monetary policy rules in the open economy effects on welfare and business cycles abstract this paper computes welfare maximizing taylor style interest rate rules in a business cycle model of a small open economy the model assumes staggered price setting and shocks to domestic productivity to the world interest rate to world inflation and to the uncovered interest rate parity condition optimized policy rules have a pronounced anti inflation stance and entail significant nominal and real exchange rate volatility the country responds to an increase in external volatility by holding more foreign assets the policy rule affects the variance and the mean of consumption the effect on the mean matters significantly for welfare

fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

the less volatile u s economy a bayesian investigation of timing breadth and potential explanations using a bayesian model comparison strategy we search for a volatility reduction in u s real gross domestic product gdp growth within the postwar sample we find that aggregate real gdp growth has been less volatile since the early 1980s and that this volatility reduction is concentrated in the cyclical component of real gdp sales and production growth in many of the components of real gdp display similar reductions in volatility suggesting the aggregate volatility reduction does not have a narrow source we also document structural breaks in inflation dynamics that occurred over a similar time frame as the gdp volatility reduction

some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

the global implications of regional exchange rate regimes abstract we examine the implications of a regional fixed exchange rate regime for global exchange rate volatility the concept of the optimum currency area turns out to play an important role the formation of a regional regime tends to decrease global volatility when countries are symmetric the effects tend to be ambiguous in the case of asymmetries the reduction in global volatility is larger when the rest of the world has more rigid labor markets than the peggers and when the exchange rate management is done mostly by countries with relatively more flexible labor markets and in the presence of a negative correlation in productivity shocks across countries

the early millennium slowdown replicating the peersman 2005 results summary this paper undertakes both a narrow and wide replication of the constant coefficients vector autoregression var identified with sign restrictions considered by peersman journal of applied econometrics 2005 20 2 185 207 his results for the us are robust to an increase in the sample period from 2002 q2 to 2014 q2 but the extension to time varying parameters highlights the importance of testing the robustness of results against time variation in particular there are differences across models regarding the role of individual shocks during the 2001 us slowdown copyright 2015 john wiley sons ltd

sequential bayesian inference for vector autoregressions with stochastic volatility abstract we develop a sequential monte carlo smc algorithm for bayesian inference in vector autoregressions with stochastic volatility var sv the algorithm builds particle approximations to the sequence of the model s posteriors adapting the particles from one approximation to the next as the window of available data expands the parallelizability of the algorithm s computations allows the adaptations to occur rapidly our particular algorithm exploits the ability to marginalize many parameters from the posterior analytically and embeds a known markov chain monte carlo mcmc algorithm for the model as an effective mutation kernel for fighting particle degeneracy we show that relative to using mcmc alone our algorithm increases the precision of inference while reducing computing time by an order of magnitude when estimating a medium scale var sv model

the macroeconomic and fiscal implications of inflation forecast errors abstract the accuracy of inflation forecasts has important implications for macroeconomic stability and real interest rates in economies with nominal rigidities erroneous forecasts destabilize output undermine the conduct of monetary policy under inflation targeting and affect the cost of both short and long term government borrowing we propose a new method for forecasting inflation that combines individual forecasts using time varying coefficient estimation along with an alternative method based on neural nets its application to forecast data from the us and the euro area produces superior performance relative to the standard practice of using individual or linear combinations of individual forecasts especially during periods marked by structural changes

structural evolution of the postwar u s economy we consider a time varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the lucas critique for the postwar u s economy the model allows blocks of parameters to change at endogenously estimated points of time contrary to the lucas critique there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in reduced form parameters for inflation or the unemployment rate however the structure of the u s economy has evolved considerably over the postwar period with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation though not on the unemployment rate related we find changes in the phillips curve tradeoff between inflation and cyclical unemployment measured as the deviation from the time varying steady state unemployment rate implied by the model in the 1970s and especially since the mid 1990s

modelling inflation volatility this paper discusses estimation of us inflation volatility using time varying parameter models in particular whether it should be modelled as a stationary or random walk stochastic process specifying inflation volatility as an unbounded process as implied by the random walk conflicts with priors beliefs yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility we therefore propose an alternative model with a change point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past 40 years to accommodate the stationarity restriction we develop a new representation that is equivalent to our model but is computationally more efficient all models produce effectively identical estimates of volatility but the change point model provides more information on the level and persistence of volatility and the probabilities of changes for example we find a few well defined switches in the volatility process and interestingly these switches line up well with economic slowdowns or changes of the federal reserve chair moreover a decomposition of inflation shocks into permanent and transitory components shows that a spike in volatility in the late 2000s was entirely on the transitory side and characterized by a rise above its long run mean level during a period of higher persistence

