Weak Instruments: A Guide to the Literature

Weak instruments have become an issue in many contexts in which econometric methods have been used. Some progress has been made into how one diagnoses the problem and how one makes an allowance for it. The present paper gives a partial survey of this literature, focussing upon some of the major contributions and trying to provide a relatively simple exposition of the proposed solutions.

Can Turkish Recessions be Predicted?

In response to the widespread criticism that macro-economists failed to predict the global recession coming from the GFC, we look at whether recessions in Turkey can be predicted. Because the growth in Turkish GDP is quite persistent one might expect this is possible. But it is the sign of GDP growth that needs to be forecast if we are to predict a recession, and this is made more difficult by the persistence in GDP growth. We build a small SVAR model of the Turkish economy that is motivated by New Keynesian models of the open economy, and find that using the variables entering it increases predictive success, although it is still the case that the predictive record is not good. Non-linear models for Turkish growth are then found to add little to predictive ability. Fundamentally, recession prediction requires one to forecast future shocks to the economy, and thus one needs some indicators of these. The paper explores a range of indicators for the Turkish economy, but none are particularly advantageous. Developing a bigger range of these indicators should be a priority for future Turkish macro-economic research.Business cycles, binary models, predicting recessions

Can Turkish Recessions Be Predicted?

There is much scepticism about the ability to predict recessions. Harding and Pagan (2010b)have argued that this is because the definition of a recession involves the signs of future growth rates of economic activity and there is little predictability of these from the past. Turkey represents an interesting case study since growth in Turkish GDP features quite high serial correlation, suggesting that growth itself is predictable. Thus I want to examine whether it is possible to predict recessions in Turkey. As there seems only a small published literature on this it will be necessary to indicate what definition of recession is to be used and what information might be available to make a prediction of such an event. We found that using information from past macroeconomic variables would result in only limited success in predicting Turkish recessions.Conditional CAPM

Structural macro-econometric modelling in a policy environment

In this paper we review the evolution of macroeconomic modelling in a policy environment that took place over the past sixty years. We identify and characterise four generations of macro models. Particular attention is paid to the fourth generation -- dynamic stochastic general equilibrium models. We discuss some of the problems in how these models are implemented and quantified.

Sign Restrictions in Structural Vector Autoregressions: A Critical Review

The paper provides a review of the estimation of structural VARs with sign restrictions. It is shown how sign restrictions solve the parametric identification problem present in structural systems but leave the model identification problem unresolved. A market and a macro model are used to illustrate these points. Suggestions have been made on how to find a unique model. These are reviewed, along with some of the difficulties that can arise in how one is to use the impulse responses found with sign restrictions.Structural Vector Autoregressions, New Keynesian Model, Sign Restrictions

Measurement of Business Cycles

We describe different ways of measuring the business cycle. Insti- tutions such as the NBER, OECD and IMF do this through locating the turning points in series taken to represent the aggregate level of economic activity. The turning points are determined according to rules that either come from a parametric model or are non-parametric. Once located information can be extracted on cycle characteristics. We also distinguish cases where a single or multiple series are used to represent the level of activity.

The Credit Channel and Monetary Transmission in Brazil and Chile: A Structured VAR Approach

We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key structural features of Emerging Market economies, notably the role of a bank-credit channel. We find that interest rate changes have swifter effects on output and inflation in both countries compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission, as currency movements are highly responsive to changes in in policy-controlled interest rates. We also find the typical size of credit shocks to have large effects on output and inflation in the two economies, being stronger in Chile where bank penetration is higher.Monetary Policy, Bank Credit, VAR, Brazil, Chile

An Econometric Analysis of Some Models for Constructed Binary Time Series

Macroeconometric and financial researchers often use secondary or constructed binary random variables that differ in terms of their statistical properties from the primary random variables used in micro-econometric studies. One important difference between primary and secondary binary variables is that, while the former are, in many instances, independently distributed (i.d.), the latter are rarely i.d. We show how popular rules for constructing the binary states interact with the stochastic processes for of the variables they are constructed from, so that the binary states need to be treated as Markov processes. Consequently, one needs to recognize this when performing analyses with the binary variables, and it is not valid to adopt a model like static Probit which fails to recognize such dependence. Moreover, these binary variables are often censored, in that they are constructed in such a way as to result in sequences of them possessing the same sign. Such censoring imposes restrictions upon the DGP of the binary states and it creates difficulties if one tries to utilize a dynamic Probit model with them. Given this we describe methods for modeling with these variables that both respects their Markov process nature and which explicitly deals with any censoring constraints. An application is provided that investigates the relation between the business cycle and the yield spread.Business cycle; binary variable, Markov process, Probit model, yield curve

On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables

This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side effects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information