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Holger C. Wolf

In the wake of emerging market turmoil, the role and welfare consequences of volatility have attracted renewed attention. An emerging consensus points to various types of volatility being both a consequence and a determinant of longer-term growth performance. The linkages appear to be context dependent. This paper employs classification tree analysis to explore determinants of consumption volatility taking account of context dependence. The results suggest output volatility, measures of input volatility, and measures of economic development are best able to differentiate between countries with high and low consumption volatility. [JELE21, E32]

Mr. Douglas Laxton, Mr. Guy M Meredith, and David Rose

Data for the G–7 countries strongly support the view that economic activity has a nonlinear effect on inflation, with high levels of activity raising inflation by more than low levels decrease it. In the face of such asymmetries, the average level of output in an economy subject to demand shocks will be below the level of output at which there is no tendency for inflation to rise or fall, contrary to linear model predictions. One implication is that policymakers can raise the average level of output over time by responding promptly to demand shocks, reducing the variance of output around trend.

Mr. Peter B. Clark, Mr. Douglas Laxton, and David Rose

This paper presents empirical evidence supporting the proposition that there is a significant asymmetry in the U.S. output-inflation process. The important policy implication of this asymmetry is that it can be very costly if the economy overheats because this will necessitate a severe tightening in monetary conditions in order to re-establish inflation control. The empirical results presented in the paper show that the conclusions regarding asymmetry are robust to a number of tests for sensitivity to changes in the method used to estimate potential output and in the specification of the Phillips curve,

Mr. Thomas Harjes

This paper estimates a small dynamic macroeconomic model for the South African economy with Bayesian methods. The model is tailored to assessing the impact of domestic as well as external shocks on inflation within an inflation-targeting framework, by incorporating forward-looking behavior of private agents and of the monetary authority. The model is able to display important empirical features of the monetary transmission mechanism that have been found in other studies. It helps to integrate the short-term inflation outlook into a consistent medium-term framework and to design the policy response for various shocks that affect inflation.

Mr. Liam P. Ebrill and Mr. Steven M. Fries

A U.S. inflation-forecasting model recently developed by the Federal Reserve—the so-called P* relationship—is analyzed. An innovation in that model is the significance of M2 velocity in predicting changes in inflation. However, this paper's empirical analysis indicates that an inflation equation in levels, rather than first differences, is more appropriate and reveals that the significance of Ml velocity is not robust to this alternative specification. Although there is a long-run relationship between M2 and the price level, the output gap in a Phillips curve model captures much of the short-run deviations from this relationship.

Mr. David T. Coe and Mr. Reza Moghadam

An aggregate production function is estimated using recent cointegrating techniques particularly appropriate for estimating long-run relationships. The empirical results suggest that the growth of output in France has been spurred by increased trade integration within the European Community and by the accumulation not only of business sector capital—the only measure of capital included in most empirical studies—but also by government infrastructure capital, residential capital, and research and development capital. Calculations of potential output indicate that trade and capital—broadly defined—account for all of the growth in the French economy during the past two decades.

Norman Loayza, J. Humberto Lopez, and Mr. Angel J. Ubide

This paper analyzes common economic patterns across countries and economic sectors in Latin America, East Asia, and Europe for the period 1970-94 by means of an error-components model that decomposes real value-added growth in each country into common international effects, sector-specific effects, and country-specific effects. We find significant comovements in the European and East Asian samples. In the Latin American sample, however, we find country-specific components to be more important than common patterns. These results are robust to different sub-sample time spans and different sub-sample country groups.