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

regime switching and the in stability of the price rent relationship evidence from the us present value models of house prices assert that in the absence of self fulfilling bubbles a house price is equal to the present discount value of all future rents which implies a linear relationship between house price and rent and hence a stable price to rent ratio using a markov switching error correction model we re examine this relationship in the us housing market and find two distinctive regimes one with a long run relation between house price and rent predicted by the present value models and the other in which the relation is nonlinear furthermore we find evidence that deviations of house prices from the present value models predictions are caused by the overreaction of house prices to movements in rents rather than speculative bubbles attributable to extraneous factors

asymmetric persistence in gdp a deeper look at depth abstract if an economic time series behaves asymmetrically then an interpretation of economic fluctuations based on linear time series models could be misleading beaudry and koop 1993 recently argued that for post war us gdp data there exists a statistically significant difference in persistence between negative and positive shocks we demonstrate that their test has two pitfalls first the t statistic for testing asymmetry in persistence does not have a conventional interpretation second a highly significant t value may come from sources different from asymmetry using international data we investigate for the presence of asymmetric persistence across the g 7 countries

asymmetric price adjustment and economic fluctuations this paper considers a possible explanation for asymmetric adjustment of nominal prices the authors present a menu cost model in which positive trend inflation causes firms relative prices to decline automatically between price adjustments in this environment shocks that raise firms desired prices trigger larger price responses than shocks that lower desired prices the authors use this model of asymmetric adjustment to address three issues in macroeconomics the effects of aggregate demand the effects of sectoral shocks and the optimal rate of inflation copyright 1994 by royal economic society

further evidence on the asymmetric behavior of economic time series over the business cycle evidence has recently been presented by salih neftci to support the hypothesis that recessions in economic activity tend to be steeper and more short lived than recoveries in economic activity that evidence however was confined to the behavior of the unemployment rate in the united states in this paper it is shown that when neftci s methods are applied to analyze the behavior of real gross national product investment and productivity in the united states or when they are used to analyze industrial production abroad the asymmetry hypothesis seems to be less compelling

stylized facts and regime changes are prices procyclical we investigate empirically the stability of the correlation between output growth and inflation using a technique that allows for changes in regime we look at recent quarterly data for the g4 and at historical data for the u s and u k we find evidence of changes both in means and variances in both sources of data in the quarterly data we find that the covariance between output growth and inflation is typically negative in the historical data we find as suggested in previous studies that inflation was procyclical especially in the inter war years but has been countercyclical in the post war period

the brevity and violence of contractions and expansions abstract early studies of business cycles argued that contractions in economic activity were briefer shorter and more violent rapid than expansions this paper systematically investigates this claim and in the process discovers a robust new business cycle fact contractions in employment are briefer and more violent than expansions but we cannot reject the null of equal brevity and violence for expansions and contractions in output the difference arises because employment typically lags output around peaks but they coincide in their troughs we discuss the performance of existing business cycle models in accounting for this fact and conclude that none can fully account for it we then show that a business cycle model with asymmetric adjustment costs on employment and a choice of when to scrap old technologies can account for the business cycle fact both qualitatively and quantitatively

a floor and ceiling model of us output abstract building on previous nonlinear time series models we further examine the form of nonlinearity in us output we develop a model of us output that allows for floor and ceiling effects to alter the dynamics of output growth the model estimated on post korean war quarterly data displays features similar to nonlinear trade cycle models of the 1940s and 1950s thus as predicted by many of the earlier theoretical models our empirical results suggest that the turning points of the business cycle provide new initial conditions for the ensuing growth process we also find important asymmetries in the responses of output to positive and negative shocks this history and shock dependence property is not present in linear or approximately linear models of the type that arise in the standard implementations of real business cycle theory

