Mr. Chorng-Huey Wong, Mr. Eric V. Clifton, and Mr. Gene L. Leon
This paper examines the impact of the introduction of inflation targeting on the unemployment-inflation trade-off in OECD countries. Theoretical models suggest that the credibility-enhancing effects of the adoption of inflation targeting should cause an improvement in the unemployment-inflation trade-off, i.e., that reducing inflation by a given amount should occur with a smaller rise in unemployment. The empirical evidence examined for OECD countries adopting inflation targeting supports this hypothesis. Using a smooth transition regression model, it is shown that the improvement in this trade-off does not take place immediately after the adoption of inflation targeting; rather, it improves over time as the credibility of the central bank is established.
How do financial markets respond to concerns over debt sustainability and the level of public debt in emerging markets? We introduce a measure of debt sustainability – the difference between the debt stabilizing primary balance and the primary balance–in an otherwise standard spread regression model applied to a panel of 26 emerging market economies. We find that debt sustainability is an important determinant of spreads. In addition, using a panel smooth transition regression model, we find that the sensitivity of spreads to debt sustainability doubles as public debt increases above 45 percent of GDP. These results suggest that market interest rates react more to debt sustainability concerns in a country with a high level of debt compared to a country with a low level of debt.
Table 5 summarizes the estimation where model 4 represents the spread regression with this new definition of debt sustainability and model 5 represents the smoothtransitionregressionmodel. Contrasting model 4 with model 2 shows that there are no major differences between the two regressions, although the response of the debt consolidating primary balance is slightly higher than the debt stabilizing primary balance by about 3 basis points (27.13 versus 24.50). Moving to model 5, we notice that the
Mr. Chorng-Huey Wong, Mr. Eric V. Clifton, and Mr. Gene L. Leon
is developed for the IT countries, which includes the single structural shift as a special case.
The models in the previous section for the IT countries assume that the inflation process can be modeled as two linear trends with a switch occurring at the exact introduction of inflation targeting. It is more likely that the aggregate reaction of economic agents to inflation targeting will be more smooth, leading to a less than abrupt change in their underlying behavioral parameters. This type of process is better
Nidhaleddine Ben Cheikh, Samy Ben Naceur, Mr. Oussama Kanaan, and Christophe Rault
Our paper examines the effect of oil price changes on Gulf Cooperation Council (GCC) stock markets using nonlinear smooth transition regression (STR) models. Contrary to conventional wisdom, our empirical results reveal that GCC stock markets do not have similar sensitivities to oil price changes. We document the presence of stock market returns’ asymmetric reactions in some GCC countries, but not for others. In Kuwait’s case, negative oil price changes exert larger impacts on stock returns than positive oil price changes. When considering the asymmetry with respect to the magnitude of oil price variation, we find that Oman’s and Qatar’s stock markets are more sensitive to large oil price changes than to small ones. Our results highlight the importance of economic stabilization and reform policies that can potentially reduce the sensitivity of stock returns to oil price changes, especially with regard to the existence of asymmetric behavior.
. and Y. Lu , 2014 , “ Emerging Market Local Currency Bond Yields and Foreign Holdings in the Post-Lehman Period—a Fortune or Misfortune? ”, IMF Working Paper No. 14/29 , International Monetary Fund .
González , A. , T. Teräsvirta , and D. Van Dijk , 2005 , “ Panel SmoothTransitionRegressionModels ”, Research Paper No. 165 , Quantitative Finance Research Centre, University of Technology , Sydney .
Hansen , B. , 1999 , “ Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference ”, Journal of Econometrics , 93
Foreign holdings of emerging markets (EMs) government bonds have increased substantially over the last decade. While foreign participation in local-currency sovereign bond markets provides an additional source of financing and reduces sovereign yields, it raises concerns about increased sensitivity of yields to shifts in market sentiment. The analysis in this paper suggests that foreign participation and an undiversified investor base transmit global financial shocks to local-currency sovereign bond markets by increasing yield volatility and, beyond a certain threshold, amplify these spillovers. These estimates are robust to a range of econometric techniques including panel smooth threshold regression.
panel data. Their results suggest that the negative effect of income inequality on growth is significant for less-developed countries and that the negative effect diminishes and becomes positive for high income level countries. Conditioning on the level of inequality, they find that the effect is negative for countries with high levels of inequality and for low levels of initial inequality. Cho et al. (2014) utilize a panel smoothtransitionregressionmodel with panel data conditioning on initial levels of income inequality. Their findings suggest that the effect
Charl Jooste, Mr. Alfredo Cuevas, Ian C. Stuart, and Philippe Burger
TERäSVIRTA , T. 2004 . Smoothtransitionregressionmodelling . IN LüTKEPOHL , H. and KRäTZIG , M. (Ed). 2004 . Applied time series econometrics . Cambridge University Press , Cambridge .
TONG , H. and LIM , K.S. 1980 . Threshold autoregressions, limit cycles and data . Journal of the royal statistical society . B42:245 - 292
VALENTE , G. 2003 . Monetary policy rules and regime shifts. Applied Financial Economics , 13 , pp. 525 - 35
Appendix 1 – Dickey-Fuller t values for GMM
OLS DF (Y) *
The linearity of the relationship between income inequality and economic development has been long questioned. While theory provides arguments for which the shape of relationship may be positive for low levels of inequality and negative for high ones, most of the empirical literature assumes a linear specification finding conflicting results. Employing an innovative empirical approach robust to endogeneity, we find pervasive evidence of nonlinearities. In particular, similar to the debt overhang literature, we identify an inequality overhang level in that the slope of the relationship between income inequality and economic development switches from positive to negative at a net Gini of about 27 percent. We also find that in an environment characterized by widespread financial inclusion and high income concentration, rising income inequality has a larger negative impact on economic development because banks may curtail credit to customers at the lower end of the income distribution. On the positive side, a sufficiently high female labor participation can act as a shock absorber reducing such negative impact, possibly through a more efficient allocation of resources.