We investigate two alternative versions of Purchasing Power Parity (PPP): reversion to a constant mean in the spirit of Cassel and reversion to a constant trend in the spirit of Balassa and Samuelson, using long-span real exchange rate data for industrialized countries. We develop unit root...

We propose a new methodology to study the stability of steady-state growth. Long-run GDP per capita can be characterized by: (1) the linear trend hypothesis, where there are no long-run changes in GDP levels or growth rates, (2) the level shift hypothesis, where there are long-run level shifts,...

Rules-based monetary policy evaluation has long been central to macroeconomics. Using the original Taylor rule, a modified Taylor rule with a higher output gap coefficient, and an estimated Taylor rule, we define rules-based and discretionary eras by smaller and larger policy rule deviations,...

Tests for structural change play an important role in macroeconomics and international finance. We investigate the empirical performance of the Bai and Perron (1998) multiple structural change tests and show that the use of their critical values may cause severe size distortions in persistent...

Transnational terrorism data are difficult to forecast because they contain an unknown number of structural breaks of unknown functional form. The rise of religious fundamentalism, the demise of the Soviet Union, and the rise of al Qaeda have changed the nature of transnational terrorism. 'Old...

The Taylor rule has been the dominant metric for monetary policy evaluation over the past 20 years, and it has become common practice to identify periods where policy either adheres closely to or deviates from the Taylor rule benchmark. The purpose of this paper is to identify (Taylor)...

"In a classic paper, Nelson and Plosser could not reject the unit root hypothesis in favor of trend stationarity for 13 out of 14 long-term annual macro series. Subsequent studies, allowing for one or two structural changes, have found more rejections with a broken trend stationary alternative....

We first show that the recent success of modern macroeconomic models in forecasting nominal exchange rates, evaluated using the Clark and West (2006) inference procedure, is partly due to the presence of the constant term (drift), in addition to the economic fundamentals. We then model the...