Showing papers on "Real gross domestic product published in 2001"

Inflation and economic growth: evidence from four south asian countries

Abstract: This paper seeks to examine the relationship between inflation and GDP growth for four South Asian countries (Bangladesh, India, Pakistan and Sri Lanka). A comparison of empirical evidence is obtained from the cointegration and error correction models using annual data collected from the IMF International Financial Statistics. The authors find evidence of a long-run positive relationship between GDP growth rate and inflation for all four countries. There are also significant feedbacks between inflation and economic growth. These results have important policy implications. Moderate inflation is helpful to growth, but faster economic growth feeds back into inflation. Thus, these countries are on a knife-edge.

The Predictive Power of the Index of Consumer Sentiment

Abstract: THE MONTHLY RELEASE of the Index of Consumer Sentiment (ICS) by the Survey Research Center of the University of Michigan is featured in the financial press with much fanfare, especially during periods of economic uncertainty. Yet the conventional wisdom appears to be that although the index by itself has considerable predictive power, when used in conjunction with other readily available economic variables its marginal value is quite small. For example, Christopher Carroll, Jeffrey Fuhrer, and David Wilcox conclude that "consumer sentiment does indeed forecast future changes in household spending.... Further, sentiment likely has some (though probably not a great deal) of incremental predictive power relative to at least some other indicators for the growth of spending."(1) On the other hand, John Matsusaka and Argia Sbordone find evidence of a qualitatively significant causal relationship between the ICS and GDP: they estimate that between 13 and 26 percent of variations in GDP can be attributed to variations in consumer sentiment.(2) This paper assesses the predictive power of the ICS, addressing two questions in particular. First, does the index, either alone or in conjunction with other indicator variables, sharpen predictions of recession and recovery? Second, does the index, either alone or in conjunction with other economic indicators, help to predict personal consumption expenditure? The first question is especially timely in view of the plunge in the ICS in recent months. To answer this question, it is necessary first to define precisely and in quantitative terms what is meant by recession and what is meant by recovery, next to translate the ICS and other indicator variables into a recession signal, and finally to evaluate the accuracy of that signal as a predictor of recession. The next section summarizes the procedure used to carry out these three steps. This procedure is then applied to quarterly values of a set of indicator variables that includes the ICS as well as the spread between long- and short-term interest rates, a composite stock market index, and an index of leading indicators. This procedure is also applied to a model that generates current-quarter estimates of these indicator variables from data for the first, or first two, months of the quarter, to assess the accuracy of high-frequency predictions of recession and recovery. Finally, the value of monthly indicator data for forecasting personal consumption expenditure is investigated. This question is motivated by the fact that monthly values of the ICS as well as of other indicator variables are available before the corresponding monthly values of personal consumption expenditure are released. An accurate and timely forecast of personal consumption expenditure and its components would be helpful in predicting periods of recession and recovery. Predicting the Probability of Recession Definition of Recession A popular definition of recession is the occurrence of two or more successive quarters of decline in real GDP.(3) This definition, however, corresponds only approximately to the standard reference cycle chronology maintained by the National Bureau of Economic Research (NBER). Recession quarters as identified by the NBER coincide roughly with quarters in which real GDP declines, but the correspondence is not perfect. A slightly more technical definition of recession that corresponds more closely with the NBER chronology is two or more successive quarters in which a weighted average of the current and immediately preceding and following quarterly GDP growth rates is negative. In particular, let [y.sub.t] denote the rate of growth of real GDP from quarter t - 1 to t, and let(4) (1) [[bar]y.sub.t] = 0.25[y.sub.t-1] + 0.50[y.sub.t] + 0.25[y.sub.t+1]. According to the average growth rate criterion, a recession is said to begin in quarter t if that quarter is the first of two or more successive quarters for which [[bar]y. …

Modelling the Demand for Loans to the Private Sector in the Euro Area

Abstract: This paper studies the determinants of loans to the private sector in the euro area. Using the Johansen methodology, the study identifies one cointegrating relationship linking real loans, GDP and interest rates. This relationship implies that in the long-run real loans are positively related to real GDP and negatively to real short-term and long-term interest rates. Both the signs and the magnitude of the coefficients suggest that the cointegrating vector describes a long-run demand equation. The short-run dynamics of the demand for euro area real loans is subsequently modelled by means of a Vector Error Correction Model (VECM). A number of specification tests performed on the VECM produced satisfactory results, with tests of stability of the model's parameters showing no signs of structural breaks during the sample period (1980 Q1 - 1999 Q2). All of this suggests that developments in real loans to the private sector in the euro area can be reasonably explained by the model.

