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Working Paper
Nowcasting Tail Risks to Economic Activity with Many Indicators
This paper focuses on tail risk nowcasts of economic activity, measured by GDP growth, with a potentially wide array of monthly and weekly information. We consider different models (Bayesian mixed frequency regressions with stochastic volatility, classical and Bayesian quantile regressions, quantile MIDAS regressions) and also different methods for data reduction (either the combination of forecasts from smaller models or forecasts from models that incorporate data reduction). The results show that classical and MIDAS quantile regressions perform very well in-sample but not out-of-sample, ...
Journal Article
Alternative Indicators for Chinese Economic Activity Using Sparse PLS Regression
Official Chinese GDP growth rates have been remarkably smooth over the past decade, in contrast with alternative Chinese economic data. To better identify Chinese business cycles, we construct a sparse partial least squares (PLS) factor from a wide array of Chinese higher-frequency data, targeted toward variables that are highly correlated with important aspects of the Chinese economy. Our resulting alternative growth indicator clearly identifies Chinese business cycle fluctuations and it performs well both in out-of-sample testing for China as well as when applied to other economies. Using ...
Working Paper
Capturing Macroeconomic Tail Risks with Bayesian Vector Autoregressions
A rapidly growing body of research has examined tail risks in macroeconomic outcomes. Most of this work has focused on the risks of significant declines in GDP, and it has relied on quantile regression methods to estimate tail risks. Although much of this work discusses asymmetries in conditional predictive distributions, the analysis often focuses on evidence of downside risk varying more than upside risk. We note that this pattern in risk estimates over time could obtain with conditional distributions that are symmetric but subject to simultaneous shifts in conditional means (down) and ...
Working Paper
Forecasting local inflation with global inflation: when economic theory meets the facts
This paper provides both theoretical insight as well as empirical evidence in support of the view that inflation is largely a global phenomenon. First, we show that inflation across countries incorporates a significant common factor captured by global inflation. Second, we show that in theory a role for global inflation in local inflation dynamics emerges over the business cycle even without common shocks, and under flexible exchange rates and complete international asset markets. Third, we identify a strong "error correction mechanism" that brings local inflation rates back in line with ...
Working Paper
Country-specific oil supply shocks and the global economy: a counterfactual analysis
This paper investigates the global macroeconomic consequences of country-specific oilsupply shocks. Our contribution is both theoretical and empirical. On the theoretical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply ...
Working Paper
Specification Choices in Quantile Regression for Empirical Macroeconomics
Quantile regression has become widely used in empirical macroeconomics, in particular for estimating and forecasting tail risks to macroeconomic indicators. In this paper we examine various choices in the specification of quantile regressions for macro applications, for example, choices related to how and to what extent to include shrinkage, and whether to apply shrinkage in a classical or Bayesian framework. We focus on forecasting accuracy, using for evaluation both quantile scores and quantile-weighted continuous ranked probability scores at a range of quantiles spanning from the left to ...
Working Paper
Current Account Adjustment and Retained Earnings
This paper develops a formal strategy to calculate current accounts with retained earnings (RE) on equity investment and analyzes their adjustment during the global financial crisis. RE are the part of companies' profits which are reinvested and not distributed to shareholders as dividends. International statistical standards treat RE on foreign direct investment and RE on portfolio investment differently: while the former enter the current and financial account, the latter do not. We show that this differential treatment strongly affects current accounts of several advanced economies, ...
Working Paper
The U.S. oil supply revolution and the global economy
This paper investigates the global macroeconomic consequences of falling oil prices due to the oil revolution in the United States, using a Global VAR model estimated for 38 countries/regions over the period 1979Q2 to 2011Q2. Set-identification of the U.S. oil supply shock is achieved through imposing dynamic sign restrictions on the impulse responses of the model. The results show that there are considerable heterogeneities in the responses of different countries to a U.S. supply-driven oil price shock, with real GDP increasing in both advanced and emerging market oil-importing economies, ...
Report
Would protectionism defuse global imbalances and spur economic activity?: a scenario analysis
In the evolving analysis of global imbalances, the possibility that countries will resort to increased protectionism is often mentioned but rarely analyzed. This paper attempts to fill that gap, examining the macroeconomic implications of a shift to protectionist policies through the lens of a dynamic general equilibrium model of the world economy that encompasses four regional blocs. Simulation exercises are carried out to assess the consequences of imposing uniform and discriminatory tariffs on trading partners as well as the consequences of tariff retaliation. We also discuss a scenario in ...
Working Paper
Limited asset market participation and the consumption-real exchange rate anomaly
Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country's aggregate consumption rises relative to foreign consumption, when the country's real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this "consumption-real exchange rate anomaly" can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of ...