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Business cycles and forecasting
the heart of the derivation of these models and on the lack of cointegration between exchange rates and their main macroeconomic determinants, thus implying the absence of a meaningful long-term equilibrium relationship between these two factors, k) The consensus reported by the authors (p. 135) is that: (a) exchange rates have non-normal leptokurtic distributions, (b) their changes are not necessarily independent, or identically distributed, and (cl extending the sampling frequency from daily to weekly to monthly levels generally tends to reduce non-normality. Most of the papers described in the book and some of the original estimates of the authors use different currencies, differently sampled (e.g at different times of the day), by different agencies, over different periods, and at different frequencies. Given this heterogeneity of the data sources and of their use (albeit with some important exceptions) and the general disregard of institutional factors (such as the EMS, the permanent or transitory barriers to capital mobility, the characteristics of Central Banks’ interventions in the markets, the date alignment of forward contracts, etc.) some ‘mixed and conflicting results’ are to be expected. Nevertheless, there is some inner consistency among the different pieces of empirical evidence. If IRPT holds [under (a), above] but the term structure of forward premia [under (e)] does not, the markets should show some deviations from efficiency, as they do under (b). Given this occasional lack of weak-form efficiency, it is quite natural that the information contained in the forward rate might be sometimes insufficient to forecast the future spot rate [under (c)l. ‘News’ [under (d)] and a time varying risk premium [under (e)] could bridge this gap between forward and spot rates and help to increase the efficiency results. But if the ‘news’ is too big (take, for instance, the new operating procedures of US monetary policy at the end of 1979, economic reform in Eastern Europe, or the Iraq-Kuwait crisis in the Gulf) and PPP does not hold [under (a)], there must be some important structural breaks, and some qualitatively new dynamics of exchange rates might occur thereafter [De Grauwe and Vansanten (1990)]. Maybe it is ask-
ing too much for ‘structural’ models of exchange rates, estimated over long samples, to hold [under (f)]. Allowing for conditional (i.e. model-explained) heteroskedasticity is ‘the’ new line of research on exchange rate forecasting using ARCH models. The results seem to be encouraging (see references in the book). This approach moves further than has been usual towards the inclusion of institutional factors and market and policy events in order to evaluate where possible regime switches might occur and to allow for the fact that exchange rates can show totally different dynamics after these changes [see De Grauwe and Vansanten (1990)]. But, contrary to what is maintained by De Grauwe and Vansanten (1990>, inference and forecasting are possible in this field and for this reason exchange rate econometrics still remains a challenging subject. The book by Baillie and McMahon is a valuable guide for anyone wishing to accept this challenge. Massimo Unil*ersity of Rome
II ‘Tor
Vergata’
Tivegna
and
Luiss, Rome
References De Grauwe, P. and K. Vansanten, 1990, “Deterministic chaos in the foreign exchange market”, Crntre for Economic and Policy Reseurch Discussion Paper n. 370. Fama. E.F.. 1984, “Forward and spot exchange rates”, Journal of Morwtary Economics, 14/3, 319-338. Frankel, J.A., 1982, “In search of the exchange risk premium: A six currency test assuming mean-variance optimization”, Journal of International Money and Finance, 1, 255-274. Frankel, J.A., 1988, “Recent estimates of time-variation in the conditional variance and in exchange risk premium”, Journal of International Money and Finance, 7. 115-125. Giovannini, A. and P. Jorion, 1989, “The time variation of risk and return in the foreign exchange and stock markets”, Journal of Finunce, 44, 307-325. Mees, R.A. and K. Rogoff, 1983, “Empirical exchange rate models of the seventies: Do they fit out of sample?“, Journul of International Economics, 14, 3-24.
