prohibition and the supply of brazilian mahogany we use a unique data set to investigate the economic consequences of banning the harvest and trade of brazilian mahogany because we find strong evidence that mahogany is smuggled out of brazil as other tropical species through formal export mechanisms we are able to construct a time series of quantities and implicit export prices covering both the periods before and after prohibition our finding suggests that a trade ban increases supply and makes the illegal good more affordable our analysis can offer important insights into other illegal markets such as those for narcotics and products manufactured from endangered animal species

inflation and asset returns in a monetary economy postwar u s data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth these patterns are closely matched quantitatively by an equilibrium monetary asset pricing model the model also implies negative correlations between expected asset returns and expected inflation and it predicts that the inflationasset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations the co movements of real asset returns inflation and money growth have been studied extensively over the past fifteen years table i displays some of the statistical properties of these series using quarterly u s data from 1959 to 1990 note first the significantly negative correlation between real equity returns and inflation note also the negative correlation between inflation and the ex post real return to nominally riskless bonds while this fact is not particularly surprising numerous studies conclude that the correlations between ex ante real asset returns and expected inflation are also negative 2 in contrast to these patterns the correlation between money growth and real equity returns is weakly positive in the data while the correlation between money growth and the real bond return is virtually zero initially these empirical patterns were viewed as anomalies negative correlations between inflation and ex post real stock returns contradict the traditional view that equities ought to act as an inflation hedge 3 negative correlations between expected inflation and ex ante real returns violate the

phases of the canadian business cycle in this paper we contrast a number of univariate models of canadian gdp our preferred models are used to provide a business cycle chronology for canada which is compared with some existing more judgmentally determined chronologies we find that a simple two quarters of negative growth rule for determining recession dates is the mast similar to our chronology we also find that the mast recent recession in canada was unique in both its length and the slow speed of recovery jel classification c22 c51 c52 e32

semiparametric duration models in this article we consider semiparametric duration models and efficient estimation of the parameters in a non iid environment in contrast to classical time series models where innovations are assumed to be iid we show that in for example the often used autoregressive conditional duration acd model the assumption of independent innovations is too restrictive to describe financial durations accurately therefore we consider semiparametric extensions of the standard specification that allow for arbitrary kinds of dependencies between the innovations the exact nonparametric specification of these dependencies determines the flexibility of the semiparametric model we calculate semiparametric efficiency bounds for the acd parameters discuss the construction of efficient estimators and study the efficiency loss of the exponential pseudolikelihood procedure this efficiency loss proves to be sizeable in applications for durations observed on the paris bourse for the alcatel stock in july and august 1

new measures of the output gap based on the forward looking new keynesian phillips curve abstract forward looking versions of the new keynesian phillips curve imply that the output gap the deviation of the actual output from its natural level due to nominal rigidities drives the dynamics of inflation relative to expected inflation we exploit this to set up a bivariate unobserved component model for extracting new estimates of the output gap in the us the gap estimates are large and persistent even after allowing for correlated trend and cycle shock we then augment our model to use the information in the unemployment rate the estimates confirm the presence of a large and persistent cyclical component

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

real asset returns inflation and activity in a small open cash in advance economy abstract the effects of inflation are worked out for a small open economy with cash in advance cia constraints on bond purchases if all transactions are subject to cia constraints an increase in the inflation rate will reduce savings bringing about a current account deficit while the capital stock will be unaffected if investment is not subject to cia constraints an increase in the inflation rate will encourage investment and reduce savings bringing about a current account deficit numerical evaluation of the model gives rise to falls in real interest rates that are in line with recent empirical findings

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

common stochastic trends in european stock markets the objective of the paper is to investigate whether price indices of different european stock markets display a common long run trending behaviour using cointegration analysis we provide empirical evidence of common stochastic trends among five important european stock markets over the period 1975 1991

are stocks a good hedge against inflation evidence from emerging markets theory suggests that equities are a good hedge against inflation however most of the empirical evidence for industrialized economies suggests that the relationship between stock returns and inflation is negative one explanation is the negative correlation between inflation and real output growth this paper examines the relationship between inflation and stock returns for ten important emerging stock market esm markets namely chile mexico brazil argentina thailand s korea malaysia hong kong philippines and turkey during the 1990s to anticipate the results the relationship between stock returns and inflation for the whole sample period is positive and statistically significant for three of the sample esms while it is positive but statistically insignificant for a further three only for one esm is the relationship negative and statistically significant this result may be due to the role of money and the positive relationship between consumer prices and output

