Summary of findings—Euro-area data

The model comparisons in this section do not allow us to draw decisive conclusions. Some caveats no doubt apply: the presumptions of a clearly defined monetary policy for the economy under study, which are underlying the P*-model as it is laid out in Gerlach and Svensson (2003), is not favoured by adopting an observation period which starts nearly 30 years before the intro­duction of the Euro.[85] Likewise, the ICM—with its focus on the labour market influx on inflation—is probably a better model description of the national economies than for the Euro area.



— 1-step Forecasts AWM — Dp




— 1-step Forecasts (ICM) — Dp



Pstar model

— Pstar 1-step Forecasts — Dp



Enhanced Pstar model — 1-step Forecasts — Dp




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Revisiting empirical models of Norwegian inflation

The definitions of the variables are in line with those we presented for the ICM in Chapter 9, but the sample is different and covers the period 1966(4)-1996(4). The wage variable wt is average hourly wages in the mainland economy, exclud­ing the North Sea oil-producing sector and international shipping. The produc­tivity variable at is defined accordingly. The price index pt is measured by the official consumer price index. The import prices index pit is a weighted average of import price indices from trading countries. The unemployment variable ut is defined as a ‘total’ unemployment rate, including labour market programmes. The tax-rates t1t and t3t are rates of payroll tax and indirect tax, respectively.6

The output gap variable gapt is measured as deviations from the trend obtai...

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Testing the encompassing implications

So far the NPCM has mainly been used to describe the inflationary process in studies concerning the United States economy or for aggregated Euro data. Heuristically, we can augment the basic model with import price growth and other open economy features, and test the significance of the forward infla­tion rate within such an extended NPCM. Recently, Batini et al. (2000) have derived an open economy NPCM from first principles, and estimated the model on United Kingdom economy data. Once we consider the NPCM for individual European economies, there are new possibilities for testing—since pre-existing results should, in principle, be explained by the new model (the NPCM)...

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Productivity at

Productivity growth Д^ is basically modelled as a moving average with declining weights

Дat = 0.73 — 0.76Д^_ 1 — 0.79Д^_ 2 — 0.48Да^ 3 (0.15) (0.05) (0.05) (0.10)

— 0.18ecmat — 0.06Adumt + 0.08Seasonalt_ 3 (9.10)

(0.04) (0.02) (0.01)

T = 1972(4)-2001(1) = 114

a = 1.52%

Far(i-S)(5, 102) = 0.17[0.97]

X2normality(2) = 1.23[0.54]

FHETx2 (10,96) = 0.74[0.69].

(Reference: see Table 9.2. The numbers in [..] are p-values.)

In the longer run the development is influenced by the real wage, by unem­ployment and by technical progress—proxied by a linear trend—as expressed by the equilibrium correction mechanism

ecmat = at-4 — 0.3(u> — p)t-i — 0.06wt-3 — .002Trend t.

The dummy Adumt = [i86q2]t picks up the effect of a lock-out in 1986(2) and helps whiten the residuals.

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The wage-price block of the Area Wide Model

The unique feature of the AWM is that it treats the Euro area as a single econ­omy. Since the Euro was introduced only on 1 January 1999 and the information set underlying the estimation of the model—as documented in Fagan et al. (2001)—is a constructed data set covering the period 1970(1)-1998(4), the counterfactual nature of this modelling exercise is evident.

The AWM is used for forecasting purposes and the model has been specified to ensure that a set of structural economic relationships holds in the long run. It is constrained to be consistent with the neoclassical steady-state in which the long-run output is determined via a production function by exogenous techno­logical progress and the available factors of production, where the growth rate of labour force is exogenous...

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Evaluation of interest rate rules

10.3.1 A new measure—RMSTEs

Since we set the monetary policy instrument RSt in order to make a target variable xt stay close to its target level x*, it makes sense to evaluate the rules according to how well they achieve their objective. In the theoretical literature,

image214 image215

Figure 10.3. Ex post calculations of the implied interest rates from different
interest rate rules over the period 1995(1)-2000(4).

£(xt — x*)2 = J V [x] + (x — x* )2,


Подпись: RMSTE(x)

however, policy evaluation is often based on the unconditional variance of xt, denoted V [x]. An alternative measure which puts an equally large weight on the bias of the outcome, that is, on how close the expected value of xt is to the target x*, is the RMSTE...

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