Showing papers in "Econometric Reviews in 1984"

Forecasting and conditional projection using realistic prior distributions

Abstract: This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied t o 10 macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variable responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates We provide unconditional forecasts as of 1982:12 and 1983:3. We also describe how a model such as this can be used to make conditional projections and to analyze policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982: 12 Although no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, information that may help in evaluating causal hypotheses without containing any such hypotheses.

Tests of specification in econometrics

Abstract: This survey of recent developments in testing for misspecification of econometric models reviews procedures based on a method due to Hausman. Particular attention is given to alternative forms of the test, its relationship to classical test procedures, and its role in pre-test estimation.

Adaptive estimation of non–linear regression models

Abstract: This paper summarizes from an econometric perspective recent work by statisticians on adaptive estimation. It also presents new findings concerning the adaptive estimability of non-linear regression models.

Base drift and the longer run growth of M1 : experience from a decade of monetary targeting

Abstract: The Federal Reserve has been announcing target ranges for the growth of M1 and other monetary aggregates since 1975. In “Base Drift and the Longer Run Growth of M1: Experience from a Decade of Monetary Targeting,” Alfred Broaddus and Marvin Goodfriend discuss a technical aspect of the Fed’s monetary targeting procedure known as “base drift.” Base drift refers to the Fed’s practice of using the actual dollar level of an aggregate in the base quarter as the base level for the target range, rather than the midpoint of the targeted range set in the preceding period. Broaddus and Goodfriend estimate the cumulative impact of base drift on the effective growth of M1 since 1975 and indicate several ways in which base drift undermines the Fed’s present monetary targeting strategy. Net base drift was substantially upward over the 1975-1984 period. Further, since there has been both upward and downward base drift during the period, the cumulative drift tends to understate the quantitative significance of base drift on a year-to-year basis. Although in retrospect some part of the cumulative drift that occurred in 1982-1983 may have been fortuitous in the sense that inflation has remained low through 1984, the authors argue that the routine allowance of base drift greatly reduces the disciplinary features of monetary targeting and therefore probably reduces its effectiveness and credibility. Finally, they suggest two modifications of the present procedure that would eliminate base drift and in their view increase the public’s confidence in the Fed’s commitment to restore and maintain price stability.

Vector autoregressions as a tool for forecast evaluations

Abstract: In his article, “Vector Autoregressions as a Tool for Forecast Evaluation,” Roy H. Webb proposes that VAR forecasts be used as a standard of comparison for other forecasts. He begins by explaining how conventional forecasting models are constructed and used, and summarizes a few common objections to these models. He then describes the VAR methodology and compares forecasts from a simple VAR model with those from a consulting firm that uses a conventional model and with a series of consensus forecasts. The VAR model holds its own in this competition; in fact, only the VAR model is able to predict the 1981-1982 recession one year before its occurrence.

On nonneutral relative price effects in monetarist thought: some Austrian misconceptions

Abstract: The rise in the rate of inflation during the 1970s was paralleled by a rise in interest in monetarism, which offered the means for controlling inflation. Despite the increased interest, monetarism is still often misunderstood, as Thomas M. Humphrey points out in “On Nonneutral Relative Price Effects in Monetarist Thought: Some Austrian Misconceptions.” Economists of the Austrian school have portrayed monetarism as oblivious to the effects of monetary disturbances on the real economy of output and jobs. Humphrey exposes their fallacy with selections from monetarist literature from the 19th century to the present. He shows that monetarism is actually similar to Austrian theory in stressing the relative price effects of monetary disturbances. As a result, monetarists and Austrians agree that to decrease disruptions to the real economy, monetary volatility should be minimized.

An investigation of cash management practices and their effects on the demand for money

Abstract: The observed shift in statistical demand-for-money relationships during the mid-1970s was once thought to reflect an unexplainable change in behavior. More recently, economists have recognized that the conventional regressions inadequately represented the demand for money. Specifically, the standard models overpredicted money demand during the 1970s since they failed to capture the effects of sophisticated cash management techniques. In “An Investigation of Cash Management Practices and Their Effects on the Demand for Money,” Michael Dotsey examines ways of augmenting the conventional models to overcome this problem. By looking at the causes of changes in cash management practices, Dotsey finds four variables related to cash management, which he tests for ability to explain the mid-1970s shift in a standard regression explaining the demand for money. Each of the proxies reduces the instability of the equation. Indeed, one such proxy, the number of electronic funds transfers over the Federal Reserve’s wire system, captures the entire shift in the conventional model in the 1970s.

