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Michael Bleaney is a Professor of Economics at the University of Nottingham. This paper was written while he was a visiting scholar in the IMF Research Department.
The estimated shifts in persistence and dates are: Canada +0.03 (1981), Sweden +0.07 (1979), UK +0.11 (1974) and US +0.06 (1979).
As is discussed below, it matters whether or not we are concerned about bias relative to the true value of the parameter or merely relative to the estimate from another sample. It is the latter which is important in the present context, where comparisons of estimates are being made across exchange rate regimes. The point made here is not the same point as that made by Burdekin and Siklos, who test for simultaneous shifts in mean inflation and the persistence coefficient, so their analysis does not allow for mean shifts within any given period when persistence is assumed to be constant.
Dornbusch (1982) uses a slightly different version of the model in which each contract lasts for precisely two periods.
The use of the word “speculate” is deliberate. These authors do not derive this prediction from their theoretical model; indeed Dornbusch makes this very point in his comments on Obstfeld’s paper (Obstfeld, 1995, p. 200).
The work of Burdekin and Siklos (1999) does not address the issue of how shifts in α affect estimates of β; they focus on the endogenous choice of break-points for both these parameters.
More frequent observations (monthly or quarterly) are available for most of the period, but it is not clear that it would be advantageous to use them. With higher-frequency observations, measurement error problems would be magnified, since the one-period changes would be smaller. Using annual data also preserves consistency with previous research.
The first observation of the dependent variable is not used i.e. when the period is given as 1954–67, the first observation of the dependent variable used is 1955, to allow for the lagged dependent variable. Data earlier than 1954 were not used because of Korean war effects and other disturbances to the inflation process in some countries.
The test for equality of variances yields F(8, 7) = 3.01, compared with a 95% critical value of 4.90.
The t-test for the difference of means assumes that both populations are normally distributed with equal variances. The Mann-Whitney U-test for the difference of medians, which assumes only that the two populations have similar distributions, yields a test statistic of 48, which is also significant at the 1% level.
They estimate equation (3) by instrumental variables, using lagged inflation as the instrument. The classification of the Bretton Woods period as a fixed-rate period is questionable, however, since it is not clear that US monetary policy was constrained in any significant way, given that the US dollar was the reserve currency.
These are the long-run coefficients. The short-run reaction is much less, as there is a high coefficient on the last-period interest rate.
The countries are: Austria, Belgium, Canada, Denmark, Finland, France, Greece, Ireland, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the UK and the US.
The point estimates of long-run accommodation are 0.699 [ = 0.633/(1 – 0.094)] for non-floating regimes and 0.601 [= (0.633 – 0.282)/(1 – 0.094 – 0.323)] for floating regimes.