An Investigation into Rule of Thumb Behaviour in New Zealand

<p>In recent times, macroeconomic models have begun to describe aggregate consumer and firm behaviour by allowing some proportion to behave in a rule of thumb manner. This dissertation attempts to address two main issues that are concurrent in the literature. First I test for the proportion of aggregate behaviour that deviates from Classical consumer allocation theory and New Keynesian firm pricing theory in New Zealand. Rule of thumb consumers are assumed to consume out of current income as opposed to obeying the Permanent Income Hypothesis, while rule of thumb firms set prices in a backward looking manner. Using the GMM estimation procedure, I examine the sensitivity of estimates across a range of instrumental variables. After positive GMM specification tests I find the proportion of rule of thumb consumers is 0.21 and the proportion of backward looking price setters is 0.82. These results suggest that specifications which fail to allow for rule of thumb behaviour cannot fully reflect consumer and firm decisions. The second main issue seeks to address how these estimates compare to those estimated in a small open economy DSGE model. Monte Carlo Markov Chain (MCMC) estimation finds an estimated degree of external habit persistence of 0.9, proportion of rule of thumb consumers of 0.34, and the proportion of backward looking price setters falls to 0.7. A full range of MCMC diagnostics is subsequently computed. The diagnostic tests are largely favourable.</p>

An Investigation into Rule of Thumb Behaviour in New Zealand

<p>In recent times, macroeconomic models have begun to describe aggregate consumer and firm behaviour by allowing some proportion to behave in a rule of thumb manner. This dissertation attempts to address two main issues that are concurrent in the literature. First I test for the proportion of aggregate behaviour that deviates from Classical consumer allocation theory and New Keynesian firm pricing theory in New Zealand. Rule of thumb consumers are assumed to consume out of current income as opposed to obeying the Permanent Income Hypothesis, while rule of thumb firms set prices in a backward looking manner. Using the GMM estimation procedure, I examine the sensitivity of estimates across a range of instrumental variables. After positive GMM specification tests I find the proportion of rule of thumb consumers is 0.21 and the proportion of backward looking price setters is 0.82. These results suggest that specifications which fail to allow for rule of thumb behaviour cannot fully reflect consumer and firm decisions. The second main issue seeks to address how these estimates compare to those estimated in a small open economy DSGE model. Monte Carlo Markov Chain (MCMC) estimation finds an estimated degree of external habit persistence of 0.9, proportion of rule of thumb consumers of 0.34, and the proportion of backward looking price setters falls to 0.7. A full range of MCMC diagnostics is subsequently computed. The diagnostic tests are largely favourable.</p>

Myopia and Anchoring

We develop an equivalence between the equilibrium effects of incomplete information and those of two behavioral distortions: myopia, or extra discounting of the future; and anchoring of current behavior to past behavior, as in models with habit persistence or adjustment costs. We show how these distortions depend on higher-order beliefs and GE mechanisms, and how they can be disciplined by evidence on expectations. We finally illustrate the use of our toolbox with a quantitative application in the context of inflation, a bridge to the HANK literature, and an extension to networks. (JEL C53, D83, D85, E12, E31, E37)

Research and Development Intensity and Effective Tax Rate: Empirical Evidence from India

This article examines the link between research and development (R&D) intensity and effective tax rates (ETRs) in India. We added a new perspective to the current base erosion and profit shifting debate in two ways. First, the study extends the literature on base erosion and profit shifting by providing empirical evidence on the link between R&D intensity and ETR in the context of emerging economy of India. Second, we investigate the R&D intensity and ETR relationship in a dynamic context using Bias Corrected Least Square Dummy Variable Model. We find that R&D intensity has a significant and negative effect on both average and current ETR. The results show that the effect of R&D intensity on current effective tax was more than average ETRs. We also find that larger firms are associated with lower ETR. A significant negative association was also observed between ETR and capital intensity. The dynamic analysis confirms the habit persistence in the ETR that current period ETR is highly dependent on its previous year ETR.

A DSGE Model-Based Analysis of the Indian Slowdown

A New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with habit persistence used to examine the US slowdown is also used to analyze the contribution of basic demand and supply shocks to the Indian slowdown. Kalman filter-based maximum likelihood estimation is undertaken with Indian output, inflation and interest rate data. First, our model based output gap tracks the statistical Hodrick–Prescott filter-based output gap well. Second, comparison of estimated parameters, impulse responses and forecast error variance decomposition between India and the US brings out the differences in policy responses, the structure of the two economies and their inflationary processes. There is a higher impact of interest rate shocks on output and inflation, and lower impact of technology shocks on output but higher on inflation in comparison to US. The former indicates monetary policy over-reaction and the latter validates a supply curve that technology shocks shift and inadequate adjustment of actual to potential output. Habit persistence is higher, markup and interest rate shocks are more volatile in India. Markup shocks play a much larger role in determination of Indian inflation again pointing to the importance of supply side factors. Third, smoothed states obtained from the Kalman filter to create counterfactual paths of output and inflation (during 2009:Q4 to 2013:Q2) in the presence of a given shock, show monetary shocks imposed significant output cost. The output gap was negative post the 2011 slowdown and in 2016.