Constructing historical euro-zone data*

Abstract: Existing methods of reconstructing historical Euro-zone data by aggregation of the individual countries' aggregate data raises numerous difficulties, especially due to past exchange rate changes. The approach proposed here is designed to avoid such distortions, and aggregate exactly when exchange rates are fixed. We first compute growth rates within states, aggregate these, then cumulate this Euro-zone growth rate to obtain the aggregated levels variables. The aggregate of the implicit-deflator plice index coincides with the implicit deflator of our aggregate nominal and real data. We apply the method to Euro-zone M3, GDP and prices over the previous two decades. 1. Background With the introduction on 31 December 1998 of the irrevocably-fixed Euro exchange rates, eleven countries of the European Union entered a new monetary union. From that date onwards, monetary policy for these countries is set by the newly-formed European Central Bank (ECB). The Governing Council of the ECB bases its monetary policy on 'medium-term assumptions regarding real GDP growth and the trend decline in the velocity of circulation of M3' (ECB, 1999a, p. 40). Therefore, the construction of historical data for aggregate M3 and GDP for the Euro zone is of practical relevance to policy makers. In addition, any econometric model for Euro-zone countries requires such historical data. This paper describes an approach to doing so from the aggregate data of the individual member states. A number of previous reconstructions are noted, but as these have important drawbacks, an approach related to that in T6rnqvist (1936) is proposed and its properties are discussed. Although there have been many important contributions to index-number theory (see Section 4), few are directly relevant to the problem confronted here, where we wish to use the national aggregates from member states - not the individual-item data usually input into index calculations - to construct a Euro-zone aggregate. Moreover, the inherently non-stationary nature of those national aggregates, both from unit-roots inducing integrated time series

On the Transmission of Monetary Policy Shocks

Abstract: Empirical studies reveal that monetary policy shocks generate long-lasting effects on real GDP, countercyclical real wages before World War II and procyclical real wages afterwards. In this paper, we construct a dynamic general equilibrium model to explain the observed output persistence and the evolving nature of real wage cyclicality. The model features three important rigidities: staggered price-setting, staggered wage-setting, and an input-output structure. We show that, while no subset of the model with fewer ingredients can produce both the desired patterns of real wage dynamics and persistent movements in aggregate output, the model with all three features successfully accounts for these empirical regularities. In particular, it explains how the real wage can change from being countercyclical or acyclical to being procyclical as the input-output structure becomes more sophisticated, while at the same time delivering significant output persistence. The ascending sophistication of the input-output structure in the model mimics the rising complexity of the input-output connections from the prewar period to the postwar period in the actual economies, a trend that is documented in the literature.

The Less-Volatile U.S. Economy: A Bayesian Investigation of Timing, Breadth, and Potential Explanations

Abstract: Using a Bayesian model comparison strategy, we search for a volatility reduction in U.S. real gross domestic product (GDP) growth within the postwar sample. We find that aggregate real GDP growth has been less volatile since the early 1980s, and that this volatility reduction is concentrated in the cyclical component of real GDP.Sales and production growth in many of the components of real GDP display similar reductions in volatility, suggesting the aggregate volatility reduction does not have a narrow source. We also document structural breaks in inflation dynamics that occurred over a similar time frame as the GDP volatility reduction.

The determinants of private sector credit in industrialised countries : do property prices matter?

