forecasting brazilian inflation by its aggregate and disaggregated data a test of predictive power by forecast horizon abstractthis work aims to compare the forecast efficiency of different types of methodologies applied to brazilian consumer inflation indice de precos ao consumidor amplo ipca we will compare forecasting models using disaggregated and aggregated data from ipca over 12 months ahead we used ipca in a monthly basis over the period between january 1996 and march 2012 out of sample analysis will be made through the period of january 2008 to march 2012 the disaggregated models were estimated by seasonal autoregressive integrated moving average sarima and will have different levels of disaggregation from ipca as groups and items as well as disaggregation with more economic sense used by brazilian central bank as 1 services monitored prices food and industrials and 2 durables non durables semi durables services and monitored prices aggregated models will be estimated by time series techniques as sarima state space structural models and markov switching the forecasting accuracy among models

aid volatility policy and development summary we build on bulir and hamann s analysis of aid volatility bulir a hamann j 2003 aid volatility an empirical assessment imf staff papers 50 1 64 89 bulir a hamann j 2008 volatility of development aid from the frying pan into the fire washington dc imf paper submitted to this special section showing that the conclusions reached depend on the dataset used their argument that the poorest countries have the highest volatility appears not to be correct the impact of volatility on growth is negative overall but differs between positive and negative volatility the mix between responsive components of aid for example programme aid and proactive components for example technical assistance is important finally we conclude that measures which increase trust between donor and recipient and reductions in the degree of donor oligopoly reduce aid volatility without obviously reducing its effectiveness

time varying smooth transition autoregressive models nonlinear regime switching behavior and structural change are often perceived as competing alternatives to linearity in this article we study the so called time varying smooth transition autoregressive tv star model which can be used both for describing simultaneous nonlinearity and structural change and for distinguishing between these features two modeling strategies for empirical specification of tv star models are developed monte carlo simulations show that neither of the two strategies dominates the other a specific to general to specific procedure is best suited for obtaining a first impression of the importance of nonlinearity and or structural change for a particular time series a specific to general procedure is most useful in careful specification of a model with nonlinear and or time varying properties an empirical application to a large dataset of u s macroeconomic time series illustrates the relative merits of both modeling strategies

the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

the imf s role in structural adjustment in the 1980s conditional lending for structural adjustment in developing countries moved the imf beyond its role of macroeconomic crisis management fund supported adjustment programmes have often been flawed by a lack of distributional analysis and by poor sequencing of reforms notably premature financial liberalisation as a result they have caused avoidable hardship in addition the attempt to taper out aid as part of the reform programme leads to avoidable reductions in post stabilisation growth an important role for the fund in poststabilisation environments is to provide credible signals to private investors as macroeconomic crises spread across latin america and africa during the 1980s the imf became much more involved in low income countries whereas following its interventions in developed countries the fund had rapidly withdrawn post crisis in the low income countries its involvement became continuous this was partly because stabilisation often took longer however additionally by the 1980s it was already evident that whereas those poor countries which had adopted market based development strategies were developing those which had adopted inward oriented high regulation strategies were in decline unlike the economic crisis of 1998 the crises of the 1980s were concentrated among the inward orientated hence a reasonable diagnosis was that the crises were not merely manifestations of fiscal imbalance but that many other policies needed reform the task thus went beyond the conventional one of rectifying a crisis to reorienting a development strategy the fund joined with the world bank in an attempt to induce these reforms through sustained conditional lending hence the imf moved beyond its traditional role of short run macroeconomic crisis management fund and bank conditions were linked through cross conditionality but with the fund as the lead agency on many areas of policy this gave the fund a critical role in structural adjustment the fund s instrument for concessional lending in low income countries is its extended structural adjustment facility esaf in 1997 the board of the fund commissioned an external review of its esaf programmes in which we participated the report of the evaluation botchwey et al 1998 suggested three lines of criticism of fund adjustment programmes and these form the basis of our analysis in this paper the first is that through flawed design the programmes have sometimes had adverse consequences for the poor either directly through reducing incomes or indirectly through reductions in social service provision our criticism is of the sequence sometimes adopted by fund

cotrending and the stationarity of the real interest rate abstract this paper introduces the concept of cotrending to trend stationary series with structural breaks we apply it to nominal interest rates and inflation in order to test the long run fisher effect

structural break nonlinearity and asymmetry a re examination of ppp proposition in this study we examine the validity of the ppp proposition for 28 european countries for this purpose we propose a new unit root test procedure that allows for both gradual structural breaks a

testing for the absence of expected real profits from forward market speculation abstract this paper tests for the absence of expected real profits from forward market speculation it contrasts with the literature that has considered opportunities for expected nominal profit from speculation that is profits denominated in one of the currencies these studies assume money illusion on the part of market participants but this paper does not empirical results fail to find evidence of unexploited real profit opportunities

