An Evolutionary Algorithm for the Estimation of Threshold Vector Error Correction Models

We develop an evolutionary algorithm to estimate Threshold Vector Error Correction models (TVECM) with more than two cointegrated variables. Since disregarding a threshold in cointegration models renders standard approaches to the estimation of the cointegration vectors inefficient, TVECM necessitate a simultaneous estimation of the cointegration vector(s) and the threshold. As far as two cointegrated variables are considered this is commonly achieved by a grid search. However, grid search quickly becomes computationally unfeasible if more than two variables are cointegrated. Therefore, the likelihood function has to be maximized using heuristic approaches. Depending on the precise problem structure the evolutionary approach developed in the present paper for this purpose saves 90 to 99 per cent of the computation time of a grid search.evolutionary strategy, genetic algorithm, TVECM

Did the Crisis Affect Potential Output?

Conventional Phillips-curve models that are used to estimate the output gap detect a substantial decline in potential output due to the present crisis. Using a multivariate state space model, we show that this result does not hold if the long run role of excess liquidity (that we estimate endogeneously) for inflation is taken into account.output gap, liquidity, state space models

Much ado about nothing: Sovereign ratings and government bond yields in the OECD

In this paper, we propose a new method to assess the impact of sovereign ratings on sovereign bond yields. We estimate the impulse response of the interest rate, following a change in the rating. Since ratings are ordinal and moreover extremely persistent, it proves difficult to estimate those impulse response functions using a VAR modeling ratings, yields and other macroeconomic indicators. However, given the highly stochastic nature of the precise timing of ratings, we can treat most rating adjustments as shocks. We thus no longer rely on a VAR for shock identification, making the estimation of the corresponding IRFs well suited for so called local projections - that is estimating impulse response functions through a series of separate direct forecasts over different horizons. Yet, the rare occurrence of ratings makes impulse response functions estimated through that procedure highly sensitive to individual observations, resulting in implausibly volatile impulse responses. We propose an augmentation to restrict jointly estimated local projections in a way that produces economically plausible impulse response functions. We develop a semiparametric local projections method where smoothness can be imposed as constraint without assuming a specific functional form. The degree of smoothing can be assessed using a standard information criterion. While rating downgrades can play some role, we find no evidence for an impact of ratings in the most critical case of countries that are unusually well rated compared to their debt situation. Rather, ratings seem to be adjusted when the market evaluation of the risk associated with the high level of debt has already peaked

Inflation Expectations: Does the Market Beat Professional Forecasts?

The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.Das vorliegende Papier vergleicht die auf dem Markt offenbarte Inflationserwartung mit den Inflationsprognosen auf der Grundlage aktueller Schätz- bzw. Prognoseverfahren für ein Panel von zehn Industriestaaten seit 1980. Zu diesem Zweck entwickeln wir ein rekursives Filterverfahren, mit dessen Hilfe aus den Realzinsdivergenzen zwischen den Industriestaaten die unerwartete Inflation geschätzt werden kann. Die verwendeten Inflationsschätzungen, mit denen die extrahierten Erwartungen verglichen werden, umfassen ARMA-Modelle, VAR-Modelle unter Berücksichtigung von konstanten oder sich im Zeitablauf verändernden Phillipskurvenffekten, VAR-Modelle, dynamische Faktorenmodelle sowie auf diesen Schätzungen basierende Modellselektion- bzw. Modelaveraging-Prognosen

An Evolutionary Algorithm for the Estimation of Threshold Vector Error Correction Models

We develop an evolutionary algorithm to estimate Threshold Vector Error Correction models (TVECM) with more than two cointegrated variables. Since disregarding a threshold in cointegration models renders standard approaches to the estimation of the cointegration vectors inefficient, TVECM necessitate a simultaneous estimation of the cointegration vector(s) and the threshold. As far as two cointegrated variables are considered this is commonly achieved by a grid search. However, grid search quickly becomes computationally unfeasible if more than two variables are cointegrated. Therefore, the likelihood function has to be maximized using heuristic approaches. Depending on the precise problem structure the evolutionary approach developed in the present paper for this purpose saves 90 to 99 per cent of the computation time of a grid search.Im vorliegenden Papier wird ein evolutionärer Algorithmus zur Schätzung von Threshold-Vektorfehlerkorrekturmodellen (TVECM) mit mehr als zwei kointegrierten Variablen entwickelt. Da die fehlende Berücksichtigung eines Schwellenwerts, bei dem sich die Anpassung an das langfristige Gleichgewicht verändert, in einem Kointegrationsmodell dazu führt, dass konventionelle Schätzer nicht länger effizient sind, muss dieser Schwellenwert simultan mit dem Kointegrationsvektor geschätzt werden. Solange nur zwei kointegrierte Variablen betrachtet werden, wird die Schätzung üblicherweise mittels einer Rastersuche vorgenommen. Eine solche Rastersuche ist allerdings, wenn mehr als zwei Variablen kointegriert sind, aufgrund des immensen Rechenaufwands meist undurchführbar. Die Likelihood-Funktion muss daher über heuristische Verfahren maximiert werden. Abhängig von der genauen Problemstruktur kann der zu diesem Zweck im vorliegenden Papier vorgeschlagene Algorithmus 90 bis 99 Prozent der Rechnerkapazität, die für eine Rastersuche notwendig wäre, sparen

