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We analyse the determinants of the public's relative concerns about inflation and unemployment using responses to the Gallup Poll question on the relative seriousness of inflation and unemployment. We then estimate the rate of inflation that politicians will choose to impose on the US economy given the natural rate of unemployment. We find that this rate of inflation, which we call ‘the natural rate of inflation’, is in the region of 5%.

A prominent feature of U.S. monetary data is the nonstationarity of M1 velocity. One aspect of the empirical failure of the dynamic general equilibrium monetary models of money demand is the inability of these models to reproduce a nonstationary income velocity. The Euler's equations of these models reflect that equilibrium income velocity and nominal interest rates are both stationary, which is inconsistent with the stylized facts. Using a specific parametric form of a cash-in-advance model a la Lucas and Stokey (1987) we argue that the failure to reproduce a nonstationary income velocity may be due to the assumption of a homogeneous utility function involving cash and credit goods. Once this homogeneity restriction is relaxed, the equilibrium income velocity becomes nonstationary. A long-run nonlinear relationship between velocity, nominal interest rates and real output then emerges, which is consistent overall with the data.

A direct, ex ante, measure of inflation uncertainty in the US is compared with a number of proxies used in empirical studies. The direct estimate is the root mean subjective variance of the probability distributions for inflation reported by respondents to the ASA/NBER survey. The proxies include forecast standard deviations from ARIMA, ARCH and structural models of inflation. These proxies are not significantly correlated with the direct measure, nor with one another. Use of the proxies leads to incorrect inferences about the correlation between inflation and inflation uncertainty, and between inflation uncertainty and the real interest rate.

A Bayesian vector autoregressive (BVAR) model is developed for the Connecticut economy to forecast the unemployment rate, nonagricultural employment, real personal income, and housing permits authorized. The model includes both national and state variables. The Bayesian prior is selected on the basis of the accuracy of the out-of-sample forecasts. We find that a loose prior generally produces more accurate forecasts. The out-of-sample accuracy of the BVAR forecasts is also compared with that of forecasts from an unrestricted VAR model and of benchmark forecasts generated from univariate ARIMA models. The BVAR model generally produces the most accurate short- and long-term out-of-sample forecasts for 1988 through 1992. It also correctly predicts the direction of change.

This study uses Bayesian vector autoregressive models to examine the usefulness of survey data on households' buying attitudes for homes in predicting sales of homes. We find a negligible deterioration in the accuracy of forecasts of home sales when buying attitudes are dropped from a model that includes the price of homes, the mortgage rate, real personal disposable income, and die unemployment rate. This suggests that buying attitudes do not add much to the information contained in these variables. We also find that forecasts from the model that includes both buying attitudes and the aforementioned variables are similar to those generated from a model that excludes the survey data but contains the other variables. Additionally, the variance decompositions suggest that the gain from including the survey data in the model that already contains other economic variables is small.

Recently, there has been much concern about the size of federal budget deficit and its impact on interest rates. The peace time recovery after the 1981–1982 recession was the longest in U.S. history, accompanied by the largest budget deficit to GDP ratios. The present study investigates the effects of cyclically-adjusted federal deficits on long-term interest rates for 1970:1–1991:2. Using Johansen-Juselius procedures, we find evidence of a long-run relationship between federal budget deficits and long-term interest rates.

The expected error variance of a combined forecast is necessarily lower than that of an individual forecast, but in practice there may be considerable variation around these expected values. This paper introduces a measure of the benefit from combining, the probability of a reduction in error variance, which recognizes this problem. The measure is applied to data on the forecasts and forecasting methods of a panel of U.S. economists to determine how the benefits of combining vary with the number of forecasts combined, and with the diversity in theories and techniques among the component forecasts.

This paper explores the technology spillover effect of foreign direct investment (FDI) in Indian manufacturing industries across different clusters in India. To measure the spillover effect to domestic firms in a particular cluster, a model is used that combines an innovative production function with a conventional one. The empirical findings reveal significant variations across clusters with regard to spillovers. While some clusters benefit from cluster-specific foreign presence and technology stock, a more commonly observed pattern is that domestic firms in a cluster gain from the presence of foreign firms in other clusters of the region and region-specific technology stock.