L.M.
and D.F. Ellis, eighth edition Publishing Company, Cincinnati, ermore, 1991) pp. 586, f16.95.
and
Valentine
Forecasting,
Business
Cycles
(South-Western Dallas and Liv-
This book is aimed at a variety of readers including students on Business and Economics courses at the intermediate level and also for those on an MBA course as a basic macroeconomics text. As the title suggests the text incorporates discussions on the nature of business cycles, basic macroeconomic theory and forecasting. There is also a short section on macroeconomic policy. The book is structured as follows: part 1 (5 chapters) Introduction to Business Fluctuations; part 2 (7 chapters) National Income Analysis; part 3 (2 chapters) Business Cycle Theories; part 4 (6 chapters) Forecasting Economic Activity; part 5 (2 chapters) Proposals for Achieving Economic Growth and Stability. The structure of the text illustrates the emphasis the authors have given to providing linkages between theory and forecasting activity. Part 1 provides a general introduction to business fluctuations including an historical record of business cycles in the United States. This particular section (Chapter 2) could have been made more user-friendly through the incorporation of time series graphs for the main series discussed. Part 2 together with part 3 provide the main theoretical underpinnings of the text. The reader is given an adequate tour through theories provided by the Classical Keynesian and Monetarist schools both in terms of comparative static and dynamic analysis. The static analysis extends to aggregate demand and supply analysis following on from the development of the traditional IS/LM paradigm. Dynamic analysis incorporates a brief discussion of Harrod/Domar growth theory and a more fuller discussion of Business Cycle theory. A minor criticism of this section is that some of the topics tend to be dealt with superficially. For example, the role of money and/or finance in the determination of national income deserves fuller treatment. This is also true of the rational expectations hypothesis. In mitigation of this point each chapter concludes with an excellent list of readings which point the interested reader in the right direction. Part 4 is concerned with forecasting. A number of methods are discussed involved in the forecasting of trends (linear and non-linear) and short-term macroeconomic activity. A useful consideration of leading indicators and diffusion indices appears here. There is also a discussion on the procedures for developing an expenditure model of gross national product. The final chap-
ter in this part deals with forecasting sales both at the industry and firm level. Perhaps more attention should have been given in this section to the role of macro-econometric models as this provides a valuable link with the theory developed in parts 2 and 3. Similarly greater discussion could have been devoted towards the evaluation of different forecasts. The role of policy is the subject of part 5. The nature of the various policy objectives are discussed together with the main policy instruments against the background of US institutional arrangements. There is a danger that a book with such a wide coverage will fail to provide adequate discussion of some or all of the main subject areas. In general this text avoids this potential danger, although it is easy to criticise the omission of a number of topics such as those noted above. These are, however, fairly minor and do not significantly detract from the essential value of a good text which commendably links the practical problem of forecasting to the relevant economic theory. The value of this text is evidenced by the fact that it is now in its eighth addition. J.L. Thompson The Lil!erpool Business School Lillerpool Polytechnic, UK
K. Holden, D.A. Peel and J.L. Thompson, Economic Forecusting: An Introduction (Cambridge University Press, Cambridge, UK, 1991) 1SBN OS21 356121, 0521 35692x. h/b f30.00, $44.5; p/b f10.95, $16.95. This is an interesting little book which maintains the standards of earlier work by the same authors. It will be especially useful as reading material for graduate and final year undergraduate students. The text is concise and comprehensive, yet there is a nice balance of technical material and discussion, algebra and text, theory and application. If at times the exposition is a little thin, this is offset with copious references to the aca-
ing too much for ‘structural’ models of exchange rates, estimated over long samples, to hold [under (f)]. Allowing for conditional (i.e. model-explained) heteroskedasticity is ‘the’ new line of research on exchange rate forecasting using ARCH models. The results seem to be encouraging (see references in the book). This approach moves further than has been usual towards the inclusion of institutional factors and market and policy events in order to evaluate where possible regime switches might occur and to allow for the fact that exchange rates can show totally different dynamics after these changes [see De Grauwe and Vansanten (1990)]. But, contrary to what is maintained by De Grauwe and Vansanten (1990>, inference and forecasting are possible in this field and for this reason exchange rate econometrics still remains a challenging subject. The book by Baillie and McMahon is a valuable guide for anyone wishing to accept this challenge. Massimo Unil*ersity of Rome
II ‘Tor
Vergata’
Tivegna
and
Luiss, Rome
References De Grauwe, P. and K. Vansanten, 1990, “Deterministic chaos in the foreign exchange market”, Crntre for Economic and Policy Reseurch Discussion Paper n. 370. Fama. E.F.. 1984, “Forward and spot exchange rates”, Journal of Morwtary Economics, 14/3, 319-338. Frankel, J.A., 1982, “In search of the exchange risk premium: A six currency test assuming mean-variance optimization”, Journal of International Money and Finance, 1, 255-274. Frankel, J.A., 1988, “Recent estimates of time-variation in the conditional variance and in exchange risk premium”, Journal of International Money and Finance, 7. 115-125. Giovannini, A. and P. Jorion, 1989, “The time variation of risk and return in the foreign exchange and stock markets”, Journal of Finunce, 44, 307-325. Mees, R.A. and K. Rogoff, 1983, “Empirical exchange rate models of the seventies: Do they fit out of sample?“, Journul of International Economics, 14, 3-24.
