Research

Working Papers

A Financial Mechanism for Foreign-Denominated Reserves in Advanced Economies (with Y. Bing)  slides

Abstract: Research on international reserves largely focuses on their relationship with exchange rates, rather than domestic interest rates. Candidate explanations have mostly concentrated on emerging economies. We innovate by advancing a financial mechanism that is more closely connected with the large-scale asset purchase (LSAP) programs the central banks of several advanced economies implemented since the Great Financial Crisis (GFC) of 2007.  Expansionary shocks in international reserve holdings tend to be contractionary for short-term yields in the UK, Canada, Switzerland, and Japan. Our nonlinear framework suggests the transmission of international reserves shocks onto domestic yields is regime dependent. Our analysis finds a preponderance of evidence that: (i) the onset of GFC in all four countries, (ii) the negative policy rate periods in Switzerland and Japan in the mid 2010s, and (iii) the quantitative tigthtening efforts Bank of England and Bank of Canada began in 2022 all had material effects on the transmission of international reserve shocks onto domestic interest rates. 

Yield Curve Shocks: Identification and Information Sufficiency (with E. Olson and M. Wohar)

Abstract: We apply recently developed tests of information sufficiency in structural VARs to extract fundamental structural shocks to the yield curve. While a small-scale specification seems sufficient to guarantee the fundamentalness of shocks to the level and the slope of the yield curve, we find information content from the same low dimensional model is insufficient to extract the fundamental shocks to the federal funds rate. A medium-scale specification properly augmented with information on inflation expectations improves the sufficiency test for all specifications we consider. However, contractionary shocks to both the federal funds rate and the level of the yield curve give rise to important price puzzles—while shocks to the slope of the yield curve elicit sensible responses across the board. Shocks that cause the yield curve to rotate may be particularly informative for economic activity and inflation dynamics. We conclude these shocks have an edge (over other types of yield curve or federal funds rate disturbances) in capturing the intertemporal tradeoffs agents make in the formulation of inflation expectations. 

Selected Publications

A Divisia Measure of the Money Supply for Mexico (with F. Colunga-Ramos) 

Journal of Money Credit and Banking (forthcoming)  Appendix

Abstract: We produce the first measure of Divisia money for Mexico. Various structural VAR identifications with Divisia M4 as an indicator of monetary policy yield responses of production and prices that are in every case at least as sensible as—and generally offer an improvement over—their counterpart specifications with a short-term offer rate as the indicator. Importantly, we find our Divisia specifications do not require expanding the model’s information set with commodity prices or the real exchange rate for a resolution of the price puzzle. We reach similar conclusions for Mexico to those Keating et al. (2019) arrive at for the U.S. economy.

Inflation Expectations in Forward-Looking Interest Rate and Money Growth Rules (with Z. Chen)

Journal of Economic Dynamics and Control (2025)

Abstract: We propose a novel approach that directly embeds rational expectations (RE) into a low-dimensional structural vector autoregression (SVAR) without the need for any mapping to a dynamic stochastic general equilibrium (DSGE) model. Beginning from a fully specified “consensus” structural model, we establish an instrumental variable procedure internal to the SVAR to obtain RE-consistent structural responses to identified monetary policy shocks. Our RE-SVAR framework facilitates a comparison across two alternative monetary policy indicators that accommodate long horizons in the formation of inflation expectations in the policy rule. We construct clouds of responses of inflation and economic activity to monetary policy shocks. We find large regions of puzzling responses to innovations in the federal funds rate. This suggests that indicator often requires being augmented with more information in standard VAR settings. A money growth rule characterization—with Divisia M4 as a policy indicator—exhibits comparatively larger regions of sensible responses within a low-dimensional textbook model of the economy. 