Abstract: Episodes of boom and bust in credit markets have often coincided with cycles in economic activity and property markets. The coincidence of these cycles has already been widely documented in the literature, but few studies address the issue in a formal way. In this study we analyse the determinants of credit to the private non-bank sector in 16 industrialised countries since 1980 based on a cointegrating VAR. Cointegration tests suggest that the long-run development of credit cannot be explained by standard credit demand factors. But once real property prices, measured as a weighted average of real residential and real commercial property prices, are added to the system, we are able to identify long-run relationships linking real credit positively to real GDP and real property prices and negatively to the real interest rate. These long-run relationships may be interpreted as long-run extended credit demand relationships, but we may also capture effects on credit supply. Impulse response analysis based on a standard Cholesky decomposition reveals that there is significant two-way dynamic interaction between bank credit and property prices. We also find that innovations to the short-term real interest rate have a strong and significant negative effect on bank credit, GDP and property prices.

Does fiscal decentralization improve health outcomes? - evidence from a cross-country analysis

Abstract: Decentralization of fiscal responsibilities has emerged as a primary objective on the agendas of national governments, and international organizations alike. Yet there is little empirical evidence on the potential benefits of this intervention. The authors fill in some quantitative evidence. Using panel data on infant mortality rates, GDP per capita, and the share of public expenditures managed by local governments, they find greater fiscal decentralization is consistently associated with lower mortality rates. The results suggest that the benefits of fiscal decentralization are particularly important for poor countries. They suggest also that the positive effects of fiscal decentralization on infant mortality, are greater in institutional environments that promote political rights. Fiscal decentralization also appears to be a mechanism for improving health outcomes in environments with a high level of ethno-linguistic fractionalization, however, the benefits from fiscal decentralization tend to be smaller.

Economic Growth in East Asia Before and After the Financial Crisis

Abstract: In 1997-98, five east Asian countries -- Indonesia, Malaysia, South Korea, the Philippines, and Thailand -- experienced sharp currency and banking crises. The contraction of real GDP was severe in relation to the previous history and in comparison with five east Asian countries that were less affected by the financial crisis. Recoveries in the five crisis countries in 1999-2000 were strong in most cases, but it is unclear whether the pre-crisis growth paths will be reattained. Indications for permanently depressed prospects come from the sharp reductions in investment ratios, which have recovered only slightly, and the lowered stock-market prices. A panel analysis for a broad group of economies shows that a combined currency and banking crisis typically reduces economic growth over a five-year period by 2% per year, compared with 3% per year for the 1997-98 crisis in east Asia. The broader analysis found no evidence that financial crises had effects on growth that persisted beyond a five-year period.

Macroeconomic Effects of EU Enlargement for Old and New Members

Abstract: Recalculating the macroeconomic effects of EU enlargement based on a global model ("Oxford Economic Forecasting") has found that this step towards integration will produce a win-win situation for both sides (CEECs and EU). In view of the difference in importance between markets (the EU sells only 5 percent of its total exports to the CEEC 10, whereas two-thirds of the total CEEC 10 exports flow into the EU), and the dimensions of the two blocks (the CEEC 10 have a GDP of just 10 percent of that of the EU 15), the gains for the CEECs will be tenfold those of the EU in general. Hungary and Poland may be able to boost their real GDP by some 8 to 9 percent within ten years of enlargement, which translates into an additional annual economic growth of 1 percent. The Czech Republic is likely to profit at a slightly lower level (5 to 6 percent in additional real GDP within ten years). The EU can raise its real GDP by about 0.5 percent within six years (2005–2010), or slightly less than 0.1 percentage point per year. Countries which already have close trading ties with the CEECs (such as Austria, Germany and Italy) will win more than the EU average. In Austria, the (cumulated) real GDP can be pushed up by ¾ percentage point, or by 0.15 percent per year. For some EU countries, the cost of enlargement will exceed their benefits: this applies in particular to Spain, Portugal and Denmark. Considering that the three CEECs explicitly studied in the report (Poland, Czech Republic, Hungary) make up about two-thirds of the absolute GDP of the CEEC 10, the calculated GDP effects in the case of EU enlargement by 10 CEECs can – as a rule of thumb – be raised by about a third in the east and west. But EU enlargement must not be seen as a "job generation machine". If enlargement of the single market should lead to productivity shocks and more intense competition, employment should be expected to slow down temporarily. The model was based on the underlying assumption that no transition rules will be adopted to restrict the free movement of labour. If such rules should be introduced (which is the case in Germany and Austria), the immigration surplus in the EU computed in this study would be correspondingly lower.