can a well fitted equilibrium asset pricing model produce mean reversion in recent papers cecchetti et al 1990 and kandel and stambaugh 1990 showed that negative serial correlation in long horizon returns was consistent with an equilibrium model of asset pricing in this paper we show that their results rely on misspecified markov switching models for the endowment process once the proper markov specification is chosen for the endowment process the model does not produce mean reversion of the magnitude detected in the data furthermore the small amount of mean reversion produced by the model is due only to small sample bias we also show that this model is unable to predict negative excess returns contrary to empirical evidence

inflation and currency reform expectations of currency reform are explicitly incorporated into a rational expectations version of the cagan model of money market equilibrium where expectations about the timing of reform are lerived from a simple government rule for choosing when to reform the currency the model is estimated for three of the episodes of hyperinflation that cagan investigated and the results support the hypothesis that expectations of reform were responsible for the apparent instability of the demand for money during the final months of these hyperinflations

real exchange rate overvaluation and currency crises evidence from thailand this article examines real exchange rate rer misalignment in thailand in the lead up to the 1997 1998 currency crisis the methodology involves estimating the long run equilibrium rer based on the internal and external balance approach rer misalignment is measured by comparing the actual rer with the estimated long run equilibrium rer the results suggest that there was a persistent rer overvaluation from 1991 up to the onset of the crisis in 1997 too much net short term capital inflows and government expenditure expansion were the main contributory factors after the massive depreciation of nominal exchange rate during the crisis the rer seems to have gradually returned to its long run equilibrium level

vulnerability to a currency crisis lessons from the asian experience are currency crises caused by manias and panics in financial markets or by unsustainable deteriorations in domestic macroeconomic conditions this question is explored in the context of the recent asian currency crisis the theoretical concept of vulnerability is used to identify three early warning indicators of susceptibility to a currency crisis rapid accumulation of mobile capital domestic lending booms and overvalued exchange rates it is shown that the crisis and noncrisis countries of asia may be distinguished empirically using these indicators over the decade preceding the crisis this exercise provides convincing evidence that the crisis emanated largely from domestic macroeconomic conditions

the inconsistency of land values land rents and capitalization formulas this paper examines relationships that exist between farm income land values and capital asset pricing theory using two commonly referenced data sets it is shown that land prices and land rents do not have the same time series representations a necessary condition for the simple capital asset pricing theory to hold this suggests that a fundamental rethinking of the way in which land prices are viewed and modeled is needed more complex models that allow for rational bubbles risk aversion and future shifts in government policy or commodity prices may be required

a nonlinear approach to us gnp a univariate nonlinear model is estimated for us gnp that on many criteria outperforms standard linear models the estimated model is of the threshold autoregressive type and contains evidence of asymmetric effects of shocks over the business cycle in particular the nonlinear model suggests that the post 1945 us economy is significantly more stable than the pre 1945 us economy

testing for rational bubbles with exogenous or endogenous fundamentals the german hyperinflation once more abstract the presence of rational price bubbles during the german hyperinflation is tested under two different structural assumptions on the money process if the money supply is constrained to be exogenous to the current inflation rate the hypothesis of no bubble can be rejected however this is no longer found to be true when a feedback rule from inflation to money creation is allowed the analysis contradicts previous results presented in the literature

the impact of economic contractions on the effectiveness of r d and advertising evidence from u s companies spanning three decades the critical role of research and development r d and advertising in the marketing strategy of the firm is well established this paper conceptually and empirically examines why and how much the effectiveness of these two marketing instruments differs between times of economic expansions versus periods of economic contractions and whether these results depend on the cyclicality of the industry in question we consider a key marketing metric market share and a key financial metric firm profit our empirical setting is 1 175 u s firms across a time period spanning over three decades we find that r d and advertising contribute to firm performance but that their effectiveness is not constant across the business cycle increasing advertising share in contractions has a stronger effect on profit and market share than increasing advertising share in expansions likewise investments in r d in contractions lead to higher gains in market share and profit than r d investments in expansions albeit only in subsequent years if in contractions the firm faces tight budget constraints and has to choose between either maintaining r d or advertising our simulation results show that maintaining r d is associated with better company performance we find that advertising effectiveness in general and in contractions in particular is systematically moderated by the degree of cyclicality of the industry in which the firm operates in relatively stable industries advertising effects are small or even nonsignificant and they do not go beyond the year the firm advertises however in highly cyclical industries advertising effects are long lasting its total effect being 50 larger market share and 200 larger profits than in industries of average cyclicality the effect of industry cyclicality on advertising effectiveness is especially pronounced in contractions collectively these findings provide valuable and actionable insights into how firms should respond to contractions in order to grow profits and market share

