James S. Fackler

An Application of Vector Time Series Techniques to Macroeconomic Forecasting

A wide variety of time series techniques are now used for generating forecasts of economic variables, with each technique attempting to summarize and exploit whatever regularities exist in a given data set. It appears that many researchers arbitrarily choose one of these techniques. The purpose of this article is to provide an example for which the choice of time series technique appears important; merely choosing arbitrarily among available techniques may lead to suboptimal results.

Accounting for the great depression: A historical decomposition

Abstract This paper answers two distinct questions. First, To what extent do theories of the Great Depression account for movements in output during 1929:10–1933:12? Second, How much of the Depression could have been avoided if the money stock had grown along its anticipated pre-1929:9 path? The results reveal that an eclectic view of the Depression dominates monocausal explanations. Counterfactual simulations indicate much of the Depression would have been avoided if money growth had been maintained along its pre-Depression path.

Evaluating Monetary Policy Options

We present a procedure for evaluating ex ante the effects of alternative paths of a monetary policy tool (the federal funds rate in our illustrations) on output and the price level within a variant of a widely used vector autoregressive model of the U.S. economy. This exercise is a supplement to, or even an alternative to, analysis that relies on a particular structural model. Illustrations of the method are provided by evaluating the effects of changes in the funds rate target. Additionally, the Taylor rule is used to generate target funds rates for different target inflation rates, and the effects of these are evaluated.

Specification and Goldfeld money demand function

Abstract Despite intensive investigation of the temporal stability of the Goldfield formulation of the money demand function, a clear consensus on its stability has yet to emerge. This paper builds a statistical case supporting the first difference of log-levels specification, as opposed to the more commonly used log-levels specification, of the Goldfeld equation and then examines the stability of both specifications. Formal stability tests proposed by Cooley and Prescott, Farley and Hinich, and Brown, Durbin, and Evans are employed; the out-of-sample predictive performance is examined as well. These tests strongly support the first difference specification over thelog-levels specification.

Output, inflation and stabilization: a counterfactual analysis

Abstract We estimate a small open-economy macro model in which movements in inflation and output are driven by fiscal, real, monetary, exchange rate, and asset disturbances. We use 1980s data from Bolivia and Brazil, each of which undertook stabilization programs, though only Bolivias succeeded. An important part of our analysis is ‘counterfactual’, where hypothetical paths of output and inflation under alternative policymaking scenarios are investigated. For Bolivia, there is clear evidence that deficits affect inflation largely through their effects on money growth, and do not have much influence on output. External shocks are important for Brazilian inflation.

An empirical open-economy macro model with credit

Abstract We estimate a model of the credit view of the transmission mechanism, in which the effect of movements in the exchange rate are explicit. We find, first, that changes in credit are at least as important as any other variable in explaining movements in output, prices and interest rates. This reconfirms what others have found concerning the importance of credit in the transmission mechanism. Second, and more novel, we find significant effects from changes in exchange rates on credit. The results imply that the recent emphasis placed by the Federal Reserve on monitoring exchange rates has been wise.

Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation-Output Variability Tradeoff

We suggest a new way of computing the inflation-output variability tradeoff under inflation forecast targeting. Our approach is based on dynamic, stochastic simulations of the average inflation rate over a two-year horizon using the moving average representation of a vector autoregressive (VAR) model. Using real-time data over two samples, we estimate the inflation-output variability tradeoff for the United States and show that it has shifted favorably over time. We analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time.

Stochastic macroeconomic control with non-identical control intervals☆

Abstract David Kendrick (1976) has recently suggested that dynamic control schemes which economists have applied to macroeconomic models generally rest on the stringent assumption that monetary and fiscal policy are executed with the same frequency. Kendrick observes: ‘The Federal Reserve Board can make monetary policy decisions fairly quickly. However, fiscal decisions are made by the President, but must then go to Congress, and back to the President. No control theory application has yet taken account of the difference in timing between the policy-making actions.’ This paper recognizes that agents having non-identical control intervals are involved in controlling the macroeconomy and examines the role of monetary and fiscal policies in this context.

Bernanke versus Taylor: a post mortem

Our analysis sheds light on the issue of whether the monetary policy contributed to the recent housing boom and bust. We have estimated and analysed a model that allows a comparison between the actual policy and several alternative Taylor rules. When the Taylor rule path was computed using revised data and the deflator for the GDP, we found a notable impact on key housing market variables, supporting Taylor’s critique of the Fed policy. However, the bulk of our evidence suggests that the policy as it would have been conducted under our real-time Taylor rules would not have had any significant impact on the housing market variables. This conclusion is robust with regard to the price index used as well as the relative weights used on the inflation and output gaps.

The nominal rate of interest, the rate of return on money, and inflationary expectations

Abstract This paper offers two modifications to the standard comparative-static analysis that help explain why nominal interest rates may either over- or under-adjust to a change in inflationary expectations, even in full general equilibrium: the inclusion of the real rate of return to money balances in commodity demand functions, and the presence of differing costs of obtaining information. In brief, the first factor may explain why nominal interest rates could over-adjust to a change in inflationary expectations, while the second may substitute for real balance effects in limiting the upward adjustment of nominal rates.