Global inflation

This paper shows that inflation in industrialized countries is largely a global phenomenon. First, the inflation rates of 22 OECD countries have a common factor that alone accounts for nearly 70 percent of their variance. This large variance share that is associated with Global Inflation is not only due to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, we show that, in conformity to the prediction of New Keynesian open economy models, there is little spillover of inflationary shocks across countries. The comovement of inflation comes largely from common shocks. Global Inflation is a function of real developments at short horizons and monetary developments at longer horizons. Third, there is a robust "error correction mechanism" that brings national inflation rates back to Global Inflation. A simple model that accounts for this feature consistently beats the previous benchmarks used to forecast inflation 4 to 8 quarters ahead across samples and countries.Inflation (Finance)

EXCHANGE RATE DETERMINATION OF TL/US$:A CO-INTEGRATION APPROACH

In our paper, we investigate exchange rate determination mechanism of TL/US$ for the 1987Q1-2006Q4 period using quarterly observations. Following a large literature review we first highlight various approaches explaining monetary model exchange rate determination based on economic fundamentals and then construct an empirical model revealing both long-run stationary relationships and short-run dynamic adjustment processes of the nominal exchange rate for the Turkish economy. Our findings employing multivariate Johansen-Juselius type co-integrating approach indicate that nominal exchange rate is co-integrated with the fundamentals suggested by economics theory. Besides, short-run deviations from the fundamental-based equilibrium course of the nominal exchange rate have permanent effects on the long-run equilibrium exchange rate and so have been stemmed from the existence of some form of hysteresis effects dominated in the nominal exchange rate.Exchange Rates; Sticky Price Monetary Model; Flexible Price Monetary; Economic Fundamentals; Randow Walk; Co-integration; Hysteresis; Turkish Economy

Exchange rate determination of TL/US$: a co-integration approach

In our paper, we investigate exchange rate determination mechanism of TL/US$ for the 1987Q1-2006Q4 period using quarterly observations. Following a large literature review, we first highlight various approaches explaining monetary model exchange rate determination based on economic fundamentals, and then, construct an empirical model revealing both long-run stationary relationships and short-run dynamic adjustment processes of the nominal exchange rate for the Turkish economy. Our findings employing multivariate Johansen-Juselius type co-integrating approach indicate that nominal exchange rate is co-integrated with the fundamentals suggested by economics theory. Besides, short-run deviations from the fundamental-based equilibrium course of the nominal exchange rate have permanent effects on the long-run equilibrium exchange rate, and so have been stemmed from the existence of some form of hysteresis effects dominated in the nominal exchange rate.Exchange Rates ; Sticky Price Monetary Model ; Flexible Price Monetary ; Economic Fundamentals ; Randow Walk ; Co-integration ; Hysteresis ; Turkish Economy ;

Inflation expectations in the euro area: Are consumers rational?

In this paper, we propose a quantitative measure for inflation expectations based on consumer survey data. Thereafter, we proceed to testing the rationality assumption. This issue is of noteworthy interest in its own as it is commonly assumed in the theoretical modelling literature that the rational expectations hypothesis holds. This analysis is conducted for the euro area as a whole, as well as for several member countries, using a sample covering the last two decades. Moreover, we also assess if the conclusions hold when one focuses on the post-euro introduction period.

Money Rules For The Eurozone Candidate Countries

This study proposes the adoption of money growth rules as indicator variables of monetary policies by the countries converging to a common currency system, in particular, by the eurozone candidate countries. The analytical framework assumes an inflation target as the ultimate policy goal. The converging countries act in essence as “takers” of the inflation target, which, in this case, is the eurozone’s inflation forecast. The study advances a forward-looking money growth model that might be applied to aid monetary convergence to the eurozone. However, feasibility of adopting money growth rules depends on stable relationships between money and target variables, which are low inflation and stable exchange rate. Long-run interactions between these variables are examined for Poland, Hungary and the Czech Republic by employing a Johansen cointegration test, along with short-run effects assessed with a vector error correction procedure.common currency system, eurozone, monetary convergence, money growth rules, inflation targeting.

Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter?