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

real exchange rate and international reserves in an era of growing financial and trade integration abstract this paper evaluates the impact of international reserves terms of trade shocks and capital flows on the real exchange rate reer we observe that international reserves cushion the impact of terms of trade shocks on reer and that this effect is important for developing but not for industrial countries this buffer effect is especially significant for asian countries and for countries exporting natural resources financial depth reduces the buffer role of international reserves in developing countries developing countries reers seem to be more sensitive to changes in reserve assets whereas industrial countries display a significant relationship between hot money and reer

reserve accumulation and monetary sterilization in singapore and taiwan asian economies have embraced the globalization of production trade and capital flows one dimension of contemporary globalization has been the heavy exchange rate management by and rapid and massive stockpiling of foreign exchange reserves in asia this article undertakes an empirical investigation to assess the extent of de facto sterilization and capital mobility in singapore and taiwan using quarterly data between 1990 and 2008 our empirical results suggest that since 2001 both singapore and taiwan have a high degree of but not perfect de facto capital mobility to date this high effective capital mobility has not undermined the ability of the central bank in either economies to sterilize their respective foreign exchange intervention but may make the process increasingly difficult over time

a simple method of testing for cointegration subject to multiple regime changes abstract in this paper we propose a simple method of testing for cointegration in models that allow for multiple shifts in the long run relationship the procedure consists of carrying out conventional residual based tests with standardized residuals from an appropriate markov switching model our monte carlo results show that standard tests work well even though their asymptotic validity can be questioned because they are not based on least squares residuals an empirical application to the present value model of stock prices is also discussed

statistical nonlinearities in the business cycle a challenge for the canonical rbc model abstract the cyclical components of u s macroeconomic time series exhibit significant nonlinearities standard equilibrium models of business cycles cannot replicate nonlinear features of the data applying the efficient method of moments gallant a r tauchen g 1996 which moments to match econometric theory 12 4 657 681 to build an algorithm that searches over the model s parameter space establishes the parameterization that best allows replication of all statistical properties of the data the results show that under this parameterization the model captures nonlinearities in investment but fails to account for observed properties of consumption

evolving wage cyclicality in latin america a vector autoregression model with time varying coefficients is used to examine the evolution of wage cyclicality in four latin american economies brazil chile colombia and mexico during the period 1980 2010 wages are highly pro cyclical in all countries up to the mid 1990s except in chile wage cyclicality declines thereafter especially in brazil and colombia this decline in wage cyclicality is in accordance with declining real wage flexibility in a low inflation environment controlling for compositional effects caused by changes in labor force participation along the business cycle does not alter these results

markov switching models and the unit root hypothesis in real us gdp abstract i find that real us gdp is better characterized as a trend stationary markov switching process than as having a regime dependent unit root i examine the effects of both assumptions on the analysis of business cycle features and their implications for the persistence of the dynamic response of output to a random disturbance

are business cycles asymmetric a correction neftci 1984 proposed a nonparametric test procedure for determining whether business cycles are asymmetric in the sense that contractions are steeper than expansions he found evidence of this type of asymmetry in postwar quarterly u s unemployment variables this comment identifies a probable error in neftci s empirical work that reverses the significance of his results for the unemployment rate and it suggests that this test may have low power and be sensitive to measurement error