international evidence on the long run impact of inflation in this paper i use a structural vector autoregression framework to analyze the effects of a permanent change in inflation on the long run real interest rate and real output level in 14 industrialized countries long run monetary superneutrality is rejected for all 14 countries using annual data the results indicate that a permanent increase in inflation lowers the long run real interest rate in each country a permanent increase in inflation also increases the long run real output level in a number of countries long run monetary superneutrality is also rejected for four out of the five countries examined using quarterly data under long run monetary superneutrality lrsn a per

the asymmetric business cycle abstract the business cycle is a fundamental yet elusive concept in macroeconomics in this paper we consider the problem of measuring the business cycle first we argue for the output gap view that the business cycle corresponds to transitory deviations in economic activity away from a permanent or trend level then we investigate the extent to which a general model based approach to estimating trend and cycle for the u s economy leads to measures of the business cycle that reflect models versus the data we find empirical support for a nonlinear time series model that produces a business cycle measure with an asymmetric shape across nber expansion and recession phases specifically this business cycle measure suggests that recessions are periods of relatively large and negative transitory fluctuations in output however several close competitors to the nonlinear model produce business cycle measures of widely differing shapes and magnitudes given this model based uncertainty we construct a mode

a general theory and some evidence of expectation traps in monetary policy i show that multiple equilibria are a general property of economies under full monetary policy discretion three simple conditions are sufficient to rule out generically a unique equilibrium in a static economy the key departure from barro and gordon 1983 is to consider bounded welfare costs of inflation i also show that in a two markov equilibrium economy the inflation response to certain perturbations is generically qualitatively different in each equilibrium finally i discuss some evidence on inflation dynamics that supports the hypothesis that u s monetary policy was caught in an expectation trap during the high inflation episode of the 1970s

exchange rate regimes and shifts in inflation persistence does nothing else matter this paper reexamines the findings of george s alogoskoufis and ron smith 1991 who argue that sharp increases in inflation persistence can be attributed to changes in the exchange rate regime using long time series data from the united kingdom the united states canada and sweden the authors suggest that these authors emphasis on a post 1967 shift in inflation persistence is misplaced and that there are other equally good candidates to account for changes in inflation persistence such as wars oil price shocks and central bank reforms this conclusion is supported by recently developed tests that allow for multiple structural shifts at unknown dates

the relationships between permanent and transitory movements in u s output and the unemployment rate this paper estimates the permanent and transitory movements in u s output and the unemployment rate and the relationships between them the results suggest that permanent movements in u s output and the unemployment rate are important for explaining overall fluctuations further the correlation between changes in these series arises in large part due to the relationship between their permanent components

a time varying natural rate of interest for the euro area abstract we estimate a time varying natural rate of interest tvnri for a synthetic euro area over the period 1979q1 2004q4 using a small macroeconomic model broadly following a methodology developed by laubach and williams 2003 measuring the natural rate of interest the review of economics and statistics 85 4 1063 1070 for the united states the kalman filter simultaneously estimates the output gap and the natural rate of interest our identifying assumptions include a close relationship between the tvnri and the low frequency fluctuations of potential output growth the difference between the real rate of interest and its estimated natural level offers valuable insights into the monetary policy stance over the last two decades and a half

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

bayesian analysis of the output gap our objective is to build output gap estimates that benefit from information provided by phillips curve theory and business cycle studies for this we develop a bayesian analysis of the bivariate phillips curve model proposed by kuttner for estimating potential output given our priors we obtain samples from parameters and state variables joint posterior distribution following a gibbs sampling strategy we sample the state variables given parameters using the carter kohn procedure and we exploit a likelihood factorization to draw parameters given the state a metropolis hastings step is used to remove the conditioning on starting values to accommodate the variance moderation that has been observed on u s gross domestic product kuttner s model is extended for a change in variance parameters we apply this methodology to the analysis of the output gap in the united states and in the european monetary union finally some important extensions to the original kuttner model are discussed

on the fisher effect abstract we use post war quarterly data for belgium canada denmark france germany greece ireland japan the netherlands the united kingdom and the united states to examine the fisherian link between inflation and short term nominal interest rates in doing so we apply the king and watson 1997 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful fisher effect tests critically depend on such properties we conclude that the data are generally rejecting the fisher effect

the euro and inflation uncertainty in the european monetary union in this paper we investigate empirically the relationship between inflation and inflation uncertainty in twelve emu countries we estimate a time varying parameter model with a garch specification for the conditional volatility of inflation in order to distinguish between short run structural and impulse and steady state uncertainty we then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the euro and its effects on the links between inflation and inflation uncertainty we find that steady state inflation has generally remained stable with the important exception of germany where the trend has become positive steady state inflation uncertainty and inflation persistence have both increased and the relationship between inflation and inflation uncertainty has broken down in many countries these findings cast doubt on the optimistic view taken by the ecb concerning its success in controlling inflation and suggest the need for improvements in its analytical framework

