We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one shock can explain the majority of ...unpredictable movements in the slope. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). By showing that “slope shocks” are essentially “TFP news shocks” we provide a new explanation for the relationship between the slope and macroeconomic fundamentals. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance. (JEL E23, E43, E52, G12, G14)
It is argued that in structural vector autoregressive (SVAR) analysis a Markov regime switching (MS) property can be exploited to identify shocks if the reduced form error covariance matrix varies ...across states. The model setup is formulated and discussed and it is shown how it can be used to test restrictions which are just-identifying in a standard structural vector autoregressive analysis. The approach is illustrated by two SVAR examples which have been reported in the literature and which have features that can be accommodated by the MS structure.
We study the importance of time-varying bond risk premia in a consumption and portfoliochoice problem for a life-cycle investor facing short-sales and borrowing constraints. Tilts in the optimal ...asset allocation in response to changes in bond risk premia exhibit pronounced life-cycle patterns. We find that the investor is willing to pay an annual fee up to 1% to implement a strategy that optimally conditions on prevailing bond risk premia in addition to her age and wealth. To solve our model, we extend recently developed simulation-based techniques to life-cycle problems featuring multiple state variables and multiple risky assets.
We evaluate various economic models’ relative performance in forecasting future US output growth and inflation on a monthly basis. Our approach takes into account the possibility that the models’ ...relative performance can vary over time. We show that the models’ relative performance have, in fact, changed dramatically over time, for both revised and real-time data, and investigate possible factors that might explain such changes. In addition, this paper establishes two empirical stylized facts. Specifically, most predictors for output growth lost their predictive ability in the mid-1970s, and became essentially useless over the last two decades. When forecasting inflation, on the other hand, fewer predictors are significant, and their predictive ability worsened significantly around the time of the Great Moderation.
This is the story of the life and impact of the political activist, journalist and freedom-fighter Sivaram Dharmeratnam, who dedicated his life to helping the Tamil people in Sri Lanka. He started ...out as an active participant in the war against the Sri Lankan government - and was labelled a 'terrorist'. Yet he stepped away from ruthless violence. Instead, he became a high profile journalist in the Sri Lankan press, and used his position to fearlessly critique the government, despite repeated threats on his life. Finally, in 2005, Sivaram was assassinated. This vivid life history also engages with much broader issues. It offers an intimate portrait of why an educated man adopts a position of supporting violence.
This paper provides an empirical assessment of the effects of financial sector policies on development of the financial system in Malaysia over the period 1959–2005. The technique of principal ...component analysis is used to construct a summary measure of interest rate policies in order to account for the joint influence of various interest rate controls imposed on the Malaysian financial system. The results show that economic development, interest rate controls, and capital liquidity requirements positively affect the level of financial development. However, greater trade openness, higher statutory reserve requirements, and the presence of directed credit programs appear to be harmful for development of the Malaysian financial system. The results provide some support to the argument that some form of financial restraints may help promote financial development. (JEL E44, E58, O16, O53)
We extend Lubik and Schorfheide's 2004. Testing for indeterminacy: an application to U.S. monetary policy. American Economic Review 94, 190–217 likelihood-based estimation of dynamic stochastic ...general equilibrium (DSGE) models under indeterminacy to encompass a sample period the includes both determinacy and indeterminacy by implementing a change-point methodology Chib, S. 1998. Estimation and comparison of multiple change-point models. Journal of Econometrics 86, 221–241. By letting the data provide estimates of the dates of the determinacy regimes and allowing the estimates of structural parameters to be the same across regimes, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the regimes. The most striking finding about the indeterminacy regime, which is estimated to coincide with the Great Inflation of the 1970s, is that it exhibits the price puzzle, in that the inflation rate rises immediately and in a sustained manner following a positive interest rate shock. Thus, the price puzzle might have been a genuine phenomenon under indeterminacy, rather than a false finding to be excised through specification search and parameter restrictions.
In this paper we extend the work in Serletis and Shahmoradi (Macroecon Dyn 10:652–666,
2006
) by investigating the effects of money growth uncertainty on real economic activity, in the context of a ...multivariate framework in which a structural vector autoregression is modified to accommodate multivariate GARCH-in-Mean errors, as in Elder (J Money, Credit Bank 36:912–928,
2004
). The model uses a recursive identification scheme, takes into account the possible interaction between conditional means and variances, isolates the effects of money growth volatility on output growth, and is able to explicitly model heteroskedasticity. We use quarterly data for the United States over the period from 1959:1 to 2005:4, provide a comparison among simple-sum, Divisia, and currency equivalent monetary aggregation procedures at each of the four levels of monetary aggregation—M1, M2, M3, and MZM—and find evidence that money growth volatility has significant negative effects on output growth. Issues of structural stability are addressed and sub-sample analysis is performed. Moreover, the robustness of the results to alternative identification schemes, alternative measures of the level of economic activity, and to the use of monthly observations is also investigated.
We study the impact of residential and non-residential investment on economic growth using U.S. data. Unlike previous studies we include the external sector (net exports) in our estimations, and we ...calculate impulse response analysis using Pesaran and Shin’s (Economics Letters 58:17–29, 1998) generalized impulse response approach. We find that shocks to residential investment have a larger impact on GDP than shocks to non-residential investment, which supports the findings of the closed-economy approach of Coulson and Kim (Real Estate Economics 28:233–247, 2000). However, a closed economy model tends to overstate the importance of residential investment and understate the relevance of nonresidential investment.
A spectral analysis of the Australian time series for the investment and savings ratios on quarterly data over the period from September 1959 to December 2005 reveals that the major cyclical ...components of the savings and investment ratios cohere strongly. This suggests there is a medium to long term relationship between investment and savings. Further, the investment and saving ratios cohere strongly with the business cycle suggesting a procyclical pattern of investment and saving behaviour on Australian data. A subsequent long memory analysis reveals that the saving and investment ratios, the investment ratio and real GDP and the savings ratio and real GDP are fractionally cointegrated. The policy implications are explained.