cross country performance of levy regime switching models for stock markets abstractthis article compares the performance of regime switching levy models across sixteen 16 international stock markets from a cross country perspective the empirical application is dedicated to the study of equity markets in the americas asia and europe the results are of interest for a financial audience in order to document the sensitivity of stock indexes to the intensity of jumps under changing economic regimes expansion or recession we pick up singularities in japan and malaysia compared to other countries and regions of the world

persistence in international inflation rates we test for fractional dynamics in inflation rates based on the consumer price index cpi for 27 countries and inflation rates based on the wholesale price index wpi for 22 countries the fractional differencing parameter is estimated using semiparametric and approximate maximum likelihood methods significant evidence of fractional dynamics with long memory features is found in both cpi and wpi based inflation rates for industrial as well as developing countries implications of the findings are considered and sources of long memory are hypothesized

uncovering financial market expectations of inflation this paper seeks to uncover market expectations of inflation from the joint dynamics of nominal interest rates and observed inflation i postulate 1 the existence of a stable vector autoregression in unobserved variables and 2 efficient financial markets the estimation procedure requires no further structural assumptions the econometrician need not observe all the information used by agents in forming forecasts or all the variables that influence real interest rates i find no empirical evidence that economic recessions are correlated with inflation forecast errors however postwar recessions are associated with ex ante real interest rates that are twice the postwar average

does conditionality work a test for an innovative us aid scheme performance based aid has been proposed as an alternative to the failed traditional approach whereby donors make aid conditional on the reform promises of recipient countries however hardly any empirical evidence exists on whether ex post rewards are effective in inducing reforms we attempt to fill this gap by investigating whether the millennium challenge corporation mcc was successful in promoting better control of corruption we employ a difference in difference in differences ddd approach considering different ways of defining the treatment group as well as different time periods during which incentive effects could have materialized we find evidence of strong anticipation effects immediately after the announcement of the mcc while increasing uncertainty about the timing and amount of mcc aid appears to have weakened the incentive to fight corruption over time

monetary policy regimes and the reduced form for interest rates this study investigates whether the recent poor performance and inst ability of reduced form interest rate equations can be accounted for by changes in monetary policy regimes the results imply that reduced form coefficients move by statistically significant and economically meaningful amounts in response to such policy parameter shifts both in sample and out of sample predictions from the models that allow f or the endogeneity of the money stock outperform those produced by the conventional specification copyright 1987 by ohio state university press

the federal reserve s new operating procedures a post mortem abstract although money stock targeting has been the strategic focus of federal reserve policy since the mid 1970 s operating policy the tactics whereby the longer run strategy is implemented over short term intervals has been changed by the federal reserve at least twice over this period a particularly dramatic change in operating policy was announced by the federal reserve in october 1979 this paper provides empirical evidence that settles questions about the nature of this change and suggests that the new operating procedures may have contributed to the heightened interest rate volatility experienced over the 1979 to 1982 period

domestic foreign interest rate differentials near unit roots and symmetric threshold models this paper investigates the near unit root behavior of interest rate differentials across countries using a symmetric band tar model that allows for a heteroscedastic error process we find that the time series properties of monthly short term interest differentials over the period 1974 2005 between the united states and canada france germany japan and the united kingdom can be characterized by a symmetric band tar process which can explain its near unit root behavior reported in the extant literature results significantly reject a linear model in favor of the alternative hypothesis of a two regime symmetric threshold model that exhibits significantly greater persistence within the threshold bands than when outside the threshold bands

source of monetary growth uncertainty and economic activity the time varying parameter model a large body of research suggests that uncertainty is an important factor affecting economic activity most earlier research however fails to consider the possibility that uncertainty may affect the value of new information and economic activity differently depending upon its source the author first examines the importance of these different sources for modeling u s monetary growth uncertainty he then empirically relates different sources of monetary growth uncertainty to economic activity measured by real gnp the results suggest that different sources of uncertainty have different impacts on economic activity the results tend to confirm predictions arising in the literature on irreversible investment and uncertainty copyright 1993 by mit press

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

exchange rate volatility and u s monetary policy an arch application this paper examines the effect of shifts in u s monetary policy regimes on the stochastic process that generates foreign exchange rates to account for the observed behavior of the data record the author models nominal dollar exchange rates as univariate autoregressive conditional heteroskedastic processes he then tests the stability of this process across u s monetary policy regimes for four of the currencies in the sample accounting for regime shifts improves the fit of the model regime shifts also appear to diminish the degree of persistence of variance making it less likely that exchange rates are integrated in variance copyright 1989 by ohio state university press

inflation targeting with nairu uncertainty and endogenous policy credibility abstract stochastic simulations are employed to compare performances of monetary policy rules in linear and nonlinear variants of a small macro model with nairu uncertainty under different assumptions about the way inflation expectations are formed cases in which policy credibility is ignored or treated as exogenous are distinguished from cases in which credibility and inflation expectations respond endogenously to the monetary authorities track record in delivering low inflation it is shown that endogenous policy credibility strengthens the case for forward looking inflation forecast based rules relative to backward looking taylor rules

