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We analyze the fiscal adjustment process in the United States using a multivariate threshold rector error regression model. The shift from single-equation to multivariate setting adds value both in terms of our economic understanding of the fiscal adjustment process and the forecasting performance of nonlinear models. We find evidence that fiscal authorities intervene to reduce real per capita deficit only when it reaches a certain threshold and that fiscal adjustment takes place primarily by cutting government expenditure. The results of out-of-sample density forecast and probability forecasts suggest that a shift from a univariate autoregressive model to a multivariate model improves forecast performance. (JEL C32, C53, E62), I. INTRODUCTION The recent deterioration in U.S. budget deficit has raised serious concerns about the long-run sustainability of U.S. fiscal policy. In addressing this issue, many studies have examined whether [...]

This paper examines whether a monetary policy tightening (i.e., an increase in the domestic interest rate) was successful in defending the exchange rate from speculative pressures during the Asian financial crisis. We estimate a bivariate VECM for four Asian countries, and improve upon existing studies in two important ways. First, by using a long data span we are able to compare the effects of an interest rate rise on the nominal exchange rate during tranquil and turbulent periods. Second, we take into account the endogeneity of interest rates and identify the system by exploiting the heteroscedasticity properties of the relevant time series, following Rigobon [Identification through heteroscedasticity. Review of Economics and Statistics, in press]. We find that while tight monetary policy helped to

We contribute to the debate on whether the U.S. large federal budget deficits are sustainable in the long run. We model the U.S. government deficit per capita as a threshold autoregressive process. We find evidence that the U.S. budget deficit is sustainable in the long run and that economic policy makers will only intervene to reduce per capita deficit when it reaches a certain threshold. (JEL C32, E62), I. INTRODUCTION There has been an ongoing debate on whether the U.S. fiscal policy is sustainable in the long run. In addressing this issue, a number of studies have examined [...]

We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade-off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade-off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s: and second, the economic performance in the 1990s of targeting and non-targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation-targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework.

This paper investigates the impact of European Monetary Union (EMU) and of the recent financial and fiscal crisis on the integration of the European sovereign debt market using annual data 1992–2010. The panel regression dependent variable is time-varying market linkages computed from daily realised correlations between sovereign bond returns for 13 European economies and Germany. The results indicate that the elimination of currency risk following the implementation of EMU led to a fundamental and significant one-off increase in integration. The net impact of fiscal fundamentals was negligible up until 2009 as the markets seemed to be pricing in a potential bailout for member states in crisis and not fully pricing default risk. However, by 2010 the parlous situation of the peripheral economies lead the markets to price default risk and heralded a return to segmentation. The related increase in peripheral economy sovereign spreads has exacerbated the problem of fiscal imbalances which pose a major challenge for policy-makers. [ABSTRACT FROM AUTHOR]