Aid and Growth Regressions

Abstract: This paper examines the relationship between foreign aid and growth in real GDP per capita as it emerges from simple augmentations of popular cross-country growth specifications. It is shown that aid in all likelihood increases the growth rate, and this result is not conditional on ‘good’ policy. There are, however, decreasing returns to aid, and the estimated effectiveness of aid is highly sensitive to the choice of estimator and the set of control variables. When investment and human capital are controlled for, no positive effect of aid is found. Yet, aid continues to impact on growth via investment. We conclude by stressing the need for more theoretical work before this kind of cross-country regression is used for policy purposes.

Financial sector development and economic growth in New Zealand

Abstract: Most of the empirical evidence on how development of the financial sector impacts on economic growth is in a cross-country context. This paper considers the evidence from one country, New Zealand, which has in recent times been subject to substantial economic reforms, not least in the financial sector. Some valid long-run relationships are found between indicators of both banking and stock market development and private savings, but rather more mixed results when considering either real GDP per capita or its growth rate.

The effects of business cycles on growth

Abstract: This paper explores the links between business cycles and long-run growth. Although it is clear from a theoretical point of view that both of these phenomena are driven by the same macroeconomic variables, the interaction between economic fluctuations and growth has been largely ignored in the academic literature. The main reason for this lack of attention is the surprising stability of long-term growth rates and their apparent independence from business cycle conditions, at least among industrial economies. Business cycles in these countries can be characterized as alternating series of recessions followed by recoveries that bring gross domestic product (GDP) levels to trend, this suggests that one can study growth and business cycles independently. To illustrate this point, figure 1 displays real GDP per capita for the U.S. economy during the period 1870–1999. A simple log-linear trend represents a highly accurate description of the long-term patterns of per capita output in the United States. This pattern is very similar for other industrial countries such as France, Germany, and Great Britain, although the slope of the trend shows stronger indications of breaks, especially after the Second World War.

Markov-Switching Procedures for Dating the Euro-Zone Business Cycle

Abstract: This paper addresses the issues of identification and dating of the Euro-zone business cycle by using the Markov-switching approach innovated by Hamilton in his analysis of the US business cycle. Regime shifts in the stochastic process of economic growth in the Euro-zone are identified by fitting Markov-switching models to aggregated and single-country Euro-zone real GDP growth data of the last two decades. The models are found to be statistically congruent and economically meaningful. Based of the smoothed regime probabilities from the Markov-switching models the Euro-zone business cycle is dated and recessions from 1980Q1 to 1981Q1 and 1992Q3 to 1993Q2 are revealed. A Markov-switching vector autoregression of real GDP growth rates in eight EMU member states shows that while the business cycles in the Euro-zone have not been perfectly synchronized over the last two decades, the overall evidence for the presence of a common Euro-zone cycle is strong. Zusammenfassung Markov-Regimewechselmodelle zu...

Dynamics of macroeconomic adjustment in a globalized developing economy: growth, accumulation and distribution, Turkey 1969-1999

Abstract: Our purpose in this paper is to establish stylized facts of the Turkish macroeconomic adjustments using data from 1969 to 1999. We adopt a traditional a priori definition of business cycles as cyclical co-movements of economic variables such as public, private and construction investments, trade balance, labour productivity, wages and fiscal accounts with the cyclical component of real GDP. We also incorporate in our analysis an investigation of the cyclical components of exchange rates, interest rates, price inflation, and the monetary aggregates. Our quantitative findings reveal a robust and significant positive relationship between public and private investments and real GDP growth, suggesting the presence of “crowding in” effects of public investment. Trend growth of manufacturing wages and average labour productivity are loosely associated over the whole period, and the rapid gains in productivity in the post-1980 reform era are not observed to be materialized as gains in remunerations of wa...

The determinants of private sector credit in industrialised countries: do property prices matter?

