Kamps, Christophe (Kiel
Institute for World Economics)
New Estimates of
Government Net Capital Stocks for 22 OECD Countries 1960-2001
The issue of whether government capital
is productive has received a lot of attention in the recent past. Yet,
empirical analyses of public capital productivity have in general been limited
to a small sample of countries for which official capital stock estimates are
available. Alternatively, many researchers have investigated the output effects
of public investment – recognizing that investment may be a poor proxy for the
corresponding capital stock. This paper tries to overcome this data shortage by
providing internationally comparable capital stock estimates for a large panel
of OECD countries.
JEL: E22, H540
Keywords: capital stock,
perpetual inventory method, OECD countries
Kattuman, Paul
(University of Cambridge), Michael R Baye, Rupert Gatti, John Morgan
Outline Pricing and
the Euro Changeover: Cross-Country Comparisons
We study the impact of the Euro
on prices charged by online retailers within the EU. Our data spans the period
before and after the Euro was introduced, covers a variety of products, and
includes countries inside and outside of the Eurozone. Our main finding is that
the Euro changeover in 2002 neither mitigated price differences nor resulted in
purchasing power parity for products sold online. In fact, evidence suggests
that online prices in the Eurozone actually increased compared to prices of EU
countries outside the Eurozone. Further, contrary to the predictions of
purchasing-power-parity, we find significant differences in the prices charged
by firms both within and across seven countries in the European Union. We also
find significant differences in both the average price charged and the best
price available in these countries. These conclusions are robust to a variety
of controls.
JEL: D400, D830, F150, L130, M370
Keywords: price competition,
Euro, internet
Kellard, Neil
(University of Essex), Mark E Wohar
Trends and
Persistence in Primary Commodity Prices
This paper applies new time-series
procedures to examine the Prebisch-Singer hypothesis of a secular deterioration
in relative primary commodity prices and the nature of their persistence.
Employing a dataset of 24 relative commodity prices for the 1900-98 period, the
pervasiveness of the Prebisch-Singer hypothesis is shown to be a function of a
priori selected decision criteria, providing an explanation of conflicting
findings in the recent literature. Moreover, much less persistence is found in
the relative commodity prices than previously reported, since 23 out of the 24
commodities can be classified as trend-stationary. This implies there may well
be more room for stabilization and price support mechanisms than previously
advocated.
JEL: O13, C22
Keywords: primary commodities,
unit root tests, structural breaks
Kenc, Turalay
(Imperial College), John Driffill, Martin Sola
An Empirical
Examination of Term Structure Models with Regime Shifts
We examine several continuous-time
term structure models in which the short rate is subject both to continuous
changes and to discrete shifts. Several regime-switching term structure models
are developed, with regime-dependence in various combinations of their drift
and diffusion parameters. We examine their predictive power. Our empirical
analysis suggests that it is important to attempt to specify the switching
model correctly: badly parameterized switching models may not be an improvement (in terms of pricing) over models which
do not allow for regime switching, even when there are clear breaks in the
data.
JEL: E43, G12
Keywords: term structure of
interest rates, bond yields, stochastic discount factor/pricing kernel, regime
switching
Kim, Byung-Yeon
(University of Essex), Jukka Pirttila
The Political Economy
of Reforms: Empirical Evidence from Post-Communist Transition in the 1990s
Using a novel data set from
post-communist countries in the 1990s, this paper examines the link-ages
between political constraints, economic reforms and growth. Results from a
dynamic panel analysis suggest that public support for reform is negatively
associated with increases in income inequality and unemployment. In addition,
both ex post and ex ante political constraints referring to the extent of
public support affect progress in economic reforms, which in turn determines
eco-nomic growth. These findings highlight that while economic reforms are
needed to foster growth, they must be designed in such a way that they do not
undermine political support for reform.
JEL: P26, O11, C33
Keywords: political constraints,
economic reform, transition, growth, dynamic panel models
Kim, Dong Heon
(University of Manchester), Denise R Osborn, Marianne Sensier
Nonlinearity in the
Fed's Monetary Policy Rule
This paper investigates the
nature of nonlinearities in the monetary policy rule of the US Fed using the
flexible approach of Hamilton (2001a). We find that while there is significant
evidence of nonlinearity for the period to 1979, there is little such evidence
for the subsequent period. Possible asymmetries in the Fed's reactions to
inflation deviations from target and the output gap in the 1960s and 70s may
tell part of the story, but do not capture the entire nature of the
nonlinearity. The inclusion of the interaction between inflation deviations and
the output gap, as recently proposed, appears to characterize the nonlinear
policy rule more adequately.
JEL: E52, E58, C13
Keywords: nonlinearities,
monetary policy rule, Phillips curve, interaction
Kim, Tae-Hwan
(University of Nottingham), Thanaset Chevapatrakul, Paul Mizen
We consider an experiment where
we use the Taylor rule information set, inflation and the output gap, to predict
the next change in monetary policy for the United Kingdom 1992 - 2000. To do
this we use a limited dependent variable approach, where the next rate change
could be `upwards', `downwards' or `no change'. A Multinomial Logit model is
used to predict the next most likely change using monthly data, and these
predictions are compared to the actual outturn. Against this hypothesis we
compare a wider information set including more than just inflation and output
gap variables. The in-sample and out-of-sample prediction tests are evaluated
using forecast performance tests.
JEL: E5
Keywords: The Taylor rule,
monetary policy, directional forecast
Kirman, Alan (GREQAM,
EHESS, IUF Marseille), Wolfgang Hardle, Rainer Schulz, Axel Werwatz
Transactions That Did
Not Happen and Their Influence on PricesThis paper studies data
from the wholesale fruit and vegetables market in Marseille. We have details of
counteroffers to the prices that were proposed by the seller even when no
transaction took place. With a simple heoretical model we analyse the evolution
of prices during the day and in particular the relation between the final price
struck and the proposals of the two parties. Periods with no buyer refusals, of
offers or bargaining with no transaction will lead to a revision of the
seller’s first price. More importantly the sharing of the surplus moves in the
buyer’s favour during the day. These presumptions are then shown to be
confirmed by our data set.
JEL: C78, D44, Q13
Keywords: bargaining, markets
Knell, Markus
(Osterreichische Nationalbank)
Wage Formation in Open
Economies and the Role of Monetary and Wage-Setting Institutions
The paper studies the
determinants of unemployment in a two-countrymodel, where real wages are the
outcome of the strategic interaction between various institutional players
(firms, unions, central banks). We show that: (i) the results derived in the
recent literature on this topic are not generally robust against the
introduction of openness; (ii) the shape of the Calmfors-Driffill curve not
only depends on a country's own centralization of wage bargaining (CWB) but
rather on home and foreign characteristics; (iii) the model challenges the
established belief that a shift to a monetary union (MU) will (negatively)
affect unemployment in all member countries by fundamentally changing the
nature of strategic interactions. Under certain assumptions our open-economy
model suggests that the formation of a MU has no effect whatsoever on
structural unemployment.
JEL: E50, E58, F41, F42, J51
Keywords: wage-setting,
unemployment, monetary union
Kocher, Martin
(University of Innsbruck), Matthias Sutter
We test for behavioral
differences between groups and individuals in gift-exchange experiments.
Related studies establish group behavior as typically closer to the
game-theoretic equilibrium. We show that this result may depend crucially on
the decision making procedure within groups. A novel decision making protocol
opens up the black box of group decision making and allows to track important
features of the group interaction process. We are able to show that the mere
fact of being a group member shifts initial individual choices towards the
game-theoretic equilibrium.
JEL: C72, C91, C92, D70
Keywords: gift-exchange
experiment, group behavior, individual behavior, decision making, reciprocity
Kohler, Wilhelm
(Johannes-Kepler Universitat Linz)
Factor price frontiers
with international fragmentation of multistage productionThis
paper investigates international fragmentation in a modeling framework where
the multi-stage nature of industrial production is made explicity, and where
the engineering sequence of stages is juxtaposed with a sequence of increasing
economic incentive for international fragmentation. Assuming that there are two
tradable goods sectors, a multi-stage sector amenable to international
fragmentation and a standard sector where production is always fully integrated
in the domestic economy, I first explore the nature and shape of the domestic
factor price frontier, endogenously determining the margin of international
fragmentation under given world prices for the two goods. I then explore the consequences
of an exogenous change in the terms of trade on the margin of international
fragmentation, and the implications of a fall in the cost of transport and
communication that facilitates an increasing degree of international
fragmentation
JEL: D33, F11, F15, F23
Keywords: international
fragmentation, multi-stage production, factor price frontiers
Konings, Jozef
(Katholieke Universiteit Leuven), Ana Xavier
Firm Performance and
Selection in an emerging Economy: Micro Evidence from Slovenia
We investigate the determinants
of firm survival and growth (employment and sales), in the context of
transition from plan to market, using firm data from Slovenia spanning from
1994 to 1998 and OLS and Heckman selection models. Firm and industry
pre-transition conditions including size, ownership, financial constraints,
trade and market structure are used to understand what firms best performed in
the Slovenian transition. Small, private, exporting and capital intensive firms
grew the fastest. Large firms with positive profits and higher sunk costs were
more likely to survive compare to firms with harder financial constraints, high
costs or trading abroad.
