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Working Paper
Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations
In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations ...
Working Paper
Variable Selection and Forecasting in High Dimensional Linear Regressions with Structural Breaks
This paper is concerned with the problem of variable selection and forecasting in the presence of parameter instability. There are a number of approaches proposed for forecasting in the presence of breaks, including the use of rolling windows and exponential down-weighting. However, these studies start with a given model specification and do not consider the problem of variable selection, which is complicated by time variations in the effects of signal variables. In this study we investigate whether or not we should use weighted observations at the variable selection stage in the presence of ...
Working Paper
The Contribution of Foreign Holdings of U.S. Treasury Securities to the U.S. Long-Term Interest Rate: An Empirical Investigation of the Impact of the Zero Lower Bound
We find empirical evidence of a possible structural break in the relationship between the foreign holdings of U.S. Treasury securities and the U.S. long-term interest rate occurring at the time when U.S. monetary policy became constrained at the zero-lower bound (ZLB). The estimated marginal effect of the foreign holdings ratio on the U.S. long-term interest rate, particularly its long-run effect, appears to have become stronger during the ZLB regime than it was before. We argue that the leading explanation of this apparent break is the nonlinearity introduced by the ZLB. Motivated by theory, ...
Working Paper
Breaks in the Phillips Curve: Evidence from Panel Data
We revisit time-variation in the Phillips curve, applying new Bayesian panel methods with breakpoints to US and European Union disaggregate data. Our approach allows us to accurately estimate both the number and timing of breaks in the Phillips curve. It further allows us to determine the existence of clusters of industries, cities, or countries whose Phillips curves display similar patterns of instability and to examine lead-lag patterns in how individual inflation series change. We find evidence of a marked flattening in the Phillips curves for US sectoral data and among EU countries, ...
Working Paper
Dynamic Econometrics in Action: A Biography of David F. Hendry
David Hendry has made–and continues to make–pivotal contributions to the econometrics of empirical economic modeling, economic forecasting, econometrics software, substantive empirical economic model design, and economic policy. This paper reviews his contributions by topic, emphasizing the overlaps between different strands in his research and the importance of real-world problems in motivating that research.
Working Paper
Financial Frictions, Financial Shocks, and Aggregate Volatility
I revisit the Great Inflation and the Great Moderation. I document an immoderation in corporate balance sheet variables so that the Great Moderation is best described as a period of divergent patterns in volatilities for real, nominal and financial variables. A model with time-varying financial frictions and financial shocks allowing for structural breaks in the size of shocks and the institutional framework is estimated. The paper shows that (i) while the Great Inflation was driven by bad luck, the Great Moderation is mostly due to better institutions; (ii) the slowdown in credit spreads is ...
Working Paper
Variable Selection and Forecasting in High Dimensional Linear Regressions with Structural Breaks
This paper is concerned with the problem of variable selection and forecasting in the presence of parameter instability. There are a number of approaches proposed for forecasting in the presence of breaks, including the use of rolling windows or exponential down-weighting. However, these studies start with a given model specification and do not consider the problem of variable selection. It is clear that, in the absence of breaks, researchers should weigh the observations equally at both the variable selection and forecasting stages. In this study, we investigate whether or not we should use ...
Working Paper
Why is the Hong Kong Housing Market Unaffordable? Some Stylized Facts and Estimations
The house price in Hong Kong is well-known to be "unaffordable." This paper argues that the commonly used house price-to-income ratio may be misleading in an economy with almost half of the population living in either public rental housing or subsidized ownership. Moreover, we re-focus on the relationships between economic fundamentals and the housing market of Hong Kong. While the aggregate GDP, population and longevity continue to grow, the real wage and household income fall behind. The trend component of the real GDP growth suffers a permanent downward shift after the first quarter of ...
Working Paper
Does Communicating a Numerical Inflation Target Anchor Inflation Expectations? Evidence & Bond Market Implications
High-frequency empirical evidence suggests that inflation expectations in the United States became better anchored after the Federal Reserve began communicating a numerical inflation target. Using an event-study approach, we find that forward measures of inflation compensation became unresponsive to news about current inflation after the adoption of an explicit inflation target. In contrast, we find that forward measures of nominal compensation in Japan continued to drift with news about current inflation, even after the Bank of Japan adopted a numerical inflation target. These empirical ...
Report
Real-time inflation forecasting in a changing world
This paper revisits the accuracy of inflation forecasting using activity and expectations variables. We apply Bayesian-model averaging across different regression specifications selected from a set of potential predictors that includes lagged values of inflation, a host of real activity data, term structure data, nominal data, and surveys. In this model average, we can entertain different channels of structural instability by incorporating stochastic breaks in the regression parameters of each individual specification within this average, allowing for breaks in the error variance of the ...