inflation stationarity during latin american inflation insights from unit root and structural break analysis inflation stationarity has important theoretical and policy implications yet most of the literature has focused on low inflation countries this article investigates inflation stationarity in brazil argentina chile mexico and bolivia during a hyperinflationary period from 1980 to 2004 we test for structural breaks in inflation discuss the breaks in terms of changes in monetary regimes and test if accounting for these structural breaks changes the nonstationarity results for those nations that fail the traditional augmented dickey fuller adf test for inflation all five are found to have inflation rates that are i 0 once the structural breaks analysis is incorporated into our unit root tests

on real interest rate dynamics and regime switching abstract we find evidence of regime switching dynamics in the usa and the uk real interest rates over the period 1881 2003 for the uk there is a regime in which the real interest rate displays a relatively stronger mean reversion and a regime in which it displays a relatively weaker mean reversion the former regime is characterized by a relatively larger error in the estimation of the reversion parameter and higher volatility for the usa the two regimes differ in volatility the probability of transition from one regime to another is found to be significantly related to the inflation rate regime and to the political regime the results highlight the importance of regime switching in the dynamics of the real interest rate as well as the role of inflation and political regimes in explaining this switching

the dynamics of inflation a study of a large number of countries over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet in this article we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation targeting regimes or new monetary regimes we consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958 to 2007 which include alternative monetary policy regimes the coefficient of the inflation parameter is estimated by ordinary least squares ols autoregressive moving average arma and autoregressive fractionally integrated moving average arfima models furthermore the grid bootstrap median unbiased mub estimator approach developed by hansen 1999 is used to estimate the finite sample ols

bayesian estimation of the output gap for a small open economy the case of canada abstract we introduce a novel approach for estimating output gaps for small open economies identification is based on a multivariate trend cycle decomposition in which transitory exchange rate movements are linked to the output gap and inflation the model is then applied to canadian data

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

estimation of time varying adjusted probability of informed trading and probability of symmetric order flow shock summary recently duarte and young 2009 studied the probability of informed trading pin proposed by easley et al 2002 and decomposed it into two parts the adjusted pin apin as a measure of asymmetric information and the probability of symmetric order flow shock psos as a measure of illiquidity they provide some cross section estimates of these measures using daily data over annual periods in this paper we propose a method to estimate daily apin and psos by extending the method in tay et al 2009 using high frequency transaction data our empirical results show that while pin is positively contemporaneously correlated with variance apin is not on the other hand psos is positively correlated with daily average effective spread and variance which is consistent with the interpretation of psos as a measure of illiquidity compared to apin psos exhibits clustering and sporadic bursts over time copyright 2012 john wiley sons ltd

how much has labour taxation contributed to european structural unemployment abstract we analyse the effect of labour taxes on euro area unemployment making use of the blanchard and katz 1999 wage dynamics reconciling theory and evidence american economic review 89 2 69 74 nairu model we represent structural unemployment as that made up of two elements an observed part related to labour taxes plus a non stationary unobservable component related to the reservation wage and to the wage mark up contrary to empirical estimates available so far this modelling explicitly acknowledges the existence of non measurable factors responsible for the unemployment non stationarity for the period 1970 2004 we obtain a tax effect that lies in the middle of the estimates that can be found in the literature this study gives support to the view that lowering labour taxes can help to reduce unemployment in continental europe

does budget deficit lower equity prices in usa abstract this paper investigates the relationship between budget deficits and stock prices incorporating the effects of inflation and the demographic structure the results show that while the proportion of population in their prime earning age has a positive effect both budget deficits and inflation have a negative impact on stock prices

a bayesian model comparison for trend cycle decompositions of output we compare a number of widely used trend cycle decompositions of output in a formal bayesian model comparison exercise this is motivated by the often markedly different results from these decompositions different decompositions have broad implications for the relative importance of real versus nominal shocks in explaining variations in output using us quarterly real gdp we find that the overall best model is an unobserved components model with two features 1 a nonzero correlation between trend and cycle innovations 2 a break in output growth in 2007 under this specification annualized trend output growth decreases from about 3 4 to 1 5 after the break the results also indicate that real shocks are more important than nominal shocks

hours per capita and productivity evidence from correlated unobserved components models recent studies debate the effect of a permanent productivity shock on hours per capita within a structural var context this paper examines the issue using a correlated unobserved components uc framework the estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours this result is robust for non stationary or levels stationary specifications of hours model comparisons indicate that the data do not favor imposing var type restrictions on the uc models copyright 2008 john wiley sons ltd

