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The Centre for Growth and Business Cycle Research

Discussion papers 2004

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Osborn, D. R., Sensier, M., (2004). ‘Modelling UK Inflation: Persistence, Seasonality and Monetary Policy’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 46.

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This paper studies monthly RPIX inflation in the UK in the context of the change to inflation targeting in 1992. Our empirical models take account of the strong and changing seasonal pattern of inflation, while also focusing on inflation persistence and Phillips curve explanations. In both univariate and Phillips curve models, we find strong evidence of a change in parameters around the end of 1992, at the time of the introduction of inflation targeting. All models point to a substantial decline in inflation persistence after this date.

van Dijk, D., Osborn, D. R., Sensier, M., (2004). ‘Testing for causality in variance in the presence of breaks’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 45.

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We examine the size properties of tests for causality in variance in the presence of structural breaks in volatility. Extensive Monte Carlo simulations demonstrate that these tests suffer from severe size distortions when such breaks are not taken into account. Pre-testing the series for structural changes in volatility is shown to largely remedy the problem.

Kesriyeli, M., Osborn, D. R., Sensier, M., (2004). ‘Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 44.

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This paper analyses monthly values of the short-term interest rate for the US, the UK and Germany since the early 1980s in the context of possible nonlinearities and changes over time in the interest rate response to the output gap, inflation, past interest rate changes and external variables (world commodity prices and the real exchange rate). The statistical models used are of the smooth transition class, with very substantial evidence of nonlinearity and/or parameter instability uncovered in the interest rate reaction functions for all three countries. These effects are primarily associated with time and changes in interest rates, with different coefficients applying when interest rates are increasing versus when they are decreasing. The reaction function coefficients for both the US and UK are also found to change during the 1980s.

Agénor, P-R., (2004). ‘The Macroeconomics of Poverty Reduction’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 43.

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This paper puts in perspective the recent research on the macroeconomics of poverty reduction. It begins by arguing that research on poverty was, and continues to be, distorted by an excessive focus on micro and measurement issues. The debate on "pro-poor growth" is used to illustrate the extent of this bias. Next, it provides a review of the transmission channels of macroeconomic policies to the poor, with particular emphasis on the role of the labour market. It then presents a new class of theoretical and applied macroeconomic models for poverty analysis. It concludes by identifying directions for future research.

Blackburn, K., Forgues-Puccio G.F., (2004). ‘Distribution and Development in a Model of Misgovernance’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 42.

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This paper presents an analysis of bureaucratic corruption, income inequality and economic development. The analysis is based on a dynamic general equilibrium model in which bureaucrats are appointed by the government to implement a redistributive programme of taxes and subsidies designed to benefit the poor. Corruption is reflected in bribery and tax evasion as bureaucrats conspire with the rich in providing false information to the government. In accordance with empirical evidence, the model predicts a positive relationship between corruption and inequality and a negative relationship between corruption and development.

Mejía-Reyes, P., Osborn, D. R., Sensier, M., (2004). ‘Modelling Real Exchange Rate Effects on Output Performance in Latin America’, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 35.

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This paper develops a model that examines the effect of monetary policy uncertainty on trend growth. It is assume that the provision of potentially productive public goods and services is financed by money creation (seignorage). Uncertainty derives from stochastic fluctuations in money supply. It is found that money is not neutral and that higher variability in money growth affects the choices of individuals on how to allocate their time between different activities. Depending on the underlying mechanism through which improvements in productivity occur, a greater degree of monetary policy uncertainty (higher monetary variability) can have either positive or negative effects on the average rate of growth.