Do probit models help in forecasting turning points of German business cycles?

In this paper we used a data set constructed for a companion paper (Fritsche/Stephan, 2000) where we explored the leading indicator properties of different time series for the German business cycle. Now we test for the ability of different indicator series to forecast recessions by using a probit approach as proposed by Estrella/Mishkin (1997). The dating procedure refers to the study by Artis et. al. (1997). We took into consideration the criticism made by Dueker (1997) who stated that in the probit model the fact that the economy is already in a state of recession must be controlled for. The results of our estimate are unsatisfactory on the whole. Only the ifo institute's business expectation of producers of intermediate inputs, the interest rate spread, the long-term interest rate, and money supply M2 show satisfactory leading properties.business cycle, probit model, modified McFadden's R2, recession, Germany

Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-run Divergence? Results from a Comparison with the United States of America and Germany

Using unit labor cost (ULC) data from Euro area countries as well as US States and German Laender we investigate inflation convergence using different approaches, namely panel unit root tests, cointegration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs

Growth and Inflation Forecasts for Germany: An Assessment of Accuracy and Dispersion

Based on a panel of German professional forecasts for 1970 to 2002 we find that growth and inflation forecasts are unbiased and weakly, but not strongly efficient. Besides the effect of diverging forecasting dates, no other substantial differences in forecasting quality are found among forecasters. We argue that is not always advisable to listen to the majority of forecast-ers. The dispersion of forecasts correlates positively with the volatility of macroeconomic variables. This suggests that forecasters do not behave predominately strategic, but share no common belief on the adequate model of the economy.Forecast error evaluation; Consensus forecast; Disagreement; Uncertainty; Germany

Do Leading Indicators Help to Predict Business Cycle Turning Points in Germany?

Using a binary reference series based on the dating procedure of Artis, Kontolemis and Osborn (1997) different procedures for predicting turning points of the German business cycles were tested. Specifically, a probit model as proposed by Estrella and Mishkin (1997) as well as Markov-switching models were taken into consideration. The overall results indicate that the interest rate spread, the longterm interest rate as well as some monetary indicators and some survey indicators can help predicting turning points of the business cycle.Business cycle, leading indicators, probit model, McFadden's R2, Markov switching models

Default Option, Risk-Aversion and Household Borrowing Behaviour

Assuming a risk-neutral bank and assuming household utility to be exponential, we show how under information symmetry the covariance of income and loan repayments may explain higher household borrowings than in the case without default option. Under ex post information asymmetry and positive control costs, the result is less clear-cut. We also make evident that in a situation in which a household without default option would neither borrow nor save, the existence of a default option makes household borrowing behaviour unpredictable.Consumption, exponential utility, certainty equivalent, households, default option, borrowing, risk, risk aversion, risk management

Forecast Errors and the Macroeconomy: A Non-Linear Relationship?

The paper analyses the reasons for departures from strong rationality of German business cycle forecasts based on annual observations from 1963 to 2004. We rely on forecasts from the joint forecast of the so-called "six leading" forecasting institutions in Germany. We test for a non-linear relation between forecast errors and macroeconomic fundamentals and find evidence for such a non-linearity for inflation forecasts. Evidence from probit models further suggests that some macroeconomic fundamentals - especially monetary factors - correlate to large positive or negative forecast growth and inflation forecast errors.Forecast error evaluation; Non-linearities; Business cycles

Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-Run Divergence?: Results from a Comparison with the United States of America and Germany

Using unit labor cost (ULC) data from Euro area countries as well as US States and German Länder we investigate inflation convergence using different approaches, namely panel unit root tests, co-integration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs

Forecast errors and the macroeconomy — a non-linear relationship?

The paper analyses reasons for departures from strong rationality of growth and inflation forecasts based on annual observations from 1963 to 2004. We rely on forecasts from the joint forecast of the so-called "six leading" forecasting institutions in Germany and argue that violations of the rationality hypothesis are due to relatively few large forecast errors. These large errors are shown - based on evidence from probit models - to correlate with macroeconomic fundamentals, especially on monetary factors. We test for a non-linear relation between forecast errors and macroeconomic fundamentals and find evidence for such a non-linearity for inflation forecasts.forecast error evaluation, non-linearities, business cycles

Productivity Growth in the United States and Germany: Is Germany Falling Further behind?

The long-term development in productivity in an economy is the main indicator in an assessment of the outlook for economic development. In theory, countries that lag behind the leading countries in productivity should gradually succeed in closing that gap. Since the mid-1990s the Federal Republic of Germany has not been able to continue the process of catching up with the trend in productivity in the United States that was typical until then. In past decades the development in Germany compared with the United States was dominated by the process of introducing best-practice technologies, for example modern information and communications technologies, but that has evidently faltered now. That is still the conclusion to be drawn after the introduction of the new methods of calculating the national accounts, which were expected to reduce the methodological differences in the assessment of productivity between Germany and the United States. However, the gap in productivity growth between the two economies may be expected to shrink again in the medium term, partly because the structural reforms on the labour market and the investment in modern information and communications technologies made in the past should have a positive effect. Productivity growth matters in the long run. As only the wealth created can be distributed the speed at which the efficiency of an economy is increasing will mark the limit for this distribution. So without a clear rise in efficiency the population in a country cannot expect their material prosperity to continue to rise. Owing to this fundamental interrelation determining the medium to long-term growth rate in productivity, and here especially the productivity of labour, is of crucial importance. Since the mid-1990s the typical process of catching up with the development in productivity in the United States has been interrupted in Germany. Until now economists have always assumed that a country with a lower level of productivity will be able to catch up owing to cost advantages in the acquisition of more efficient production technologies. By introducing bestpractice technologies - e.g. modern information and communications technologies - into their businesses and society countries that lag behind the leading productivity countries should succeed in gradually closing that gap. That process was characteristic of the development in Germany compared with the United States in past decades, but it has evidently faltered now. The productivity gap is growing again. At the same time other OECD and newly industrialised countries are catching up with Germany. So Germany is under pressure from two sides. The productivity gap that has been opening since the mid-1990s is putting Germany at a disadvantage in the international competition for inward investment, as on liberalized capital markets capital flows to where it can be used most productively, that is, at the highest rate of return. With the opening of markets in the newly industrialised countries, the political change in eastern Europe since the early 1990s and the resultant growing integration in the world economy Germany now has to maintain its position as a location for production in face of more intensive competition worldwide. High labour productivity is an essential location factor. If there are insufficient incentives to invest capital in highly productive jobs in Germany unemployment will rise rapidly while wages stagnate, as the low level of investment in the domestic economy makes progress in productivity relatively modest. Hence a low level of productivity can easily lead to a low level of growth with rising unemployment. The separation of short-term fluctuations in productivity from the medium to long-term trend in Germany compared with the United States has already been analyzed in an earlier study. However, at that time it was not possible to use the revised data of the national accounts for Germany as these were only published by the Federal Statistical Office in April this year.4 The introduction of chain indexes5 and hedonic methods6 in calculating the domestic product involved considerable methodological changes, and the implications of these for the determination of the short and medium-term productivity trends in Germany and the United States will be examined in this paper.