Akhter Faroque

Financing constraints and firm heterogeneity in investment behaviour: an application of non-nested tests

Estimating an extended qmodel against Canadian panel date it is demonstrated that the usual practice of conditioning tests of financing constraints on the a priorisorting of firms into financially constrained and unconstrained groups may lead to spurious inference about the existence of credit rationing. The sample sorting bias is minimized by empirically determining the best sorting criterion. The results reveal that while liquidity is the most important and robust determinant of corporate investment, the data do not support critical predictions of either the underinvestment or the overinvestment theories.

Causality and the Structure of Canada's Balance of Payments: Evidence from Time Series

Recent historical data on Canadas balance of payments reveals a persistent pattern of current account deficits and capital account surpluses. The theoretical interpretation and significance of this recurrent pattern are controversial issues among economists. The essence of this debate is, in our view, a disagreement of a more fundamental nature concerning the underlying causal relationship between the current and capital accounts. Three different causal viewpoints are identified and discussed. Then, an empirical investigation using both bivariate and multivariate time series analysis is conducted in order to help discriminate among the viewpoints. Our findings strongly suggest a feedback relation between the current and the long-term capital account indicating that unidirectional causal viewpoints are inconsistent with the Canadian experience.

An investigation into the demand for alcoholic beverages in Canada: a choice between the almost ideal and the Rotterdam models

In this article I investigate the historical pattern of interactions in the demand for three categories of alcoholic beverages in Canada, using both the differential Almost Ideal and the differential Rotterdam demand systems. I evaluate these models based on several decision criteria including model encompassment (based on the J-test), structural stability, conformity with demand theory and the credibility of the estimated price and income responses, in an attempt to determine which of these models is better suited for explaining the demand for alcoholic beverages. The results reveal that both models satisfy the restrictions of demand theory and of structural stability but the Rotterdam model is preferable on grounds of the remaining two criteria.

Inflation regimes and the stability of the pass-through of wages to consumer prices in Canada

This article has formally identified distinct historical inflation regimes in Canada since 1961 in order to facilitate an investigation of the impact of regime changes on the wage-price dynamics in the economy. Both in and out-of-sample evidence suggest that wage growth exerts an influence on inflation only during a high-inflation regime but inflation exerts a more systematic and quantitatively stronger influence on wage growth regardless of the prevailing inflation regime. Overall, the results do not support either the ‘cost-push’ view of inflation or the ‘new view’ that claims that increased globalization during the 1990s has reduced the feedback from wage growth to inflation by weakening the bargaining power of workers.

Have Structural Changes Eliminated the Out-of-Sample Ability of Financial Variables To Forecast Real Activity After the Mid-1980s? Evidence From the Canadian Economy

This article evaluates how consistently reliable the information content of individual financial variables is for Canadas future output growth. We estimate the timing of structural changes in linear growth models and check robustness to specification changes, multiple breaks, and business cycle asymmetry. Our simulated out-of-sample forecast evaluation strategy, using the Mean Square Error F-type (MSE-F) and the new encompassing (ENC-NEW) tests, shows that the leading information content of most financial variables for Canadas future Gross Domestic Product (GDP) growth has deteriorated substantially after 1984:04, but the 1–3-year term spread exhibits a consistently reliable predictive ability at the 1 and 2 quarter horizons and has significant forecasting ability at the 8 quarter horizon. Also, the real M1 money growth has regained its ability to forecast output growth since 1991:01.

What determines business fixed investment? Evidence from the Canadian economy

Business fixed investment in Canada is shown to be more closely related to profitability than to stock market valuation and multifactor productivity as proxy for technology shocks.

Fundamentals versus the leading index-the forecasting of Canada's output growth since 1991: an encompassing approach

We evaluate the ability of Statistics Canadas Composite Leading Index to forecast Canadas real Gross Domestic Product (GDP) growth rate in the backdrop of the Duguay (1994, JME) model and also the dynamic and the error-correction variants of the Duguay model, that already include the ‘fundamentals’ of the Canadian business cycle. The results show that integrating the index in these models substantially improve the in-sample fit of the models and also provide an explanation for the ‘perplexingly’ large influence of the US real GDP on aggregate spending in the Canadian economy. Out-of-sample forecasts over the inflation-targeting regime (January 1991–April 2004), evaluated using the forecast encompassing tests, confirm that the index contains an important amount of new information about the future growth rate, quite apart from the information contained in the fundamentals.

An evaluation of excess demand, actual cost and normal cost pricing hypotheses using non-nested tests

This paper has emperically analyzed three versions(zero lag,geometric lag and almon lag) of three price change hypotheses – namely the excess demand, actual cost and the normal cost hypothesis – the goal being to select the hypothesis that describes the underlying price dynamics for manufactured goods. The rival models are specified as non-nested alternatives and each version is estimated by using an efficient estimator. The traditional discrimination criteria which clearly reject the zero lag version, are found to be impotent in discriminating between the dynamic versions of the models. A sequential cross-evaluation of the two dynamic versions using both pairwise and multiple non-nested hypothesis tests proposed by Davidson and MacKinnon reveals a systematic domination by the almon version of normal cost pricing over both the excess demand and the actual cost pricing mechanisms in the Canadian manufacturing sector during the period 1961:1–87:4. This result is robust under alternative specifications of th...