forecasting recessions the puzzle of the enduring power of the yield curve for over two decades researchers have provided evidence that the yield curve specifically the spread between long and short term interest rates contains useful information for signaling future recessions despite these findings forecasters appear to have generally placed too little weight on the yield spread when projecting declines in the aggregate economy indeed we show that professional forecasters are worse at predicting recessions a few quarters ahead than a simple real time forecasting model that is based on the yield spread this relative forecast power of the yield curve remains a puzzle the appendix is included online as supplementary material

revisiting purchasing power parity for african countries with nonlinear panel unit root tests this study applies panel seemingly unrelated regressions sur kapetanios et al kapetanios shin snell kss surkss tests proposed by wu and lee 2009 to investigate the properties of long run purchasing power parity ppp in 15 african countries the empirical results from the univariate unit root and panel based unit root tests indicate that ppp does not hold for these 15 countries under study however panel surkss tests indicate that ppp is valid for four of these 15 countries these results have important policy implications for these 15 african countries under study

ppp and structural breaks the peseta sterling rate 50 years of a floating regime abstract this paper aims to illustrate the relevance of considering structural breaks in purchasing power parity ppp tests to that end we examine the peseta sterling real exchange rate between 1870 and 1935 this is an interesting series given that the peseta was not part of the gold standard yet maintained a floating rate regime during most of that period when breaks are not considered it is impossible to reject the existence of a unit root in the series however if two breaks are allowed with these capturing the particular events that occurred in the monetary history of these currencies at the beginning and end of the period then the null hypothesis can be rejected and ppp emerges as a good approximation of the behavior of the peseta sterling exchange rate even if that rate was predominantly a floating regime

real exchange rates and time varying trade costs this paper re examines the empirical modeling of purchasing power parity ppp deviations in the presence of commodity market frictions first we show that a specific type of smooth transition models can closely approximate the functional form of the theoretical adjustment mechanism derived by dumas 1992 dynamic equilibrium and the real exchange rate in a spatially separated world review of financial studies 5 2153 180 for the case of constant as well as changing trade costs second we develop for the first time an empirical model of the real exchange rate which allows for changes in the degree of market integration by employing a long span of data on the dollar sterling real exchange rate and a micro founded proxy for trade frictions we provide novel evidence of a significant relationship between the persistence of the real exchange rate and the level of trade costs this finding suggests that both the difficulty of detecting ppp and the extend of rogoff s puzzle vary over time with the degree of trade restrictiveness finally we highlight policy repercussions of our results

nonlinear dynamics in deviations from the law of one price a broad based empirical study abstract in this paper we test empirically the validity of the law of one price using data for five major bilateral us dollar exchange rates and nine goods sectors during the recent floating exchange rate regime since the early 1970s using threshold autoregressive models we find strong evidence of nonlinear mean reversion in deviations from the law of one price with plausible convergence speeds consistent with theoretical arguments on international goods markets arbitrage under transactions costs and with an emerging strand of empirical literature these results contribute towards forming a consensus view in favor of discrete regime switching in deviations from the law of one price and the presence of differing nonzero transactions costs across a broad range of goods and countries

asymmetric loss and herding behaviour of exchange rate forecasters evidence from south africa this study examines the asymmetry of the loss function for private forecasters in exchange rate forecasts of the south african rand it tests rationality under the possibility of an asymmetric loss function the results indicate less evidence of asymmetry for a horizon of 1 month but considerable evidence of asymmetry for a horizon of 3 months however the shapes of the distributions formed by estimated asymmetry parameters of sub samples for each forecaster are symmetric regardless of the forecast horizons which implies that these forecasters do not herd or antiherd in fact the results of our empirical herding test show that forecasters neither herd nor antiherd which is in sharp contrast to recent findings on antiherding for foreign exchange rates in emerging market economies our findings provide consistent evidence for a recent suggestion that antiherding might result in the rejection of rationality even under asymmetric loss functions our findings also suggest that central bank transparency m

on the loss function of the bank of canada a note abstract based on the approach advanced by elliott et al elliott g komunjer i timmermann a 2005 estimation and testing of forecast rationality under flexible loss review of economic studies 72 1107 1125 we studied whether the inflation and output growth projections published by the bank of canada are consistent with an asymmetric loss function current year projections provide no signs of asymmetry but next year projections do the hypothesis of rationality of the projections can be rejected under symmetric loss but not under asymmetric loss

federal budget projections a nonparametric assessment of bias and efficiency as an important initial step in the annual budget process the president presents to congress each january his budget with details of federal spending activity and priorities our paper is a statistical assessment of the merit of the budget figures submitted to congress we investigate the overall budget as well as several important specific accounts an important aspect of our paper is the introduction of a nonparametric methodology which incorporates exact tests for assessing the unbiasedness and the internal and external consistency of forecasts the empirical evidence shows that the nonparametric results confirm the presence of bias in forecasts on the outlay side suggested by regression results but tends to find fewer series exhibiting bias on the revenue side on the other hand the nonparametric approach lends greater support to the conclusion that the government s budget projections do not fully exploit available information copyright 1995 by mit press

liquidity and the dynamic pattern of asset price adjustment a global view abstract global liquidity expansion has been very dynamic since 2001 contrary to conventional wisdom high money growth rates have not coincided with a concurrent rise in goods prices at the same time however asset prices have increased sharply significantly outpacing the subdued development in consumer prices we investigate the interactions between money and goods and asset prices at the global level using aggregated data for major oecd countries our var results support the view that different price elasticities on asset and goods markets explain the observed relative price change between asset classes and consumer goods

