Pär Österholm

Testing for Cointegration Using the Johansen Methodology When Variables are Near-Integrated

We investigate the properties of Johansens (1988, 1991) maximum eigenvalue and trace tests for cointegration under the empirically relevant situation of near-integrated variables. Using Monte Carlo techniques, we show that in a system with near-integrated variables, the probability of reaching an erroneous conclusion regarding the cointegrating rank of the system is generally substantially higher than the nominal size. The risk of concluding that completely unrelated series are cointegrated is therefore non-negligible. The spurious rejection rate can be reduced by performing additional tests of restrictions on the cointegrating vector(s), although it is still substantially larger than the nominal size.

Does Money Growth Granger Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARS

We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.

Hysteresis and non-linearities in unemployment rates

This study tests whether there is evidence of mean reversion in unemployment rates using the recently developed unit root test of Kapetanios et al. (2003). In this framework, the null hypothesis of a unit root process is tested against the alternative of a globally stationary exponential smooth transition autoregressive process. Applying the test to monthly data for Australia, Canada, Finland, Sweden and the USA, it is concluded that unemployment hysteresis finds less support when non-linearities are allowed for compared to the benchmark of using a standard Augmented Dickey–Fuller test.

The effect on the Swedish real economy of the financial crisis

This article investigates the effects of the financial crisis on the Swedish real economy. In order to do this, an index which describes the financial conditions of the Swedish economy is developed. The index indicates that domestic Swedish financial conditions have deteriorated substantially during 2008 and are now at the highest level since the crisis of the early 1990s. A Bayesian Vector Autoregression (BVAR) model with both US and Swedish variables is used to assess the quantitative effects of the financial crisis on Swedish real Gross Domestic Product (GDP) growth. Results suggest that the growth of the Swedish economy will be substantially slower in the next couple of years due to the financial crisis.

Forecasting real exchange rate trends using age structure data – the case of Sweden

Theory predicts that life cycle saving and consumption behaviour could cause real exchange rate variations as the age structure varies. Time series regressions show that the Swedish demographic structure has significant explanatory power on the real exchange rate during 1960 to 2002. A model using age shares as regressors is used for medium-term out-of-sample forecasts, which perform well both compared to naïve forecasts and forecasts based on an autoregressive model.

Killing four unit root birds in the US economy with three panel unit root test stones

This study tests for the presence of unit roots in four US macroeconomic time series using panel unit root tests. The Im, Pesaran and Shin (Journal of Econometrics, 115, pp. 53–74, 2003) test, the Multivariate Augmented Dickey-Fuller test (Taylor and Sarno, Journal of International Economics, 46, pp. 281–312, 1998) and the Johansen (Journal of Economic Dynamics and Control, 12, pp. 231–54, 1988) likelihood ratio test are applied to unemployment, the real exchange rate, the nominal interest rate and inflation. The three tests all have ways of controlling the obvious cross-sectional dependence in the panel. Using monthly data from 1960 to 2002 there is evidence that all time series are generated by stationary processes.

Does Unemployment Hysteresis Equal Employment Hysteresis

This paper investigates if conclusions regarding labour market hysteresis differ depending on whether employment or unemployment rates are studied. Applying a range of unit-root tests to monthly data from Australia, Austria, Canada, Finland, Sweden, the UK and the USA, we find results for employment rates that contrast those based on unemployment rates. In particular, rather than the mixed evidence for hysteresis found using unemployment rates, employment rates result in unequivocal evidence of hysteresis in Australia, Canada and the USA. These findings cast doubt on previous conclusions in the literature.

The Effect of External Conditionson Growth in Latin America

This paper investigates the sensitivity of Latin American GDP growth to external developments using a Bayesian VAR model with informative steady-state priors. The model is estimated on quarterly data from 1994 to 2006 on key external and Latin American variables. It finds that 50 to 60 percent of the variation in Latin American GDP growth is accounted for by external shocks. Conditional forecasts for a variety of external scenarios suggest that Latin American growth is robust to moderate declines in commodity prices and U.S. or world growth, but sensitive to more extreme shocks, particularly a combined external slowdown and tightening of world financial conditions.

Population age structure and real exchange rates in the OECD

Macroeconomic theory predicts that variations in population cohort sizes will lead to demographically induced real exchange rate movements. While such effects have previously been established for individual countries, this paper exploits cross-sectional time series data to test the prediction for a larger number of economies. A reduced form model with population age shares as regressors is estimated using a panel of 25 OECD countries between 1971 and 2002. The results confirm that demographic structure has significant explanatory power for the real exchange rate and the estimated relationship supports age structure effects in accordance with the life cycle hypothesis.

The Rise and Fall of U.S. Inflation Persistence

This paper estimates the path of inflation persistence in the United States over the last 50 years and draws implications about the evolution of the Federal Reserves monetary-policy preferences. Standard models of central-bank optimization predict persistent inflation outcomes. Time variation of the central banks preference for output stability should be reflected in changes in inflation persistence. We estimate an ARMA(1,q) model with a time-varying autoregressive parameter for monthly U.S. inflation data from 1955 to 2006. The coefficients provide an estimate of the inflation target and the path of inflation persistence. The estimated inflation target over the sample is approximately 2.8 percent and we find that inflation persistence declined substantially during Volcker and Greenspans tenures to a level significantly less than one and significantly below that of the 1970s and early 1980s.