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An analysis of sustainability of fiscal policies related to budget deficits and the situation of public debts in US and Europe is offered. Additional information on the economic factors needed to assure sustainability of fiscal policies in US and Europe is also included.

Contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates, empirical evidence suggests that the term spread between long and short rates fails to [...]

It often proves difficult to give a satisfactory economic interpretation to estimated cointegrating vectors derived from the maximum likelihood estimation of unrestricted vector correction models. This paper shows that this is because, without introducing a priori information, they are not identified. This is even true where there is only a single cointegrating vector. It is also shown that the common stochastic trends derived using VAR analysis in the presence of cointegration are not identified, nor can they be obtained uniquely from the estimated cointegrating vectors. The implication is that cointegration analysis needs to take account of structural restrictions after all. Consequently it is likely to be of less use in econometric model building than was first thought. Key words: Cointegration; Common stochastic trends; Econometrics; Identification; Nonstationarity

Real business cycle (RBC) analysis is claimed to have given prominence to the basic defects of the econometric methodology of macroeconomic model-building. Macroeconomic theory needs to be taken seriously in determining the model and emphasize on the values of key structural parameters. The narrowly focused original RBC models should be considered only as prototypes.

We propose a way of testing a subset of equations of a DSGE model. The test draws on statistical inference for limited information models and the use of indirect inference to test DSGE models. Using the numerical small sample distribution of our test for two subsets of equations of the Smets–Wouters model we show that the test has accurate size and good power in small samples, and better power than using asymptotic distribution theory. In a test of the Smets–Wouters model on US Great Moderation data, we reject the specification of the wage‐price but not the expenditure sector. This points to the wage‐price sector as the source of overall model rejection. [ABSTRACT FROM AUTHOR]

This lecture is about how best to evaluate economic theories in macroeconomics and finance, and the lessons that can be learned from the past use and misuse of evidence. It is argued that all macro/finance models are 'false' so should not be judged solely on the realism of their assumptions The role of theory is to explain the data. Models should be judged by their ability to do this. Data-mining will often improve the statistical properties of a model but does not improve economic understanding. These propositions are illustrated from the last 50 years of macro and financial econometrics. [ABSTRACT FROM AUTHOR]

This paper explores the effects of the US business cycle on US stock market returns through an analysis of the equity risk premium. We propose a new methodology based on the SDF approach to asset pricing that allows us to uncover the different effects of aggregate demand and supply shocks. We find that negative shocks are more important that positive shocks, and that supply shocks have a much greater impact than demand shocks. Copyright © 2009 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU. [ABSTRACT FROM AUTHOR]

This paper examines the optimal allocation each period of an internationally diversified portfolio from the different points of view of a UK and a US investor. We find that investor location affects optimal asset allocation. The presence of exchange rate risk causes the markets to appear not fully integrated and creates a preference for home assets. Domestic equity is the dominant asset in the optimal portfolio for both investors, but the US investor bears less risk than the UK investor, and holds less foreign equity – 20% compared with 25%. Survey evidence indicates actual shares are 6% and 18%, respectively, making the home-bias puzzle more acute for US than UK investors. There would seem to be more potential gains from increased international diversification for the US than the UK investor. [ABSTRACT FROM AUTHOR]

Focuses on a study which examined the issue of how to identify the shocks in a cointegrated vector autogressive models. Overview of the model and its specification; Estimation of the shocks; Conclusions.

This paper explains the contradictory findings from long-run and short-run tests of the rational expectations hypothesis of the term structure. Recent research suggests that, while the long-run tests support the theory, the short-run tests do not. Our results which are based on US Treasury bills rates confirm this and suggest that the conflict in the evidence can be explained by the presence of a stationary, time-varying, term premium. Nevertheless, 'news' about future changes in short rates are far more important than the risk premium in explaining interest rate movements at the short end of the term structure, and comprise the main source of the single factor explanation that emerges from our results. [ABSTRACT FROM AUTHOR]

The UK stockmarket is tested for mean variance efficiency (MVE) in the sense that sectoral stock returns satisfy the restrictions implied by CAPM. There are two main innovations in the paper. One is the use of a model for excess returns in which the conditional oovariance matrix of returns varies over time due to the simultaneous influence of four macroeconomic shocks. The other is the use of a likelihood ratio test for MVE calculated from analytical derivatives of the likelihood function in order to reduce the computational burden of these high parameter dimensional models. The model with macroeconomic shocks is compared with the multivariate ARCH-in-mean model. Although the macroeconomic shocks model is found to perform slightly better than the ARCH model, and both produce a significant and plausible estimate of the coefficient of risk aversion, the null hypothesis that the UK stockmarket is mean variance efficient is rejected for both models in favour of the alternative hypothesis that equity returns are an unrestricted linear function of asset shares. Another important finding is that the most important shocks affecting the UK stockmarket either have an international origin or are due to the bond market. [ABSTRACT FROM AUTHOR]

This article focuses on estimation of the vintage Cobb-Douglas production function for the United States for the period 1900-1960. It is shown in this paper that for the Cobb-Douglas vintage production function an identification problem arises that may cause serious biases in the estimated parameters if conditional estimation techniques are used with the wrong values of the parameters that are given. A further disquieting aspect of this evidence is that sometimes the parameter that is given is the rate of embodied technical progress which is usually the parameter through which the embodied hypothesis is expressed. In these cases no standard error may be attached to the rate of embodied technical progress and so no direct test of the embodiment hypothesis may be made. In this paper an attempt is made to obtain parameters of the vintage production functions and their standard errors using nonlinear estimation methods. Although the estimates derived are not completely free from conditioning assumptions they do indicate that once cyclical movements in output are adequately treated their evidence alone is not sufficient to support the embodiment hypothesis.