on the political economy of national tax revenue forecasts evidence from oecd countries sustainable budgets are important quality signals for the electorate politicians might thus have an incentive to influence tax revenue forecasts which are widely regarded as a key element of national budget plans looking at the time period from 1996 to 2012 we systematically analyze whether national tax revenue forecasts in 18 oecd countries are biased due to political manipulation drawing on theories from the field of political economy we test three hypotheses using panel estimation techniques we find support for partisan politics left wing governments seem to produce more optimistic or less pessimistic tax revenue forecasts than do right wing ones contrary to the theoretical prediction based on the common pool problem we find that more fragmented governments and parliaments tend to produce more pessimistic or less optimistic tax revenue forecasts we find no empirical evidence that political business cycles play a role in tax revenue forecasts

state responses to fiscal crises the effects of budgetary institutions and politics this paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits more restrictive state fiscal institutions such as no deficit carryover rules and tax and expenditure limitations are correlated with more rapid fiscal adjustment to unexpected deficits political factors are also important when a single party controls the state house and the governorship deficit adjustment is much faster than when party control is divided in gubernatorial election years tax increases and spending cuts are both significantly smaller than at other times

a new analysis of the determinants of the real dollar sterling exchange rate 1871 1994 the high persistence of both ppp deviations and the proxy variables for the equilibrium real rate might create a problem of spurious coefficient significance within recently applied nonlinear models to illustrate we consider the real dollar sterling exchange rate over the period 1871 1994 a nonlinear estar process with a time varying equilibrium seems to parsimoniously fit the data appropriate significance levels are obtained using the wild bootstrap method to adequately capture the conditional heteroskedasticity in the data our results provide further evidence for the nonlinear model and the implied speed of adjustment is found to be substantially faster than previously reported in the literature

capital inflows and economic welfare for a small open economy with variable returns to scale abstract in the presence of a production subsidy a tariff and or variable returns to scale this paper shows that a capital inflow improves welfare under certain conditions and that only temporary production subsidy tariff may be needed to generate capital inflows even if the domestic rental rate is initially lower than the world rental rate

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

municipal labor demand in the presence of uncertainty an econometric approach we specify a model of municipal labor demand when resource flows available to the municipality are uncertain the model allows us to test the hypothesis that employment decisions are rational in the sense that they incorporate all available information at the time that the decisions are made we find that for our sample of communities on the whole one cannot reject the hypothesis that labor demand is consistent with intertemporal utility maximization under uncertainty however small and large communities exhibit different behavior the employment decisions of small communities are consistent with the model while those of large communities are not

trade in producer services a heckscher ohlin approach trade in services has become topical but little theory has been developed this paper assumes that one commodity and the services of capital are tradable and examines the traditional trade results service trade can produce the same equilibrium as commodity trade but substantial differences exist depending on whether the tradable commodity is capital or labor intensive tariffs on either commodity have the same commodity price effects and will always increase the welfare of the immobile factor labor factor income taxes can also affect trade patterns when both goods and capital services are tradable there is an indeterminacy in trade patterns and tariffs while reducing commodity trade may not reduce welfare

flexible fourier stationary test in purchasing power parity for african countries this study applies stationary test with a fourier function proposed by enders and lee 2004 2009 to test the validity of long run purchasing power parity ppp to assess the nonstationary properties of the real exchange rate for 20 african countries we find that our approximation has higher power to detect u shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process we examine the validity of ppp from the nonlinear point of view and provide robust evidence clearly indicate that ppp holds true for almost african countries our findings point out their exchange rate adjustment is mean reversion towards ppp equilibrium values in a nonlinear way

capital and technology movements and economic welfare economists have long valued capital mobility as an aid to international efficiency robert mundell has shown that under certain conditions the capital movement induced by tariffs on goods will substitute for trade and enable the tariff impeded international economy to reach essentially the same equilibrium as would a completely free international economy it will also except possibly for the case when the optimal tariff is non zero benefit both countries but if perfect unlimited capital mobility is a good thing for the borrowing country it does not follow as this paper demonstrates that any limited amount of capital mobility however small is a good thing if the capital movement is due to discrepancies in returns due solely to a tariff then a small amount of capital inflow will actually diminish welfare in the recipient country thus countries which take a few cautious steps toward liberalization of capital flow may find their welfare diminished this conclusion is related to the intuitive notion that perhaps it might not be a good idea to allow only a few foreign investors to reap high rates of return in capital short countries if foreign investment is allowed enough should be allowed to depress the rate of return so that excessive profits are not taken otut of the country by a few privileged investors on the other hand however this paper shows that if differences in returns are due to a technological advantage in the capital importing country so that the country with initially high return to capital nonetheless exports the capital intensive good and if these differences in returns are accompanied but not caused by tariffs then even short hesitant steps toward liberalization of capital inflow will improve the borrowing country s welfare this paper also shows that the home country s welfare may be improved or diminished by importing the advanced country s technology when the home country levies a tariff and pays royalties for the technology the critical point is that a movement of technology may either increase or diminish economic welfare depending on whether the technological progress is of the capital saving type or of the labor saving type in the fixed production coefficients case in the same case when the technological progress is hicksian neutral technology inflow will reduce or have no effect on the home country s economic welfare depending on whether the foreign country s technological progress occurs in the home country s inmport competing or export industries similarly capital or technology inflow will never increase the borrowing country s welfare when the country specializes completely in a single industry some of these results should be modified when we treat the possibility that changes in factor prices alter factor proportions

