N. Kundan Kishor

VAR Estimation and Forecasting When Data Are Subject to Revision

We show that Howrey’s method for producing economic forecasts when data are subject to revision is easily generalized to handle the case where data are produced by a sophisticated statistical agency. The proposed approach assumes that government estimates are efficient with a finite lag. It takes no stand on whether earlier revisions are the result of “news” or of reductions in “noise.” We present asymptotic performance results in the scalar case and illustrate the technique using several simple models of economic activity. In each case, it outperforms both conventional VAR analysis and the original Howrey method. It produces GDP forecasts that are competitive with those of professional forecasters. Special cases and extensions of the analysis are discussed in a series of appendices that are available online.

The Success of the Fed and the Death of Monetarism

We propose an explanation for the demise of monetarism in the United States. We show that optimal monetary policy would lead to zero correlation between monetary aggregates and inflation if the effect of monetary aggregates on inflation is known precisely and to negative correlations if there is coefficient uncertainty. From 1960 to 1982 the correlation of the monetary base and inflation was positive and so the variance in the growth rate of monetary base in the United States was clearly too large monetary base growth destabilized inflation. However, from 1983 to 2003 variations in monetary base growth were clearly stabilizing and could have been just right. (JEL E52, E31, E32)

A Note On Time Variation In A Forward-Looking Monetary Policy Rule: Evidence From European Countries

This paper estimates time-varying forward-looking monetary policy reaction functions for the central banks of France, Germany, Italy, and the United Kingdom. We utilize the framework developed by Kim [Economics Letters 91 (2006) 21–26] and Kim and Nelson [Journal of Monetary Economics (2006) 1949–1966] to deal with the issue of endogeneity in a time varying–parameter model. Our results find substantial time variation in the conduct of monetary policy in these four countries, which cannot be adequately captured by the conventional fixed-coefficient approach. Our findings suggest that there was a significant decline in the Bank of Frances and the Bank of Italys response to the German interest rate in 1992, and it coincided with the breakdown of the exchange rate management system in Europe. Our results suggest that the Bank of England was slower than the Bundesbank to increase its response to expected inflation, as its response to inflation became more than one-for-one only in the early 1980s.

The Dynamic Relationship between Housing Prices and the Macroeconomy: Evidence from OECD Countries

This paper studies the dynamic relationship among house prices, income and interest rates in 15 OECD countries. We find that any disequilibrium in the long-run cointegrating relationship among these variables is corrected by the subsequent movement in house prices in most of these countries. This error-correction property of house prices implies that most of the variations in house prices are transitory, as compared to the movements in income and interest rates that are permanent, suggesting that the short-run movements in house prices are independent of the movements in income and interest rates. The results suggest that only the permanent movement in house prices, income and interest rates are associated with each other. We also find that the correlation in house price cycles across different OECD countries has changed over time with the highest correlation during the boom period of 1998–2005.

Understanding the dynamics of the macroeconomic trilemma

This paper tests the autonomy of domestic monetary policy in the context of the macroeconomic policy trilemma for a large data-set of developing and developed countries covering three different time periods characterized with different exchange rate regimes and capital controls. The existing literature uses fixed coefficient methodologies to examine monetary policy independence; whereas we show that the coefficients of interest are unstable as countries switch between different exchange rate regimes and/or capital controls over time. The contribution is in using a time-varying parameter model that better captures the effects of the heterogeneity in different exchange rate regimes and capital mobility restrictions on monetary policy independence over time, allowing a more accurate test of the macroeconomic trilemma.

Dynamic Comovement among Banks, Systemic Risk, and the Macroeconomy

This paper develops a new measure of comovement in the banking sector that takes into account the dynamic nature of interlinkages among different bank holding corporations at different stages of business cycles. For this purpose, we use a dynamic factor model with time-varying parameters and stochastic volatility that decomposes the panel data for the return on assets (ROA) and net chargeoffs (NCO) into a common component and an institution-specific idiosyncratic components. We find that the relative contribution of the common factor in explaining the variation in ROA and NCO peaked during the financial crisis, suggesting a significant increase in systemic stress in the banking sector. Using the least absolute shrinkage and selection operator (LASSO) approach, we show that the estimated common components and their stochastic volatilities from our approach perform well when compared to other widely used measures of systemic risk in explaining real economic activity. Furthermore, we find that these measures have better in-sample fit with real economic activity measures than the industry averages of ROA and NCO that are frequently used in the banking literature. Finally, we provide economic interpretation for the idiosyncratic components as banking balance sheet characteristics.

Measuring Trend Inflation and Inflation Persistence for India

In this study we propose a new measure of trend inflation for India. Using monthly data for CPI-IW inflation, we use a multivariate unobserved component model that incorporates information from food and energy prices and provides an estimated trend inflation that we argue is a more reasonable measure of long-run inflation expectations in India. We first show that our measure of trend inflation is superior to other commonly used alternatives in terms of forecasting inflation at longer forecasting horizons. We then highlight the limitations of the RBI’s survey-based expected inflation measure in capturing long-run inflation dynamics. Finally, we provide an estimate of inflation persistence, by estimating a time-varying model of inflation gap defined as the difference between CPI-IW inflation in India and our estimated trend inflation. We find that inflation persistence in India has varied significantly over time, with lower persistence during the Global financial crisis of 2008 followed by an increase in persistence since 2010.

Has Wealth Effect Changed Over Time? Evidence from Four Industrial Countries

In this paper, we use long-run equilibrium relationship between consumption, disposable income, and wealth to estimate wealth effect across four industrial countries: Canada, Germany, the UK, and the USA. We also examine whether wealth effect in these countries has changed over time. Our results indicate that the USA and the Canadian economy have become more sensitive to wealth changes in the recent time period. We find that for each dollar increase in wealth, consumption in the USA increases by 1.8 cents, whereas the corresponding increase in Canada is 2.5 cents. This response was insignificant in the USA before 1969 and in Canada before 1983. The corresponding estimate of wealth effect is one cent for the UK economy for the post-1987 time period. We don’t find any significant evidence for wealth effect in Germany.