conditional duration models for high frequency data a review on recent developments this paper reviews the recent literature on conditional duration modeling in high frequency finance these conditional duration models are associated with the time interval between trades price and volume changes of stocks traded in a financial market an earlier review by pacurar provides an exhaustive survey of the first and some of the second generation conditional duration models we consider almost all of the third generation and some of the second generation conditional duration models notable applications of these models and related empirical studies are discussed the paper may be seen as an extension to pacurar

the behaviour of the us consumer price index 1913 2003 a study of seasonality in the monthly us cpi this article analyses the seasonality in the monthly consumer price index cpi over the period january 1913 to december 2003 we examine three types of month effects if the mean of monthly cpi changes of the entire data set and of a given month were significantly different from zero if the mean of monthly cpi changes of a given month was different from the mean of the other months and if the variance of the monthly cpi changes for a given month was different from the variance of the other months the mean of monthly cpi changes for the entire data set 0 27 was found to be significantly greater than zero the means of monthly changes show a downward trend from september to december when the data are sliced into three sub periods we find an increasing trend in the means and medians of monthly changes but a decreasing trend in the sds of the monthly changes the mean of monthly cpi changes during the republican presidencies 0 15 was significantly lower than during the democratic presidencies 0

inflation presidents fed chairs and regime shifts in the u s real interest rate several recent papers agree on the existence of significant regime shifts in the u s real interest rate but disagree on the proximate causes of the shifts caporale and grier 2000 point to large political changes as correlates while rapach and wohar 2004 show that real rate breaks are correlated with inflation regime shifts and argue that the inflation regime changes cause the real rate shifts in this paper we show that controlling for the timing of changes in the inflation regime dummy variables representing either party change in the presidency or change in the identity of the fed chair are still strongly significant for explaining real interest rate fluctuations when we control for a fixed coefficient linear relationship between inflation and the real rate we find two real rate regime shifts that line up almost exactly with the accessions of paul volcker and alan greenspan even if we first let inflation regime switches explain the real rate and then look for regime shifts in the residuals we find almost exactly the same two breaks these results imply that fed chairs sometimes differ with respect to their preferred equilibrium real interest rate

an inflation predicting measure of the output gap in the euro area using a small bayesian dynamic factor model of the euro area we estimate the deviations of output from its trend that are consistent with the behavior of inflation we label these deviations the output gap in order to pin down the features of the model we evaluate the accuracy of real time inflation forecasts from different model specifications the version that forecasts inflation best implies that after the 2011 sovereign debt crisis the output gap in the euro area has been much larger than the official estimates versions featuring a secular stagnation like slowdown in trend growth and hence a small output gap after 2011 do not adequately capture the inflation developments

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

labour taxes and unemployment evidence from a panel unobserved component model abstract this paper estimates the impact of labour taxes on unemployment using a panel of yearly observations 1970 2005 for 16 oecd countries possible heterogeneity of the unemployment incidence of taxes is taken into account by grouping countries according to their wage setting institutions panel data unit root and cointegration tests show that unemployment and labour tax rates are non stationary but not cointegrated as this finding may be induced by missing non stationary variables we set up a panel unobserved component model labour taxes are found to have a positive impact on unemployment only in countries characterised by strong but decentralised unions

the euro dollar exchange rate chaotic or non chaotic a continuous time model with heterogeneous beliefs abstract the aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents beliefs in order to explore non linearities and possible chaotic behaviour the theoretical model contains an intrinsic non linearity that gives rise to a jerk differential equation which is in principle capable of generating chaos the model is econometrically estimated in continuous time with euro dollar data and examined for the possible presence of chaotic motion our results indicate that the possibility of chaotic dynamics in our model is rejected

measuring the dollar euro permanent equilibrium exchange rate using the unobserved components model this paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the euro dollar permanent equilibrium exchange rates peer for the period 1975q1 to 2008q4 the results show that for most of the sample period the euro dollar exchange rate closely followed the values implied by the peer the only significant deviations from the peer occurred in the years immediately before and after the introduction of the single european currency the forecasting exercise shows that incorporating economic fundamentals provides a better long run exchange rate forecasting performance than a random walk process

evolving post world war ii u k economic performance in this paper we use tests for multiple structural breaks at unknown points in the sample and band pass filtering techniques to investigate changes in u k economic performance since the end of world war ii empirical evidence suggests that the most recent decade associated with the introduction of an inflation targeting regime has been significantly more stable than the previous post wwii era both for real gdp growth and for three measures of inflation we identify break dates around the time of the introduction of inflation targeting in october 1992 for all four series the estimated innovation variance over the most recent sub period is the lowest of the post wwii era the volatility of the band pass filtered macroeconomic indicators we consider is after 1992 almost always lower than either during the bretton woods regime or over the 1971 92 period often like in the case of inflation and real gdp markedly so the phillips correlation appears to have undergone significant changes over the last 50 years from being unstable in the 1970s to slowly stabilising from the beginning of the 1980s onwards after 1992 the correlation exhibits by far the greatest extent of stability of the post wwii era

