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112. Forecasting U.S. Inflation by Bayesian Model Averaging
- Author:
- Jonathan H. Wright
- Publication Date:
- 09-2003
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Recent empirical work has considered the prediction of inflation by combining the information in a large number of time series. One such method that has been found to give consistently good results consists of simple equal weighted averaging of the forecasts over a large number of different models, each of which is a linear regression model that relates inflation to a single predictor and a lagged dependent variable. In this paper, I consider using Bayesian Model Averaging for pseudo out-of-sample prediction of US inflation, and find that it gives more accurate forecasts than simple equal weighted averaging. This superior performance is consistent across subsamples and inflation measures. Meanwhile, both methods substantially outperform a naive time series benchmark of predicting inflation by an autoregression.
- Topic:
- International Relations, Economics, and International Trade and Finance
- Political Geography:
- United States
113. Bayesian Model Averaging and Exchange Rate Forecasts
- Author:
- Jonathan H. Wright
- Publication Date:
- 09-2003
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Exchange rate forecasting is hard and the seminal result of Meese and Rogoff (1983) that the exchange rate is well approximated by a driftless random walk, at least for prediction purposes, has never really been overturned despite much effort at constructing other forecasting models. However, in several other macro and financial forecasting applications, researchers in recent years have considered methods for forecasting that combine the information in a large number of time series. One method that has been found to be remarkably useful for out-of-sample prediction is simple averaging of the forecasts of different models. This often seems to work better than the forecasts from any one model. Bayesian Model Averaging is a closely related method that has also been found to be useful for out-of-sample prediction. This starts out with many possible models and prior beliefs about the probability that each model is the true one. It then involves computing the posterior probability that each model is the true one, and averages the forecasts from the different models, weighting them by these posterior probabilities. This is effectively a shrinkage methodology, but with shrinkage over models not just over parameters. I apply this Bayesian Model Averaging approach to pseudo-out-of-sample exchange rate forecasting over the last ten years. I find that it compares quite favorably to a driftless random walk forecast. Depending on the currency-horizon pair, the Bayesian Model Averaging forecasts sometimes do quite a bit better than the random walk benchmark (in terms of mean square prediction error), while they never do much worse. The forecasts generated by this model averaging methodology are however very close to (but not identical to) those from the random walk forecast.
- Topic:
- International Relations, Economics, and International Trade and Finance
- Political Geography:
- United States
114. Contagion: An Empirical Test
- Author:
- Jon Wongswan
- Publication Date:
- 09-2003
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Using the conditional Capital Asset Pricing Model (CAPM), this paper tests for the existence and pattern of contagion and capital market integration in global equity markets. Contagion is defined as significant excess conditional correlation among different countries' asset returns above what could be explained by economic fundamentals (systematic risks). Capital market integration is defined as the situation in which only systematic risks are priced. The paper uses a panel of sixteen countries, divided into three blocs: Asia, Latin America, and Germany-U.K.-U.S., for the period from 1990 through 1999. The results show evidence of contagion and capital market integration. In addition, contagion is found to be a regional phenomenon.
- Topic:
- International Relations, Economics, Globalization, and International Trade and Finance
- Political Geography:
- United States, United Kingdom, Asia, Germany, and Latin America
115. National Strategy for Homeland Security
- Publication Date:
- 07-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This document is the first National Strategy for Homeland Security. The purpose of the Strategy is to mobilize and organize our Nation to secure the U.S. homeland from terrorist attacks. This is an exceedingly complex mission that requires coordinated and focused effort from our entire society-the federal government, state and local governments, the private sector, and the American people.
- Topic:
- Defense Policy and Terrorism
- Political Geography:
- United States and America
116. Allied Contributions to the Common Defense
- Publication Date:
- 06-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- The Responsibility Sharing Report presents the Department of Defense's annual assessment of the relative contributions toward the common defense and mutual security by our NATO allies, our Pacific allies (Japan and the Republic of Korea), and the Gulf Cooperation Council (GCC) nations. The cornerstone of effective alliance relationships is the fair and equitable sharing of the full range of mutual security responsibilities, and the appropriate balancing of costs and benefits.
- Topic:
- Security and Defense Policy
- Political Geography:
- United States, Japan, and Korea
117. Sticky Prices, No Menu Costs
- Author:
- David Bowman
- Publication Date:
- 12-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- A model that contains no costs to changing prices but in which prices do not respond to nominal shocks is presented. In models that do not feature superneutrality of money flexible price equilibria will allow certain types of monetary shocks to affect the real economy. Sticky price behavior may in fact be better at protecting the real economy from the effects of monetary shocks in such environments. This point is demonstrated in a standard monetary model with liquidity effects. An equilibrium in which sticky prices are supported without menu costs is then constructed. In equilibrium firms choose to keep prices fixed in response to nominal shocks because doing so provides a service to their customers, increasing profits by expanding the customer base.
- Topic:
- Economics, Emerging Markets, and International Trade and Finance
- Political Geography:
- United States
118. International Monetary Policy Coordination and Financial Market Integration
- Author:
- Alan Sutherland
- Publication Date:
- 12-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- The welfare gains from international coordination of monetary policy are analysed in a two-country model with sticky prices. The gains from coordination are compared under two alternative structures for financial markets: financial autarky and risk sharing. The welfare gains from coordination are found to be largest when there is risk sharing and the elasticity of substitution between home and foreign goods is greater than unity. When there is no risk sharing the gains to coordination are almost zero. It is also shown that the welfare gain from risk sharing can be negative when monetary policy is uncoordinated.
- Topic:
- Economics, Human Welfare, and International Trade and Finance
- Political Geography:
- United States
119. Monetary Policy and the Financial Accelerator in a Monetary Union
- Author:
- Simon Gilchrist, Jean-Olivier Hairault, and Hubert Kempf
- Publication Date:
- 12-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In this paper, we consider the effect of a monetary union in a model with a significant role for financial market imperfections. We do so by introducing a financial accelerator into a stochastic general equilibrium macro model of a two country economy. We show that financial market imperfections introduce important cross-country transmission mechanisms to asymmetric shocks to supply and demand. Within this framework, we study the likely costs and benefits of monetary union. We also consider the effects of cross-country heterogeneity in financial markets. Both the presence of financial frictions and the use of a single currency have significant impacts on the international propagation of exogenous shocks. The introduction of asymmetries in the financial contract widens the difference in cyclical behavior of national economies in a monetary union, but financial integration compensates the loss of policy instruments.
- Topic:
- Development, Economics, and International Trade and Finance
- Political Geography:
- United States
120. Productivity, Investment, and Current Accounts: Reassessing the Evidence
- Author:
- Jaime Marquez
- Publication Date:
- 11-2002
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- The most widely accepted explanation for the inverse association between private investments and current accounts [Glick and Rogoff, 1995] rests on data for manufactures through 1990. Is this consensus robust to revisions to the national accounts and the expansion of information technologies since 1990? To address this question I replicate their results and I find that post 1990 developments eliminate the support for such a conclusion. I also implement alternative formulations and find, again, a lack of empirical support for their findings. Thus I examine the role of measurement errors and focus on the treatment of the manufacturing sector as representative of the whole economy and the exclusion of the contribution of capital when measuring productivity. Correcting these two measurement errors restores to Glick and Rogoff's conclusion its original strength.
- Topic:
- Economics, International Trade and Finance, and Science and Technology
- Political Geography:
- United States