This paper explores the horizontal and vertical technology spillover effect of foreign direct investment (FDI) across Indian manufacturing industries. On the basis of Pedroni cointegration tests, we find that technology spillovers can be transmitted via all kinds of intermediate factors. We find that the horizontal foreign presence and inter-industry foreign presence have exclusive penetration effect to spur labor productivity and technology spillover across Indian industries. Furthermore, intermediate factors like technology import intensity, inter-industry technology import intensity, R&D intensity and inter-industry R&D intensity promote technology spillover and labor productivity across Indian manufacturing industries.

This paper explores the technology spillover effect of foreign direct investment (FDI) in Indian manufacturing industries across different clusters in India. To measure the spillover effect to domestic firms in a particular cluster, a model is used that combines an innovative production function with a conventional one. The empirical findings reveal significant variations across clusters with regard to spillovers. While some clusters benefit from cluster-specific foreign presence and technology stock, a more commonly observed pattern is that domestic firms in a cluster gain from the presence of foreign firms in other clusters of the region and region-specific technology stock.

The paper attempts to analyze the spillover effect of Foreign Direct Investment (FDI) across Indian manufacturing industries. Foreign presence by way of FDI brings new channels of technology spillover to the domestic industrial firms in the form of enhanced efficiency and diffusion of knowledge in the long-run. By carrying out Pedroni cointegration tests, the analysis tries to provide a long-run relationship between endogenous variables and explanatory variables, pertaining to technology spillovers across Indian manufacturing industries. We find that technology spillovers are relatively higher in industries like food products, textiles, chemicals, drugs and pharmaceuticals and non-metallic mineral products.

The political business cycle hypothesis has been criticized on the grounds that it is impossible for governments to generate a vote winning boom because voters judge political candidates by the performance they expect in the future. In this paper, we directly test the hypothesis that voters are forward rather than backward looking. We compare the conventional view that presidential popularity depends on recently observed inflation and unemployment to three alternative models which assume varying forms of forward looking behavior. Non-tested hypothesis tests reject the forward looking models in favor of the one with the recent actual variables.

This article describes aforward-looking modelfor long-term interest rates. It shows that movements in expected deficits relative to movements in actual deficits are a statistically significant determtnant of changes in long-term interest rates. Other determinants include changes in actual government purchases, movements in the expected unemployment rate relative to changes in the actual unemployment rate, the expected rate of growth in the money supply, and inflation uncertainty.

This paper summarizes recent empirical studies on the effects of budget deficits on interest rates, investment, and trade deficits in the United States. It also reports new evidence on the effects of budget deficits on investment and on trade deficits for the 1980s. The results support the view that budget deficits crowd out domestic investment and increase trade deficits.

This paper estimates the ARIMA processes for the observed and expected price level corresponding to the three-level adaptive expectations model proposed by Jacobs and Jones (1980). These univariate processes are then compared with the best-fit ARIMA model. The results indicate that the best-fit model for the observed price level is a restricted version of the two-level adaptive learning process specified in terms of prices, suggesting a simple adaptive rule in the inflation rate. A comparison of the time-series forecasts from the best-fit model with the mean responses to the ASA-NBER survey shows no significant difference in their accuracy. The time-series forecasts are, however, conditionally efficient. The best-fit ARIMA model for expected prices measured by the ASA-NBER consensus forecasts does not correspond to any version of the Jacobs and Jones model.

This paper uses the track records of a panel of US economic forecasters participating in a consensus forecasting service to test for conservatism and consensus-seeking behaviour. The tests are based on a particular method-of-moments estimator, designed to allow for the heteroscedasticity and serial correlation which is inevitably present in errors from repeated forecasts for fixed target dates. Most forecasters prove to be conservative. When revising forecasts they give too much weight to their own past forecasts. Surprisingly, forecasters are not consensus-seeking but ‘variety-seeking’. When revising forecasts, they give too little weight to the known forecasts of other forecasters.

