Working Papers

Authors: Gerhard Toews, Torfinn Harding, Radoslaw Stefanski

May 2016

We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices. We find that a giant discovery with the value of a country's GDP increases the real exchange rate by 14% within 10 years following the discovery. The appreciation is nearly exclusively driven by an appreciation of the prices of non-tradable goods. We show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behaviour and Dutch disease dynamics.

Reference: 174

Individual View

Abstract:

This paper provides a quantitative assessment of the ‘temptation preferences' of Gul and Pesendorfer (2001) for understanding consumer life-cycle choices. I first confirm the empirical relevance of these preferences. I then show that they provide rational and straightforward explanations for many life-cycle features that appear to be inconsistent with standard preferences. These include the puzzle of ‘excess sensitivity' in consumption; the ‘retirement-consumption puzzle'; the demand for commitment devices; and the slow downsizing in housing towards the end of the life-cycle.

JEL Codes: D12, D91, E21, G11, R21

Keywords: life-cycle models, temptation preferences, housing; estimating Euler-Equations

Reference: 796

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Authors: Rabah Arezki, Amadou Sy

Apr 2016

This paper studies the appropriate financing structure of infrastructure investment in Africa. It starts with a description of recent initiatives to scale up infrastructure investment in Africa. The paper then uses insights from the literature on informed vs. arm’s length debt to discuss the structure of infrastructure financing. Considering the differences in investors’ preferences that Africa faces, the paper argues that continent’s success to fill its greenfield and hence risky infrastructure gap hinges upon a delicate balancing act between development banking and institutional long-term investment. In a first phase, development banks which have both the flexibility and expertise should help finance the riskier phases of large greenfield infrastructure projects. In a second phase, development banks should disengage and offload their mature brownfield projects to pave the way for a viable engagement of long term institutional investors such as sovereign wealth funds. In order to promote an Africa wide infrastructure bond markets where the latter could play a critical role, the enhancement of Africa’s legal and regulatory framework should however start now.

JEL Codes: H49, H54, G30, G38

Keywords: Africa, Infrastructure Finance, Development Banks, Long-term Investors

Reference: 173

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Authors: Pawel Dziewulski, John Quah

Apr 2016

Abstract:

Supermodular functions are widely used in economics to model complementarity. For example, a firm's production function is supermodular if the marginal productivity of each factor increases with the usage of other factors. This in turn guarantees that when the price of a factor falls, the firm's demand for all factors increase. We generalise the notion of supermodular functions so the concept is also applicable to correspondences.  Supermodular correspondences arise naturally in a variety of settings. To illustrate the use of the concept and our results, we apply them to study, amongst other things, the optimising behaviour of firms producing multiple output goods and of agents with ambiguity aversion.

JEL Codes: C61, D21, D24

Keywords: supermodular correspondence, monotone comparative statics, multi- output production, ambiguity aversion

Reference: 795

Individual View

Authors: Anthony Venables, Samuel E Wills

Apr 2016

The paper explores strategies for managing revenue from natural resources, focusing on the balance between domestic and foreign asset accumulation. It suggests that domestic asset accumulation is the priority in developing countries, while there are three motives for accumulating foreign assets; inter-generational transfer, temporary ‘parking’ of funds, and stabilisation. The paper argues that the first of these is inappropriate for low income countries. The second is required if it is difficult to absorb extra spending in the domestic economy and takes time to build up domestic investment. The third is important, and depends on the extent to which the economy has other ways of adjusting to shocks.

JEL Codes: E60, F34, F35, F43, H21, H63, O11, Q33

Keywords: resource curse, managing windfalls, fiscal rules, volatility, absorptive capacity, Dutch disease, public investment

Reference: 171

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Authors: Felix Pretis, James Reade, Genaro Sucarrat

Apr 2016

Abstract:

This paper provides an overview of the R-package 'gets’, which contains facilities for General-to-Specific (GETS) modelling of the mean and variance of a regression, and Indicator Saturation (IS) methods for the detection and modelling of structural breaks and outliers. The mean can be specified as an autoregressive model with covariates (an 'AR-X' model), and the variance can be specified as an autoregressive log-variance model with covariates (a 'log-ARCH-X' model). The covariates in the two specifications need not be the same, and the classical regression model is obtained as a special case when there is no dynamics, and when there are no covariates in the variance equation. The four main functions of the package are arx, getsm, getsv and isat. The first function estimates an AR-X model with log-ARCH-X errors. The second function undertakes GETS model selection of the mean specification of an arx object. The third function undertakes GETS model selection of the log-variance specification of an arx object. The fourth function undertakes GETS model selection of an indicator saturated mean specification allowing for the detection of structural breaks and outliers. Examples of how LaTeX code of the estimation output can be generated is given, and the usage of two convenience functions for export of results to EViews and STATA are illustrated.

