Consider the NPCM (with forward term only) estimated on quarterly Norwegian data:
Apt = 1.06 Apt+1 + 0.01 wst + 0.04 Apit + dummies (7.21)
(0.11) (0.02) (0.02)
x2(10) = 11.93[0.29].
The closed economy specification has been augmented heuristically with import price growth (Apit) and dummies for seasonal effects as well as special events in the economy described in Bardsen et al. (2002b). Estimation is by GMM for the period 1972(4)-2001(1). The instruments used (i. e. the variables in z1) are lagged wage growth (Awt-1, Awt-2), lagged inflation (Apt-1, Apt-2), lags of level and change in unemployment (ut-1, Aut-1, Aut-2), and changes in
The growth rate of real credit demand, Acrt, is sluggish, and it is also affected in the short run by income effects. In addition the equation contains a step dummy st for the abolition of currency controls (which again takes the value 1 after 1990(3) and (0) before) and a composite dummy variable
CRdumt = [0.5i85q3 + i85q4 + 0.5i86q1 + i87q1 + P dum]t
to account for the deregulation of financial markets.
Acrt = — 0.26 + 0.17Acrt_ i + 0.42Acrt_ 2 + 0.10Ayt (0.05) (0.06) (0.06) (0.02)
— 0.27ARLt_i — 0.026ecmcrt + 0.015CRdumt — 0.006st (9.11) (0.12) (0.005) (0.002) (0.002)
T = 1972(4)-2001(1) = 114
a = 0.61%
F ar(i-5)(5, 101) = 0.52[0.75] xLmality(2) = 0.06[0.97]
Fhetx2(13, 92) = 0.94[0.51].
(Reference: see Table 9.2. The numbers in [..] are p-values.)
The long-run properties are tho... Read More
Table 10.2 shows the results from a series of counterfactual model simulations. For each interest rate rule we show the bias, standard deviation, and RMSTE measured relative to a baseline scenario. The baseline is the results we obtain for the variables from a model simulation where the interest rate is kept equal to actual sample values.
Flexible and strict rules The least volatile development in interest rates is seen to follow from the strict targeting rule (ST). The sharp rise in output growth in 1997 is reflected in the volatility of the interest rates implied by the flexible rule (FLX) and the smoothing rule (SM). The FLX rule puts three times more weight on inflation than on output growth. Table 10... Read More
The ICM equation for aggregate consumer price inflation in Table 8.12 contains three key sources of inflation impulses to a small open economy: imported inflation including currency depreciation (a pass-through effect), domestic cost pressure (unit labour costs), and excess demand in the product market. Monetary shocks or financial market shocks may of course generate inflation Read More
impulses in situations where they affect one or more of the variables associated with these inflation channels. In this section, we will investigate another possibility, namely that shocks in monetary or financial variables have direct effects on inflation which have been neglected in the ICM...
The dominance of EqCMs over systems consisting of relationships between differenced variables (dVARs) relies on the assumption that the EqCM model coincides with the underlying data generating mechanism. However, that assumption is too strong to form the basis of practical forecasting. First, parameter non-constancies, somewhere in the system, are almost certain to arise in the forecast period. The example in Section 11.2.1 demonstrated how allowance for non-constancies in the intercept of the cointegrating relations, or in the adjustment coefficients, make it impossible to assert the dominance of the EqCM over a dVAR... Read More