state budget stabilization fund adoption preparing for the next recession or circumventing fiscal constraints the high rate of budget stabilization fund adoption during the 1980s is often attributed to the 1980 1982 recession in this view states adopted funds to prevent a recurrence of the fiscal crises experienced during that recession an alternative hypothesis is that some funds adopted during this period were intended to circumvent tax and expenditure limit laws we find that states with tels in place were significantly more likely to adopt statutory funds but were significantly less likely to adopt funds with stringent deposit and withdrawal rules suggesting that some funds were adopted to circumvent existing fiscal constraints

purchasing power parity over two centuries trends and nonlinearity in two recent contributions lothian and taylor and cuddington and liang produced empirical evidence that annual data for the dollar sterling real exchange rate spanning two centuries exhibited a non linear deterministic trend this trend could be proxying harrod balassa samuelson effects lothian and taylor showed that a linear stationary autoregressive mode which embodied a cubic trend implied much faster mean reversion of the real exchange rate to shocks than a model that excluded the trend this article shows that both non linearity and a deterministic trend can be allowed for in a theoretically appealing manner and that the fitted models provide a parsimonious explanation of both the dollar sterling and franc sterling real exchange rates over the two centuries of data generalized impulse response function analysis of the models demonstrates that the speed of adjustment to shocks can be even faster when trends are considered

long run purchasing power parity with asymmetric adjustment further evidence from african countries this study applies threshold cointegration test advanced by enders and siklos 2001 to investigate the properties of asymmetric adjustment in long run purchasing power parity ppp in 22 selected african countries during the period of january 1980 to december 2003 although there is evidence of long run ppp for most african countries the adjustment mechanism is asymmetric these results have particularly important policy implications for african countries

the central banker as a risk manager estimating the federal reserve s preferences under greenspan we derive a natural generalization of the taylor rule that links changes in the interest rate to the balance of the risks implied by the dual objective of sustainable economic growth and price stability this monetary policy rule reconciles economic models of expected utility maximization with the risk management approach to central banking within this framework we formally test and reject the standard assumption of quadratic and symmetric preferences in inflation and output that underlies the derivation of the taylor rule our results suggest that fed policy decisions under greenspan were better described in terms of the fed weighing upside and downside risks to their objectives rather than simply responding to the conditional mean of inflation and of the output gap

potential pitfalls in determining multiple structural changes with an application to purchasing power parity we investigate the empirical performance of the bai and perron multiple structural change tests and show that the use of their critical values may cause severe size distortions in persistent series to correct these size distortions while maintaining a good power we implement the bai structural change test and extend it in two directions developing a new procedure to choose the number of breaks and a restricted version that specifically models breaks that imply mean or trend reversion using our new methodologies we reconcile the results of unit root tests with those of tests for structural change when testing for long run purchasing power parity

empirical evidence on the currency carry trade 1900 2012 abstract most of the currency literature investigates the risk and return characteristics of the currency carry trade after the collapse of the bretton woods system in order to gauge the long term currency carry premium we extend the sample to 20 currencies over the period 1900 to 2012 we find modest sharpe ratios in the range of 0 2 0 4 for carry trading over this period this is markedly lower than the sharpe ratios above 0 6 reported for recent sample periods we document that carry trading occasionally incurs substantial losses which fits well with risk based explanations for deviations from uncovered interest parity we find that large carry trading losses do not necessarily coincide with large losses in global equity markets our results help to better understand the source and nature of excess returns on the carry trade

purchasing power parity over two centuries abstract this paper re examines the purchasing power parity hypothesis for the dollar sterling exchange rate using the two centuries of data from lothian and taylor lt 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 3 488 509 unlike lt we conclude that the dollar sterling rer is nonstationary implying a rejection of the long run ppp hypothesis the differences in our conclusions are explained by 1 sensitivity of adf unit root tests to the choice of lag length and or 2 the presence of significant time trends in the adf or phillips perron unit root test equations

bias in federal reserve inflation forecasts is the federal reserve irrational or just cautious abstract inflation forecasts of the federal reserve seem to have systematically under predicted inflation from the fourth quarter of 1968 until volcker s appointment as chairman and to systematically over predict it afterwards until the second quarter of 1998 furthermore under quadratic loss commercial forecasts seem to have information not contained in those forecasts to investigate the cause of this apparent irrationality this paper recovers the loss function implied by federal reserve s inflation forecasts the results suggest that the cost of having inflation above an implicit time varying target was larger than the cost of having inflation below it for the period since volcker and that the opposite was true for the pre volcker era once these asymmetries are taken into account the federal reserve s inflation forecasts are found to be rational

bias in omb s economic forecasts and budget proposals the office of management and budget omb annually submits the president s budget for the u s government to the congress the economic forecasts and revenue and outlay proposals contained in the budget have been criticized as biased especially during the 1980s tests for bias in one year ahead proposals for the 1963 89 period show no bias in economic forecasts and revenue estimates but substantial bias in outlay proposals most outlay proposals are consistently less than actual outcomes accounting for underprediction of the federal deficit omb outlay proposals appear to be influenced by politics republican administrations show more significant proposal biases with defense proposals higher and domestic outlay proposals lower than outcomes the office of management and budget consistently understates the deficits by resorting to the most optimistic economic assumptions it can credibly and now sometimes even incredibly employ senator james sasserwall street journal 25 january 1990

