Growth and Inflation Forecasts for Germany: An Assessment of Accuracy and Dispersion

Based on a panel of German professional forecasts for 1970 to 2002 we find that growth and inflation forecasts are unbiased and weakly, but not strongly efficient. Besides the effect of diverging forecasting dates, no other substantial differences in forecasting quality are found among forecasters. We argue that is not always advisable to listen to the majority of forecast-ers. The dispersion of forecasts correlates positively with the volatility of macroeconomic variables. This suggests that forecasters do not behave predominately strategic, but share no common belief on the adequate model of the economy.Forecast error evaluation; Consensus forecast; Disagreement; Uncertainty; Germany

Do Leading Indicators Help to Predict Business Cycle Turning Points in Germany?

Using a binary reference series based on the dating procedure of Artis, Kontolemis and Osborn (1997) different procedures for predicting turning points of the German business cycles were tested. Specifically, a probit model as proposed by Estrella and Mishkin (1997) as well as Markov-switching models were taken into consideration. The overall results indicate that the interest rate spread, the longterm interest rate as well as some monetary indicators and some survey indicators can help predicting turning points of the business cycle.Business cycle, leading indicators, probit model, McFadden's R2, Markov switching models

Estimating and Forecasting Aggregate Productivity Growth Trends in the US and Germany

This paper addresses the issue of estimating and forecasting productivity growth trends in the US and Germany from the perspective of a business cycle researcher who wants to use the available information in time series of aggregate labor productivity to derive a model for short- and/or long-term forecasts of labour productivity. We will use stability tests and a deterministic model with structural breaks that is estimated using the methods mentioned in Hansen (2001). The methodological approach also draws on Gordon (2003) using a Kalman filter specification. We discuss the implications of unit-root assumptions for long-term forecasts and argue in favor of a near unit-root modelling. That implies a convergence of productivity growth rates in both countries within the next 15 years.

The New Keynesian Model and the Long-Run Vertical Phillips Curve: Does It Hold for Germany?

New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for West German data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without.Cointegration; Vector error correction model; Unemployment; Phillips curve; Hysteresis

Do probit models help in forecasting turning points of German business cycles?

In this paper we used a data set constructed for a companion paper (Fritsche/Stephan, 2000) where we explored the leading indicator properties of different time series for the German business cycle. Now we test for the ability of different indicator series to forecast recessions by using a probit approach as proposed by Estrella/Mishkin (1997). The dating procedure refers to the study by Artis et. al. (1997). We took into consideration the criticism made by Dueker (1997) who stated that in the probit model the fact that the economy is already in a state of recession must be controlled for. The results of our estimate are unsatisfactory on the whole. Only the ifo institute's business expectation of producers of intermediate inputs, the interest rate spread, the long-term interest rate, and money supply M2 show satisfactory leading properties.business cycle, probit model, modified McFadden's R2, recession, Germany

The Store-of-Value-Function of Money as a Component of Household Risk Management

We analyse how money as a store of value affects the decisions of a representative household under diversifiable and non-diversifiable risks. given that the central bank successfully stabilizes the rate of inflation at a low level. Assuming exponential utility allows us to derive an explicit relationship between optimal money holdings, the household's desire to tilt, smooth and stabilize consumption as well as minimize portfolio risk. In this context we also show how the correlation between stochastic labour income and stock returns impact the store-of-value function of money. Finally we prove that the store-of-value benefits of money holdings continue to hold even if we take riskless alternatives into account.Money demand, consumption, CRRA, CARA, exponential utility, households, risk, risk management

Forecast Errors and the Macroeconomy: A Non-Linear Relationship?

The paper analyses the reasons for departures from strong rationality of German business cycle forecasts based on annual observations from 1963 to 2004. We rely on forecasts from the joint forecast of the so-called "six leading" forecasting institutions in Germany. We test for a non-linear relation between forecast errors and macroeconomic fundamentals and find evidence for such a non-linearity for inflation forecasts. Evidence from probit models further suggests that some macroeconomic fundamentals - especially monetary factors - correlate to large positive or negative forecast growth and inflation forecast errors.Forecast error evaluation; Non-linearities; Business cycles

Does the Dispersion of Unit Labor Cost Dynamics in the EMU Imply Long-Run Divergence?: Results from a Comparison with the United States of America and Germany

Using unit labor cost (ULC) data from Euro area countries as well as US States and German Länder we investigate inflation convergence using different approaches, namely panel unit root tests, co-integration tests and error-correction models. All in all we cannot reject convergence of ULC growth in EMU, however, country-specific deviations from the rest of the currency union are more pronounced in Europe and more persistent. This holds before and after the introduction of the common currency.Unit labor costs, inflation, EMU, convergence, panel unit root tests, convergence clubs

Do probit models help in forecasting turning points in German business cycles?

In this paper we used a data set constructed for a companion paper (Fritsche/Stephan, 2000) where we explored the leading indicator properties of different time series for the German business cycle. Now we test for the ability of different indicator series to forecast recessions by using a probit approach as proposed by Estrella/Mishkin (1997). The dating procedure refers to the study by Artis et. al. (1997). We took into consideration the criticism made by Dueker (1997) who stated that in the probit model the fact that the economy is already in a state of recession must be controlled for. The results of our estimate are unsatisfactory on the whole. Only the ifo institute's business expectation of producers of intermediate inputs, the interest rate spread, the long-term interest rate, and money supply M2 show satisfactory leading properties.In diesem Artikel wird ein Datensatz benutzt, mit dem auch in einer begleitenden Untersuchung die Frühindikatoreigenschaften verschiedener Reihen für den deutschen Konjunkturzyklus getestet wurden. Um die Fähigkeit, Rezessionen zu prognostizieren, zu testen, wird der von Estrella/Mishkin vorgeschlagene Ansatz benutzt. Für die Einteilung der Konjunkturphasen wurde auf Artis et. al. (1997) zurückgegriffen. Der Einwand von Dueker (1997), dass es wichtig ist, zu kontrollieren, ob die Wirtschaft sich schon in einer Rezession befindet, wurde berücksichtigt. Die Resultate der Schätzung sind insgesamt unbefriedigend. Nur die Ifo-Geschäftserwartungen von Vorleistungsgüterproduzenten, die Zinsdifferenz, die langfristigen Zinsen sowie die Geldmenge M2 zeigen befriedigende Vorlaufeigenschaften

Warum Konjunkturprognosen?

Konjunkturprognostiker stehen im Kreuzfeuer der öffentlichen Kritik. Im vorliegenden Bericht wird folgenden Fragen nachgegangen: Was können Konjunkturprognosen leisten? Welchen Kriterien haben sie zu genügen? Wie sind die Leistungen von - zum Teil öffentlich geförderten - Institutionen, die Konjunkturprognosen liefern, zu beurteilen? Haben sich Konjunkturprognosen bewährt? Was sind die Gründe für Unterschiede bei der Prognosegüte? Insgesamt zeigt sich, dass die untersuchten Prognosen im Großen und Ganzen den Kriterien der Unverzerrtheit und Rationalität genügen. Bezüglich Beschleunigungen und Verlangsamungen schneiden sie auf jeden Fall deutlich besser als ein Münzwurf ab. Allerdings sind die Fehlermargen relativ hoch und nehmen mit der Länge des Prognosezeitraums zu - Konjunkturprognosen sind unsicher. Die mit der Prognose verbundene Unsicherheit sollte angegeben werden. Prognoseinstitutionen sollten zudem ihre Prognoseinstrumente wissenschaftlich nachvollziehbar machen und die Anwendungsbedingungen ihrer Aussagen offen legen