The evolution of the bank regulatory structure : a reappraisal

Abstract: In his article, “The Evolution of the Bank Regulatory Structure: A Reappraisal,” F. Ward McCarthy Jr. argues that neither of these competing theories provides a sufficient explanation for the major developments in the bank regulatory framework of the United States. He proposes that the structure of bank regulation has been dictated in part by the desire of governments to enhance their abilities to generate revenue. McCarthy traces the history of government intervention in the banking industry from the colonial period through the 1930s and demonstrates that concern about public finance has been a crucial factor behind every important change in the institutional structure of bank regulation.

The Outlook for Inflation

Abstract: The behavior of final product prices since 1980 has been consistent with price models used by mainstream economists Final product prices fall, or at least grow more slowly, during recessions and do not increase significantly during the first year of economic recovery According to economists KJ Kowalewski and Michael E Bryan, current estimates of economic activity and capacity output suggest that these prices should not grow significantly faster in 1984 The inflation outlook for 1985 is less certain, however, because the future course of monetary and fiscal policies and possible errors in our measures of capacity output are unknown

The economic outlook for the Fifth District states in 1984: forecasts from vector autoregression models

Abstract: Anatoli Kuprianov and William Lupoletti employ the VAR technique to forecast the regional economy in “The Economic Outlook for Fifth District States in 1984.” The authors document the experiences of the economies of Maryland, Virginia, West Virginia, North Carolina, South Carolina, and the District of Columbia over the past 25 years. After summarizing the differences between conventional and VAR forecasting models, they present forecasts of each state for 1984 produced by a five-variable VAR model. These forecasts suggest that the recovery of 1983 should continue through 1984 for most Fifth District states.

Working Paper Review: A Regional Economic Forecasting Procedure Applied to Texas

Abstract: In this paper economist James G. Hoehn proposes and implements a relatively simple method for building a multivariate autoregressive forecasting model for regional economic time series. The method used is a time series approach requiring little a priori or theoretical knowledge, as in the building of structural econometric models. In this way, the method is similar to the so-called vector autoregression (VAR) models of Anderson and Kuprianov and Lupoletti. However, the way variables are chosen to be included and the way relationships are estimated involve more hypothesis tests and less prior knowledge.

Risk in Large-Dollar Transfer Systems

Abstract: Settlement risk is the risk that a bank will be unable to repay other banks for daylight credit, meaning the net amount (payments minus receipts) owed for a day's transactions on a payment system. Payments volumes have been growing rapidly on Fedwire and even more rapidly on privately operated systems. This growth highlights the need for management of settlement risk exposure. One vital ingredient of settlement risk management is the ability to control daylight credit extended or used by a bank across the various payment systems. Equally vital is the need for banks and their customers to recognize who is at risk in making and receiving large-dollar payments.

The promises and pitfalls of contemporaneous reserve requirements for the implementation of monetary policy

Abstract: In February of this year, the Federal Reserve Board changed the rules by which banks’ required reserves are calculated; the previous system of lagged reserve requirements was replaced by contemporaneous reserve requirements (or CRR). According to the Board, the new reserve accounting system will improve the implementation of monetary policy by strengthening the linkage between bank reserves and the money supply. However, according to Marvin Goodfriend, author of “The Promises and Pitfalls of Contemporaneous Reserve Requirements for the Implementation of Monetary Policy,” the benefits of CRR are not obtainable with operating procedures that target either the Federal funds rate or nonborrowed reserves. Goodfriend presents the case for combining CRR with total reserve targeting. He argues that, compared with Federal funds rate or nonborrowed reserve targeting, a procedure in which total reserves are targeted would minimize the number of difficult economic and political decisions the Fed has to make, protect against pressure to help finance the budget deficit, and make the Fed’s effort to stabilize the price level both more credible and more effective.