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Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models

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Author Info
Hermann Sintim-Aboagye ()
Abstract

Theoretical exposition and empirical evidence in central bank independence (CBI) literature confirm an inverse relationship between inflation and measures of CBI mostly in developed economies. Based on this ex ante information on CBI-inflation tradeoff, this paper proposes two functional forms for the diagonal and off diagonal elements in the residual covariance matrix in the estimation process. The proposed functional forms are used in a generalized maximum likelihood and then in a generalized least squares (GLS) (with the restricted covariance matrix) framework for the empirical test. The results are compared to the outcome of an SUR model (unrestricted). The tests involve 14 emerging economies and covers the period 1960–1990. Compared to SUR, majority of results of GLS model in samples with and without outliers provide stronger and more significant evidence confirming the CBI-inflation tradeoff. Notably, the standard errors of the GLS estimates are lower than that of the SUR estimates. Without outliers, the GLS estimates show even lower standard errors as compared to the outcome of the SUR model. Low standard errors provide baseline indication of more accurate estimates. Copyright Springer Science+Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s10644-006-9001-1
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Publisher Info
Article provided by Springer in its journal Economic Change and Restructuring.

Volume (Year): 38 (2005)
Issue (Month): 2 (June)
Pages: 167-178
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Handle: RePEc:kap:ecopln:v:38:y:2005:i:2:p:167-178

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Web page: http://www.springerlink.com/link.asp?id=113294

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Related research
Keywords: emerging economies; inflation; generalized least squares; central bank independence; C51; E58;

References listed on IDEAS
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  3. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  4. Hermann Sintim-Aboagye & David Tufte, 2006. "Central Bank Independence, Inflation Variability, and the Revenue Smoothing Hypothesis," International Advances in Economic Research, Springer, vol. 12(2), pages 147-160, May. [Downloadable!] (restricted)
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  9. Bilin Neyapti, 2003. "Budget Deficits and Inflation: The Roles of Central Bank Independence and Financial Market Development," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 458-475, October. [Downloadable!] (restricted)
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