JEL Codes: C50, C52, C87

Keywords: general-to-specific, model selection, indicator saturation, log-variance, R

Reference: 794

Individual View

Authors: Janine Aron, John Muellbauer

Apr 2016

Abstract:

In the absence of micro-data in the public domain, new aggregate models for the UK’s mortgage repossessions and arrears are estimated using quarterly data over 1983-2014, motivated by a conceptual double trigger frame framework for foreclosures and payment delinquencies. An innovation to improve on the flawed but widespread use of loan-to-value measures, is to estimate difficult-to-observe variations in loan quality and access to refinancing, and shifts in lenders’ forbearance policy, by common latent variables in a system of equations for arrears and repossessions. We introduce, for the first time in the literature, a theory-justified estimate of the proportion of mortgages in negative equity as a key driver of aggregate repossessions and arrears. This is based on an average debt-equity ratio, corrected for regional deviations, and uses a functional form for the distribution of the debt-equity ratio checked on Irish micro-data from the Bank of Ireland, and Bank of England snapshots of negative equity. We systematically address serious measurement bias in the ‘months-in-arrears’ measures, neglected in previous UK studies. Highly significant effects on aggregate rates of repossessions and arrears are found for the aggregate debt-service ratio, the proportion of mortgages in negative equity and the unemployment rate. Economic forecast scenarios to 2020 highlight risks faced by the UK and its mortgage lenders, illustrating the usefulness of the approach for bank stress-testing. For macroeconomics, our model traces an important part of the financial accelerator: the feedback from the housing market to bad loans and hence banks’ ability to extend credit.

JEL Codes: G21, G28, G17, R28, R21, C51, C53, E27

Keywords: foreclosures, mortgage repossessions, mortgage payment delinquencies, mortgage arrears, credit risk stress testing, latent variables model.

Reference: 793

Individual View

Authors: Lina O Anderson, Samantha De Martino, Torfinn Harding, Karlygash Kuralbayeva, Andre Lima

Apr 2016

To reduce deforestation rates in the Amazon, Brazil established in the period 2004-2010 conservation zones covering an area 1.5 times the size of Germany. In the same period, Brazil experienced a large reduction in deforestation rates. By combining satellite data on deforestation with data on the location and timing of the conservation zones, we provide spatial regression discontinuity estimates and difference-in-difference estimates indicating that the policy cannot explain the large reduction in deforestation rates. The reason is that the zones are located in areas where agricultural production is likely to be unprofitable. We also provide evidence that zones reduce deforestation if the incentives for municipalities to reduce deforestation are high. We rationalize these finding with a spatial economics model of land use, with endogenous location of conservation zones and imperfect enforcement. Our findings point to the need for other explanations than the conservation zones to explain the sharp decline in deforestation rates in the Brazilian Amazon since 2004.

JEL Codes: Q28, Q58, R11, R14

Keywords: regulation, conservation policies, deforestation, Brazil

Reference: 172

Individual View

Authors: Climent Quintana-Domeque, Damian Clarke, Sonia Oreffice

Apr 2016

Abstract:

We study the determinants of season of birth of the first child, for White non-Hispanic married women aged 25-45 in the US, using birth certificate and Census data. The prevalence of good season (quarters 2 and 3) is significantly related to mother's age, education, and smoking status during pregnancy, as well as to receiving WIC food during pregnancy and to pre-pregnancy body mass index. Moreover, those who did not use assisted reproductive technology (ART) present a higher prevalence of good season births. The frequency of good season is also higher and more strongly related to mother's age in states where cold weather is more severe, and varies with mother's occupation, exhibiting a particularly strong positive association with working in "education, training, and library". Remarkably, this relationship between good season and weather disappears for mothers in "education, training, and library" occupations, revealing that season of birth is a matter of choice and preferences, not simply a biological mechanism. We estimate the compensating wage differential for mothers who work in jobs other than "education, training, and library", which allows us to provide an upper-bound to the life-time value of good season of birth of about USD 1,000,000. Finally, we present evidence that good season of birth is positively related to health at birth conditional on several maternal characteristics.

