13th A R Bergstrom Prize in Econometrics to James Graham

Congratulations to James Graham, who was awarded the 2019 A. R. Bergstrom Prize in Econometrics for his paper “House Prices and Consumption: A New Instrumental Variables Approach”. The Bergstrom Prize can be awarded every two years and aims to reward the achievement of excellence in econometrics, as evidenced by a research paper in any area of econometrics.

Fluctuations in house prices are thought to have a significant impact on the macroeconomy, especially through their effect on consumption expenditures. The household balance sheet channel is a commonly cited explanation for this effect, whereby movements in house prices induce wealth effects and changes in the value of collateral. The primary difficulty in trying to identify these effects empirically is that house prices are endogenous equilibrium objects. Instrumental variables strategies are one way to isolate potentially exogenous variation in such prices.

James’ paper assesses the response of household consumption to house prices using a new instrumental variable strategy, which follows the literature on Bartik instruments. These are often referred to as “shift-share”’ instruments, since they typically consist of some aggregate shock that differentially affects locations according to the share of economic activity exposed to that shock.

In the paper, the instrument for local house price growth consists of the local share of houses possessing particular physical characteristics, which is then interacted with regional growth in the marginal prices of those characteristics. The characteristics include features that capture the overall quality of a house, such as its age, number of bedrooms, or number of bathrooms. The intuition for the effectiveness of the instrument is that the more the housing stock in each location is concentrated in particular characteristics, the more exposed that location will be to shocks to the relative prices of those characteristics. For example, if San Francisco was composed mostly of two-bedroom houses built prior to the 1960s, while Las Vegas has mostly four-bedroom houses built in the early 2000s, then a general increase in the price of larger and newer houses would result in relatively faster house price appreciation in Las Vegas.

To conduct the empirical analysis, James uses large micro-data sets on house prices and household consumption. The house price instrument is constructed using data on millions of individual housing transactions from across the US. Because this data contains information on geography, house characteristics, and house prices, it can be used to construct the composition of house characteristics in each location and to run the hedonic house price regressions that are used to estimate the marginal prices of the house characteristics. Household consumption expenditures are taken from a large panel data set which, among other things, contains information on the location of each household. Each household can then be linked to local house price changes in order to estimate the effect of these prices on their consumption behavior.

James reports IV-estimated average consumption elasticities with respect to house prices in the range of 0.1 to 0.15. These estimates correspond to marginal propensities to consume out of housing wealth of approximately 1.2 to 1.8 cents in the dollar, in line with previous estimates in the literature. Another important contribution of the paper is to show that, when estimating consumption elasticities in a panel data setting, the Bartik instrument performs much better than popular alternative instruments in the literature (e.g. local housing supply elasticities). For instance, the instrument provides significant time-series variation in house prices, while other instruments are mostly only useful in the cross-section.

In their assessment, the adjudicators Professors David Fielding, Alfred Haug, and Dorian Owen noted that James’ paper “is an excellent piece of empirical research.  It is well crafted with great attention to detail, using new data on millions of individual housing transactions across the US. The author developed a novel instrument for house prices in order to overcome endogeneity problems when estimating the relationship between household consumption and house prices. The robustness of the empirical findings is convincingly demonstrated.”

12th A R Bergstrom Prize in Econometrics to Daan Steenkamp

Congratulations to Daan Steenkamp, who was awarded the 2017 A. R. Bergstrom Prize in Econometrics for his paper Daan_Steenkamp_dp17-02. The Bergstrom Prize can be awarded every two years and aims to reward the achievement of excellence in econometrics, as evidenced by a research paper in any area of econometrics.

If an asset price contains a ‘bubble’ it will exhibit explosive (i.e. exponential) dynamics. Recently developed tests by Phillips et al. (2015a) and Phillips et al. (2015b) provide an accurate way to gauge whether asset prices are experiencing explosive dynamics, or have done so in the past.

Daan Steenkamp’s paper applies those tests to eleven of the most commonly traded exchange rates at a daily frequency and over a long sample. When measured at a daily frequency, the volatility of exchange rates tends to be high and potentially non-stationary, and there may be a size distortion in the standard tests causing them to over-reject the null that the series is explosive. For this reason, a wild bootstrapping technique is used to compute critical values for statistical interference.

