Showing papers in "International Economic Review in 1998"
TL;DR: In this article, a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using ARCH and stochastic volatility models and it has been shown that volatility models produce strikingly accurate inter-daily forecasts for the latent volatility factor that would be of interest in most financial applications.
Abstract: A voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using ARCH and stochastic volatility models. While most of these studies have documented highly significant in-sample parameter estimates and pronounced intertemporal volatility persistence, traditional ex-post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts. Contrary to this contention, we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications. New methods for improved ex-post interdaily volatility measurements based on high-frequency intradaily data are also discussed.
3,174 citations
TL;DR: In this paper, a consistent framework for conditional interval forecast evaluation with higher-order moment dynamics is presented. But this framework is not suitable for the case of exchange rate forecasting, where higher order moment dynamics are present.
Abstract: A complete theory for evaluating interval forecasts has not been worked out to date. Most of the literature implicitly assumes homoskedastic errors even when this is clearly violated, and proceed by merely testing for correct unconditional coverage. Consequently, I set out to build a consistent framework for conditional interval forecast evaluation, which is crucial when higher-order moment dynamics are present. The new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management.
2,307 citations
TL;DR: In this article, the unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a spectrum of workers search by sequentially sampling from the set of offers is characterized.
Abstract: The unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a continuum of workers search by sequentially sampling from the set of offers is characterized. Wage dispersion is a robust outcome provided that workers search while employed as well as when unemployed. The unique nondegenerate equilibrium distribution of wage offers is constructed for three cases: (1) identical workers and employers, (2) identical employers and an atomless distribution of worker supply prices, and (3) identical workers and an atomless distribution of job productivities. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
1,714 citations
TL;DR: In this article, a simple and operational framework for density forecast evaluation is developed, with a detailed application to density forecasting of asset returns in environments with time-varying volatility.
Abstract: Density forecasting is increasingly more important and commonplace, for example in financial risk management, yet little attention has been given to the evaluation of density forecasts. The authors develop a simple and operational framework for density forecast evaluation. They illustrate the framework with a detailed application to density forecasting of asset returns in environments with time-varying volatility. Finally, the authors discuss several extensions. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
1,082 citations
TL;DR: In this article, the authors develop methods to introduce prior information in both reduced-form and structural VAR models without introducing substantial new computational burdens, which makes it feasible to use a single, large dynamic framework (for example, twenty-variable models) for tasks of policy projections.
Abstract: If dynamic multivariate models are to be used to guide decisionmaking, it is important that probability assessments of forecasts or policy projections be provided. When identified Bayesian vector autoregression (VAR) models are presented with error bands in the existing literature, both conceptual and numerical problems have not been dealt with in an internally consistent way. In this paper, the authors develop methods to introduce prior information in both reduced-form and structural VAR models without introducing substantial new computational burdens. Their approach makes it feasible to use a single, large dynamic framework (for example, twenty-variable models) for tasks of policy projections. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
977 citations
TL;DR: A simple theoretical model of pollution is developed that generates an inverted U-shape relationship between per capita income and environmental quality as discussed by the authors, which is then used to study long-run growth.
Abstract: A simple theoretical model of pollution is developed that generates an inverted U-shape relationship between per capita income and environmental quality. This model is then used to study long-run growth. The same inverted U-shape is shown to appear in time series and the prospects for sustained growth are shown to hinge on whether increasingly strict environmental regulation is compatible with a constant rate of return on capital. Implementation is also studied. Tax and voucher schemes are shown to have an advantage over direct regulation because they provide the correct incentives for capital accumulation. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
956 citations
TL;DR: In this article, the authors evaluate the argument that differences in physical and intangible capital can account for the large international income differences that characterize the world economy today and conclude that they cannot.
Abstract: This paper evaluates the argument that differences in physical and intangible capital can account for the large international income differences that characterize the world economy today. The finding is that they cannot. Savings rate differences are of minor importance. What is all-important is total factor productivity (TFP). In addition, the paper presents industry evidence that TFPs differ across countries and time for reasons other than differences in the publicly available stock of technical knowledge. These findings lead the author to conclude a theory of TFP is needed. This theory must account for differences in TFP that arise for reasons other than growth in the stock of technical knowledge. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
666 citations
TL;DR: In this paper, the effects of high marginal tax rates in welfare programs have been investigated by applying methods of simulation estimation to a model of labor supply and multiple program participation, showing that high welfare tax rates do not necessarily induce major reductions in work effort.
