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Growth and Business Cycle Research Group

Discussion papers 2008

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Artis, M., Okubo, T. (2008). 'The UK Intranational Trade Cycle', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 111.

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The paper uses annual data on real GDP for the UK regions and 12 manufacturing sectors to derive regional and regional/sectoral business cycles using an H-P filter. The cohesion of the cycles is examined via cross-correlations and comparisons made with the regional cycles for Japan, the United States and the EuroArea. The UK emerges as especially cohesive and efforts to explain the overall cross-correlations of regional GDP not very successful owing to the low variance of the explicand; when attention is turned to the sectoral/regional cycles, with their greater variance it is possible to demonstrate that economic variables such as distance, dissimilarity in structure and level of output play a significant role in explaining the variance in the cross-correlations. A significant feature of the cross-correlations in relation to those of EU countries is that whilst they continue to provide support for the “UK idiosyncrasy” they no longer do so as strongly as they did in earlier data samples.


Artis, M., Okubo, T. (2008). 'Globalization and Business Cycle Transmission', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 110.

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The paper uses long-run GDP data for developed countries drawn from Maddison (2003) to generate deviation cycles for the period from 1870 to 2004. The cyclical deviates are examined for their bilateral cross-correlation values in three separate periods, those of the first globalisation wave (1870 to 1914), the period of the “bloc economy” (1915 to 1959) and for the period of the second globalization (1960-2004). Cluster analysis is applied and the McNemar test is used to test for the relative coherence of alternative groupings of countries in the three periods. The bloc economy period emerges as one that features some well-defined sub-global clusters, where the second globalization period does not, the first globalization period lying between the two in this respect. The second globalization period shows a generally higher level of cross correlations and a lower variance than the other two periods. The features uncovered suggest that the second globalization period is indeed one that comprises a more inclusive world economy than ever before.


Bataa, E., Osborn, D. R., Sensier, M., van Dijk, D.(2008). 'Identifying Changes in Mean, Seasonality, Persistence and Volatility for G7 and Euro Area Inflation', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 109.

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This study examines the properties of monthly CPI inflation in G7 countries and the Euro area (aggregate) over the period 1973-2007 using a new iterative decomposition procedure that separates changes in mean, seasonal and dynamic components together with conditional volatility. We uncover mean and seasonality breaks for all countries and, even allowing for these, changes in persistence are indicated for all countries except Canada. Further, while volatility reductions are widespread in the mid- to early 1980s, Canada, France and the US all exhibit increased volatility from 1999 onwards. Of methodological interest, iteration is shown to provide more evidence of persistence breaks and fewer volatility breaks overall compared with the usual approach of sequentially examining changes in the properties of inflation, while application of linear seasonal adjustment also reduces evidence of persistence breaks. Although failure to allow for breaks in mean, seasonal or dynamic components affects conclusions about the existence and dates of volatility breaks, nevertheless, evidence remains of a volatility increase in some countries in 1999.


Yilmaz, S.D., (2008). 'Public and Private Maintenance Expenditure in a Growing Economy', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 108.

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This paper studies the optimal taxation structure and public maintenance spending in an endogenous growth model where public maintenance spending effects the efficiency of public and private capital. Private firms also spend on maintenance, which increases the efficiency of private capital and reduces its depreciation. The growth-maximizing tax rate and maintenance spending are derived in this baseline setting, and the first-best welfare maximizing solution is also considered. The model is then extended to analyze the congestion effects of private usage on the efficiency of public and private capital, as well as the impact of maintenance spending tax refunds received by the private sector on the optimal tax rate.


Bratsiotis, G.J., (2008). 'Cross Price Effects, Nominal Rigidity and Endogenous Persistence', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 107.

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This paper shows that in macroeconomic models of product differentiation that are built on CES utility specifications, the widely used assumption of approximating cross price effects to zero, (since Dixit-Stiglitz 1979), plays indeed no crucial role. This is true not only when a large number of agents is assumed, but also at the flexible symmetric macro equilibrium where such effects are shown to cancel out regardless of the number of agents. We then show that this latter result is no longer true in the presence of nominal rigidities, where the ratio of cross to own price elasticities, (typically absent in recent New Keynesian models), is shown to be the key determinant of the coefficient of wage and inflation persistence.


