Reserve Bank Discussion Papers Released

Reserve Bank Discussion Papers Released

Cyclical changes in firm volatility

By Emmanuel De Veirman and Andrew Levin

http://www.rbnz.govt.nz/research/discusspapers/dp11_06.pdf

We estimate changes in the volatility of firm-level sales, earnings and employment growth of US firms. Our method differs from existing measures for firm-level sales and employment volatility in that it not only captures longer-run changes in volatility, but also measures cyclical changes in firm volatility. We detect substantial cyclical variation in firm-specific volatility around trend. Firm-specific volatility was low in the early 1990s, rose in the mid- and late-1990s, and was high around 2000. Our results are consistent with the hypothesis, deduced from models with financial frictions, that rising idiosyncratic volatility before 2001 contributed to the coincident rise in the external finance premium and to the 2001 recession. Endogenous pricing models imply that price adjustment is less frequent, and disinflation more costly, when firm-specific volatility is low. Consistent with endogenous pricing models, we find that the output cost of disinflation was three times larger in the early 1990s than in the early 2000s.

DP 2011/07

Forecasting house price inflation: a model combination approach http://www.rbnz.govt.nz/research/discusspapers/dp11_07.pdf

By Sarah Drought and Chris McDonald

http://www.rbnz.govt.nz/research/discusspapers/dp11_07.pdf

In this paper we use a range of statistical models to forecast New Zealand house price inflation. We address the issue of model uncertainty by combining forecasts using weights based on out-of-sample forecast performance. We consider how the combined forecast for house prices performs relative to both the individual model forecasts and the Reserve Bank of New Zealand's house price forecasts. We find that the combination forecast is on par with the best of the models for most forecast horizons, and has produced lower root mean squared forecast errors than the Reserve Bank's forecasts.

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