Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach

Standard estimates of the NAIRU or natural rate of unemployment are subject to considerable uncertainty. We show in this paper that using multiple indicators to extract an estimated NAIRU cuts in half uncertainty as measured by variance. The inclusion of an Okun’s Law relation is particularly valuable. We estimate the NAIRU as an unobserved component in a state-space model and show that using multiple indicators reduces both parametric uncertainty and filtering uncertainty. Additionally, our multivariate approach overcomes the “pile-up” problem observed by other investigators.

Why Were Changes in the Federal Funds Rate Smaller in the 1990s?

In this paper, we identify two major changes in the dynamics of the federal funds rate in the 1990s. We model the desired rate in a two-regime setting, one when the Fed makes no change and the other when the Fed is moving the desired rate to a new level. We find that the 1990s saw longer duration in the no-change regime as well as smaller changes in the other regime. We show the smaller changes were neither due to a less aggressive Fed nor due to lower volatility of the fundamentals. In fact, the Fed responded more aggressively to changes in fundamentals in the 1990s. The results also suggest that the Fed became more forward-looking in the last decade.

Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach

Standard estimates of the NAIRU or natural rate of unemployment are subject to considerable uncertainty. We show in this paper that using multiple indicators to extract an estimated NAIRU cuts in half uncertainty as measured by variance. The inclusion of an Okun’s Law relation is particularly valuable. We estimate the NAIRU as an unobserved component in a state-space model and show that using multiple indicators reduces both parametric uncertainty and filtering uncertainty. Additionally, our multivariate approach overcomes the “pile-up†problem observed by other investigatorsNAIRU, parametric uncertainty, filtering uncertainty

Foreign aid and export performance: a panel data analysis of developing countries

The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates of direct effect of foreign aid on exports are imprecise. However, the effect of the quadratic term of foreign aid on exports is negative and precise. This implies large amount of foreign aid does adversely affect export performance. The results are robust to the use of two different export performance measures and different sub-samples.Developing countries - Economic conditions ; Exports

Measuring Persistent Global Economic Factors with Output, Commodity Price, and Commodity Currency Data

In this study we use monthly G7 industrial production data, commodity price index data, and commodity currency exchange rate data in a dynamic factor model to examine the global economic factors useful for commodity price prediction. We differentiate between the dynamic factors by specifying a persistent factor and a non-persistent factor, both as a single global factor using all data and as factors for each category of data. The in-sample predictive performances of the three persistent factors together are better than the non-persistent factors and the single global factors. Out-of-sample outcomes based on forecast combinations also support the presence of predictive information in the persistent factors for overall commodity prices and for most sub-categories of commodity price indexes relative to their means. The gains in forecast accuracy are heterogeneous; ranging from 5 to 7 percent in the 1 to 6 months horizon for the overall commodity prices to a high of around 20 percent for fertilizers in the 12 month horizon in the recent sample. We further show that the information in the persistent factors, especially in the commodity currency exchange rate based persistent factor, can be integrated with other global measures to further improve the predictive performances of the global measures

Volatility Forecasting: The Role of Internet Search Activity and Implied Volatility

Recent empirical literature shows that Internet search activity is closely associated with volatility prediction in financial and commodity markets. In this study, we search for a benchmark model with available market-based predictors to evaluate the net contribution of the Internet search activity data in forecasting volatility. We conduct in-sample analysis and window-size robust out-of-sample forecasting analysis in multiple markets for robust model validation. The predictive power of the Internet search activity data disappears in the financial markets and substantially diminishes in the commodity markets once the model includes implied volatility. A further common component analysis shows that most of the predictive information contained in the Internet search activity is also present in implied volatility while implied volatility has additional predictive information that is not contained in the Internet search activity data