Batbekh , S., Blackburn, K., (2008). 'On the Macroeconomics of Microfinance', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 106.

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Microfinance (small scale lending to the poor) is integrated into a dynamic macroeconomic model of income distribution. Two-period-lived agents, belonging to overlapping generation of dynastic families, choose between three alternative occupations - subsistence production, small-scale project investment and large-scale project investment. Subsistence activity is costless and riskless, whilst project investment is the opposite and may require external funding from financial institutions with imperfect powers of contract enforcement. In the absence of microfinance, only large-scale, collateralised loans are available through the traditional banking sector. Under such circumstances, initial inequalities persist as only the wealthy are able to acquire these loans, and as the small-scale enterprise is either not feasible or not profitable. With the introduction of microfinance, this venture is made both possible and attractive through the provision of non-collateralised loans and other features of microlending arrangements. Poverty and inequality are reduced as a result.


Agénor, P-R., El Aynaoui, K., (2008). 'Excess Liquidity, Bank Pricing Rules, and Monetary Policy', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 105.

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This paper analyzes the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on firms’ net worth. The demand for excess reserves is determined by precautionary factors and opportunity cost variables. The basic framework is used to examine the impact of a change in the refinance rate and the required reserve ratio. The analysis is then extended to account for the impact of excess liquidity on bank pricing rules and macroeconomic equilibrium. Symmetric and asymmetric rules are shown to provide new explanations of the “price puzzle” or “stagflationary” effect associated with contractionary monetary policy.


Berardi, M., (2008). 'Fundamentalists vs. chartists: learning and predictor choice dynamics', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 104.

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In a simple, forward looking univariate model of price determination we investigate the evolution of endogenous predictor choice dynamics in presence of two types of agents: fundamentalists an chartists. We find that heterogeneous equilibria in which fundamentalists and chartists coexist are possible, even when the fraction of agents is endogenized. We then combine evolutionary selection among heterogeneous classes of models with adaptive learning in the form of parameter updating within each class of rules and find that equilibria in which chartists constantly outperform fundamentalists seem never to be learnable. Simulations also show that, in general, interactions between learning and predictor choice dynamics do not prevent convergence of both processes towards their equilibrium values when the equilibrium is E-stable.


Blackburn, K., Neanidis,K.C., Haque, M.E., (2008). 'Corruption, Seigniorage and Growth: Theory and Evidence', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 103.

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This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public finance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which financial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government's reliance on seigniorage finance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government's budget constraint, we find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.


Gouveia, P.M.D.C.B., Osborn, D.R., Rodrigues, P.M.M., (2008). 'Comparing Seasonal Forecasts of Industrial Production', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 102.

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Forecast combination methodologies exploit complementary relations between different types of econometric models and often deliver more accurate forecasts than the individual models on which they are based. This paper examines forecasts of seasonally unadjusted monthly industrial production data for 17 countries and the Euro Area, comparing individual model forecasts and forecast combination methods in order to examine whether the latter are able to take advantage of the properties of different seasonal specifications. In addition to linear models (with deterministic seasonality and with non-stationary stochastic seasonality), more complex models that capture non-linearity or seasonally varying coefficients (periodic models) are also examined. Although parsimonious periodic models perform well for some countries, forecast combinations provide the best overall performance at short horizons, implying that utilising the characteristics captured by different models can contribute to improved forecast accuracy.


Artis, M., Okubu, T.,(2008). 'The Intranational Business Cycle: Evidence from Japan', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 101.

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This paper studies the intranational business cycle – that is the set of regional (prefecture) business cycles – in Japan. One reason for choosing to examine the Japanese case is that long time series and relatively detailed data are available. A Hodrick-Prescott filter is applied to identify the cycles in annual data from 1955 to 1995 and bilateral cross-correlation coefficients are calculated for all the pairs of prefectures.  Comparisons are made with similar sets of bilateral cross correlation coefficients calculated for the States of the US and for the member countries of a "synthetic EuroArea". The paper then turns to an econometric explanation of the cross-correlation coefficients (using Fisher’s z-transform), in a panel data GMM estimation framework.  An augmented gravity model provides the basic model for the investigation, whilst the richness of the data base allows for additional models to be represented.


Assenza, T., Berardi, M.,(2008). 'Learning in a Credit Economy', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 100.