fiscal news state budget rules and tax exempt bond yields abstract this paper investigates how state fiscal institutions such as balanced budget rules and restrictions on state debt issuance mediate the bond market reaction to state fiscal news we analyze data on the yields of bonds issued by different states as reported in the chubb relative value survey along with data on state budget forecasts for the period 1988 1998 we find that unexpected deficits are correlated with higher state bond yields this effect is smaller for states with tight antideficit rules than for states without these fiscal rules unexpected deficits have a particularly large effect in raising bond yields of states with tax limits these results suggest that bond market participants view fiscal institutions as relevant in assessing the risk characteristics of tax exempt bonds and that the economic significance of these institutions depends on the state s economic and fiscal circumstances

purchasing power parity with flexible fourier stationary test for central and eastern european countries this study applies stationary test with a fourier function proposed by enders and lee 2004 2009 to test the validity of long run purchasing power parity ppp to assess the nonstationary properties of the real exchange rate rer for seven central and eastern european countries ceecs we find that our approximation has higher power to detect u shaped breaks and smooth breaks than linear method if the true data generating process of exchange rate is in fact a stationary nonlinear process we examine the validity of ppp from the nonlinear point of view and provide robust evidence clearly indicating that the ppp holds true for all ceecs our findings point out their exchange rate adjustment is mean reversion towards ppp equilibrium values in a nonlinear way

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

trade factor prices and the gains from trade with increasing returns to scale existing analyses seem to suggest that national increasing returns to scale are not a very useful tool for analysing trade owing to problems such as multiple equilibria and the tendency towards complete specialization the purpose of this paper is to construct a model in which there are in fact determinant relationships among country size the direction of trade the gains from trade and international factor price differences in the model differences in country size determine the direction of trade which in turn determines factor price differences and limits the possible distribution of the gains from trade commerce international prix des facteurs de production et les gains de l change dans un contexte de rendements croissants a l echelle les analyses conventionnelles semblent suggerer que les rendements croissants h l 6chelle au niveau national ne constituent pas une avenue prometteuse dans l analyse du commerce international parce que de tels rendements creent une presomption en faveur de la specialisation complete et conduisent a des situations d 6quilibres multiples le but de ce m6moire est de construire un mod le dans lequel il existe des rapports determinants entre la dimension du pays la direction des 6changes les gains de l echange et les differentiels internationaux entre les prix des facteurs de production dans ce mod le les differences entre les pays en termes de dimension d6terminent la direction du commerce international laquelle d6termine le differentiel entre les prix des facteurs de production et limite l eventail des r6partitions possibles des gains de l echange

trade and investment with constant and increasing returns to scale it has been well known since the seminal paper by mundel that in a heckscher ohlin model with constant returns to scale factor flows can be perfect substitutes for com modity trade this paper extends the analysis to differentiate between factor movements and investment and considers the possibility of trade and investment occurring simultaneously the analysis is carried out in models with constant and increasing returns to scale in the crs model it is shown that it is important whether the returns to capital are repatriated in terms of commodity x or commodity y the country well endowed with capital could export the labour intensive good and generally the pattern of trade cannot be predicted by endowment differences between countries with both investment and trade tariffs need not produce a welfare loss with irs it is shown that there can be no presumption as to the direction of investment in the no trade world trade patterns however are predictable as investment will be after trade has taken place thus the direction of investment may depend on whether trade or investment occurs first

nonlinearities in real exchange rate determination do african exchange rates follow a random walk in this article we aim at modelling the long run behaviour of the real effective exchange rates reer for a pool of african countries not much attention has been paid to this group of countries in particular to the existence of nonlinearities in the long run path of such a variable controlling for two sources of nonlinearities i e asymmetric adjustment to equilibrium and nonlinear deterministic trends allows us to gain some insight about the behaviour of the african reer we find that these sources of nonlinearities help us to explain the apparent unit root behaviour found applying linear unit root tests for most of the countries

real exchange rate assessment in the gcc countries a trade elasticities approach this article adopts new panel econometric methods to assess real exchange rate alignment with economic fundamentals in the countries of the gulf cooperation council gcc using a theoretical approach popularized by paul krugman in the late 1980s results from panel econometric applications of the krugman model yield low levels of real exchange rate undervaluation in the gcc countries although indicating persistence of undervaluation albeit statistically low into the medium term they also show that the recent real exchange rate undervaluation could be characterized as due to short run frictions and adjustment costs associated with continued depreciation of the us dollar to which gcc countries currencies are pegged further failure to find supporting evidence for the marshall lerner condition underscores the propriety of using fiscal policy rather than exchange rate policy to address recent inflationary pressures and help resolve lingering global financial imbalances

sticky prices and time to equilibrium evidence from asia pacific trade related economies the theoretical relation between exchange rate and prices has been a difficult proposition to find supporting evidence despite many studies of developed economies using standard research methods the exchange rate to price relation appears to hold in the long run only a result consistent with sticky price hypothesis there is a need to add to this sticky price literature by examining more yet studied economies to this area of research this article presents results to support long run equilibrium in the asia pacific economies as being 5 years the methodology is used to group countries with high trade intensity within a region and value weight the resulting variables to test the theory in a regional context our positive finding on the long run equilibrium we believe helps in some ways to enrich the literature on the exchange rate behaviour of an important region for world trade

