Fluctuations In Output Growth Research Articles

Current account dynamics: A SVAR analysis when the country‐specific shocks are correlated at leads

AbstractThe assumption of no correlation of the structural shocks as Blanchard and Quah's identification (BQ) assumes is not suitable when central banks, through discretionary policies or inflation targeting regimes, affect the output growth among other goals. In this study, we analyze the present value model of the current account (PVM) using a three‐SVAR specification and a modified BQ to identify three structural shocks: country‐specific permanent, country‐specific temporary, and global, but allowing the correlation of the domestic ones. Using Australia, Canada, Norway, and the UK, we find that those shocks are correlated and are less volatile than BQ would assume they are. The PVM predictions that hold are: (i) a positive (no) response in the current account to a country‐specific temporary (global) shock; and (ii) with the exception of Australia, there is no response in the current account to a country‐specific permanent shock. In addition, for all countries, the country‐specific temporary shock dominates current account changes but does not dominate net output growth fluctuations, which was a puzzle identified by a prior study. The role of the shock is enhanced by the modified BQ, but even with this enhancement, it still does not hold the most significant role in output variations, as indicated by PVM.

What drives aggregate investment? Evidence from German survey data

The ifo Investment Survey asks firms in the German manufacturing sector about the importance of sales, technological factors, finance, return expectations, and macroeconomic policy for their investment activity in a given year. We show that these subjective investment determinants 1) capture economically what their labels suggest, and 2) have strong explanatory power for aggregate manufacturing investment growth fluctuations. In a second step, we use these determinants to identify aggregate demand and aggregate technology shocks and argue that the bulk of the variance of both aggregate manufacturing investment and output growth fluctuations (as much as approximately two thirds in both cases) is explained by aggregate demand shocks. Consistent with neoclassical views, however, technological factors are the most important investment determinant on average.

What Drives Aggregate Investment?: Evidence from German Survey Data

The ifo Investment Survey asks firms in the German manufacturing sector about the importance of sales, technological factors, finance, return expectations, and macroeconomic policy for their investment activity in a given year. We show that these subjective investment determinants 1) capture economically what their labels suggest, and 2) have strong explanatory power for aggregate manufacturing investment growth fluctuations. In a second step, we use these determinants to identify aggregate demand and aggregate technology shocks and argue that the bulk of the variance of both aggregate manufacturing investment and output growth fluctuations (as much as approximately two thirds in both cases) is explained by aggregate demand shocks. Consistent with neoclassical views, however, technological factors are the most important investment determinant on average.

Is Industrial Production Still the Dominant Factor for the US Economy?

We propose a new class of large approximate factor models which enable us to study the full spectrum of quarterly Industrial Production (IP) sector data combined with annual non-IP sectors of the economy. We derive the large sample properties of the estimators and test statistics for the new class of unobservable factor models involving mixed frequency data and common as well as frequency-specific factors. Despite the growth of service sectors, we find that a single common factor explaining 90% of the variability in IP output growth index also explains 60% of total GDP output growth fluctuations. A single low frequency factor unrelated to manufacturing explains 14% of GDP growth. The picture with a structural factor model featuring technological innovations is quite different. Last but not least, our identification and inference methodology rely on novel results on group factor models that are of general interest beyond the mixed frequency framework and the application of the paper.

The Monetary Transmission Mechanism and Inflation Targeting: A Regime-Switching VAR Approach for Canada

This study employs a Markov-switching VAR with regime-dependent dynamics to assess the trans­mission mechanism of monetary policy in Canada. The regime-switching estimations divide the sam­ple period stochastically into two continuous regimes that corresponds to the periods before and after explicit-inflation targeting in Canada. The empirical results indicate relatively large differences in both the innovation process due to the variance component of the VAR and the propagation mech­anism due to the regime-dependent systematic component. The pre-targeting regime corresponds to much larger innovations in the macroeconomic variables and overall larger systematic responses of the macroeconomic variables to the innovation processes, suggesting a stronger monetary transmis­sion mechanism in the regime. However, variance decompositions and counterfactual analysis sug­gest that monetary policy has become more responsive to fluctuations in output growth and inflation in the target regime. Overall, about 80 per cent of the variations in the monetary policy rate in the current regime can be explained by the systematic reactions of policy to output growth and inflation at the relevant policy horizons.

Assessing the Impacts of Non-Ricardian Households in an Estimated New Keynesian DSGE Model

SummaryA New Keynesian DSGE model with non-Ricardian households is estimated for the Portuguese economy and the stability of the model’s prediction (posterior distributions, impulse responses, and sources of fluctuations in endogenous variables) tested under different assumptions on non-Ricardian households. Their share is estimated to be relatively high (58 %). Furthermore, estimates of several parameters as well as the magnitude and persistence of shocks are particularly sensitive to the share of non-Ricardian households. Impulse responses to consumption preference and productivity shocks are amplified for lower shares; for greater proportions, the model predicts more noticeable responses to price markup and government spending shocks. Fluctuations in output growth are mainly driven by productivity shocks for a lower share and by price markup shocks in the opposite scenario. A high proportion of these households together with a high degree of price stickiness lead the Taylor-type interest rate rule solution to be locally indeterminate.

Co-movement of Government Debt and Economic Growth in the Euro-area: A Bayesian Dynamic Factor Model Analysis

This paper applies a Bayesian dynamic factor model to analyze the co-movement of government debt and economic growth in 12 euro-area countries from 1970–2009. We decompose the variations in output growth and government debt into three distinct factors: (i) a common factor capturing co-movement across the 24 series in all 12 countries; (ii) a country factor common to the two series in each country; and (iii) an idiosyncratic factor specific to each series. We find that the common factor affects output growth positively but government debt negatively. Furthermore, the common factor dominates the country and idiosyncratic factors in accounting for the fluctuations in output growth and government debt, especially in the period 1999–2009 when the common factor became less volatile but more important for macroeconomic fluctuations. Our results suggest some convergence in output growth and government debt in the 12 euro-area countries after the launch of the euro.

