is that a random walk predicts exchange rates better than economic models meese and rogoff 1983a b and 1988 this paper offers a potential explanation for this finding when exchange rates and fundamentals are highly persistent long horizon forecasts of economic models are asymptotically biased by the estimation error in the parameter that measures the persistence when this bias outweighs the benefits from exploiting economic information the random walk model will forecast better this happens even if the economic model is the true data generating process the reason is that a random walk model imposes a unit root rather than estimates it the paper thus proposes a test for equal predictive ability in the presence of highly persistent variables when applied to the meese rogoff exercise this test shows that the poor forecasting ability of economic models does not imply that the models are not a good description of the data

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

temporary stabilization predetermined exchange rates the paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation against a background in which a constant rate of devaluation has no real effects it is shown that the temporary policy does and furthermore that the real effects tend to become bigger in absolute value as the horizon of the temporary policy is shortened the central discussion is carried out in terms of a one good cash in advance model with perfect capital mobility and ramsey type consumers results are extended to account for home goods and variable velocity the roles of capital mobility and banking liberalization are briefly discussed

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

big data analytics in economics what have we learned so far and where should we go from here research into predictive accuracy testing remains at the forefront of the forecasting field one reason for this is that rankings of predictive accuracy across alternative models which under misspecification are loss function dependent are universally utilized to assess the usefulness of econometric models a second reason which corresponds to the objective of this paper is that researchers are currently focusing considerable attention on so called big data and on new and old tools that are available for the analysis of this data one of the objectives in this field is the assessment of whether big data leads to improvement in forecast accuracy in this survey paper we discuss some of the latest and most interesting methods currently available for analyzing and utilizing big data when the objective is improved prediction our discussion includes a summary of various so called dimension reduction shrinkage and machine learning methods as well as a summary of recent tools that are useful for ranking prediction models associated with the implementation of these methods we also provide a brief empirical illustration of big data in action in which we show that big data are indeed useful when predicting the term structure of interest rates

international coordination of fiscal policy in limiting economies we examine the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero we show that these policies converge if countries raise revenues through lump sum taxation however if there are unremovable domestic distortions such as distorting taxes there can be gains to coordination even when a single country s policy cannot affect world prices these results differ from the received wisdom in the optimal tariff literature the key distinction is that contrary to the tariff literature the spending decisions of governments are explicitly modeled

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

current account dynamics in a finite horizon model abstract this paper examines the response of the current account in a small open economy to a permanent change in the price of imported intermediate goods to do so it extends blanchard s 1985 open economy model to incorporate the capital stock with adjustment costs a la hayashi 1982 a price increase in imported intermediate goods can be viewed as a combination of transfer payments abroad and capital taxation the former effect leads to a current account deficit and the latter leads to a current account surplus the overall effect depends on the relative magnitude of these effects

the housing led growth hypothesis revisited evidence from the chinese provincial panel data this paper investigates the relationship between housing investment and economic growth in china utilising province level data via recently developed panel unit root tests and panel co integration analysis the empirical results suggest a stable long run relationship between housing investment non housing investment and gdp in china in addition the existence is demonstrated of bi directional granger causality between housing investment and gdp at the national level the panel error correction model supports the hypothesis that housing investment appears to have a dual role acting as both a driver and follower in china s economic fluctuations however the impacts of housing investment on economic growth in three sub regions are found to be strikingly different

the gains from fiscal cooperation in the two commodity real trade model abstract this paper analyzes the gains from fiscal cooperation within the context of the standard two commodity real trade model it shows how the adjustment in the terms of trade is the critical factor in determining the effects of moving from a noncooperative equilibrium in general a noncooperative equilibrium leads to an overexpansion of government expenditure on the import good relative to a cooperative equilibrium the specific example of a logarithmic economy is also considered the paper discusses further the welfare effects resulting from the formation of a coalition of two countries among three

debt and distortionary taxation in a simple perfect foresight model abstract we examine the real effects of a temporary substitution of debt for distortionary income taxation we find that such a policy may reduce consumption increase investment and reduce interest rates these results arise even though we examine the same model used by barro where temporary substitution of debt for lump sum taxes was shown to have no real effects we show that these anti keynesian effects on consumption are as significant as various pro keynesian effects such as finite lives hence the impact of debt is an empirical issue and ricardian neutrality appears to be a reasonable benchmark

fiscal policy coordination and emu a dynamic game approach abstract this paper examines the case for fiscal policy coordination in a european economic and monetary union emu a two bloc model with two market structures is examined emu producing a single homogeneous good in both blocs emu1 and a two good emu emu2 where each bloc produces a single home good the european central bank sets monetary policy so as to achieve credibly low inflation rates we find that for emu2 as relative prices can change countries have an incentive to improve their terms of trade leading to an inefficient noncooperative outcome which can be avoided by cooperation

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

in sample inference and forecasting in misspecified factor models this article considers in sample prediction and out of sample forecasting in regressions with many exogenous predictors we consider four dimension reduction devices principal components ridge landweber fridman and partial least squares we derive rates of convergence for two representative models an ill posed model and an approximate factor model the theory is developed for a large cross section and a large time series as all these methods depend on a tuning parameter to be selected we also propose data driven selection methods based on cross validation and establish their optimality monte carlo simulations and an empirical application to forecasting inflation and output growth in the u s show that data reduction methods outperform conventional methods in several relevant settings and might effectively guard against instabilities in predictors forecasting ability

durability in consumption and the dynamics of the current account abstract in a model with durable goods and ricardian production technology an increase in government expenditure increases the steady state level of employment and reduces consumption the country runs a current account surplus the two factor model with costly investment akin to turnovsky and sen oxford econom pap 43 1991 1 confirms all the basic results of the simple model except for the current account balance the increase in capital has a negative effect whereas a decrease in the stock of consumer durables has a positive effect on the purchase of foreign bonds thus creating an ambiguous effect on the current account balance moreover the current account will likely exhibit non monotonic adjustment

stabilization with exchange rate management stabilization programs in open economies typically consist of two stages in the first stage the rate of currency devaluation is reduced but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves making a future policy change necessary only later at a second stage is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit we study how different second stage policy changes affect economic dynamics during the first stage these changes include tax increases budget cuts on traded and nontraded goods and increases in the growth rate of money

terms of trade factor intensities and the current account in a life cycle model this paper examines the effects of terms of trade changes on the external adjustment of a small open economy where each consumer has a life cycle saving function the supply side of the economy is given by the standard two sector model with two primary factors labour and capital it is shown that when both commodities are produced a terms of trade deterioration leads to a current account deficit surplus if the export import sector is more labour intensive

channels of international policy transmission abstract four channels of international budgetary and monetary policy transmission are analysed within the context of nominal wage sluggishness the first is based on capital gains on holdings of foreign assets spill over effects arising through the second and third channels depend on whether home and foreign goods are gross substitutes or gross complements and on whether the elasticity of intertemporal substitution is less or greater than one the final channel assumes finite lifetimes and no bequest motive it departs from debt neutrality in order to give a non trivial role to wealth effects and current account dynamics

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

consumer durables permanent terms of trade shocks and the recent us trade deficits abstract this paper employs an open economy real business cycle model to suggest that part of the 1980s us trade deficits may have been driven by permanent declines in consumer durable import prices we also show that most of the resulting decline in the trade balance is due to wealth effects not substitution effects