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Discussion Paper
Estimating the output gap in real time
I propose a novel method of estimating the potential level of U.S. GDP in real time. The proposed wage-based measure of economic potential remains virtually unchanged when new data are released. The distance between current and potential output ? the output gap ? satisfies Okun?s law and outperforms many other measures of slack in forecasting inflation. Thus, I provide a robust statistical tool useful for understanding current economic conditions and guiding policymaking.
Working Paper
Estimating Dynamic Macroeconomic Models : How Informative Are the Data?
Central banks have long used dynamic stochastic general equilibrium (DSGE) models, which are typically estimated using Bayesian techniques, to inform key policy decisions. This paper offers an empirical strategy that quantifies the information content of the data relative to that of the prior distribution. Using an off-the-shelf DSGE model applied to quarterly Euro Area data from 1970:3 to 2009:4, we show how Monte Carlo simulations can reveal parameters for which the model's structure obscures identification. By integrating out components of the likelihood function and conducting a Bayesian ...
Working Paper
Poor (Wo)man’s Bootstrap
The bootstrap is a convenient tool for calculating standard errors of the parameters of complicated econometric models. Unfortunately, the fact that these models are complicated often makes the bootstrap extremely slow or even practically infeasible. This paper proposes an alternative to the bootstrap that relies only on the estimation of one-dimensional parameters. The paper contains no new difficult math. But we believe that it can be useful.
Working Paper
The Income-Achievement Gap and Adult Outcome Inequality
This paper discusses various methods for assessing group differences in academic achievement using only the ordinal content of achievement test scores. Researchers and policymakers frequently draw conclusions about achievement differences between various populations using methods that rely on the cardinal comparability of test scores. This paper shows that such methods can lead to erroneous conclusions in an important application: measuring changes over time in the achievement gap between youth from high- and low-income households. Commonly-employed, cardinal methods suggest that this ...
Working Paper
Explaining Machine Learning by Bootstrapping Partial Dependence Functions and Shapley Values
Machine learning and artificial intelligence methods are often referred to as “black boxes” when compared with traditional regression-based approaches. However, both traditional and machine learning methods are concerned with modeling the joint distribution between endogenous (target) and exogenous (input) variables. Where linear models describe the fitted relationship between the target and input variables via the slope of that relationship (coefficient estimates), the same fitted relationship can be described rigorously for any machine learning model by first-differencing the partial ...
Working Paper
Revisiting the Great Ratios Hypothesis
The idea that certain economic variables are roughly constant in the long run is an old one. Kaldor described them as stylized facts, whereas Klein and Kosobud labelled them great ratios. While such ratios are widely adopted in theoretical models in economics as conditions for balanced growth, arbitrage or solvency, the empirical literature has tended to find little evidence for them. We argue that this outcome could be due to episodic failure of cointegration, possible two-way causality between the variables in the ratios and cross-country error dependence due to latent factors. We propose a ...
Working Paper
Robust Bayesian Analysis for Econometrics
We review the literature on robust Bayesian analysis as a tool for global sensitivity analysis and for statistical decision-making under ambiguity. We discuss the methods proposed in the literature, including the different ways of constructing the set of priors that are the key input of the robust Bayesian analysis. We consider both a general set-up for Bayesian statistical decisions and inference and the special case of set-identified structural models. We provide new results that can be used to derive and compute the set of posterior moments for sensitivity analysis and to compute the ...
Working Paper
Easy Bootstrap-Like Estimation of Asymptotic Variances
The bootstrap is a convenient tool for calculating standard errors of the parameter estimates of complicated econometric models. Unfortunately, the bootstrap can be very time-consuming. In a recent paper, Honor and Hu (2017), we propose a ?Poor (Wo)man's Bootstrap? based on one-dimensional estimators. In this paper, we propose a modified, simpler method and illustrate its potential for estimating asymptotic variances.
Working Paper
Estimating (Markov-Switching) VAR Models without Gibbs Sampling: A Sequential Monte Carlo Approach
Vector autoregressions with Markov-switching parameters (MS-VARs) fit the data better than do their constant-parameter predecessors. However, Bayesian inference for MS-VARs with existing algorithms remains challenging. For our first contribution, we show that Sequential Monte Carlo (SMC) estimators accurately estimate Bayesian MS-VAR posteriors. Relative to multi-step, model-specific MCMC routines, SMC has the advantages of generality, parallelizability, and freedom from reliance on particular analytical relationships between prior and likelihood. For our second contribution, we use SMC's ...
Working Paper
Revisiting the Great Ratios Hypothesis
Kaldor called the constancy of certain ratios stylized facts, whereas Klein and Kosobud called them great ratios. While they often appear in theoretical models, the empirical literature finds little evidence for them, perhaps because the procedures used cannot deal with lack of cointegration, two-way causality and cross-country error dependence. We propose a new system pooled mean group estimator that can deal with these features. Monte Carlo results show it performs well compared with other estimators, and using it on a dataset over 150 years and 17 countries, we find support for five of the ...