JEL Codes: I10, J01, J13

Keywords: Quarter of birth, Fertility timing, Compensating wage differentials, Birth out-comes.

Reference: 792

Individual View

Authors: Climent Quintana-Domeque, Nicola Barban, Elisabetta De Cao, Sonia Oreffice

Mar 2016

Abstract:

Social scientists have overwhelmingly documented a strong and increasing educational homogamy between spouses. When estimating sorting by education, the presence of measurement error in the education variables or random factors in the matching process may underestimate the actual degree of assortative mating, simultaneity bias may overestimate it, while omitting other individual characteristics relevant in the marriage market may under- or overestimate it. We address these issues using an instrumental variables approach based on exploiting genetic variation in polygenic scores and controlling for population stratification. Specifically, we instrument spousal education with his/her educational polygenic score while controlling for own educational polygenic score. If the exclusion restriction is satisfied, our findings indicate that (1) assortative mating is underestimated when using OLS, and that (2) male education is correlated with other matching-relevant socioeconomic characteristics, while female education is productive per se in the matching. If the exclusion restriction is not satisfied, our evidence is consistent with (2). This suggests that individual socioeconomic attractiveness in the marriage market is multidimensional for men, but can be summarized with education for women.

JEL Codes: D1, J1, J12

Keywords: Matching, Years of Education, College, Polygenic Scores, HRS

Reference: 791

Individual View

Authors: Ian Crawford, Donna Harris

Mar 2016

Abstract:

We study the effects of social interactions on individuals’ other-regarding preferences. Using a modified dictator game and a structural choice-revealed preference approach, we compare five models of other regarding preferences and, using our preferred specification, we measure an individual’s preferences before and after subjects have interacted face-to-face in a small group. We then examine whether a change in preferences is observed. We find that these interactions do indeed change individuals’ other-regarding preferences and that these effects are highly heterogeneous. In most groups, preferences of individual group members become more homogenous as might be expected, but we also find that subjects’ preferences can converge towards those of a single key individual in the group whose preferences are both extreme and also unchanging. These key individuals often have strongly egoistic preferences and are also more likely to be male. These effects are more prevalent amongst younger subjects than older.

JEL Codes: C90, C92, D70

Keywords: Other-regarding preferences, social interactions, preference dynamics, preference heterogeneity, social conformity

Reference: 790

Individual View

Authors: Guido Ascari, Paolo Bonomolo Hedibert F. Lopes

Mar 2016

Abstract


The instability of macroeconomic variables is usually ruled out by rational expectations. We propose a generalization of the rational expectations framework to estimate possible temporary unstable paths. Our approach yields drifting parameters and stochastic volatility. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy and instability. We apply our methodology to US inflation dynamics in the ‘70s through the lens of a simple New Keynesian model. When unstable RE paths are allowed, the data unambiguously select them to explain the stagflation period in the ‘70s.Thus, our methodology suggests that US inflation dynamics in the ‘70s is better described by unstable rational equilibrium paths.

JEL Codes: E31, E52

Keywords: Rational Expectations, Sunspots, Instability, Indeterminacy, Inflation, Monetary Policy.

Reference: 787

Individual View

Authors: Guido Ascari, Anna Florio, Alessandro Gobbi

Mar 2016

Abstract:

A natural generalisation of the original Leeper (1991) taxonomy leads to the concepts of globally active (or passive) and globally switching policies to explain the determinacy properties of a model where both monetary and fiscal policies may switch according to a Markov process. Monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. This new taxonomy also links the determinacy analysis to the model dynamics because it qualifies under which conditions expectations and wealth effects
arise in the Markov-switching model.

 

JEL Codes: E5

Keywords: Monetary Policy and Fiscal Policy Interaction, Markov Switching, Non-linear models.