Capital controls and international interest rate differentials

The literature on interest rate differentials caused by capital controls is mostly case based yet. The present paper tries to find general evidence how large the interest rate differentials - and thus the distortions of capital markets - actually are. Advocates of capital controls generally argue, that capital controls (should) affect capital flow composure rather than the total, analogue to Tobin's idea concerning currency markets only. Based on a new measure for capital controls, which is including information on the direction of the flows, which are subject to the control, it is shown here with a sample of 86 countries from 1997 to 2003, that the interest rate effects are to severe to sign this assumption. The results indicate, that capital controls, as they are commonly employed, have significant impact on interest rates, hence risking accordingly high growth impeding effects

IWH-Indikatoren zur Kapitalmarktregulierung: Hinweise auf eine Renaissance der Kapitalverkehrskontrollen

Mittels der hier erstmals vorgestellten IWH-Indikatoren zur Beschreibung der Regulierungsintensität internationaler Kapitalmärkte ist es möglich, Kapitalverkehrskontrollen künftig mit ökonometrischen Verfahren zu evaluieren. Der Datensatz deckt über 150 Länder und einen Zeitraum von bisher 13 Jahren (1997 bis 2009) ab. Er unterscheidet Kapitalverkehrskontrollen nicht nur nach ihrer Intensität, sondern auch nach der Richtung (Zufluss oder Abfluss) der regulierten Kapitalströme. So kann den unterschiedlichen Folgen von Kapitalmarktpolitik Rechnung getragen werden, je nachdem, ob sie durch Zuflusskontrollen dem Aufbau riskanter Außenpositionen entgegenwirken möchte, oder ob sie – wesentlich weiter verbreitet – auf eine Erhöhung des heimischen Kapitalangebots abzielt. Die explizite Berücksichtigung von diskretionären Entscheidungsspielräumen gestattet es darüber hinaus, auch die institutionelle Ausgestaltung von Kapitalverkehrskontrollen in die empirische Analyse einzubeziehen. Erste Auswertungen der Indikatoren zeigen in der Folge der Finanz- und Wirtschaftskrise eine weltweite Renaissance der Regulierung grenzüberschreitender Kapitalströme. Der Anteil regulierter Teilmärkte ist von 2007 bis 2009 global um ca. zehn Prozentpunkte angestiegen. Kapitalimporte und -exporte sind dabei in ähnlicher Form betroffen. Der Anstieg der Kontrollintensität geht nicht auf massive Eingriffe einzelner Staaten zurück, sondern ist über alle betrachteten Ländergruppen hinweg zu beobachten. Teilweise, wie z. B. in den Transformationsökonomien des früheren Warschauer Paktes, wurden viele Jahre der Liberalisierungsanstrengungen in kurzer Zeit kompensiert. Diese Entwicklung ist insofern bedenklich, als dass sich theoretische Überlegungen bezüglich Kapitalverkehrskontrollen stark widersprechen und auch keine empirische Evidenz vorliegt, die eine solche Politik rechtfertigt

Money and Inflation: The Role of Persistent Velocity Movements

While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In the present paper we use a multivariate state space framework, that substantially expands the traditional vector error correction approach, to analyze the short run impact of money on prices. We contribute to the literature in three ways: First, we distinguish changes in velocity of money that are due to institutional developments and thus do not induce inflationary pressure, and changes that reflect transitory movements in money demand. This is achieved with a newly developed multivariate unobserved components decomposition. Second, we analyze whether the high volatility of the transmission from monetary pressure to inflation follows some structure, i.e., if the parameter regime can assumed to be constant. Finally, we use our model to illustrate the consequences of the monetary policy of the Fed that has been employed to mitigate the impact of the financial crisis, simulating different exit strategy scenarios.velocity, multivariate state space model, inflation, money

Macroeconomic trade effects of vehicle currencies: Evidence from 19th century China

We use the Chinese experience between 1867 and 1910 to illustrate how the volatility of vehicle currencies affects trade. Today's widespread vehicle currency is the dollar. However, the macroeconomic effects of this use of the dollar have rarely been addressed. This is partly due to identification problems caused by its international importance. China had adopted a system, where silver was used almost exclusively for trade, similar to a vehicle currency. While being important for China, the global role of silver was marginal, alleviating said identification problems. We develop a bias corrected structural VAR showing that silver price fluctuations significantly affected trade

Liquidity in the Liquidity Crisis: Evidence from Divisia Monetary Aggregates in Germany and the European Crisis Countries

While there has been some debate over the usefulness of monetary aggregates, there has been surprisingly little discussion of the actual implications for liquidity. In this paper, we provide an approximation of the liquidity development in six Euro area countries from 2003 to 2012. We show that properly measured monetary aggregates contain significant information about liquidity risk