Ali Anari

House Prices and Inflation

The present paper examines the long-run impact of inflation on homeowner equity by investigating the relationship between house prices and the prices of nonhousing goods and services, rather than return series and inflation rates as in previous empirical studies on the inflation hedging ability of real estate. There are two reasons for this methodological departure from prior practice: (1) while the total return on housing cannot be accurately measured, the total return on housing is fully reflected in housing prices, and (2) given that using returns or differencing a time series leads to a loss of long-run information contained in the series, valuable long-run information can be captured by using prices. Also, unlike previous related studies, we exclude housing costs from goods and services prices to avoid potential bias in estimating how inflation affects housing prices. Monthly data series are collected for existing and for new house prices as well as the consumer price index excluding housing costs for the period 1968-2000. Based on both autoregressive distributed lag (ARDL) models and recursive regressions, the empirical results yield estimated Fisher coefficients that are consistently greater than one over the sample period. Thus, we infer that house prices are a stable inflation hedge in the long run. Copyright 2002 by the American Real Estate and Urban Economics Association.

The Effects of Securitization on Mortgage Market Yields: A Cointegration Analysis

Securitization of the residential mortgage market has completely transformed the process of financing home loans in the U.S. over the last two decades. We examine the effects of securitization on yield spreads in the primary mortgage market. Cointegration techniques are employed to test the relationship between the increasing volume of mortgage securities over time and the yield spread on mortgage loan rates. We find that a 10% increase in the level of mortgage securitization as a proportion of total mortgage originations decreases yield spreads on home loans by as much as 20 basis points. Other results indicate that, while prepayment speed has a significant effect on mortgage yield spreads, default risk does not. We conclude that securitization of the residential mortgage market plays an important role in decreasing the cost of home loans. Copyright American Real Estate and Urban Economics Association.

Further Evidence on the Credit View: The Case of Finland

The present paper provides further empirical evidence on the credit view (i.e., bank credit availability has a positive impact on macroeconomic activity) by investigating the case of Finland. The Finnish economy suffered a severe recession in the early 1990s that was marked by widespread banking crisis and extensive government intervention. Using monthly data for the 1980–1996 period, unrestricted and restricted vector autoregression (VAR) models with GDP, money supply, consumer prices, bank credit, and exports were estimated. It is found that, while money supply had the largest effect on economic output, bank credit exhibited a fairly strong effect on output that exceeded price effects for the most part. Exports had little impact on fluctuations in GDP but did help to explain industrial output changes over time. Based on these results, it is concluded that there is empirical support for the credit view in Finland. By implication, government intervention in Finland to restore safety and soundness during the banking crisis likely limited further damage to the macroeconomy associated with disruption of credit intermediation services.

Nonmonetary effects of the financial crisis in the Great Depression

The credit hypothesis maintains that nonmonetary factors worsen declines in output during severe economic contractions, which has been a prominent rationale for stringent bank regulation. We apply recent advances in time series analysis to re-examine the role of U.S. bank failures in the Great Depression. In brief, month-by-month decompositions of output, prices, money supply, the liabilities of failed firms, and the deposits of failed banks indicate that bank failures did not initiate the fall in output and prices. However, chronic bank failure over at least a two year period of time in combination with a surge in failures in the latter part of this period of banking industry distress had large negative effects on all of the variables under study. We conclude that chronic bank failures coupled with subsequent threshold failure effects can have deep and pervasive influences on the economy, which justifies government intervention at such times.

The Fisher Puzzle and Real Rate Anomaly

We study the relationships between interest and inflation rates using a recursive equation approach that takes into account both Fisher and Wicksell effects. Extending previous work, a state space representation is used to estimate time-varying ex post Fisher and Wicksell equation effects. We subsequently recover ex ante interest and inflation rate series. Using these ex ante rate series, we estimate an ex ante Fisher equation, including both time-varying intercept estimates of the ex ante real interest rates and time-varying Fisher coefficients. Our results for the U.S. and three other countries support the Fisher propositions after taking into account Wicksell effects.

Impacts of Monetary Policy Rates on Interest and Inflation Rates

This paper extends previous research on how monetary policy rates impact interest and inflation rates. We develop and apply a system model comprised of joint Fisher-Wicksell effects augmented with the federal funds rate. Theoretical relationships between ex ante and ex post coefficients are specified, dynamic relationships of the model are investigated, and steady state policy rate elasticities of inflation and interest rates are derived. Employing U.S. rate series and state space econometric methods, we estimate time-varying coefficients of the augmented system model. Policy rate elasticities of inflation rates provide insights into the effectiveness of using policy rates to control inflation and influence interest rates. These and other results suggest that dual Fisher and Wicksell effects are important channels of monetary policy rate transmission to interest and inflation rates.

Applications of Business Analysis Model FIRM

This chapter provides step-by-step instructions for applying the business model FIRM to Home Depot Company using time series of sales, total costs, and total assets for this company. The chapter covers the data used; estimated equations for sales, assets, and profit rate; and forecasts of fundamental business variables, including sales, total costs, total assets, total profits, profit rate, and profit margin. The estimated models are also used for simulations of cost reduction, sales projections, and investment evaluation. Following these steps, managers can readily apply FIRM to their own firm.

A Business Simulation Model of Conventional Firms

This chapter discusses an accounting approach for the derivation of our business model FIRM from the concepts of profit rate and profit margin. Equations for fundamental business variables are presented, including sales, assets, total costs, total profit, profit rate, and profit margin. A system equations approach is discussed for estimating these equations by means of regression methods for the purposes of business analyses and simulations.

A Macroeconomic Profit System Model of Advanced Market Economies

This chapter provides a two-sector macroeconomic model consisting of a business sector and a nonprofit sector. This profit system model is developed from the microprofit system model of the firm in Chapter 2. Using annual US macroeconomic data in the period 1959–2008, the empirical representation of the model is estimated, its reliability is tested, and different applications are investigated, including economic forecasting, monetary policy, fiscal policy, and business cycle analysis. In brief, the results demonstrate the crucial role of profits in the economy. Profit drives not only business sector and national output but is a prime determinant of capital stock and employment. Given the major influence of profits on the economy, it is not surprising that it also plays a role in the transmission of inflation. Moreover, we show that changes in profit can lead to business cycle fluctuations in economic activity.

Profit System Models of the Firm, Industry, and Business Sector

This chapter proposes an integrated profit system model of the firm consisting of dynamic relationships among fundamental business variables. The first part of the chapter derives theoretical profit system models of production, capital stock, profit rate, profit margin, total profit, and employment for firms in the business sector, in addition to related models of employee compensation and other business variables. The second part of the chapter provides empirical profit system models that capture the relationships between these variables as a system of dynamic equations. These empirical models can be applied to individual firms, industries, and the whole business sector.