Reference: 788

Individual View

Authors: Laurens Cherchye, Bram De Rock, Selma Telalagic Waltheror, Frederic Vermeulenor

Mar 2016

Abstract:

Do individuals divorce for economic reasons? Can we measure the attractiveness of new matches in the marriage market? We answer these questions using a structural model of the household and a rich panel dataset from Malawi. We propose a model of the household with consumption, production and revealed preference conditions for stability on the marriage market. We define marital instability in terms of the consumption gains to remarrying another individual in the same marriage market, and to being single. We find that a 1 percentage point increase in the wife’s estimated consumption gains from remarriage is significantly associated with a 0.6 percentage point increase in divorce probability in the next three years. In a multinomial model, higher values of consumption gains from remarriage raise the odds of divorce and remarriage but not of divorce and singleness. These findings provide out-of-sample validation of the structural model and shed new light on the economic determinants of divorce.

JEL Codes: D11, D12, D13, J12

Keywords: Marriage Market, Divorce, Malawi, Agricultural Production, Revealed Preference

Reference: 786

Individual View

Authors: David Hendry, Grayham E. Mizon

Mar 2016

Abstract:

We recommend a major shift in the Econometrics curriculum for both graduate and undergraduate teaching. It is essential to include a range of topics that are still rarely addressed in such teaching, but are now vital for understanding and conducting empirical macroeconomic research. We focus on a new approach to macro-econometrics teaching, since even undergraduate econometrics courses must include analytical methods for time-series that exhibit both evolution from stochastic trends and abrupt changes from location shifts, and so confront the ‘non-stationarity revolution’. The complexity and size of the resulting equation specifications, formulated to include all theory-based variables, their lags and possibly non-linear functional forms, as well as potential breaks and rival candidate variables, places model selection for models of changing economic data at the centre of teaching. To illustrate our proposed new curriculum, we draw on a large UK macroeconomics database over 1860–2011. We discuss how we reached our present approach, and how the teaching of macroeconometrics, and econometrics in general, can be improved by nesting so-called ‘theory-driven’ and ‘data-driven’ approaches. In our methodology, the theory-model’s parameter estimates are unaffected by selection when the theory is complete and correct, so nothing is lost, whereas when the theory is incomplete or incorrect, improved empirical models can be discovered from the data. Recent software like Autometrics facilitates both the teaching and the implementation of econometrics, supported by simulation tools to examine operational performance, designed to be feasibly presented live in the classroom.

JEL Codes: C51, C22

Keywords: Teaching Econometrics, Model Selection, Theory Retention, Location Shifts,Indicator Saturation, Autometrics

Reference: 785

Individual View

Authors: David Hendry, Andrew B. Martinez

Mar 2016

Abstract:

This paper develops a new approach for evaluating multi-step system forecasts with relatively few forecast-error observations. It extends Clements and Hendry (1993a) using Abadir et al.(2014) to generate "design-free" estimates of the general matrix of the forecast-error second-moment when there are relatively few forecast-error observations. Simulations show that the usefulness of alternative methods deteriorates when their assumptions are violated. The new approach compares well against these methods and provides correct forecast rankings.

JEL Codes: C22, C32, C53

Keywords: Invariance, Forecast Evaluation, Forecast Error, Moment Matrices, MSFE, GFESM

Reference: 784

Individual View

Authors: Jonathon M. Clegg

Mar 2016

Abstract:

Rational retrospective voting models have dominated the literature on election forecasting and the economic vote since they were first proposed by Anthony Downs in 1957. The theory views voters as appraisers of incumbent government’s past performance, which acts as the principal source of information individuals use when making their vote. Pure retrospective voting requires far less of the electorate in order to hold a government accountable and empirical work based on this theory has been very adept at predicting election outcomes and explaining individual voting decisions. In terms of the time period assessed to form judgements on past performance however, there is a surprising disconnect between the theoretical line of thought and actual testing. The sensible assumption of retrospective voting models is that voters, looking to judge a government’s past performance, should assess changes in their own welfare over an entire term of office, with little or no discounting of past events. The majority of empirical studies however, focus on economic performance over shorter time horizons, usually within a year of an election. There have only been a handful of studies attempting to empirically test the correct temporal relationship between changes in economic indicators and election outcomes, despite its importance for retrospective voting models and democratic accountability. This working paper empirically tests over which time horizons changes in macroeconomic fundamentals continue to have a significant bearing on election outcomes in Post War Britain. It finds that longer-term measures of economic change, over entire government terms, are better at predicting changes in incumbent’s vote shares than shorter-term measures, closer to the election period. This has important consequences for future voting models and is a promising result for democratic accountability.

