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

revisiting the exchange rate disconnect puzzle abstractone of the major anomalies in international macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals dubbed the exchange rate disconnect puzzle this article examines this issue for five australian dollar bilateral exchange rates using quarterly data for the period 1984 1 2015 4 a novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration the results show that the exchange rates and fundamentals move together in the long run furthermore the results show that fundamentals granger cause exchange rates both in the short run and the long run

family planning in a life cycle model with income risk several us states have recently restricted the access to abortions we study fertility intentions and how family planning and abortions are used as mechanisms to control fertility among couples facing income risk we formulate and estimate a life cycle consumption saving model with uninsurable income risk and imperfect contraceptive control that matches fertility behavior in the british household panel survey bhps well we use the estimated model to investigate how family planning and abortions are used to control fertility in our model our simulations suggest that income risk affects family planning and that abortion is used to control fertility due to the presence of income risk this indicates that the availability of abortions might play a role as an insurance mechanism

computer automation of general to specific model selection procedures abstract disputes about econometric methodology partly reflect a lack of evidence on alternative approaches we reconsider econometric model selection from a computer automation perspective focusing on general to specific reductions embodied in pcgets starting from a general congruent model standard testing procedures eliminate statistically insignificant variables with diagnostic tests checking the validity of reductions ensuring a congruent final selection since jointly selecting and diagnostic testing has eluded theoretical analysis we study modelling strategies by simulation the monte carlo experiments show that pcgets recovers the dgp specification from a general model with size and power close to commencing from the dgp itself

aid and growth what meta analysis reveals abstract recent literature in the meta analysis category where results from a range of studies are brought together throws doubt on the ability of foreign aid to foster economic growth and development this article assesses what meta analysis has to contribute to the literature on the effectiveness of foreign aid in terms of growth impact we re examine key hypotheses and find that the effect of aid on growth is positive and statistically significant this significant effect is genuine and not an artefact of publication selection we also show why our results differ from those published elsewhere

flex cars and the alcohol price abstract we build a model that incorporates the effect of the innovative flex car an automobile that is able to run with either gasoline or alcohol on the dynamics of fuel prices in brazil our model shows that differences regarding fuel prices will now depend on the proportions of alcohol gasoline and flex cars in the total stock conversely the demand for each type of car will also depend on the expected future prices of alcohol and gasoline in addition to the car prices the model reflects our findings that energy prices are tied in the long run and that causality runs stronger from gasoline to alcohol the estimated error correction parameter is stable implying that the speed of adjustment towards equilibrium remains unchanged the latter result is probably due to a still small fraction of flex cars in the total stock approx 5 despite the fact that its sales nearly reached 100 in 2006

habit persistence and teen sex could increased access to contraception have unintended consequences for teen pregnancies we develop a dynamic discrete choice model of teen sex and pregnancy that incorporates habit persistence habit persistence has two sources here the first is a fixed cost of having sex which relates to a moral or psychological barrier that has been crossed the first time one has sex the second is a transition cost whereby once a particular relationship has progressed to sex it is difficult to move back we estimate significant habit persistence in teen sex implying that the long run effects of contraception policy may be different from their short run counterparts especially if the failure rate of contraception is sufficiently large programs that increase access to contraception are found to decrease teen pregnancies in the short run but increase them in the long run

interpreting econometric evidence the behaviour of consumers expenditure in the uk abstract the dynamic models of consumers expenditure proposed by davidson et al 1978 and hendry and von ungern sternberg 1979 are re appraised in the light of hall s 1978 analysis of the empirical implications of the life cycle permanent income hypothesis in particular that the series for consumption should obey a random walk apart from trend in an attempt to reconcile the conflicting findings monte carlo experiments are used to demonstrate that if the davidson et al model were actually correct the hall model would appear to give a good description of the data and would probably not be rejected all the models are re estimated with new data for the uk and these data do reject a modified random walk specification in conclusion we discuss the issue of income exogeneity and comment on questions of model selection and interpretation

general to specific modelling using pcgets this review examines the facilities provided by pcgets version 1 0 an oxmetrics module designed to implement automated general to specific model selection in the context of cross section or dynamic time series models that are linear in the parameters a cross section empirical example is used to illustrate the steps involved the output produced and the options available for modellers copyright blackwell publishing ltd 2003

uncertain infant mortality learning and life cycle fertility this article examines the links between infant mortality and fertility in an environment with unobserved heterogeneity in infant mortality risk across mothers in such an environment replacement behavior i e the fertility response to an experienced child death might be influenced by mothers learning about a family specific component of infant mortality risk i explicitly introduce learning by mothers in a dynamic stochastic model of life cycle marital fertility and i estimate the model s structural parameters using malaysian panel data the framework is used to estimate replacement rates and to correct for birth selectivity in the estimation of the relationship between infant mortality risk and health inputs

disequilibrium buffer stocks and consumers expenditure on non durables the authors examine the importance of a disequilibrium real balance effect on non durable consumers expenditure in the u k using cointegration techniques and the johansen procedure they first establish a desired long run demand function for liquid assets depending on income wealth and a set of interest rates deviations of liquidity from this desired level cause changes in consumption via intertemporal substitution but via its effect on disequilibrium liquidity consumption is modeled in an error correction framework and is also found to depend on income and financial wealth both the disequilibrium liquidity and wealth terms may be picking up the effects of financial liberalization e g mortgage leak on consumption as funds released will be temporarily held in financial assets they also find some evidence that changes in the distribution of income have an independent effect on aggregate consumption copyright 1991 by mit press

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

model selection based unit root detection in unemployment rates international evidence a model selection based unit root detection by using the bayesian information criterion is proposed first six alternative model classes are obtained considering the presence or absence of a unit root and considering three kinds of deterministic terms no constant constant constant and trend second given the selected model class the best model is selected from the alternative models with different lags third the best of the entire model set comprising the six models obtained in the preceding step is selected finally whether an observed time series contains a unit root is determined on the basis of the selected model simulation results suggest that the proposed method is at least comparable to and often better than the sequential testing method provided by dolado et al 1990 empirical results obtained by the proposed method are more convincing than those obtained by the sequential testing method and suggest that the hysteresis hypothesis can be applied to monthly time series of the unemploym

seasonal fluctuations and the life cycle permanent income model of consumption this paper examines a new possible explanation for the recent rejections of the life cycle permanent income model of consumption the treatment of seasonal fluctuations the paper shows that when the seasonal fluctuations in consumption purchases are included in an analysis of the life cycle permanent income model there is no evidence in the aggregate data against the model the estimates of the parameters of agents utility functions obtained with seasonally unadjusted data are plausible and the unadjusted data do not reject the overidentifying restrictions on the model

sustainable management of renewable resources an experimental investigation in continuous time abstractthis study addresses one of the most basic questions in renewable resource management the ability of economic agents to exploit a renewable resource in an efficient and sustainable manner in a laboratory experiment subjects are presented with renewable resource extraction problems where optimal management will lead to a stable steady state a test of sustainability of the extraction practices shows that extraction behaviour results in steady states only 56 of the time the mode of the steady state distribution coincides with the optimal steady state extraction the trade off between accruing a higher payoff in the present and sustaining the resource for future exploitation leads to suboptimal behaviours such as initial overextraction of the resource compared to the optimal extraction policy costly downward adjustment of the extraction later in time and settling down for lower long run resource and extraction the suboptimal behaviours lead to 17 loss in efficiency on average in terms of th

evolution of the trans atlantic exchange rate before and after the birth of the euro and policy implications the establishment of the euro could present a challenge to the hegemony of the us dollar as the predominant international currency the fact that the unipolar us dollar dominated international monetary system can be unstable in the presence of large shocks presents an opportunity for the euro to promote systemic stability the present study pursues this conjecture by exploring with cointegration and error correction method techniques the interdependence between the dynamics of the dollar euro exchange rate and economic fundamentals in the context of a monetary exchange rate model our results suggest that both short run price stickiness and long run secular growth fundamentals affect the exchange rate path these findings support a relatively broad based policy approach to promote the collective economic interest of the eu zone to the extent that such policies succeed in strengthening and stabilizing the euro zone economy they are likely to buttress and possibly accelerate the internationalization

consumption saving and rational expectations some further evidence for the u k this paper examines implications of the rational expectations permanent income framework for quasi savings using u k data the residual from a cointegrating regression between income and consumption provides the quasi savings series that is used in conjunction with differenced income in a bivariate vector autoregression with associated restrictions and exclusion tests a further implication is that savings should granger cause labor income changes incomes and consumption are found to be cointegrated in levels as a robust result and the bivariate system performs well however savings granger cause labor income changes with a perverse positive sign and exclusion restrictions fail copyright 1989 by royal economic society

measuring the value of children by sex and age using a dynamic programming model one of the important determinants of fertility is the value of children as perceived by parents this paper estimates gender and age specific values of children using a dynamic programming model the underlying hypothesis is that observed fertility outcome for any couple is the solution to their life cycle optimization problem findings from the korean data indicate that children impose net costs when young and net benefits when old both the early costs and the later benefits are larger for male children than female children and for better educated women than lowereducated women simulation studies which use estimated values of children suggest that a decrease in the costs of abortion and pre natal gender screening tests may raise the male birth ratio through gender selective abortions

politics and exchange rate forecasts abstract standard exchange rate models perform poorly in out of sample forecasting when compared to the random walk model we posit part of the poor performance of these models may be due to omission of political factors we test this hypothesis by including political variables that capture party specific election specific and candidate specific characteristics surprisingly we find our political model outperforms the random walk in out of sample forecasting at 1 12 month horizons for the pound dollar mark dollar pound mark and the trade weighted dollar mark and pound exchange rates

monetary policy for an open economy an alternative framework with optimizing agents and sticky prices the new open economy macroeconomics seeks to provide an improved basis for monetary and exchange rate policy through the construction of open economy models that feature rational expectations optimizing agents and slowly adjusting prices of goods this paper promotes an alternative approach for constructing such models by treating imports not as finished consumer goods but rather as raw material inputs to the home economy s productive process this treatment leads to a clean and simple theoretical structure that has some empirical attractions as well a particular small economy model is calibrated and its properties exhibited primarily by means of impulse response functions the preferred variant is shown to feature a pattern of correlations between exchange rate changes and inflation that is more realistic than provided by a more standard specification important recent events are interpreted in light of the alternative models

an estimable dynamic stochastic model of fertility and child mortality this paper develops a finite horizon dynamic stochastic model of discrete choice with respect to life cycle fertility within an environment where infant survival is uncertain the model yields implications for the number timing and spacing of children a tractable estimation method is developed for the linear constraint quadratic utility case that is intimately tied to the dynamic optimization problem and the method is applied to malaysian household data estimation is based on integrating the numerical solution of the dynamic programming model of behavior with a maximum likelihood procedure

innovation and the evolution of market structure this paper examines the association between innovation and the evolution of market structure a dynamic model of market concentration is applied to seventy three u k industries 1970 79 and the results are found to be consistent with the hypothesis that innovation is deconcentrating the results reported here and those contained in earlier work combine to suggest that innovation and changes in market concentration interact in a relatively rapid mutually reinforcing but rather weak spiral of increased innovation and decreasing concentration copyright 1990 by blackwell publishing ltd

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

an investigation of the long run properties of aggregate non durable consumers expenditure in the united this paper estimates the effects of the modeling of nondurable consumption in the light of the five years of new data since the publication of the paper by j e h davidson et al 1978 and the development of the new cointegration technique of r f engle and c w j granger 1987 existing models are found to be inadequate on two grounds they fail parameter stability tests and they do not contain a suitable equilibrium specification the paper uses the cointegration approach to search for an encompassing model that is both stable and cointegrates the main finding is that the analysis must be extended to allow for differential income effects caused by changing higher rate income tax bands copyright 1989 by royal economic society

econometric issues in macroeconomic models with generated regressors the paper critically reviews the literature on the econometric issues raised by the use of generated regressors gr in empirical models the economic rationale for the use of gr is considered with examples being drawn from several macroeconomic examples including new classical macroeconomic ncm models which postulate monetary neutrality various estimation methods are discussed for models which include surprise or unexpected terms and the strengths and weaknesses of each approach are investigated drawing upon the work of mcaleer and mckenzie 1991 situations where the typically inefficient two step estimation 2se method will be efficient are highlighted problems of model misspecification and measurement errors are also investigated an empirical section highlights some of the dangers of using uncorrected 2se estimation results through a careful consideration of many recent attempts to test the ncm monetary neutrality hypothesis copyright 1993 by blackwell publishers ltd

aggregate consumption and the distribution of income in the united kingdom an econometric analysis blinder i975 explained this omission by arguing that with the ascendancy of the friedman 1957 and modigliani and brumberg i954 models of consumer behaviour the view that income distribution affected aggregate consumption fell into disrepute in academic circles it was supplanted by the view that marginal and perhaps even average propensities to consume are constant over the income distribution pp 447 8 the life cycle model as is well known derives the aggregate consumption function from the hypothesis that the consumer chooses the time path of consumption which maximises lifetime utility subject to the constraint that the present discounted value of all consumption plus the present discounted value of the bequest if any is equal to lifetime disposable resources a consequence of such a hypothesis is that consumption at each instant is proportional to lifetime disposable resources with the constant of proportionality dependent only on age length of life the rate of interest and tastes in their empirical work friedman and modigliani may also have had to ignore income distribution due to lack of data however blinder 1975 went on to show that even under the life cycle hypothesis provided that the marginal utility of bequests say f was different

applied econometrics without sinning one must offer a cautious welcome to any paper kennedy 2001 discussing the problems confronting the implementation of econometrics to empirical data especially from someone who has written an elementary econometrics textbook see kennedy 1985 and later editions there is a considerable gulf between the elementary and inappropriate methodology inherent in many such textbooks and what applied econometricians need to do in practice to model economic data there is some good advice in his paper but also some which is bad kennedy fails to formalize the issues is unclear at key points and neither draws essential distinctions nor defines central terms consequently although some of his recommendations should help to narrow the theory applications gap others could exacerbate the difficulties the remainder of this note amplifies these comments first the topic is in fact addressed in some textbooks albeit none of which are cited by kennedy see inter alia hendry and doornik 2001 and earlier editions especially chs 11 and 15 hendry 1995a provides extensive analyses of the problems of matching theory and evidence empirical modelling and data measurement issues as well as de emphasizing estimation and highlighting the role of graphs spanos 1986 analyzes the difficulties inherent in the conventional paradigm and clearly explains an alternative approach now exposited in his introductory textbook spanos 1999 and charemza and deadman 1997 describe the practice of modelling non stationary time series also see hendry and wallis 1984 ch 1 for an earlier general discussion there are too many relevant papers on methodology to list additional to those kennedy mentions but mizon 1995 and hendry 1997 clarify some of his difficulties second the theory and practice of model building has advanced spectacularly in the last few years see e g hoover and perez 1999 2000 krolzig and hendry 2001 hendry and krolzig 2001b many of the so called sins turn out to be false accusations while others formulating and checking the ingredients of the basic specification remain essential if anything useful is to result from empirical modelling thus considerable revision of the ten econometric commandments

the monetary model strikes back evidence from the world abstract we revisit the dramatic failure of monetary models in explaining exchange rate movements using the information content from 98 countries we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals we also find fundamentals based models very successful in beating a random walk in out of sample prediction

modelling uk inflation 1875 1991 uk inflation has varied greatly in response to many economic policy and exchange rate regime shifts two world wars and two oil crises as well as legislative and technological changes inflation is modelled as responding to excess demands from all sectors of the economy goods and services factors of production money financial assets foreign exchange and government deficits equilibrium correction terms are developed for each of these over the sample indicator variables and commodity prices capture turbulent years variables representative of most theories of inflation matter empirically yielding an eclectic model inconsistent with any single cause explanation copyright 2001 john wiley sons ltd

the specification and estimation of dynamic stochastic discrete choice models a survey our main goal is to quantify the returns to a career in the united states congress we specify a dynamic model of career decisions of a member of congress and estimate this model using a newly collected dataset given estimates of the structural model we

a dynamic model of contraceptive choice of spanish couples in this paper we propose a simple dynamic stochastic model of sterilization and contraceptive use and we estimate its structural parameters using a sample of married couples from the 1995 spanish family and fertility survey the estimated structural model improves on previous studies in terms of its ability to rationalize observed behavior the large proportion of women contracepting at parity 0 is interpreted as evidence of precautionary contraceptive behavior allowing for simple forms of permanent unobserved heterogeneity across couples in their ability to conceive has important implications for estimates of utility and cost parameters our estimates of child valuation parameters imply that most spanish couples would have two children but significant deviations from this goal are brought about by imperfect and costly fertility control our simulations suggest that the introduction of sterilization has reduced fertility by an average of 0 2 children per couple and that the availability of more effective reversible contraceptive methods would reduce expected fertility by up to 0 4 children per couple

testing the long run structural validity of the monetary exchange rate model using a recently developed econometric technique we test the validity of the over identifying restrictions of the long run structural relations underlying the flex price monetary model of the exchange rate our main finding is that for the canadian us dollar structural identification is rejected by the data

monetary models of dollar yen euro nominal exchange rates dead or undead the predictions of the models were based on ex post realised values of the explanatory variables in other words the standard exchange rate models we estimated exhibited extremely poor out of sample fit 2 at the time these nihilistic results seemed quite radical since there was widespread optimism about the potential of monetary models especially sticky price monetary models to explain how flexible exchange rates function after all the main cornerstones of monetary exchange rate models were relatively noncontroversial long run purchasing power parity or some variant of ppp and a presumption that there is a strong long run connection between money growth and inflation today the meese and rogoff 1983a results no longer seem quite so crazy despite longer data sets on modern floating rates and the application of more sophisticated econometric techniques researchers have continued to find it very frustrating to firmly demonstrate any systematic relationship between exchange rates and macroeconomic fundamentals at least for the cross rates between the dollar dm euro and yen it is true that researchers have occasionally found particular sub samples where certain models seem to perform noticeably better than the random walk model but as a rule these results wilt under sustained out of sample testing surveying the evidence in their survey for the handbook of international economics frankel and rose 1995 conclude that numerous attempts to overturn the meese and rogoff 1983a results have failed

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

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

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

models of mortality rates analysing the residuals abstractthe area of mortality modelling has received significant attention over the last 25 years owing to the need to quantify and forecast improving mortality rates this need is driven primarily by the concern of governments insurance and actuarial professionals and individuals to be able to fund their old age in particular to quantify the costs of increasing longevity we need suitable model of mortality rates that capture the dynamics of the data and forecast them with sufficient accuracy to make them useful in this article we test several of the leading time series models by considering the fitting quality and in particular testing the residuals of those models for normality properties in a wide ranging study considering 30 countries we find that almost exclusively the residuals do not demonstrate normality further in hurst tests of the residuals we find evidence that structure remains that is not captured by the models

gini playing soccer the level of income inequality in a european country influences the competitive balance of its major soccer leagues we test this hypothesis using cointegration techniques for seven male professional soccer leagues the dutch english french german italian spanish and ukrainian soccer leagues from the 1980 1981 season to the 2011 2012 season controlling for the level of income inequality using variables such as real gdp per capita trade openness and the emigration rate we conclude that income inequality measured by the gini index causes changes in the measures of competitive balance that we employ the hirschman herfindahl index and the sd concerning the final number of points scored by the various teams

what is the globalisation of inflation abstract this paper studies the globalisation of cpi inflation by analysing core energy and food components testing for structural breaks in the relationships between domestic inflation and a corresponding country specific foreign inflation series at the monthly frequency for oecd countries the iterative methodology employed separates coefficient and variance breaks while also taking account of outliers we find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s compatible with the introduction of inflation targeting in many countries of our sample there is less evidence of increased synchronisation of shortrun movements in core than aggregate inflation but an increased role for shortrun foreign energy inflation often contributes to the globalisation effect

testing the stochastic implications of the life cycle permanent income hypothesis using uk regional time series data this paper applies exclusion tests of the pure life cycle permanent income hypothesis lcpih to time series data on each of the eleven standard regions of the uk data are annual and extend from 1975 to 1994 the results obtained suggest that there are considerable differences in consumption behaviour across the regions theory has indicated that a departure of consumption behaviour from that predicted by the lcpih can occur because of a change in unemployment consequently a comparison is undertaken of the empirical results obtained for the eleven regions and the respective unemployment movements following this comparison it is possible to conclude that the contrasting unemployment experiences of the regions of the uk have contributed significantly to yet cannot account for fully the observed differences in consumption behaviour

the overvaluation of purchasing power parity abstract recent panel studies of purchasing power parity have reported strong evidence of mean reversion in real exchange rates however these studies fail to control for cross sectional dependence in the data this failure has dramatic consequences raising the significance level of tests with a nominal size of 5 percent to as much as 50 percent it is shown in this paper that controlling for cross sectional dependence no evidence against the random walk null can be found in panels of up to 64 real exchange rates this finding cannot be attributed to low power as there is ample power in panels of this size to reject the unit root null