Prakash Loungani

Oil Price Shocks and the Dispersion Hypothesis

Recent research by David Lilien shows that a significant fraction of aggregate unemployment can be explained by the dispersion of employment growth across industries. This paper presents two new results in this area. First, it is shown that a significant fraction of the variation in Liliens dispersion index is due to the differential impact of oil shocks across industries. Second, and more important, it is shown that, once the dispersion in employment growth due to oil shocks is accounted for, the residual dispersion has no explanatory power for unemployment.

How Accurate Are Private Sector Forecasts? Cross-Country Evidence from Consensus Forecasts of Output Growth

This paper evaluates the performance of Consensus Forecasts of GDP growth for industrialized and developing countries from 1989 to 1998. The questions addressed are (1) How do forecast errors differ across industrialized and developing countries? (2) How well do forecasters predict recessions? (3) Are forecasts efficient and unbiased? (4) How does private sector performance compare with that of international organizations? (5) Is forecaster discord a reliable predictor of forecast accuracy? Two key results emerge. First, the record of failure to predict recessions is virtually unblemished. Second, there is high degree of similarity between private forecasts and those of international organizations.

Product Market Competition and the Impact of Price Uncertainty on Investment: Some Evidence from US Manufacturing Industries

This paper examines the relationship between real exchange rates and real interest rates using three different approaches across four currencies and two horizons with 20 years of data. Each approach gives some encouragement that this relationship might hold, but each approach also encounters problems establishing the form or usefulness of the relationship. On balance, this paper contributes to the literature by finding more encouraging results than in earlier studies, but it still remains to be demonstrated that the real exchange rate-real interest rate relationship is the linchpin to explaining exchange rate movements.

Stock market dispersion and unemployment

Abstract The sectoral shifts hypothesis, advanced by Lilien (1982) and Davis (1987), suggests that unemployment is, in part, the result of resources being reallocated from declining to expanding sectors of the economy. Using U.S. data from 1931 to 1987, we test this hypothesis by constructing an index measuring the dispersion among stock prices from different industries. We find that lagged values of this index significantly affect unemployment. We show that the stock market dispersion index is less contaminated by aggregate demand influences than Liliens employment dispersion index, which makes our test less vulnerable to the Abraham and Katz (1986) critique.

Sources of Inflation in Developing Countries

This paper develops stylized facts about the inflation process in developing countries, focusing particularly on the relationship between the exchange rate regime and the sources of inflation. Using annual data from 1964 to 1998 for 53 developing countries, we find that money growth and exchange rate changes-factors typically related to fiscal influences-are far more important in countries with floating exchange rate regimes than in those with fixed exchange rates. Instead, inertial factors dominate the inflation process in developing countries with fixed exchange rate regimes.

Cyclical fluctuations and sectoral reallocation: Evidence from the PSID☆

Abstract This paper documents the correlation between permanent sectoral reallocation and the business cycle using data from the Michigan Panel Study of Income Dynamics. We find that the outflow of workers from goods to services accelerates during recessions. The flow from services to stable employment in surables accelerates during booms. We also document the contribution of sectoral reallocation to total unemployment. Permanent switchers account for about a quarter of the total weeks of unemployment during booms; this proportion rises to nearly 40% duing recessions

Was China the First Domino?: Assessing Links Between China and the Rest of Emerging Asia

We assess links between China and the rest of emerging Asia. Some commentators have argued that China’s apparent devaluation in 1994 may have contributed to the Asian financial crisis. We argue that the devaluation was not economically important: The more-relevant exchange rate was a floating rate that was not devalued, and high Chinese inflation has led to a very sharp real appreciation of the currency. Although in principle, export competition with China could nevertheless have placed pressure on other Asian exporters, we argue that the striking feature of the data is the common movement between export growth from China and from other developing Asian economies. To the extent there is evidence of export competition, it is the period from about 1989 to 1993: China’s exchange rate depreciated sharply, Chinese export growth exceeded export growth of other Asian economies, and the composition of Asian exports (measured by export shares of various goods to the United States and other industrial economies) changed substantially. Finally, we speculate on the effects of the Asian crisis on China’s prospects. China’s economic growth is likely to slow because of increased trade competition as a result of the devaluation of other Asian currencies, and because of reduced capital inflows. In addition, these reduced inflows are likely to reduce job creation in the non-state sector, and hence make enterprise restructuring more difficult in China.

Labor Market Policies and IMF Advice in Advanced Economies During the Great Recession

In this paper we present and analyze the IMF’s labor market recommendations for advanced economies since the beginning of the crisis, both in general and specifically in program countries. Our analysis is informed by our reading of the theoretical and empirical literature on the design of labor market policies and institutions in advanced economies. We organize our discussion around two concepts: micro flexibility, namely the ability of the economy to allow for the reallocation of workers to jobs needed to sustain growth; and macro flexibility, namely the ability of the economy to adjust to macroeconomic shocks. Achieving both types of flexibility while protecting workers and maintaining incentives for workers and firms to invest in existing relations, is not that simple, and the design of labor market institutions faces delicate trade-offs.

Global Housing Cycles

Housing cycles and their impact on the financial system and the macroeconomy have become the center of attention following the global financial crisis. This paper documents the characteristics of housing cycles in a large set of countries, and examines the determinants of house price movements. Empirical analysis shows that house price dynamics are mostly driven by income and demographics but fluctuations in these fundamentals and credit conditions can create deviations from the implied equilibrium path. We conclude with a discussion of the macroeconomic implications of house price corrections.

The Distributional Effects of Fiscal Consolidation

This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments.