Andrew Scott

Seasonality in Dynamic Regression Models

This paper examines the implications of treating seasonality as an unobserved component which changes slowly over time. This approach simplifies the specification of dynamic relationships by separating non-seasonal from seasonal factors. We illustrate this approach using the consumption model of Davidson et al (1978) and estimate a stable error correction model between consumption, income and prices over the period 1958-92. More generally, we argue that autoregressive models are unlikely to successfully model slowly changing seasonality, and may confound seasonal effects with the dynamic responses of prime interest. Our approach can be used in a wide range of cases and we show that there is little loss in efficiency even if seasonality is deterministic.

Asymmetric Business Cycles: Theory and Time-series Evidence

Abstract We offer a theory of economic fluctuations based on intertemporal increasing returns: agents who have been active in the past face lower costs of action today. This specification explains the observed persistence in individual and aggregate output fluctuations even in the presence of i.i.d shocks because individuals respond to the same shock differently depending on their recent past experience. The exact process for output, the sharpness of turning points and the degree of asymmetry are determined by the form of heterogeneity. Our general formulation, under certain assumptions, reduces to a number of popular state space (unobserved components) models. We find that on US data our general formulation performs better than many of the existing econometric models, largely because it allows sharper downturns and more pronounced asymmetries than linear models, and is smoother than discrete regime shift models. Our estimates imply that only modest intertemporal returns are needed for our model to explain US GNP, and that heterogeneity across agents plays an important role in the propagation of business cycle shocks.

Asymmetries in the Cyclical Behaviour of UK Labour Markets

This paper examines the connection between the business cycle, nonlinearities, and asymmetries in the U.K. labor market. The economy is shown to display cyclical asymmetries; stochastic properties of variables such as employment, unemployment, real wages, and the unemployment-vacancy ratio crucially depend upon the state of the business cycle. The authors show that, in most cases, conditioning on the state of the cycle removes residual nonlinearities and is more successful than the linear and a number of nonlinear time-series models. The robustness of the authors findings is confirmed using a variety of diagnostics and alternative measures of the cycle. Copyright 1994 by Royal Economic Society.

Competition, Globalization, and the Decline of Inflation

We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.

Debt and Deficit Fluctuations and the Structure of Bond Markets

We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit. Data for US government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness.

Sticky prices and volatile output

This paper examines the effect of introducing a specific type of price stickiness into a stochastic growth model subject to a cash-in-advance constraint. As in previous studies, it is found that the introduction of price rigidities provides a substantial source of monetary non-neutrality that contributes significantly to output volatility. It is shown that the introduction of this form of sticky prices improves the models performance at explaining inflation, but worsens it for output. The most dramatic failure of the model is the extremely high-frequency fluctuations in output that it generates. Sticky prices not only fail to produce persistent business cycle fluctuations but they generate volatility at very high frequencies.

Fickle investors: an impediment to growth

The aim of this paper is to construct theoretical models which help to shed light on the recent criticisms of volatile investment flows. We do not make any empirical attempt to establish the exisitence or gauge the importance of the adverse affects of flows in recent exchange rate crises. Instead we simply assume the existence of fickle outside investors and examnine the consequences for the economy in the context of two partial equilibrium endogenous growth models. In our first model, the scale of fickle outside investment funds traces out a meanvariance tradeoff for the growth rate of the economy. In particular, the volatility of these funds dissuades risk averse agents from the risky entrpreneural activities. This result opens up the possibility theat some regulation of outside investment may increase growth. Our second model involves increasing returns and multiple equilibria. In the context of this model fickle investor behaviour can have very persistent and substantial effects on both output growth and volatility.

Key to the Horn: Ethiopia's Prospects to 2030

Few African countries have developed as rapidly as Ethiopia over the past 25 years and that economic growth has also been paired with a sizeable expansion of service delivery. Nonetheless, Ethiopians continue to suffer from some of the lowest levels of access to basic services of any country in Africa – and indeed the world. This policy brief summarises the results from a more comprehensive study that explores options for the Government of Ethiopia and its development partners to advance human development and economic growth between now and 2030.

A New Paradigm? Understanding the evolving UK macroeconomics profession

In this article, Andrew Scott examines the changing incentives for macroeconomic research in the UK. The last year has seen two significant developments. The first is the ESRC’s commitment to a funding initiative encouraging a broad range of work on growth and business cycle issues. Implicit in this is a reduction in the importance of large scale macroeconometric models. The second development is the publication of the Bank of England’s Economic Models at the Bank of England (EMBE) which advocates a pluralistic approach to economic analysis. While maintaining a substantial role for large scale macroeconometric models it advocates the use of different techniques, models and methodologies when providing policy advice. This article examines the causes and reasons behind these developments and their likely implications for UK macroeconomics.