Research Roundup

Highlighting some interesting research that I’ve come across recently, and worth a read (excerpts/abstracts):

1. Dealing with Volatile Capital Flows - “How have emerging-market countries dealt with capital flow volatility in the current crisis? What is the appropriate level of reserves for emerging-market countries? How can international crisis-lending and liquidity-provision arrangements be improved? What role can financial regulation and capital controls play in dealing with volatile capital flows? Olivier Jeanne discusses these and other important questions that are useful to keep in mind when thinking about the reform of international liquidity provision for emerging-market countries to deal with volatile capital flows.”
   
   I’ve talked about the dangers of unregulated capital flows before (here and more extensively here), and this new article just reinforces my view that open capital accounts aren’t necessarily beneficial for economic development.
   
   Jeanne, Olivier, "Dealing with Volatile Capital Flows", Peterson Institute for International Economics, Policy Brief 10-18, July 2010
   
   
2. Estimates of Fundamental Equilibrium Exchange Rates, May 2010 - "The fundamental question explored is what pattern of exchange rates is consistent with satisfactory medium-term evolution of the world economy, interpreted as achieving those objectives while maintaining internal balance in each country...The big disequilibrium in the pattern of exchange rates remains the undervaluation of the renminbi and the overvaluation of the dollar. The size of this disequilibrium is, however, less than previously estimated (now 15 percent on an effective basis and 24 percent bilaterally with respect to the dollar), due to the decline in the IMF's estimate of China's prospective current account surplus."
   
   Cline and Williamson update their estimates of the real effective exchange rate against the USD for a range of countries, and find some pretty significant changes from last year. Their methodology suggests that the MYR should be at RM2.52 to the USD, up from 2.63 last year. I covered their previous research, and what I think is wrong with it, here. Read this post for an alternative view.
   
   Cline, William R., and John Williamson, "Estimates of Fundamental Equilibrium Exchange Rates, May 2010", Peterson Institute for International Economics, Policy Brief 10-15, June 2010
   
   
3. Do Consumer Price Subsidies Really Improve Nutrition? - Many developing countries use food-price subsidies or price controls to improve the nutrition of the poor. However, subsidizing goods on which households spend a high proportion of their budget can create large wealth effects. Consumers may then substitute towards foods with higher non-nutritional attributes (e.g., taste), but lower nutritional content per unit of currency, weakening or perhaps even reversing the intended impact of the subsidy. We analyze data from a randomized program of large price subsidies for poor households in two provinces of China and find no evidence that the subsidies improved nutrition. In fact, it may have had a negative impact for some households.
   
   Another example of subsidies and market distortions creating perverse incentives, though with a different approach (and implications) than that which I tried to show.
   
   Jensen, Robert T., and Nolan H. Miller, "Do Consumer Price Subsidies Really Improve Nutrition?", NBER Working Paper No. 16102, June 2010
   
   
4. Calling Recessions in Real Time - "This paper surveys efforts to automate the dating of business cycle turning points. Doing this on a real time, out-of-sample basis is a bigger challenge than many academics might presume due to factors such as data revisions and changes in economic relationships over time. The paper stresses the value of both simulated real-time analysis-- looking at what the inference of a proposed model would have been using data as they were actually released at the time-- and actual real-time analysis, in which a researcher stakes his or her reputation on publicly using the model to generate out-of-sample, real-time predictions. The immediate publication capabilities of the internet make the latter a realistic option for researchers today, and many are taking advantage of it. The paper reviews a number of approaches to dating business cycle turning points and emphasizes the fundamental trade-off between parsimony-- trying to keep the model as simple and robust as possible-- and making full use of available information. Different approaches have different advantages, and the paper concludes that there may be gains from combining the best features of several different approaches."
   
   Prof Hamilton is one of the two bloggers behind Econbrowser, which is one of my favourite reads. And he isn’t afraid to put his research to the test either – you can find his recession indicator index on the Econbrowser frontpage, complete with emoticon (details here and here).
   
   James D. Hamilton, "Calling Recessions in Real Time", NBER Working Paper No. 16162, July 2010
   
   
5. Moving Holiday Effects Adjustment for Malaysian Economic Time Series - The dates of holidays such as Eid-ul Fitr, Eid-ul Adha, Chinese New Year and Deepavali vary from one year to the next and non-fixed date can affect time series data. The moving holidays need to be taken into consideration in the seasonal adjustment process to avoid misleading interpretations on the seasonally adjusted and trend estimates. Hence, by removing the moving holiday effect, the important features of economic series, such as the turning points can be easily identified. Seasonally adjusted data also allows meaningful comparisons to be made over a shorter time frame and it also reflects real economic movements. Currently, there are various methods applied for seasonal adjustment such as the X-12 ARIMA. However, these methods can only be used to adjust for the North American Easter effect and there is no such method which can deal with holiday effects in Malaysia such as Eid-ul Fitr, Eid-ul Adha, Chinese New Year and Deepavali. Due to these limitations, this paper proposes a procedure for seasonal adjustment of moving holiday effects in Malaysian economic time series data called SEAM (Seasonal Adjustment for Malaysia). The procedure involves estimating the irregular components using the X-12 ARIMA program and subsequently removing the moving holiday effects using a regression method. Three types of regressors namely, REG1 (using one weight variable), REG2 (using two weight variables) and REG3 (using three weight variables) are proposed in this study to measure the Eid-ul Fitr, Chinese New Year and Deepavali effects. Overall, it is found that SEAM is an effective method in removing the Malaysian moving holiday effects.
   
   Data in most advanced economies is seasonally adjusted i.e. smoothened to take out seasonal effects from holidays, structural peaks and troughs in consumption and production (and thus demand and supply), and other "regular" shocks to data. But Malaysian data is not seasonally adjusted, which is a failing I've tried to remedy in part through this blog. While doing some research on the subject, I stumbled on this paper, which explains how to account for Malaysian specific holidays that aren't included in standard statistical seasonal adjustment programs – since these holidays aren’t specific to any date in the standard Georgian calendar, you can introduce bias into seasonally adjusted series. The procedure outlined isn't earth-shatteringly new from my reading, but since it is known and available, I'm somewhat nonplussed that DOS still hasn't applied seasonal adjustment to Malaysian data. So what about it, DOS?
   
   Update: Hah! Seems I spoke too soon. I just checked the revised external trade data for May which has just come out on the DOS website, and Table 17 includes seasonally adjusted data for exports and imports. I await with bated breath for seasonal adjustment to be applied to the rest of Malaysian time series.
   
   Norhayati Shuja, Mohd Alias Lazim and Yap Bee Wah, "Moving Holiday Effects Adjustment for Malaysian Economic Time Series", Journal of the Department of Statistics Malaysia, Volume 1 2007 (Warning: pdf link)