intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

subjective interest rate uncertainty and the macroeconomy a cross country analysis abstract we ask whether uncertainty about interest rates is important for economic activity the effects of interest rate uncertainty on the economy are examined through the lens of a small var where the assumption that uncertainty can affect real activity contemporaneously but not vice versa is indeed in line with the data our measure of uncertainty stems from professional forecasts of short and long term interest rates and accounts for both disagreement among forecasters and the perceived variability of future aggregate shocks studying a panel of countries we find that subjective interest rate uncertainty has large negative and persistent effects on the economy

no price like home global house prices 1870 2012 how have house prices evolved in the long run this paper presents annual house price indices for 14 advanced economies since 1870 based on extensive data collection we are able to show for the first time that house prices in most industrial economies stayed constant in real terms from the 19th to the mid 20th century but rose sharply in recent decades land prices not construction costs hold the key to understanding the trajectory of house prices in the long run residential land prices have surged in the second half of the 20th century but did not increase meaningfully before we argue that before world war ii dramatic reductions in transport costs expanded the supply of land and suppressed land prices since the mid 20th century comparably large land augmenting reductions in transport costs no longer occurred increased regulations on land use further inhibited the utilization of additional land while rising expenditure shares for housing services increased demand

macroeconomic uncertainty through the lens of professional forecasters abstractwe analyze the evolution of macroeconomic uncertainty in the united states based on the forecast errors of consensus survey forecasts of various economic indicators comprehensive information contained in the survey forecasts enables us to capture a real time measure of uncertainty surrounding subjective forecasts in a simple framework we jointly model and estimate macroeconomic common and indicator specific uncertainties of four indicators using a factor stochastic volatility model our macroeconomic uncertainty estimates have three major spikes has three major spikes aligned with the 1973 1975 1980 and 2007 2009 recessions while other recessions were characterized by increases in indicator specific uncertainties we also show that the selection of data vintages affects the estimates and relative size of jumps in estimated uncertainty series finally our macroeconomic uncertainty has a persistent negative impact on real economic activity rather than producing wait and see dynamics

nonlinear effects of mortgage spreads over the business cycle this paper provides robust evidence for the nonlinear effects of mortgage spread shocks during recessions and expansions in the united states estimating a smooth transition vector autoregression stvar model we show that mortgage spread shocks hitting in a recessionary phase create significantly deeper and more protracted declines in consumption and housing market variables in addition we provide evidence that these mortgage spread shocks could be largely interpreted as credit supply shocks in the mortgage market our empirical results imply that unconventional monetary policy such as the federal reserve s mortgage backed security purchase program would be a more effective tool for stabilizing the economy during recessions than in expansions

uncertainty matters evidence from close elections abstract this paper uses a data rich environment to produce direct econometric estimates of macroeconomic and financial uncertainty for 11 advanced nations these indices exhibit significant independent variation from popular proxies and provide a refinement of the influential work of jurado et al 2015 that results in improved real time performance we use this new data in combination with narrative evidence to jointly identify macro uncertainty and financial shocks macro uncertainty shocks are identified with close elections and financial shocks with financial stress during financial crises we find that macro uncertainty shocks matter for the majority of countries and that the real effects of macro uncertainty shocks are generally larger conditioning on close elections these results are robust to controlling for news shocks and global uncertainty as well as a variety of shocks considered to be important drivers of the business cycle

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

maximum likelihood estimation of fractional cointegration with an application to u s and canadian bond rates we estimate a multivariate arfima model to illustrate a cointegration testing methodology based on joint estimates of the fractional orders of integration of a cointegrating vector and its parent series previous cointegration tests relied on a two step testing procedure and maintained the assumption in the second step that the parent series were known to have a unit root in our empirical example of fractional cointegration we illustrate how uncertainty regarding the order of integration of the parent series can be even more important than uncertainty regarding the order of integration of the cointegrating vector when testing for cointegration

impact of economic uncertainty in a small open economy the case of chile we construct the first news based economic uncertainty index for chile which allowed us to rebuild 23 years of the history of economic uncertainty in the country and quantify its impact on the eco