monetary economics a review essay in this essay i define money to be whatever objects serve as generally acceptable media of exchange and i define monetary economics to be the study of the causes and economic consequences of the monetization of exchange that is of the use of media of exchange these definitions lead me to specify the distinctive objectives of monetary economics to be to understand 1 the monetization of exchange and its relation to the technologies of production and of exchange 2 the form that money takes and especially the viability of fiat money 3 the determination and significance of the real value of units of money and 4 the relation between the nominal quantity of money and aggregate economic activity the essay tries to acquaint the reader with the contents of the recently published handbook of monetary economic as they relate to these objectives of monetary economics and offer some critical thoughts on selected unsettled issues in monetary economics that my reading of the handbook suggested this abstract was borrowed from another version of this item

ruling out divergent speculative bubbles abstract the growth in the empirical literature on testing for divergent in mean speculative bubbles indicates that existing theoretical arguments for ruling out such price paths are not sufficiently compelling here we strengthen the case for ruling out explosive or implosive bubbles a priori by filling in two gaps first we demonstrate why divergent stochastic bubbles arising from purely extrinsic uncertainty as in blanchard 1979 cannot be equilibria in a monetary optimizing model second we show why existing arguments for ruling out implosive price bubbles are insufficient in some cases and we provide stronger arguments

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

intrinsic bubbles and regime switching abstract froot and obstfeld 1991 allow for an intrinsic bubble in stock prices using approximately a century of annual data for the us in an attempt to model the widely documented deviations from the prices predicted by present values or fundamentals however they assume that the log of real dividends follows a constant random walk with drift over the whole period we show that this assumption is invalid and that a markov switching model is a more appropriate representation of dividends we then generalise the formulation of stock prices including the intrinsic bubble to allow for this and show that regime switching provides a better explanation for stock prices than the bubble we show that when allowance is made both for the bubble and for regime switching in the dividend process the incremental explanatory contribution of the bubble is low

population age structure saving capital flows and the real exchange rate a survey of the literature this paper surveys the existing literature on the effects of population age structure on saving capital flows and the real exchange rate we build on previous surveys of age structure and saving behaviour by including extensive discussion of international linkages specifically the impact on capital flows and real exchange rates we also point to unresolved issues that need to be addressed given that population aging has serious policy implications in the developed economies these days

does purchasing power parity hold sometimes regime switching in real exchange rates standard unit root tests are not very powerful in drawing conclusions regarding the validity of purchasing power parity ppp rather than asking whether ppp holds throughout the whole sample period we examine in this study if ppp holds sometimes by employing hamilton type 1989 markov regime switching models when at least one of multiple regimes is stationary ppp holds locally within the regime there are indeed various reasons that we should expect that the persistence of real exchange rates changes over time employing five real exchange rates spanning more than 100 years we find herein strong evidence that the strength of ppp varies during the sample periods and that there exist stationary regimes in which ppp holds throughout the article we also make comparisons to previous markov regime switching estimation results by kanas 2006 on the same data series the new markov switching model selection criterion of smith et al 2006 which is devised especially for discriminating markov regime s

business cycle asymmetries characterisation and testing based on markov switching autoregressions tests for business cycle asymmetries are developed for markov switching autoregressive models the tests of deepness steepness and sharpness are wald statistics which have standard asymptotics for the standard two regime model of expansions and contractions deepness is shown to imply sharpness and vice versa whereas the process is always nonsteep two and three state models of u s gnp growth are used to illustrate the approach along with models of u s investment and consumption growth the robustness of the tests to model misspecification and the effects of regime dependent heteroscedasticity are investigated

