Modelling of the Inflation-Unemployment Tradeoff from the Perspective of the History of Econometrics

This paper examines the history of econometrics through a particular case study - modelling the tradeoff between inflation and unemployment. It focuses on the questions of what econometric tools modellers would choose to model the tradeoff, how their choices helped shape the ways that they obtained, interpreted and theorised the empirical evidence and how their different concerns and the different problems that they encountered has fed back into the development of econometrics. The study reveals that much of the interaction between econometrics and economics involved modellers taking certain tradeoffs between theory and data, and their different positions generated disputes, factions as well as confusions. It also reveals that the history of modelling the tradeoff mirrors the evolving process of how the Cowles structural modelling paradigm in econometrics became consolidated, challenged, reformed or abandoned.Phillips curve, History of econometrics

Econometric Studies of Business Cycles in the History of Econometrics

This study examines the evolution of econometric research in business cycle analysis during the 1960-90 period. It shows how the research was dominated by an assimilation of the tradition of NBER business cycle analysis by the Haavelmo-Cowles Commission approach, catalysed by time-series statistical methods. Methodological consequences of the assimilation are critically evaluated in light of the meagre achievement of the research in predicting the current global recession.Business cycles, NBER, Forecasting

Long-term Nexus of Industrial Pollution and Income in China

This study examines the long-run relationship between industrial pollution and income in China using provincial panel data. Four types of pollutants are modelled: waste water, solid wastes, soot and SO 2 emission. Two types of income effects are considered: the scale and growth effects. The study finds little evidence of inverse U shape curves as postulated by EKC models; pollutant emissions may go positively or negatively with income irrespective of income levels whereas certain sign of alleviation in pollutant concentration due to income growth is discernible; trade is found to be insignificant while the hazardous nature of pollutants appears to be an important factor for heterogeneity in the income effect estimates; the heterogeneity cautions us against simple panel model specification.Environmental Kuznets curve, Pollution, Economic growth, Trade, Heterogeneity

VAR Modelling Approach and Cowles Commission Heritage

This paper examines the rise of the VAR approach from a historical perspective. It shows that the VAR approach arises as a systematic solution to the issue of 'model choice' bypassed by Cowles Commission (CC) researchers, and that the approach essentially inherits and enhances the CC legacy rather than abandons or opposes it. It argues that the approach is not so atheoretical as widely believed and that it helps reform econometrics by shifting research focus from measurement of given theories to identification/verification of data-coherent theories, and hence from confirmatory analysis to a mixture of confirmatory and exploratory analysis.VAR, Macroeconometrics, Methodology, Rational expectations, Structural model

Globalisation Effect on Inflation in the Great Moderation Era: New Evidence from G10 Countries

The effect of globalisation on inflation is modeled and simulated for ten countries from G10 during the Great Moderation period. The results are supportive of the globalisation hypothesis. In particular, the results show that dynamic channels and magnitudes of globalisation to domestic inflation are highly heterogeneous from country to country, that increases in trade openness could be either inflationary or deflationary, while increased imports from low-cost emerging-market economies have been mostly deflationary, and that there has been almost no direct globalisation impact as far as inflation persistence is concerned while the impact on inflation variability can be positive as well as negative. Overall, globalisation is shown to have contributed positively to the aspect of low inflation rather than that of stable inflation during the Great Moderation era

Sources of Investment Inefficiency: The Case of Fixed-Asset Investment in China

This study attempts to measure the inefficiency associated with aggregate investment in a transitional economy. The inefficiency is decomposed into allocative and production inefficiency based on standard production theory. Allocative inefficiency is measured by disequilibrium investment demand. Institutional factors are then taken into consideration as possible explanatory variables of the disequilibrium. The resulting model is applied to Chinese provincial panel data. The main findings are: Chinese investment demand is strongly receptive to expansionary fiscal policies and inter-provincial network effects; and although there are signs of increasing allocative efficiency, the tendency of over-investment remains, even with improvements in production efficiency.Over-investment, Efficiency, Disequilibrium, Soft-budget constraint

How Much Intraregional Exchange Rate Variability Could a Currency Union Remove? The Case of ASEAN+3

A multilateral currency union removes the intraregional exchange rates but not the union rate variability with the rest of the world. The intraregional exchange rate variability is thus latent. A two-step procedure is developed to measure the variability. The measured variables are used to model inflation and intraregional trade growth of individual union members. The resulting models form the base for counterfactual simulations of the union impact. Application to ASEAN+3 shows that the intraregional variability consists of mainly short-run shocks, which have significantly affected the inflation and trade growth of major ASEAN+3 members, and that a union would reduce inflation and promote intraregional trade on the whole but the benefits facing each member vary and may not be significant enough to warrant a vote for the union.Currency union, Latent variables, Dynamic factor model, Simulation