stock market conditions and monetary policy in a dsge model for the u s abstract this paper investigates the interactions between stock market fluctuations and monetary policy within a dsge model for the u s economy first we design a framework in which fluctuations in households financial wealth are allowed but not necessarily required to exert an impact on current consumption this is due to the interaction in the financial markets of long time traders holding wealth accumulated over time with newcomers holding no wealth at all importantly we introduce nominal wage stickiness to induce pro cyclicality in real dividends additional nominal and real frictions are modeled to capture the pervasive macroeconomic persistence of the observables employed to estimate our model we fit our model to post wwii u s data and report three main results first the data strongly support a significant role of stock prices in affecting real activity and the business cycle second our estimates also identify a significant and counteractive response of the fed to stock price fluctuations third we derive from our model a microfounded measure of financial slack the stock price gap which we then contrast to alternative ones currently used in empirical studies to assess the properties of the latter to capture the dynamic and cyclical implications of our dsge model the behavior of our stock price gap is consistent with the episodes of stock market booms and busts occurred in the post wwii as reported by independent analyses and closely correlates with the current financial meltdown typically employed proxies of financial slack such as detrended log indexes or growth rates show limited capabilities of capturing the implications of our model consistent index of financial stress cyclical properties of the model as well as counterfactuals regarding shocks to our measure of financial slackness and monetary policy shocks are also proposed

measuring macroeconomic uncertainty a historical perspective abstract using 100 years of data we provide a new macroeconomic uncertainty proxy for the us and other 14 major industrial countries we show macroeconomic uncertainty experiences an overall declining pattern in the century and the influential political and economic events two world wars and major recessions are associated with a dramatic surge in macroeconomic uncertainty meanwhile a global common component plays an important role in driving uncertainty fluctuations across countries

interstate migration in mexico variations on the todaro theme abstract this study of migration in mexico is based upon a modified todaro approach and utilizes census data in a simultaneous equations model of 13 variables it is unique in several ways a it introduces proxy variables for employment probability and cost of migration that have not heretofore been found in the literature but for which data are often available b it illustrates that in some important cases census data have advantages not available through surveys and c it finds that in some sense land reform in mexico may have operated perversely finally the study opens a new avenue for the study of informal sector growth

measuring uncertainty and its impact on the economy we propose a new framework for measuring uncertainty and its effects on the economy based on a large var model with errors whose stochastic volatility is driven by two common unobservable factors representing aggregate macroeconomic and financial uncertainty the uncertainty measures can also influence the levels of the variables so that contrary to most existing measures ours reflect changes in both the conditional mean and volatility of the variables and their impact on the economy can be assessed within the same framework moreover identification of the uncertainty shocks is simplified with respect to standard var based analysis in line with the favar approach and with heteroskedasticity based identification finally the model which is also applicable in other contexts is estimated with a new bayesian algorithm which is computationally efficient and allows for jointly modeling many variables while previous var models with stochastic volatility could only handle a handful of variables empirically we apply the method to estimate uncertainty and its effects using us data finding that there is indeed substantial commonality in uncertainty sizable effects of uncertainty on key macroeconomic and financial variables with responses in line with economic theory

rational expectation bubbles evidence from hong kong s sub indices this paper uses hong kong stock market s four sub indices to examine the existence and causes of rational expectation bubbles the unit root test is applied to the rational bubble hypothesis various causality test methods are used to examine the causality of bubble among the four sub indices the empirical results show that in the sub periods of 1986 2002 and 2000 2012 the bubbles of commerce industry and utilities industries are consistent with rational expectation bubbles but not so in the finance and properties industries in general the rational expectation bubbles in the two sub periods seemed to have caused by expectations in other growing foreign economies

an investigation of regime shifts in uk commercial property returns a time series analysis the random walk hypothesis vis a vis asset price suggests that prices traded in a market cannot be predicted based on historical information employing unsecuritized uk commercial property returns we analyse this hypothesis by investigating regime shifts or multiple changes in persistence in the series our results uncover regime shifts in both the aggregate and sector specific data specifically the shifts are less frequent in the industrial sector compared to the office retail and aggregate returns data we highlight some implications for academics practitioners and regulators

can stock volatility be benign new measurements and macroeconomic implications we find nonsynchronized movements of two new measures of financial market uncertainty good and bad volatility which are based on the maximum and minimum stock prices within a month good bad volatility is associated with better worse expectations about the future economic situation and clearly signals acceleration deceleration in economic activity the var results indicate that i output employment and stock price plummet rapidly in response to a bad volatility shock while their responses to a good volatility shock are modest and ii bad volatility shocks explain the bulk of economic activity and stock price fluctuations in the medium run

testing for rational bubbles in the presence of structural breaks evidence from nonstationary panels this paper presents new results on the rational bubbles hypothesis for a panel of 18 oecd countries using the model developed by campbell 2000 we provide an analysis of international data that exploits increased power deriving from the panel unit root and cointegration methodology together with the flexibility of allowing explicitly for multiple endogenous structural breaks in the individual series differently from the time series methodology the panel data approach allows for a global analysis of the financial crashes that are related to rational bubbles we find strong evidence in favor of bubbles phenomena

land and the transition from a dual to a modern economy tenurial contracts in agriculture can be an initial source of wealth accumulation for dynasties of poor credit constrained individuals the income from such contracts can be invested in education of offspring who then can find work in the formal manufacturing sector this process allows the economy to develop into a modern economy with a large manufacturing sector an excessive number of poor individuals competing for scarce land however drives up the rental price of land which then slows the process of accumulation and forces the economy to converge to a less efficient dual equilibrium in such cases a policy of land redistribution coupled with a temporary education subsidy may be needed to push the economy to a modern equilibrium

dynamic asymmetries in u s unemployment we examine dynamic asymmetries in u s unemployment using nonlinear time series models and bayesian methods we find strong statistical evidence in favor of a two regime threshold auto regressive model empirical results indicate that once we take into account both parameter and model uncertainty there are economically interesting asymmetries in the unemployment rate one finding of particular interest is that shocks that lower the unemployment rate tend to have a smaller effect than shocks that raise the unemployment rate this finding is consistent with unemployment rises being sudden and falls gradual

stock price effects of permanent and transitory shocks this paper exploits the long run equilibrium relationship between stock prices and dividends implied by the present value model to structurally identify a dynamic model that governs the behavior of stock prices the innovations to the data are dichotomized into those that leave a permanent imprint on both series and those that have only transitory effects unlike previous studies however we do not impose arbitrary identifying restrictions to decompose the joint process restrictions that may not be consistent the data jel c12 c32 e24

rational bubbles or persistent deviations from market fundamentals abstract tests for fractional integration in the s p 500 log dividend yield are conducted in order to test the proposition that exogenous shocks have permanent effects the presence of a unit root in the log dividend yield is consistent with rational bubbles in stock prices our findings based on tests for fractional integration yield robust rejections of the null hypothesis of rational bubbles the results strongly suggest that the log dividend yield is mean reverting

modeling long run behavior with the fractional arima model abstract when modeling long run behavior fractional arima models can give insights unobtainable with the nonfractional arima models as an application the deterministic trend and unit root with drift models are nested in the fractional arima model this allows testing between the two models based on estimated parameter values this test is applied to postwar us quarterly real gnp the test concludes that gnp is consistent with both models the estimated fractional parameter is significantly smaller than reported in diebold and rudebusch 1989 the difference is explained by bias in the previous estimates relationships with the cumulative impulse response and spectral density at frequency zero are noted

common and country specific economic uncertainty abstract we use a factor model with stochastic volatility to decompose the time varying variance of macroeconomic and financial variables into contributions from country specific uncertainty and uncertainty common to all countries we find that the common component plays an important role in driving the time varying volatility of nominal and financial variables the cross country co movement in volatility of real and financial variables has increased over time with the common component becoming more important over the last decade simulations from a two country dsge model featuring epstein zin preferences suggest that increased globalisation and trade openness may be the driving force behind the increased cross country correlation in volatility

