Stephen K. Pollard

Unit Roots and Structural Change: An Application to US House-Price Indices

This paper employs time-series analysis to investigate the price dynamics of the house price indices included in the S&P/Case–Shiller Composite10 index and the validity of the ‘ripple effect’, following the approach outlined by Meen (1999). More specifically, the paper first considers the time-series properties of the capital gain from the sale of houses. That is, it examines whether shocks to the capital gain series produce permanent or transitory changes. In general, the findings lack uniformity and depend upon the assumptions imposed by the testing procedures. Secondly, it considers the time-series properties of the ratio of regional house price indices to the Composite10 index. That is, it examines whether shocks to these house price ratios exhibit trend reversion. The tests of this ‘ripple effect’ also display conflicting evidence.

Cointegration between exchange rates and relative prices: another view

Abstract In this paper the cointegration property of exchange rates and relative prices, as implied by the purchasing power parity theory (PPP), is reexamined using a time-varying parameter (TVP) approach. Such an approach recognizes the possibility that the lack of cointegration between exchange rates and relative prices found in recent literature may be the result of the nonstationarity of the cointegrating regression parameters themselves. The tests of cointegration in a TVP framework indicate that PPP is better supported and point to the presence of structural instability in the long run equilibrium relationship between exchange rates and relative prices.

The ‘Efficiency’ of the London metal exchange: A test with overlapping and non-overlapping data

In this paper the three approaches available to test the hypothesis that the futures price is an unbiased predictor of future spot prices are utilized to analyze the ‘efficiency’ of the London Metal Exchange for the period January 1975–December 1983. The first technique uses non-overlapping observation and derives a test of this hypothesis using OLS. The second uses overlapping data and models explicitly the moving average process in the error structure using ARMA procedures. The third uses a FIML technique to estimate a bivariate stochastic stationary process of the spot and futures prices and tests the unbiased predictor hypothesis in the form of complex non-linear cross-equation restrictions. The results conform to the predictions of the unbiased predictor hypothesis regardless of the methodology and/or data employed.

Unanticipated monetary growth, output, and the price level in Latin America: An empirical investigation

Abstract This paper provides statistical evidence on the response of real output and the price level to movements in unanticipated monetary growth for 16 Latin American countries in the context of Barros version of the rational expectations-natural rate theory. ARIMA ( p, d, q ) modeling of the growth rate of M2 is employed for each country and the residuals of the selected model utilized to estimate the parameters of the real output and price level equations. Careful attention is devoted to the autocorrelation structure of the residuals of the real output and price level equations. The empirical results suggest that generally unanticipated monetary growth has positive effects on real output and negative effects on the price level. Such patterns, however, do not exhibit an unambiguous symmetric response.

Price policy and agricultural export performance in Jamaica

Abstract Jamaica experienced one of the longest uninterrupted periods of negative growth among LDCs in the 1970s. Agricultural exports led this decline with an unusually poor growth performance, exacerbating foreign exchange shortages. Commodity board pricing policies played a strong role in penalizing these exports. Further, board policies appear to be inefficient in either maximizing profits or foreign exchange. Implicit and unstated objectives of board policies are discussed. Supply functions show that farmers do react positively to price changes, contrary to board assumptions. Beneficiaries of this penalizing price policy are identified and an important implication for foreign aid policy is underscored.

Unemployment Rate Hysteresis and the Great Recession: Exploring the Metropolitan Evidence

This paper explores the mean-reverting behavior of the unemployment rate using monthly geographically disaggregated data for the period 1991:01 through 2012:02. We apply both standard unit-root tests and tests that allow for one and two structural breaks in the mean. We find evidence that favors both unit-root and stationary processes. No series exhibits stationarity around a constant mean, which does not support the traditional natural-rate hypothesis, but about half of the series exhibit stationarity around a shifting mean. For these series, we find that the break occurs at the Great Recession. To complement the unit-root analysis, we also examine the behavior of the series using the Bai and Perron methods to detect multiple regimes at unknown points of time. We find that the Great Recession also altered the persistence of the unemployment rate series over the identified regimes. In general, the values of the estimated persistence within regimes decrease between those regimes, implying faster absorption of shocks later in the sample period.