A second contribution of Daan’s paper is to consider the possibility of both positive and negative explosive periods. Currency pairs provide a natural test case in this regard because explosive increases (or collapses) in a foreign currency imply a corresponding collapse (or increase) in the given base currency. Furthermore, the influence of the base currency on the explosive dynamics may be inferred by considering the dynamics of its effective exchange rate, i.e. that currency’s value against a wide basket of foreign currencies.

The results show that bouts of explosiveness in exchange rates against the United States (US) dollar are uncommon at a daily frequency. Periods of explosiveness tend to last for several days but involve only small changes in currency levels. These also usually reverse shortly afterwards.

Second, the dynamics of the US dollar appear to be largely responsible for the results found for the individual currency pairs, as evidenced by a high concordance of their explosiveness with explosiveness in the broad value of the US dollar exchange rate. This result suggests that there are relatively few instances where explosiveness in individual cross-rates reflected country-specific factors. There is also evidence that explosive episodes in currency markets coincide with periods of high market volatility.

In their assessment, the adjudicators Professors Mark Holmes and Bob Reed noted that Daan’s work was “competent analysis based on cutting edge econometric techniques that provide valuable insights.”

11th A R Bergstrom Prize in Econometrics to Michelle Lewis

Congratulations to Michelle Lewis, who was awarded the 2015 A. R. Bergstrom Prize in Econometrics for her paper “Forecasting with Macro-Finance Models: Applications to United States and New Zealand”. The Bergstrom Prize can be awarded every two years (although a three year gap ensued this time) and aims to reward the achievement of excellence in econometrics, as evidenced by a research paper in any area of econometrics.

Michelle Lewis’s Masters Thesis employs macro-finance models, which incorporate macroeconomic and timely financial market data, to forecast macroeconomic variables and the yield curve for New Zealand and the United States. The macro-finance models use the arbitrage-free Nelson-Siegel approach to represent yield curve data with just several components, and those components are combined with the macroeconomic variables of economic activity, inflation, and policy interest rates in a joint vector autoregression to produce forecasts.

The key contribution to the literature is that Michelle’s forecasting analysis is undertaken in a genuine real-time setting. That is, the model estimation and forecasts use the actual macroeconomic data that was available at each historical point in time, which realistically allows for an unavoidable uncertainty faced by practitioners. Conversely, the comparable literature to-date uses quasi-real-time macroeconomic data, which simply truncates the final available macroeconomic data series to estimate the model and produce forecasts over history. While showing promising forecasting benefits from macro-finance models, quasi-real-time analysis is unrealistic because it implicitly assumes that future revisions to historical macroeconomic data are already known at each historical point in time.

Fortunately, Michelle’s results show that, even in real time, there are still substantial forecasting benefits from using macro-finance models. The forecast improvements are most significant and robust for inflation and the policy rate, and economic activity for longer horizons. Furthermore, theoretically motivated restrictions on the yield curve dynamics improve the forecast performance of macroeconomic variables, and the yield curve itself.

However, for economic activity at short-term horizons, the forecasts from macro-finance models do not outperform forecasts from a standard vector autoregression of the macroeconomic variables. This result is at odds with the analogous quasi-real-time analysis, hence illustrating that quasi-real-time analysis can overstate the forecasting benefits of macro-finance models.

In their assessment, the adjudicators Professors Alfred Haug and Les Oxley noted: “The thesis is a substantial piece of empirical research that involved constructing new data and applying sophisticated econometric techniques that were skilfully mastered. Overall, it is an excellent piece of empirical econometrics. The author needs to be congratulated on her achievements.”

10th A R Bergstrom Prize in Econometrics to Isabelle Sin

Congratulations to Isabelle Sin, who was awarded the 2012 A. R. Bergstrom Prize in Econometrics for her paper “The Gravity of Ideas: How Distance Affects Translations”. The Bergstrom Prize can be awarded every two years and aims to reward the achievement of excellence in econometrics, as evidenced by a research paper in any area of econometrics.

The citation for the award writes that Izi’s paper, elements of which appeared in her PhD dissertation, is “an innovative study of how various measures of distance affect the international transmission of ideas, as one potentially important component underlying growth and development processes.” More information about the prize is available from the New Zealand Association of Economists.

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