Mark A. Thoma

Subsample instability and asymmetries in money-income causality

Abstract One puzzle in the money-income causality literature is the variability in results across sample periods, particularly with regard to the 1980s. This paper shows that the p -values of money-income causality tests across sample periods are highly correlated with the level of real activity. When real activity declines, money-income causalitybecomes stronger, and when real activity increases, the relationship becomes weaker. The investigation proceeds in three stages. First, rolling regressions are used to document the subsample instability and the correlation with real activity as well as the variability of the results across model specifications, trend specifications, and over the business cycle. The second stage uses bootstrap simulations to show that the variability across sample periods and the correlation with real activity is significant, and the third stage builds a combination dummy variable and varying coefficients VAR model that captures the asymmetries in the relationship between money and income.

Partisan Effects in Economies with Variable Electoral Terms

In fixed-time electoral economies, partisan surprises are associated with a change in government as in Alberto Alesina (1987). This paper models additional partisan surprises present in variable-electoral-term economies due to the timing of the change in government. Two versions of the model are presented, one in which the timing of the change is exogenous and one in which it is endogenous. The model is interesting as it provides an explanation of movements in expected inflation, output, and employment in all periods, not just those immediately after an election as in fixed-electoral-term models. Copyright 1991 by Ohio State University Press.

Modeling and Forecasting Cointegrated Variables: Some Practical Experience

Abstract Although the issue of identifying cointegrating relationships between time-series variables has become increasingly important in recent years, economists have yet to reach an agreement on the appropriate manner of modeling such relationships. In this paper, we attempt to distinguish between modeling techniques through a comparison of forecast statistics, while focusing on the issue of whether or not imposing cointegrating restrictions via an error-correction model improves long-run forecasts. We find that imposing cointegrating restrictions often improves forecasting power, and that these improvements are most likely to occur in models which exhibit strong evidence of cointegration between variables.

The implications for an open economy of partisan political business cycles: Theory and evidence

Abstract This paper develops and tests the predictions of two open economy models in which partisan effects are present, a small-country-one-good model of exchange rate determination and a model that assumes the two countries each specialize in the production of one good. From these models, we can obtain predictions for the behaviour of the terms of trade, the current account, and real and nominal exchange rates. The predictions are tested empirically using panel data from 14 OECD countries and the results provide support for the theoretical predictions that systematic partisan effects are present in current accounts, real exchange rates, and the terms of trade.

The Effects of Inside and Outside Money on Industrial Production across Spectral Frequency Bands

This paper examines money-income causality using band spectral filtering techniques. The papers central finding is that relatively low frequency movements in outside money are responsible for the relationship between money and economic activity. This result is inconsistent with theoretical models in which unanticipated changes in money are responsible for movements in real activity. Reverse causality is also examined. The results are not supportive of a strong feedback relationship from income to inside money. However, there is evidence of strong feedback from income to outside money.

Credibility and political business cycles

Abstract This paper develops a political business cycle model based on partisanship and credibility arguments that explains the pre-electron behavior of inflation, output, and money growth. The approach taken is to introduce elections and a Mundell-Tobin effect into a structure similar to the Barro-Gordon (1983) model of governmental reputation. The models predictions are similar to those of the simple manipulative models of Nordhaus (1975) and Frey and Schneider (1978) , but the predictions do not rely on economic irrationally, myopia, or memory loss.

Some international evidence on the exogeneity of the ex ante real rate of interest and the rationality of expectations

Abstract Litterman and Weiss (1985) report evidence in support of the joint hypothesis that the ex-ante real rate of interest is exogenous and expectations are rational using postwar U.S. data. This paper explores the robustness of their findings across countries, sample periods, data definitions, and to the inclusion of supply shocks. The joint hypothesis of exogeneity of the real interest rate and the rationality of expectations is supported in all cases when supply shocks are omitted from the model. However, when supply shocks are included in the model, the hypothesis does not fare as well. Another implication of their results, that the ex-ante real rate follows a stationary AR(1), is also supported, but there is some sensitivity to the choice of sample period.

Okun’s Equality-Efficiency Trade-Off

The leaks are attributed to the administrative costs of taxation, the incentive effects on work for both those paying the taxes and those receiving the redistributed income, and from the resources used for tax avoidance. For many, this has become an economic law used to resist any attempt to address inequality.

Bad advice, herding and bubbles

Prior to the crash of the housing market, many experts told the public that the upward trend in housing prices was not a bubble, it could be explained by fundamentals. This paper shows that an increase in the propensity of individuals to herd toward trend-chasing behavior caused, for example, by bad advice from experts, increases the likelihood that a destructive bubble will occur.

Study of Short-Run Grain Movements on the Inland Waterway System

Time series techniques-particularly impulse-response functions and variance decompositions-are used to characterize the short-run relationships between 17 variables in a vector autoregressive model designed to trace the short-run interconnections among variables affecting lockages on the Mississippi and Illinois Rivers. The model contains five categories of variables: lockages, barge rates, grain bids, rail rates, and rail deliveries. Variance decompositions are constructed that identify barge rates as the most important variable affecting lockages at both short and long horizons. Barge rates are, in turn, explained largely by lockages and rail rates, indicating two-way feedback or bidirectional causality between lockages and barge rates. Impulse-response functions are also examined. The variance decompositions indicate that barge rates are important in explaining lockages, and the impulse-response functions show how lockages and other variables respond to such shocks. In general, there is a substitution ...