Abstract: Episodes of boom and bust in credit markets have often coincided with cycles in economic activity and property markets. The coincidence of these cycles has already been widely documented in the literature, but few studies address the issue in a formal way. In this study we analyse the determinants of credit to the private non-bank sector in 16 industrialised countries since 1980 based on a cointegrating VAR. Cointegration tests suggest that the long-run development of credit cannot be explained by standard credit demand factors. But once real property prices, measured as a weighted average of real residential and real commercial property prices, are added to the system, we are able to identify long-run relationships linking real credit positively to real GDP and real property prices and negatively to the real interest rate. These long-run relationships may be interpreted as long-run extended credit demand relationships, but we may also capture effects on credit supply. Impulse response analysis based on a standard Cholesky decomposition reveals that there is significant two-way dynamic interaction between bank credit and property prices. We also find that innovations to the short-term real interest rate have a strong and significant negative effect on bank credit, GDP and property prices.

Long-run and Short-run Determinants of the Real Exchange Rate in Zambia

Abstract: The paper analyses the main determinants of the real exchange rate in Zambia. It first gives a brief review of the Zambian economy and a review on real exchange rate studies. Then an illustrative model is presented. The study employs cointegration analysis in estimating the long-run determinants of the real exchange rates for imports and exports, and of the internal real exchange rate. The finding is that terms of trade, government consumption, and investment share all influence the real exchange rate for imports, while terms of trade, central bank reserves and trade taxes influence the real exchange rate for exports in the long-run. The internal real exchange rate is influenced by terms of trade, investment share, and the rate of growth of real GDP in the long-run. Error-correction models are then estimated. Besides the difference of the fundamentals mentioned above, aid and openness are found to impart short-run effects on the real exchange rate indices. The coefficients of adjustment are found to be -0.38, -0.79 and -0.80 respectively for the real exchange rates for imports and exports, and for the internal real exchange rate.

Okun's Law: Does the Austrian unemployment-GDP relationship exhibit structural breaks?

Abstract: Okun's Law postulates an inverse relationship between movements of the unemployment rate and the real gross domestic product (GDP). Empirical estimates for US data indicate that a two to three percent GDP growth rate above the natural or average GDP growth rate causes unemployment to decrease by one percentage point and vice versa. In this investigation we check whether this postulated relationship exhibits structural breaks by means of Markov-Chain Monte Carlo methods. We estimate a regression model, where the parameters are allowed to switch between different states and the switching process is Markov. As a by-product we derive an estimate of the current state within the periods considered. Using quarterly Austrian data on unemployment and real GDP from 1977 to 1995 we infer only one state, i.e. there are no structural breaks. The estimated parameters demand for an excess GDP growth rate of 4.16% to decrease unemployment by one percentage point. Since only one state is inferred, we conclude that the Austrian economy exhibits a stable relationship between unemployment and GDP growth. (author's abstract)

Do country fundamentals explain emerging market bond spreads

Abstract: This paper shows that emerging market eurobond spreads after the Asian crisis can be almost completely explained by market expectations about macroeconomic fundamentals and international interest rates. Contrary to the claim that emerging market bond spreads are driven by market variables such as stock market volatility in the developed countries, it is found that this did not play a significant role after the Asian crisis. Using panel data techniques, it is shown that the determinants of bond spreads can be divided into long-term structural variables and medium-term variables which explain month-to-month changes in bond spreads. As relevant medium-term variables, ''consensus forecasts'' of real GDP growth and inflation, and international interest rates are identified. The long-term structural factors do not explicitly enter the model and show up as fixed or random country-specific effects. These intercepts are highly correlated with the countries' credit rating.

Recovery and Sustainability in East Asia

Abstract: This paper analyzes the macroeconomic adjustment from the crisis in East Asia in a broad international prospective. The stylized pattern from the previous 160 currency crisis episodes over the period from 1970 to 1995 shows a V-type adjustment of real GDP growth in the years prior to and following a crisis. The adjustment shows a much sharper V-type in the crisis episodes with the IMF program, compared to those without. Cross-country regressions show that depreciation of real exchange rate, expansionary macroeconomic policies and favorable global environments are critical for the speedy post-crisis recovery. In this sense, the East Asian process of adjustment is not much different from the stylized pattern from the previous currency crisis episodes. However, the degree of initial contraction and following recovery has been far greater in East Asia than what the cross-country evidence predicts. This paper argues that the sharper adjustment pattern in East Asia is attributed to the severe liquidity crisis that was triggered by investor's panic and then amplified by the weak corporate and bank balance sheet. We find no evidence for a direct impact of a currency crisis on long-run growth.