This article tests various hypotheses concerning the determinants of the 3-, 6-, and 9-month horizon term premia. The term premia are computed using the forecasts of the 3-month Treasury bill rate from the survey conducted by the American Statistical Association in collaboration with the National Bureau of Economic Research. We find that the term premia are influenced by the level of interest rates and cyclical factors in addition to the level of rates. They are also influenced by government economic policy.

Many studies have used Gallup Poll data to estimate the relationship between presidential popularity, and inflaion and unemployment. Typically these estimates are made over the terms of several presidents. The only time-varying effect included in these studies is an intercept dummy. No account is taken of the possibility that there may be changes in the positions or slope of the indifference curves between inflation nd unemployment. Within this paper, we estimate the US public's social preference function between inflation and unemployment as a quadratic within a sets of equations framework. A series of F-tests leads us to believe that there is structural change in the economic variables as well as in the intercepts over time. Thus, estimating each administration individually or in the sets of equations format is superior to constraining slope coefficients to be equal across administrations by simply estimating the function over the entire time period. We hypothesize that the public has become somewhat mo...

This paper tests whether economic forecasters differentiate their products, either by making forecasts which are consistently more optimistic or pessimistic than the industry average, or by developing comparative advantages in forecasting some variables at the expense of others. Application of nonpara-metric tests to the track records of 19 U.S. forecasters shows that the first strategy is followed, but not the second. These results imply that many forecasters may have found it optimal to produce forecasts which are technically irrational.

This paper uses a survey of US economic forecasters to assess the impact of their theories and forecasting methods on the accuracy of their predictions for a number of macroeconomic variables. Forecasters who give more weight to Keynesian ideology and econometric modelling dominate predominantly atheoretical times series forecasters for most variables. Although Keynesianism is the most popular ideology in practice, most forecasters place more weight on judgment than on any formal modelling technique.

A quadratic presidential popularity function for the Nixon and Ford presidencies is estimated. Using monthly data it is found that there is a structural change in the relationship between presidential popularity and inflation and unemployment between the two presidencies. This result strengthens the authors' earlier finding that one must be wary of using a single social preference function between inflation and unemployment that is time invariant.

Dua and Miller (1996) created leading and coincident employment indexes for the state of Connecticut, following Moore's (1981) work at the national level. The performance of the Dua-Miller indexes following the recession of the early 1990s fell short of expectations. This paper performs two tasks. First, it describes the process of revising the Connecticut Coincident and Leading Employment Indexes. Second, it analyzes the statistical properties and performance of the new indexes by comparing the lead profiles of the new and old indexes as well as their out-of-sample forecasting performance, using the Bayesian Vector Autoregressive (BVAR) method. The new indexes show improved performance in dating employment cycle chronologies. The lead profile test demonstrates that superiority in a rigorous, non-parametric statistic fashion. The mixed evidence on the BVAR forecasting experiments illustrates the truth in the Granger and Newbold (1986) caution that leading indexes properly predict cycle turning points and do not necessarily provide accurate forecasts except at turning points, a view that our results support.

Economists often use Gallup Poll data on presidential performance to analyze the interaction between politics and the state of the macroeconomy. The household survey undertaken by the Survey Research Center (SRC) of the University of Michigan provides an alternative data base. The SRC asks respondents about the government's performance specifically with respect to inflation and unemployment. We compare whether the Gallup or SRC data are the more useful for estimating the public's social preference function between inflation and unemployment for the Carter, Reagan, Bush and Clinton presidencies. The estimates that use Gallup Poll data are unsatisfactory because for two of the periods the coefficients of inflation and unemployment are not well estimated and for one period there is serial correlation of the residuals. The estimates using the SRC data set are satisfactory and the results are consistent with economic theory. We conclude that a researcher using survey data to estimate the public's reaction to varying rates of inflation and unemployment should prefer the SRC series when it is available.