Identifying Monetary Policy Shocks with Divisia Money in the UK (with J. Binner, R. Bissoondeeal, and B. Jones)

Macroeconomic Dynamics  (2025)

Abstract: We construct a Divisia money measure for U.K. households and private non-financial corporations and a corresponding dual user cost index employing a consistent methodology from 1977 up to the present. Our joint construction of both the Divisia quantity index and the Divisia price dual facilitates an investigation of structural vector autoregresssion models (SVARs) over a long sample period of the type of non-recursive identifications explored by Belongia and Ireland (2016, 2018), as well as the block triangular specification advanced by Keating et al. (2019). An examination of the U.K. economy reveals that structures that consider a short-term interest rate to be the monetary policy indicator generate unremitting price puzzles. In contrast, we find sensible economic responses in various specifications that treat our Divisia measure as the indicator variable.

A Granular Investigation on the Stability of Money Demand (with Z. Chen)

Macroeconomic Dynamics  (2025)

Abstract: A large literature has shown money demand functions constructed from simple-sum aggregates are unstable. We revisit the controversy surrounding the instability of money demand by examining cointegrating income-money relationships with the Divisia monetary aggregates for the U.S., and compare them with their simple-sum counterparts. We innovate by conducting a more granular analysis of various monetary assets and their associated user costs. We find characterizing money demand with simple-sum measures only works well in a period preceding 1980. Divisia aggregates, their components, and their user costs provide a more reliable interpretation of money demand. Subsample analysis across 1980 and 2008 suggests the instability of money demand is a matter of measurement rather than a consequence of a structural change in agents’ preference for monetary assets.

A Tale of Two Tightenings (with Y. Lu)

Journal of Economic Dynamics and Control (2024)

Abstract: Balance sheet policy is now a prominent facet of monetary policy. Based on the U.S. experience between 2017 and 2019, Smith and Valcarcel (2023) show the first period of quantitative tightening (QT1) was markedly different from earlier balance sheet expansions. This paper provides evidence the Federal Reserve’s second balance sheet unwind effort that began in January 2022 (QT2) is strikingly different from QT1. We find substantial announcement effects during QT2 for various treasury yields and interest rate spreads, which are largely absent from QT1. At the time of this writing—by February 2023—both episodes have experienced a similar percent reduction in reserve balances. Yet, QT2 shows a stronger market response upon implementation. Not only are the underlying financial conditions different across the two periods, but the conduct of monetary policy in 2022 seems to be different as well. A clearer signaling mechanism for the expectations channel of monetary transmission takes place during QT2 than was apparent during QT1. The liquidity effects that seemed to be so important during QT1 have been largely attenuated during the second episode of balance sheet tightening.

Hedging Inflation Expectations in the Cryptocurrency Futures Market (with J. Liu) 

Journal of Financial Stability (2024) 

Abstract: This paper finds the first evidence of time variation in the relationship between inflation expectations and the price of cryptocurrency futures. Daily data on the futures markets of Bitcoin—starting in December 2017—and Ethereum—available since February 2021—reveal responses to inflation expectations that are consistently positive across both measures in a full sample encompassing 2022. These results hold for a sample that precedes the Luna crash in May 13, 2022. However, the response turns negative in the period between the failures of the Luna and FTX crypto exchanges. We find cryptocurrency futures provide an effective hedge against inflation expectations and may provide a hedge against idiosyncratic market risk if the ensuing uncertainty is embraced by traders leading them to search-for-yield behavior. Risk that is more systemic—and not properly digested by financial markets—may lead futures contract holders to exit their positions ahead of expiration, leading to a bid down of futures prices and an erosion of their hedging ability. This may have contributed to the turbulence in cryptocurrencies experienced during the latter part of 2022. 

The Financial Market Effects of Unwinding the Federal Reserve's Balance Sheet (with A.L. Smith)

Journal of Economic Dynamics and Control (2023)

Abstract:. Twice in a brief 12-year period between 2008 and 2020, central banks turned to asset purchase programs to combat a global economic downturn. While balance sheet expansions have become familiar and been widely studied, balance sheet normalization is less well understood. This paper provides a first analysis of the financial market effects of balance sheet normalization based on the U.S. experience between 2017 and 2019. We find evidence that unwinding past asset purchases tightens financial conditions. However, we show that these effects cannot be merely portrayed as quantitative easing in reverse. In particular, we find that balance sheet normalization generally lacked the large announcement effects that characterized quantitative easing. Instead, the effects of normalization manifested upon implementation and surfaced, in part, through larger liquidity effects than were evident during various phases of balance sheet expansion. 