political regime change and the real interest rate the effect of changes in policy regimes on real interest rates has important implications for financial and economic theory there is little current evidence that policy regime changes have any impact on the level of real interest rates we use large political changes as our measure of policy regime changes changes in presidential administration are more significantly correlated with real rate changes than are changes in the federal reserve chair or the mean shift points identified by garcia and perron 1996 using time series methods we also show that change of party control of congress is a significant factor explaining real rates we argue that theoretical models built on the assumptions of constant or policy invariant real interest rates are at variance with the empirical evidence

interest rates and budget deficits revisited evidence from the g7 countries this article revisits whether budget deficits affect interest rates and broadens the literature by examining whether financial globalization has changed this relationship a structural model of interest determination is extended to account for the fact that official capital flows are determined differently than private flows and is estimated for a 1960 2005 g7 panel we find that deficits have a significant but small effect on long term rates but that this result depends on the fiscal concept used moreover we find no evidence of structural change in interest rate determination in the recent decades with the exception of an increased impact of insurance related capital inflows in recent years

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

structural breaks in international tourism demand are they caused by crises or disasters it is recognised that the tourism industry is vulnerable to some form of crises or disaster however despite the attention given to the nature and consequences of tourism crises and disasters there is a gap in the literature regarding the ex post detection of these events in this article we estimate both the number and date of structural breaks in international tourism arrival series for 25 countries and madeira island using the bai and perron 1998 structural break test we compare the date of tourism crises and disasters to the dating of these structural breaks we observe that tourism crises and disasters are largely consistent with the dates of breaks therefore this method allows us to solve a gap in the tourism industry related to the correct allocation of negative shocks in international tourism arrival demand to crisis or disaster phenomena

inflation investment and growth a money and banking approach output growth investment and the real interest rate in long run evidence tend to be negatively affected by inflation theoretically inflation acts as a human capital tax that decreases output growth and the real interest rate but increases the investment rate opposing evidence this paper resolves this puzzle by requiring exchange for investment as well as consumption inflation then decreases the investment rate and still decreases both output growth and real interest up to some moderately high rate of inflation above which increasingly low investment finally causes capital to fall relative to labour and the real interest rate to rise

estimating the u s output gap with state level data this paper develops a method to estimate the u s output gap by exploiting the cross sectional variation of state level output and unemployment rate data the model assumes that there are common output and unemployment rate trend and cycle components and that each state s output and unemployment rate are subject to idiosyncratic trend and cycle perturbations i estimate the model with bayesian methods using quarterly data from 2005 q1 to 2018 q2 for the 50 states and the district of columbia results show that the u s output gap reached about negative 4 6 around the years of the great recession and was about 0 9 in 2018 q2

let s take a break trends and cycles in us real gdp abstract trend cycle decompositions for us real gdp such as the unobserved components models the beveridge nelson decomposition the hodrick prescott filter and others yield very different cycles which bear little resemblance to the nber chronology ascribes much movements to the trend leaving little to the cycle and some imply a negative correlation between the noise to the cycle and the trend we argue that these features are artifacts created by the neglect of a change in the slope of the trend function once this is accounted for all methods yield the same cycle with a trend that is non stochastic except for a few periods around 1973 the cycle is more important in magnitude than previously reported and it accords well with the nber chronology our results are corroborated using an alternative trend cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component

trend cycle correlation drift break and the estimation of trend and cycle in canadian gdp abstract univariate correlated trend cycle models are highly sensitive to the specifications of breaks in the data this paper argues using monte carlo experiments that a bivariate correlated unobserved components uc framework with breaks delivers substantially more accurate results for the trend cycle parameters than the corresponding univariate frameworks in a finite sample size the paper estimates stochastic trend and cyclical fluctuations in canada from a bivariate uc model results show a fairly volatile stochastic trend after the drift break and the negative trend cycle shock correlation are accounted for the estimated cyclical component is large persistent and consistent with ecri denoted canadian recessions

external wealth the trade balance and the real exchange rate abstract we examine the link between the net foreign asset position the trade balance and the real exchange rate in particular we decompose the impact of a country s net foreign asset position external wealth on its long run real exchange rate into two mechanisms the relation between external wealth and the trade balance and holding fixed other determinants a negative relation between the trade balance and the real exchange rate we also provide additional evidence that the relative price of nontradables is an important channel linking the trade balance and the real exchange rate

