Essays on Empirical Macroeconomics

Abstract: The first essay reexamines the proposed presence of so-called loss aversion in aggregate consumption. Recent empirical and theoretical studies have suggested, that consumption growth reacts asymmetrically to positive and negative expected income growth. After investigating the case for Swedish consumption using survey data, and a panel of annual observations on 15 OECD countries, we conclude that previous results can not easily be generalized. The second essay deals with real exchange rate dynamics. The recent past has seen an increased interest in piecewise linear real exchange rate models. By invoking Heckscher's (1916) 'commodity points', it has been argued that a threshold autoregressive (TAR) model should be used to study movements in the real exchange rate. We find that the power of the tests for TAR behavior can be very low for realistic parameter settings. Moreover, the confidence intervals for the threshold parameter are too wide to be used for economic analysis. The third essay examines the permanence of fiscal contractions. Instead of relying on descriptive statistics to evaluate the permanence of a fiscal contraction, this paper suggests that this issue should be studied using tests for structural breaks in cointegrating relationships between taxes and spending. Applying Gregory and Hansen's (1996) test on Danish and Irish data and find that the fiscal contraction in Ireland (1987-1989) induced a structural change in fiscal policy, while the results from the Danish data do not imply such a regime shift. The forth essay deals with how to determine what deterministic components should be included in Vector Error Correction (VEC) models. More specifically, we examine, by means of Monte Carlo simulation, the properties of the so called 'Pantula principle'. Examining the five models contained within the Johansen methodology, we find that the 'Pantula principle' is heavily biased towards choosing model 3 (unrestricted constant) when model 4 (restricted trend) is the true one. We suggest a modification that reduces this bias to an important extent. The fifth essay deals with inflation and output volatility. Ceteris paribus, most economists would argue that a strict policy of price stability increases the volatility in output. In a recent study of U.S. data, however, it appears as if the decrease in output volatility has been matched by a corresponding decrease in the level of inflation and volatility of inflation. We appraise to what extent this holds in the U.K., Canada, Sweden, Australia and New Zealand. We also employ data on both the quarterly growth rates and the output gap to check how robust this finding is to how output volatility is measured. In the U.K., Canada, New Zealand and the U.S. we find that the recorded decrease in output volatility coincides with a sharp reduction in the level of inflation. In the Swedish case the analysis is unfortunately blurred by questions concerning the quality of the data. Australia does not conform to the anticipated picture in the sense that inflation is neither lower nor less volatile after the decrease in output volatility.