Monetary Transmission in Money Markets: The Not-So-Elusive Missing Piece of the Puzzle (with Z. Chen)

Journal of Economic Dynamics and Control (2021):   Appendix

Abstract: We investigate the effects of U.S. monetary policy shocks from alternative policy indicators for a modern sample encompassing 1988-2020. The choice of the Wu and Xia (2016) shadow federal funds rate leads to persistent price puzzles. These puzzles arise despite inclusion of the usual suspect fixes such as commodity prices, federal funds futures and forward rate data. We find they occur at monthly and quarterly frequencies. We consider alternative indicators with the same broad monetary aggregates Keating et al. (2019) employed in their investigation of a historical sample. They provide a consistent resolution of the price puzzle and they do not require the ad hoc inclusion of commodity prices or futures data. This price puzzle correction is not a feature of our time-varying approach as it also obtains from constant parameter econometric estimation. Our analysis suggests monetary policy has transmitted substantial expansionary effects in money markets in the aftermath of the 2007 Financial Crisis and the decade that followed.

Inflation volatility and inflation in the wake of the Great Recession  (with S. Cekin)

Empirical Economics (2020):

Abstract: A reduced-form investigation reveals that the level of inflation and its volatility in the USA may not have been monotonic. This paper quantifies a reversal of the relationship by considering linear and nonlinear estimation methodologies on the trend and volatility of inflation. Our findings suggest that the spikes in inflation volatility in the period after 2008 are related to transitory, rather than permanent movements in inflation, suggesting that the US Great Moderation period may be merely on hold, rather than over with.

Yield curve rotations, monetary shocks, and Greenspan's conundrum

Quantitative Finance and Economics (2019) 3(1): 1-21

Abstract: Between June 2004 and December 2005 the Federal Reserve conducted a relatively aggressive contractionary policy that saw a steady increase in the effective federal funds rate of over 300 basis points. Yet the 10-year treasury rate fluctuated little over 60 basis points and ultimately declined slightly over the period. This was dubbed Greenspan’s Conundrum after a famous speech by the former chairperson in February 2005. This highlights the importance of understanding the efficacy with which the central bank may impact term premia through changes in the short-term rate. I find hikes in interest rates lead to reductions in rate spreads at first, before turning positive roughly about a year post shock. These findings are statistically significant for a variety of interest rate spreads over two different samples. Following a contractionary monetary policy action, the yield curve experiences a clockwise tilt at first and an eventual counterclockwise rotation after some delay. A counterfactual analysis suggests that augmenting the federal funds rate hike of 2004 with a similar action to the Fed’s 2011 Operation Twist—but conducive to contraction rather than expansion—could have mitigated Greenspan’s Conundrum of 2004–2005.

A model of monetary policy shocks for financial crises and normal conditions (with J. Keating, L Kelly, and L. Smith)  

Journal of Money Credit and Banking (2019) 51(1): 227-259 Codes

Abstract: Deteriorating economic conditions in late 2008 led the Federal Reserve to lower the target federal funds rate to near zero, inject liquidity into the financial system through novel facilities and engage in large scale asset purchases. The combination of conventional and unconventional policy measures prevents using the effective federal funds rate to assess the effects of monetary policy beyond 2008. This paper develops an approach to identify the effects of monetary policy shocks in such instances. We employ a newly created broad monetary aggregate to elicit the effects of monetary policy shocks both prior to and after 2008. Our model produces plausible responses to monetary policy shocks free from price, output, and liquidity puzzles that plague other approaches. It also produces a series of monetary policy shocks which aligns well with major changes in the Fed’s asset purchase programs.