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection

real exchange rates and real interest rate differentials a present value interpretation although the real exchange rate real interest rate reri relationship is central to most open economy macroeconomic models empirical support for the relationship is generally found to be rather weak in this paper we re investigate the reri relationship using bilateral us real exchange rate data spanning the period 1978 2007 instead of testing one particular model we build on campbell and shiller 1987 cointegration tests of present value models journal of political economy 95 1062 1088 to propose a metric of the economic significance of the relationship our empirical results provide robust evidence that the reri link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons

a two country natrex model for the euro dollar this paper develops a natrex natural real exchange rate model for two large economies the eurozone and the united states the natrex approach has already been adopted to explain the medium long term dynamics of the real exchange rate in a number of industrial countries so far however it has been applied to a one country framework where the rest of the world is treated as given in this paper we build a natrex model where the two economies are fully specified and allowed to interact our theoretical model offers the basis for empirical estimation of the euro dollar equilibrium exchange rate that will be carried out in future research jel classification f31 f36 f47

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

stationary properties of the real interest rate and the per capita consumption growth rate empirical evidence for theoretical arguments many economic theories connecting the real interest rate and the per capita consumption growth rate require that both rates evolve together over time this article investigates whether these rates present similar stationary behaviour for the seven most industrialized countries over the 1957 2005 period the analysis relies on the unit root tests developed by elliott et al 1996 and lopez 2006 to look for stationary or regime wise stationary behaviour respectively furthermore the final break selection uses bai and perron s 2003 method the results show for all the countries considered that both rates are either stationary or regime wise stationary with the same number of breaks and mostly with corresponding dates the results hold whether the rates are calculated annually or quarterly

international order flows explaining equity and exchange rate returns macroeconomic models of equity and exchange rate returns perform poorly at high frequencies the proportion of daily returns that these models explain is essentially zero instead of relying on macroeconomic determinants we model equity price and exchange rate behavior based on a concept from microstructure order flow the international order flows are derived from belief changes of different investor groups in a two country setting we obtain a structural relationship between equity returns exchange rate returns and their relationship to home and foreign equity market order flow to test the model we construct daily aggregate order flow data from 800 million equity trades in the u s and france from 1999 to 2003 almost 60 of the daily returns in the s p100 index are explained jointly by exchange rate returns and aggregate order flows in both markets as predicted by the model daily exchange rate returns and order flow into the french market have significant incremental explanatory power for the daily s p returns the model implications are also validated for intraday returns

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

estimation of high frequency volatility an autoregressive conditional duration approach we propose a method to estimate the intraday volatility of a stock by integrating the instantaneous conditional return variance per unit time obtained from the autoregressive conditional duration acd model called the acd icv method we compare the daily volatility estimated using the acd icv method against several versions of the realized volatility rv method including the bipower variation rv with subsampling the realized kernel estimate and the duration based rv our monte carlo results show that the acd icv method has lower root mean squared error than the rv methods in almost all cases considered this article has online supplementary material

twin sons of different mothers the long and the short of the twin deficits debate i introduction the relationship between the government budget deficit and the current account deficit has been a contentious subject in empirical macroeconomics for at least the past 20 yr papers have variously found a positive link no link and three recent pieces even find a negative link between the two there are however some things that almost all these studies have in common for example they ignore the possibility of structural breaks in the series when examining their time series properties most previous studies treat the variables under study as being integrated of order 1 which is to say as having a unit root this is a hard assumption to square with the fact that the variables are measured as fractions of gross domestic product gdp and have over the last half century at least shown no inclination toward typical unit root behavior by contrast in three recent pieces corsetti and muller 2006 kim and roubini 2008 muller 2006 the two series are simply treated as pure stationary processes without any pretesting which obviously conflicts with results from the traditional unit root tests in this article we show that both the budget deficit and the current account deficit are stationary around an occasionally shifting mean which is to say that they have structural breaks but are stationary after allowing for those breaks since it is well known that traditional unit root tests have little power when the underlying data contain structural breaks this explains the puzzling finding that the budget deficit and the current account deficit expressed as fractions of gdp test out as i 1 series in practice our findings also cast doubt on the validity of assuming the two series are purely stationary processes given our framework a simple test for the existence of a long run equilibrium relationship between budget and current account deficits is to compare the number and timing of their structural shifts we find that the two series are not closely related either in their number of breaks or in their timing of structural shifts we thus conclude that over the long run genetically the deficits are not twins another factor that existing studies have in common is their treatment of the error structure of the model as homoskedastic despite relatively clear visual evidence of volatility clustering conditional heteroskedasticity in least squares residuals when we consider the short run dynamics of the demeaned variables through a vector autoregression var analysis we show that the error covariance of this var model is significantly conditionally heteroskedastic and go on to specifically account for this phenomenon with a var generalized autoregressive conditional heteroskedasticity garch model we consider a trivariate model that also includes the real interest rate here we find a significant and sizeable positive short run effect of budget deficit innovations on the current account deficit in both the impulse response functions and the variance decompositions of the model our answer to the question of the paternity of the two deficits thus depends on the horizon studied each series has structural breaks that are largely independent of each other so they are not twins at all over the long run however once we allow for these secular shifts the short run dynamics reveal a very strong family resemblance indeed the rest of the article is organized as follows in section ii we review some of the existing empirical literature section iii discusses the time series properties of the data and presents our results about the long run evidence on the twin deficits question section iv sets out our var garch model and presents our results on short run twin deficits behavior section v is a brief conclusion ii an overview of the empirical literature the relationship between current account deficits and government budget deficits has been a subject of extensive study

