Inflation equations derived from the P*-model

The P*-model is presented in Section 8.5.4. The basic variables of the model are calculated in much the same way for Norway as for the Euro area in the previous …

Forecast comparisons

Both models condition upon the rate of unemployment ut, average labour productivity at, import prices pit, and GDP mainland output yt. In order to investigate the dynamic forecasting properties we …

The NPCM in Norway

Consider the NPCM (with forward term only) estimated on quarterly Norwegian data[65]: Apt = 1.06 Apt+1 + 0.01 wst + 0.04 Apit + dummies (7.21) (0.11) (0.02) (0.02) x2(10) = …

Credit expansion crt

The growth rate of real credit demand, Acrt, is sluggish, and it is also affected in the short run by income effects. In addition the equation contains a step dummy …

The Incomplete Competition Model

The dynamic version of the ICM is presented in Chapters 5 and 6 and an example of empirical estimation is discussed in greater detail within the frame­work of a small …

RMSTEs and their decomposition

Table 10.2 shows the results from a series of counterfactual model simulations. For each interest rate rule we show the bias, standard deviation, and RMSTE measured relative to a baseline …

Testing for neglected monetary effects on inflation

The ICM equation for aggregate consumer price inflation in Table 8.12 contains three key sources of inflation impulses to a small open economy: imported inflation including currency depreciation (a pass-through …

Summary and conclusions

The dominance of EqCMs over systems consisting of relationships between differenced variables (dVARs) relies on the assumption that the EqCM model coincides with the underlying data generating mechanism. However, that …

Money and inflation

The role of money in the inflation process is an old issue in macro­economics, yet money plays no essential part in the models appearing up to and including Chapter 7 …

Interest rates for government bonds RBOt and bank loans RLt

Finally, the model consists of two interest rate equations. Before the deregula­tion, so st = 0, changes in the bond rate RBOt are an autoregressive process, corrected for politically induced …

The New Keynesian Phillips Curve Model

Recall the definition in Chapter 7: the NPCM states that inflation is explained by expected inflation one period ahead E(Apt+i | It), and excess demand or marginal costs xt (e. …

Relative loss calculations

So far we have summarised the counterfactual results through the effects on the mean and variability of a number of key variables. In the following we will investigate how the …

Evaluation of inflation models’ properties

The models above are estimated both for annual inflation (A4pt) and quarterly inflation (Apt) for all the inflation models, except for the NPCM where the forward-looking term on the right-hand …

A.2 Solving and estimating rational expectations models

To make the exposition self-contained, this appendix illustrates solution and estimation of simple models with forward looking variables—the illustration being the hybrid ‘New Keynesian Phillips curve’. Finally, we comment on …

Models of money demand

8.2.1 The velocity of circulation Models of the velocity of circulation are derived from the ‘equation of exchange’ identity often associated with the quantity theory of money (Fisher 1911) which …

Testing exogeneity and invariance

Following Engle et al. (1983), the concepts of weak exogeneity and parameter invariance refer to different aspects of ‘exogeneity’, namely the question of valid conditioning in the context of estimation, …

The P*-model of inflation

In the P*-model (Hallman et al. 1991) the long-run equilibrium price level is defined as the price level that would result with the current money stock, mt, provided that output …

Welfare losses evaluated by response surface estimation

Taylor (1979a) argues that the tradeoff between inflation variability and out­put variability can be illustrated by the convex relationship in Figure 10.6. In point A monetary policy is used actively …

Summary of the findings—Norway vs. Euro area

The overall conclusion from the comparisons of inflation models for the Norwegian economy is that monetary measures do not play an important part in explaining and/or predicting Norwegian inflation. The …

Undetermined coefficients

This method is more practical. It consists of the following steps: 1. Make a guess at the solution. 2. Derive the expectations variable. 3. Substitute back into the guessing solution. …

Dynamic models

The equilibrium-correction model provides a flexible dynamic specification for the money demand function. This entails explicit and separate modelling of the short-run dynamic specification and the long-run cointegrating relationship for …

Model performance

The model (9.5)-(9.13) is a small econometric model for Norway, which is characterised by the inclusion of labour market effects in addition to effects of aggregated demand and the exchange …

Empirical evidence from Euro-area data

In this section, we present estimated reduced form versions of the AWM and ICM inflation equations in order to evaluate the models and to compare fore­casts based on these equations …

Forecasting using. econometric models

The non-stationary nature of many economic time series has a bearing on virtually all aspects of econometrics, including forecasting. Recent devel­opments in forecasting theory have taken this into account, and …

Transmission channels and. model properties

In this chapter, we develop an econometric model for forecasting of inflation in Norway, an economy that recently opted for inflation tar­geting. We illustrate the estimation methodology advocated earlier, by …

Factorization

Finally, we shall take a look at this very elegant method introduced by Sargent. It consists of the following steps: 1. Write the model in terms of lead - and …

Inverted money demand equations

In reviewing the lineages of the Phillips curve in Chapter 4, we saw that the relationship between wage growth and the level of economic activity (or unem­ployment) has a prominent …

Responses to a permanent shift in interest rates

In this section, we discuss the dynamic properties of the full model. In thesimulations of the effects of an increase in the interest rate below we have not Figure 9.9. …

The reduced form ICM inflation equation

We derive a reduced form inflation equation for the ICM much in the same vein as for the AWM. The information set for this model is given by all variables …

EqCMs vs. dVARs in macroeconometric forecasting

The development of macroeconometric models in the course of the 1980s and 1990s, with more emphasis on dynamic specification and on model evaluation, meant that the models became less exposed …

The wage-price model

We first model the long-run equilibrium equations for wages and prices based on the framework of Chapter 5. As we established in Section 5.4 the long-run equations of that model …

Estimation

Remember that the model is APt = bp1Et APt+1 + bp1 APt —1 + bp2Xt + Zpt, which can be rewritten as n = jEtnt+1 + SxH + vpt. The …

Monetary analysis of Euro-area data

8.3.1 Money demand in the Euro area 1980—97 In this section, we establish that money demand in the Euro area can be mod­elled with a simple equilibrium correction model. We …

Evaluation of monetary. policy rules

We now relax the assumption of an exogenous interest rate in order to focus on monetary policy rules. We evaluate the performance of different types of reaction functions or interest …

The P*-model

The estimation of the P*-model in Section 8.5.4 requires additional data relative to the AWM data set. We have used a data series for broad money (M3) obtained from Gerlach …

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