a fractional cointegration analysis of purchasing power parity a generalized notion of cointegration called fractional cointegration is introduced to examine the long run purchasing power parity ppp hypothesis by allowing deviations from equilibrium to follow a fractionally integrated process the fractional cointegration analysis can capture a wider range of mean reversion behavior than standard cointegration analyses this gain is flexibility in modeling subtle mean reverting dynamics is found to be important for a proper evaluation of long run ppp empirical results based on historical data for the 1914 1989 period show that ppp reversion exists and can be characterized by a fractionally integrated process in three out of five countries studied the results support ppp as a long run phenomenon though significant short run deviations from ppp can exist

on the power of dickey fuller tests against fractional alternatives abstract we examine the properties of dickey fuller unit root tests under fractionally integrated alternatives and find that these tests have quite low power

economic policy uncertainty and unemployment in the united states a nonlinear approach we model us post wwii monthly data with a smooth transition var model and study the effects of an unanticipated increase in economic policy uncertainty on unemployment in recessions and expansions we find the response of unemployment to be statistically and economically larger in recessions a state contingent forecast error variance decomposition analysis confirms that the contribution of epu shocks to the volatility of unemployment at business cycle frequencies is markedly larger in recessions

inventories and the three phases of the business cycle this article demonstrates that recessions typically are followed by high growth recovery phases that push output back to its prerecession level thus postwar fluctuations in real output in the united states have consisted of three sequential phases rather than two contractions high growth recoveries and moderate growth periods following recoveries data from before world war ii also exhibit this pattern for the postwar period the three phase pattern is shown to reflect swings in inventory investment and suggests that output fluctuations have an important transitory component the evidence in this article supports delong and summers s output gaps view and friedman s plucking model view of fluctuations

internal migration and urban employment reply despite the diversity and intensity of michael todaro s comment 1986 the essence of controversy reduces to differences in the respective views of the urban subsistence sector each view in turn depends upon a distinctive viewpoint observing from the viewpoint of the bureaucrat and other elite to whom he defers in his comment todaro sees the large cityward flow of third world humanity as a menace destroying urban amenities todaro s focus being the modern sector his model only incorporates an urban subsistence sector indirectly and then only as a way station on the route to modern sector employment his assumption is that every potential migrant has modern sector employment as an explicit goal conceptually he leaves no room for the uneducated rural persons whose aspirations are keyed to the modest employments of the urban subsistence sector we on the other hand look from below from the subsistence sector from there we see both rural and urban welfare gains from observed spatial movement of labor we grant that unpleasant externalities may be involved especially from the point of view of a discomfitted elite however those possible externalities should be studied in their own right and have no place in a debate between competing explanations of migration 2 the present debate therefore comes down to a straightforward empirical question if in fact there are persons who move to the city with the intent of taking up permanent employment in the urban subsistence sector then their decisions cannot be explained by todaro if they are few in number the theorist may assume them away if their numbers are significant however migration flows must be viewed as dual in nature and an alternative explanation for the subsistence portion is required todaro s crucial point is that the colesanders theory requires them to make an artificial separation of migration flows into those who go to the modern sector and those who go to and remain in the subsistence sector this argument is effectively countered we believe by our crucial point that todaro s view of an undifferentiated flow carries with it the inappropriate assumption that all migrants deem themselves able to enter into modern sector employment 3

bootstrap inference in econometrics the astonishing increase in computer performance over the past two decades has made it possible for economists to base many statistical inferences on simulated or bootstrap distributions rather than on distributions obtained from asymptotic theory in this paper i review some of the basic ideas of bootstrap inference the paper discusses monte carlo tests several types of bootstrap test and bootstrap confidence intervals although bootstrapping often works well it does not do so in every case

economic policy uncertainty in the us does it matter for the euro area abstract we investigate the effects of a us economic policy uncertainty shock on some euro area macroeconomic aggregates via structural vars we model the indicators of economic policy uncertainty recently developed by baker et al 2013 jointly with the aggregate price indexes and alternative indicators of the business cycle for the two above indicated economic areas according to our svars a one standard deviation shock to us economic policy uncertainty leads to a statistically significant fall in the european industrial production and prices of 0 12 and 0 06 respectively the contribution of the us uncertainty shock on the european aggregates is shown to be quantitatively larger than the one exerted by an euro area specific uncertainty shock

