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Working Paper
A framework for economic forecasting
This paper proposes a tripartite framework of design, evaluation, and post-evaluation analysis for generating and interpreting economic forecasts. This framework's value is illustrated by re-examining mean square forecast errors from dynamic models and nonlinearity biases from empirical forecasts of U.S. external trade. Previous studies have examined properties such as nonlinearity bias and the possible nonmonotonicity and nonexistence of mean square forecast errors in isolation from other aspects of the forecasting process, resulting in inefficient forecasting techniques and seemingly ...
Working Paper
An analogue model of phase-averaging procedures
This paper considers the statistical and econometric effect that fixed n-period phase-averaging has on time series generated by some simple dynamic processes. We focus on the variance and autocorrelation of the data series and of the disturbance term for levels and difference equations involving the phase-average data. Further, we examine the effect of phase-averaging on the erogeneity of variables in those equations and the implications phase-averaging has for conducting statistical inference. ; To illustrate our analytical results, we investigate claims by Friedman and Schwartz in their ...
Discussion Paper
Predicting Fed Forecasts
Monetary policy decisions by the Fed's Federal Open Market Committee (FOMC) have attracted considerable attention in recent years, especially with quantitative easing through large-scale asset purchases, the introduction of forward guidance, and December's "lift-off" after seven years of a near-zero federal funds rate. The FOMC's decisions are based in part on the Greenbook forecasts, which are economic forecasts produced by the Federal Reserve Board's staff and which are presented to the FOMC prior to their policy meetings. This note shows that the minutes of the FOMC meetings--and the ...
Working Paper
PC-give and David Hendry's econometric methodology
This paper summarizes David Hendry's empirical econometric methodology, unifying discussions in many of his and his co-authors' papers. Then, we describe how Hendry's suite of computer programs PC-GIVE helps users implement that methodology. Finally, we illustrate that methodology and the programs with three empirical examples: postwar narrow money demand in the United Kingdom, nominal income determination in the United Kingdom from Friedman and Schwartz (1982), and consumers' expenditure in Venezuela. These examples help clarify the methodology's central concepts, which include ...
Working Paper
Broad money demand and financial liberalization in Greece
This paper develops a constant, data-coherent, error correction model for broad money demand (M3) in Greece. This model contributes to a better understanding of the effects of monetary policy in Greece and of the portfolio consequences of financial innovation in general. The broad monetary aggregate M3 was targeted until recently, and current monetary policy still uses such aggregates as guidelines, yet analysis of this aggregate has been dormant for over a decade. ; In spite of large fluctuations in the inflation rate, introduction of new financial instruments, and liberalization of the ...
Working Paper
Distributions of error correction tests for cointegration
This paper provides cumulative distribution functions, densities, and finite sample critical values for the single-equation error correction statistic for testing cointegration. Graphs and response surfaces summarize extensive Monte Carlo simulations and highlight simple dependencies of the statistic's quantiles on the number of variables in the error correction model, the choice of deterministic components, and the estimation sample size. The response surfaces provide a convenient way for calculating finite sample critical values at standard levels; and a computer program, freely available ...
Working Paper
General-to-specific modeling: an overview and selected bibliography
This paper discusses the econometric methodology of general-to-specific modeling, in which the modeler simplifies an initially general model that adequately characterizes the empirical evidence within his or her theoretical framework. Central aspects of this approach include the theory of reduction, dynamic specification, model selection procedures, model selection criteria, model comparison, encompassing, computer automation, and empirical implementation. This paper thus reviews the theory of reduction, summarizes the approach of general-to-specific modeling, and discusses the econometrics ...
Working Paper
Constructive data mining: modeling Argentine broad money demand
This paper assesses the empirical merits of PcGets and Autometrics--two recent algorithms for computer-automated model selection--using them to improve upon Kamin and Ericsson's (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correction model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a "ratchet" variable that captures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically ...
Working Paper
Hazards in implementing a monetary conditions index
Some recent studies have suggested constructing a Monetary Conditions Index (or MCI) to serve as an indicator of monetary policy stance. The central banks of Canada, Sweden, and Norway all construct an MCI and (to varying degrees) use it in conducting monetary policy. Empirically, an MCI is calculated as the weighted sum of changes in a short-term interest rate and the exchange rate relative to values in a baseline year. The weights aim to reflect these variables' effects on longer-term focuses of policy -- economic activity and inflation. This paper derives analytical and empirical ...
Working Paper
Output and inflation in the long run
Cross-country regressions explaining output growth often obtain a negative effect from inflation. However, that result is not robust, due to the selection of countries in sample, temporal aggregation, and omission of consequential variables in levels. This paper demonstrates some implications of these mis-specifications, both analytically and empirically. In particular, for most G-7 countries, annual time series of inflation and the log-level of output are cointegrated, thus rejecting the existence of a long-run relation between output growth and inflation. Typically, output and inflation are ...