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Economic Currents

Keep up to date with the latest UHERO news.

Just Published: "Macroeconomic Forecasting in the Era of Big Data"

Posted January 27, 2020 | Categories: Blog

Peter Fuleky (editor)

Big data analysis has a long history in macroeconomics. In 1937, National Bureau of Economic Research researchers Wesley Mitchell and Arthur Burns used 487 monthly and quarterly economic time series to advise policy makers on the state of the US business cycle. Since then advances in information technology and its ubiquitous use have lead to tremendous progress in this area.

The last three decades have seen a surge in data collection. Although most data arises at the micro level, the available information is frequently consolidated for use in government statistics and macroeconomic analysis. Statisticians and econometricians have developed numerous techniques to digest the ever-growing amount of data and improve predictions. This volume surveys the adaptation of these methods to macroeconomic forecasting from both the theoretical and the applied perspective. The reader is presented with the current state of the literature and a broad collection of tools for analyzing large macroeconomic datasets.

Each chapter of the book is self-contained with references. The topics are grouped into five main parts. Part I sets the stage by surveying big data types and sources. Part II reviews some of the main approaches for modeling relationships among macroeconomic time series, including dynamic factor models, vector autoregressions, volatility models, and neural networks. Part III showcases dimension reduction techniques yielding parsimonious model specifications. Part IV surveys methods that deal with model and forecast uncertainty. Several techniques described in Parts III and IV originated in the machine learning literature and have been successfully adopted in econometrics. They are frequently combined to avoid overfitting and to improve forecast accuracy. Part V examines important extensions of the topics covered in the previous three sections.

Although most of the topics covered in this volume have shown up elsewhere in the literature, the objective was to present a coherent collection of big data tools used in macroeconomic forecasting, emphasizing methodology as in a handbook. The volume assumes prior training in econometrics and time series analysis. By focusing on forecasting in data-rich environments, the book complements more general texts on the market. The chapters attempt to balance the depth and breadth of the covered material, and are more survey-like than journal articles concentrating on specific questions.

Phil Garboden (contributor) and Peter Fuleky (editor)

Given the rapid evolution of big data analysis, the topics included in this volume are somewhat selective, focusing on the time series aspects of macroeconomic forecasting---as implied by the title---rather than on spatial, network, structural, and causal modeling. The intended audience includes researchers, professional forecasters, instructors, and students. The volume can be used as a reference and a teaching resource in advanced courses focusing on macroeconomic forecasting.

- Peter Fuleky


Publication: Who Are we Measuring and Modeling for? Supporting Multilevel Decision‐Making in Watershed Management

Posted January 24, 2020 | Categories: Blog, Water Resources

UHERO and an international partnership, ClimateWise, tackled the question of how hydrological ecosystem service information is actually used in decision making in watershed management programs. Linking hydrological monitoring and modeling efforts to actual user needs increases the relevance and uptake of these studies and has important implications for where researchers should focus their energy. As always, relationships and local champions matter a lot in the actual use of this type of information, and use is often in unexpected ways.


Little relief from Hawaii’s high cost of living

Posted January 21, 2020 | Categories: Hawaii's Economy, Blog

Living in paradise comes at a cost. Hawaii is notorious for its combination of high costs of living and low incomes relative to these costs. These factors impose hardships on Hawaii families of modest-to-moderate income and prompt some to consider relocating to less-expensive mainland locales.

So how expensive is it to live in Hawaii compared with other states? The BEA produces regional price parities (RPP) that allow us to compare consumer buying power across the country. The most recent RPPs show that the price of consumer goods and services in Hawaii—including housing rents and imputed rents of homeowners—is more than 18% higher than the national average. Other high-price states include California and New York, with average prices 15-16% higher than the national average. As in most other high-priced areas, expensive housing is the main driver: Hawaii rents are more than 50% higher than the national average, and higher still in Honolulu. In contrast, the average price for goods in Hawaii is 11% above the national average.

The higher price of goods and services can be explained in part by the distance of Hawaii from mainland markets. Shipping costs are one component. But the physical distance from the mainland also raises the pricing power of local firms due to more limited competition. The high rents reflect the appeal of living in Hawaii, the restrictions and regulations facing developers, and, as we mentioned in our recent Construction Forecast report, building costs that are among the highest in the world. A significant portion of these costs are passed on to consumers.

Even though Hawaii prices are much higher than those across the country, our per capita personal income is only on par with the national average. In 2017, the prices of goods and services were 18.5% higher in Hawaii compared with the US overall, but per capita personal income in Hawaii was only 2.5% higher. As a result, after adjusting for Hawaii’s high prices, the purchasing power of income per person was the fourth lowest in the nation!

