Optimal lag-length choice in stable and unstable VAR models under situations of homoscedasticity and ARCH

The performance of different information criteria - namely Akaike, corrected Akaike (AICC), Schwarz-Bayesian (SBC), and Hannan-Quinn - is investigated so as to choose the optimal lag length in stable and unstable vector autoregressive (VAR) models both when autoregressive conditional heteroscedasticity (ARCH) is present and when it is not. The investigation covers both large and small sample sizes. The Monte Carlo simulation results show that SBC has relatively better performance in lag-choice accuracy in many situations. It is also generally the least sensitive to ARCH regardless of stability or instability of the VAR model, especially in large sample sizes. These appealing properties of SBC make it the optimal criterion for choosing lag length in many situations, especially in the case of financial data, which are usually characterized by occasional periods of high volatility. SBC also has the best forecasting abilities in the majority of situations in which we vary sample size, stability, variance structure (ARCH or not), and forecast horizon (one period or five). frequently, AICC also has good lag-choosing and forecasting properties. However, when ARCH is present, the five-period forecast performance of all criteria in all situations worsens.

Forecasting industry-level CPI and PPI inflation : does exchange rate pass-through matter?

We show that incorporating the effects of exchange rate pass-through into a model can help in obtaining superior forecasts of domestic, industry-level inflation. Our analysis is based on a multivariate system of domestic inflation, import prices and exchange rates that incorporates restrictions from economic theory. These are restrictions on the transmission channels of the exchange rate pass-through to domestic prices, and are presented as testable hypotheses that lead to model reduction. We provide the results of various tests, including causality and prior restrictions, which support the underlying economic arguments and the model we use. The forecasting results for our model suggest that it has a superior performance overall, jointly producing more accurate forecasts of domestic inflation.

Demystifying the supply of capital and labour in a nation’s economic chain

Public capital has been considered to be the wheels of economic activity in a nation or region. The reverse effect, the contribution of economic growth to public capital, is also worth analysis. The non-structural vector auto-regression (VAR) approach is performed for the Australian economy using yearly data for the 1960-2008 period. The optimal lag is investigated to build the VAR model that is then tested for stability. The impulse response function is further employed to examine the response of one economic variable to the innovation of others and to determine the lagged terms for the maximum absolute value of the other variables’ responses. The results will provide historical evidence for the federal and regional governments of Australia to estimate the effects of these production variables, in particular, the effect of infrastructure spending on the gross domestic product.

Testing the expectations hypothesis for interest rate term structure : some Australian evidence

Many test results are found inconsistent with the expectations hypothesis of the term structure. The aim of this paper is to re-examine the expectations hypothesis of the term structure using the Australian interest rate data from 1969(7) to 1995(7). We start with the cointegration test on R_t, r_t, and S_t followed by the Granger causality test from S_t to ∇ r_t. Finally we carry out the VAR model of cross-equation restrictions test. Our findings show that there is no conclusive rejection of the expectations hypothesis of the term structure.

An analysis of Fiji's monetary policy transmission

Purpose – The purpose of this paper is to examine the monetary policy transmission mechanism for the Fiji Islands using a structural vector autoregressive (SVAR) model for the period 1975 to 2005.

Design/methodology/approach – The SVAR model investigates how a monetary policy shock – defined as a temporary and exogenous rise in the short-term interest rate – affects real and nominal macro variables; namely real output, prices, exchange rates, and money supply.

Findings – The results suggest that a monetary policy shock statistically significantly reduces output initially, but then output is able to recover to its pre-shock level. A monetary policy shock generates inflationary pressure, leads to an appreciation of the Fijian currency and reduces the demand for money. The paper also analysed the impact of a nominal effective exchange rate (NEER) shock (an appreciation) on real output and found that it leads to a statistically significant negative effect on real output.

Practical implications – The findings of this study should be of direct relevance to the research and policy work undertaken at the Reserve Bank of Fiji.

Originality/value – For a small economy, such as Fiji, where monetary policy is key to sustainable macroeconomic management, this is the first paper that undertakes a dynamic analysis of monetary policy transmission. The paper uses time series data over three decades and builds a structural VAR model, rooted in theory. This paper will be of direct relevance to the Reserve Bank of Fiji. The approach and model proposed will also be useful for applied monetary policy researchers in other developing countries where inflation rate targeting is a key element of the monetary policy setting.

Investigating the housing market fluctuation under an expansionary monetary policy in Australia

This research empirically investigates the impact of monetary policy on the housing market in Australia from 1996 to 2009. Three primary variables associated with the housing sector and monetary policy, including interest rates, money supply and house prices, are estimated by a structural vector autoregression (VAR) model. Depending upon the analysis using the impulse response function, it can be identified that monetary policy significantly affects the housing market in Australia by the adjustments in interest rates and money supply. The empirical results from this study may be useful for policy makers to enact appropriate policies in relation to the infrastructure planning.

A structural VAR analysis of electricity consumption and real GDP : evidence from the G7 countries

In this paper, we depart from the literature on electricity consumption–real GDP in that for the first time we examine the reaction of real GDP to shocks in electricity consumption. To achieve this goal, we use the structural vector autoregressive (SVAR) model and examine the impact of electricity consumption shocks on real GDP for the G7 countries. We find that except for the USA, electricity consumption has a statistically significant positive impact on real GDP over short horizons. This finding implies that except for the USA, electricity conservation policies will hurt real GDP in the G7 countries.

A factor-augmented VAR approach : the effect of a rise in the US personal income tax rate on the US and Canada

In this paper a factor-augmented vector autoregressive (FAVAR) model is estimated to characterize the dynamic effects of shocks in the personal income tax rate in the United States on United States and Canadian economies. The representation and the estimate of the FAVAR model is based on Stock and Watson (2005) and the shocks are recovered applying the identification scheme proposed by Bernanke et al. (2005); this method allows impulse response functions to be generated for all the variables in the dataset and provides a description of the domestic and international transmission mechanisms of United States movements in the personal income tax rate. A distinguishing feature of our model is the disaggregation of traded goods sector where imports and exports are disaggregated into 12 and 13 industries, respectively. This provides extra information on the domestic and international transmission mechanism across the two countries. The results show that the FAVAR approach generates a reasonable characterisation of the effects of United States movements in the US personal income tax rate on the United States economy and its transmission to the Canadian economy.