This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity across different levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates because the Ricardian effect is smaller at lower financin costs of fiscal policy. Using threshold vector autoregression models on U.S. data, the paper provides new evidence that expansionary government spending is more conducive to short-term growth when real rates are low. It also finds asymmetric effects on interest rates and inflation and threshold effects associated with substitution between financing methods. Copyright 2006, International Monetary Fund

Essays in macroeconomic interdependence, business cycles and nowcasting in a multi-country context

This thesis employs a multi-country approach and builds upon the existing literature on the Bayesian Panel Vector Autoregressions (PVARs) as its foundation for analysing empirical macroeconomic interdependence, business cycles synchronisation and economic forecasting. The contribution is provided in three essays. The first essay (Chapter 2) examines macroeconomic interdependency of main macroeconomic variables in terms of dynamic, static, and cross-sectional homogeneity features by using a PVAR model. In order to accurately measure these features, a stochastic search specification selection (S 4 ) prior algorithm is employed to investigate their interdependencies within the G-7 countries. The results indicate that while cross-sectional homogeneity is of little significance among the G-7, dynamic and static interdependencies are of great importance. In brief, the S 4 algorithm is beneficial for classifying each type of the panel structure of macro-financial interlinkages. This essay also compares the inflation forecasting performance of the S 4 algorithm with the original factor shrinkage prior of Canova and Ciccarelli (2009) and finds that the PVARs with the S 4 algorithm give a better point forecasting performance, particularly in the short-term forecast horizons. Regarding the density forecasts, the PVARs with the S 4 prior outperform the PVARs with the factor shrinkage prior for all the G-7 in the short-term horizons, whereas in the long-term horizons, although the PVARs with the factor shrinkage prior give an improved performance, they still only forecast better for two of the seven countries, namely Canada and Japan. The second essay (Chapter 3) investigates the economic interdependencies between the ASEAN+3 and the US as well as between the ASEAN+3 members themselves through the lens of business cycle synchronisation, by using a Bayesian panel Markov-switching VAR approach (The PMS-VAR model). The main reason for investigating this phenomenon is that the increasing level of regional economic integration of the ASEAN+3 has led to a discussion over the past decade about whether or not the ASEAN+3 is decoupling from the US economy. The results provide evidence that the business cycles of the ASEAN+3 economies are much more synchronised with each other than any of them are with the US economy, especially for real economic variables. However, for financial variables, the results indicate that after the US subprime crisis of 2008 the synchronisations of the ASEAN+3 and the US have become more substantial, particularly of their stock price indices and exchange rates. The third essay (Chapter 4) studies recent literature on nowcasting. Upon study, there is a substantial gap to be found regarding investigation into whether or not multi-country nowcasting models can give predictive gains, no doubt due to the historical issue of over-parameterisation, and this thesis meets the challenge of filling that gap. These models are helpful when considering the role of interdependence among a particular group of economies and have potential to help in the assessment of nowcasts of several different GDPs. Therefore, this chapter focuses mainly on comparing nowcasting performance between multi-country models - large Bayesian VARs, Panel VARs and a multi-country dynamic factor model, and individual-country models - MF-BVARs, MF-DFM, with mixed-frequency approaches, applied to the four largest European economies during both normal periods and the Covid-19 pandemic. The results show that country-specific models outperform the other models when it comes to nowcasts for almost all countries, especially the pandemic period.This thesis employs a multi-country approach and builds upon the existing literature on the Bayesian Panel Vector Autoregressions (PVARs) as its foundation for analysing empirical macroeconomic interdependence, business cycles synchronisation and economic forecasting. The contribution is provided in three essays. The first essay (Chapter 2) examines macroeconomic interdependency of main macroeconomic variables in terms of dynamic, static, and cross-sectional homogeneity features by using a PVAR model. In order to accurately measure these features, a stochastic search specification selection (S 4 ) prior algorithm is employed to investigate their interdependencies within the G-7 countries. The results indicate that while cross-sectional homogeneity is of little significance among the G-7, dynamic and static interdependencies are of great importance. In brief, the S 4 algorithm is beneficial for classifying each type of the panel structure of macro-financial interlinkages. This essay also compares the inflation forecasting performance of the S 4 algorithm with the original factor shrinkage prior of Canova and Ciccarelli (2009) and finds that the PVARs with the S 4 algorithm give a better point forecasting performance, particularly in the short-term forecast horizons. Regarding the density forecasts, the PVARs with the S 4 prior outperform the PVARs with the factor shrinkage prior for all the G-7 in the short-term horizons, whereas in the long-term horizons, although the PVARs with the factor shrinkage prior give an improved performance, they still only forecast better for two of the seven countries, namely Canada and Japan. The second essay (Chapter 3) investigates the economic interdependencies between the ASEAN+3 and the US as well as between the ASEAN+3 members themselves through the lens of business cycle synchronisation, by using a Bayesian panel Markov-switching VAR approach (The PMS-VAR model). The main reason for investigating this phenomenon is that the increasing level of regional economic integration of the ASEAN+3 has led to a discussion over the past decade about whether or not the ASEAN+3 is decoupling from the US economy. The results provide evidence that the business cycles of the ASEAN+3 economies are much more synchronised with each other than any of them are with the US economy, especially for real economic variables. However, for financial variables, the results indicate that after the US subprime crisis of 2008 the synchronisations of the ASEAN+3 and the US have become more substantial, particularly of their stock price indices and exchange rates. The third essay (Chapter 4) studies recent literature on nowcasting. Upon study, there is a substantial gap to be found regarding investigation into whether or not multi-country nowcasting models can give predictive gains, no doubt due to the historical issue of over-parameterisation, and this thesis meets the challenge of filling that gap. These models are helpful when considering the role of interdependence among a particular group of economies and have potential to help in the assessment of nowcasts of several different GDPs. Therefore, this chapter focuses mainly on comparing nowcasting performance between multi-country models - large Bayesian VARs, Panel VARs and a multi-country dynamic factor model, and individual-country models - MF-BVARs, MF-DFM, with mixed-frequency approaches, applied to the four largest European economies during both normal periods and the Covid-19 pandemic. The results show that country-specific models outperform the other models when it comes to nowcasts for almost all countries, especially the pandemic period