Financial development and the magnitude of business cycle fluctuations in OECD countries

We study empirically how the development of financial systems influences the magnitude of output growth fluctuations in a sample of OECD countries between 1995 and 2005. While the development of banking sectors is not significantly related to the magnitude of macroeconomic fluctuations, countries characterized by developed stock markets experience less pronounced fluctuations.

Interpreting fluctuations in output growth in China

Unlike in OECD countries, fluctuations in output growth in China are not straightforward in their interpretation. On the one hand, they reflect the business cycle, which results from shocks to aggregate demand. On the other hand, they also reflect the structural transformations that have accompanied China’s transition to a market economy. Demand shocks can be identified by virtue of the persistence of their impact. This paper decomposes the variance in provincial, regional, and national output growth according to its persistence characteristics. The results suggest that during the reform period, only a minority of output growth variance can be attributed to demand shocks and business cycle fluctuations. It is also found that there is substantial heterogeneity in the persistence characteristics of output growth across provinces. Implications of the findings for macroeconomic policy are discussed.

The optimality of a gulf currency union: Commonalities and idiosyncrasies

A high degree of shared national elements that drive the bulk of observed output volatility between countries is generally seen as a necessary prerequisite for the formation of a successful monetary union. This is because countries in a monetary union accept a one-size-fits all, resigning regions to policies that are based on some aggregate macroeconomic target rather than a country-specific one. For this reason, the cost of monetary union membership depends on the incidence of asymmetric (nation-specific) shocks rather than symmetric, or common shocks. This criteria is examined for the Gulf Cooperation Council (GCC) countries, who reaffirmed plans for the implementation of a single currency. This paper quantifies, using structural factor models with common factor restrictions, changes in output synchronisation, the importance of common factor or idiosyncratic shocks between the regions, and the synchronisation of these shocks across the GCC as well as the implications for GCC-wide macroeconomic policy at short-to-medium term horizons. Despite current difficulties in fulfilling the convergence criteria goals to monetary union, the results show the synchronisation of output growth fluctuations between economies of the GCC to have increased over the past 25 years. This paper also finds that a fairly sizeable proportion of output fluctuations in business cycle frequencies are driven by a common component that, to some degree, reflects U.S. monetary policy and U.S. demand shocks as well as changes in crude oil prices.

On Cyclicality in the Current and Financial Accounts: Evidence from Nine Industrial Countries

The paper investigates cyclical fluctuations in the current and financial accounts of the balance of payments and major underlying components for nine industrial countries. Explanatory variables are domestic output growth, price inflation, real exchange rate fluctuations, energy price inflation, global growth, and regional growth. The evidence indicates the importance of fluctuations in output growth to the cyclicality of the current and financial balances. High domestic growth tends to stimulate financial inflows and provides adequate resources to finance a large current account deficit. Other factors appear to be less important to the cyclicality of the current and financial balances and their negative correlations.

ESTIMATED DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODEL OF THE TAIWANESE ECONOMY

Abstract. I develop a small open economy dynamic stochastic general equilibrium model to study monetary policy and the business cycle in Taiwan. Several versions of the model with different representations of Taiwanese monetary policy are estimated using Bayesian techniques. The major findings are that: (i) monetary policy in Taiwan is best described by a money supply growth rate rule; (ii) the Taiwanese economy is more flexible than the Euro area economy; and (iii) export price mark‐up and investment‐specific technology shocks are the main driving forces of output growth fluctuations in Taiwan.

On Cyclicality in the Current and Financial Accounts: Evidence From Nine Industrial Countries

The paper investigates cyclical fluctuations in the current and financial (formerly capital) accounts of the balance of payments and major underlying components for nine industrial countries. The empirical model uses as explanatory variables domestic output growth, price inflation, real exchange rate fluctuations, energy price inflation, global growth, and regional growth. The evidence from the estimation of the model indicates the importance of fluctuations in output growth to the cyclicality of the current and financial account balances. The necessary and sufficient condition to sustain a large current account deficit is high domestic growth, which tends to stimulate financial inflows and provides adequate resources for financing. Other factors appear to be less important to the cyclicality of the current and financial account balances and their negative correlations.

On Cyclicality in the Current and Financial Accounts: Evidence from Nine Industrial Countries

The paper investigates cyclical fluctuations in the current and financial (formerly capital) accounts of the balance of payments and major underlying components for nine industrial countries. The empirical model uses as explanatory variables domestic output growth, price inflation, real exchange rate fluctuations, energy price inflation, global growth, and regional growth. The evidence from the estimation of the model indicates the importance of fluctuations in output growth to the cyclicality of the current and financial account balances. The necessary and sufficient condition to sustain a large current account deficit is high domestic growth, which tends to stimulate financial inflows and provides adequate resources for financing. Other factors appear to be less important to the cyclicality of the current and financial account balances and their negative correlations.

Rational Partisan Theory: Evidence for Seven OECD Economies

According to the Rational Partisan Theory of business cycles (“RPT”), ex ante uncertainty about the outcome of elections will generate post‐election output growth fluctuations. This paper employs vote prediction equations and opinion polls to compute election win probability estimates for 62 elections in seven OECD economies. The probability estimates are used to calibrate partisan intervention terms entered in output growth regressions. For the UK and, to some extent, Canada and Australia, our results are supportive of the RPT. For the US, the calibrated intervention terms are dominated by a partisan dummy variable turned on after each election.