JEL Codes: D72, C52

Reference: 143

Individual View

Authors: David Gill,Victoria Prowse, Zdenka Kissova, Jaesun Lee

Mar 2016

 

Abstract:

Rank-order relative-performance evaluation, in which pay, promotion and symbolic awards depend on the rank of workers in the distribution of performance, is ubiquitous. Whenever firms use rank-order relative-performance evaluation, workers receive feedback about their rank. Using a real-effort experiment, we aim to discover whether workers respond to the specific rank that they achieve. In particular, we leverage random variation in the allocation of rank among subjects who exerted the same effort to obtain a causal estimate of the rank response function that describes how effort provision responds to the content of rank-order feedback. We find that the rank response function is U-shaped. Subjects exhibit 'first-place loving' and 'last-place loathing', that is subjects work hardest after being ranked first or last. We discuss implications of our findings for the optimal design of firms' performance feedback policies, workplace organizational structures and incentives schemes.

JEL Codes: C23, C91, J22, M12,

Keywords: Relative performance evaluation, Relative performance feedback, Rank order feedback, Dynamic effort provision, Real effort experiment, Flat wage, Fixed wage, Taste for rank, Status seeking,Social esteem, Self esteem, Public feedback, Private feedback.

Reference: 783

Individual View

Authors: Robert Allen

Mar 2016

Abstract:

Schumpeter’s ‘perennial gale of creative destruction’ blew strongly through Britain during the Industrial Revolution, as the factory mode of production displaced the cottage mode in many industries. A famous example is the shift from hand loom weaving to the use of power looms in mills. As the use of power looms expanded, the price of cloth fell, and the ‘golden age of the hand loom weaver’ gave way to poverty and unemployment. This paper argues that the fates of the hand and machine processes were even more closely interwoven. With the expansion of factory spinning in the 1780s, the demand for hand loom weavers soared in order to process the newly available cheap yarn. The rise in demand raised the earnings of hand loom weavers, thereby, creating the ‘golden age’. The high earnings also increased the profitability of developing the power loom by raising the value of the labour that it saved. This meant that less efficient–hence, cheaper to develop--power looms could be brought into commercial use than would have been the case had the golden age not occurred. The counterfactual possibilities are explored with a model of the costs of weaving by hand and by power. The cottage mode of production was an efficient system of producing cloth, but it self-destructed as its expansion after 1780 raised the demand for sector-specific skills, thus providing the incentive for inventors to develop a power technology to replace it. The power loom, in turn, devalued the old skills, so poverty accompanied progress.

JEL Codes: N63, N34, O31

Keywords: Technological Change, Invention, Technological Unemployment, Creative Destruction

Reference: 142

Individual View

Authors: Robert Allen

Mar 2016

Abstract:

This paper proposes a new method for defining an international poverty line based on explicit budgeting. The novel feature is that linear programming is used to deduce the diet that minimizes cost and guarantees survival. Nonfood items are also explicitly budgeted and amount to about one quarter of the cost of subsistence. A series of least cost diets are calculated with increasingly demanding nutritional requirements for twenty countries using prices from ICP 2011. The aim is to see which requirements rationalize the spending pattern of the poor. The ‘reduced basic’ model does the job. When the cost of the nonfood items are added to the cost of the ‘reduced basic’ diet, the resulting Linear Programming Poverty Line (LPPL) averages $1.88 per day across the poor countries in the sample. The same model rationalizes both the spending pattern of the poor and the World Bank Poverty Line. The LPPL has the advantages that it is (1) clearly related to survival and well being, (2) comparable across time and space since the same nutritional requirements are used everywhere, (3) adjusts consumption patterns to local prices, (4) presents no index number problems since solutions are always in local prices, and (5) requires only readily available information, namely, the prices in ICP or equivalent.

