Forecasting Inflation Using Dynamic Model Averaging

We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.

Inequality and Risk-Taking Behaviour

This paper investigates social influences on attitudes to risk and offers an evolutionary explanation of risk-taking by young low-ranked males. Becker, Murphy and Werning (2005) found that individuals about to participate in a status tournament may take fair gambles even though they are risk averse in both wealth and status. Here their model is generalised by use of the insight of Hopkins and Kornienko (2010) that in a tournament or status competition one can consider equality in terms of the status or rewards available as well as in initial endowments. While Becker et al. found that risk-taking is increasing in the equality of initial endowments, it is found here that it is increasing in the inequality of rewards in the tournament. Further, it is shown that the poorest will be risk loving if the lowest level of status awarded is sufficiently low. Thus, the disadvantaged in society rationally engage in risky behavior when social rewards are sufficiently unequal. Finally, as greater inequality in terms of social status induces gambling, it can cause greater inequality of wealth.

Forecasting Inflation Using Dynamic Model Averaging

We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coe¢ cient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.

Optimal taxation and the skill premium

The stylized facts suggest a negative relationship between tax progressivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demographic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.

A New Model Of Trend Inflation

This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.

Estimating United States Phillips Curves With Expectations Consistent With The Statistical Process Of Inflation

‘Modern’ Phillips curve theories predict inflation is an integrated, or near integrated, process. However, inflation appears bounded above and below in developed economies and so cannot be ‘truly’ integrated and more likely stationary around a shifting mean. If agents believe inflation is integrated as in the ‘modern’ theories then they are making systematic errors concerning the statistical process of inflation. An alternative theory of the Phillips curve is developed that is consistent with the ‘true’ statistical process of inflation. It is demonstrated that United States inflation data is consistent with the alternative theory but not with the existing ‘modern’ theories.

Universal banking, competition and risk in a macro model

A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.

Modified 'dumbbell' technique: a simple and intuitive method to position balloon-expandable stent valves.

Intraoperative cardiac imaging plays a key role during transcatheter aortic valve replacement. In recent years, new techniques and new tools for improved image quality and virtual navigation have been proposed, in order to simplify and standardize stent valve positioning and implantation. But routine performance of the new techniques may require major economic investments or specific knowledge and skills and, for this reason, they may not be accessible to the majority of cardiac centres involved in transcatheter valve replacement projects. Additionally, they still require injections of contrast medium to obtain computed images. Therefore, we have developed and describe here a very simple and intuitive method of positioning balloon-expandable stent valves, which represents the evolution of the 'dumbbell' technique for echocardiography-guided transcatheter valve replacement without angiography. This method, based on the partial inflation of the balloon catheter during positioning, traps the crimped valve in the aortic valve orifice and, consequently, very near to the ideal landing zone. It does not require specific echocardiographic knowledge; it does not require angiographies that increase the risk of postoperative kidney failure in elderly patients, and it can be also performed in centres not equipped with a hybrid operating room.

Some Implications Of Capping The Inflation Indexation Of USS Pensions

On 1 October 2011 the Universities Superannuation Scheme (USS) substantially reduced the pension entitlements of its members. The most onerous of the changes is the cap placed on the indexation of pensions where in the event of high inflation the cap will quickly lower the real value of the pension. This paper quantifies the impact of the inflation cap and high inflation on the real value of the member’s pension and the concomitant impact on the USS and universities.

Low-frequency drug-resistant HIV-1 and risk of virological failure to first-line NNRTI-based ART: a multicohort European case-control study using centralized ultrasensitive 454 pyrosequencing.