is the persistence of shocks to output asymmetric abstract this paper provides evidence that the persistence of positive shocks to output is not significantly different from the persistence of negative shocks this contrasts the results of beaudry and koop 1993 journal of monetary economics 31 149 163 showing asymmetry in the effects of innovations to gnp an unobserved components model modified to incorporate a threshold process is used to examine gnp as well as industrial production data its ability to discriminate between positive and negative output shocks and separately estimate their enduring effects provides for a more cogent test of symmetry in the persistence of shocks

performance based conditionality a european perspective abstract the critique of conditionality has led to the recent emphasis on ownership by the recipient government to promote ownership it has been suggested that traditional ex ante conditionality based on promises of policy changes be replaced by ex post conditionality in which aid is based on performance in terms of ultimate objectives in this spirit the european commission has reformed its adjustment aid this article reviews early experience with the eu initiative in four countries benin burkina faso madagascar and uganda we find a shift toward intermediate indicators which are too distant from the final impact of the policies

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

trend stationary of inflation rates evidence from lm unit root testing with a long span of historical data the article applies the lm univariate unit root test recently developed by lee and strazicich 2003 2004 to re examine the validity of trend stationary in the inflation rates of 11 oecd and asian countries using a longer span of historical data our empirical findings are favourable to the trend stationary of the inflation rates when we control the structural breaks in series and therefore they point to the absence of hyperinflation in the majority of the countries the results indicate that shocks to inflation rates are temporary and soon converge with the inflation rates being trend stationary hence most structural breaks in the inflation rate occur around the great depression world war i world war ii and energy shock periods for the convergence effect we repeat the unit root tests utilized above for smaller sub samples so as to provide a robust analysis the outcomes show that by selecting a longer data span we can catch more powerful convergent evidence overall some policy implications a

smooth breaks and non linear mean reversion post bretton woods real exchange rates the recent literature on purchasing power parity ppp has emphasized the role of two phenomena that may lead to the rejection of the ppp hypothesis structural breaks and non linear adjustment induced by transaction costs these two hypotheses are analyzed separately in the literature we develop tests for unit roots that account jointly for structural breaks and non linear adjustment structural breaks are modeled by means of a fourier function that allows for infrequent smooth temporary mean changes and is hence compatible with long run ppp nonlinear adjustment is modeled by means of an estar model our tests present good finite sample properties the tests are applied to a set of 15 oecd countries rers and are able to reject the null of a unit root in 14 cases the breaks are usually associated with the great appreciation and later depreciation of the dollar in the 1980s and the estar adjustment appears to play an important role

permanent and temporary inflation uncertainty and investment in the united states abstract we estimate the impact on us non residential fixed investment of permanent and temporary inflation uncertainty we find that while both have a negative effect temporary uncertainty is more important for investment this study has implications for monetary policy and applied econometric practice

testing ppp hypothesis under temporary structural breaks and asymmetric dynamic adjustments we test the empirical validity of the ppp proposition under temporary structural breaks and dynamic nonlinear adjustments although several testing procedures have recently been proposed in the exi

the duration analysis of structural breaks is stability destabilizing this article investigates how the duration of a regime i e the length of stability affects the likelihood of a permanent structural break by devising the duration dependence in structural break method which combines a structural break test and a duration dependence test first the locations of structural breaks are identified by bai and perron s 1998 method then it is estimated how a hazard rate changes in duration between structural breaks by parametric duration analysis using the weibull and the log logistic hazard functions this study reveals the evidence of positive duration dependence that is stability is destabilizing in 13 out of 27 international stock indices and the pooled data in other words as one regime continues over time with unchanged parameter values a new structural break is more likely to occur this method discloses a lower degree of duration dependence than the duration dependence markov switching model durland and mccurdy 1994 that considers temporary switches betwe

consumption and exchange rate uncertainty evidence from selected asian countries we set out to assess the effects of exchange rate uncertainty on real consumption in selected asian countries consumption influences business cycles which in turn shape short run monetary policy decisions hence understanding factors driving consumption is appealing to policymakers in the extant literature few studies have analysed the effects of uncertainty on consumption the available ones generally focus on the long run effects in spite of the fact that the short run persistence and adjustments to equilibrium are equally relevant our study takes this limitation seriously by distinguishing the short and long run effects of exchange rate uncertainty on consumption using a flexible dynamic panel data technique that allows long run effects to be homogeneous and the short run effects to be heterogeneous we find that uncertainty impedes consumption in the long run in the short run however the effects are immaterial this evidence remains robust to the measure of uncertainty asymmetric uncertainty the role of consumer prices and the global financial crisis of 2008 by decomposing uncertainty into its temporary and permanent components we find that the latter have a stronger effect on consumption in the long run than the former although both components demand policy attention the evidence suggests that policymakers should be more concerned with permanent uncertainty