generalized long memory and mean reversion of the real exchange rate definitive evidence regarding a rapid mean reversion of the real exchange rate is not present when using standard linear methodology including unit root tests and fractional integration to consider the robustness of these results we use an encompassing model the gegenbauer autoregressive moving average garma model which nests as special cases the existing linear methods the garma model accommodates a complete notion of persistence and allows shocks to dissipate slowly in a cyclical manner we find evidence supporting a weak version of purchasing power parity where equilibrium errors are long memory with strongly persistent cycles however this new form of cyclical mean reversion is likely too slow to be economically meaningful the inability to find a strong equilibrium attractor process using a very general encompassing linear methodology provides support for the recent models that allow for a nonlinear attraction process and for shifting real exchange rate equilibria

testing the rationality of doe s energy price forecasts under asymmetric loss preferences this paper examines the rationality of the price forecasts for energy commodities of the united states department of energy s doe departing from the common assumption in the literature that doe s forecasts are based on a symmetric underlying loss function with respect to positive vs negative forecast errors instead we opt for the methodology of elliott et al 2005 that allows testing the joint hypothesis of an asymmetric loss function and rationality and reveals the underlying preferences of the forecaster results indicate the existence of asymmetries in the shape of the loss function for most energy categories with preferences leaning towards optimism moreover we also examine whether there is a structural break in those preferences over the examined period 1997 2012

explaining time variation in geographic price dispersion the pattern of price dispersion significantly varies over time and across locations using a detailed dataset with product level retail prices we examine the role of time varying factors in shapin

perceived inflation under loss aversion building on prospect theory we apply the concept of loss aversion to the formation of inflation perceptions and test empirically for nonlinearities in the inflation perceptions relation for a panel of 10 euro area countries specifically under the assumption of loss aversion inflation changes above a certain reference rate will be perceived more strongly rejecting rationality of inflation perceptions in general under symmetric loss and in a majority of cases under flexible loss functions panel smooth transition models give evidence of nonlinearities in the inflation perceptions relation regarding both actual inflation and time this result is confirmed by dynamic fixed effects estimates where the slope of the estimated value function is significantly steeper in the loss region and the implied average reference inflation rate is found close to 2

purchasing power parity and the behavior of prices and nominal exchange rates across exchange rate regimes abstract the evidence presented in this paper shows that purchasing power parity as a long run proposition is indeed a very useful approximation we see this quite clearly in the panel data for three historical periods examined here the classical gold standard era from 1870 to 1914 the interwar period from 1921 to 1939 and the period after world war ii from 1959 to 1998 price level behavior across countries differs in the way that ppp suggests when monetary arrangements differ and is highly similar when monetary arrangements are themselves similar inflation rates adjusted for exchange rate changes in general are highly correlated and bear a one to one relation to one another within and across the three periods and the varied monetary regimes that prevailed

the cause of an integral correction mechanism of the real exchange rate abstract i find that rabanal and rubio ramirez 2015 s international real business cycle model can explain an integral correction mechanism of the real exchange rate an input adjustment cost in their model implies that the real exchange appreciates following a positive domestic productivity shock and reverts to steady state quickly but presents a long run cyclical movement these particular dynamics help explain the ppp puzzle

testing the rationality of state revenue forecasts recent revenue shortfalls in several states focus attention on the question of whether states do a good job of forecasting revenues in modem economics forecasts are eval uated on the basis of whether or not they are rational do the forecasts optimally incorporate all available information this paper develops a method for testing the rationality of state revenue forecasts and applies it to the analysis of data from new jersey massachusetts and maryland one of our main findings is that in all three states the forecasts of own revenues are systematically biased downward tn 1985 the 50 states raised 349 billion in revenues from their own sources and received 84 billion in grants from the federal government u s bureau of the census 1987 p 266 state governments are clearly important players in the u s system of public finance and the efficiency with which they conduct their financial affairs has an important impact on consumer welfare one important determinant of a state s ability to con duct reasonable fiscal policies is the quality of its revenue forecasts sensible deliberations about ex penditures cannot be made in the absence of good forecasts indeed in the presence of con stitutional or statutory provisions for balanced budgets unanticipated changes in revenues can wreak havoc not only on proposals that are sched uled for funding but on plans that have already been put into effect as well in recent months two powerful governors michael dukakis of massachusetts and mario cuomo of new york have suffered major politi cal embarrassments because actual revenues fell substantially short of the predictions in their re spective states such episodes focus attention on the question of whether states do a good job of forecasting revenues in modem economics fore casts are evaluated on the basis of whether or not they are rational do the forecasts optimally incorporate all information that is available at the time they are made although there is a large literature on state revenue forecasting methods that literature focuses mostly on state budgetary institutions forecasts themselves are evaluated only in an informal fashion 1 although the theory and econometric methods of rational expectations have been used to evaluate forecasts made by households and businesses 2 these powerful tools have not been applied to state government fore casts this paper applies these methods to the problem of state revenue forecasting and as an example uses them to analyze data from new jersey massachusetts and maryland the results cast light not only on the question of rationality per se but on issues such as the impact of political factors on forecasts section ii presents the conceptual framework for testing rational expectations the relevant in stitutional issues and data are described in section iii the results are discussed in section iv we find that in all three states forecasts of own rev enues are systematically biased downward section v concludes with a summary

