Allan D. Brunner

Are Higher Levels of Inflation Less Predictable? A State-Dependent Conditional Heteroscedasticity Approach

Milton Friedman proposed that there is a positive relationship between inflation and uncertainty about the future path of inflation. In contrast to previous studies of this hypothesis, we find strong statistical evidence that higher levels of inflation are less predictable, although innovations in inflation are somewhat better predictors of future volatility than the actual level of inflation. We argue that previous failures to find an inflation-uncertainty relationship are due to two factors. First, none of the previous work directly tested Friedmans hypothesis by including the level of inflation in the model of the conditional variance. Second, these studies also used symmetric models, which appears inconsistent with Friedmans hypothesis. Our results are robust to different sample periods and to assumptions about the presence of a unit root in inflation. To test the inflation-uncertainty hypothesis, we use state-dependent models (SDMs) of conditional moments to estimate the time-varying conditional v...

Conditional Asymmetries in Real GNP: A Seminonparametric Approach

Two critical assumptions are often made in empirical research regarding the relationship between economic variables and economic disturbances—linearity and Gaussianity. Together, these two assumptions place strong restrictions on the time series behavior of a model. Most important, these restrictions imply conditional symmetry. Using seminonparametric (SNP) techniques, this article presents evidence that real gross national product growth displays conditional asymmetry. Although these results confirm related results of Brock and Sayers, Sichel, and Hamilton, the SNP approach is novel in that it emphasizes the relationship between common modeling assumptions and the restrictions that these assumptions place on data.

Potential problems in estimating bilinear time-series models

Abstract We present evidence of undesirable statistical properties of the bilinear model. We show that in certain regions of the parameter space the expected likelihood function exhibits bimodality. The true optimum is often characterized by a long, narrow spike that becomes more pronounced with increases in the sample size. Consequently, conventional optimization routines would frequently miss a global optimum with this feature. Moreover, although statistical tests would have strong power against alternatives near the global optimum, they would have almost zero power against the local minimum. This phenomenon also continues to persist in extremely large samples. In addition, we show that the distributional properties of the parameter estimates and the standard t -statistic also do not have desirable properties in finite samples.

Determinants of the 1991-1993 Japanese recession: Evidence from a structural model of the Japanese economy

The objectives of this paper are to determine the extent to which various factors contributed to the current recession in Japan and to assess whether the recent behavior of the Japanese economy differs from that in previous recessions. Toward that end, we develop a small, structural macroeconometric model of the Japanese economy and estimate it using data from 1971 Q1 through 1991 Q1, the period just prior to the recent downturn. The important results can be summarized as follows. First, the severity of the current recession probably does not reflect structural economic changes. Second, the poor economic performance in 1991-1993 period was to some extent predictable, reflecting the unwinding of imbalances that developed during the preceding expansion. Finally, unpredictable movements in exchange rates, land and stock prices occurring after 1991 played an important, but not predominant, part in accentuating the downturn, while unusually stimulative fiscal and monetary policies appear to have contributed substantially to GDP during the recession.

Has Japan Entered a New Era of Financial Constraints

The collapse of Japanese asset prices in the early 1990s—which weakened the balance-sheet positions of banks, firms, and households—has led some observers to suggest that “balance-sheet problems” may have contributed to the recent economic downturn and may impede a recovery. In this paper, we conclude that balance-sheet problems did not and will not play a significant role in depressing the Japanese economy. First, while asset prices appear to have some explanatory power in loan demand and supply relationships, we find that asset price shocks in the 1990s had little effect on borrowing and lending, other than through traditional wealth effects on aggregate demand. Second, we find little evidence that bank lending was tighter than usual compared to downturns of the 1990–93 magnitude. Finally, we find some puzzling evidence that borrowers lowered their appetite for loans, even after accounting for sharp declines in aggregate demand and asset prices.