estimation and forecasting in models with multiple breaks this paper develops a new approach to change point modelling that allows the number of change points in the observed sample to be unknown the model we develop assumes that regime durations have a poisson distribution it approximately nests the two most common approaches the time varying parameter tvp model with a change point every period and the change point model with a small number of regimes we focus considerable attention on the construction of reasonable hierarchical priors both for regime durations and for the parameters that characterize each regime a markov chain monte carlo posterior sampler is constructed to estimate a version of our model which allows for change in conditional means and variances we show how real time forecasting can be done in an efficient manner using sequential importance sampling our techniques are found to work well in an empirical exercise involving u s gdp growth and inflation empirical results suggest that the number of change points is larger than previously estimated in these series and the implied model is similar to a tvp with stochastic volatility model

marginal contributions and externalities in the value our concern is the extension of the theory of the shapley value to problems involving externalities using the standard axiom systems behind the shapley value for an arbitrary exogenous coalition structure leads to the identification of bounds on players payos around an externality free value in endogenizing the coalition structure we analyze a two stage process of coalition formation in whose second stage our axiomatic results are applied we find reasons to explain inecient coalition structures and provide sucient conditions for eciency

taylor rules and the euro this paper uses real time data to analyze whether the variables that normally enter central banks interest ratesetting rules which we call taylor rule fundamentals can provide evidence of out of sample predictability for the united states dollar euro exchange rate from the inception of the euro in 1999 to the end of 2007 the major result of the paper is that the null hypothesis of no predictability can be rejected against an alternative hypothesis of predictability with taylor rule fundamentals for a wide variety of specifications that include inflation and a measure of real economic activity in the forecasting regression we also present less formal evidence that with real time data the taylor rule provides a better description of ecb than of fed policy during this period while the evidence of predictability is only found for specifications that do not include the real exchange rate in the forecasting regression the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the u s and the euro area and to whether or not there is interest rate smoothing the evidence of predictability is stronger for realtime than for revised data about the same with inflation forecasts as with inflation rates and weakens if output gap growth is included in the forecasting regression bad news about inflation and good news about real economic activity both lead to out of sample predictability through forecasted exchange rate appreciation

can the markov switching model forecast exchange rates abstract a markov swirching model is fit for 18 exchange rates at quarterly frequencies the model fits well in sample for many exchange rates by the mean squared error criterion the markov model does not generate superior forecasts to a random walk or the forward rate there appears to ne some evidence that the forecasts of the markov model are superior at predicting the direction of change of the exchange rate

monetary policy in open economies abstract the recent literature on monetary policy in open economies has produced a strong presumption in favor of activistic policy and flexible exchange rates we argue that this result may owe much to the combination of two commonly made assumptions that nominal goods prices are rigid and that the monetary authorities have a lot of information about the economy when the source of nominal rigidity is found in wages and monetary policy is conducted according to less information demanding rules such as a standard interest rate rule policies that stabilize the money supply or the nominal exchange rate may perform better

modeling structural breaks in economic relationships using large shocks abstract this paper introduces a new model of structural breaks in the coefficients of economic relationships which allows them to be driven by large past economic shocks the breaks generated by these shocks can be taken to reflect stochastic changes in agents decisions or beliefs triggered by extraordinary economic events our model specifies that both the timing and size of breaks are stochastic the last property of it enables us to investigate qualitative effects that large shocks can have on economic relationships as an empirical application of our model the paper investigates the stability the oil economy relationship since the early sixties from the six large oil shocks identified by our data the paper shows that only the first oil shock at the end of 1973 has caused a major long term adverse effect on economic activity all the large oil price shocks that have happened since then did not have any significant negative effects on the slope of the oil economy relationship

oil prices and the rise and fall of the us real exchange rate abstract questions of the relative importance of real vs monetary shocks in explaining exchange rate movements still have no widely accepted answer despite their importance both for the research agenda and for policy questions we examine this issue using a variety of empirical techniques for the us effective exchange rate we find that a stable link exists between oil price shocks and the us real effective exchange rate over the post bretton woods period the results suggest that oil prices may have been the dominant source of persistent real exchange rate shocks and that energy prices may have important implications for future work on exchange rate behavior

