The reduced form ICM inflation equation

We derive a reduced form inflation equation for the ICM much in the same vein as for the AWM. The information set for this model is given by all variables included in the estimation of the price-unit labour cost system in Jansen (2004). The information set differs from that of the AWM on the following points: lags of changes in unit labour costs, Aulct, are used instead of lags of changes in trend unit labour costs; the changes in the wage share, Awst, the world commodity price index, Aptaw, and the GDP deflator at factor prices, Aqt, are not included; and the equilibrium-correction terms are those of the ICM,


Figure 8.6. Recursive estimates for the coefficients of the (reduced form)
AWM inflation equation

ecmpjCM and ecmulcjCM, which are derived from the estimated steady-state equat...

Read More

EqCMs vs. dVARs in macroeconometric forecasting

The development of macroeconometric models in the course of the 1980s and 1990s, with more emphasis on dynamic specification and on model evaluation, meant that the models became less exposed to the critique against earlier generations of models, namely that models that largely ignore dynamics and temporal properties of the data, will necessarily produce suboptimal forecasts; see, for example, Granger and Newbold (1986: ch. 6). At the same time, other model features also changed in response to developments in the real econ­omy, for example, the more detailed and careful modelling of the supply-side factors and the transmission mechanism between the real and financial sectors of the economy; see Wallis (1989) for an overview...

Read More

The wage-price model

We first model the long-run equilibrium equations for wages and prices based on the framework of Chapter 5. As we established in Section 5.4 the long-run equations of that model can be derived as a particular identifica­tion scheme for the cointegrating equations; see (5.19)-(5.20). Second, we incorporate those long-run equations as equilibrium correcting terms in a dynamic two-equation simultaneous core model for (changes in) wages and prices.

9.2.1 Modelling the steady state

From equations (5.19)-(5.20), the variables that contain the long-run real wage claims equations are collected in the vector [wt pt at pit ut]’. The wage variable wt is average hourly wages in the mainland economy, excluding the oil produc­ing sector and international shipping...

Read More


Remember that the model is

APt = bp1Et APt+1 + bp1 APt —1 + bp2Xt + Zpt, which can be rewritten as

n = jEtnt+1 + SxH + vpt.

The model is usually estimated by means of instrumental variables, using the ‘errors in variables’ method (evm)—where expected values are replaced by
actual values and the expectational errors:

Подпись: bp2Подпись: Ext+iint = Y^t+i + 5xt + vpt – YVt+i – (A.22)

The implications of estimating the model by means of the ‘errors in variables’ method is to induce moving average errors. Following Blake (1991), this can be readily seen using the expectational errors as follows.

1. Lead (A.15) one period and subtract the expectation to find the RE error:

3. Finally, re-express in terms of original variables, again using Apt = n + aApt-i:

Apt – aiApt-i = (— ) (Apt+i – aiApt) + ( ) xt + ( f— ) ...

Read More

Monetary analysis of Euro-area data

8.3.1 Money demand in the Euro area 1980—97

In this section, we establish that money demand in the Euro area can be mod­elled with a simple equilibrium correction model. We base the empirical results on the work by Coenen and Vega (2001) who estimate the aggregate demand for broad money in the Euro area. In Table 8.1 we report a model which is a close approximation to their preferred specification for the quarterly growth

Table 8.1

Подпись: Д(т — p)t Подпись: —0.74 (0.067) image127 Подпись: 1

Empirical model for Д(ш — p)t in the Euro area based on
Coenen and Vega (2001)

Дpant + Дpant і

— 0.36ДИЬ-_1 — 0.53 —-— t-1 — 0.01dum86t

(0.08) (0.050) 2 (0.002)

— 0.14[(m — p) — 1.140y + 1.462Дpan + 0.820(RL — RS)]t-2 (0.012)

Подпись: а0.23%

Подпись: Diagnostic tests

FAr(5, 55) =0.97[0.44]

Farch (4, 52) = 0.29[0.89]

X2cnmality(2) = 0.82[0.66]


Read More

Evaluation of monetary. policy rules

We now relax the assumption of an exogenous interest rate in order to focus on monetary policy rules. We evaluate the performance of different types of reaction functions or interest rate rules using the small econo­metric model we developed, in Chapter 9. In addition to the standard efficiency measures, we look at the mean, deviations from targets, which may be of particular interest to policy makers. Specifically, we introduce the root mean squared target error (RMSTE), which is an analogue to the well known root mean squared forecast error. Throughout we assume that the monetary policy rules aim at stabilising inflation around an infla­tion target and that the monetary authorities also put some weight on stabilising unemployment, output, and interest rates...

Read More