David J. Smyth

A Multivariate Time Series Analysis of the United States Aggregate Production Function

This study examines the effects of hours of work per unit of private sector capital, the relative price of energy, government capital per unit of private sector capital, and inflation on private sector output per unit of capital in the U.S. over the period 1952–90. A small vector autoregressive model that comprises the variables typically employed in single-equation estimates of the aggregate production function is used. Variance decompositions and cumulative impulse response functions indicate that hours of work per unit of private sector capital, the relative price of energy, and the inflation rate have significant effects on private sector output per unit of capital over the 1952–90 period. However, there is no evidence of a significant effect for government capital per unit of private capital. An historical decomposition that begins in 1973 with the emergence of a “productivity slump” and continues through 1990 indicates that shocks to hours of work per unit of capital, the relative price of oil, and inflation appear important in explaining output per unit of capital but shocks to government capital are not important.

Inflation and growth

Abstract Inflation reduces the ability of economic agents to operate efficiently in a private enterprise system. To test and evaluate the strength of this effect, inflation variables are included in an empirical growth relationship for the U.S. private business sector. Both the rate of inflation and the change in the rate of inflation have significant negative effects on output growth. Two by-products of the analysis are the following. First, some but not all of the apparent post-1973 decline in productivity growth can be explained by an increase in the size of the services producing sector relative to the goods producing sector. Second, the rate of growth of private sector output is independent of the rate of growth of government non-military capital stock.

The accuracy of OECD forecasts of the international economy: Demand, output and prices

Abstract This paper examines the accuracy of forecasts of the international economy made by the OECD. Our large data set, comprising over 7,000 pairs of forecasts and outcomes, includes one-, two-, and three-step ahead semi-annual forecasts of the main components of demand, output and prices for Canada, France, Germany, Italy, Japan, the U.K. and the U.S.A. over the twenty-year period 1968–1987. Various measures of accuracy are computed; also a comparison is made with competing naive and time-series predictions. The analysis includes a full range of diagnostic checks on forecast performance, including rationality tests for unbiasedness, efficiency and consistency. Although there is considerable variation in the accuracy of these forecasts, they are generally superior to the naive and time-series predictions. Error is predominantly non-systematic. However, our analysis exposes exceptions, particularly forecasts of government consumption, and in some of the forecasts of fixed and inventory investment, the foreign balance and inflation. Accuracy in these cases could be improved by a simple linear correction, or by incorporating information contained in recent, known forecast errors. At least half the OECD forecasts fail one or more of the rationality tests.

Voters and Macroeconomics: Are They Forward Looking or Backward Looking?

The political business cycle hypothesis has been criticized on the grounds that it is impossible for governments to generate a vote winning boom because voters judge political candidates by the performance they expect in the future. In this paper, we directly test the hypothesis that voters are forward rather than backward looking. We compare the conventional view that presidential popularity depends on recently observed inflation and unemployment to three alternative models which assume varying forms of forward looking behavior. Non-tested hypothesis tests reject the forward looking models in favor of the one with the recent actual variables.

Measurement errors in survey forecasts of expected inflation and the rationality of inflation expectations

Studies that use survey data to test the rationality of inflationary expectations usually test for unbiasedness by regressing actual inflation on expected inflation and testing the joint hypothesis that the intercept is zero and the slope coefficient is one. Such studies are fatally flawed because they incorrectly assume that expected inflation is measured without error. A procedure that allows for the influence of observation errors in expected inflation is developed and applied to the University of Michigan Survey Research Center data. Contrary to some recent studies, unbiasedness is rejected.

The public's indifference map between inflation and unemployment: Empirical evidence for the Nixon, Ford, Carter and Reagan presidencies*

ConclusionsWe have succesfully estimated the publics indifference map between inflation and unemployment. The indifference curves are nonlinear and concave to the origin for most unemployment rates; the data are insufficient to permit us to be sure of the form at low unemployment rates. There is clear evidence of honeymoon and Watergate effects and a Reagan as president effect. The public dislikes expected and unexpected inflation equally.

Energy prices and the aggregate production function

Abstract This paper tests the hypothesis that the effects of increases and decreases in relative energy prices on output are symmetrical. Alternative ratchet specifications are embedded in an aggregate production function for private sector output and estimated using US data. The major finding is that the relationship between relative energy prices and output is highly asymmetrical. Increases in relative energy prices above previous peak levels have a substantial deleterious effect on output. Decreases in relative energy prices and increases below the previous peak have no effect on output.

Structural change in the United States' social preference function, 1953–88

Many studies have used Gallup Poll data to estimate the relationship between presidential popularity, and inflaion and unemployment. Typically these estimates are made over the terms of several presidents. The only time-varying effect included in these studies is an intercept dummy. No account is taken of the possibility that there may be changes in the positions or slope of the indifference curves between inflation nd unemployment. Within this paper, we estimate the US publics social preference function between inflation and unemployment as a quadratic within a sets of equations framework. A series of F-tests leads us to believe that there is structural change in the economic variables as well as in the intercepts over time. Thus, estimating each administration individually or in the sets of equations format is superior to constraining slope coefficients to be equal across administrations by simply estimating the function over the entire time period. We hypothesize that the public has become somewhat mo...

The supply side effects of inflation in the United States: evidence from multifactor productivity

The hypothesis that inflation has reduced the rate of growth in the United States is tested using time series data for multifactor productivity. The negative effects of inflation on growth are significant and substantial.

Forecasting the developing world: An accuracy analysis of the IMF's forecasts

Abstract The accuracy of the forecasts for the developing world made by the International Monetary Fund from 1980 to 1988 is analyzed in this paper. The forecasts are for the growth in real output, exports and imports, the inflation rate, long-term debt, the current account balance and the ratio of reserves to imports. The developing world is divided into five regions, Africa, Asia, Europe, the Middle East and the Western Hemisphere, and the forecasts are for each region. Overall the IMFs forecasts are inferior to those generated by a naive model, a simple random walk, although the differences are not usually significant. When allowance is made for changes in forecasting difficulty (measured by the performance of the naive model) the IMFs forecasting accuracy does not improve significantly over time and for somew series it deteriorates. The results suggest that there is no reason to prefer the IMF forecasts for the developing world over those that can be obtained by assuming a simple random walk.