Gerdie Everaert

Measuring Inflation Persistence: A Structural Time Series Approach

Time series estimates of inflation persistence incur an upward bias if shifts in the inflation target of the central bank remain unaccounted for. Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved timevarying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the halflife of a shock, can range from 1 quarter in case of a costpush shock to several years for a shock to longrun inflation expectations or the output gap.

Success and failure of fiscal consolidation in the OECD: A multivariate analysis

This paper tests five hypotheses explaining thesuccess and failure of fiscal consolidation in amultivariate regression framework. These hypothesesconcern (i) the composition of the consolidationprogramme, (ii) its size and persistence, (iii) thegravity of the debt situation, (iv) the influence ofthe international macroeconomic environment and (v) thecontribution of a preceding devaluation. To testfor composition effects we use cyclically-adjusteddata. Although many conclusions of the existingempirical literature are confirmed, some do notsurvive. A popular hypothesis – that to succeed, consolidationshould rely on cutting the government wagebill – is rejected. A new empirical result is that thecontribution of a devaluation to the success of fiscalconsolidation depends on the composition of theconsolidation programme.

Balanced growth and public capital: An empirical analysis with I(2)-trends in capital stock data

Abstract The contribution of public capital to economic growth in Belgium is analysed in a cointegrated VAR model. Two methodological problems are addressed. First, as technology is unobservable, the neoclassical growth model is used to identify it as a common stochastic trend. Second, apparent I(2) behaviour of capital stocks disables cointegration analysis to pick up a standard production function specification as an equilibrium relation. Therefore, a steady state relation between output, private and public investment is estimated instead, with the I(2) trends in capital stock series capturing ‘medium-term’ adjustment. Public investment is found to have a positive impact on economic growth.

Public capital and productivity growth: evidence for Belgium, 1953-1996

Abstract This paper analyses the impact of public capital on multifactor productivity in Belgium making use of single-equation cointegration analysis on annual data for the period 1953–1996. Instead of fitting a deterministic trend to capture the underlying technological progress, patent statistics are used as a proxy. From the estimated long-run equilibrium between public capital and productivity, we estimate an error–correction model to check for the direction of causality. The results support a strong positive relationship with causality running from public capital to productivity.

Common correlated effects estimation of dynamic panels with cross-sectional dependence

We derive inconsistency expressions for dynamic panel data estimators under error cross-sectional dependence generated by an unobserved common factor in both the fixed effect and the incidental trends case. We show that for a temporally dependent factor, the standard within groups (WG) estimator is inconsistent even as both N and T tend to infinity. Next we investigate the properties of the common correlated effects pooled (CCEP) estimator of Pesaran (2006) which eliminates the error cross-sectional dependence using cross-sectional averages of the data. In contrast to the static case, the CCEP estimator is only consistent when next to N also T tends to infinity. It is shown that for the most relevant parameter settings, the inconsistency of the CCEP estimator is larger than that of the infeasible WG estimator, which includes the common factors as regressors. Restricting the CCEP estimator results in a somewhat smaller inconsistency. The small sample properties of the various estimators are analyzed using Monte Carlo experiments. The simulation results suggest that the CCEP estimator can be used to estimate dynamic panel data models provided T is not too small. The size of N is of less importance.

Infrequent Large Shocks to Unemployment: New Evidence on Alternative Persistence Perspectives

This paper tests whether the observed high persistence of unemployment rates in most OECD countries is due to (full) hysteresis against the alternative that it is caused by adjustment towards an increased natural rate. The analysis relies on standard univariate unit root tests. Usually such tests cannot reject the presence of a unit root in the unemployment rate, pointing to full hysteresis. This paper shows that the unit root hypothesis can clearly be rejected once infrequent level-shifts are allowed for.

Estimation and Inference in Time Series with Omitted I(1) Variables

Standard cointegration analysis yields spurious results when relevant I(1) variables are omitted from the model. As an alternative, an unobserved components approach is proposed where the error term is modelled as the sum of a transitory and a random walk component. The latter should capture omitted I(1) variables and is allowed to be correlated with the observed I(1) variables. Provided that the model is correctly specified and identified, the long-run relation between the non-cointegrated variables can be estimated consistently with maximum likelihood using the Kalman filter. The robustness of this approach to the integration properties of the error terms is supported for small samples via an extensive Monte Carlo study. The proposed methodology is applied to testing purchasing power parity.

UNEMPLOYMENT PERSISTENCE AND THE NAIRU: A BAYESIAN APPROACH

This paper estimates the United States and euro area NAIRU in a Bayesian framework. We set out a simple structural model explaining unemployment by demand and supply factors, which are treated as unobserved variables that have observable effects on measured unemployment, output and inflation. The model allows for unemployment persistence and a time-varying core inflation rate. The results show that although cyclical shocks are very persistent, most of the increase in European unemployment is driven by structural factors. The degree of persistence is lower in the United States but demand shocks seem to be more important in explaining variation in unemployment.

Orthogonal to Backward Mean Transformation for Dynamic Panel Data Models

The within‐groups estimator is inconsistent in dynamic panels with fixed as the individual sample mean of the lagged dependent variable used in the within transformation is contemporaneously correlated with the idiosyncratic error term. This paper suggests transforming the lagged dependent variable into orthogonal deviations from its individual backward mean, which is contemporaneously uncorrelated with the idiosyncratic error term. As this transformation eliminates the individual effects as but not for fixed, this alternative estimator is consistent for but inconsistent for and fixed. The inconsistency for fixed is shown to be negligibly small, though. Moreover, a Monte Carlo simulation shows that overall, it has superior small sample properties compared to other dynamic panel data estimators.

Is the Impact of Labour Taxes on Unemployment asymmetric

This paper tests whether the impact of labour taxes on unemployment is symmetric with respect to increases and decreases in labour taxes. Using a panel of 16 OECD countries over the period 1970-2005, we estimate a panel unobserved component model to account for the fact that unemployment rates and labour taxes are non-stationary but not co integrated. We find a positive impact of tax increases in European and Nordic countries but no effect of decreasing labour taxes on the rate of unemployment. For Anglo-Saxon countries, no impact of labour taxes on unemployment is found.