revisiting the persistence of real exchange rates abstract in this paper we provide new and robust evidence that panel regressions significantly reduce the estimated half lives of real exchange rates in a sample of 21 countries these results are obtained under dynamic panel models that control for non purchasing power parity ppp equilibria small sample bias does not have a significant impact on half lives since the increase in the half life arising from the bias is more than compensated by the decrease of the half life due to the control of non ppp equilibria among the two sources of non ppp equilibria i e first the balassa samuelson effect and second smooth shifts in mean we find that under a heterogeneous panel model the first source results in a larger reduction of half lives

rational expectations and macroeconomic forecasts the article presents extensive results from testing for bias and serially correlated errors in a collection of time series of quarterly multiperiod forecasts for six variables including real gnp growth inflation and unemployment the analysis covers responses by 79 frequent participants in economic outlook surveys conducted regularly since 1968 it shows much greater incidence of apparently systematic errors for inflation than for the other variables also the tests are more favorable to composite group forecasts than to most of the individual forecast sets

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

evaluating rationality of level and growth rate forecasts of direct tax revenues under flexible loss function evidence from swiss cantons abstract we explore the rationality of tax revenue forecasts in swiss cantons under asymmetric loss functions we find evidence of asymmetric losses for the level forecasts but not for growth rates allowing for asymmetric losses alters the outcome of rationality tests for the level forecasts

validity of purchasing power parity for selected latin american countries linear and non linear unit root tests abstract the aim of this study is to examine empirically the validity of ppp in the context of unit root tests based on linear and non linear models of the real effective exchange rate of argentina brazil chile colombia mexico peru and venezuela for this purpose we apply the harvey et al 2008 linearity test and the non linear unit root test kruse 2011 the results show that the series with linear characteristics are argentina brazil chile colombia and peru and those with non linear characteristics are mexico and venezuela the linear unit root tests indicate that the real effective exchange rate is stationary for chile and peru and the non linear unit root tests evidence that mexico is stationary in the period analyzed the results show support for the validity of ppp in only three of the seven countries

using regional economic indexes to forecast tax bases evidence from new york this paper evaluates the use of measures of regional economic activity to forecast tax revenues for new york state and new york city at 3 6 and 12 month horizons we construct sales and withholding tax base series and then apply the methodology of stock and watson 1989 1991 to estimate regional indexes of coincident economic indicators employing an out of sample forecasting framework we find that the use of the coincident indexes leads to statistically and economically significant improvements in tax base forecasts compared to those generated from univariate autoregressions in addition the coincident indexes produce forecasts that are generally more accurate than forecasts that rely on the use of the coincident indicators separately though our analysis focuses on forecasting movements in tax revenue at the state or local level it is also intended to draw attention to the value the indexes may provide in other applications

factor movements and commodity trade as complements abstract several models are presented in which factor mobility leads to an increase in the volume of world trade the models share the common characteristic that the basis for trade is something other than differences in relative factor endowments these alternative bases for trade include returns to scale imperfect competition production and factor taxes and differences in production technology taken together the models suggest a more general idea the widely held notion that trade in goods and factors are substitutes is in fact a rather special result which is a general characteristic only of factor proportions models

the theorems of international trade with factor mobility abstract this paper addresses the relation between goods trade and international factor mobility in general terms the basic theorems of international trade suitably interpreted are shown to hold in their strong versions if the number of international markets for goods and factors is at least as large as the number of factors the crucial dimensionality issue is hence not the relative number of goods and factors per se but the number of international markets relative to the number of factors only the price version of the heckscher ohlin theorem fails to be essentially preserved by this condition

fiscal forecasts at the fomc evidence from the greenbooks abstract this paper examines fiscal policy forecasts prepared for the federal open market committee and its influence on u s monetary policy the forecasts contain useful information beyond that i

a utility based comparison of some models of exchange rate volatility abstract when estimates of variances are used to make asset allocation decisions underestimates of population variances lead to lower expected utility than equivalent overestimates a utility based criterion is asymmetric unlike standard criteria such as mean squared error to illustrate how to estimate a utility based criterion we use five bilateral weekly dollar exchange rates 1973 1989 and the corresponding pair of eurodeposit rates of homoskedastic garch autoregressive and non parametric models for the conditional variance of each exchange rate garch models tend to produce the highest utility on average a mean squared error criterion also favors garch but not as sharply

parity reversion persistence in real exchange rates middle income country case this article investigates purchasing power parity ppp in the specific context of middle income countries to circumvent the low power of traditional stationarity tests augmented dickey fuller and phillips perron tests it performs variance ratio and fractional integration tests in addition to perron s test that accounts for potential structural changes in real exchange rate processes beyond estimating half life shocks to ppp this article attempts to explain these estimates using a set of country specific variables as suggested by economic theory the evidence suggests that reversion to parity tends to be faster in high inflation countries and that productivity improvement leads to a higher level of persistence openness to trade tends to reduce the extent of deviations from parity but this result does not appear to be statistically robust evidence shows also that deviations are less persistent under a fixed exchange rate regime and under unrestricted capital mobility

loss functions for predicted click through rates in auctions for online advertising summary we characterize the optimal loss functions for predicted click through rates in auctions for online advertising whereas standard loss functions such as mean squared error or log likelihood severely penalize large mispredictions while imposing little penalty on smaller mistakes a loss function reflecting the true economic loss from mispredictions imposes significant penalties for small mispredictions and only slightly larger penalties on large mispredictions we illustrate that when the model is misspecified using such a loss function can improve economic efficiency but the efficiency gain is likely to be small

