Creator: Sargent, Thomas J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 229 Keyword: Geometric distributed leads, Inverse Z-transform, Linear prediction problem, Univariate optimization problem, Recursive projection formula, and Inverse optimal control problem Subject (JEL): C02 - Mathematical Methods
Creator: Doan, Thomas., Litterman, Robert B., and Sims, Christopher A. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.) Number: 243 Abstract:
This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied to ten macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variables responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates. We provide unconditional forecasts as of 1982:12 and 1963:3* We also describe how a model such as this can be used to make conditional projections and to analyse policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982:12. While no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, which may help in evaluating causal hypotheses, without containing any such hypotheses themselves.
Keyword: Macroeconomics, Bayesian methods, and Forecasting Subject (JEL): E27 - Macroeconomics : Consumption, saving, production, employment, and investment - Forecasting and simulation and C11 - Econometric and statistical methods : General - Bayesian analysis
Creator: Todd, Richard M. Series: Business analysis committee meeting Description:
Version without Software Appendix appears on the Federal Reserve Bank of Minneapolis Web site at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=571
Keyword: BVAR, Vector autoregression, and Bayesian analysis Subject (JEL): C53 - Econometric modeling - Forecasting and other model applications
Creator: Kocherlakota, Narayana Rao, 1963- Series: Lucas expectations anniversary conference Abstract:
There were three important changes in the United States economy during the 1980s. First, from 1982-90, the decade featured the longest consecutive stretch of positive quarterly output growth in United States history. Second, wage inequality expanded greatly as the wages of highly skilled workers grew markedly faster than the wages of less skilled workers (Katz and Murphy (1992)). Finally, consumption inequality also expanded as the consumption of highly skilled workers grew faster than that of less skilled workers (Attanasio and Davis (1994)). This paper argues that these three aspects of the United States economic experience can be interpreted as being part of an efficient response to a macroeconomic shock given the existence of a particular technological impediment to full insurance. I examine the properties of efficient allocations of risk in an economic environment in which the outside enforcement of risksharing arrangements is infinitely costly. In these allocations, relative productivity movements have effects on both the current and future distribution of consumption across individuals. If preferences over consumption and leisure are nonhomothetic, these changes in the allocation of consumption will generate persistent cycles in aggregate output that do not occur in efficient allocations when enforcement is costless.
Keyword: Business cycle, Skilled workers, Risk, and Consumption Subject (JEL): E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles and E21 - Macroeconomics : Consumption, saving, production, employment, and investment - Consumption ; Saving ; Wealth
Creator: Gourieroux, Christian, 1949, Renault, Eric., and Touzi, Nizar. Series: Simulation-based inference in econometrics Abstract:
This paper is interested in the small sample properties of the indirect inference procedure which has been previously studied only from an asymptotic point of view. First, we highlight the fact that the Andrews (1993) median-bias correction procedure for the autoregressive parameter of an AR(1) process is closely related to indirect inference; we prove that the counterpart of the median-bias correction for indirect inference estimator is an exact bias correction in the sense of a generalized mean. Next, assuming that the auxiliary estimator admits an Edgeworth expansion, we prove that indirect inference operates automatically a second order bias correction. The latter is a well known property of the Bootstrap estimator; we therefore provide a precise comparison between these two simulation based estimators.
