Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters*

This paper uses forecasts from the European Central Bank?s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work. Given the relatively short data span of the Survey of Professional Forecasters and the need to control for many explanatory variables,we use dynamic model averaging in order to ensure a parsimonious econometric specification. We use both regression-based and VAR-based methods. We find no support for the backward looking behavior embedded in the Neo-classical Phillips curve. Much more support is found for the forward looking behavior of the New Keynesian Phillips curve, but most of this support is found after the beginning of the financial crisis.inflation expectations, survey of professional forecasters,Phillips curve, Bayesian

Interaction of Fiscal Policies on the Euro Area: How Much Pressure on the ECB?

Since the Helsinki European Council of December 1999, a process of increased coordination of fiscal policies in the area of the Euro seems to be on its way. In this paper I examine this process from the point of view of the independence of the European Central Bank (ECB). The interaction of the governments and the ECB is addressed in a game theoretical framework. First, the conditions under which the national governments are able to put pressure on the ECB are made explicit. Then the main question is addressed: would a greater fiscal coordination reduce or increase the capacity of the monetary authority of targeting long run inflation? Formal and informal, discretional (positive) and rule-based (negative) coordination and their interactions are examined as possible solutions of the game. I conclude that the main point is not how much fiscal coordination is there, but the form it takes. It turns out that a mix of informal political coordination and binding rules is the one that best preserves the independence of the ECB. For negative coordination, it is shown that a simple change in the definition of "excessive deficit" can at the same time allow more stabilization of output after a shock and a better control of inflation by the ECB.European Montary Union, European Central Bank, game theory, fiscal policy, monetary policy, policy coordination

Inflation and Inflation Uncertainty in the Euro Area

This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates the linkages between them in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, implying that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.inflation, inflation uncertainty, time-varying parameters, GARCH models, ECB, EMU

Is U.S. Fiscal Policy Optimal?

We find and compare two simple fiscal rules. The first is a theoretical rule that approximates well Ramsey-optimal fiscal policy in a DSGE model calibrated to the U.S. economy over the period 1955:1 to 2007:3. The second is an empirical rule that approximates well actual U.S. fiscal policy over the same period. Our main findings are: First, Ramsey-optimal fiscal policy displays limited volatility even in the presence of sticky prices, while public debt absorbs most of the shocks. Second, actual U.S. fiscal policy is excessively counter-cyclical. Ramsey-optimal fiscal policy is negatively correlated with output over the business cycle, as expansions generate reduction in the level of public debt and the tax rate and vice versa. On the other hand, actual fiscal policy is positively correlated with output, with tax rate being raised during expansions and reduced during recessions. Third, actual fiscal policy is inconsistent with long-run debt sustainability over the period considered.fiscal policy

Inflation and Inflation Uncertainty in the Euro Area

This paper estimates a time-varying AR-GARCH model of inflation producing measures of inflation uncertainty for the euro area, and investigates the linkages between them in a VAR framework, also allowing for the possible impact of the policy regime change associated with the start of EMU in 1999. The main findings are as follows. Steady-state inflation and inflation uncertainty have declined steadily since the inception of EMU, whilst short-run uncertainty has increased, mainly owing to exogenous shocks. A sequential dummy procedure provides further evidence of a structural break coinciding with the introduction of the euro and resulting in lower long-run uncertainty. It also appears that the direction of causality has been reversed, and that in the euro period the Friedman-Ball link is empirically supported, implying that the ECB can achieve lower inflation uncertainty by lowering the inflation rate.Inflation, inflation uncertainty, time-varying parameters, GARCH models, ECB, EMU

Macroeconomic Nowcasting Using Google Probabilities

Abstract de la ponencia[EN] Many recent papers have investigated whether data from internet search engines such as Google can help improve nowcasts or short-term forecasts of macroeconomic variables. These papers construct variables based on Google searches and use them as explanatory variables in regression models. We add to this literature by nowcasting using dynamic model selection (DMS) methods which allow for model switching between time-varying parameter regression models. This is potentially useful in an environment of coefficient instability and over-parameterization such as can arise when forecasting with Google variables. We extend the DMS methodology by allowing for the model switching to be controlled by the Google variables through what we call Google model probabilities. That is, instead of using Google variables as regressors, we allow them to determine which nowcasting model should be used at each point in time. In an empirical exercise involving nine major monthly US macroeconomic variables, we find DMS methods to provide large improvements in nowcasting. Our use of Google model probabilities within DMS often performs better than conventional DMS.Koop, G.; Onorante, L. (2016). Macroeconomic Nowcasting Using Google Probabilities. En CARMA 2016: 1st International Conference on Advanced Research Methods in Analytics. Editorial Universitat Politècnica de València. 117-117. https://doi.org/10.4995/CARMA2016.2015.4213OCS11711

Food price pass-through in the euro area The role of asymmetries and non-linearities

In this paper we analyse the pass-through of a commodity price shock along the food price chain in the euro area. Unlike the existing literature, which mainly focuses on food commodity prices quoted in international markets, we use a novel database that accounts for the role of the Common Agricultural Policy in the European Union. We model several departures from the linear pass-through benchmark and compare alternative specifications with aggregate and disaggregate food data. Overall, when the appropriate dataset and methodology are used, it is possible to identify a significant and longlasting food price pass-through. The results of our regressions are applied to the strong increase in food prices in the 2007-08 period; a simple decomposition exercise shows that commodity prices are the main determinant of the increase in producer and consumer prices, thus solving the pass-through puzzle highlighted in the existing literature for the euro area. JEL Classification: C32, C53, E3, Q17food commodity prices, inflation, non-linearities, Pass-Through

Dynamic Model Averaging in Large Model Spaces Using Dynamic Occam's Window

Bayesian model averaging has become a widely used approach to accounting for uncertainty about the structural form of the model generating the data. When data arrive sequentially and the generating model can change over time, Dynamic Model Averaging (DMA) extends model averaging to deal with this situation. Often in macroeconomics, however, many candidate explanatory variables are available and the number of possible models becomes too large for DMA to be applied in its original form. We propose a new method for this situation which allows us to perform DMA without considering the whole model space, but using a subset of models and dynamically optimizing the choice of models at each point in time. This yields a dynamic form of Occam's window. We evaluate the method in the context of the problem of nowcasting GDP in the Euro area. We find that its forecasting performance compares well that of other methods. Keywords: Bayesian model averaging; Model uncertainty; Nowcasting; Occam's window