L.M.
and D.F. Ellis, eighth edition Publishing Company, Cincinnati, ermore, 1991) pp. 586, f16.95.
and
Valentine
Forecasting,
Business
Cycles
(South-Western Dallas and Liv-
This book is aimed at a variety of readers including students on Business and Economics courses at the intermediate level and also for those on an MBA course as a basic macroeconomics text. As the title suggests the text incorporates discussions on the nature of business cycles, basic macroeconomic theory and forecasting. There is also a short section on macroeconomic policy. The book is structured as follows: part 1 (5 chapters) Introduction to Business Fluctuations; part 2 (7 chapters) National Income Analysis; part 3 (2 chapters) Business Cycle Theories; part 4 (6 chapters) Forecasting Economic Activity; part 5 (2 chapters) Proposals for Achieving Economic Growth and Stability. The structure of the text illustrates the emphasis the authors have given to providing linkages between theory and forecasting activity. Part 1 provides a general introduction to business fluctuations including an historical record of business cycles in the United States. This particular section (Chapter 2) could have been made more user-friendly through the incorporation of time series graphs for the main series discussed. Part 2 together with part 3 provide the main theoretical underpinnings of the text. The reader is given an adequate tour through theories provided by the Classical Keynesian and Monetarist schools both in terms of comparative static and dynamic analysis. The static analysis extends to aggregate demand and supply analysis following on from the development of the traditional IS/LM paradigm. Dynamic analysis incorporates a brief discussion of Harrod/Domar growth theory and a more fuller discussion of Business Cycle theory. A minor criticism of this section is that some of the topics tend to be dealt with superficially. For example, the role of money and/or finance in the determination of national income deserves fuller treatment. This is also true of the rational expectations hypothesis. In mitigation of this point each chapter concludes with an excellent list of readings which point the interested reader in the right direction. Part 4 is concerned with forecasting. A number of methods are discussed involved in the forecasting of trends (linear and non-linear) and short-term macroeconomic activity. A useful consideration of leading indicators and diffusion indices appears here. There is also a discussion on the procedures for developing an expenditure model of gross national product. The final chap-
ter in this part deals with forecasting sales both at the industry and firm level. Perhaps more attention should have been given in this section to the role of macro-econometric models as this provides a valuable link with the theory developed in parts 2 and 3. Similarly greater discussion could have been devoted towards the evaluation of different forecasts. The role of policy is the subject of part 5. The nature of the various policy objectives are discussed together with the main policy instruments against the background of US institutional arrangements. There is a danger that a book with such a wide coverage will fail to provide adequate discussion of some or all of the main subject areas. In general this text avoids this potential danger, although it is easy to criticise the omission of a number of topics such as those noted above. These are, however, fairly minor and do not significantly detract from the essential value of a good text which commendably links the practical problem of forecasting to the relevant economic theory. The value of this text is evidenced by the fact that it is now in its eighth addition. J.L. Thompson The Lil!erpool Business School Lillerpool Polytechnic, UK
K. Holden, D.A. Peel and J.L. Thompson, Economic Forecusting: An Introduction (Cambridge University Press, Cambridge, UK, 1991) 1SBN OS21 356121, 0521 35692x. h/b f30.00, $44.5; p/b f10.95, $16.95. This is an interesting little book which maintains the standards of earlier work by the same authors. It will be especially useful as reading material for graduate and final year undergraduate students. The text is concise and comprehensive, yet there is a nice balance of technical material and discussion, algebra and text, theory and application. If at times the exposition is a little thin, this is offset with copious references to the aca-