purchasing power parity over two centuries strengthening the case for real exchange rate stability a reply to cuddington and liang cuddington and liang 2000 purchasing power parity over two centuries journal of international money and finance 19 751 755 examine the long span of sterling dollar real exchange rate data of lothian and taylor 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 488 509 and claim to reject long run purchasing power parity by fitting time trends or by considering very high order autoregresssive representations this reply demonstrates however that the central claims of lothian and taylor are in fact strengthened by the implications of cuddington and liang s analysis in that while the economic importance of introducing trend terms is slight this leads to a faster estimated speed of mean reversion c 2000 elsevier science ltd all rights reserved jel classification f31 f41 c22

german business cycle forecasts asymmetric loss and financial variables abstract we examine the efficiency of german forecasts for output growth and inflation allowing for an asymmetric loss function of the forecasters we find the loss of output growth forecasts to be approximately symmetric while there is an asymmetry in the loss of the inflation forecasts the information of financial variables seems to be adequately incorporated into the output forecasts but to a lesser extent into the inflation forecasts

is the relationship between prices and exchange rates homogeneous empirical tests of purchasing power parity ppp are implicitly based on the conditions of symmetry and proportionality of the price coefficients we investigate a separate condition which we term homogeneity specifically while there may be factors that drive a wedge between prices and exchange rates when these factors are held constant we would expect a change in exchange rates to be associated with a proportional or homogeneous change in prices to test for the existence of homogeneity in prices we conduct two experiments first we apply a time varying coefficient procedure to nine euro area countries as well as the euro area as a whole during the monthly sample period 1999 m1 to 2011 m3 second we apply the same procedure to the same group of countries plus canada japan and mexico over the longer period 1957 m4 to 2011 m3 we find that averages of the price coefficients corrected for specification biases are uniformly homogeneous in the long run providing strong support for ppp

assessing the prudence of economic forecasts in the eu we estimate the eu commission loss preferences for major economic forecasts of 12 member states based on a recently proposed method by elliott komunjer and timmermann 2005 the paper provides evidence of asymmetries in the underlying forecast loss preference of the commission that tend to vary across member states in some cases our results show that eu forecasts tend to display a rather optimistic picture for main economic variables e g government balance thus allowing a certain degree of leeway in the fiscal adjustment path towards the medium term objective of close to balance or in surplus of the recently revised stability and growth pact over the period of our sample 1970 2004 this apparent asymmetry in the underlying loss preferences tends to deter prudent advice over economic policy lastly we provide an analysis on the trade off between loss and distribution asymmetries for which simulation results show that the testing method is robust in the presence of skewness copyright 2009 john wiley sons ltd

interpretation and limits of sustainability tests in public finance public debt is considered sustainable if discounted net repayments are expected to cover the initial debt issuance i e if the government s inter temporal budget constraint is expected to hold with risk averse lenders and an uncertain economic environment bohn 1995 stresses that this constraint relies on a stochastic discount factor which depends on lenders preferences to get round the difficulty related to the specification of private agents preferences in empirical analysis bohn 1998 suggests to estimate fiscal reaction functions describing how primary surplus reacts to indebtedness after having solved the econometric issues arising when primary surplus and debt have a very different persistence with a nonparametric approach or are both integrated with parametric tests we estimate fiscal reaction functions for france and greece there remain important limitations and interpretation difficulties that are common to all econometric sustainability tests

evaluating the efficiency of the fomc s new economic projections since 2007 fomc policymakers have been publishing detailed numerical projections of macroeconomic series over the next three years by testing whether the revisions to these projections are unpredictable i find that fomc s efficiency is generally accepted for inflation but often rejected for real economic variables notably for the unemployment rate the rejection is due to the strong autocorrelation of revisions which may reflect information rigidity of fomc s unemployment projections the joint efficiency of the entire projection is accepted in most cases

the effects of railroad development on price convergence among the states of the usa from 1866 to 1906 this study examines the effects of the reduced transaction costs on the price behaviours in the second half of the nineteenth century where declines in transaction costs were mainly caused by railroad development during this period it employs a panel test introduced by levin and lin 1992 on the convergence of wheat and corn prices using a panel of 48 us states from 1866 to 1906 the results show that by decreasing transportation costs railroads played an important role in price convergence among states of the usa for wheat and corn during the postbellum period

new evidence on nominal exchange rate predictability abstract the meese rogoff puzzle one of the well known puzzles in international economics concerns the weak relationship between nominal exchange rates and market fundamentals the purpose of this paper is to show that market fundamentals do in fact matter in forecasting nominal exchange rates in particular we emphasize the importance of the harrod balassa samuelson effect in modeling deviations from purchasing power parity based on the post bretton woods period we provide solid out of sample evidence that rejects the random walk forecast model at medium term and long term forecast horizons we also find mild evidence for out of sample predictability of nominal exchange rates over the short term

revisiting purchasing power parity for east asian countries using the rank test for nonlinear cointegration this study applies a simple and powerful nonlinear rank test proposed by breitung 2001 to test the validity of long run purchasing power parity ppp in a sample of east asian countries over the period march 1985 september 2008 the empirical results indicate that ppp holds for all of east asian countries studied and the nominal exchange rate domestic consumer price index cpi and the us cpi are all linearly interrelated with the exception of china our results have important policy implications for these east asian countries under study

