Long-run Response Research Articles

Nominal and real effective exchange rates of middle eastern countries and their trade performance

Indexes of real and nominal effective exchange rates that are published by the IMF, are mostly for industrial countries. None of the Middle Eastern countries have received any attention on this regard. This paper tries to close the gap by constructing such indexes for 11 middle eastern countries over 1971(I)–1994(IV) period. As an application, long-run response of their trade balance to devaluation is also investigated.

Transitional dynamics in a two-sector non-scale growth model

Abstract This paper shows how, under plausible conditions, the transitional dynamics in a two-sector R&D-based non-scale growth model are represented by a two-dimensional stable saddlepath, thus enriching the transitional adjustment paths relative to that of the standard two-sector endogenous growth model. The transition speed itself is variable both through time and across sectors. Capital and knowledge grow at very different rates, consistent with the empirical evidence. Numerical simulations are used to characterize the transition paths in response to a range of specific shocks. In some cases, capital or knowledge may overshoot their respective long-run responses, during the transitional dynamics.

A Comparison of the Properties of NZM and FPS

The New Zealand Treasury and the Reserve Bank of New Zealand both maintain and use comprehensive macroeconomic models of the New Zealand economy: NZM and FPS respectively. In this paper, shocks are applied to the two models to illustrate and compare their dynamic properties. The most notable differences arise from their characterisations of the inflation process. In NZM, inflation is modelled as a cost-push phenomenon, whereas FPS models inflation as a demand pull process. Consequently, shocks arising from demand and cost sources often have quite different implications for monetary policy in the two models. In contrast, in general the long-run responses of the models to permanent shocks are quite similar, although the transition paths differ reflecting both the differing inflation processes and adjustment dynamics.

Structure and dynamics of non-suburban passenger travel demand in Indian railways

In this paper we derive long run structural relationships for all the three classes, viz. upper, second and ordinary second class, of non-suburban long distance passenger transport demand for Indian railways using annual time series data for 1970–1995. We employ some of the recent developments in multivariate dynamic econometric time series modeling including estimation of long-run structural cointegrating relationships, short-run dynamics and measurement of the effects of shocks and their persistence on evolution of the dynamic passenger transport demand system. The models are estimated using a cointegrating vector autoregressive (VAR) modeling framework, which allows for endogeneity of regressors. The demand systems are found to be stable for all the classes in the long run and they converge to equilibrium in a period of around 2–4 years after a typical system-wide shock. Any disequilibrium in the short-run is corrected in the long-run with adjustments in passenger transport demand and the price variable, i.e. real rate charged per passenger kilometer. Results show that travel demand in all classes would rise with income, although the rise is less than proportionate in the case of ordinary class. High price elasticity in long-run and short-run impulse responses indicate that passenger fare hike could lead to substantial decline in travel demand leading to decline in revenue earnings of the railways.

Some Issues in the Empirical Specification of Federal Reserve Reaction Rules

Simple estimated monetary policy reaction rules of the Taylor rule type have recently become a popular way to describe and interpret monetary policy. Empirical implementation of such rules always involves a partial adjustment component which captures inertia in the Federal funds rate. Looking at the period since 1980, in many ways a single monetary policy regime, I show that the inertial component of monetary policy is larger in the 1990s than in the 1980s. This means that the estimated short-run response of the Fed to inflation is quite small, raising questions about the credibility with the public of such a rule. Furthermore, the adjustment parameter is quite close to its limiting value of 1, creating instability in the estimated long-run responses. The increased inertia may be related to the Fed's concern about the impact of its decisions on financial markets.

Permanent and transitory shocks on real and nominal exchange rates in Turkey during the post-1980 period

With the adoption of export-led growth and a liberal exchange rate regime in a post-1980, high-inflation country like Turkey, it becomes important to measure the relative importance of permanent and temporary shocks on real and nominal exchange rates (RER and NER, respectively) and the decomposition of the RER into these two components. This task was undertaken by using a structural vector autoregressive approach which entailed restricting the long-run response of the RER only to real shocks. Both the bilateral and the effective rates were considered. For the post-1980 period, several discoveries were made. First, except for Italy, real shocks were dominant in explaining the fluctuation in the RER. Second, the changes in the price ratio determined the permanent component in the RER, again, with the exception of Italy. Third, it takes three to four years for both the RER and the NER responses to reach their permanent levels.