Keyword: Edgeworth correction, Econometrics, Bootstrap, Bias correction, Economic models, Indirect inference, and Simulation Subject (JEL): C13 - Econometric and statistical methods : General - Estimation, C15 - Econometric and statistical methods : General - Simulation methods, C32 - Multiple or simultaneous equation models - Time-series models ; Dynamic quantile regressions, and C22 - Single equation models ; Single variables - Time-series models ; Dynamic quantile regressions
Creator: Goenka, Aditya. and Spear, Stephen E. Series: Finance, fluctuations, and development Abstract:
This paper develops a dynamic model of general imperfect competition by embedding the Shapley-Shubik model of market games into an overlapping generations framework. Existence of an open market equilibrium where there is trading at each post is demonstrated when there are an arbitrary (finite) number of commodities in each period and an arbitrary (finite) number of consumers in each generation. The open market equilibria are fully characterized when there is a single consumption good in each period and it is shown that stationary open market equilibria exist if endowments are not Pareto optimal. Two examples are also given. The first calculates the stationary equilibrium in an economy, and the second shows that the on replicating the economy the stationary equilibria converge to the unique non-autarky stationary equilibrium in the corresponding Walrasian overlapping generations economy. Preliminary on-going work indicates the possibility of cycles and other fluctuations even in the log-linear economy.
Keyword: Overlapping generations model, General equilibirum theory, and Game theory Subject (JEL): D91 - Intertemporal choice and growth - Intertemporal consumer choice ; Life cycle models and saving, C72 - Game theory and bargaining theory - Noncooperative games, and D50 - General equilibrium and disequilibrium - General
Creator: Da-Rocha, Jose-Maria., Giménez Fernández, Eduardo Luís., and Lores Insua, Francisco Xavier. Series: Advances in dynamic economics Abstract:
In this paper we will consider a simple small open economy with three assets - domestic capital, foreign securities and public debt - to study the government's incentives to devalue and to repay or default the debt. We show that the announcement of a devaluation is anticipated by domestic agents who reduce domestic investments and increase foreign holdings. Once a government devalues, the expectations vanish and the economy recovers its past levels of investment and GDP. However, in a country with international debt denominated in US dollars if a government devalues it requires a higher fraction of GDP to repay its external debt. In consequence, there exists a trade-off between recovering the economy and increasing the future cost of repaying the debt. Our main result is to show that, as devaluation beliefs exists, a devaluation increase government incentives to default and devalue. We calibrate our model to match the decrease in investment of domestic capital, the reduction in production, the increase in trade balance surplus, and the increase in debt levels observed throughout 2001 in Argentina. We show that for a probability of devaluation consistent with the risk premium of the Argentinian Government bonds nominated in dollars issued on April 2001 the external debt of Argentina was in a crisis zone were the government find optimal to default and to devalue.
Keyword: South America, Default, Argentina, Latin America, Devaluation, and Debt crisis Subject (JEL): F30 - International finance - General, E60 - Macroeconomic policy, macroeconomic aspects of public finance, and general outlook - General, and F34 - International finance - International lending and debt problems
Creator: Mendoza, Enrique G., 1963- and Smith, Katherine A. Series: Advances in dynamic economics Abstract:
"Sudden Stops " experienced during emerging markets crises are characterized by large reversals of capital inflows and the current account, deep recessions, and collapses in asset prices. This paper proposes an open-economy equilibrium asset pricing model in which financial frictions cause Sudden Stops. Margin requirements impose a collateral constraint on foreign borrowing by domestic agents and trading costs distort asset trading by foreign securities firms. At equilibrium, margin constraints may or may not bind depending on portfolio decisions and equilibrium asset prices. If margin constraints do not bind, productivity shocks cause a moderate fall in consumption and a widening current account deficit. If debt is high relative to asset holdings, the same productivity shocks trigger margin calls forcing domestic agents to fire-sell equity to foreign traders. This sets off a Fisherian asset-price deflation and subsequent rounds of margin calls. A current account reversal and a collapse in consumption occur when equity sales cannot prevent a sharp rise in net foreign assets.
Keyword: Collateral constraints, Fisherian deflation, Emerging markets, Margin calls, Open economy asset pricing, Asset pricing, Sudden stops, Nonlinear dynamics, and Trading costs Subject (JEL): F32 - International finance - Current account adjustment ; Short-term capital movements, D52 - General equilibrium and disequilibrium - Incomplete markets, E44 - Money and interest rates - Financial markets and the macroeconomy, and F41 - Macroeconomic aspects of international trade and finance - Open economy macroeconomics