a simple account of the behavior of long term interest rates recent empirical research on the term structure of interest rates has shown that the long term interest rate is well described by a distributed lag on short term interest rates but does not conform to the expectations theory of the term structure it has been suggested that the long rate overreacts to the short rate this paper presents aunified taxonomy of risk premia or deviations from the expectations theory this enables the hypothesis of overreaction to be formally stated it is shown that if anything the long rate has underreacted to the short rate however the independent movement of the long rate is primarily responsible for the failure of the expectations theory

measuring business cycles a modern perspective in the first half of this century special attention was given to two features of the business cycle 1 the comovement of many individual economic series and 2 the different behavior of the economy during expansions and contractions both of these attributes were ignored in many subsequent business cycle models which were often linear representations of a single macroeconomic aggregate however recent theoretical and empirical research has revived interest in each attribute separately notably dynamic factor models have been used to obtain a single common factor from a set of macroeconomic variables and nonlinear models have been used to describe the regime switching nature of aggregate output we survey these two strands of research and then provide some suggestive empirical analysis in an effort to unite the two literatures and to assess their usefulness in a statistical characterization of business cycle dynamics

analysing inflation by the fractionally integrated arfima garch model this paper considers the application of long memory processes to describing inflation for ten countries we implement a new procedure to obtain approximate maximum likelihood estimates of an arfima garch process which is fractionally integrated i d with a superimposed stationary arma component in its conditional mean additionally this long memory process is allowed to have garch type conditional heteroscedasticity on analysing monthly post world war ii cpi inflation for ten different countries we find strong evidence of long memory with mean reverting behaviour for all countries except japan which appears stationary for three high inflation economies there is evidence that the mean and volatility of inflation interact in a way that is consistent with the friedman hypothesis

likelihood ratio based tests for markov regime switching markov regime switching models are widely considered in economics and nance although there have been persistent interests see e g hansen 1992 garcia 1998 and cho and white 2007 the asymptotic distributions of likelihood ratio based tests have remained unknown this paper considers such tests and establishes their asymptotic distributions in the context of nonlinear models allowing for multiple switching parameters the analysis simultaneously addresses three di culties i some nuisance parameters are unidenti ed under the null hypothesis ii the null hypothesis yields a local optimum and iii the conditional regime probabilities follow stochastic processes that can only be represented recursively addressing these issues permits substantial power gains in empirically relevant situations besides obtaining the tests asymptotic distributions this paper also obtains four sets of results that can be of independent interest 1 a characterization of conditional regime probabilities and their high order derivatives with respect to the model s parameters 2 a high order approximation to the log likelihood ratio permitting multiple switching parameters 3 a re nement to the asymptotic distribution and 4 a uni ed algorithm for simulating the critical values for models that are linear under the null hypothesis the elements needed for the algorithm can all be computed analytically the above results also shed light on why some bootstrap procedures can be inconsistent and why standard information criteria such as the bayesian information criterion bic can be sensitive to the hypothesis and the model s structure when applied to the us quarterly real gdp growth rates the methods suggest fairly strong evidence favoring the regime switching speci cation consistently over a range of sample periods

interest rate targeting abstract the paper develops a model in which the monetary authority successfully targets the nominal interest rate while also holding down the forecast variance of the price level the latter objective pins down the extent of monetary accommodation to shifts in the demand for money and other shocks and thereby makes determinate the levels of money and prices at each date empirical evidence for the united states suggests that the model s predictions accord reasonably well with observed behavior for nominal interest rates growth rates of the monetary base and rates of inflation

business cycle turning points a new coincident index and tests of duration dependence based on a dynamic factor model with regime switching the synthesis of the dynamic factor model of stock and watson 1989 and the regime switching model of hamilton 1989 proposed by diebold and rudebusch 1996 potentially encompasses both features of the business cycle identified by burns and mitchell 1946 1 comovement among economic variables through the cycle and 2 nonlinearity in its evolution however maximum likelihood estimation has required approximation recent advances in multimove gibbs sampling methodology open the way to approximation free inference in such non gaussian nonlinear models this paper estimates the model for u s data and attempts to address three questions are both features of the business cycle empirically relevant might the implied new index of coincident indicators be a useful one in practice do the resulting estimates of regime switches show evidence of duration dependence the answers to all three would appear to be yes

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

financial crisis and the great depression a regime switching approach i explore the timing of and effects of the u s financial crisis of the 1930s in a regime switching framework estimated conditional probabilities over the state of the financial sector suggest that a prolonged period of crisis begins not with the 1929 stock market crash but with the first banking panic of october 1930 these probabilities also suggest that the crisis persists until the introduction of federal deposit insurance in early 1934 consistent with the view that this financial crisis had real effects these conditional probabilities contain additional explanatory power for output fluctuations this is in addition to that provided by the money stock