Purchasing Power Parity between the UK and the Euro Area

We use the Johansen cointegration approach to assess the empirical validity of the purchasing power parity (PPP) between the UK and the Euro Area, which we represent by Germany, the largest of its members. We conduct the empirical analysis in the context of the global financial crisis that began in 2007 and find that it directly affects the cointegration space. We fail to validate the Johansen and Juselius (1992) original hypothesis that nonstationarity of the PPP associates with the nonstationarity of interest rate differentials to produce a stationary relation. On the other hand, we do not reject PPP. We find that PPP cointegrates with inflation differentials. We also find, contrary to conventional wisdom, that (i) equilibrium adjustment occurs between the German and UK inflation rates, while weak exogeneity exists for the German and UK interest rates and the PPP condition, and (ii) three common trends associated with the German interest rate, the UK interest rate, and the PPP condition “push” the system with the German interest rate and the PPP condition playing dominant roles.

Distribution dynamics and convergence in Latin America: A non-parametric analysis

This paper examines the dynamics of income distribution and convergence in Latin America during the period 1960 to 2000. Our results, based on the intradistribution dynamics approach, reveal a “twin peaks” dynamics, which echoes findings reported for the OECD, the Asia Pacific Basin and worldwide. Notable differences, however, are found between the income dynamics in Latin America and in these other regions. Further, our findings indicate that physical capital investment and health capital serve to explain Latin America’s “twin peaks” polarization. Other factors, such as geographical proximity, trade openness and human capital, are also found to help explaining it to some extent.

Test of the efficiency of commodity futures in a multi-contract framework

ConclusionsThis paper has extended the EMH to encompass multiple contracts with different expectational horizons. A time series model was estimated for agricultural commodities using a methodology which explicitly accounts for the presence of overlapping data in the samples. The empirical evidence points to the conclusion that the relationships between spot and futures prices over different contracts that are traded simultaneously do not conform to the predictions of the EMH. Past forecast errors of contracts of different maturities can then be exploited by market participants to make trading decisions about these contracts. This finding is of importance, given the emergence of recent literature on the decline of sources of information in the agricultural sector (Just 1983; Gardner 1983) and does not confirm Workings (1942) and Justs (1983) theoretical supposition that futures prices can provide market participants with the necessary information when making forecasts about spot prices for agricultural commodities. The results, moreover, suggest that future research on hedging strategies needs to incorporate the informational content of the multi-contract relationships that exist in these markets.

Simulating the Impacts of Credit Policy and Fertilizer Subsidy on Central Luzon Rice Farms, the Philippines: Comment

input use, production, and income of farmers in the program. They also attempted to explain why farmers default on formal loans. Their model is a significant improvement over those used in most previous studies aimed at measuring credit impact. David and Meyer provide an extensive review of these studies. The major RH findings are that credit and fertilizer subsidies caused, at most, a 21% to 30% increase in yields on these farms, and they predicted that default rates should average 10% per year. Despite its strengths, this study suffers from several weaknesses inherent in most credit impact research. These flaws are the focus of this critique. We also suggest how to improve future research on rural financial markets in less developed countries. Our first concern is that RH treat loans as if they were production inputs, and they largely ignore the nonrice, nonfarm, and consumption activities of the farm household. They do not clarify that a formal loan is just one of various sources of near-cash liquidity available to farm households, and that purchases of inputs for rice production are only one of a number of uses of liquidity. RH do not account for the fungible nature of credit, substitution of borrowed funds for own funds, and possible diversion of borrowed funds to nonfarm uses or consumption. We feel it is useful to define loans as claims on resources, not as production inputs. Viewing credit as a production input rather than as a claim on resources is a weakness in most credit impact studies. The essential characteristic of credit is its fungibility. Borrowed funds can be used to buy any good or service available in the market, irrespective of the stated loan purpose. Hence, the effect of credit on rice output is not directly measurable. To assign cause and effect, a researcher would need comprehensive information on all sources and uses of liquidity by the farm household concurrent with the loan. While RH do acknowledge that credit is fungible, they do not integrate this notion into their analysis. Substitution of borrowed for owned funds is generally ignored by researchers, including the fact that a farmers own funds and his borrowed funds are equal in purchasing power and can be substituted for each other. One needs to have information on the marginal changes in liquidity use occurring in all farm household activities concurrent with borrowing. For example, if additional beer drinking yields a higher satisfaction to the farm household than the return from increased fertilizer use in rice, the net effect from a fertilizer credit program will, undoubtedly be some increased beer consumption. RH did not analyze the diversion of liquidity to consumption or nonfarm enterprise activities (but they do note that it is difficult to detect). These alternative uses of funds are available to all farm households and need to be recognized. There is also the question of additionality. Additionality refers to the behavior and expenditure patterns of the farm household when additional liquidity is acquired. To account for this, one needs to know how additional liquidity is spent. RH assume that additional liquidity will be spent on rice enterprises. This leads to an overestimation of any credit