In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.

Forecasting, Structural Time Series Models and the Kalman Filter

The Credit Crisis: Conjectures about Causes and Remedies

Following the substantial pre-2007 housing bubble experienced in the domestic economy, Irish house prices continued to fall for almost seven years up to the mid-point of 2013. Since 2013 the rate of price increases observed, particularly in the Dublin area, has prompted concerns of another price bubble emerging. In this paper, the results from an earlier analysis of Irish house prices are updated and supplemented with cross-country indicators of housing market conditions. The results suggest that Irish house prices, as of December 2013, were still somewhat undervalued and, in the absence of a significant housing supply response, are likely to continue to increase in the coming years.

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Quarterly Economic Commentary

Between the start of the economic and financial crisis in 2008, and early 2010, almost four million jobs were lost in the euro area. Employment began to rise again in the first half of 2011, but declined once more at the end of that year and remains at around three million workers below the pre-crisis level. However, in comparison with the severity of the fall in GDP, employment adjustment has been relatively muted at the aggregate euro area level, mostly due to significant labour hoarding in several euro area countries. While the crisis has, so far, had a more limited or shorter-lived impact in some euro area countries, in others dramatic changes in employment and unemployment rates have been observed and, indeed, more recent data tend to show the effects of a re-intensification of the crisis. The main objectives of this report are: (a) to understand the notable heterogeneity in the adjustment observed across euro area labour markets, ascertaining the role of the various shocks, labour market institutions and policy responses in shaping countries JEL Classification: E42, F15, F33, F41

Euro area labour markets and the crisis

We develop a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency risk. In this model, banks face taxation, flotation costs of securities, and default costs and maximize shareholder value by making their financing, liquid asset holdings, and default decisions in response to these frictions as well as regulatory requirements. Our analytic characterization of the bank policy choices shows that imposing solely liquidity requirements leads to lower bank losses in default at the cost of an increased likelihood of default. Combining liquidity requirements with leverage requirements reduces drastically both the likelihood of default and the magnitude of bank losses in default.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2705364_code274700.pdf?abstractid=2448162&mirid=1&type=2

Bank Capital, Liquid Reserves, and Insolvency Risk

This paper provides a detailed description of the current version of the Ecofin Council approved production function (PF) methodology which is used for assessing both the productive capacity (i.e. potential output) and cyclical position (i.e. output gaps) of EU economies. Compared with the previous 2010 paper on the same topic, there have been two significant changes to the PF methodology, namely an overhaul of the NAWRU methodology & the introduction of a new T+10 methodology.

/pdf/the-production-function-methodology-for-calculating-58m5vq94yv.pdf

The production function methodology for calculating potential growth rates and output gaps

Program GAP Technical Description and User-manual

During the period 2008-2012, EU governments incurred substantial costs bailing out banks. As corporate income taxation (CIT) in most countries still favors debt- over equity- financing, reducing or eliminating this debt bias would complement regulatory reforms reducing costs of financial crises. To estimate this effect, we use a two-step approach. First, using panel regressions on a dataset of 32,833 bank-year observations we find sizable long-run effects of CIT on leverage in the EU. Second, we simulate the effect of tax reforms on bank losses using a Vasicek-based model with actual banks' balance sheets to estimate costs of systemic crises for six large EU member states. Even if the tax elasticity of bank leverage is taken at the lower end of the ranges found in recent literature, eliminating the debt bias could lead to reductions of public finance losses in the range of 60 to 90%. The results hold even when considering much smaller effects for banks that are close to the regulatory minimum capital requirement of the Basel III framework. Even when asset portfolio risk is allowed to increase endogenously and considering conservative ranges of the parameter space, we conclude that tax reforms to remove the debt bias can result in very sizable reductions in risks and costs of financial crises. �

Debt Bias in Corporate Taxation and the Costs of Banking Crises in the EU

The use of unobserved component models to estimate the NAWRU has been strongly criticized due to some excessive pro-cyclicality at the sample end, especially in the neighbourhood of turning points. To address this criticism, the European Commission now uses a model-based approach where the information set is augmented with a structural indicator of the labour market to which the NAWRU is supposed to converge in a certain number of years. The resulting NAWRU estimates mixes information about the business cycle and the labour market characteristics. The application to the EU Member States shows that besides moderating pro-cyclicality, this approach also reduces the first revision to the one- and two-year-ahead forecasts of the NAWRU in four-fifth of the countries considered.

NAWRU Estimation Using Structural Labour Market Indicators

We point out that the simple slice sampler generates chains that are correlation-free when the target distribution is centrally symmetric. This property explains several results in the literature about the relative performance of the simple and product slice samplers. We exploit it to improve two algorithms often used to circumvent the slice inversion problem, namely stepping out and multivariate sampling with hyperrectangles. In the general asymmetric case, we argue that symmetrizing the target distribution before simulating greatly enhances the efficiency of the simple slice sampler. To achieve symmetry we focus on the Box-Cox transformation with parameters chosen to minimize a measure of skewness. This strategy is illustrated with several sampling problems. Jel code: C11, C15.

https://publications.jrc.ec.europa.eu/repository/bitstream/111111111/54199/1/jrc113316_jrcwp2018-11.pdf

Rossi Alessandro

Papers

The production function methodology for calculating potential growth rates and output gaps

Program GAP Technical Description and User-manual

Debt Bias in Corporate Taxation and the Costs of Banking Crises in the EU

NAWRU Estimation Using Structural Labour Market Indicators

The slice sampler and centrally symmetric distributions