Roberto Duncan Picks


Associate Professor
of Economics


Inflation forecasting

New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment
(with Enrique Martínez-García) [coming soon]


We use a broad-range set of model specifications of inflation in emerging market economies (EMEs) and pseudo out-of-sample forecasts to assess their forecasting performance at different horizons (1 to 12 quarters ahead) with quarterly data over the period 1980Q1-2016Q4. We concentrate on 14 of the EMEs with the most complete coverage and, in general, find that a simple arithmetic average of the current and three previous observations (the RW-AO predictor) consistently outperforms its standard competitors. These include most conventional forecasting models based on domestic factors, existing open-economy Phillips curve-based specifications, factor-augmented models, and time-varying parameter models – based on the root mean squared prediction error (RMSPE). The RW-AO model is also accurate in predicting the direction of change for inflation in EMEs and, often, the RMSPE gains are shown to be statistically significant. Finally, we argue that the RW-AO model is successful in forecasting inflation among EMEs because it is a straightforward method to downweight later data, which is a robust strategy when there are unknown structural breaks in the data generating process and model misspecification. We suggest that these breaks could arise, for instance, from changes in the credibility of the central bank's inflation target or from shifts in the inflation target itself. The limitations to measure the policy credibility and implicit targets make the task of inflation forecasting in EMEs a challenging one.


Forecasting Local Inflation with Global Inflation: When Economic Theory Meets the Facts
(with Enrique Martínez-García) [under review]


This paper provides a novel approach to inflation forecasting based on the view that inflation is inherently a global phenomenon. First, we show theoretically that in a New Open Economy Macro (NOEM) model global inflation captures the endogenous comovement of inflation across countries that arises through international spillovers. More precisely, we derive an "error correction mechanism" that brings local inflation rates back in line with global inflation. We argue that this explains the relative success of inflation forecasting models based on global inflation (e.g., Ciccarelli and Mojon (2010)). Second, the NOEM model can be approximated by a finite-order VAR that provides a tractable model of inflation forecasting. We use Bayesian techniques to estimate the NOEM-BVAR specification and pseudo-out-of-sample forecasts to assess the model’s performance at different horizons (1 to 8 quarters ahead) across 17 OECD countries with quarterly data over the period 1980Q1-2014Q4. In general, we find that the NOEM-BVAR model produces a lower root mean squared prediction error (RMSPE) than its standard competitors -which include most conventional forecasting models based on domestic factors. In a number of cases, the gains in smaller RMSPEs are statistically significant. The NOEM-BVAR model is also accurate in predicting the direction of change for inflation, and often better than its competitors along this dimension too.

[Presentation slides]


The cyclicality of macroeconomic policies and volatility

Do Good Institutions Promote Countercyclical Macroeconomic Policies?
(with César Calderón and Klaus Schmidt-Hebbel; Oxford Bulletin of Economics and Statistics) [Article]


The literature has argued that developing countries are unable to adopt counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. Using a world sample of 115 industrial and developing countries for 1984-2008, we find that the level of institutional quality plays a key role in countries' ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, reflected in extended monetary policy and fiscal policy rules. The threshold level of institutional quality at which monetary and fiscal policies are a-cyclical is found to be similar.

[Working paper version (includes Supplementary Appendix)]


Institutional Quality, the Cyclicality of Monetary Policy and Macroeconomic Volatility
(Journal of Macroeconomics, March 2014, 39: 113-155.) [Article]


