The use of real-time information in Phillips curve relationships for the euro area

The dynamics of the Phillips Curve in New Keynesian, Expectations Augmented and Hybrid forms are extremely sensitive to the choice, timing and restrictions on variables. An important element of the debate revolves round what information decision-makers took into account at the time and round what they thought was going to happen in the future. The original debate was conducted using up to date, revised estimates of the data as in the most recent official publications. In this paper, however, we explore how much three aspects of the specification of the information available at the time affect the performance of the various Phillips curves and the choice of the most appropriate dynamic structures. First we consider the performance of forecasts, published at the time, as representations of expectations. Second, we explore the impact of using 'real time data' in the sense of what were the most recently available estimates of the then present and past. Finally we review whether it helps to use the information that was available at the time in the choice of instruments in the estimation of the relationships rather than the most up to date estimate of the data series that has been published. Thus different datasets are required in the instrument set for every time period. We use a single consistent source for 'real-time' data on the past, estimates of the present and forecasts, from OECD Economic Outlook and National Accounts. We set this up as a panel for the euro area countries covering the period since 1977. The OECD publishes forecasts twice a year, which permits a more detailed exploration of the importance of the timing of information. Our principal conclusions are (1) that the most important use of real time information in the estimation of the Phillips curve is in using forecasts made at the time to represent expectations; (2) real time data indicate that the balance of expectations formation was more forward than backward-looking; (3) by contrast using the most recent, revised, data suggests more backward-looking and less well-determined behaviour. --real-time data,Phillips curve,euro area

The role of expectations in euro area inflation dynamics

Only abstract. Paper copies of master’s theses are listed in the Helka database (http://www.helsinki.fi/helka). Electronic copies of master’s theses are either available as open access or only on thesis terminals in the Helsinki University Library.Vain tiivistelmä. Sidottujen gradujen saatavuuden voit tarkistaa Helka-tietokannasta (http://www.helsinki.fi/helka). Digitaaliset gradut voivat olla luettavissa avoimesti verkossa tai rajoitetusti kirjaston opinnäytekioskeilla.Endast sammandrag. Inbundna avhandlingar kan sökas i Helka-databasen (http://www.helsinki.fi/helka). Elektroniska kopior av avhandlingar finns antingen öppet på nätet eller endast tillgängliga i bibliotekets avhandlingsterminaler.This paper examines empirical performance of three different Phillips curve specifications in the euro area. Instead of imposing rational expectations, direct measures, ie OECD forecasts, are used to proxy for economic agents' inflation expectations. Real marginal costs are measured in three different ways. The results suggest that with directly measured expectations the estimated New Classical Phillips curve has satisfactory statistical properties. Moreover, the driving variable enters the estimated purely forward-looking New Keynesian Phillips curve with a correct sign, but it is definitely outperformed by the New Classical and the Hybrid Phillips curve. We interpret our results as indicating that the European inflation process is not purely forward-looking, so that inflation cannot instantaneously adjust to new information. Consequently, even allowing for possible non-rationality in expectations, a lagged inflation term enters the New Keynesian Phillips curve for the European inflation dynamics. The inflation process seems to have become more forward-looking in the recent years of low and stable inflation. Furthermore, in the New Keynesian Phillips curve relationship the output gap turns out to be at least as good a proxy for real marginal costs as the labour income share

