Empirical Validation and Revision of the Misery Index for Taiwan
Date Issued
2010
Date
2010
Author(s)
Chen, Yun-Chu
Abstract
This paper empirically investigated the applicability of the misery index and the financial definition of the misery index to Taiwan and finally proposed a revised equation of the misery index for Taiwan.
Based on the views and modifications of the misery index in previous literature, this paper used the data in Taiwan from 1990Q1 to 2009Q2 to first examine the correlation between the misery index and worldwide significant events as well as the correlation between the financial definition of the misery index and worldwide significant events, respectively. Later, this paper examined the explanatory power of various combinations of variables, including unemployment rate, inflation rate, the rate of change of stock indices, the rate of change of the indirect exchange rate, and economic growth rate for Taiwan’s Consumer Confidence Index (Taiwan’s CCI) from 1990Q1 to 2009Q2. By finding the combination of variables that best explains Taiwan’s CCI, this study attempted to revise the equation of the misery index for Taiwan.
Empirical results and analyses are as follows:
I. Through various tests of structural changes, this paper found that the misery index and the financial definition of the misery index cannot predict or explain the effects of worldwide significant events. Therefore, the equation of the misery index should be rectified according to practical conditions in Taiwan.
II. Formulation of a modified equation of the misery index for Taiwan:
This paper used Taiwan’s CCI as a proxy variable of well-being and applied multiple regression method to investigate the explanatory power of different combinations of variables associated with the misery index for Taiwan’s CCI to find the combination that best explains Taiwan’s CCI. The results are as follows:
1. The model with unemployment rate and inflation rate divided as two independent variables can better explain Taiwan’s CCI than the model with unemployment rate and inflation rate directly summed as one composite variable (i.e. misery index). The same conclusion was also observed in the test of the financial definition of the misery index. In other words, the composite variables used in the misery index and the financial definition of the misery index cannot adequately capture the misery in Taiwan in empirical validation and should be modified.
2. Decline in unemployment rate or inflation rate or any rise in the rate of change of stock indices, the rate of change of the indirect exchange rate, and economic growth can all lead to a rise of Taiwan’s CCI as theoretically expected.
3. Findings from model regression estimations include:
(1) Among all macroeconomic variables, unemployment rate, inflation rate, and the rate of change of stock indices have significant effects on Taiwan’s CCI.
(2) In terms of significance level, Taiwan’s CCI is most significantly influenced by the rate of change of stock indices and economic growth rate, followed by inflation rate, unemployment rate, the effects of the rate of change of the indirect exchange rate are least significant.
(3) In terms of the magnitude of the regression coefficients, unemployment rate, among all the variables considered, has the largest magnitude of influence on Taiwan’s CCI. Inflation rate has the second largest magnitude, followed by the rate of change of stock indices.
(4) According to the best estimator in regression, unemployment rate, inflation rate, and the rate of change of stock indices are in a ratio of approximately 26:9:(-1). In other words, unemployment rate is nearly 26 times more influential to Taiwan’s CCI than the rate of change of stock indices to Taiwan’s CCI; inflation rate is nearly 9 times more influential to Taiwan’s CCI than the rate of change of stock indices to Taiwan’s CCI; unemployment rate is nearly 2.7 times more influential to Taiwan’s CCI than inflation rate to Taiwan’s CCI; It can be inferred that the weight of unemployment in the misery index had been underestimated.
4. Based on the above empirical results, this study proposed a revised equation of the misery index for Taiwan. Finally, the “revised” misery index was validated through regression estimations and tests for structural changes to derive the following conclusion: The “revised” misery index indeed has a good explanatory power for the economic misery in Taiwan. In other words, the rise of the “revised” misery index will induce a significant decline in Taiwan’s CCI and a higher level of economic misery.
Subjects
misery index
financial definition of the misery indexs
structural change
multiple regression
Consumer Confidence Index (CCI)
well-being
life satisfaction
SDGs
File(s)![Thumbnail Image]()
Loading...
Name
ntu-99-P96341009-1.pdf
Size
23.53 KB
Format
Adobe PDF
Checksum
(MD5):d6e370f6853480fc8136217f1cbba1d2