JEL Codes: I12, I32, O61, O63

Keywords: Absolute poverty, Diet problem, Linear Programming, World Bank Poverty Line

Reference: 141

Individual View

Authors: Valeria Rueda, Guillaume Laval, Etienne Patin

Feb 2016

Abstract:

This article explores the role of individual cultural distance on income, using the genetic distance as a proxy for cultural distance. We show that cultural distance has heterogeneous predictive power. In particular, culturally distant individuals living in regions with other individuals from more trusting ancestries or less xenophobic ones are more likely to be economically successful. First generation migrants seem to be less likely to success the more culturally distant they are, but this effect vanishes as time spent in the USA increases. Our research challenges the static view that cultural differences are necessarily an obstacle to economic performance in the long-run. Our interpretation of the results is robust to the use of alternative measures for cultural distance.

JEL Codes: J61, N30, O15, Z13, Z15 r

Keywords: Cultural Distance, Cultural Diversity, Genetics, Historical Persistence, Labor Participation, Social Capital

Reference: 140

Individual View

Authors: Anthony Venables, Jan I. Haaland

Feb 2016

Abstract:

This paper derives optimal trade and domestic taxes for a small open economy containing a monopolistically competitive (MC) sector in which firms may have heterogeneous productivity levels. Analysis encompasses cases in which the domestic MC sector is able to expand or contract flexibly, or is constrained to be of fixed size. In the former case domestic protection can bring gains by increasing the number of product varieties on offer; these gains (and the corresponding rates of domestic subsidy or of import tariffs) are reduced by heterogeneity of foreign exporters some of whom may withdraw from the market. In the latter case gains from protection arise from terms-of-trade effects; since various margins of substitution are switched off, only the relative values of domestic taxes, import tariffs and export taxes matter. In general, policies work through both a terms-of-trade and a variety effect, and the paper shows how the relative importance of each depends on the structure of the economy.

JEL Codes: F12, F13

Keywords: trade policy, monopolistic competition, heterogeneous firms, terms of trade, variety, productivity.

Reference: 782

Individual View

Authors: Heinrich H. Nax

Feb 2016

Abstract:

Reinforcement relative to an adaptive benchmark is a well-established model of behavior outside finance. Recently, reinforcement has been identified as an important driver of decisions to repurchase a stock. In this paper, we enrich the existing reinforcement model of repurchasing by an aspiration-based market benchmark. When choosing which stock to repurchase, investors’ sources of reinforcement are weighted averages of absolute returns from previous sales and relative returns with respect to a market benchmark. The weights change according to market environments. We empirically identify the following crucial asymmetry that cannot be reconciled by simple reinforcement strategy, but is consistent with the model we propose: investors place more weight on relative returns when the market is performing well, and place more weight on absolute returns when the market is performing badly.

JEL Codes: G02, G11, D01

Keywords: Reinforcement, Stock Repurchasing, Aspiration Adjustment

Reference: 781

Individual View

Authors: David Hendry, Felix Pretis, Lea Schneider, Jason E. Smerdon

Feb 2016

Abstract:

We present a methodology for detecting structural breaks at any point in time-series regression models using an indicator saturation approach. Building on recent developments in econometric model selection for more variables than observations, we saturate a regression model with a full set of designed break functions. By selecting over these break functions using an extended general-to-specific algorithm, we obtain unbiased estimates of the break date and magnitude. Monte Carlo simulations confirm the approximate properties of the approach. We assess the methodology by detecting volcanic eruptions in a time series of Northern Hemisphere mean temperature spanning roughly 1200 years, derived from a fully-coupled global climate model simulation. Our technique demonstrates that historic volcanic eruptions can be statistically detected without prior knowledge of their occurrence or magnitude- and hence may prove useful for estimating the past impact of volcanic events using proxy-reconstructions of hemispheric or global mean temperature, leading to an improved understanding of the effect of stratospheric aerosols on temperatures. The break detection procedure can be applied to evaluate policy impacts as well as act as a robust forecasting device.

JEL Codes: C22, C52, Q54

Keywords: Indicator Saturation, Model Selection, Location Shifts, Climate,Temperature, Volcanic Eruptions

Reference: 780

Individual View

Authors: Jennifer Castle, David Hendry, Michael P. Clements

Feb 2016

Abstract:

Economic forecasting may go badly awry when there are structural breaks, such that the relationships between variables that held in the past are a poor basis for making predictions about the future. We review a body of research that seeks to provide viable strategies for economic forecasting when past relationships can no longer be relied upon.

JEL Codes: C51, C22

Keywords: Business Cycles, Forecasting, Breaks

Reference: 779

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