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

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

fiscal policy debt management and exchange rate credibility lessons from the recent italian experience abstract this paper explores some potential determinants of exchange rate credibility with reference to the italian experience of the 1990s the analysis relies on a nonlinear framework emphasizing shifts between credible and non credible states and assuming a significant degree of persistence in the above regimes almost all fiscal and debt management indicators display significant effects on devaluation expectations the main policy implications of the paper are that a restrictive fiscal stance a lengthening of average debt maturity and an increase in the share of foreign denominated debt are crucial to stabilize the lira exchange rate and to qualify italy in the former group of countries which will join emu

dynamics of persistence in international inflation rates characteristics of inflation play a key role in policy formulation and market analysis several studies have analyzed inflation persistence and reached diverging conclusions in this paper we investigate the dynamics of inflation persistence using fractionally integrated processes and find that there has been a clear decline in inflation persistence in the united states over the past two decades we also show that the presence of fractional integration in inflation successfully explains previous diverging results lastly we provide some international comparisons to examine the extent to which there has been a commensurate decline in inflation persistence in the other g7 economies

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

testing the term structure of interest rates using a stationary vector autoregression with regime switching abstract the expectations model of the term structure for us data on three and six month treasury bills for the period 1962 1 1987 3 is explored the analysis allows for the nonstationarity of the data and for unobserved stochastic switches of regime by estimating vars in the yield spread and the change in the three month rate which allow the time series processes to change between regimes in contrast to other results for the expectations model such as those of hamilton 1988 mankiw and miron 1986 and others we find that the data do not reject the model

discovering the link between inflation rates and inflation uncertainty a new time series model is used to reassess the strength of the link between inflation uncertainty and the level of inflation in the united states the model provides several statistical measures that can be used to examine different aspects of uncertainty the main finding is that uncertainty about the long rather than short term prospects for inflation moved strongly with the rate of inflation since the early 1970s copyright 1991 by ohio state university press

estimation of unobserved expected monthly inflation using kalman filtering hamilton developed a technique for estimating financial market expectations of inflation based on the observed time series properties of interest rates and inflation the technique is based on a state space representation derived from an underlying vector autoregressive process of the expected real interest rate and the expected inflation rate on lagged expectations and lagged values of the observed treasury bill rate and the actual inflation rate this article extends this work in two ways first we use monthly data since the quarterly data used by hamilton may obscure many interesting movements especially for determining the role of inflationary expectations in stock price movements and this is one of our primary interests second we employ an alternative method developed by burmeister and wall for estimating the parameters of the model and this method leads to a different identification proof both approaches share the use of the kalman filter to estimate the unobserved variables in this case e

a theory based state dependent phillips curve and its estimation to explain the existing empirical irregularity about the slope of a phillips curve this article provides a model of imperfect competition to short that the slope of a phillips curve is shock dependent we empirically apply a state space markov switching model to examine the impact of inflation surprise on the unemployment gap resulting in the state dependent phillips curve fitting quite well our empirical evidence indicates that an unexpected monetary expansion does produce effects in reducing unemployment rates and that supply shocks should not be ignored in estimating the phillips curve because they dominate demand shocks in several nonoil shock periods jel c51 e24 e52 i introduction it is well known that a downward sloping short run phillips curve implies a trade off between the inflation rate and unemployment rate however empirical findings point out that the slope of the phillips curve depends on the selected sample periods 1 does any theoretical model explain the changes in the slope of a short run phillips curve as displayed in the data can we find empirical support for our model that implies a slope changeable phillips curve to answer these questions this article provides a theoretical model implying that the slope of the phillips curve is shock dependent we then apply a state space markov switching model to investigate the empirical support of the theoretical model although a stable negative short run phillips curve is crucial for producing inflation forecasts in policy making institutions there is no general consensus about the negative slope of the phillips curve in empirical literature 2 one of the explanations to the previous empirical irregularity as suggested by king and watson 1994 is that the relationship between unemployment and inflation is shock dependent which means that the slope of a phillips curve relies on the dominance of the demand or supply shocks therefore the conventional single equation regression based on the state independent framework is not appropriate apart from neglecting the state dependent characteristic of the phillips curve there are several other drawbacks for conventional empirical studies when investigating the phillips curve first many articles assume that forecast errors of inflation are homoscedastic which is challenged in the literature the homoscedastic assumption is debatable because several studies such as engle 1983 jansen 1989 evans 1991 and brunner and hess 1993 point out significant heteroscedasticity in the u s inflation rate arch or garch type models provide estimates of how the conditional variance of inflation varies over time within a given structure and therefore they ignore the possibility of structural changes caused by changing regimes a markov switching heteroscedasticity model is an alternative that allows regime changes in the variance structure instead of applying arch type models to estimate the time varying conditional variance of inflation within a given structure this article takes into account the influence of regime changes on inflation s variance we apply the state dependent conditional heteroscedasticity approach provided by brunner and hess 1993 and evans and wachtel 1993 to estimate the forecasting errors of inflation the second drawback is a constant natural rate assumption the unemployment gap is the difference between the unemployment rate and the natural rate conventional literature assumes a constant natural rate which is challenged theoretically and empirically as stated by gordon 1997 the existence of unionization unemployment insurance programs and labor force demographics leads to a highly persistent unemployment rate we therefore assume that the unobservable natural rate is time varying and behaves in accordance with the hysteresis of unemployment rates 3 recent empirical works of a regime switching approach on the phillips curve have focused on whether the relationship between inflation and unemployment rates is nonlinear as in ferri et al