Some experiments in constructing a hybrid model for macroeconomic analysis

VAR analysis is a widespread method of quantitatively analyzing macroeconomic issues. In this paper we examine the use of “hybrid” VAR models that retain the short-run features of a VAR but are designed to reproduce selected characteristics of calibrated models that are frequently used for the simulation of policy actions. The calibrated model we use is the McKibbin-Sachs Global (MSG2) model of the world economy. For permanent shocks we constrain the long-run responses in the hybrid model to match those from MSG2. For transitory shocks we match shorter-run cumulative responses. The estimated effects of a permanent US money-supply shock are broadly consistent with those of MSG2, but differ in some dimensions from those obtained from a standard recursive VAR.

Improved Multiple Comparisons with a Control in Response Surface Analysis

Quadratic response surface methodology often focuses on finding the levels of some (coded) predictor variables x = (x 1, x 2,…, x k) that optimize the expected value of a response variable y. Typically the experimenter starts from some best guess or “control” combination of the predictors (usually coded to x = 0) and performs an experiment varying them in a region around this center point. The question of interest addressed here is whether any x in the experimental region provides a long-run mean response E(y) preferable to that of the control, and if so, by what amount? This article approaches this question via simultaneous confidence intervals for δ(x) = E(y|x) = E(y|0) for all x within a specified distance of 0. A new method for two or more predictors is introduced that gives sharper intervals than the Scheffe method and also the Sa and Edwards adaptation of the Casella and Strawderman method. The new method does not require a rotatable design and allows for one-sided simultaneous bounds for δ(x). Appr...

Improved Multiple Comparisons With a Control in Response Surface Analysis

Quadratic response surface methodology often focuses on finding the levels of some (coded) predictor variables x = (x 1, x 2,…, x k) that optimize the expected value of a response variable y. Typically the experimenter starts from some best guess or “control” combination of the predictors (usually coded to x = 0) and performs an experiment varying them in a region around this center point. The question of interest addressed here is whether any x in the experimental region provides a long-run mean response E(y) preferable to that of the control, and if so, by what amount? This article approaches this question via simultaneous confidence intervals for δ(x) = E(y|x) = E(y|0) for all x within a specified distance of 0. A new method for two or more predictors is introduced that gives sharper intervals than the Scheffé method and also the Sa and Edwards adaptation of the Casella and Strawderman method. The new method does not require a rotatable design and allows for one-sided simultaneous bounds for δ(x). Approximate sample-size savings of the improved method over the Sa and Edwards adaptation of the Casella and Strawderman method ranged from 12%–45% for two-sided intervals and 19%–40% for one-sided intervals for designs with two or three predictors. Approximate sample-size savings of the improved method over the Scheffe method ranged from 14%–47% for two-sided intervals and 22%–62% for one-sided intervals.

Fractionally Integrated Models With ARCH Errors: With an Application to the Swiss 1-Month Euromarket Interest Rate

We introduce ARFIMA-ARCH models, which simultaneously incorporate fractional differencing and conditional heteroskedasticity. We develop the likelihood function and we use it to construct the bias-corrected maximum (modified profile) likelihood estimator. Finite-sample properties of the estimation procedure are explored by Monte Carlo simulation. Backus and Zin (1993) have motivated the existence of fractional integration in interest rates by the persistence of the short rate and the variability of the long end of the yield curve. An empirical investigation of a daily one-month Swiss Euromarket interest rate finds a difference parameter of 0.72. This indicates non-stationary behavior. In contrast to first-order integrated models, the long-run cumulative response of shocks to the series is zero.

Non-stationarity and structural breaks in mineral price and supply historical series

Mineral commodity prices and, to a lesser extent, supply have typically experienced substantial fluctuations as well as sudden, largely unanticipated, breaks. Instability has severe consequences in term of returns on mining investment and the balance of payments of the countries concerned. Studies on commodity instability ignore non-stationarity and tend to focus on relatively short time series. Other studies, that investigate whether economic variables behave as random walks or as mean-reverting series, seldom pay attention to structural breaks, end mainly examine macroeconomic variables. Following an overview of historical and methodological issues, which have raised different interpretations, an IO-ADF model is applied to metal price end supply series. Result lend support to both views on the long-run response of these variables to major historical shocks, depending on the metal.

