Segmenting monetary variability: an application to the Franc Zone

Failure to detect or account for structural changes in economic modelling can lead to misleading policy inferences, which can be perilous, especially for the more fragile economies of developing countries. Using three potential monetary policy instruments (Money Base, MO, and Reserve Money) for 13 member-states of the CFA Franc zone over the period 1989:11-2002:09, we investigate the magnitude of information extracted by employing data-driven techniques when analyzing breaks in time-series, rather than the simplifying practice of imposing policy implementation dates as break dates. The paper also tests Granger's (1980) aggregation theory and highlights some policy implications of the results

Modelling stock volatilities during financial crises: A time varying coefficient approach

We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the volatility dynamics, including the underlying volatility persistence and volatility spillover structure. Using daily data from several key stock market indices, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying modelwhich provides the platformupon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for time varying asymmetric GARCH specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure.Open Access funded by European Research Council under a Creative Commons license

Stock Market Volatility, Risk Attitude and the Demand for Money in the UK

Is stock market volatility an important determinant of money demand in the UK? If yes, what is the driving force behind that effect? In a cointegration framework, we find that volatility in share prices is an important positive determinant of money demand, alongside standard variables and the stock price level. By studying different stock market indexes effects, we find that the risk aversion of investors is an important force behind the effect, implying that the effect is due to investors’ flight to safer assets in times of volatile stock prices

Monetary Policy Preferences of the EMU and the UK

We estimate the central bank policy preferences for the European Monetary Union and for the UK. In doing so, we extend the theoretical framework suggested by Cecchetti et al. (2002) by assuming that policy preferences change across different regimes either due to the different phases of the business cycle, or due to changes in propagation mechanism, or due to volatility shifts of the underlying structural shocks. Our empirical results suggest that the weight that policy makers put on inflation is typically profound. Furthermore, it appears that volatility shifts of the economic disturbances is the main factor, which generates variation in policy preferences.This is the author accepted manuscript. The final version is available from Wiley via https://doi.org/10.1111/manc.1212

Modelling Returns and Volatilities During Financial Crises: a Time Varying Coefficient Approach

We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the mean and volatility dynamics, including the underlying volatility persistence and volatility spillovers structure. Using daily data from several key stock market indices we find that stock market returns exhibit time varying persistence in their corresponding conditional variances. Furthermore, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying model which provides the platform upon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for low order time varying specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure

Structural Changes and the Role of Monetary Aggregates in the UK

We investigate whether or not monetary aggregates are important in determining output. In addition to the official Simple Sum measure of money, we employ the sophisticated weighted Divisia aggregate. We also investigate whether or not the influence of money on output is time varying using data-driven procedures to identify breaks in the data and conduct estimations for the different segments defined by these breaks. We find that structural breaks do exist in some of the variables under investigation and these do influence the relationship between monetary aggregates and output. However, the official Simple Sum aggregate appears to be more affected by the breaks than the theoretically superior Divisia aggregate. In particular, our results show that in some segments of our data, the Simple Sum aggregate does not influence output significantly whereas the Divisia aggregate maintains a significant relationship with output in all segments. We conclude that Divisia money is still influencing output in spite of the diminished role played in monetary policy. Our investigation also suggests that the recovery from the financial crisis using quantitative easing would have been faster if money was not being hoarded

Modelling UK house prices with structural breaks and conditional variance analysis

This paper differs from previous research by examining the existence of structural breaks in the UK regional house prices as well as in the prices of the different property types (flats, terraced, detached and semi-detached houses) in the UK as a whole, motivated by the uncertainty in the UK housing market and various financial events that may lead to structural changes within the housing market. Our paper enhances the conventional unit root tests by allowing for structural breaks, while including structural break tests strengthens our analysis. Our empirical results support the existence of structural breaks in the mean equation in seven out of thirteen regions of the UK as well as in three out of four property types, and in the variance equation in six regions and three property types. In addition, using a multivariate GARCH approach we examine both the behaviour of variances and covariances of the house price returns over time. Our results have significant implications for appropriate economic policy selection and investment management

The price puzzle: fact or artefact?

A conventional finding of recursive structural VAR (SVAR) analyses is the price puzzle namely the positive relationship between interest rates and inflation. We employ a Markov regime-switching structural VAR (MRS-SVAR) to investigate whether the price puzzle is present at regimes where there is violation of the Taylor principle. Our results suggest that the price puzzle is a regime-dependent phenomenon driven by passive monetary policy and Choleski identifying restrictions