Policy Regime Change Research Articles

Agricultural policy regime change assessment: Austrian accession to the European union

Policy regime change evaluation involves assessing what would have been had the policy not changed. In this paper, we empirically assess the impact on Austrian pig producers of the 1995 decision of Austria to join the European Union. Applying a recently developed Hausman-Wu-Type cointegration test, we confirm the existence of a cointegrating relationship between Austrian and EU pig prices series. This rela- tionship is used to forecast the counterfactual time path of prices. Within an expected utility framework, we compute the Austrian producer's willingness to pay to remain under the pre-accession policy. Accounting for the dual income and insurance effects, we found producers to have been under-compensated. Conventional welfare measures which do not include the insurance component would significantly underestimate the total welfare impact.

Implementing transition management as policy reforms: a case study of the Dutch energy sector

Proposals to alter large-scale socio-technical systems through government actions in order to promote goals such as sustainability are highly uncertain policy projects. What is being proposed is the replacement of specific elements of existing policy ‘mixes’—the goals and means—by others, in the expectation of avoiding counterproductive or sub-optimal policy outcomes. While laudable, such efforts are fraught with risks; including the possibility of the creation of sub-optimal policy mixes or of failed reform efforts with resulting poor outcomes. This article develops a model and typology of policy regime change processes and outcomes following Thelen and others in arguing that complex policy mixes typically emerge through one or more of four processes, ‘drift’, ‘conversion’, ‘layering’ and ‘replacement’, and that the expected outcomes of these different processes in terms of their ability to meet initial expectations are linked to the manner in which policy goals and means are (or are not) combined in a consistent, coherent and congruent fashion. This propensity is illustrated through examination of the case of energy transition management as practiced in the Netherlands.

Manitoba: From provincial-based planning to localised Aboriginal governance

Policy change in Manitoba's integrated land use management can be characterized by three distinct phases: 1993–2000, 2000–2004, and 2004–2008. The first period was dominated by an ambitious province-wide planning initiative that intended to implement broad sustainable development principles. These ideals were carried over into an area specific initiative known as the East Side of Lake Winnipeg Planning Initiative. In the final phase, there was a significant shift in the number and type of actors involved as well as the planning goals which shifted from implementation of sustainable development to enhancing Aboriginal governance capacity. This case study presents the policy change in Manitoba's land management policy regime as a process of “policy layering” followed by “policy conversion.”

How Robust Are Popular Models of Nominal Frictions?

This paper analyzes three popular models of nominal price and wage frictions to determine which best fits post-war U.S. data. We construct a dynamic stochastic general equilibrium (DSGE) model and use maximum likelihood to estimate each model's parameters. Because previous research finds that the conduct of monetary policy and the behavior of inflation changed in the early 1980s, we examine two distinct sample periods. Using a Bayesian, pseudo-odds measure as a means for comparison, a sticky price and wage model with dynamic indexation best fits the data in the early-sample period, whereas either a sticky price and wage model with static indexation or a sticky information model best fits the data in the late-sample period. Our results suggest that price- and wage-setting behavior may be sensitive to changes in the monetary policy regime. If true, the evaluation of alternative monetary policy rules may be even more complicated than previously believed.

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.

Great Expectations and the End of the Depression

This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt's policy actions. On the monetary policy side, Roosevelt abolished the gold standard and—even more importantly—announced the explicit objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending, which made his policy objective credible. These actions violated prevailing policy dogmas and initiated a policy regime change as in Sargent (1983) and Temin and Wigmore (1990). The economic consequences of Roosevelt are evaluated in a dynamic stochastic general equilibrium model with nominal frictions. (JEL D84, E52, E62, N12, N42)

Has exchange rate pass-through really declined? Evidence from Canada

Several empirical studies suggest that exchange rate pass-through has declined in recent years among industrialized countries. Results for Canada also indicate that import and consumer prices have become less responsive to exchange-rate movements in the 1990s. These findings are based on reduced-form regressions that are typically motivated by partial-equilibrium models of pricing. This paper uses instead a structural, general-equilibrium approach to test the premise that exchange rate pass-through has decreased in Canada. Our approach consists in estimating a dynamic stochastic general-equilibrium model for Canada over two sub-samples, which cover the periods before and after the adoption of inflation targeting by the Bank of Canada. We then use impulse-response analysis to assess the stability of exchange rate pass-through across the two sub-samples. Our results indicate that pass-through to Canadian import prices has been rather stable, while pass-through to Canadian consumer prices has declined in recent years. Counterfactual experiments reveal that the change in monetary policy regime is largely responsible for this decline.