Interest rate pass-through: the user cost of monetary assets and the federal funds rate 

International Journal of Finance and Economics (2018) 23(2): 94-110

Abstract: Evidence of substantial pass-through in short-term rates and other rates of financial and monetary assets has been typically rejected by the data. In a first, this paper investigates level and volatility transmissions among the Federal Funds rate and the user cost of various monetary assets, which include both instruments of public debt (e.g. t-bills) and private debt (e.g. commercial paper). Results suggest substantial and time-varying pass-through. Higher degrees of bi-directional pass-through occurs between the Federal Funds rate to the user cost of more liquid assets—both in levels and volatilities. Federal Funds rate spillovers propagate faster onto more liquid rates as well. These findings have important implications for monetary transmission not only across the term structure but along markets of varying liquidity.

An international perspective on the loan puzzle in emerging markets  (with A. Leblebiciouglu) 

Banking and Finance Issues in Emerging Markets (ISETE Vol.25)  2018

CHARTS

Abstract: In seminal work, Den Haan et al. (2007, 2010) show business loans respond in the opposite direction of what may be intended by monetary policy action in the United States and Canada. Based on various approaches, identification schemes, and samples, we document evidence this loan puzzle is not exclusive to developed economies but is also pervasive in emerging markets. We find business loans generally decline following expansionary monetary policy shocks. A preponderance of statistical and structural evidence indicates important transmissions of this puzzle from the United States to emerging markets.

Predictability and underreaction in industry-level returns: evidence from commodity markets (with A. Vivian and M. Wohar)

 Journal of Commodity Markets (2017) 6:1-152

Abstract: This paper finds significant evidence that commodity log price changes can predict industry-level returns for horizons of up to six trading weeks (30 days). We find that for the 1985–2010 period, 40 out of 49 U.S. industries can be predicted by at least one commodity. Our findings are consistent with Hong and Stein’s (1999) “underreaction hypothesis.” Unlike prior literature, we pinpoint the length of underreaction by employing daily data. We provide a comprehensive examination of the return linkages among 25 commodities and 49 industries. This provides a more detailed investigation of underreaction and investor inattention hypotheses than most related literature. Finally, we implement data-mining robust methods to assess the statistical significance of industry returns reactions to commodity log price changes, with precious metals (such as gold) featuring most prominently. While our results indicate modest out-of-sample forecast ability, they confirm evidence that commodity data can predict equity returns more than four trading weeks ahead.

What's so great about the Great Moderation? (with J. Keating) 

Journal of Macroeconomics (2017) 51:115-142

Abstract: This paper examines how volatilities of output growth and inflation have changed over a long period for eight countries. We obtain a number of robust empirical results based on a variety of different econometric methods. The lowest volatility occurs during or shortly after the Great Moderation period. Volatility is reduced during that time for most of the countries; however, these reductions in volatility pale in comparison with stability gains achieved during two other periods. One of those periods is the Postwar Moderation, which began near the end of World War II for each country. Not only is the decline in volatility impressive, but also the volatility is typically at the lowest level up to that point in a sample or at least has fallen to a low not seen for decades. And those reductions in volatility are statistically significant, in contrast to the Great Moderation. A second fall in volatility that in nearly all cases exceeds that of the Great Moderation is for inflation during the 1920s. And this moderation in inflation during the 1920s is statistically significant in almost every case. Overall, these and a number of other notable changes in volatility are remarkably robust across countries, different data sources, and alternative econometric methodologies. For example, implementation of a broad-based fixed exchange rate system is typically associated with a substantial reduction in macroeconomic volatility. Another finding, obtained from structural vector autoregression models, is that the changes in volatility for each variable are primarily driven by a fundamentally different type of disturbance.

Compression in monetary user costs in the aftermath of the financial crisis: implications for the Divisia M4 monetary aggregate

 (with R. Mattson) Applied Economic Letters (2016) 23 (18):1294-1300

Abstract: Differences in Divisia and simple-sum money arise from appropriate weighing mechanisms in Divisia, which rely on information on the user cost of monetary assets. We show convergence in the growth rate of Divisia M4 and its simple-sum counterpart beginning in early 2009, shortly after the collapse in the Federal Funds rate. This phenomenon results from compression in user costs.

