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Jel Classification:C32 

Working Paper
Modelling Dependence in High Dimensions with Factor Copulas

his paper presents flexible new models for the dependence structure, or copula, of economic variables based on a latent factor structure. The proposed models are particularly attractive for relatively high dimensional applications, involving fifty or more variables, and can be combined with semiparametric marginal distributions to obtain flexible multivariate distributions. Factor copulas generally lack a closed-form density, but we obtain analytical results for the implied tail dependence using extreme value theory, and we verify that simulation-based estimation using rank statistics is ...
Finance and Economics Discussion Series , Paper 2015-51

Working Paper
High-Dimensional Copula-Based Distributions with Mixed Frequency Data

This paper proposes a new model for high-dimensional distributions of asset returns that utilizes mixed frequency data and copulas. The dependence between returns is decomposed into linear and nonlinear components, enabling the use of high frequency data to accurately forecast linear dependence, and a new class of copulas designed to capture nonlinear dependence among the resulting uncorrelated, low frequency, residuals. Estimation of the new class of copulas is conducted using composite likelihood, facilitating applications involving hundreds of variables. In- and out-of-sample tests confirm ...
Finance and Economics Discussion Series , Paper 2015-50

Working Paper
Financial Stress and Equilibrium Dynamics in Money Markets

Interest rate spreads are widely-used indicators of funding pressures and market functioning in money markets. Using weekly data from 2002 to 2015, we analyze money market dynamics in a long-run equilibrium framework where commonly-monitored spreads serve as error correction terms. We find strong evidence for nonlinearities with respect to levels of the spreads. We provide point and interval estimates for spread thresholds that quantify funding pressure points from a long-run perspective. Our results indicate significant asymmetry in the adjustment toward long-run equilibrium. We show that ...
Finance and Economics Discussion Series , Paper 2015-91

Working Paper
Oil Price Pass-Through into Core Inflation

We estimate the oil price pass-through into consumer prices both in the US and in the euro area. In particular, we disentangle the specific effect that an oil price change might have on each disaggregate price, from the effect on all prices that an oil price change might have since it affects the whole economy. To do so, we first estimate a Dynamic Factor Model on a panel of disaggregate price indicators, and then we use VAR techniques to estimate the pass-through. Our results show that the oil price passes through core inflation only via its effect on the whole economy. This pass-through is ...
Finance and Economics Discussion Series , Paper 2017-085

Working Paper
GDP Trend-cycle Decompositions Using State-level Data

This paper develops a method for decomposing GDP into trend and cycle exploiting the cross-sectional variation of state-level real GDP and unemployment rate data. The model assumes that there are common output and unemployment rate trend and cycle components, and that each state?s output and unemployment rate are subject to idiosyncratic trend and cycle perturbations. The model is estimated with Bayesian methods using quarterly data from 2005:Q1 to 2016:Q1 for the 50 states and the District of Columbia. Results show that the U.S. output gap reached about -8% during the Great Recession and is ...
Finance and Economics Discussion Series , Paper 2017-051

Working Paper
Forecast Combination for Euro Area Inflation - A Cure in Times of Crisis?

The period of extraordinary volatility in euro area headline inflation starting in 2007 raised the question whether forecast combination methods can be used to hedge against bad forecast performance of single models during such periods and provide more robust forecasts. We investigate this issue for forecasts from a range of short-term forecasting models. Our analysis shows that there is considerable variation of the relative performance of the different models over time. To take that into account we suggest employing performance-based forecast combination methods, in particular one with more ...
Finance and Economics Discussion Series , Paper 2016-104

Working Paper
The Origins of Aggregate Fluctuations in a Credit Network Economy

I show that inter-firm lending plays an important role in business cycle fluctuations. I first build a tractable network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms propagate financial shocks, amplifying their aggregate effects by about 30 percent. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I then estimate aggregate and idiosyncratic shocks to ...
Finance and Economics Discussion Series , Paper 2018-031

Working Paper
When Can Trend-Cycle Decompositions Be Trusted?

In this paper, we examine the results of GDP trend-cycle decompositions from the estimation of bivariate unobserved components models that allow for correlated trend and cycle innovations. Three competing variables are considered in the bivariate setup along with GDP: the unemployment rate, the inflation rate, and gross domestic income. We find that the unemployment rate is the best variable to accompany GDP in the bivariate setup to obtain accurate estimates of its trend-cycle correlation coefficient and the cycle. We show that the key feature of unemployment that allows for precise ...
Finance and Economics Discussion Series , Paper 2016-099

Working Paper
Measuring the Natural Rate of Interest : International Trends and Determinants

U.S. estimates of the natural rate of interest ? the real short-term interest rate that would prevail absent transitory disturbances ? have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the ...
Finance and Economics Discussion Series , Paper 2016-073

Working Paper
The Empirical Implications of the Interest-Rate Lower Bound

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in U.S. ...
Finance and Economics Discussion Series , Paper 2012-83

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