In contrast to industrialized countries, emerging market economies are characterized by pro- or a-cyclical monetary policies and high output volatility. This paper argues that those facts can be related to a long-run feature of the economy -namely, its institutional quality (IQL). The paper presents evidence that supports the link between an index of IQL (law and order, government stability, investment profile, etc.), and (i) the cyclicality of monetary policy, and (ii) the volatilities of output and the nominal interest rate. In a DSGE model, foreign investors that choose a portfolio of direct investment and lending to domestic agents, face a probability of partial confiscation which works as a proxy that captures IQL. The economy is hit by external shocks to demand for home goods and productivity shocks while its central bank seeks to stabilize inflation and output. In the long run, a lower IQL tends to discourage external liabilities. If there is a positive external demand shock, we observe an increase in output and real appreciation. The latter operates through two opposite channels. First, it directly increases the opportunity cost of leisure generating incentives to expand labor supply. Second, it reduces the real value of the debt denominated in foreign currency which stimulates consumption but contracts the labor supply. If the IQL is low, the economy attracts fewer loans for domestic consumers and shows a lower debt-to-consumption ratio in the steady state. This implies that the reduction of the real value of the debt caused by the real appreciation is smaller. Given this low wealth effect, the real appreciation leads to an expansion of the labor supply. Wages drop and inflation diminishes. The central bank reacts by cutting its policy rate to stabilize inflation and generates a negative comovement between output and the nominal interest rate (pro-cyclical policy). As a corollary, negative correlations between policy rates and output are not necessarily an indicator of destabilizing polices even in the presence of demand shocks.

[Working paper version in Ideas] [Supplementary Appendix]


A Simple Model to Teach Business Cycle Macroeconomics for Emerging Market and Developing Economies
(Journal of Economic Education, September 2015, 46(4): 394-402.) [Article]


The canonical neoclassical model is insufficient to understand business cycle fluctuations in emerging market and developing economies (EMDEs). We reformulate the model proposed by Aguiar and Gopinath (2007) in a simple setting that can be used to teach business cycle macroeconomics for EMDEs at the undergraduate level. The simplified model is employed for qualitatively explaining facts such as the highly countercyclicality of the trade balance and the higher volatility of output and consumption compared with those observed in advanced countries.

[Supplementary Appendix] [Related Working Paper in Ideas]


Global imbalances and the US Current account deficit

Does the US Current Account Show a Symmetric Behavior over the Business Cycle?
(International Review of Economics and Finance, January 2016, 41: 202–219.) [Article]


Traditionally, the literature that attempts to explain the link between the current account and output finds a linear negative relationship (e.g., Backus et al., 1995). Using nonparametric regressions, we find a robust U-shaped relationship between the US current account and the GDP cycle. When output is above (below) its trend the current account and detrended output are positively (negatively) correlated. We argue that this nonlinearity might be caused by persistent productivity shocks coupled with uncertainty shocks about future productivity.

[Working paper version in Ideas]


A Threshold Model of the US Current Account
(Economic Modelling, August 2015, 48: 270–280.) [Article]


What drives US current account imbalances? Is there solid evidence that the behavior of the current account is different during deficits and surpluses or that the size of the imbalance matters? Is there a threshold relationship between the US current account and its main drivers? We estimate a threshold model to answer these questions using the instrumental variable estimation proposed by Caner and Hansen (2004). Rather than concluding that the size or the sign of (previous) external imbalances matters, we find that time is the most important threshold variable. One regime exists before and another one exists after the third quarter of 1997, a period that coincides with the onset of the Asian financial crisis and the Taxpayer Relief Act of 1997. Statistically significant determinants in the second regime are the fiscal surplus, productivity, productivity volatility, oil prices, the real exchange rate, and the real interest rate. Productivity has become a more important driver since 1997.

[Working paper version in Ideas] [An Econbrowser Post]


Financial Liberalization, Low World Interest Rates, and Global Imbalances: A Note with a Simple Two-Country Model
(Applied Economics Letters, April 2014, 21(14): 1025-1029.) [Article]


We can understand the role of the liberalization of capital outflows on the global imbalances, the increasing share of US equities in foreign investors' portfolio, and the decline in the world interest rate and the S&P dividend-price ratio, facts observed during the last three decades, when taxes on international assets holdings are reduced in a simple two-country model with costs of portfolio adjustment.