a new model of trend inflation this article introduces a new model of trend inflation in contrast to many earlier approaches which allow for trend inflation to evolve according to a random walk ours is a bounded model which ensures that trend inflation is constrained to lie in an interval the bounds of this interval can either be fixed or estimated from the data our model also allows for a time varying degree of persistence in the transitory component of inflation in an empirical exercise with cpi inflation we find the model to work well yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model this article has supplementary materials online

real time inflation forecasting in a changing world this article revisits the accuracy of inflation forecasting using activity and expectations variables we apply bayesian model averaging across different regression specifications selected from a set of potential predictors that includes lagged values of inflation a host of real activity data term structure data relative price data and surveys in this model average we can entertain different channels of structural instability by either incorporating stochastic breaks in the regression parameters of each individual specification within this average or allowing for breaks in the error variance of the overall model average or both thus our framework simultaneously addresses structural change and model uncertainty that would unavoidably affect any inflation forecast model the different versions of our framework are used to model u s personal consumption expenditures pce deflator and gross domestic product gdp deflator inflation rates for the 1960 2011 period a real time inflation forecast

on the evolution of the monetary policy transmission mechanism this paper investigates whether the monetary transmission mechanism has changed or whether apparent changes are due to changes in the volatility of exogenous shocks also the question of whether any changes have been gradual or abrupt is considered a mixture innovation model is used which extends the class of time varying vector autoregressive models with stochastic volatility the advantage of our extension is that it allows us to estimate whether where when and how parameter change is occurring our empirical results indicate that the transmission mechanism the volatility of exogenous shocks and the correlations between exogenous shocks are all changing

macroeconomic factors strike back a bayesian change point model of time varying risk exposures and premia in the u s cross section this article proposes a bayesian estimation framework for a typical multi factor model with time varying risk exposures to macroeconomic risk factors and corresponding premia to price u s publicly traded assets the model assumes that risk exposures and idiosyncratic volatility follow a break point latent process allowing for changes at any point on time but not restricting them to change at all points the empirical application to 40 years of u s data and 23 portfolios shows that the approach yields sensible results compared to previous two step methods based on naive recursive estimation schemes as well as a set of alternative model restrictions a variance decomposition test shows that although most of the predictable variation comes from the market risk premium a number of additional macroeconomic risks including real output and inflation shocks are significantly priced in the cross section a bayes factor analysis massively favors the proposed change point model supplementary materials for th

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

short run independence of monetary policy under pegged exchange rates and effects of money on exchange rates and interest rates this paper examines the effects of money supply changes on exchange rates interest rates and production in an optimizing two country model in which some sectors of the economy have predetermined nominal prices in the short run and other sectors have flexible prices money supply shocks have liquidity effects both within and across countries and induce a cross country real interest differential the model predicts that liquidity effects are highly nonlinear and are not likely to be captured well empirically by linear models particularly those involving only a single country a striking implication of the model is that countries have a significant degree of short run independence of monetary policy even under pegged exchange rates copyright 1997 by ohio state university press

core existence in vertically differentiated markets we prove that a sufficient condition for the core existence in a n firm vertically differentiated market is that the qualities of firms products are equispaced along the quality spectrum this result contributes to see that a fully collusive agreement among firms in such markets is more easily reachable when product qualities are not distributed too asymmetrically along the quality ladder

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

testing the monetary model of exchange rate determination a closer look at panels abstract in this paper we undertake an extensive evaluation of panel tests of the long run monetary model of exchange rate determination we first show how poorly the monetary model performs on a country by country basis for us dollar exchange rates over the post bretton woods period for a large number of industrialized countries in sharp contrast we find considerable support for the monetary model using panel procedures as in groen 2000 and mark and sul 2001 given the disparity in the country by country and panel approaches we carefully analyze the homogeneity restrictions inherent in the panel procedures the evidence on the appropriateness of the homogeneity restrictions is mixed in the end whether the monetary model conforms to post bretton woods data largely depends on one s prior beliefs

the stochastic volatility in mean model with time varying parameters an application to inflation modeling this article generalizes the popular stochastic volatility in mean model to allow for time varying parameters in the conditional mean the estimation of this extension is nontrival since the volatility appears in both the conditional mean and the conditional variance and its coefficient in the former is time varying we develop an efficient markov chain monte carlo algorithm based on band and sparse matrix algorithms instead of the kalman filter to estimate this more general variant the methodology is illustrated with an application that involves u s u k and germany inflation the estimation results show substantial time variation in the coefficient associated with the volatility highlighting the empirical relevance of the proposed extension moreover in a pseudo out of sample forecasting exercise the proposed variant also forecasts better than various standard benchmarks