We develop a Bayesian Vector Autoregressive Model (BVAR) to forecast home sales in Connecticut. In addition to home prices and mortgage interest rates, we also include measures of current and future economic conditions to see if these variables provide useful information with which to forecast Connecticut home sales. The best performing model incorporates recently developed coincident and leading employment indexes for Connecticut. These composite indexes perform markedly better than the inclusion of individual variables such as the unemployment rate or housing permits authorized.

This paper uses Bayesian vector autoregressive models to examine the usefulness of leading indicators in predicting US home sales. The benchmark Bayesian model includes home sales, the price of homes, the mortgage rate, real personal disposable income, and the unemployment rate. We evaluate the forecasting performance of six alternative leading indicators by adding each, in turn, to the benchmark model. Out-of-sample forecast performance over three periods shows that the model that includes building permits authorized consistently produces the most accurate forecasts. Thus, the intention to build in the future provides good information with which to predict home sales. Another finding suggests that leading indicators with longer leads outperform the short-leading indicators.

We analyze the impact of weather shocks on price formation in spot and futures market for food in India where until the recent introduction of commodity futures markets in 2005, the transmission of these shocks to short-term (spot) price movements was unclear. Hitherto, the price discovery mechanism was weak and end price was expected to be different (mostly higher unless some product prices were administered) from the market-clearing price. In addition, this weak mechanism was expected to result in higher price volatility. The introduction of a futures market is expected to reduce risk, a major component in agricultural production as well as in price formation. Though the commodity futures market in India is nascent, we model transmission of weather shocks to futures and spot prices using monthly data. Based on cointegration analysis, our results suggest strong long-run co-movement between futures prices and spot prices for commodities traded in futures markets. Changes in rainfall affect both futures and spot prices with different lags. However, rainfall shocks generate larger responses from futures prices than from spot prices. Although there could be other factors that affect futures prices, after controlling for fuel prices, our results clearly show the transmission mechanism of weather shocks from futures to spot prices. We also explore the changes in responsiveness of prices of major agricultural commodities to rainfall with introduction of futures contracts to facilitate the pass-through of various types of shocks to agricultural commodity prices. Using smooth transition regression, we find that the bivariate relationships between rainfall and prices of rice, wheat and pulses show some nonlinearity with the structural change happening after the introduction of futures market. These relations are found to be much stronger in the post-structural change period that broadly coincides with the introduction of futures market.

We develop coincident and leading employment indexes for the Connecticut economy. Four employment-related variables enter the coincident index while five employment-related variables enter the leading index. The peaks and troughs in the leading index lead the peaks and troughs in the coincident index by an average of 3 and 9 months. Finally, we use the leading index in vector-autoregressive (VAR) and Bayesian vector-autoregressive (BVAR) models to forecast the coincident index, nonfarm employment, and the unemployment rate.

The paper attempts to analyze the spillover effect of Foreign Direct Investment (FDI) across Indian manufacturing industries. Foreign presence by way of FDI brings new channels of technology spillover to the domestic industrial firms in the form of enhanced efficiency and diffusion of knowledge in the long-run. By carrying out Pedroni cointegration tests, the analysis tries to provide a long-run relationship between endogenous variables and explanatory variables, pertaining to technology spillovers across Indian manufacturing industries. We find that technology spillovers are relatively higher in industries like food products, textiles, chemicals, drugs and pharmaceuticals and non-metallic mineral products.

This paper analyzes the public's perceptions of macroeconomic policy during the Bush presidency. It links the public's view of President Bush's performance with respect to unemployment and inflation to the actual behavior of unemployment and inflation and the public's expectations of their future behavior. We find that both the level of unemployment and the expected change in unemployment significantly influenced the public's perception of the president's performance. Inflation and expectations about inflation did not play an important role.

This paper introduces survey-based measures of expectations and uncertainties about income and real interest rates into an otherwise conventional consumption function. The survey dat a contribute more than conventional variables to the explanation of changes in consumption. The hypothesis that consumption follows a random walk is rejected in favor of a model in which consumption responds with a lag to changes in expected income growth. The significance of inflation in earlier estimates of the U.S. consumpti on function is shown to be spurious and due to a strong negative correlation between expected inflation and expected income growth. Copyright 1992 by MIT Press.