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In this work we analyze a credit economy à la Kiyotaki and Moore (JPE, 1997) enriched with learning dynamics. Both borrowers and lenders need to make expectations about the future price of the collateral, and under heterogeneous learning this can have interesting consequences for the economy when the possibility of bankruptcy is taken into consideration.


Anderson, R.D.J., (2008). 'US Consumer Inflation Expectations: Evidence Regarding Learning, Accuracy and Demographics', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 99.

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Central banks have become increasingly aware of the importance of consumer inflation expectations in meeting monetary policy objectives. US consumer year-ahead inflation expectations data is available as measured by the Michigan 'Survey of Consumer Attitudes and Behavior'. Using the detailed demographic information recorded as part of the interview process to accommodate forecast heterogeneity, results suggest the accuracy of forecasts is linked to the demographic characteristics of the respondent. This survey also contains a short-rotating panel dimension, with most respondents being reinterviewed six months after the initial interview. Uniquely, this paper uses these matched interviews to examine whether consumers learn about inflation, improving the accuracy of their forecast from initial to reinterview. Results suggest, having corrected for attrition bias, that being reinterviewed stimulates agents to learn and improve forecast accuracy, the level of improvement being dependent on the demographic characteristic of the interviewee.


Haque, M.E., Kneller, R., (2008). 'Public Investment and Growth: The Role of Corruption', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 98.

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In this paper, we examine the growth effects of public investment in the presence of corruption. Our methodology improves on previous research on this topic by explicitly recognizing the role of simultaneity between public investment, corruption and growth and the possible biases arising from omission of correlated variables from the single reduced form equation based analysis. We use three-stage least squares method in a panel set up for a system of four equations on growth, public investment, corruption and private investment. Our primary results are twofold. First, corruption increases public investment. Second, corruption reduces the returns to public investment and makes it ineffective in raising economic growth.


Andreou, E., Pelloni, A. and Sensier, M. (2008). 'Is Volatility Good for Growth? Evidence from the G7', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 97.

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We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7.


Aslanidis, N., Osborn, D. R. and Sensier, M. (2008). 'Co-movements between US and UK stock prices: the roles of macroeconomic information and time-varying conditional correlations', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 96.

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We provide evidence on the sources of co-movement in monthly US and UK stock returns by investigating the role of macroeconomic and financial variables in a model with time-varying correlations. Cross-country communality in response is uncovered, with changes in US Federal Funds rate, UK bond yields and oil prices having negative effects in both markets. These effects do not, however, explain the marked increase in correlations from around 2000, which we attribute to time variation in the correlations of shocks to these markets. A regime-switching model captures this time variation well and shows the correlations increase dramatically around 1999-2000.


Agénor, P-R., Yilmaz, D., (2008). 'Aid Allocation, Growth and Welfare with Productive Public Goods', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 95.

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This paper develops an open-economy intertemporal growth model with endogenous relative prices and an imperfect world capital market. The government provides two categories of public services, infrastructure and health, which are both productive. Externalities associated with infrastructure in the production of health services are also accounted for. The model is calibrated for a "typical" low-income country and used to examine the growth and welfare effects of both permanent and temporary, tied and untied, increases in aid. Dynamic trade-offs between the short- and the long-run effects of aid shocks on growth, welfare, and the real exchange rate are shown to depend crucially on the composition of aid flows.


Agénor, P-R., Bayraktar, N., (2008). 'Contracting Models of the Phillips Curve Empirical Estimates for Middle-Income Countries', Centre for Growth and Business Cycle Research Discussion Paper Series, The University of Manchester, No. 94.

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This paper provides empirical estimates of contracting models of the Phillips curve for eight middle-income developing countries (Chile, Colombia, Korea, Malaysia, Mexico, Morocco, Tunisia, and Turkey). Following an analytical review, a variety of models with one and more leads and lags are estimated using two-step GMM techniques. Nested and non-nested tests are used to select a specification for each country, and in-sample predictive capacity and stability are analyzed. Higher-dimension models tend to perform better than parsimonious models with one lead and one lag. Except for Colombia and Korea, backward-looking behaviour has a relatively larger impact on inflation dynamics. World oil prices and relative input prices have a limited effect, whereas borrowing costs are significant for Korea and Mexico.