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Working Paper
Asymmetric persistence in GDP? A deeper look at depth
If economic time series behave asymmetrically, then an interpretation of economic fluctuations based on linear time series models could be misleading. Beaudry and Koop (1993) recently argued that for post war U.S. GDP data there exists a statistically significant difference in persistence between negative and positive shocks. Their finding, if true, would be quite interesting since it would bring a new perspective to the literature on business cycle, which has been dominated by two conflicting views: the trend-reverting view of Blanchard (1981) and the permanent view of Campbell and Mankiw ...
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Short-term speculators and the origins of near-random-walk exchange rate behavior
This paper suggests that normal speculative activity could be a source of random-walk exchange rate behavior. Using a noise trader model to analyze very short-term exchange rate behavior, it shows that rational, risk-averse speculators will smooth the impact of shocks to exchange rate fundamentals. With sufficient speculative activity, an exchange rate could become statistically indistinguishable from a random walk, regardless of the generating processes of its fundamental determinants. ; This result may help resolve the apparent inconsistency between the observed behavior of floating ...
Working Paper
Can long-horizon forecasts beat the random walk under the Engel-West explanation?
Engel and West (EW, 2005) argue that as the discount factor gets closer to one, present-value asset pricing models place greater weight on future fundamentals. Consequently, current fundamentals have very weak forecasting power and exchange rates appear to follow approximately a random walk. We connect the Engel-West explanation to the studies of exchange rates with long-horizon regressions. We find that under EW's assumption that fundamentals are I(1) and observable to the econometrician, long-horizon regressions generally do not have significant forecasting power. However, when EW's ...
Working Paper
The algebra of I (1)
Journal Article
If exchange rates are random walks, then almost everything we say about monetary policy is wrong
The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in ...
Working Paper
Measuring business cycle features
Since the extensive work by Burns and Mitchell (1947), many economists have interpreted economic fluctuations in terms of business cycle phases. Given this, we argue that in addition to usual model selection criteria currently used in the profession, the adequacy of a univariate macroeconomic time series model should be based on its ability to replicate two most important business cycle features of the U.S. data--duration and amplitude. We propose a number of checks for whether univariate statistical models generate business cycle features observed in US GDP and find that many popular ...