This paper tests the rationality of forecasts made by individuals who contribute to the Blue Chip consensus forecasting service and tries, by means of a questionnaire on forecasting methods, to establish why some forecasters appear more rational than others. Tests based on consensus forecasts prove unreliable as guides to the number of individuals who produce rational forecasts. Individual forecasts are more likely to be rational if they are based on a mainstream economic theory and incorporate a substantial element of judgment. Copyright 1991 by Ohio State University Press.

In this paper we estimate the natural rate of inflation for the United States. To obtain our estimate we combine macroeconomic theory and the theory of public choice. Macroeconomic theory gives us the equilibrium rate of unemployment, commonly known as the natural rate of unemployment. At this unemployment rate, the rate of inflation is indeterminate as it depends on government monetary and fiscal policy. Public choice theory supposes that, in their own self interest, politicians respond to the concerns of the voters. We quantify the public’s concerns with respect to inflation and unemployment and show that politicians will choose an equilibrium rate of inflation of approximately five or six per cent.

We combine an econometric analysis of survey data on the relative seriousness of inflation and unemployment with the median voter theorem to derive the equilibrium rate of inflation. If the natural rate of unemployment is 7 percent, then the equilibrium inflation rate is 5.4 percent.

The U.K. authorities' reaction function for the Treasury bill rate is estimated over the p eriod 1972, quarter 3, to 1982, quarter 4. The variables included in the reaction function are obtained from various issues of the Bank of England Quarterly Bulletin and the National Institute Economic Revie w. The estimated reaction function shows the importance the authoriti es attach to the level of economic activity, the conditions in the fi nancial markets, the deviation of the actual rate of growth of the mo ney supply from the target rate of growth, the value of sterling, and the level of competitiveness. Copyright 1988 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

(1987). The accuracy and rationality of UK inflation expectations: some quantitative evidence. Applied Economics: Vol. 19, No. 6, pp. 819-828.

We have succesfully estimated the public's indifference map between inflation and unemployment. The indifference curves are nonlinear and concave to the origin for most unemployment rates; the data are insufficient to permit us to be sure of the form at low unemployment rates. There is clear evidence of honeymoon and Watergate effects and a Reagan as president effect. The public dislikes expected and unexpected inflation equally.

It is now common for theoretical analyses of macroeconomic policy to assume that the public's social preferences between inflation and unemployment may be represented by an indifference map that is concave to the origin and most assume that the functional form is quadratic.' We estimate such a quadratic social preference function. We proxy public satisfaction by the public's rating of presidential performance using Gallup Poll data.2 Such data have been widely used by both economists and political scientists in analyses of the economic and non-economic determinants of presidential popularity.3 As we have found [33] that over the period 1953 to 1988 there have been structural shifts in the relationship between presidential popularity and inflation and unemployment we limit our analysis to only one presidency, the Reagan administration.

The accuracy of forecasts of interest rates over different forecast horizons and time periods is examined. The results indicate a deterioration in “absolute” forecast accuracy measured by the mean absolute error and the root mean squared error but no decrease in “relative” accuracy measured by the Theil coefficient with an increase in the forecast span. The results also indicate a decline in accuracy in periods of volatile interest rates. Support is found for the hypothesis that the ratio of the variability of predicted changes to that of actual changes falls with an increase in the forecast horizon.

In a recent article in this Journal} Gramlich (1983) concluded that the mean inflation forecasts from the University of Michigan Survey Research Center (SRC) surveys of households were, in the years 1956-1980, more accurate and more rational than the mean inflation forecasts from Livingston's Philadelphia Inquirer surveys of professional economists. These paradoxical Elndings have proved robust with respect to improvements in testing procedures (Bryan and Gavin 1986a, 1 986b). The purpose of this note is not to cast doubt on the result themselves, but to urge caution in their interpretation. With respect to forecast accuracy, we show that while the average forecast from the SRC is indeed more accurate than the average forecast from the Livingston survey, the forecast of a typical household is much less accurate than that of a typical economist. The apparent superiority of the SRC survey is entirely due to its larger