the changing transmission of uncertainty shocks in the u s this article investigates if the impact of uncertainty shocks on the u s economy has changed over time to this end we develop an extended factor augmented vector autoregression var model that simultaneously allows the estimation of a measure of uncertainty and its time varying impact on a range of variables we find that the impact of uncertainty shocks on real activity and financial variables has declined systematically over time in contrast the response of inflation and the short term interest rate to this shock has remained fairly stable simulations from a nonlinear dynamic stochastic general equilibrium dsge model suggest that these empirical results are consistent with an increase in the monetary authorities antiinflation stance and a flattening of the phillips curve supplementary materials for this article are available online

google it up a google trends based uncertainty index for the united states and australia we develop uncertainty indices for the united states and australia based on freely accessible real time google trends data our google trends uncertainty gtu indices are found to be positively correlated to a variety of alternative proxies for uncertainty available for these two countries var investigations document an economically and statistically significant contribution to unemployment dynamics by gtu shocks in the united states in contrast the contribution of gtu shocks to unemployment dynamics in australia is found to be much milder and substantially lower than that of monetary policy shocks

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

the price dividend ratio and limits to arbitrage evidence from a time varying estr model abstract recent share price dynamics has led to much debate within academic and practitioner circles researchers have typically argued that either a bubble component exists within prices or that the price dividend relationship exhibits persistence this note shows that an empirical model designed to capture limits to arbitrage can explain the movement in prices over the recent past

a test for rational bubbles in the nasdaq stock index a fractionally integrated approach abstract in this paper we test for the presence of rational bubbles in the nasdaq stock market index over the period 1994 06 2003 11 by means of a methodology based on fractional processes the results suggest that the existence of bubbles depends on the sampling frequency used in the analysis we cannot reject the unit root hypothesis when using monthly data on price dividend ratios which according to the present value model suggests the existence of rational bubbles however we reject this hypothesis in favor of fractional alternatives when using daily and weekly data this might be explained by the temporal aggregation and or the sample sizes used in the application

cointegration fractional cointegration and exchange rate dynamics multivariate tests due to johansen 1988 1991 as implemented by baillie and bollerslev 1989a and diebold gardeazabal and yilmaz 1994 reveal mixed evidence on whether a group of exchange rates are cointegrated further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process hence the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons in the article by baillie and bollerslev 1989a it is argued that seven different nominal spot and forward exchange rates all contain unit roots in their univariate time series representations at the same time however the spot exchange rates appear to be tied together in the long run through a cointegration type relationship the latter finding of baillie and bollerslev has attracted particular interest and several studies such as those by hakkio and rush 1991 and sephton and larsen 1991 have already addressed this issue using the same data as the baillie and bollerslev article sephton and larsen 1991 describe the evidence for the presence of cointegration as being fragile and note that mixed conclusions are reached by truncating the baillie and bollerslev sample at different points in time diebold gardeazabal and yilmaz 1994 henceforth diebold et al provide interesting evidence that application of the johansen 1988 1991 tests with and without an intercept will result in different inferences on the baillie and bollerslev data set furthermore diebold et al carry out an ex ante forecasting experiment and find that the addition of an error correction term to the martingale model as implied by the standard cointegration paradigm fails to reduce the prediction mean square error when compared to a simple martingale model this therefore leads diebold et al to conclude that there exists substantial uncertainty regarding the existence of cointegration relationships among nominal dollar exchange rates this article provides some additional evidence on the existence of such a long run relationship among the same seven nominal spot exchange rates after further analysis it appears that a form of cointegration does exist between the exchange rates so that they do not drift apart in the long run we argue that this form of cointegration is

measuring how fiscal shocks affect durable spending in recessions and expansions we estimate how durable expenditures respond to government spending shocks at different points in the business cycle using a nonlinear var approach that allows for the durable multiplier to vary smoothly with the state of the economy we find strong evidence that the aggregate durable spending response to fiscal shocks is substantially larger during expansions than during recessions in contrast to what has been has been observed for the aggregate multiplier we argue that these results are consistent with the theoretical predictions of the fixed cost model of durable demand in berger and vavra 2012