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

exchange market pressure in oecd and emerging economies domestic vs external factors and capital flows in the old and new normal abstract we study the ways domestic and external global factors such as risk appetite global liquidity u s monetary policy and commodity prices affected the exchange market pressure before and after the global financial crisis as well as the role of these factors during the federal reserve s tapering episode utilizing a comprehensive database on capital controls we investigate whether control measures have a significant impact on mitigating exchange market pressure associated with capital flows net and gross using quarterly data over the 2000 2014 period and a dynamic panel model estimation we find that external factors played a significant role in driving exchange market pressure for both oecd countries and emerging market countries with a larger impact on the latter while the effect of net capital flows on exchange market pressure is muted short term gross portfolio inflows and outflows comprise important factors that account for exchange market pressure short term portfolio flows and long term foreign direct investment flows have a significant impact on exchange market pressure for emerging market economies and no significant effect for oecd countries capital controls seem to significantly reduce the exchange market pressure although the economic size of this impact is highly dependent on the institutional quality

characterizing nonlinearities in business cycles using smooth transition autoregressive models during the past few years investigators have found evidence indicating that various time series representing business cycles such as production and unemployment may be nonlinear in this paper it is assumed that if the time series is nonlinear then it can be adequately described by a smooth transition autoregressive star model the paper describes the application of these models to quarterly logarithmic production indices for 13 countries and europe tests reject linearity for most of these series and estimated star models indicate that the nonlinearity is needed mainly to describe the responses of production to large negative shocks such as oil price shocks

measuring and predicting heterogeneous recessions this paper examines the usefulness of a more refined business cycle classification for monthly industrial production ip beyond the usual distinction between expansions and contractions univariate markov switching models show that a three regime model is more appropriate than a model with only two regimes interestingly the third regime captures severe recessions contrasting the conventional view that the additional third regime represents a recovery phase this is confirmed by means of markov switching vector autoregressive models that allow for phase shifts between the cyclical regimes of ip and the conference board s leading economic index lei the timing of the severe recession regime mostly corresponds with periods of substantial financial market distress and severe credit squeezes providing empirical evidence for the financial accelerator theory

do recessions permanently change output abstract this paper examines whether negative innovations to gnp are more or less persistent than positive innovations we find that once we allow for the impulse response of gnp to be asymmetric negative innovations to gnp are observed to be much less persistent than positive ones in particular the effect of a recession on the forecast of output is found to be negligible after only eight to twelve quarters while the effect of a positive shock is estimated to be persistent and amplified over time our results may therefore help reconcile two antagonistic views about the nature of business cycle fluctuations

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

are linear models really unuseful to describe business cycle data we use first differenced logged quarterly series for the gdp of 29 countries and the euro area to assess the need to use nonlinear models to describe business cycle dynamic behaviour our approach is model estimation free based on testing only we aim to maximize power to detect non linearities and simultaneously we purport avoiding the pitfalls of data mining the evidence we find does not support some descriptions because the presence of significant non linearities is observed for 2 3 of the countries only linear models cannot be simply dismissed as they are frequently useful contrarily to common knowledge nonlinear business cycle variation does not seem to be an universal undisputable and clearly dominant stylized fact this finding is particularly surprising for the u s case some support for nonlinear dynamics for some further countries is obtained indirectly through unit root tests but this is marginal to our study based on indirectmethods only and can hardly be invoked to support nonlinearity in classical business cycles

private foreign investment in india pain or panacea private foreign capital whose presence in indian industry was long regarded with concern and suspicion is now presented as a panacea for india s poor industrial and export performance this paper examines available evidence to compare the behaviour and performance of domestic and foreign controlled firms in india over the last five decades it discusses the contribution of foreign capital to aggregate investment balance of payments and economic growth we assess the effects of government policy towards foreign investment review recent changes and outline implications for the future