A Market Based Approach to Inflation Expectations, Risk Premia and Real Interest Rates

In this paper we approach the inflation expectations and the real interest rate by using the information contain in the yield curve. We decompose nominal interest rates into real risk-free rates, inflation expectations and risk premia using an affine model that takes as factors the observed inflation rate and the parameters generated in the zero yield curve estimation. Under this approach we could obtain a measure of inflation expectations free of any risk premia. Moreover in our estimation we avoid imposing arbitrary restrictions as is mandatory under other methodologies based on unobserved components. The empirical exercise has been applied to an economy - like the Spanish one during the 90's - with an important convergence process and a change in the monetary policy regime. The results suggest that the evolution of inflation expectations has been smoother than was expected.

Inflation persistence during periods of structural change: an assessment using Greek data

The paper estimates inflation persistence in Greece from 1975 to 2003, a period of high variation in inflation and changes in policy regimes. Two empirical methodologies, univariate autoregressive (AR) modelling and second-generation random coefficient (RC) modelling, are employed to estimate inflation persistence. The empirical results from all the procedures suggest that inflation persistence was high till 1996, while it started to decline after 1997, when inflationary expectations seem to have been stabilised, and thus, monetary policy was effective at reducing inflation. Empirical findings also detect a sluggish response of inflation to changes in monetary policy. This observed delay seems to have changed little over time.

A regime switching approach to the Feldstein–Horioka puzzle: Evidence from some European countries

The domestic savings-investment correlation is re-examined using data for some European countries in order to obtain some information about the degree of capital mobility in the sense of the Feldstein and Horioka [Feldstein, M., & Horioka, C. Y. (1980). Domestic saving and international capital flows. Economic Journal 90, 314–329]. Applying a Markov-switching model with heteroscedastic disturbances, we find that the correlation coefficients are unstable due to the policy regime changes consistent with the Lucas [Lucas, R. (1976). Econometric policy evaluation: A critique. In K. Brunner, & A. H. Meltzer (Eds.), The Phillips curve and labor markets. Amsterdam: North-Holland] critique.

Endogenous Monetary Policy Regime Change

This paper makes changes in monetary policy rules (or regimes) endogenous. Changes are triggered when certain endogenous variables cross specified thresholds. Rational expectations equilibria are examined in three models of threshold switching to illustrate that (i) expectations formation effects generated by the possibility of regime change can be quantitatively important; (ii) symmetric shocks can have asymmetric effects; (iii) endogenous switching is a natural way to formally model preemptive policy actions. In a conventional calibrated model, preemptive policy shifts agents' expectations, enhancing the ability of policy to offset demand shocks; this yields a quantitatively significant "preemption dividend."

Monetary policy and long-term US interest rates

This paper assesses the effect of federal funds rate innovations on longer-term US nominal interest rates across different periods. The evidence suggests that these responses change with changes in the monetary policy regime. Time periods considered are pre- and post-1979 and different Federal Reserve Chairman’s tenure. The response of longer-term interest rates to federal funds rate innovations are shown to be smaller and less persistent in the post-1979 period when the Federal Reserve placed more emphasis on inflation.

Euro area inflation persistence

This paper presents evidence on the lag between monetary policy actions and the response of inflation in the euro area as a whole as well as in some of its core countries, notably Germany, Italy and France. In line with previous findings for the US and the UK, results here show that it takes over a year before monetary policy actions have their maximum effect on inflation both in the euro area and in individual countries and that a lag of this length has existed in Europe at least since the collapse of the Bretton Woods system, despite the numerous changes in European monetary policy regime thereafter. Results based on alternative definitions of inflation persistence support these findings and indicate, if any, that transmission lags could be in fact much longer for individual countries and the euro area as a whole, although, at the country level, there is strong evidence over time of a drop in German inflation persistence and a sizeable shift in the mean of inflation – particularly in Italy and France. An examination based on results from this paper reveals that euro area inflation persistence could well be an intrinsic phenomenon rather than a ‘statistical fluke’ due to aggregation.

Economic policies and demand for money: evidence from Canada

This study identifies Canadian fiscal and monetary policy regime changes that could influence the services of money. It is argued that if these policy regime changes were not incorporated in the estimation of demand for real balances, the resulting estimate would be biased and unstable. Using Canadian monthly data for the January 1975 to June 2001 period, the paper estimates a standard demand-for-money (M1) function with and without these policy regime changes. It was found the demand for money in Canada is stable over the short- and long-run periods when these policy regime changes are incorporated and the estimated coefficients have correct signs.

The saving‐investment relationship in periods of structural change

Purpose – To study the dynamic relationship between saving‐investment in Greece during a period of structural changes with policy regime changes employing different methods of estimation.Design/methodology/approach – Different empirical methods are used to estimate the time varying savings retention coefficient. A recursive OLS, rolling OLS, Kalman filter estimator and Markov switching regime modeling (MS‐R) are applied which have the advantage to capture the dependence structure of the series both in terms of constant and variance.Findings – The empirical evidence suggests that the degree of correlation between saving and investment weakens during financial liberalization periods.Practical implications – Conclusions drawn from this analysis could be useful for the analysis of other medium‐sized economies.Originality/value – The paper employs four different estimation models to test the stability of the estimated coefficient. The MS‐R is used, for the first time, to take into account the policy regime cha...

Endogenous Monetary Policy Regime Changes

Endogenous Monetary Policy Regime Changes

Endogenous Monetary Policy Regime Change [with Comments

Endogenous Monetary Policy Regime Change [with Comments

Taxa de câmbio social e abertura comercial

O objetivo geral deste artigo é avaliar o impacto da abertura comercial brasileira na taxa de câmbio social. O seu objetivo específico é desenvolver e calcular uma medida apropriada para a taxa de câmbio social a ser utilizada na análise de projetos de investimentos no Brasil. Utilizando um modelo de custo de oportunidade da divisa para estimar taxa de câmbio social, o estudo conclui que não houve alteração importante no ordenamento das atividades econômicas segundo o grau de proteção efetiva. A tendência declinante da taxa de câmbio social é resultado da abertura comercial iniciada no final dos anos oitenta e da mudança da política cambial brasileira de janeiro de 1999.

Policy Predictions If the Model Does Not Fit

Abstract: This paper uses a novel method for conducting policy analysis with potentially misspecified DSGE models (Del Negro and Schorfheide 2004) and applies it to a simple New Keynesian DSGE model. We illustrate the sensitivity of the results to assumptions on the policy invariance of model misspecifications. JEL CLASSIFICATION: C32, E5 KEY WORDS: Bayesian Analysis, DSGE Models, Misspecification Policy Analysis. 1 Introduction Despite recent successes in improving the empirical performance of dynamic stochastic general equilibrium (DSGE) models, e.g., Smets and Wouters (2003), even large-scale DSGE models su[R]er to some extent from misspecification (see Del Negro, Schorfheide, Smets, and Wouters 2004). In this paper misspecification means that the DSGE model potentially imposes invalid cross-coe[+ or -]cient restrictions on the moving-average representation of the macroeconomic time series that it aims to explain. As a consequence, one typically observes that the forecasting performance of DSGE models is worse than that of vector autoregressions (VARs) estimated with well-calibrated shrinkage methods. On the other hand, DSGE models have the advantage that one can explicitly assess the e[R]ect of policy regime changes on expectation formation and decision rules of private agents. Thus, policy analysis with DSGE models is robust to the Lucas critique and potentially more reliable than conclusions drawn from VARs. This trade-o[R] poses a challenge to policymakers who want to use DSGE models in practice. Del Negro and Schorfheide (2004a) proposed a framework that combines VARs and DSGE models, extending earlier work by Ingram and Whiteman (1994). In this framework DSGE model restrictions are neither completely ignored as in the unrestricted estimation of VARs, nor are they dogmatically imposed as in the direct estimation of DSGE models. Instead the VAR estimates are tilted toward the restrictions implied by the DSGE model, where the degree of tilting is determined by a Bayesian data-driven procedure that trades o[R] model fit against complexity. Del Negro and Schorfheide (2004a) show that priors arising from the same model used in this paper improve both the in-sample and out-of-sample fit of a VAR. In ongoing research (Del Negro and Schorfheide, 2004b) we build upon our earlier work and further develop procedures that are suitable to study the e[R]ects of rare regime shifts with potentially misspecified DSGE models. These procedures can be viewed as a Bayesian alternative to the robust control and minimax approaches that recently have been proposed to cope with model misspecification, e.g., Hansen and Sargent (2000) and Onatsky and Stock (2002). One advantage of Bayesian procedures is that the policymaker can learn from existing data about the extent of the DSGE model's misspecification, and consequently adjust her policies. The present paper applies these procedures to a simple New Keynesian DSGE model. We illustrate that conclusions about the e[R]ects of changing the response to inflation are sensitive to assumptions about the policy invariance of observed discrepancies between model and reality. Section 2 briefly describes the DSGE model. In Section 3 we outline our framework, Section 4 discusses our findings, and Section 5 concludes. 2 The DSGE Model Starting point is a DSGE model in log-linearized form. The model used here is a standard New Keynesian DSGE model, e.g., Woodford (2003), which we now briefly describe (see Del Negro and Schorfheide (2004a) for details). The log-linearized equilibrium conditions consist of three equations in nominal interest rates [[??].sub.t], output [[??].sub.t], and inflation [[??].sub.t] ([sup.~] denotes percentage deviations from the steady state and [DELTA] is the temporal difference operator): Monetary Policy Rule: [[??].sub.t] = [rho]R [[??].sub.t-1] + (1-[rho]R) [[psi].sub.1] [[??]. …

Skill-Sorting, Self-Selectivity, and Immigration Policy Regime Change: Two Surveys of Chinese Graduate Students' Intention to Study Abroad

Skill-Sorting, Self-Selectivity, and Immigration Policy Regime Change: Two Surveys of Chinese Graduate Students' Intention to Study Abroad by Yiu Por Chen. Published in volume 95, issue 2, pages 66-70 of American Economic Review, May 2005