Gunnar Bårdsen

Testing Steady-State Implications for the NAIRU

Estimates of the NAIRU are usually derived either from a Phillips curve or from a wage curve. This paper investigates the correspondence between the operational NAIRU-concepts and the steady state of a dynamic wage-price model. We derive the parameter restrictions that secure that correspondence. The full set of restrictions can be tested by econometric analysis of the wageprice system, and this method is demonstrated for Norwegian data. A set of necessary conditions can be tested from estimated wage curves alone. Existing international evidence from empirical wage equations are re-interpreted in light of these conditions.

Dynamic modeling of the demand for narrow money in Norway

Abstract The role and stability of the demand for money are recurring issues in applied econometrics. Does a constant long-run demand for money function exist? If so, is money exogenous, and hence a policy variable, or endogenous? The notion of cointegration provides a tool for identifying long-run relationships, to be embedded in dynamic error correction models with constant parameters, while the assumed exogenuity status of variables for the parameters of interest can be assessed by recently developed tests. This paper derives a demand function for narrow money in Norway by applying these tools, starting out with a vector autoregressive representation that includes money (Ml), prices, real expenditure and several interest rates. Given a sample riddled with financial deregulation, changing monetary policy, and an economy switching its basis from industrial production towards oil exportation, one should not be surprised to find an unstable demand for money function. A conditional model with constant parameters is nevertheless established. Finally tests for weak and super exogeneity are conducted. Prices, real expenditure, and interest rates are super exogenous for the parameters of the demand for money. This means that simulation experiments can be conducted for the effects of monetary and fiscal policy on the demand for money.

Shaken or Stirred? Financial Deregulation and the Monetary Transmission Mechanism in Norway

We address the issue of how the deregulation of financial markets has affected the monetary transmission mechanism in Norway. By estimating a dynamic system of money, credit, real income and inflation during a period of fundamental structural changes in monetary policy and financial markets we are able to present empirical evidence on the tenacity of the relationships between financial and real variables. We first investigate the stability of the long-run demand functions for money and credit by means of recursive techniques for cointegrated systems. The long-run relationships turn out to be surprisingly resilient in our model; the deregulation process does not cause any permanent shifts in the relationships between financial quantity variables, real economic activity and prices. Within a small simultaneous dynamic model of the Norwegian economy we find evidence for the credit view of the monetary transmission mechanism, as both credit and money exhibit strong and stable effects on aggregate demand.

Model Specification and Inflation Forecast Uncertainty

Three classes of inflation models are discussed: Standard Phillips curves, New Keynesian Phillips curves and Incomplete Competition models. Their relative merits in explaining and forecasting inflation are investigated theoretically and empirically. We establish that Standard Phillips-curve forecasts are robust to types of structural breaks that harm the Incomplete Competion model forecasts, but exaggerate forecast uncertainty in periods with no breaks. As the potential biases in after-break forecast errors for the Incomplete Competition model can be remedied by intercept corrections, it offers the best prospect of successful inflation forecasting.

Moses: Model of Swedish Economic Studies

MOSES is an aggregate econometric model for Sweden, estimated on quarterly data, and intended for short-term forecasting and policy simulations. After a presentation of qualitative model properties, the econometric methodology is summarized. The model properties, within sample simulations, and examples of dynamic simulation (model forecasts) for the period 2009q2-2012q4 are presented. We address practical issues relating to operational use and maintenance of a macro model of this type. The detailed econometric equations are reported in an appendix.

Frequentist Evaluation of Small DSGE Models

This article proposes a new evaluation approach for the class of small-scale “hybrid” new Keynesian dynamic stochastic general equilibrium (NK-DSGE) models typically used in monetary policy and business cycle analysis. The empirical assessment of the NK-DSGE model is based on a conditional sequence of likelihood-based tests conducted in a vector autoregressive (VAR) system, in which both the low- and high-frequency implications of the model are addressed in a coherent framework. If the low-frequency behavior of the original time series of the model can be approximated by nonstationary processes, stationarity must be imposed by removing the stochastic trends. This gives rise to a set of recoverable unit roots/cointegration restrictions, in addition to the short-run cross-equation restrictions. The procedure is based on the sequence “LR1→LR2→LR3,” where LR1 is the cointegration rank test, LR2 is the cointegration matrix test, and LR3 is the cross-equation restrictions test: LR2 is computed conditional on LR1 and LR3 is computed conditional on LR2. The Type I errors of the three tests are set consistently with a prefixed overall nominal significance level. A bootstrap analog of the testing strategy is proposed in small samples. We show that the information stemming from the individual tests can be used constructively to uncover which features of the data are not captured by the theoretical model and thus to rectify, when possible, the specification. We investigate the empirical size properties of the proposed testing strategy by a Monte Carlo experiment and show the empirical usefulness of our approach by estimating and testing a monetary business cycle NK-DSGE model using U.S. quarterly data. Supplementary materials for this article are available online.

Linearizations and Equilibrium Correction Models

Linear dynamic equilibrium correction mechanisms are shown to follow from the discretisation of continuous processes with steady-state solutions.

A European-type Wage Equation from an American-style Labor Market: Evidence from a Panel of Norwegian Manufacturing Industries in the 1930s

Using a newly constructed panel of manufacturing industry data for interwar Norway, we estimate a long-run wage curve for the 1930s that has all the modern features of being homogeneous in prices, proportional to productivity, and having an unemployment elasticity of -0.1. This result is more typical of contemporary European than U.S. wage equations, even if the labour market in interwar Norway possessed distinctively more ‘American’ features than those associated with present-day European welfare states. We also present some new Monte Carlo evidence on the properties of the estimators used.

Macroeconometric Modeling for Policy

The first part of this chapter sets out a coherent approach to dynamic macroeconometric modelbuilding; the second part demonstrates the approach through building and evaluating a small econometric model; the final part demonstrates various usages of the model for policy.

Wage Formation and Bargaining Power During the Great Depression

We present an econometric analysis of wage behaviour in Norway during the interwar years. The analysis is based on a panel of manufacturing industry data using GMM estimation methods. Our empirical analysis shows that wage formation in the interwar period can be understood with the help of modern bargaining theory and well-established wage equations. We estimate a long-run wage curve that has all the standard features of being homogeneous in prices, proportional to productivity, and with a negative unemployment elasticity. We also present some new Monte Carlo evidence on the properties of the estimators used.