OBJECTIVES: It is still debated if pre-existing minority drug-resistant HIV-1 variants (MVs) affect the virological outcomes of first-line NNRTI-containing ART. METHODS: This Europe-wide case-control study included ART-naive subjects infected with drug-susceptible HIV-1 as revealed by population sequencing, who achieved virological suppression on first-line ART including one NNRTI. Cases experienced virological failure and controls were subjects from the same cohort whose viraemia remained suppressed at a matched time since initiation of ART. Blinded, centralized 454 pyrosequencing with parallel bioinformatic analysis in two laboratories was used to identify MVs in the 1%-25% frequency range. ORs of virological failure according to MV detection were estimated by logistic regression. RESULTS: Two hundred and sixty samples (76 cases and 184 controls), mostly subtype B (73.5%), were used for the analysis. Identical MVs were detected in the two laboratories. 31.6% of cases and 16.8% of controls harboured pre-existing MVs. Detection of at least one MV versus no MVs was associated with an increased risk of virological failure (OR = 2.75, 95% CI = 1.35-5.60, P = 0.005); similar associations were observed for at least one MV versus no NRTI MVs (OR = 2.27, 95% CI = 0.76-6.77, P = 0.140) and at least one MV versus no NNRTI MVs (OR = 2.41, 95% CI = 1.12-5.18, P = 0.024). A dose-effect relationship between virological failure and mutational load was found. CONCLUSIONS: Pre-existing MVs more than double the risk of virological failure to first-line NNRTI-based ART.

Human capital, social mobility and the skill premium

This paper develops a dynamic general equilibrium model to highlight the role of human capital accumulation of agents differentiated by skill type in the joint determination of social mobility and the skill premium. We first show that our model captures the empirical co-movement of the skill premium, the relative supply of skilled to unskilled workers and aggregate output in the U.S. data from 1970-2000. We next show that endogenous social mobility and human capital accumulation are key channels through which the effects of capital tax cuts and increases in public spending on both pre- and post-college education are transmitted. In particular, social mobility creates additional incentives for the agents which enhance the beneficial effects of policy reforms. Moreover, the dynamics of human capital accumulation imply that, post reform, the skill premium is higher in the short- to medium-run than in the long-run.

Unemployment Risk and Wage Differentials

Workers in less secure jobs are often paid less than identical-looking workers in more secure jobs. We show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security (i.e. the probability that the worker is not sent into unemployment). In a setting where workers search for new positions both on and off the job, the worker's marginal willingness to pay for job security is endogenous: it depends on the behavior of all firms in the labor market and increases with the rent the employing firm leaves to the worker. We solve for the labor market equilibrium, finding that wages increase with job security for at least all firms in the risky tail of the distribution of firm-level unemployment risk. Meanwhile, unemployment becomes persistent for low-wage and unemployed workers, a seeming pattern of 'unemployment scarring' created entirely by firm heterogeneity. Higher in the wage distribution, workers can take wage cuts to move to more stable employment.

Comparative Statics of Asset Prices: the effect of other assets' risk

Currently, financial economics is unable to predict changes in asset prices with respect to changes in the underlying risk factors, even when an asset's dividend is independent of a given factor. This paper takes steps towards addressing this issue by highlighting a crucial component of wealth effects on asset prices hitherto ignored by the literature. Changes in wealth do not only alter an agents risk aversion, but also her perceived 'riskiness' of a security. The latter enhances significantly the extent to which market- clearing leads to endogenously-generated correlation across asset prices, over and above that induced by correlation between payoffs, giving the appearance of 'contagion.'

Complete Markets Strikes Back: Revisiting Risk Sharing Tests under Discount Rate Heterogeneity

Recent risk sharing tests strongly reject the hypothesis of complete markets, because in the data: (1) the individual consumption comoves with income and (2) the consumption dispersion increases over the life cycle. In this paper, I revisit the implications of these risk sharing tests in the context of a complete market model with discount rate heterogeneity, which is extended to introduce the individual choices of effort in education. I .nd that a complete market model with discount rate heterogeneity can pass both types of the risk sharing tests. The endogenous positive correlation between income growth rate and patience makes the individual consumption comove with income, even if the markets are complete. I also show that this model is quantitatively admissible to account for both the observed comovement of consumption and income and the increase of consumption dispersion over the life cycle.

Arch and Structural Breaks in United States Inflation

United States Phillips curves are routinely estimated without accounting for the shifts in mean inflation. As a result we may expect the standard estimates of Phillips curves to be biased and suffer from ARCH. We demonstrate this is indeed the case. We also demonstrate that once the shifts in mean inflation are accounted for the ARCH is largely eliminated in the estimated model and the model defining expected rate of inflation in the New Keynesian model plays no significant role in the dynamics of inflation.