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

capital inflow surges in emerging economies how worried should latin america and the caribbean be in the years leading up to the global economic crisis latin america and the caribbean received large capital inflows nonetheless the region survived the albeit short lived dramatic events of 2007 09 reasonably well with no financial crisis in any of the larger economies after the crisis capital inflows rose again in 2010 gross inflows to seven latin american countries argentina brazil chile colombia mexico peru and venezuela amounted to more than 6 percent of gross domestic product gdp and net inflows exceeded 3 percent of gdp more recently following the may 2013 speech of then chairman of the u s federal reserve ben bernanke there has been concern regarding the potential effects of tapering asset purchases by the u s federal reserve system and rising interest rates possibly spelling the end of large capital inflows to the latin american and caribbean region the literature on capital inflows suggests that while these flows represent an opportunity to spur investment and growth they may also increase vulnerability to financial crises macroeconomic instability and ultimately recession a relevant question then is whether the region can declare victory in being able to manage large capital inflows successfully or whether risks remain that justify strong measures our starting point is that the region has enjoyed strong surges in capital inflows we therefore decided to condition the analysis on surges occurring we do not seek to explain the reasons for such a surge one justification for this decision is that capital flows appear to be driven as much if not more by push rather than pull factors more specifically we seek to understand what determines whether such surges end in either a banking crisis or a recession while there is a substantial literature on the determinants of capital inflows their potential impacts have received much less attention the contribution of this paper is to analyze when inflow surges may end in severe economic problems including financial or macroeconomic instability rather than to identify the determinants of those surges we must first tackle the question of how to define a capital inflow surge we are helped in this regard by a small but growing literature however the current definitions of inflow surges in the literature may be injudicious we propose a new definition which considers the total size of the inflow episode across countries we also employ a more traditional definition based on yearby year inflows relative to a country specific threshold we contrast relevant statistics on the identified episodes using these two definitions and compare our episodes with others found in the literature we also consider whether the analysis should be conducted using gross or net inflows we take the view that employing net flows may discard useful information and that gross flows are relevant where financial instability is a potential concern even if net flows are zero a domestic financial system may intermediate large gross inflows when domestic residents purchase assets abroad we choose to focus on gross inflows but we include gross outflows as a potential explanatory variable so as not to lose information 1the empirical analysis in this paper develops a set of parsimonious models that discriminate reasonably well between the different economic outcomes we then analyze the case of a typical country from the region with a recent capital inflow surge providing a set of simulations to illustrate the economic magnitude of our results we simulate the changes in the estimated probabilities of negative outcomes given changes in certain critical variables we suggest that depending on the country inflow characteristics different policy measures may then be justified however a caveat is that emerging economies in general and latin america and the caribbean in particular have been experimenting with new policy measures and we are not able to evaluate their potential effectiveness in this paper

disaggregated capital flows and developing countries competitiveness summary attracting capital and foreign exchange flows is crucial for developing countries yet these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness jeopardizing exports and growth we investigate this dilemma by comparing the impact of six types of flows on real exchange rate behavior in a sample of 57 developing countries covering africa europe asia latin america and the middle east the results reveal that portfolio investments foreign borrowing aid and income lead to real exchange rate appreciation while remittances have disparate effects across regions foreign direct investments have no effect on the real exchange rate contributing to resolve the above dilemma

capital market liberalization economic growth and instability summary this paper reviews briefly the arguments for capital market liberalization and identifies their theoretical and empirical weaknesses this provides the foundations for the argument for intervention in short term capital flows the paper concludes with a brief discussion of the various ways in which such interventions may be implemented 2000 elsevier science ltd all rights reserved

the persistence of taiwan s output fluctuations an empirical study using innovation regime switching model in this article we examine the persistence nature of taiwan s aggregate output fluctuations by using the innovation regime switching irs model in which the effect of an innovation may be permanent or transitory depending on an unobservable state variable that follows a first order markov chain by applying the irs model to taiwan s real gdp data we find that during the 1961 to 2000 period 61 39 of the real output shocks are likely to have permanent transitory effects moreover the innovations in the officially identified expansion contraction are more likely to have a permanent transitory effect these results are similar to those found in many studies of us real output fluctuations e g beaudry and koop 1993 kim and nelson 1999 and kuan et al 2005 however we also find that taiwan s output dynamics have changed drastically ever since year 2000 in particular the shocks to real gdp have become more likely to have only transitory effect even during the period of post 2001 iv ex