Three Essays on Asset Price Forecasting

This dissertation is a collection of essays examining current issues in asset price forecasting. The first chapter of this dissertation discusses the relationship between investor sentiment and excess stock return. This essay takes a novel approach in estimating investor sentiment use social media posts. In this study, I construct daily, equity-specific, investor sentiment indexes from Twitter and test the efficient market theory. We use a multinomial inverse regression to build the dictionary of relevant words and phrases for construction of the indexes. We find that our investor sentiment measure has a positive and statistically significant effect on individual stock returns. These findings are robust to different models and specifications. Chapter 2 examines the ability of international sector predictors to forecast US housing price inflation. Under floating exchange rate regimes, the Dornbusch model predicts shocks to domestic or foreign economies will be reflected in exchange rates. When exchange rates are fixed, shocks are likely to affect the net foreign asset holdings. In this study, I examine the role of the exchange rates and the net change in foreign asset holdings in improving US real estate inflation forecasts. I conduct in-sample and out-of-sample comparison of forecasting models relative to an autoregressive baseline model. I find that inclusion of foreign sector variables can improve the US real estate inflation forecasts by up to 40 percent. This improvement is mostly driven by changes in the net foreign asset holdings at longer horizons. The results are robust to samples at the metropolitan level although with different gains. Chapter 3 continues with this line research. Here, I determine the ability of net capital inflows from regions to forecast US housing inflation. Over the last decade, there has been a high correlation between balance of payment measures (Current Account deficits and Net Financial Accounts). The international finance theory has focused on determining the cause of this relationship. Specifically, this theory has found that deregulation in credit markets, accommodative US monetary policy, and fixed exchange rates caused US housing prices and balance of payments measures to move together. In 2015, BEA released new estimates of balance of payments measures in line with international standards, such that now bilateral financial account data has been created. In this study, I use a number of components from bilateral financial account data, to forecast US housing prices. Further, to empirically test the implications of the international finance theory, I use factor analysis methods to create an bilateral financial account index to forecast US housing prices. Overall, I find that many of these measures are able to produce improved forecasts of up to 50 percent

A Dynamic Approach to Inflation Targeting in Transition Economies

This study views inflation targeting as a viable regime for more advanced transition economies. A dynamic approach to the trajectory of disinflation and the flexibility of direct inflation targeting is presented in the context of achieving monetary convergence to the EU/EMU. The candidate countries are advised to begin from strict inflation targeting and to follow with a more flexible inflation targeting regime before they establish a necessary 'foundational credibility' and monetary stability. These steps, ultimately followed by the euro-peg, are necessary in preparing for accession to the eurozone. The early experiences of the Czech Republic and Poland with inflation targeting are examined.