Kostas Mouratidis

The Euro: Reflections on the first three years

In the first three years of its (virtual) existence, the euro has seen a general decline in its value (notably against the dollar). In this paper we look at this issue and reflect on the implications of the decline for the future of the euro.The paper begins by briefly reviewing some of the explanations that have been put forward for the weakness of the euro, which might be seen as temporary factors or factors that do not arise from the creation of the eurozone per se. These explanations include the decline in the value of the euro as being a reaction to previous rises, interest rate differentials as favouring the dollar and the decline in the euro as being the obverse of a rise in the value of the dollar reflecting the strength of the US economy. These explanations are found to be unconvincing, and the view is advanced that there are serious weaknesses within the eurozone itself and in the construction of the eurosystem, along with its operation, that could be undermining the value of the euro. The divergent euro area may be one of the more significant factors contributing to the euro decline.

Fiscal Readjustments in the United States: A Nonlinear Time-Series Analysis

We analyze the fiscal adjustment process in the United States using a multivariate threshold vector error regression model. The shift from single-equation to multivariate setting adds value both in terms of our economic understanding of the fiscal adjustment process and the forecasting performance of nonlinear models. We find evidence that fiscal authorities intervene to reduce real per capita deficit only when it reaches a certain threshold and that fiscal adjustment takes place primarily by cutting government expenditure. The results of out-of-sample density forecast and probability forecasts suggest that a shift from a univariate autoregressive model to a multivariate model improves forecast performance.

Testing for Trade-offs in the Reinsurance Decision of U.K. Life Insurance Firms:

Drawing a framework from the insurance and finance literature, we test for trade-offs between underwriting, solvency, and tax management objectives in the decision to purchase reinsurance in U.K.-based life insurance firms. Using a panel data design covering 630 firm-year observations for 1992-2004, we observe that underwriting and solvency risks, and expected taxes, appear to be important determinants of the level of reinsurance purchased by U.K. life insurance firms. Additionally, some of these key determinants interact with each other, suggesting that the reinsurance decision is conjointly determined. Two of the three interactions tested, however, have an impact that is in the direction opposite to that predicted. In addition, firm-specific factors, such as product mix and profitability, appear to explain the corporate decision to purchase reinsurance.

Monetary policy preferences of the EMU and the UK

We estimate the central bank policy preferences for the European Monetary Union and for the UK. In doing so, we extend the theoretical framework suggested by Cecchetti etal. (The Manchester School, Vol. 70 (2002), pp. 596-618), by assuming that policy preferences change across different regimes. Our empirical results suggest that the weight that policy makers put on inflation is typically profound. Furthermore, it appears that volatility shifts of the economic disturbances are the main factor, which generates variation in policy preferences.

Regime Dependent Effects of Inflation Uncertainty on Real Growth: A Markov Switching Approach

We empirically investigate the effects of inflation uncertainty on output growth for the United States between 1960 and 2012. Modeling output dynamics within a Markov regime switching framework, we provide evidence that inflation uncertainty exerts a negative and regime-dependent impact on output growth. A battery of sensitivity checks confirm our findings.

Evaluating Currency Crises: A Multivariate Markov Regime Switching Approach

This paper provides an empirical framework to analyse the nature of currency crises by extending earlier work of Jeanne and Masson (2000; Journal of International Economics, Vol. 50, pp. 327–350). Jeanne and Masson suggest a Markov regime switching models to analyse models of currency crises with multiple equilibria. This paper further contributes to the literature by suggesting a multivariate Markov regime switching model. In the new set‐up, one can test for the impact of the unobserved dynamics of fundamentals on the probability of devaluation.

Credibility of Interest Rate Policies in Eight European Monetary System Countries: An Application of the Markov Regime-Switching of a Bivariate Autoregressive Model

This chapter utilizes the Markov regime-switching modelling framework to study the credibility of monetary policy, with respect to the objective of price stability, in some member countries of the EMS throughout its life (i.e., 1979–98). Eight countries are examined for this purpose: Austria, Belgium, Finland, France, Italy, the Netherlands, Portugal and Spain. In addition, Germany is used as a benchmark case.1 A number of other studies have investigated the issue of credibility during the EMS period (see for example, Dahlquist and Gray, 2000; Arestis and Mouratidis, 2004a). One of the main conclusions of this body of literature is that monetary policy may go through different stages of credibility through time, in such a way that it is perceived to be credible in some circumstances and may lack credibility on other occasions. It is, thus, appropriate to use the Markov regime-switching modelling framework to study this phenomenon. Moreover, some of these studies allow the probability of switching between regimes to be a function of macroeconomic variables (see Engels and Hakkio, 1996; Gray, 1996; Dahlquist and Gray, 2000; Sarantis and Piard, 2000). In particular, most of these studies attempt to explain the currency crises of 1992 and 1993 using as information variables in the transition probabilities a number of alternatives: the exchange rate within a band (i.e., a target zone model framework), real exchange rates, budget deficits, interest rate differentials, and other variables. None of these studies includes in the transition probability the two main variables that determine the loss function of monetary authorities, namely domestic output-gap variability and inflation variability (the exception is Arestis and Mouratidis, 2004a).2

Fiscal Re-Adjustments in the U.S.: A Non-Linear Time Series Analysis

We model the joint process for real per capita U.S. federal government spending and tax revenues as a Threshold Vector Error Correction. We find evidence that fiscal authorities will intervene to reduce real per capita deficit only when it reaches a certain threshold. We also find that fiscal re-adjustment takes place only through spending cuts. A further empirical support to the non-linear dynamics underlying the U.S. fiscal process is given by the superior performance of the non-linear model in terms of out-of-sample conditional forecasting of the government spending process.