business cycle duration dependence a parametric approach this paper reexamines duration dependence in u s business cycles using parametric hazard models positive duration dependence would indicate that expansions or contractions are more likely to end as they become older this paper provides statistically significant evidence of positive duration dependence for expansions before world war ii and contractions after world war ii the evidence is stronger than in earlier research utilizing nonparametric techniques because certain nonparametric techniques have low statistical power against the type of duration dependence found in this paper evidence is also presented suggesting that expansions became longer on average after world war ii while contractions became shorter copyright 1991 by mit press

switching equilibria the present value model for stock prices revisited abstract this paper analyzes the dynamic features displayed by alternative rational expectations equilibria in the context of the present value model for stock prices with feedback in particular it shows that there exists a unique equilibrium implying cointegration and that equilibrium is characterized by either the fundamental or alternatively the backward solution depending on the size of the feedback parameter it is shown analytically that the existence of switching equilibria induces large stock market swings using us data and structural estimation the hypotheses of feedback and switching equilibria are tested the empirical results provide evidence of both switching equilibria and feedback

the dynamic causality between commodity prices inflation and output in china a bootstrap rolling window approach in this article we empirically study the time varying bilateral causality between commodity prices inflation and output in china we first perform a series of parameter stability tests and find s

the hamilton model with a general autoregressive component estimation and comparison with other models of economic time series abstract this paper generalizes the hamilton model to the important case in which the autoregressive component need not contain a unit root using u s quarterly real gnp data the model is estimated and the results are compared to those of hamilton some monte carlo evidence for the model is presented and its in sample forecasting performance is discussed and compared to the original hamilton model the arima model and the deterministic time trend model

stochastic trends deterministic trends and business cycle turning points this study examines the relationship between specifications for long run output patterns and specifications for business cycle dynamics in an application to us gdp it is found that inferences about the nature of the trend in output are not robust to changes in the specification for short run fluctuations similarly the choice of which model best describes the transitory movements in output depends on the way in which the trend is specified the empirical analysis makes use of bayesian methods to compare time series models for us gdp inspection of the predictive densities for the individual data points suggests that the information contained in the data is largely limited to the observations associated with business cycle turning points 1997 john wiley sons ltd

testing business cycle asymmetries based on autoregressions with a markov switching intercept implications of two concepts of asymmetry deepness and steepness are investigated for autoregressive processes with a markov switching intercept the formulas for the skewness of these processes and the skewness of the first differences of these processes are derived the parameter restrictions leading to nondeepness and nonsteepness are presented for the special case of a first order autoregression and two states it is shown that these restrictions imply that previous tests for asymmetries in autoregressive processes with a markov switching intercept can lead to wrong conclusions in an empirical application of the developed tests the u s unemployment rate is found to be steep

target zones for exchange rates and policy changes abstract we extend a target zone model to allow for occasional changes in the stochastic process driving fundamentals a key implication is that seeming speculative attacks may be triggered by market perceptions that macroeconomic policy has switched say from tight to loose this fundamental based explanation for large exchange rate changes accompanied by no discernible contemporaneous change in the fundamental is an alternative to theories based on self fulfilling expectations without relying on intra marginal intervention this model is better able to reproduce empirical exchange rate distributions with more mass at the center and less at the edges of the band

multi country tests for price level bubbles abstract flood and garber 1980 have examined data from the german hyperinflation to test for a price level bubble in this paper we extend this research to other episodes of hyperinflation by testing for a simultaneous bubble across countries we implement the conceptual experiment proposed by flood and garber to derive asymptotic distributions for the test statistics

bursting bubbles on the rationality of hyperinflations in optimizing models abstract it is well known that perfect foresight maximizing models frequently possess a continuum of equilibria in some of these equilibria the price level is explosive even in models in which the money supply is constant this paper shows that a sufficient condition to rule out these unstable paths is given by the assumption that there is a smallest non zero unit of output

soft landing in a markov switching economy abstract we analyse the monetary policy implications of boom bust cycles in asset prices using a markov switching rational expectations model in our simulations when a bubble bursts the taylor rule fails to achieve a soft landing contrary to the optimal policy

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

capital flows and real exchange rate appreciation in mexico summary following the recently developed bounds testing approach the paper analyzes the long run determinants of the mexican peso s real exchange rate from 1988q1 to 2008q2 controlling for the standard determinants the paper shows that all types of capital inflows tended to appreciate the peso in contrast to recent multi country studies it finds no evidence of a less harmful effect from foreign direct investment fdi on the contrary the fdi s appreciation effect can be particularly strong and interprets this finding the paper also shows that monetary policy through changes in the short term interest differential can have persistent level effects on the real exchange rate

capital inflows and the real exchange rate a comparative study of asia and latin america the nexus of real exchange rate rer and capital inflows is examined through a comparative analysis of the experiences of emerging market economies in asian and latin america during the period 1985 2000 it is found that the degree of appreciation in rer associated with capital inflow is uniformly much higher in latin american countries compared to their asian counterparts despite the fact that the latter experienced far greater foreign capital inflows relative to the size of the economy the econometric evidence suggests that both the composition of capital flows and differences in the degree of response of rer to capital flows matter in explaining these contrasting experiences while rer appreciation is a phenomenon predominantly associated with other non fdi forms of capital inflows ocfw a given level of ocfw brings about a far greater degree of appreciation of the real exchange rate in latin america where the importance of these flows in total capital inflow is also far greater on the policy front asian countries seem to have used fiscal contraction and nominal exchange rate adjustment more effectively to cushion the rer against the appreciation pressure of capital inflows there is however no evidence to suggest that sterilized intervention can generate a lasting impact on the real exchange rate

the impact of surges in net private capital inflows on manufacturing investment and unemployment abstract we use local projection methods to examine the dynamic response of surges in net private capital inflows on the output and employment shares of manufacturing the investment output ratio and the unemployment rate high income countries are studied separately from emerging economies both from asia and latin america our sample covers the years from 1970 to 2010 we find that surges in high income countries do not magnify the trend toward deindustrialization however the persistent decline in the investment to gdp ratio and the rise in the overall unemployment rate suggest that surges may negatively affect longer run growth prospects and employment opportunities in these countries in middle income asian countries surges tend to induce deindustrialization in both output and employment in the medium run but they do not lower the investment to gdp ratio in middle income latin america surges speed up deindustrialization lower investment and raise economy wide unemployment

effects of unanticipated monetary policy on aggregate japanese output the role of positive and negative shocks in this paper evidence is presented for japan that an asymmetry exists between the effects of positive and negative money shocks on output this result held over different lag lengths in the monetary variables for different specifications of the call money rate equation and when monetary policy was measured by the monetary base or by m2 cd unanticipated money unlike positive and negative shocks was statistically insignificant in explaining output results reinforce findings for the united states that an asymmetry between the effects of unexpected expansionary and contractionary monetary policy may constitute an empirical regularity requiring further investigation

business cycle asymmetry a deeper look this paper distinguishes two types of asymmetry in business cycles deepness and steepness deepness is defined as the characteristic that troughs are further below trend than peaks are above most previous research has focused exclusively on steepness which refers to cycles in which contractions are steeper than expansions a test for deepness is proposed and applied to u s post war quarterly unemployment real gnp and industrial production evidence of deepness is found for unemployment and industrial production while the evidence for real gnp is weaker previous evidence of steepness in unemployment is confirmed

the surge in capital inflows to developing countries an analytical overview after being excluded from world capital markets during the debt crisis many developing countries have experienced large capital inflows during the past five years the challenges that these inflows pose for domestic policy in recipient countries have generated a substantial literature this article presents an overview of that literature describing the characteristics of the new inflows analyzing the policy issues they raise assessing their causes and likely sustainability and evaluating potential policy responses the desirable policy response is tied to characteristics of the flows themselves as well as to the characteristics of the recipient economy