Robert W. Rich

Oil and the Macroeconomy: A Markov State-Switching Approach

This paper analyzes the relationship between oil price shocks and postwar U.S. business cycle fluctuations. The authors develop a generalized Markov switching model of output that includes a measure of net real oil price increases and examine the capabilities of this variable to generate shifts in the mean of GDP growth and to predict transitions between dichotomous growth phases. The results indicate that, while the behavior of oil prices has been a contributing factor to the mean of low growth phases of output, movements in oil prices generally have not been a principal determinant in the historical evidence of these phases. Copyright 1997 by Ohio State University Press.

The Relationship between Expected Inflation, Disagreement, and Uncertainty: Evidence from Matched Point and Density Forecasts

This paper examines matched point and density forecasts of inflation from the Survey of Professional Forecasters to analyze the relationship between expected inflation, disagreement, and uncertainty. We extend previous studies through our data construction and estimation methodology. Specifically, we derive measures of disagreement and uncertainty by using a decomposition proposed in earlier research by Wallis and by applying the concept of entropy from information theory. We also undertake the empirical analysis within a seemingly unrelated regression framework. Our results offer mixed support for the propositions that disagreement is a useful proxy for uncertainty and that increases in expected inflation are accompanied by heightened inflation uncertainty. However, we document a robust, quantitatively and statistically significant positive association between disagreement and expected inflation.

Inflation and the asymmetric effects of money on output fluctuations

Abstract This paper examines postwar U.S. data and tests the implications of Ball and Mankiws (1994) model of asymmetric price adjustment that monetary shocks have asymmetric effects on output and that the degree of asymmetry is positively related to movements in average inflation. The empirical analysis extends Covers (1992) framework to allow the degree of asymmetry to depend on an expected inflation series generated from Hamiltons (1989) Markov switching model. The results indicate that monetary shocks display assymetric effects which are exacerbated by increases in average inflation and that negative monetary shocks have a larger absolute impact on output.

A Review of Core Inflation and an Evaluation of its Measures

This paper provides a review of the concept of core inflation and evaluates the performance of several proposed measures. We first consider the rationale of a central bank in setting its inflation goal in terms of a selected rate of consumer price growth and the use of a core inflation measure as a means of achieving this long-term policy objective. We then discuss desired attributes of a core measure of inflation, such as ease of design, accuracy in tracking trend inflation, and predictive content for future movements in aggregate inflation. Using these attributes as criteria, we evaluate several candidate series that have been proposed as core measures of consumer price index (CPI) inflation and personal consumption expenditure (PCE) inflation for the United States. The candidate series are inflation excluding food and energy, inflation excluding energy, and median inflation, as well as exponentially smoothed versions of aggregate inflation and the aforementioned individual series. ; For PCE inflation, we examine quarterly data starting in 1959. Unlike previous research, we confine our analysis to the methodologically consistent CPI index, which is only available starting in 1978. We find that most of the candidate series, including the familiar ex-food and energy measure, demonstrate the ability to match the mean rate of aggregate inflation and track movements in its underlying trend. In the within-sample analysis, we find that core measures derived through exponential smoothing, in combination with simple measures of economic slack, have substantial explanatory content for changes in aggregate inflation several years in advance. In the out-of-sample analysis, however, we find that no measure performs consistently well in forecasting inflation. Moreover, we document evidence of some parameter instability in the estimated forecasting models. Taken together, our findings lead us to conclude that there is no individual measure of core inflation that can be considered superior to other measures.

Structural Estimates of the U.S. Sacrifice Ratio

This article investigates the statistical properties of the U.S. sacrifice ratio—the cumulative output loss arising from a permanent reduction in inflation. We derive estimates of the sacrifice ratio from three structural vector autoregression models and then conduct a series of simulation exercises to analyze their sampling distribution. We obtain point estimates of the sacrifice ratio that are consistent with results reported in earlier studies. However, the estimates are very imprecise, which we suggest reflects the poor quality of instruments used in estimation. We conclude that the estimates provide a very unreliable guide for assessing the output cost of disinflation policy.

The measurement and behavior of uncertainty: evidence from the ECB Survey of Professional Forecasters

We use matched point and density forecasts of output growth and inflation from the ECB Survey of Professional Forecasters to derive measures of forecast uncertainty, forecast dispersion, and forecast accuracy. We construct uncertainty measures from aggregate density functions as well as from individual histograms. The uncertainty measures display countercyclical behavior, and there is evidence of increased uncertainty for output growth and inflation since 2007. The results also indicate that uncertainty displays a very weak relationship with forecast dispersion, corroborating the findings of other recent studies indicating that disagreement is not a valid proxy for uncertainty. In addition, we find no correspondence between movements in uncertainty and predictive accuracy, suggesting that time-varying conditional variance estimates may not provide a reliable proxy for uncertainty. Last, using a regression equation that can be interpreted as a (G)ARCH-M-type model, we find limited evidence of linkages between uncertainty and levels of inflation and output growth.

Testing the Rationality of Inflation Forecasts from Survey Data: Another Look at the SRC Expected Price Change Data

This paper develops a unified econometric approach for testing the rationality of expectations from survey data series. The paper employs the estimation techniques of Hansen (1982) and Eichenbaum, Hansen and Singleton (1982) to conduct tests of unbiasedness, efficiency and orthogonality for the SRC expected price change data. In contrast to the existing literature, the analysis takes careful account of serial correlation and conditional heteroskedasticity in the disturbance terms. The results do not reject the properties of unbiasedness, efficiency or othogonality for this survey data series. Copyright 1989 by MIT Press.

Modeling Uncertainty: Predictive Accuracy as a Proxy for Predictive Confidence

This paper evaluates current strategies for the empirical modeling of forecast behavior. In particular, we focus on the reliability of using proxies from time series models of heteroskedasticity to describe changes in predictive confidence. We address this issue by examining the relationship between ex post forecast errors and ex ante measures of forecast uncertainty from data on inflation forecasts from the Survey of Professional Forecasters. The results provide little evidence of a strong link between observed heteroskedasticity in the consensus forecast errors and forecast uncertainty. Instead, the findings indicate a significant link between observed heteroskedasticity in the consensus forecast errors and forecast dispersion. We conclude that conventional model-based measures of uncertainty may be capturing not the degree of confidence that individuals attach to their forecasts but rather the degree of disagreement across individuals in their forecasts.

Two New Indexes Offer a Broad View of Economic Activity in the New York-New Jersey Region

The authors develop two coincident indexes that provide a comprehensive measure of economic activity in New Jersey, New York State, and New York City.

How Does Slack Influence Inflation

Economists have long studied the relationship between resource utilization and inflation. Theory suggests that when firms use labor and capital very intensively, production costs tend to rise and firms have more scope to pass those cost increases along in the form of higher product prices. In contrast, when that level of intensity is relatively low—that is, when the economy is operating with slack—production costs tend to rise more slowly (or even fall) and firms have less scope for raising prices. Empirical evidence, however, has varied concerning the exact nature of the relationship between resource utilization and inflation. In this study, the authors reexamine this relationship by evaluating the presence of “threshold effects.” They find that the level of intensity of resource utilization must be below or above certain critical values before it can help to forecast movements in inflation.