drift and breaks in labor productivity abstract we use endogenous break tests and the stock watson tvp mub methodology to investigate changes in the equilibrium rate of growth of labor productivity in the u s the eurozone the u k australia and japan since wwii results for the u s well capture the conventional wisdom of a golden era of high productivity growth the 1950s and 1960s a marked deceleration starting from the beginning of the 1970s and a strong growth resurgence starting from mid 1990s results for the eurozone point towards a deceleration since the early 1980s with the equilibrium rate of growth of output per hour falling to 0 9 in 2004 4

can higher inflation reduce real interest rates in the long run this paper describes a simple general equilibrium model in which a permanent easing of monetary policy engineered via open market purchases may produce a permanent decrease in the real interest rate and a permanent increase in the inflation rate under somewhat stronger assumptions the nominal interest rate may also decline est ce qu une inflation plus forte peut reduire les taux d interet reels a long terme ce m6moire pr6sente un modele d 6quilibre g6n6ral simple dans lequel un adoucissement per manent de la politique mon6taire engendr6 par des op6rations d open market peut pro duire une chute permanente du taux d int6ret r6el et un accroissement permanent du taux d inflation dans le cadre de postulats plus contraignants le taux d interet nominal peut meme chuter

high and volatile real interest rates where does the fed fit in the federal reserve s new procedures for the conduct of monetary policy introduced on october 6 1979 have been the subject not only of considerable academic and political interest but also of intense debate b friedman 1982 roley 1982 walsh 1982 1984 mascaro and meltzer 1983 among others the fed s new operating procedures generally are perceived to have resulted in abnormally high and volatile real interest rates and thus to have contributed to if not been totally responsible for the deepest recession in postwar history in this paper we address the following question was the advent of the increased volatility and level of the real rate of interest concurrent with the fed s october 1979 change in operating procedures that is was the real rate of interest high and more volatile immediately after the october 1979 change in policy procedures in which case we might infer a connection between the fed s change in policy procedures and the increased volatility and level of the real rate or did the real rate become high and more volatile some time following the policy change which might lead us to conclude that the increased volatility and the increased level of the real rate was connected to some other event s occurring after the october 1979 policy change

detrending stylized facts and the business cycle the stylized facts of macroeconomic time series can be presented by fitting structural time series models within this framework we analyse the consequences of the widely used detrending technique popularised by hodrick and prescott 1980 it is shown that mechanical detrending based on the hodrick prescott filter can lead investigators to report spurious cyclical behaviour and this point is illustrated with empirical examples structural time series models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components finally the structural framework provides a basis for exposing the limitations of arima methodology and models based on a deterministic trend with a single break

monetary policy arithmetic reconciling theory with evidence empirical evidence indicates that in countries with low inflation rates a permanent decrease in inflation rate either has no impact on capital stock and output superneutrality or causes them to fall moderately existing budget arithmetic models of monetary policy cannot deliver superneutrality in this paper we conduct a budget arithmetic analysis of monetary policy using a money demand specification money in the utility function that is new to this literature we find that one simple assumption about utility from money delivers superneutrality while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence jel classification e60 e13

trends and cycles in macroeconomic time series two structural time series models for annual observations are constructed in terms of trend cycle and irregular components the models are then estimated via the kalman filter using data on five u s macroeconomic time series the results provide some interesting insights into the dynamic structure of the series particularly with respect to cyclical behavior at the same time they illustrate the development of a model selection strategy for structural time series models

productivity shocks the real exchange rate and the euro puzzle abstract this paper utilizes a large country open economy intertemporal model to obtain the effects of alternative types of productivity shocks on the real exchange rate it then explores the conditions under which the model is consistent with the large swings in the real value of the euro the main theoretical conclusion is that the effect of a productivity shock on the real exchange rate can change signs depending on whether the shock applies to the productivity of new capital or old existing capital the growth accounting literature suggests that the underlying reason s for us productivity growth changed abruptly between the 1995 2001 and 2002 2004 intervals in the earlier period increases in the productivity of new capital were relatively more important while increases in the productivity of old capital completely dominated in the later period thus the model appears to be consistent with the abrupt switch from negative to positive around 2002 in the correlation between the real value of the euro vis a vis the dollar and the us minus eu productivity growth differential

estimating potential output as a latent variable this article proposes a new method for estimating potential output in which potential real gross domestic product gdp is modeled as an unobserved stochastic trend and deviations of gdp from potential affect inflation through an aggregate supply relationship the output and inflation equations together form a bivariate unobserved components model which is estimated via maximum likelihood through the use of the kalman filter algorithm the procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap

a theory consistent system approach for estimating potential output and the nairu abstract a new approach is proposed for estimating potential output and the nairu identification is achieved using okun s law and a phillips curve the performance of the methodology is exemplified using data from canada the uk and the us

output gaps and monetary policy in the emu area abstract several considerations suggest that the ecb may respond to emu wide output gaps in setting policy estimated reaction functions indicate that central banks respond to output gaps a taylor rule in which the central bank responds to inflation and the gap accounts for recent movements in interest rates in the emu area and optimal control exercises conducted in estimated econometric models suggest that reacting to the gap may be optimal even if the central bank cares solely about inflation in this paper we obtain point estimates with associated confidence bands of the emu wide output gap using uc models

demand side secular stagnation abstract the experience of first japan and now europe and the usa suggests that hansen s concept of secular stagnation is highly relevant recovery has been anemic and follows a generation of financially unsustainable and often lackluster growth investment demand has declined while the supply of saving has increased leaving the economy vulnerable to liquidity traps although some us indicators have improved forward real rates have declined sharply european prospects remain muddled and the zero bound will likely constrain again during the next recession infrastructure and private investment are the best ways to both minimize the risk of secular stagnation and raise demand

black swans before the black swan evidence from international libor ois spreads abstract the libor ois spread is a closely monitored indicator of the financial health of economy previous research has used this spread to identify and anticipate abrupt changes in financial markets taylor and williams 2009 refer to the drastic increase in the us libor ois spread on august 7th 2007 as a black swan in the money market in this paper rather than rely on visual observations of black swans we estimate them using bai and perron s 1998 procedure we estimate structural breaks granger causality tests and innovation accounting in international libor ois spreads and a cds index to better understand their dynamics during the recent crisis our results reveal that black swans appeared in smaller economies prior to that in large ones during the financial crisis in addition we find that only shocks to the us libor ois spread has any statistically significant effects after 30 days

an analysis of inflation and interest rates new panel unit root results in the presence of structural breaks abstract this paper investigates the order of integration of inflation and interest rates in a panel of 19 countries the results show that once multiple endogenous breaks are allowed for and appropriate critical values are used the series appear to be i 0

taylor rules and the canadian us equilibrium exchange rate abstract 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

the inflation hedging properties of turkish reits this study empirically tests the inflation hedging abilities of turkish reits in comparison to the indices of common stocks listed on the istanbul stock exchange ise over the period december 1999 to december 2004 two main factors motivate this study first compared to their counterparts in developed capital markets turkish reits have some important tax incentives as well as flexibility in managing their portfolios second the turkish economy provides a rare and good opportunity to test the hedging behaviour of real estate stocks in periods of both high and moderate inflation rates the empirical results show that turkish reits in general provide a better hedge against both actual and expected inflation than do the ise common stock indices dividing the entire sample period into the high and moderate inflation sub periods we find that the hedging ability of reits is better under high inflation than under moderate inflation

equilibrium exchange rates in transition economies taking stock of the issues in this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc in particular we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual balassa samuelson effect such as the behaviour of the real exchange rate of the open sector and regulated prices we then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model namely differences in the theoretical underpinnings differences in the econometric estimation techniques and differences relating to the time series and cross sectional dimensions of the data the ensuing three dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size copyright blackwell publishers ltd 2006

the role of search frictions in the long run relationships between inflation unemployment and capital abstract this paper explores the long run relationships between inflation unemployment and capital accumulation by proposing a model with search frictions in both goods and labor markets this framework allows us to identify a negative extensive margin effect of inflation on the number of firms demanding capital and a positive intensive margin effect of inflation on the capital demanded per firm the two effects together generate a hump shaped relationship between long run inflation and aggregate capital these results are consistent with our empirical evidence from a cross section of 76 countries which suggests a non monotonic relationship between inflation and investment to gdp ratio in the long run our calibrated results are also consistent with empirical findings from the u s data on the effect of inflation on capital stock unemployment and the real interest rates