time varying parameters and the out of sample forecasting performance of structural exchange rate models varying parameter estimation techniques based on recursive application of the kalman filter are used to improve the predictive performance of a class of monetary exchange rate models i find that allowing estimated parameters to vary over time enhances the models forecasting performance for the dollar pound dollar mark and dollar yen exchange rates contrary to earlier results in the literature ex post forecasts for the dollar mark rate compare favorably with those obtained from the naive random walk forecasting rule

macroeconomic forecasting performance under alternative specifications of time varying volatility summary this paper compares alternative models of time varying volatility on the basis of the accuracy of real time point and density forecasts of key macroeconomic time series for the usa we consider bayesian autoregressive and vector autoregressive models that incorporate some form of time varying volatility precisely random walk stochastic volatility stochastic volatility following a stationary ar process stochastic volatility coupled with fat tails garch and mixture of innovation models the results show that the ar and var specifications with conventional stochastic volatility dominate other volatility specifications in terms of point forecasting to some degree and density forecasting to a greater degree copyright 2014 john wiley sons ltd

exchange rate forecasts and expected fundamentals using a large panel of individual professionals forecasts this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals specifically good interest rate forecasts this relationship is robust to individual fixed effects and further controls reassuringly the relationship is stronger during phases when the impact from fundamentals is more obvious e g when exchange rates substantially deviate from their ppp values finally forecasters largely agree that an interest rate increase relates to a currency appreciation but only good forecasters get expected interest rates right

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

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

accounting for exchange rate variability in present value models when the discount factor is near 1 a well known stylized fact about nominal exchange rates among low inflation advanced countries particularly u s exchange rates is that their logs are approximately random walks michael i mussa 1979 is most frequently cited for observing this regularity in a famous pair of papers richard a meese and kenneth rogoff 1983a b found that the structural models of the 1970 s could not beat a random walk in explaining exchange rate movements recently some authors menzie chinn and meese 1995 nelson mark 1995 mark and donggyu sul 2001 have argued that the models can outforecast the random walk at long horizons but a comprehensive recent study by yin wong cheung et al 2003 documents that no model consistently outperforms a random walk why one obvious explanation is that the macroeconomic variables that determine the exchange rate themselves follow random walks if the log of the nominal exchange rate is a linear function of forcing variables that are random walks then it will inherit the random walk property the problem with this explanation is that the economic fundamentals proposed in the most popular models of exchange rates do not in fact follow simple random walks one resolution to this problem is that there may be some other fundamentals ones that have been proposed in some models but are not easily measurable or ones that have not yet been proposed at all that are important in determining exchange rates if these unobserved fundamentals follow random walks and dominate the variation in exchange rate changes then exchange rates will nearly be random walks even if the standard observed fundamentals are not in engel and west 2003a hereinafter ew we propose an alternative explanation we consider linear models of the exchange rate that are in the asset market approach to exchange rates these models emphasize the role of expectations of future economic fundamentals in determining the current exchange rate the exchange rate expressed as the home currency price of foreign currency in this paper can be written as a discounted sum of the current and expected future fundamentals

order flow and the monetary model of exchange rates evidence from a novel data set we propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the evans lyons microstructure approach we estimate a model augmented with order flow variables using a unique data set almost 100 monthly observations on interdealer order flow on dollar euro and dollar yen the augmented macroeconomic or hybrid model exhibits greater in sample stability and out of sample forecasting improvement vis a vis the basic macroeconomic and random walk specifications

aggregate infrastructure capital stock and long run growth evidence from finnish data abstract in this paper bayesian methods and the finnish aggregate infrastructure capital series from 1860 to 2003 are used to explore how government infrastructure policy affects long run output growth we use finnish data since to the best of our knowledge the finnish land and water construction investments series is the best available sufficiently long time series on aggregate infrastructure investments the finnish data provide strong and robust evidence indicating that permanent changes in government infrastructure policy have permanent effects on the growth rate of output

evaluating density forecasts with applications to financial risk management density forecasting is increasingly more important and commonplace for example in financial risk management yet little attention has been given to the evaluation of density forecasts the authors develop a simple and operational framework for density forecast evaluation they illustrate the framework with a detailed application to density forecasting of asset returns in environments with time varying volatility finally the authors discuss several extensions copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