The time-varying effects of permanent and transitory shocks to real output (with J. Keating) 

Macroeconomic Dynamics (2015) 19(3):477-507

Abstract: A time-varying parameter VAR for the US is estimated for annual measures of real output growth and inflation dating back to 1870. We document changes over time in the impulse responses of variables to permanent and transitory output shocks along with changes in the volatilities of output growth and inflation. Both volatilities rise quickly with World War I and its aftermath, stay relatively high until the end of World War II and drop rapidly until the mid to late-1960s. This Postwar Moderation represents the largest decline in volatilities in our sample, with declines in volatility that exceed the Great Moderation. Fluctuations in output growth volatility are primarily associated with permanent shocks to output while fluctuations in inflation volatility are primarily accounted for by temporary shocks to output. Conditioning on temporary shocks, inflation and output growth are positively correlated. This finding and the impulse responses are consistent with an aggregate demand interpretation for the temporary shocks. Our model implies aggregate demand played a key role in the changes in inflation volatility. Conversely, the two variables are negatively correlated when conditioning on permanent shocks, suggesting that these disturbances are associated primarily with aggregate supply. Our results suggest aggregate supply played an important role in output volatility fluctuations. Most of the impulse responses support an aggregate supply interpretation of permanent shocks. However, for the pre-World War I period we find that at longer horizons a permanent increase in output is generally associated with an increase in the price level that is frequently statistically significant. This evidence supports the hypothesis that aggregate demand had a long-run positive effect on output during the pre-World War I period.

Solving the Price Puzzle with an alternative indicator of monetary policy (with J. Keating and L. Kelly) 

Economics Letters (2014) 124(2):188-194

Abstract: We identify the effects of monetary policy shocks on macroeconomic variables in VARs using the Divisia M4 measure of money as the policy indicator variable. We obtain theoretically sensible responses—whether or not a commodity price index is included. Thus, we eliminate the well-known empirical puzzles from the VAR by a novel choice in a policy variable, rather than the usual attachment of an ad hoc variable.

Exchange rate volatility and the time-varying effects of aggregate shocks 

Journal of International Money and Finance (2013) 32:855-843

Abstract: This paper investigates the dynamics of the real exchange rate and relative output among the US and five of its top six trading partners since the collapse of Bretton Woods. It employs long-run restrictions to identify the usual suspect macroeconomic shocks and their relative importance for exchange rate fluctuations. An improvement of the econometric application is that it allows for the contribution of each shock to the real exchange rate and relative output to vary over time. While the volatility of US output – both total and relative to that of the UK or Canada – is estimated to have substantially reduced since the mid-1980s, consistent with the Great Moderation findings of many others, the volatility of real exchange rates has experienced a gradual and continuous increase over the same period. Monetary shocks account for only a small fraction of these dynamics, although they do track well the increase in volatility of US output during the Great Inflation period. It is supply-type shocks that seem to be more important for the relative output volatility reductions of the mid-1980s. Conversely, demand shocks seem to account for the largest portion of the volatility increases in the real exchange rate. Perhaps unsurprisingly, both volatilities increase during the 2007 financial crisis and the ensuing 2008–2009 Great Recession – periods associated with higher economic uncertainty.

Changes in the oil price inflation pass-through (with M. Wohar) 

Journal of Economics and Business (2013) 68:24-42

Abstract: We estimate a Bayesian structural vector autoregression that allows for time-varying parameters and stochastic volatility in the errors to account for the effects of various aggregate shocks on the real price of oil. We employ US quarterly data from 1948:Q1 to 2011:Q2. We find that aggregate supply (‘AS’) shocks have a meaningful effect on oil prices only during the 1970s and early 1980s. Our estimates suggest that since the Great Moderation period, oil prices respond more to aggregate demand (‘AD’) than ‘AS’ shocks and the volatility in oil prices does not seem to be contagious for the volatility in overall inflation. Our results also imply a flattening of the Phillips Curve in the 1990s and 2000s. A preponderance of evidence suggests that oil price-inflation pass-through may have shifted from a supply-side to a demand-side phenomenon. This has important implications for the ability of monetary policy makers to dampen the effects of adverse oil shocks on the aggregate economy.