Why are RPP-adjusted incomes in Hawaii so low? Partly this reflects the mix of industries here, with a large number of jobs in lower-paying areas linked to tourism. It likely also reflects the same regional preferences that drive up costs: many Hawaii residents want to live here because of geographical and cultural amenities—including family ties—and are willing to accept a lower wage in order to do so.

In coming years, the gap between Hawaii’s high prices and prices nationally is likely to narrow to some degree. With a shrinking population and stagnant job growth, appreciation of rents and other costs will be muted, while they continue to mount across the country, particularly in coastal mainland cities. Having said that, the factors that drive our high costs and modest income are fundamental. We are unlikely to get much relief from the price of paradise.

Per capita personal income for Hawaii and the US
before and after adjusting for the cost of living (2008 - 2017)

- Rachel Inafuku and Peter Fuleky


Publication: Do Natural Disasters Make Sustainable Growth Impossible?

Posted January 7, 2020 | Categories: Blog

"Do Natural Disasters Make Sustainable Growth Impossible?" has been published in the Economics of Disasters and Climate Change. This paper considers the prospects for sustainable growth using expected utility models of optimal investment under threat from natural disasters. Natural disasters reduce capital stocks and disrupt the optimal consumption and felicity paths. Prudent disaster preparedness includes precautionary investment in productive capital, programs of adaptation to disaster risk, and avoiding distortionary policies undermining the prospects of optimality and sustainability.


Forest protection provides important cost savings to water utility on Maui

Posted October 8, 2019 | Categories: Hawaii's Environment, Blog

Researchers from the University of Hawaiʻi Economic Research Organization and Water Resources Research Center partnered with the Nature Conservancy of Hawaiʻi to evaluate how native forest conservation contributes to local water supplies in a water stressed area in East Maui. They found that by preventing the degradation of native forest, conservation efforts could save the local water utility up to 137.6 million dollars over 100 years depending on a range of assumptions. This finding demonstrates that it makes practical sense for water utilities to join collective action efforts to finance watershed conservation, which in turn provides a suite of benefits in addition to water.

The team looked at potential futures of native forest under conservation versus no conservation.

Economic benefits of protecting groundwater recharge through conservation activities in Waikamoi preserve assuming a 10% spread rate of non-native species without conservation under different assumptions of future water scarcity and discount rates. The dark blue shows the part that that the water utility could finance based on savings, whereas the hatched shows the portion that could be co-financed by other entities who value the preserve. PV= present value.

Tropical forest conservation around the world provides many benefits, including supporting a diversity of flora and fauna as well a suite of ‘ecosystem services’ such as clean water and carbon sequestration. Biocultural values and livelihoods associated with tropical forests are also increasingly put forth as restoration objectives and have long motivated conservation efforts around the world. Yet, funding for tropical forest conservation remains limited and insufficient to meet the challenge of rapid biodiversity loss.

A promising partner for tropical forest conservation are emerging ‘natural infrastructure’ or investment in watershed services programs such as water funds. These programs convene water users (such as water utilities, beverage companies, non-profits, governments, and community groups) together to help finance upstream watershed management activities that help to ensure clean and ample water supplies for downstream cities and communities. Tropical forest conservation and restoration is often one strategy of these programs.

Yet, a major challenge is a lack of data on the potential water benefits and cost savings associated with watershed conservation efforts such as fencing and weed control that prevent the establishment of non-native species. In response to this gap, the UH team compared the groundwater recharge benefits of the Nature Conservancy’s Waikamoi Preserve with and without conservation actions over 100 years. They also expressed this difference in dollars based on cost savings to the water utility achieved through reducing reliance on more expensive alternatives.

UHERO graduate student Sarah Medoff hikes in the Waikamoi preserve.

The Nature Conservancy’s ~ 2,700 hectare Waikamoi preserve is the State of Hawaiʻi’s largest private nature reserve. The preserve is a truly exceptional places that provides a suite of interconnected benefits to the people of Hawaiʻi and the world, from conserving threatened and endangered bird and plant species to the deep interconnected cultural values associated with these ecosystems. This study found, that in addition to these benefits, conservation in Waikamoi also makes an important contribution to local water supplies. Through partnering with other groups and agencies to co-finance watershed conservation, water utilities can cost-effectively meet their water supply needs while also protecting a suite of other benefits associated with the preserve and other similar areas.

Modeled spread of non-native canopy species in Waikamoi without conservation (assuming a 10% spread).

UHERO team at Waikamoi with The Nature Conservancy.

- Leah Bremer

This study was published in Science of the Total Environment with authors Leah Bremer, Sarah Medoff, Chris Wada, Kimberly Burnett, and Kim Falinksi. The work was supported by The Nature Conservancy of Hawaiʻi and the National Science Foundation EPSCoR ʻIke Wai project.


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