endogenous formation of coalitions the formation of coalitions is a fundamental problem in game theory by a coalition is meant a group of players e g economic or political agents which decide to act together as one unit relative to the rest of the players this includes the instances of syndicates unions cartels blocks political parties parliamentary coalitions etc we would like to emphasize that forming a coalition does not eliminate the individual players as decision makers in all interactions with the other players coalition members act as one unit it may be useful to think of a representative agent taking their place 2 however this arrangement will continue only as long as each player finds it desirable to act this way further bargaining occurs among the members of each coalition on how to divide what they obtained together thus the existence of coalitions implies that the interactions among the players will be conducted on two levels first among the coalitions and second within each coalition most of the existing models in economics and game theory assume that the coalition structure is given exogenously instead we try here to obtain it as an endogenous outcome of our model namely we want to be able to predict which coalitions will in fact form in each given situation 3 our theory combines two kinds of game theoretic concepts value and stability the basic idea is first to evaluate the players prospects in the various coalition structures and then based on these values to find which ones are stable we will call this value coalition structure value or cs value for short the reason we are considering coalition structures i e partitions of the set of players into disjoint coalitions rather than just coalitions is that in general players may find it to their advantage to join forces in some situations and to act separately in others all depending on the way the other participants are organized this implies that both the value and the stability concepts should depend on the entire coalition structure the cs value we analyze in this paper was first developed by owen 7

exchange rate systems and macroeconomic stability abstract we examine macroeconomic stability and the properties of the international transmission of business cycles under three exchange rate systems a flexible a unilateral peg ems and a single currency emu the subjects of study are germany and france in france macroeconomic volatility under emu is comparable to that under a flexible exchange rate system but considerably lower than that under ems in germany output volatility is significantly higher under ems relative to the flexible regime and increases even further under emu inflation though becomes more stable emu also induces a strong negative international transmission of country specific supply shocks and amplifies their role this fact may complicate ecb policymaking

exogenous shocks and exchange rate regimes using a dynamic stochastic general equilibrium dsge model with nominal price rigidity and imperfect competition we examine the impact of terms of trade and foreign interest rate shocks on some key macroeconomic variables for a small open economy under different exchange rate regimes numerical solutions from the model are found consistent with empirical panel var results of 33 asian economies for the period of 1980 2009 from both the theoretical model and empirical evidence we find that i output responses to terms of trade and foreign interest rate shocks are smoother in floats ii price responses to terms of trade shocks are smoother in floats than in pegs while its responses to foreign interest shocks are more volatile in floats than in pegs and iii the effects of terms of trade and foreign interest shocks are more prolonged under floats

markov switching models with evolving regime specific parameters are postwar booms or recessions all alike abstract in this paper we relax the assumption of constant regime specific mean growth rates in hamilton s 1989 two state markov switching model of the business cycle we introduce a random walk hierarchy prior for each regime specific mean growth rate and impose a cointegrating relationship between the mean growth rates in recessionary and expansionary periods by applying the proposed model to postwar u s real gdp growth 1947 q4 2011 q3 we uncover the evolving nature of the regime specific mean growth rates of real output in the u s business cycle additional features of the postwar u s business cycle that we uncover include a steady decline in the long run mean growth rate of real output over the postwar sample and an asymmetric error correction mechanism when the economy deviates from its long run equilibrium

coalitional manipulation in a quasilinear economy in our model it is assumed that each agent knows the sum of the utility functions of the entire society as well as his own utility under this information assumption a social choice mechanism has to make a public decision and choose a balanced set of side payments the mechanisms providing for stability against coalitational manipulation are shown to be egalitarian an extension of an arbitrary egalitarian mechanism to a set of inconsistent messages is given in an explicit form journal of economic literature classification number d82

forecasting core inflation the case of south africa forecasting and estimating core inflation has recently gained attention especially for inflation targeting countries following research showing that targeting headline inflation may not be optimal a central bank can miss the signal due to the noise despite its importance there is sparse literature on estimating and forecasting core inflation in south africa with the focus still on measuring core inflation this paper emphasises predicting core inflation using large time varying parameter vector autoregressive models tvp vars factor augmented var and structural break models using quarterly data from 1981q1 to 2013q4 we use mean squared forecast errors msfe and predictive likelihoods to evaluate the forecasts in general we find that i small tvp vars consistently outperform all other models ii models where the errors are heteroscedastic do better than models with homoscedastic errors iii models assuming that the forgetting factor remains 0 99 throughout the forecast period outperforms models that allow for the forgetting factors to change with time and iv allowing for structural break does not improve the predictability of core inflation overall our results imply that additional information on the growth rate of the economy and interest rate is sufficient to forecast core inflation accurately but the relationship between these three variables needs to be modelled in a time varying nonlinear fashion