Odotusten merkitys euroalueen inflaatiodynamiikassa

Only abstract. Paper copies of master’s theses are listed in the Helka database (http://www.helsinki.fi/helka). Electronic copies of master’s theses are either available as open access or only on thesis terminals in the Helsinki University Library.Vain tiivistelmä. Sidottujen gradujen saatavuuden voit tarkistaa Helka-tietokannasta (http://www.helsinki.fi/helka). Digitaaliset gradut voivat olla luettavissa avoimesti verkossa tai rajoitetusti kirjaston opinnäytekioskeilla.Endast sammandrag. Inbundna avhandlingar kan sökas i Helka-databasen (http://www.helsinki.fi/helka). Elektroniska kopior av avhandlingar finns antingen öppet på nätet eller endast tillgängliga i bibliotekets avhandlingsterminaler.Tässä tutkimuksessa tarkastellaan kolmen Phillips-käyrän empiiristä soveltuvuutta euroalueelle. Taloudellisten päätöksentekijöiden inflaatio-odotuksia ei oleteta rationaaliksi, vaan niitä mitataan suoraan käyttämällä OECD:n ennusteita. Reaalisia rajakustannuksia mitataan kolmella eri tavalla. Tulosten mukaan suoraan mitattuja inflaatio-odotuksia käytettäessä uusklassinen Phillips-käyrä estimoituu tilastollisesti järkevästi. Lisäksi puhtaasti eteenpäin katsova uuskeynesiläinen Phillips-käyrä tuottaa järkeviä empiirisiä tuloksia, mutta nämä tulokset ovat selvästi huonompia kuin uusklassisen Phillips-käyrän ja uuskeynesiläisen Phillips-käyrän hybridimuodon empiiriset tulokset. Siten tulokset osoittavat, että euroalueen inflaatioprosessi ei ole puhtaasti eteenpäin katsova, minkä vuoksi inflaatio ei voi sopeutua välittömästi uuteen informaatioon. Lisäksi euroalueen inflaatiodynamiikkaa kuvattaessa viivästetty inflaatiotermi tarvitaan uuskeynesiläisessä Phillips-käyrässä odotusten mahdollisesta epärationaalisuudesta huolimatta. Inflaatioprosessi on muuttunut enemmän eteenpäin katsovaksi viime vuosina, jolloin inflaatio on ollut vaimea ja vakaa. Toisaalta uuskeynesiläisessä Phillips-käyrässä tuotantokuilu on ainakin yhtä hyvä reaalisten rajakustannusten empiirinen vastine kuin työtulojen BKT-osuus

IQ, expectations, and choice

We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for in ation than other men. The in ation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher in ation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment

Tackling the Bundestag growth by introducing fraction-valued votes

Currently, only China has a parliament larger than the German Bundestag, which continues to grow due to the increasing number of overhang mandates. In 2016, Norbert Lammert, then president of the Bundestag, proposed to restrict it to 630 members by allocating mandates according to quotas for each of the German states (Länder), which should be proportional to their population. This idea found no approval among the German parties, neither large nor small [Finthammer 2018]. Only in October 2019, after predictions that the next Bundestag could exceed 800 seats, did some 100 German experts in constitutional law write an open letter suggesting to constrain its size by reducing the number of effective constituencies, and the Bundestag vice-president, Thomas Oppermann, called for such a reform without delay. These and other proposals require a profound change in the existing election system. But a mathematical solution to the problem does not require such changes and is much simpler. We can prevent unfettered growth of the Bundestag — caused by allotting too many direct mandates to parties that received too few second votes — by replacing the principle of ’one man, one vote’ with a new concept: fraction-valued votes for Bundestag members. Such a practice could make overhang mandates unnecessary and the basic 598 Bundestag seats sufficient under all circumstances. For this purpose, the members of the overrepresented parties (because they receive too many direct mandates) should have vote power 1. We explain the vote power adjustments using the example of the 2017 Bundestag

Inflation dynamics in Finland 1990Q1-2012Q1

The objective of this thesis is to study whether inflation dynamics in Finland can be described using the New Keynesian Phillips curve (NKPC) over the period 1990Q1-2012Q1. The NKPC explains current inflation with forward-looking inflation expectations and current real marginal cost. The assumption of rational expectations is relaxed in this thesis and both Consensus Economics and Statistics Finland's survey data are used as proxies for inflation expectations. Since these expectations are expectations for consumer prices, inflation is measured with annual change in the Consumer Price Index. Output gap is used as a proxy for real marginal cost. The NKPC is estimated with both Ordinary Least Squares (OLS) and Generalised Method of Moments (GMM). The variables are also analysed using the frequency domain method, which gives information on the dynamics of both correlations and lead-lag relationships of variables at different frequencies. Estimations in this thesis show that once the rational expectations hypothesis is relaxed and survey-based inflation expectations are used, inflation in Finland can be explained with the New Keynesian Phillips curve over the period 1990Q1-2012Q1. The analysis of variables in this thesis shows that the dynamics of variables used in the NKPC estimations varied at different frequencies

Forecasting German GDP using alternative factor models based on large datasets

This paper discusses the forecasting performance of alternative factor models based on a large panel of quarterly time series for the german economy. One model extracts factors by static principals components analysis, the other is based on dynamic principal components obtained using frequency domain methods. The third model is based on subspace algorithm for state space models. Out-of-sample forecasts show that the prediction errors of the factor models are generally smaller than the errors of simple autoregressive benchmark models. Among the factors models, either the dynamic principal component model or the subspace factor model rank highest in terms of forecast accuracy in most cases. However, neither of the dynamic factor models can provide better forecasts than the static model over all forecast horizons and different specifications of the simulation design. Therefore, the application of the dynamic factor models seems to provide only small forecasting improvements over the static factor model for forecasting German GDP. --Factor models,static and dynamic factors,principal components,forecasting accuracy