Abstract: Work on estimating the labor supply effects of high marginal tax rates in welfare programs has been hindered by the difficulty of estimating the effects of participation in multiple welfare programs simultaneously The authors solve this problem by applying methods of simulation estimation to a model of labor supply and multiple program participation The results show asymmetric wage and tax rate effects, with fairly large wage elasticities of labor supply but very inelastic responses to moderate changes in cumulative marginal tax rates, implying that high welfare tax rates do not necessarily induce major reductions in work effort Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
624 citations
TL;DR: In this paper, the authors derived the asymptotic null distribution of the likelihood ratio (LR) test for various Markov switching (MS) models, assuming the validity of this distribution theory.
Abstract: Markov switching (MS) models raise a problem known as testing hypotheses when a nuisance parameter is not identified under the null hypothesis. The author shows that the asymptotic distribution theory used for testing in presence of such a problem appears to work also for MS models, even though its validity can be questioned because of identically zero scores under the null estimates. Assuming the validity of this distribution theory, he derives the asymptotic null distribution of the likelihood ratio (LR) test for various MS models. Monte Carlo experiments show that the LR asymptotic distributions approximate the empirical distributions very well. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
592 citations
TL;DR: The authors showed that the residuals from these regressions show little correlation across various vector autoregressions or with funds rate shocks that are derived from forward-looking financial markets, and provided a sharp critique of current monetary VARs.
Abstract: No. In many vector autoregressions (VARs), monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables. Such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the U.S. Federal Reserve's reaction function; furthermore, the residuals from these regressions show little correlation across various VARs or with funds rate shocks that are derived from forward-looking financial markets. My results provide a sharp critique of current monetary VARs.
505 citations
TL;DR: In this article, the effects of a break under the null hypothesis and the choice of break date are considered, and new limiting distributions are derived, including the case where a shift in trend occurs under the unit root null hypothesis.
Abstract: The authors consider unit root tests that allow a shift in trend at an unknown time. They focus on the additive outlier approach but also give results for the innovational outlier approach. Various methods of choosing the break date are considered. New limiting distributions are derived, including the case where a shift in trend occurs under the unit root null hypothesis. Limiting distributions are invariant to mean shifts but not to slope shifts. Simulations are used to assess finite sample size and power. The authors focus on the effects of a break under the null and the choice of break date. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this article, the authors consider a model where the central bank's characteristics are unobservable to the private sector and inferred from the policy outcome, and study transparency, credibility, and reputation.
Abstract: We de…ne and study transparency, credibility, and reputation in a model where the central bank’s characteristics are unobservable to the private sector and inferred from the policy outcome. A low-credibility bank optimally conducts a more expansionary policy than a high-credibility bank, in the sense that it induces higher in‡ation, but a less expansionary policy in the sense that it induces lower in‡ation and employment than expected. Increased transparency makes the bank’s reputation and credibility more sensitive to its actions. This moderates the bank’s policy, and induces the bank to follow a policy closer to the socially optimal one. Full transparency of the central bank’s intentions is generally socially bene…cial, but frequently not in the interest of the bank. Somewhat paradoxically, direct observability of idiosyncratic central bank goals removes the moderating in‡uence on the bank and leads to the worst equilibrium. JEL Classi…cation: E52, E58
TL;DR: In this paper, a dynamic factor model with regime switching is proposed as an empirical characterization of business cycles, which integrates the idea of comovements among macroeconomic variables and asymmetries of business cycle expansions and contractions.
Abstract: A dynamic factor model with regime switching is proposed as an empirical characterization of business cycles. The approach integrates the idea of comovements among macroeconomic variables and asymmetries of business cycle expansions and contractions. The first is captured with an unobservable dynamic factor and the second by allowing the factor to switch regimes. The model is estimated by maximizing its likelihood function and the empirical results indicate that the combination of these two features leads to a successful representation of the data relative to extant literature. This holds for within and out-of-sample, and for both revised and real-time data. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this article, the relationship between age distribution, national savings, and the current account balance was investigated and shown to have substantial demographic effects, with increases in both the youth and old-age dependency ratios associated with lower savings rates.
Abstract: This paper addresses the relationship between age distribution, national savings, and the current account balance. The results point to substantial demographic effects, with increases in both the youth and old-age dependency ratios associated with lower savings rates. They also point to differential effects on savings and investment and thus to a role for demography in determining the current account balance. The estimated demographic effect on the current account balance exceeds 6 percent of GDP over the last three decades for a number of countries and, given expected demographic trends, is likely to be substantially larger over the coming decades. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this paper, the determinantal polynomial Az -B is not zero for some value of z, and a rank condition is required for the rank condition to be satisfied.