Testing the long-run response in time series environmetric and econometric models

Time series models are a common tool in both environmetrics and econometrics. Dynamic effects are accommodated by the inclusion of lagged variables. Tests of null hypotheses involving 'long-run' effects are not invariant and, surprisingly, the most commonly used form involves a non-linear hypothesis when an equivalent linear form is available. As examples we study a simple hydrological model of river flow, a simple electricity demand model and a number of artificially constructed data sets designed to illustrate the issues in a Monte Carlo context. We conclude that the differences due to test form may be large and (a) when it makes a difference, the linear form is to be preferred in terms of accuracy of test size; (b) even with the linear form, with trended data the size distortion may be so large that it may be necessary to simulate critical values for each problem; and (c) if the persistence in the dependent variable is large, test power can be very low.

Efficient Intertemporal Utility Pricing under Uncertainty

Electric utilities today face increasing competition from substitutes for utility-generated power. As a result, utilities are being forced to reevaluate their pricing policies to address competition from other fuels and potential customer ‘bypass’ of the utility. This paper extends the analysis of second-best utility pricing to explicitly account for both the short- and long-run price responses of customers with competitive alternatives to utility-generated power. The presence of long-run substitution opportunities reduces the optimal percentage mark-up of price over marginal cost for noncore customers. Uncertainty concerning the substitution response of noncore electricity customers also tends to reduce the optimal price mark-up. © 1997 John Wiley & Sons, Ltd.

Fares, Service Levels, and Demographics: What Determines Commuter Rail Ridership in the Long Run?

Using panel data covering a 13-year period, this paper examines the roles of transportation policy and demographic changes in determining rail ridership. The paper presents a model which allows identification of long-run responses of ridership to changes in prices and service independently of exogenous shocks to ridership caused by demographic factors. Long-run price and service elasticities are estimated to be almost twice as large as short-run elasticities. After controlling for transportation prices and service levels, demographic variables contribute little to explaining residual differences in ridership. To the extent that demographic changes are driven by transportation variables, these effects are captured in the estimated long-run elasticities.

Are Tax Effects Important in the Long-Run Fisher Relation? Evidence from the Municipal Bond Market

Recent studies of the Fisher relation have yielded contradictory conclusions on the importance of taxes in determining the long-run response of nominal interest rates to changes in expected inflation. This study uses data on taxable U.S. treasury and tax exempt municipal bond interest rates to shed light on the effects of inflation on nominal interest rates.

Correction: Posterior Properties of Long-Run Impulse Responses

Correction: Posterior Properties of Long-Run Impulse Responses

TAXES, CAPITAL GAINS REALIZATIONS, AND REVENUES: A CRITICAL REVIEW AND SOME NEW RESULTS

Reviews the current state of research on the relationship between capital gains realization and the capital gains tax rate and offers a theoretical framework to guide future empirical research. Concludes that realizations are probably quite responsive to the tax rate in the short run, but that little is known about the long-run response.

Taxes, housing, and capital accumulation in a two-sector growing economy

It is sometimes argued that the favorable tax treatment afforded to housing may lead to an oversupply of housing at the expense of capital. This issue is examined in the context of a growing two-sector economy. In the basic model where the rate of time preference is constant and labor is instantaneously sectorally mobile, the long-run response of the capital stock to a tax on housing depends upon the relative capital intensities of the two sectors, while the long-run relative asset price of housing remains unchanged. The robustness of these propositions to changes in the model are considered. Taxes on capital are also analyzed.

Aliternative methods for estimating long-run responses with applications to australian import demand

This paper compares and contrasts a number of single-equation and systems estimators of long-run responses with application to a three-variable import demand model. Two variants of Box and Tiao's (1977) canonical estimator are developed and associated tests for the number of cointegrating vectors are introduced. A simulation study indicates that, while both Box-Tiao estimators have empirical distributions with fatter tails than the normal, there is evidence that the incidence of extreme values is even greater with Johansen's (1988) ML procedure.

Persistence profiles and business cycle fluctuations in a disaggregated model of U.K. output growth

This paper builds on recent work dealing with the measurement of the long-run response of output to different types of shocks at a multisectoral level. The paper re-examines the issues that surround the identification of shocks to particular sectors in a multisectoral model, and proposes “persistence profiles” of shocks as a method of carrying out impulse response analysis in multivariate systems. It is shown that, unlike the impulse response analysis familiar in the literature, the proposed “persistence profiles” are robust to the alternative parameterization of the underlying moving average representation. The analysis is applied to a simple multisectoral model of U.K. output growths, disaggregated by eight industrial sectors.