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

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

has the euro changed the business cycle abstract in contrast to the notion that the exchange rate regime is non neutral there is little evidence that emu has systematically changed the european business cycle in fact we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the euro exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross country correlations to account for this finding we develop a two country business cycle model which is able to replicate key features of european data in particular the model correctly predicts a limited effect of emu on standard business cycles statistics however further analysis reveals that the euro has changed the nature of the cycle through its impact on the transmission mechanism cross country spillovers have become relatively more domestic shocks relatively less important in accounting for economic fluctuations under emu this explains why there is little change in unconditional volatilities

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

macroeconomic effects of nominal exchange rate regimes new insights into the role of price dynamics abstract this paper analyzes the effects of pegged and floating exchange rates using a two country dynamic general equilibrium model that is calibrated to the us and a european aggregate the model assumes shocks to money productivity and the interest rate parity condition it captures the fact that the sharp increase in nominal exchange rate volatility after the end of the bretton woods bw system was accompanied by a commensurate rise in real exchange rate volatility but had no pronounced effect on the volatility of gdp this holds irrespective of whether flexible or sticky prices are assumed which casts doubt on the widespread view that the roughly equal post bw rise in nominal and real exchange rate volatility reflects price stickiness a flex prices variant of the model captures better the fact that the correlation between us and european gdp has been higher in the post bw era than under bw

technology shocks and employment recent empirical work has suggested that in response to a positive technology shock employment shows a persistent decline we show that the standard open economy flexible price model can generate a negative response of employment to a positive technology shock and can also match the negative conditional correlation between productivity and employment quite well if trade elasticities are low while the model also has good overall properties it fails to generate sufficient procyclicality in employment this finding indicates that the rbc model faces a tension between accounting for the negative response of employment to technology shocks and simultaneously maintaining that technology shocks are the major source of business cycle fluctuations

the conditional auction mechanism for sharing a surplus a first bid auction to allocate the leadership role is used to choose a public decision and a balanced set of transfers the mechanism is shown to implement an equal sharing of the surplus above the average utility level at the equilibrium an agent s message reveals the other agent s utility when only two players are involved and the exact value of the joint surplus a variety of other contexts allow for the construction of similar auction like mechanisms displaying the same mirror image effect

wage rigidity and monetary union we compare monetary union to flexible exchange rates in an asymmetric threecountry model with active monetary policy unlike the traditional oca literature we find that countries with a high degree of nominal wage rigidity benefit from monetary union specially when they join other similarly rigid countries countries with relatively more flexible wages tend to be worse off in unions with countries that have more rigid wages we examine france germany and the uk and find that the welfare implications of alternative monetary arrangements depend more on the degree of wage asymmetry than on other types of asymmetries in shocks monetary policy etc and that higher degree of wage flexibility in the uk relative to france and germany would make its participation in emu costly

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

liquidity and real activity in a simple open economy model abstract this paper analyzes the ability of an open economy version of lucas s 1990 liquidity model to account for properties of international data the focus is on the model s ability to account for exchange rate dynamics and measured effects of monetary policy shocks on exchange rates interest rates and real activities across countries the model generates a prediction that a positive domestic monetary innovation is associated with nominal and real currency depreciations however the model s predictions with respect to nominal and real exchange rate volatilities are low

efficiency in coalition games with externalities a natural extension of superadditivity is not sufficient to imply that the grand coalition is efficient when externalities are present we provide a condition analogous to convexity that is sufficient for the grand coalition to be efficient and show that this also implies that the appropriately defined core is nonempty moreover we propose a mechanism which implements the most efficient partition for all coalition formation games and characterizes the resulting payoff division

fiscal policy and regional inflation in a currency union abstract substantial attention has been devoted to inflation differentials within the european monetary union including suggestions that inflation differentials are a policy issue for national governments this paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy in a two region general equilibrium model with traded and nontraded goods lowering the labor income tax rate in response to positive inflation differentials succeeds in compressing inflation differentials such policies can lead to higher volatility of domestic inflation while leaving the volatility of real output roughly unchanged regional fiscal policies also have spill over effects on the volatility of union wide and foreign inflation in our model