Abstract: Many linear rational expectations macroeconomic models can be cast in the first-order form, AE[subscript t]y[subscript t + 1] = By[subscript t] + CE[subscript t]x[subscript]t, if the matrix A is permitted to be singular. The authors show that there is a unique stable solution under two requirements: (1) the determinantal polynomial Az - B is not zero for some value of z, and (2) a rank condition. The unique solution is characterized using a familiar approach: a canonical variables transformation separating dynamics associated with stable and unstable eigenvalues. In singular models, however, there are new canonical variables associated with infinite eigenvalues. These arise from nonexpectational behavioral relations or dynamic identities present in the singular linear difference system. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this paper, the authors model equilibrium trading patterns when marketplaces exist and goods are differentiated and show that the current stock of unmatched traders on one side of the market is trying to match with the flow of new traders on the other side.
Abstract: This paper models equilibrium trading patterns when marketplaces exist and goods are differentiated. When first visiting the market, a buyer samples a stock of goods. If fortunate, the buyer matches with and purchases one of these goods and then exits the market. If an initial match does not exist, the buyer can now only match with the flow of new goods for sale. The previous stock has been sampled and rejected. In a steady state, the current stock of unmatched traders on one side of the market is trying to match with the flow of new traders on the other side. It is shown that this market behaviour describes matching patterns between unemployed job seekers and vacancies in UK Job Centres.
TL;DR: The authors showed that the components of government spending are procyclical in U.S. data primarily because of their positive responses to the output fluctuations generated by technology shocks, and that government spending is no longer a significant driving source of the U. S. business cycle.
Abstract: Distinguishing between the goods purchase and employee compensation components of government spending is important. Shocks to government goods purchases and shocks to government employment, have the opposite effects on private output, private employment, and private investment. Moreover, with this distinction in place, quantitative analysis reveals that government spending is no longer a significant driving source of the U.S. business cycle. On the contrary, the components of government spending are procyclical in the U.S. data primarily because of their positive responses to the output fluctuations generated by technology shocks. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this paper, the authors explore the interaction between long memory and aggregation and link the (possibly fractional) orders of integration of the aggregate series with those of the underlying series when the aggregation is either cross-sectional or temporal (in discrete or continuous time).
Abstract: This paper explores the interaction between long memory and aggregation. Results are derived which link the (possibly fractional) orders of integration of the aggregate series with those of the underlying series when the aggregation is either cross-sectional or temporal (in discrete or continuous time). These results provide empirically testable hypotheses that are examined using six U.K. macroeconomic series. A semiparametric method is found to be broadly consistent with the implications of the theory but fully parametric ARFIMA models show considerable variation. Each series appears to be integrated of an order of between one and one-and-a-half.
TL;DR: In this paper, regression-based tests of hypotheses about out-of-sample prediction errors are developed for zero mean and zero correlation between a prediction error and a vector of predictors.
Abstract: We develop regression-based tests of hypotheses about out of sample prediction errors. Representative tests include ones for zero mean and zero correlation between a prediction error and a vector of predictors. The relevant environments are ones in which predictions depend on estimated parameters. We show that standard regression statistics generally fail to account for error introduced by estimation of these parameters. We propose computationally convenient test statistics that properly account for such error. Simulations indicate that the procedures can work well in samples of size typically available, although there sometimes are substantial size distortions.
TL;DR: This article developed a general model of reputation in which if a government is viewed as untrustworthy in one relationship, this government will be viewed as a trustworthy one in other relationships, and showed that this general model can support large amounts of debt.
Abstract: Some economists argue that as long as governments can earn the market rate of return by saving abroad, standard reputation models cannot support debt. We argue that these standard reputation models are partial in the sense that actions of agents in one arena affect reputation in that arena only. We develop a general model of reputation in which if a government is viewed as untrustworthy in one relationship, this government will be viewed as untrustworthy in other relationships. We show that our general model of reputation can support large amounts of debt.
TL;DR: In this article, a Bayesian dynamic latent factor model for a vector of data describing the Iowa economy is proposed, and posterior distributions of parameters and the latent factor are analyzed by Markov Chain Monte Carlo methods, and coincident and leading indicators are given by posterior mean values of current and predictive distributions for the latent factors.
Abstract: This paper designs and implements a Bayesian dynamic latent factor model for a vector of data describing the Iowa economy. Posterior distributions of parameters and the latent factor are analyzed by Markov Chain Monte Carlo methods, and coincident and leading indicators are given by posterior mean values of current and predictive distributions for the latent factor.
TL;DR: In this article, a method for using panel data to compare endogenous growth theories that predict cross-country differences in trend growth rates with exogenous growth models that predict parallel balanced growth paths was proposed.
Abstract: This paper formulates a method for using panel data to compare endogenous growth theories that predict cross-country differences in trend growth rates with exogenous growth models that predict parallel balanced growth paths. Using this method, the paper rejects theories that predict even small differences in trend growth rates for a sample of rich countries and a sample of countries with well-educated populations. Exogenous growth theories may thus characterize the growth experiences of these countries. By contrast, the paper cannot reject theories that predict widely different trend growth rates for a sample of countries with poorly educated populations. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this paper, the quantitative impact of eliminating capital income taxation on capital accumulation and steady-state welfare in a general equilibrium model with overlapping generations of sixty-five-period-lived individuals who face idiosyncratic earnings risk, borrowing constraints, and life-span uncertainty was studied.
Abstract: This paper studies the quantitative impact of eliminating capital income taxation on capital accumulation and steady-state welfare in a general equilibrium model with overlapping generations of sixty-five-period-lived individuals who face idiosyncratic earnings risk, borrowing constraints, and life-span uncertainty. Under a wide range of parameter configurations, the capital income tax rate that maximizes steady-state welfare is positive, even though eliminating it completely would raise the steady-state capital stock toward the Golden Rule. This is because the tax burden is shifted toward the younger and liquidity constrained years, reducing the individuals' ability to self-insure. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In contrast with other trade and growth theories in previous literature, the authors resents a growth theory of trade-induced learning: other things being equal, two conditions are essential for tradeinduced learning.
Abstract: In contrast with other trade and growth theories in previous literature, The author resents a growth theory of trade-induced learning: other things being equal, two conditions are essential for trade-induced learning. First, both exports and imports are equally important sources and are mutually reinforced in intensifying the learning process. Moreover, the nature or characteristics of these traded goods also influence the effect of learning. Second, trade openness is a prerequisite but not a sufficient condition for rapid growth. With whom one trades (one's trading partner) is a key factor in determining trade-induced technology spillover and hence in affecting enduring growth. Therefore, this trade-induced learning theory provides abundant and testable implications for the empirical study of trade and growth. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this paper, the authors investigate confidence intervals and inference for the instrumental variables model with weak instruments and show that confidence intervals based on the LM, LR, and Anderson-Rubin statistics perform far better than the Wald.
Abstract: We investigate confidence intervals and inference for the instrumental variables model with weak instruments. Wald-based confidence intervals perform poorly in that the probability they reject the null is far greater than their nominal size. In the worst case, Wald-based confidence intervals always exclude the true parameter value. Confidence intervals based on the LM, LR, and Anderson-Rubin statistics perform far better than the Wald. The AndersonRubin statistic always has the correct size, but LM and LR statistics have somewhat greater power. Performance of the LM and LR statistics is improved by a degrees-of-freedom correction in the overidentified case. We show that the practice of “pre-testing” by looking at the significance of the first-stage regression leads to extremely poor results when the instruments are very weak.
TL;DR: Using the estimated VAR system, one can trace out how monetary policy innovations affect the economy as discussed by the authors, finding that a positive innovation to monetary policy is followed by increases in output, prices, and money, and by a decline in the short-term nominal interest rate.
Abstract: Using the estimated VAR system, one can trace out how monetary policy innovations affect the economy As John Cochrane (1996, p 1) notes, "this literature has at last produced impulse-response functions that capture common views about monetary policy"; for example, in finding that a positive innovation to monetary policy is followed by increases in output, prices, and money, and by a decline in the short-term nominal interest rate In addition, despite ongoing debates about precisely how the policy innovation should be identified, the estimated responses of key macroeconomic variables to a policy shock are reasonably similar across a variety of studies and suggest that monetary policy shocks can have significant and persistent real effects
TL;DR: In this article, the authors model risky lending with costly state verification but without commitment to an audit strategy, and show that an increase in loan size convinces the borrower that the lender has a high stake in an audit, which leads to overinvestment relative to the commitment case.
Abstract: The authors model risky lending with costly state verification but without commitment to an audit strategy. The borrower underreports with a positive probability in the successful state and the lender audits with a positive probability after a report of failure. Under lack of commitment to audit probabilities, an increase in loan size convinces the borrower that the lender has a high stake in an audit. This reduces the probability of underreporting and leads to overinvestment relative to the commitment case. However, there is underinvestment relative to the level under full information. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: In this paper, the effect of exchange rate and commodity price uncertainty from cost and production on a competitive risk-averse exporting firm's behavior was evaluated, and the role of forward future markets in the presence of background uncertainty was discussed.
Abstract: Evaluates the effect of exchange rate and commodity price uncertainty from cost and production on a competitive risk-averse exporting firm's behavior. Role of forward-future markets in the presence of background uncertainty; Information on the behavior of the firm when missing markets were introduced.
TL;DR: The public provision scheme is often designed so that individuals can opt out, but not top up (supplement) the publicly provided quantity/quality as mentioned in this paper, which is not the case in our case.
Abstract: There is extensive public provision of private goods in all developed countries. The public provision scheme is often designed so that individuals can opt out, but not top up (supplement) the publicly provided quantity/quality. Using an optimal income ta