uncertainty shocks and unemployment dynamics in u s recessions abstract what are the effects of uncertainty shocks on unemployment dynamics we answer this question by estimating non linear smooth transition vars with post wwii u s data the relevance of uncertainty shocks is found to be much larger than that predicted by standard linear vars in terms of i magnitude of the reaction of the unemployment rate to such shocks and ii contribution to the variance of the prediction errors of unemployment at business cycle frequencies the ability of different classes of dsge models to replicate our results is discussed

testing for a break in the persistence in yield spreads of emu government bonds this study tests for a break in the persistence of emu government bond yield spreads examining data from france italy and spain and using german interest rates as a kind of benchmark the results reported here provide evidence for breaks between 2006 and 2008 the persistence of the yield spreads against german government bonds has increased signicantly after this period this could be a sign of higher sovereign credit risk and possibly even redenomination risk caused by the debt crisis in the euro area we nd long memory behavior before and after the breakpoints and empirical evidence for positive excess kurtosis and garch eects when persistence

can non linear time series models generate us business cycle asymmetric shape abstract fifteen univariate non linear time series models of us output are evaluated by their ability to reproduce the asymmetric shape of the us business cycle two models account for the growth being faster after a trough and slower before a peak

real and spurious long memory properties of stock market data we test for the presence of long memory in daily stock returns and their squares using a robust semiparametric procedure of lobato and robinson spurious results can be produced by nonstationarity and aggregation we address these problems by analyzing subperiods of returns and using individual stocks the test results show no evidence of long memory in the returns by contrast there is strong evidence in the squared returns

estimating fiscal multipliers news from a non linear world we estimate non linear vars to assess to what extent fiscal spending multipliers are countercyclical in the us we deal with the issue of non fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures this measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending results based on generalised impulse responses suggest that fiscal spending multipliers in recessions are greater than one but not statistically larger than those in expansions however non linearities arise when focusing on extreme events that is deep recessions versus strong expansionary periods

uncertainty shocks and asymmetric dynamics in korea a non linear approach this study investigates the impact of uncertainty shocks on macroeconomic activity in korea for this purpose a smooth transition var model is employed to document the state dependent dynamics of

fragility and the effect of international uncertainty shocks abstract when economic systems are fragile even modest shocks for example a shock to international capital movements can have strong negative effects on key macroeconomic fundamentals this paper proposes a large scale bayesian vector autoregression with factor stochastic volatility to investigate the macroeconomic consequences of international uncertainty shocks in g7 countries and shows that uncertainty increases fragility the factor structure enables us to identify an international uncertainty shock by assuming that it is the joint volatility process that determines the dynamics of the variance covariance matrix of the common factors to allow for first and second moment shocks we moreover assume that the uncertainty factor enters the var equation as an additional regressor our findings suggest that an international uncertainty shock has negative effects across all economies and variables under consideration leading to strong declines in output prices exports interest rates and equity prices the precise degree of fragility varies across countries a simple correlation exercise suggests that structural differences may be partially responsible for the observed differences

inflation dynamics and time varying volatility new evidence and an ss interpretation is monetary policy less effective at increasing real output during periods of high volatility than during normal times in this article i argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth to do this i construct price setting models with volatility shocks and show these models match new facts in cpi micro data that standard price setting models miss i then show that these models imply that output responds less to nominal stimulus during times of high volatility furthermore because volatility is countercyclical this implies that nominal stimulus has smaller real effects during downturns for example the estimated output response to additional nominal stimulus in september 1995 a time of low volatility is 55 larger than the response in october 2001 a time of high volatility jel codes e10 e30 e31 e50 d8 copyright 2014 oxford university press

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

sufficient information in structural vars abstract necessary and sufficient conditions under which a var contains sufficient information to estimate the structural shocks are derived on the basis of this theoretical result we propose two simple tests to detect informational deficiency and a procedure to amend a deficient var a simulation based on a dsge model with fiscal foresight suggests that our method correctly identifies and fixes the informational problem in an empirical application we show that a bivariate var including unemployment and labor productivity is informationally deficient once the relevant information is included into the model technology shocks appear to be contractionary