Econometrics: A bird's eye view

As a unified discipline, econometrics is still relatively young and has been transforming and expanding very rapidly over the past few decades. Major advances have taken place in the analysis of cross sectional data by means of semi-parametric and non-parametric techniques. Heterogeneity of economic relations across individuals, firms and industries is increasingly acknowledge and attempts have been made to take them into account either by integrating out their effects or by modeling the sources of heterogeneity when suitable panel data exists. The counterfactual considerations that underlie policy analysis and treatment evaluation have been given a more satisfactory foundation. New time series econometric techniques have been developed and employed extensively in the areas of macroeconometrics and finance. Non-linear econometric techniques are used increasingly in the analysis of cross section and time series observations. Applications of Bayesian techniques to econometric problems have been given new impetus largely thanks to advances in computer power and computational techniques. The use of Bayesian techniques have in turn provided the investigators with a unifying framework where the tasks and forecasting, decision making, model evaluation and learning can be considered as parts of the same interactive and iterative process; thus paving the way for establishing the foundation of the "real time econometrics". This paper attempts to provide an overview of some of these developments

The Effect of Exchange Rate Uncertainty on US Imports from the UK: Consistent OLS Estimation with Volatility Measured by An ARCH-type Model

This paper investigates the effect of exchange rate volatility on US-UK bilateral trade flows. As part of econometric problems arising from a generated variable, we consider a special case when an ARCH type auxiliary model is used to measure uncertainty in the exchange rate and discuss a procedure for the correct inference of the OLS estimates of the primary equation in the second stage, which includes the generated variable. By applying this two-step approach, we find a statistically significant, negative impact of exchange rate uncertainty on US imports from the United KinARCH model; Consistent estimation; Generated regressors; Volatility

The effect of exchange rate uncertainty on US imports from the UK: Consistent OLS estimation with volatility measured by an ARCH-type model

This paper investigates the effect of exchange rate volatility on US-UK bilateral trade flows. As part of econometric problems arising from a generated variable, we consider a special case when an ARCH type auxiliary model is used to measure uncertainty in the exchange rate and discuss a procedure for the correct inference of the OLS estimates of the primary equation in the second stage, which includes the generated variable. By applying this two-step approach, we find a statistically significant, negative impact of exchange rate uncertainty on US imports from the United KingdomARCH model; Consistent OLS estimation; Generated regressors;

Structural Inflation Models with Real Wage Rigidities: The Case of Canada

Real wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent illustrative structural models, we evaluate empirically the importance of real wage rigidities in the data and the extent to which such models provide useful information regarding price stickiness. Structural estimation and testing is carried out using Canadian data and identification-robust methods. Results based on one of the models are relatively uninformative. Our tests reveal important identification difficulties and considerable estimate uncertainty, as can be seen from the wide projections for the estimates. However, we obtain economically reasonable ranges for estimates of average frequency of price changes and some evidence for rigidity in real wages (as measured by a rigidity index) based on the other model we examine. In addition, our specification for the latter model yields significant [at usual levels] and correctly-signed reduced-form coefficient estimates, showing a trade-off between unemployment and inflation in the New Keynesian Phillips curve. From a methodological perspective, these results derive from our treatment of the productivity term as observable although with error, which seems to capture vital information and improve overall identification. From a substantive perspective, our findings suggest that wage-rigidity based New Keynesian Phillips Curves hold promise empirically and provide interesting research directions.Inflation and prices; Labour markets; Econometric and statistical methods

A Non-Linear Multivariate Model of the U.K. Real Exchange Rate

This paper discusses linearity testing for the UK real exchange rate within a multivariate framework. First we estimate a long-run real exchange rate relationship within a system involving real wages, the unemployment rate and the real price of oil. Then we adopt a logistic transition function for the estimated relationship and show that non-linearities in the discrepancy between the real exchange rate and its implied long-run level affect the short-run real exchange rate equation. We also find that when the real exchange rate is undervalued, unemployment falls as firms respond to an improvement in domestic competitiveness by increasing their demand for labour. At the same time, workers respond to the improvement in domestic competitiveness by demanding and getting higher wages. Further, the effect on unemployment and wages is nonlinear

Non-linear multivariate adjustment of the UK real exchange rate

Based on a multivariate non-linear model, this paper recognises an important role for the real exchange rate in affecting UK labour market conditions. The short-run real exchange rate adjusts quickly to disequilibrium deviations of the real exchange rate from its long-run level outside a rather wide interval band. When the real exchange rate is undervalued, short-run unemployment falls as firms respond to an improvement in domestic competitiveness by increasing their demand for labour. Further, there is a strong response of short-run unemployment to the disequilibrium error outside a narrow interval band. To the extent that the real exchange rate equation reflects monetary policy considerations, our results imply that unemployment can be targeted by economic policy. Furthermore, if economic authorities want to avoid large swings in unemployment then they should be prepared to intervene in exchange markets with the aim of keeping real exchange rate movements within a narrow interval band