The Impact of Government Spending on Private Spending in a Two-Sector Economy 

Public Finance Review (2013) 41(2):248-272

Abstract: Based on evidence that the dynamics of private spending on durables seem to differ from that of nondurables and services, this article disaggregates the impact of an exogenous government shock into its effect on each type of consumption good. Different calibrations of a dynamic stochastic general equilibrium (DSGE) model suggest that increases in government spending crowd out private spending on durable goods, while they serve to expand nondurable and services spending. Vector autoregression (VAR) estimates across these sectors yield qualitatively similar results. The estimated responses are driven by a negative correlation between durable spending and two measures of government spending that has not greatly varied over time—whereas the correlation between nondurable spending and government consumption has remained consistently positive throughout the sample. Estimates are consistent with a Great Moderation in three components of consumption, whereas moderations in the volatility of government spending took place earlier than the 1980s. The Great Recession of 2008–2009 saw an increase in volatility of consumption spending with no similar increases in the uncertainty of government spending. 

The dynamic adjustments of stock prices to inflation disturbances 

Journal of Economics and Business (2012) 64(2):117-144

Abstract: While theoretical predictions establish a strong positive relationship between equity prices and inflation, finding substantiating empirical evidence has been a difficult endeavor. Generally, the data suggests a weak negative relationship between stock prices and inflation. Aided by two different structural VAR specifications that allow for time variation in the covariance and drift of the system, this paper finds evidence that the weakly negative correlation between stock prices and US inflation results from offsetting effects of shocks to monetary policy and disturbances to the demand for financial assets. Since the 1960s, the stock price-inflation correlation is estimated to be relatively more stable than the volatility of either series, both of which have experienced substantial change—albeit volatility in US economic activity is estimated to have taken place far more gradually than that of stock prices. The volatilities of US economic activity, inflation, and stock prices all rose as a result of the financial crisis and the ensuing 2008–2009 Great Recession—with the level of inflation volatility estimates during the Great Recession comparable to those of the Great Inflation period of the 1970s. While it is shown that a traditional VAR approach would also predict a positive stock price response to inflationary disturbances, our time-varying approach enables us to uncover that during the 2008–2009 Great Recession period a stock price increase is more pronounced following inflationary shocks that stem from money supply, rather than money demand, disturbances—in contrast to the 1980–1982 recession where the magnitude of the stock price response to both shocks is more similar. These conclusions are qualitatively robust to changes in variable choice and measurement frequencies.

Greater Moderations (with J. Keating) 

Economics Letters (2012) 115(2):168-171

Abstract: Using a 219-year sample, we find that the US output growth and inflation volatilities fell by 60% and 76%, respectively, from 1945 until the mid-1960s. This Postwar Moderation is more substantial than the Great Moderation. The largest reduction in inflation volatility occurred during the Classical Gold Standard period. Our empirical model implies that aggregate supply accounts for most of the changes in output growth volatility while aggregate demand accounts for most of the changes in inflation volatility.

Instituting a monetary economy in a semester-long macroeconomics course 

Journal of Economic Education (2013) 44(2):129-141

Abstract: The author provides a general model to incentivize student involvement in an economics course on an ongoing basis. Rather than presenting students with a discrete number of diverse experiments to illustrate different economic concepts, he opts for the adoption of a single experiment that lives for the duration of the semester. This approach provides the flexibility to illustrate a substantial number of concepts while forgoing some of the more in-depth analysis typically afforded by more traditional one-day experiments. By instituting an experimental unit of currency that takes on value throughout the semester, many concepts related, but not exclusive, to income, redistribution, intertemporal substitution, and banking can be reinforced with minimal loss of lecture time due to setup and rule exposition.

