Paul D. McNelis

Approximating and simulating the stochastic growth model: Parameterized expectations, neural networks, and the genetic algorithm

This paper compares alternative methods for approximating and solving the stochastic growth model with parameterized expectations. We compare polynomial and neural netowork specifications for expectations, and we employ both genetic algorithm and gradient-descent methods for solving the alternative models of parameterized expectations. Many of the statistics generated by the neural network specification in combination with the genetic algorithm and gradient descent optimization methods approach the statistics generated by the exact solution with risk aversion coefficients close to unity and full depreciation of the capital stock. For the alternative specification, with no depreciation of capital, the neural network results approach those generated by computationally-intense methods. Our results suggest that the neural network specification and genetic algorithm solution methods should at least complement parameterized expectation solutions based on polynomial approximation and pure gradient-descent optimization.

The effect of the Nikkei and the S&P on the All-Ordinaries: A comparison of three models

This paper examines the influence of shocks in the Japanese Nikkei Index and in the US S&P Index on the Australian All-Ordinaries Index. We present results from the application of three models--an autoregressive linear model, a GARCH-M model and a non-linear neural network model. According to standard forecast statistics, a restricted feedforward neural network model, incorporating parallel processing of information specified by time-zones, out-performs the linear and GARCH-M models. However, according to the Diebold-Mariano test of forecast accuracy, the mean loss differential between the neural network and the linear model is not statistically different from zero, while that between the neural network and the GARCH-M is statistically different from zero. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

Exchange controls and interest rate determination with traded and non-traded assets: the Irish–United Kingdom experience

Abstract This paper is an empirical study of the effectiveness of exchange controls in recent Irish experience vis-a-vis the United Kingdom. Specifically, we examine the effects of domestic money market conditions on an array of Irish interest rates following the imposition of the controls, and the relative importance of covered British interest rates during the process of financial disintegration induced by these controls. Using time-varying parameter estimation, we find that the Central Bank gained only partial and temporary control over interest rates through domestic monetary channels. For most assets and liabilities, interest parity conditions were restored within six months after a policy change.

The Pricing of Manufactured Goods during Trade Liberalization: Evidence from Chile, Israel, and Korea

This paper is an investigation of price-setting behavior in Chile, Israel and Korea when each of these countries moved from a fairly closed to a more open international trade regime. In some cases, the intensification of the opening resulted from real appreciation rather than from a formal adjustment in tariff rates (as in Chile, 1980-82, and Israel, 1983-84). The central thesis of this paper is that the structural price equation for import-competing manufactured goods changes with the degree of openness to trade. When the economy is fairly closed, the main weight is commanded by domestic cost variables and excess demand, and foreign prices only affect pricing through their effects on imported material prices. During trade liberalization the rate of change of prices of an increasing proportion of manufacturing goods begins to be influenced by the landed cost of similar imports, but domestic variables still have a role because selected domestic manufactured goods are considered imperfect substitutes for internationally traded products. Empirical results from time-varying parameter estimation show that domestic currency prices of imports become progressively more important during the liberalization processes in the three countries.

Indexing, exchange rate policy and inflationary feedback effects in Latin America

Abstract This paper examines inflationary adjustment processes in Argentina, Brazil, Chile, Ecuador, Peru, and Uruguay with time-varying estimation techniques to determine the relationship between inflationary inertia or feedback effects from past to current inflation and the degree of indexation of wages and exchange rates to past inflation rates. The results show that reductions in the degree of exchange rate linkage to past inflation have not been particularly helpful in larger or relatively more diversified economies (such as Argentina, Brazil, or Chile), while reductions in wage linkages to past inflation rates have had strong but short-lived effects.

Income Inequality, Trade and Financial Openness

This paper examines the relationships between the Gini coefficient, trade-openness, foreign aid and foreign direct investment flows. Panel data estimates show that trade openness can be effective for changing income inequality, but its effectiveness depends on the stage of development. Simulation results show that the Gini and openness can be negatively or positively correlated — it depends on the capital intensity and on the degree of openness. Overall, the results suggest that trade and financial openness can be effective policies for reducing inequality in low income countries, if they significantly increase the marginal productivity of labour through capital intensive methods of production.

Nonlinear phillips curves in the Euro area and USA? Evidence from linear and neural network models

The paper applies neural network methodology to inflation forecasting in the Euro-area and the USA. Neural network methodology outperforms linear forecasting methods for the Euro Area at forecast horizons of one, three, and six month horizons, while the linear model is preferable for US data. The nonlinear estimation shows that unemployment is a significant predictor of inflation for the Euro Area. Neither model detects a significant effect of unemployment on inflation for the US data.

Alternative Government Spending Rules: Effects On Income Inequality And Welfare

This paper compares the effects of pro- and countercyclical government spending on income inequality and welfare in a small open economy. We examine the consequences of alternative government spending rules following shocks to productivity, domestic interest rates, terms of trade, and export demand. The simulated results show that welfare and income inequality indices can move in opposite directions for government spending rules, with countercyclical spending improving welfare and procyclical spending improving income equality.

Macroeconomic Volatility and Counterfactual Inflation‐Targeting in Hong Kong

The present paper evaluates macroeconomic adjustment in Hong Kong with an estimated dynamic stochastic general equilibrium (DSGE) model under a fixed exchange rate regime. We find that exports and world inflation shocks are the dominant sources of GDP volatility, with the risk premium taking on importance during the Asian crisis after 1997. A counterfactual simulation, assuming a flexible exchange rate regime with inflation targeting, shows that inflation would have decreased slightly, but interest‐rate volatility would have increased significantly. The welfare gains from switching out of the currency board system appear to be marginal.

Deciphering the Message in Japanese Deflation Dynamics

This paper uses linear and nonlinear neural network regime-switching (NNRS) models to decipher the message in Japanese deflation dynamics and thus identify the channels through which Japans economy can escape its deflationary spiral. The NNRS model is superior to a linear model with respect to in-sample specification tests and out-of-sample forecasting accuracy. The most important variables affecting inflation are interest rates and the output gap. Given the zero lower bound on interest rates, it will be most effective to end Japans deflationary cycle with policies that reverse the output gap by stimulating investment.