what does the show case show evidence of and lessons from adjustment in uganda abstract uganda is often seen as an african show case for the beneficial effects of structural adjustment high growth rates have been combined with a high degree of ownership of the reforms at the same time critics have pointed to continued aid dependence and limited growth of the important agricultural export sector the contribution of this paper to this debate is three fold first ownership has not always been exemplary and is still fragile in some respects second although aid has indeed been important for bringing about high growth aid dependence has diminished over time third there have been real supply responses from the agricultural export sector

unobserved component time series models with markov switching heteroscedasticity changes in regime and the link between inflation rates and inflation uncertainty in this article i first extend the standard unobserved component time series model to include hamilton s markov switching heteroscedasticity this will provide an alternative to the unobserved component model with autoregressive conditional heteroscedasticity as developed by harvey ruiz and sentana and by evans and wachtel i then apply a generalized version of the model to investigate the link between inflation and its uncertainty u s data gross national product deflator 1958 1 1990 4 i assume that inflation consists of a stochastic trend random walk component and a stationary autoregressive component following ball and cecchetti and a four state model of u s inflation rate is specified by incorporating regime shifts in both mean and variance structures i analyze the interaction of mean and variance over long and short horizons the empirical results show that inflation is costly because higher inflation is associated with higher long run uncertainty

redesigning the aid contract donors use of performance indicators in uganda abstract the perceived failure of traditional ex ante conditionality has led to proposals for using performance indicators as a basis for aid allocations ex post conditionality in this article we assess the role of performance indicators and their impact on the aid contract between donors and the government of uganda in uganda the use of performance indicators has radically changed donor recipient relations by improving both program monitoring and donor coordination it has however not yet fundamentally changed the incentive structure in the aid contract to improve the incentive structure we propose a distinction between indicators used for monitoring and those designed to guide aid allocations

shifting trends segmented trends and infrequent permanent shocks abstract a stochastic trend model is considered in which permanent shocks occur infrequently and randomly we show that this model is observationally equivalent to shifting segmented deterministic trend models moreover we show that standard full sample time series methods are incapable of distinguishing between small frequent permanent shocks and large infrequent permanent shocks an outlier search however reveals substantial evidence of large infrequent shocks to the gnp deflator and that these shocks account for most of the persistence in the gnp deflator for real gnp evidence of infrequent permanent shocks is weaker

changing inflation dynamics and uncertainty in the united states garch estimation we investigate recent changes in the level persistence and uncertainty of u s inflation despite the great strides in lowering inflation in the 1980s and 1990s we find that uncertainty has risen palpably in the current decade this is disturbing given the aforementioned findings of the negative impact of inflation uncertainty on output moreover analyzing both the standard consumer price index cpi and the cpi minus energy our results suggest that volatile energy costs contribute to the higher inflation uncertainty in the united states in the current decade

is there a peso problem evidence from the dollar pound exchange rate 1976 1987 one of the most puzzling aspects of the floating exchange rate regime since 1973 has been the apparent irrationality embedded in investors exchange rate expectations this paper investigates whether exchange rate forecasts although biased are still rational the idea is that investors can be rational and yet make repeated mistakes if the true model of the exchange rate is evolving over time the author s results support the hypothesis that the exchange rate has followed a switching regime process moreover the switching regime model estimated can explain about 75 percent of the bias implied by the forward market and the survey data copyright 1993 by american economic association

the time varying behaviour of real interest rates a re evaluation of the recent evidence a time varying parameter model with markov switching conditional heteroscedasticity is employed to investigate two sources of shifts in real interest rates 1 shifts in the coefficients relating the ex ante real rate to the nominal rate the inflation rate and a supply shock variable and 2 unconditional shifts in the variance of the stochastic process the results underscore the importance of modelling continual change in the ex ante real rate in terms of other economic variables rather than relying on a statistical characterization that permits only a limited number of discrete jumps in the mean of the process copyright 1999 john wiley sons ltd

the role of asymmetries and regime shifts in the term structure of interest rates we examine the relationship between interest rates of different maturities for the us germany and japan over the period 1982 2000 using a general multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts this approach has a very general underlying theoretical rationale that allows for time varying term premia and other short run deviations from the expectations model of the term structure the resulting nonlinear models provide good in sample fits display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out of sample forecasting properties