A refinement of the relationship between economic growth and income inequality (with F. Fawaz and M. Rahnama) 

Applied Economics (2014) 46(27):3351-3361

Abstract: There is mixed evidence in the literature of a clear relationship between income inequality and economic growth. Most of that work has focused almost exclusively on developed economies. In what we believe to be a first effort, our emphasis is solely on developing economics, which we classify as high-income and low-income developing countries (HIDC and LIDC). We make such distinction on theoretical and empirical grounds. Empirically, the World Bank has classified developing economies in this manner since 1978. The data in our sample are also supportive of such classifications. We provide theoretical scaffolding that uses asymmetric credit constraints as a premise for separating developing economies in such a way. We find strong evidence of a negative relationship between income inequality and economic growth in LIDC to be in stark contrast with a positive inequality–growth relationship for HIDC. Both correlations are statistically significant across multiple econometric specifications. Using international data from 1960 to 2010, this article explores the effect of income inequality on economic growth using dynamic panel technique, such as system generalized method of moments (GMM) that is believed to mitigate the endogenous problem. These results are strikingly contrasting to the previous estimation results of Forbes (2000) displaying significant positive correlation between two variables in the short to medium term.

Nonlinearities in the economic growth rate of Taiwan and Hong Kong: A bayesian threshold autoregression approach (with C. Moh, M. Rahnama, and P. Summers) Research in Applied Economics (2014) 6(2):1-19

Abstract: We analyze the extent to which low frequency movements in the economic activity of Taiwan and Hong Kong can be explained by those of their largest trading partners. We estimate posterior marginal probabilities across 312 different specifications for each country and computes Bayes' Factors as a model selection mechanism. Data suggests that a best fitting model requires a different specification for Hong Kong and Taiwan. Results show that economic growth rates in both Hong Kong and Taiwan are well described by a threshold model but with different types of nonlinear effects. Hong Kong’s economic growth has a nonlinear effect on its expected future growth, but is unaffected by growth in the US, Japan or Taiwan. In contrast, we find a significant nonlinear spillover effect from Japan to Taiwan.

An examination of uncovered real interest rate parity in U.S. labor-intensive manufacturing industries (with C. Moh and M. Rahnama) Journal of Business Strategies (2012) 29(1):57-78

Abstract: In a departure from the standard literature, we consider micro-level data to draw inferences about the uncovered real interest rate parity in 18 distinct manufacturing industries across 25 countries. The real interest rates are computed based on trade weights at the industry level. We examine the time series properties of real interest differentials by employing a battery of unit root tests. Using industry-specific quarterly observations on deposit and inflation rates, we find robust and statistically significant evidence in support of the uncovered real interest rate parity (UIP) in every industry we consider across all 25 countries.

Fluctuations, uncertainty and income inequality in developing countries (with F. Fawaz and M. Rahnama) 

Eastern Economic Journal (2012) 38(4):495-511

Abstract: We analyze income inequality and high frequency movements in economic activity for low and high income developing countries (LIDC and HIDC). The impact of human capital, capital formation, and economic uncertainty on income inequality for LIDC and HIDC are also evaluated. We find strong evidence that business cycle fluctuations serve to exacerbate income inequality in HIDC while they help narrow the gap in LIDC. Importantly, volatility in output widens inequality across the board but to a consistently higher degree in HIDC. Schooling helps reduce income inequality in both country groups, while investment increases income inequality. Lastly, the Kuznets inverted U-curve hypothesis is confirmed for both LIDC and HIDC.

The labor market in Palestine (with M. Rahnama) 

Middle Eastern Journal of Economics and Finance (2013) 32:822-843

Abstract: Most reports o the economic outlook of the Palestinian region are based on data provided by global agencies like the World Bank or the International Monetary Fund. Using internal sources, we provide a descriptive analysis of the labor market in the West Bank and Gaza in the 2000s. Lack of higher frequency data or more substantial sample size prevents us from conducting an inferential treatment based on a more rigorous econometric analysis. Even then, we find the unemployment rates in West Bank and the Gaza Strip more than triple following the Second Al-Aqsa Intifada period of September of 2000 through the end of 2002. However, unemployment rates and wages remain persistently high and low, respectively, through periods of relatively high or relatively low levels of military conflicts and blockade. We conclude that the political and military instability in the West Bank and the Gaza Strip must be a necessary but not sufficient explanation for the protracted economic woes of the region.