governance infrastructure and us foreign direct investment this paper examines the statistical importance of governance infrastructure as a determinant of us foreign direct investment fdi in broad terms governance infrastructure represents attributes of legislation regulation and legal systems that condition freedom of transacting security of property rights and transparency of government and legal processes our econometric analysis uses a two stage estimation procedure in the first stage the probability that a country is an fdi recipient is estimated the results indicate that countries that fail to achieve a minimum threshold of effective governance are unlikely to receive any us fdi countries that receive no us fdi are typically countries that do not promote free and transparent markets that have ineffective governments and that often have legal systems that are not rooted in english common law in the second stage the analysis is restricted to those countries that did receive fdi flows the estimated equations focus on the determinants of the amount of fdi received given that a country is a recipient of us fdi governance infrastructure including the nature of the legal system is an important determinant of the amount received

political biases despite external expert participation an empirical analysis of tax revenue forecasts in germany this paper explores whether and how political biases arise in an institutional setting where revenue forecasting is delegated to a body that includes experts from institutions neither part of nor controlled by the government the empirical analysis focuses on the performance of german federal tax revenue forecasts in the preparation of which the advice of external experts has a long tradition as an institutional safeguard while on average revenue forecasts turn out to be unbiased the results show that the government exerts an influence in particular optimism pessimism in the government s gdp forecast helps to explain why the revenue forecast turns out too optimistic pessimistic in addition governmental estimates of the revenue effects of tax law changes are found to contribute to forecast errors

oil price forecasting under asymmetric loss based on the approach developed by elliott et al 2005 we found that the loss function of a sample of oil price forecasters is asymmetric in the forecast error our findings indicate that the loss oil price forecasters incurred when their forecasts exceeded the price of oil tended to be larger than the loss they incurred when their forecast fell short of the price of oil accounting for the asymmetry of the loss function does not necessarily make forecasts look rational

the rationality of usda forecasts under multivariate asymmetric loss a large number of previous studies suggest that many usda forecasts are biased and or inefficient these findings however may be the result of the assumed loss function of usda forecasters we test the rationality of the usda net cash income forecasts and the wasde production and price forecasts between 1988 and 2018 using a flexible multivariate loss function that allows for asymmetric loss and non separable forecast errors our results provide robust evidence that usda forecasters are rational expected loss minimizers yet demonstrate a tendency to place a greater weight on under or overprediction as a result this study provides an alternate interpretation of previous findings of forecast irrationality

capital flows real exchange rate misalignment and ppp tests in emerging market countries the economic performance of emerging markets has significant impacts on economic growth and volatility of macroeconomic indicators in various countries emerging markets accounted for 20 43 of global exports during the period 1970 2005 and held 70 of global foreign reserves in recent years more than 50 of the exports from the euro area japan and the united states go to emerging markets and other developing countries the globalization of capital flows is facilitated by technological innovations and excellent information networks coupled with sharp increases in savings that are directed into financial instruments across borders the use of purchasing power parity ppp as a benchmark in exchange rate policy reforms assumes the existence of a stable relationship between the exchange rate and the ratio of price levels in two countries this article investigates whether or not long run ppp holds in emerging markets johansen s cointegration technique is used with annual data in analysing the relationsh

what do economists know an empirical study of experts expectations for more than three decades economic columnist joseph a livingston has canvassed a panel of economists twice a year eliciting their six month and twelve month forecasts for more than a dozen key variables this study analyzes whether the experts predictions are unbiased and whether complete use was made of all relevant known information unbiasedness and completeness being necessary conditions for fully rational expectations little bias was found in either the half year or full year predictions but extensive underutilization of information particularly data on monetary growth occurred to prophecy is extremely difficult especially with respect to the future chinese proverb do economists expectations regarding key price and nonprice variables utilize all known relevant information in an unbiased efficient manner this is a worthy subject for research for several reasons properties of experts predictions likely form an upper bound for those of laymen further as john muth 14 has noted the character of dynamic processes is typically very sensitive to the way expectations are influenced by the actual course of events p 316 hence we need to know precisely how events do affect expectations finally the common practice of replacing a variable s generally unobserved expectation with a proxy based on its past values will be unbiased and will not cause bias in other

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

revisiting purchasing power parity in oecd this study revisits purchasing power parity theory ppp in the 34 oecd countries during january 1994 august 2013 we use a new panel stationary test with both sharp breaks and smooth shifts a novel approach to panel unit root testing proposed by bahmani oskooee et al 2014 the results indicate that the ppp holds in half of the 34 oecd countries these results indicate the importance of proper modelling of both sharp breaks and smooth shifts in real effective exchange rate series of oecd countries

estimation and testing of forecast rationality under flexible loss in situations where a sequence of forecasts is observed a common strategy is to examine rationality conditional on a given loss function we examine this from a different perspective supposing that we have a family of loss functions indexed by unknown shape parameters then given the forecasts can we back out the loss function parameters consistent with the forecasts being rational even when we do not observe the underlying forecasting model we establish identification of the parameters of a general class of loss functions that nest popular loss functions as special cases and provide estimation methods and asymptotic distributional results for these parameters this allows us to construct new tests of forecast rationality that allow for asymmetric loss the methods are applied in an empirical analysis of imf and oecd forecasts of budget deficits for the g7 countries we find that allowing for asymmetric loss can significantly change the outcome of empirical tests of forecast rationality