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

inflation uncertainty and labour market conditions in the us recent inflation dynamics in the united states us questioned the role of driving forces of inflation in the long run although the us recorded one of the longest economic recovery periods and the

explaining the failures of the term spread models of the rational expectations hypothesis of the term structure contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates empirical evidence suggests that the term spread between long and short rates fails to forecast future movements of long term rates although its forecasts of future short term rates are in the correct direction in this paper the authors show that this puzzling behavior of the term spread alone can be explained by a time varying term premium that is correlated with the term spread once this is accounted for neither expression of the expectations hypothesis is against the predictions of the theory copyright 1997 by ohio state university press

u s dollar real exchange rates nonlinearity revisited abstract previous empirical work employing smooth transition autoregressive star models has found that u s dollar real exchange rates are nonlinear mean reverting processes we utilise tests developed from time varying smooth transition autoregressive tv star models to re examine dollar based rates these tests reveal that structural change is an important feature of the data in some cases there is support for both nonlinearity and structural change while in other cases there appears to be stronger support for structural change than for nonlinearity the results raise a number of interesting issues for future research

rounding error a distorting influence on index data rounding error is an important source of measurement error that is common in index data the problem can be traced to rounding that occurs to limit the number of digits after the decimal place to be reported in rebased index data rounding error introduces distortions that affect variance properties alter the lag distributions of time series models and cause a systematic bias in estimated coefficients for instance spuriously choppy inflation rates are obtained when constructed using the official cpi rebased with 1982 84 100 fortunately the distortions can be generally avoided by using versions of data that have greater precision

some linear and nonlinear thoughts on exchange rates abstract after discussing the inconclusive results of linear structural models as applied to exchange rates this paper assesses the possibilities of using a particular form of nonlinear estimation called alternating conditional expectations as i a diagnostic tool and ii a forecasting method it contrasts the forecast performance of various linear in levels in differences error correction and nonlinear in levels in differences specifications of a sticky price monetary model augmented by a relative wealth variable the diagnostic results are as follows the optimal transformations are almost always nonlinear and often nonmonotonic forecasting results in sample and out of sample nonlinear forecasts yield substantial improvements over a random walk however in exercises with forecasts from rolling regressions the random walk specification still dominates over one quarter forecast horizons albeit only marginally and insignificantly so nonlinear specifications do slightly better than linear competitors at four quarter horizons

us inflation dynamics on long range data in this article we evaluate inflation persistence in the united states using long range monthly and annual data the importance of inflation persistence is crucial to policy authorities and market participants since the level of inflation persistence provides an indication on the susceptibility of the economy to exogenous shocks departing from classic econometric approaches found in the relevant literature we evaluate inflation persistence through the nonparametric hurst exponent within both a global and a rolling window framework moreover we expand our analysis to detect the potential existence of chaos in the data generating process in order to enhance the robustness of our conclusions overall we find that inflation persistence is high from 1775 to 2013 for the annual data set and from february 1876 to may 2014 in monthly frequency respectively especially from the monthly data set the rolling window approach allows us to derive that inflation persistence has reached to historically high leve

evidence on purchasing power parity from univariate models the case of smooth transition trend stationarity recent research has found that trend break unit root tests derived from univariate linear models do not support the hypothesis of long run purchasing power parity ppp for us dollar real exchange rates in this paper univariate smooth transition models are utilized to develop unit root tests that allow under the alternative hypothesis for stationarity around a gradually changing deterministic trend function these tests reveal statistically significant evidence against the null hypothesis of a unit root for the real exchange rates of a number of countries against the us dollar however restrictions consistent with long run ppp are rejected for some of the countries for which a rejection of the unit root hypothesis is obtained

financing sustainable development country undertakings and rights for environmental sustainability cures abstract we propose a global mechanism to finance sustainable development sd that offers a number of advantages over the current global environmental facility gef the mechanism would be multinational provide incentives for rich and poor countries to promote sd incorporate the principle of common but differentiated responsibilities and link incentives and funding for sd to structural benchmarks and performance targets it would operate as a large fund into which rich countries would pay based on their level of population per capita income and change in a measure of environmental sustainability receipts from the funds called country undertakings and rights for environmental sustainability cures would be made to poor countries based on their population per capita income and absolute level of environmental sustainability this approach differentiates payments and receipts on the basis of income while rewarding improvements in environmental performance in rich countries and making greater payments to countries with greater environmental problems to promote flexibility recipient countries would be able to trade bank or borrow their assigned cures provided that the trade resulted in a verifiable improvement in environmental sustainability in the purchasing country a reformed gef that adopted the desirable features of cures if widely adopted and funded at a sufficiently high level would offer a significant boost to global sd and would greatly assist poor countries to address the twin challenges of poverty and environmental degradation

