Goodwin and Piggott reported that corn and soybean prices in spatially separated markets in North Carolina exhibited threshold cointegration and that commodity prices in different markets may persistently diverge. Here, a multivariate approach is used to test for threshold cointegration and nonlinear cointegration. The results suggest that departures from the law of one price do not persist indefinitely. Copyright 2003, Oxford University Press.
acroeconomists spend much of their time developing theories and building models to demonstrate how shocks propagate and affect the overall level of economic activity. Both policymakers and the private sector maintain a keen interest in understanding the state of business affairs and the most likely path the economy will take over a planning horizon. Although there are a number of economic events that concern the authorities-including excessive inflation and unemployment-considerable attention is paid to the forecasting of recession. If policymakers can anticipate a recession, they take preemptive corrective action. The private sector uses this information to shelter itself from the vagaries of the business cycle and the most likely reaction of policymakers. Recently a number of studies have examined the ability of financial variables to forecast recessions. Many analysts find that financial indicators contain information that can be used to increase forecast accuracy. Estrella and Mishkin (1998) found that the slope of the yield curve helped predict recessions beyond one quarter. Haubrich and Dombrosky (1996), Bernard and Gerlach (1996), Dueker (1997), and Atta-Mensah and Tkacz (1998) reported similar results. 1 Many of these studies employed probit models to estimate the probability of recession. Probit models are sometimes used when economists model the behavior of a dependent variable which takes on two values, e.g., recession = 1, no recession = 0. The traditional approach to probit modeling requires the researcher to choose the variables that will be included in the equation, determine their level of interaction, and assume each variable plays the same role across all recessions in the sample period. These assumptions imply Recession dates are available at the NBER Web site at http://www.nber.org. 1 Friedman and Kuttner (1998) report that the closely related paperbill spread fared less well at predicting the 1990-91 recession. They argue that relative supply conditions in the commercial paper and Treasury Bill markets led to this result. It is worth remembering that although spreads and yield curves contain information on monetary policy, they are a function of returns on assets which are not always perfect substitutes.
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