An Evaluation of Recent Macroeconomic Forecast Errors

Abstract: Despite a significant decline in the pace of economic growth in the second half of 2000, macroeconomic forecasters underpredicted real GDP growth and overpredicted the unemployment rate by a significant amount, for the fifth consecutive year. On average, real GDP forecasts were about 2 percentage points below the actual data for the 1996-2000 period, and unemployment rate forecasts about 0.5 percentage point above. On a more positive note, forecasters ended their chronic overprediction of inflation during much of this period. Nevertheless, surprisingly large and persistent errors in recent forecasts of GDP, inflation, and unemployment have perplexed macroeconomists and policymakers for quite some time, and they merit closer examination. ; This article evaluates forecast errors in an attempt to understand why recent forecasts have gone awry. The investigation centers on errors in forecasts of real GDP growth, inflation, the unemployment rate, and nominal and real short-term interest rates since 1969. The focus is on one-year-ahead forecasts because well-known lags in the effects of monetary policy require the Federal Reserve to forecast economic activity well ahead when setting its current interest rate target. In addition to studying average forecast errors, the author looks briefly at the time series properties of the work of some individual forecasters.

Fiscal Expenditure Policy and Non-Oil Economic Growth: Evidence from GCC Countries

Abstract: Through the use of a multivariate cointegration and error-correction model, this study investigates the short- and long-run relationship over the past two decades between fiscal expenditure policy and non-oil real GDP growth in member countries of the Gulf Cooperation Council (GCC). Despite the important role of the government, the empirical results do not strongly support that increases in fiscal expenditures tend to slow or accelerate non-oil real growth in these countries. However, the breakdown into current and capital expenditures is useful for assessing the effects of each spending category on short- and long-run non-oil real GDP growth.

Business Cycles, Economic Crises, and the Poor: Testing for Asymmetric Effects

Abstract: This paper examines whether output contractions associated with cyclical output fluctuations and economic crises have an asymmetric effect on poverty. The first part identifies four potential sources of asymmetry: expectations and confidence factors; credit rationing at the firm level (induced by either adverse selection problems or negative shocks to net worth); borrowing constraints at the household level; and the “labor hoarding” hypothesis. Some testable implications of these alternative explanations are also identified. The second part proposes a vector autoregression technique (involving the detrended components of real output, the unemployment rate, real wages, and the poverty rate) to test whether the initial cyclical position of the economy, and the magnitude of the initial drop in the output gap in a downturn, matter in assessing the extent to which output shocks affect poverty. The technique is then applied to Brazil, using annual data for the period 1981-99. The results indicate that poverty responds asymmetrically to output shocks, showing less sensitivity when the economy is initially in a downturn.

Cross-Country Determinants of Declines in Infant Mortality:A Growth Regression Approach

Abstract: This paper examines the determinants of infant mortality rates in a cross section of countries using a "growth regression" approach. The paper argues that infant mortality is a valid measure of living standards, worthy of study in its own right. It also shows that first order differential equation implicit in the standard growth regression is appropriate to studies of infant mortality rates, perhaps more so than those of GDP. From the perspective of identifying possible determinants of declines in infant mortality, these results are rather discouraging. Only two policy variables, primary school enrolments and DPT vaccination rates for infants, show any consistent correlation with declining infant mortality, and even those correlations are not robust to the inclusion of fixed effects, a simple way to pick up time invariant unobserved variables. From the perspective of the growth regression literature, a more interesting "non-result" is the fact that there is no evidence at all that the black market premium, the M2/GDP ratio, inflation, or the real exchange rate, all policy variables that typically explain economic growth, help to explain declining infant mortality, and only weak evidence that real GDP per capita itself is correlated with these declines. We have long known from microeconomic data that income is not a very good predictor of children's health status. These results confirm that in a growth regression context. They also suggest that the determinants of progress of nations in one welfare dimension, economic growth, are distinct from those in another, infant mortality.