optimal prediction of cyclical downturns abstract in the conventional way of visualizing economic time series the prediction problem does not dichotomize into predicting turning points and predicting conditional means yet the prediction of turning points has always been considered a separate issue in business cycle literature the paper first discusses these issues and then describes a model where the prediction of turning points does separate from the prediction of conditional means using the model an optimal way of predicting turning points is derived and applied to u s data the paper uses time series methodology and the theory of optimal stopping times

testing purchasing power parity under the null hypothesis of co integration this paper analyzes monthly data on the exchange rates and price indices of the eleven major industrial countries over the modern period of floating exchange rates it presents tests that are based upon the null hypothesis of cointegration the paper finds evidence that most country pairs not involving north american currencies have exchange rates and price indices that are cointegrated it estimates the error correction representation for the series that are cointegrated and it shows that the dynamic adjustment of the relationship between exchange rates and prices is accomplished almost entirely in the market for foreign exchange copyright 1991 by royal economic society

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

democracy and markets the case of exchange rates the relationships between the workings of democratic institutions and currency markets are studied severa competing propositions about how political re equilibration affects currency markets are derived and tested the results support the view that democratic politics affects currency markets expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency market equilibria additionally opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and or the contents of public policies electoral institutions mitigate the impact of politics on currency market equilibria political effects are weaker in countries with proportional representation electoral systems than in countries with majority plurality systems there is less evidence that central bank independence consensual corporatist systems or political coherency reduces the effect of politics on currency markets he study of democracy and markets is at the heart of political economy understanding how political equilibration and economic equilibration are related is one of the main challenges facing this field the size and nature of currency markets make them especially important cases substantively with globalization currency markets have become important constraints on elected governments reducing their room to maneuver analytically in comparison to most goods markets currency markets are informationally efficient asset markets with distinctive equilibria today s exchange rate is determined by currency traders fully informed expectations about tomorrow s exchange rate the sensitivity of these markets to the arrival of new information therefore makes them particularly well suited for studying the effects of political news and uncertainty on economic equilibration 1 this article demonstrates there are informationally relevant political factors insofar as exchange rate determination is concerned factors that directly affect the transition probabilities between currency market equilibria moreover these factors vary in important ways across democracies some electoral institutions lessen the effects of politics on currency

persistence in variance structural change and the garch model this article examines the persistence of the variance as measured by the generalized autoregressive conditional heteroskedasticity garch model in stock return data in particular we investigate the extent to which persistence in variance may be overstated because of the existence of and failure to take account of deterministic structural shifts in the model both an analysis of daily stock return data and a monte carlo simulation experiment confirm the hypothesis that garch measures of persistence in variance are sensitive to this type of model misspecification

stochastic processes for interest rates and equilibrium bond prices default free bonds represent in essence money sold forward the investor gives dollars say to the government now in exchange for a contract which promises to pay with probability one a given number of dollars at maturity and possibly a stream of intermediate coupon payments prior to maturity only recently have financial economists begun to examine the pricing of those bonds in a portfolio context in that framework nominal liquidity premiums or risk premiums on long term default free bonds are attributable to uncertainty about taste technological and price level changes which may occur prior to maturity of the bonds and prior to each coupon payment if any to the extent that the investor is unable to diversify away that uncertainty there is a systematic risk attached to the marginal utility which he or she can derive from the use in consumption or investment of the dollar payoffs on the bonds in some term structure models the instantaneous or short term rate of interest denoted here as a function of time t by r t in nominal terms and r t in real terms can be taken as a sufficient statistic1 for the source of systematic uncertainty about the marginal utility of the proceeds to be derived from defaultfree bonds maturing beyond the next instant e g merton 1974 vasicek 1977 cox ingersoll and ross 1977 specific assumptions about tastes technology and utility functions lead to specific equilibrium stochastic processes for the instantaneous short term riskless rate and longer term bond prices which are modelled as functionally dependent upon maturity and that short term riskless rate if a closed form solution exists for the long term bond price as a function of maturity and the short term interest rate it will be conditional inter alia on the parameters of the stochastic process for that short term rate marsh 1981 proposed that the closed form solutions could be tested in terms of the restrictions implied cross sectionally on the parameters of the time series process for the returns or prices of longer term bonds each with a given term to maturity for an analogy outside the term structure literature think of the closed form solution given by black and scholes 1972 for the price of an option on a nondividend paying stock with lognormal price dynamics given the model the cross section of time series for the changes in prices for each of the several options written on the same stock are not unrestricted their dispersion is functionally linked to the same volatility parameter for the stock price thus the option model including

additional evidence of long run purchasing power parity with restricted structural change we investigate two alternative versions of purchasing power parity ppp reversion to a constant mean in the spirit of cassel and reversion to a constant trend in the spirit of balassa and samuelson using long span real exchange rate data for industrialized countries we develop unit root tests that both account for structural change and maintain a long run mean or trend with conventional tests previous research finds evidence of some variant of ppp for 9 of the 16 countries with the unit root tests in the presence of restricted structural change we find evidence of ppp for five additional countries

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound