Offering a unifying theoretical perspective not readily available in any other text, this innovative guide to econometrics uses simple geometrical arguments to develop students' intuitive understanding of basic and advanced topics, emphasizing throughout the practical applications of modern theory and nonlinear techniques of estimation. One theme of the text is the use of artificial regressions for estimation, reference, and specification testing of nonlinear models, including diagnostic tests for parameter constancy, serial correlation, heteroscedasticity, and other types of mis-specification. Explaining how estimates can be obtained and tests can be carried out, the authors go beyond a mere algebraic description to one that can be easily translated into the commands of a standard econometric software package. Covering an unprecedented range of problems with a consistent emphasis on those that arise in applied work, this accessible and coherent guide to the most vital topics in econometrics today is indispensable for advanced students of econometrics and students of statistics interested in regression and related topics. It will also suit practising econometricians who want to update their skills. Flexibly designed to accommodate a variety of course levels, it offers both complete coverage of the basic material and separate chapters on areas of specialized interest.

Estimation and Inference in Econometrics

The financial market turmoil in 2007 and 2008 has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies At the same time, the stock market capitalization of the major banks declined by more than twice as much While the overall mortgage losses are large on an absolute scale, they are still relatively modest compared to the $8 trillion of US stock market wealth lost between October 2007, when the stock market reached an all-time high, and October 2008 This paper attempts to explain the economic mechanisms that caused losses in the mortgage market to amplify into such large dislocations and turmoil in the financial markets, and describes common economic threads that explain the plethora of market declines, liquidity dry-ups, defaults, and bailouts that occurred after the crisis broke in summer 2007 To understand these threads, it is useful to recall some key factors leading up to the housing bubble The US economy was experiencing a low interest rate environment, both because of large capital inflows from abroad, especially from Asian countries, and because the Federal Reserve had adopted a lax interest rate policy Asian countries bought US securities both to peg the exchange rates at an export-friendly level and to hedge against a depreciation of their own currencies against the dollar, a lesson learned from the Southeast Asian crisis of the late 1990s The Federal Reserve Bank feared a deflationary period after the bursting of the Internet bubble and thus did not counteract the buildup of the housing bubble At the same time, the banking system underwent an important transformation The

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Deciphering the Liquidity and Credit Crunch 2007-2008

The crisis of 2008-09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870-2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

This paper examines old and new evidence on the predictive performance of asset prices for inflation and real output growth. We first review the large literature on this topic, focusing on the past dozen years. We then undertake an empirical analysis of quarterly data on up to 38 candidate indicators (mainly asset prices) for seven OECD countries for a span of up to 41 years (1959 1999). The conclusions from the literature review and the empirical analysis are the same. Some asset prices predict either inflation or output growth in some countries in some periods. Which series predicts what, when and where is, however, itself difficult to predict: good forecasting performance by an indicator in one period seems to be unrelated to whether it is a useful predictor in a later period. Intriguingly, forecasts produced by combining these unstable individual forecasts appear to improve reliably upon univariate benchmarks.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w8180.pdf?abstractid=264434&mirid=1

Forecasting Output and Inflation: The Role of Asset Prices

Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

/pdf/capital-regulation-risk-taking-and-monetary-policy-a-missing-4virgvq8ix.pdf

Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

This paper assesses the linkages between money, credit, house prices and economic activity in industrialised countries over the last three decades. The analysis is based on a fixed-effects panel VAR estimated using quarterly data for 17 industrialized countries spanning the period 1970-2006. The main results of the analysis are the following: (i) There is evidence of a significant multidirectional link between house prices, monetary variables and the macroeconomy. (ii) The link between house prices and monetary variables is found to be stronger over a more recent sub-sample from 1985 till 2006. (iii) The effects of shocks to money and credit are found to be stronger when house prices are booming. The last two results are, however, in general not statistically significant due to the large confidence bands of the impulse responses.

House Prices, Money, Credit and the Macroeconomy

This paper assesses the links between money, credit, house prices, and economic activity in industrialized countries over the last three decades. The analysis is based on a fixed-effects panel vector autoregression, estimated using quarterly data for 17 industrialized countries spanning the period 1970-2006. The main results of the analysis are the following. (i) There is evidence of a significant multidirectional link between house prices, monetary variables, and the macroeconomy. (ii) The link between house prices and monetary variables is found to be stronger over a more recent sub-sample from 1985 to 2006. (iii) The effects of shocks to money and credit are found to be stronger when house prices are booming.

/pdf/house-prices-money-credit-and-the-macroeconomy-3zzl2o54fa.pdf

House prices, money, credit, and the macroeconomy

This paper assesses the macroeconomic effects of unconventional monetary policies by estimating a panel VAR with monthly data from eight advanced economies over a sample spanning the period since the onset of the global finanancial crisis. It finds that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The estimated output effects turn out to be qualitatively similar to the ones found in the literature on the effects of conventional monetary policy, while the impact on the price level is weaker and less persistent. Individual country results suggest that there are no major differences in the macroeconomic effects of unconventional monetary policies across countries, despite the heterogeneity of the measures that were taken.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2142513_code456443.pdf?abstractid=2142513&mirid=1&type=2

The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis

This paper assesses the macroeconomic effects of unconventional monetary policies by estimating a panel vector autoregression (VAR) with monthly data from eight advanced economies over a sample spanning the period since the onset of the global financial crisis. It finds that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The estimated output effects turn out to be qualitatively similar to the ones found in the literature on the effects of conventional monetary policy, while the impact on the price level is weaker and less persistent. Individual country results suggest that there are no major differences in the macroeconomic effects of unconventional monetary policies across countries, despite the heterogeneity of the measures that were taken.

/pdf/the-effectiveness-of-unconventional-monetary-policy-at-the-e8d2de1zqa.pdf

The effectiveness of unconventional monetary policy at the zero lower bound : a cross-country analysis

This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995-2012. Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the "interest rate structure", for short), on the one hand, and bank profitability - return on assets - on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, ie that non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.

Boris Hofmann

Papers

House Prices, Money, Credit and the Macroeconomy

House prices, money, credit, and the macroeconomy

The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis

The effectiveness of unconventional monetary policy at the zero lower bound : a cross-country analysis

The Influence of Monetary Policy on Bank Profitability