JEL: P2, P3, L6
Keywords: firm growth and survival,
owndership, competition, financial constraints
Krolzig, Hans-Martin
(University of Oxford), Peter Flaschel
Wage and Price
Phillips Curves
In this paper we introduce a
small Keynesian model of economic growth which is centered around two advanced
types of Phillips curves, one for money wages and one for prices, both being
augmented by perfect myopic foresight and supplemented by a measure of the
medium-term inflationary climate updated in an adaptive fashion. The model
contains two potentially destabilizing feedback chains, the so-called Mundell
and Rose-effects. We estimate parsimonious and congruent Phillips curves for
money wages and prices in the US over the past five decades. Using the
parameters of the empirical Phillips curves, we show that the growth path of
the private sector of the model economy is likely to be surrounded by
centrifugal forces. Convergence to this growth path can be generated in two
ways: a Blanchard-Katz-type error-correction mechanism in the money-wage
Phillips curve or a modified Taylor rule that is augmented by a term, which
transmits increases in the wage share (real unit labor costs) to increases in
the nominal rate of interest. Thus the model is characterized by local
instability of the wage-price spiral, which however can be tamed by appropriate
wage or monetary policies. Our empirical analysis finds the error-correction
mechanism being ineffective in both Phillips curves suggesting that the
stability of the post-war US macroeconomy originates from the stabilizing role
of monetary policy.
JEL: E24, E31, E32, J30
Keywords: Phillips curves,
Mundell effect, Rose effect, monetary policy, Taylor rule, inflation,
unemployment, instability
Landon-Lane, John S (Rutgers
University), Peter E. Robertston
Structural
Change, Accumulation and Growth in Developing Economies
Historically, episodes of rapid
growth are accompanied by significant structural change. In this paper we
therefore aim to quantify the extent to which factor accumulation induces
structural change and productivity growth in industrializing economies. We
present an extension of a standard growth model that incorporates two sectors,
traditional and modern, and an endogenous wage gap, due to efficiency wages. We
quantify the model using a panel of 78 countries over the post war era. The
results show that these labour reallocation effects are significant and can
increase the effective return to
physical capital by around 30% in many countries.
JEL: O0, O1, O3
Keywords: growth, development,
endogenous growth, dual economy, convergence
Lasselle, Laurence
(University of St Andrews), Serge Svizzero, Clem Tisdell
Heterogeneous
Expectations, Dynamics, and Stability of Markets
This paper examines the role of
heterogeneous beliefs in a cobweb model. We proceed in two stages. First, two
groups of agents are distinguished. They are either fundamentalists, or
chartists. The latter specify the expected price from an adaptive process, the
former have a “rational behaviour”. Second, agents may choose between rational
expectations and an adaptive process. We demonstrate twofold. The market
behaviour of fundamentalists compared to chartists promotes market stability.
Market stability may emerge depending on the specification of the expectations
and the intensity of switching between the two behaviours.
JEL: C62, D84, E30
Keywords: cobweb model, switching
behaviour, Flip bifurcation, Neimark-Sacker bifurcation, resonance
Lau, Sau-Him Paul
(University of Hong Kong),
Using an
error-correction model to test whether endogenous long-run growth exists
A major empirical interest in
growth studies is whether permanent changes in economic fundamentals affect the
long-run growth rate. However, a direct
time series analysis of this hypothesis may not always be feasible because the
permanence of many such changes is rather questionable. This paper explains why examining the
long-run effects of temporary changes in investment share on per capita output
provides indirectly the answer regarding the effects of (possibly hypothetical)
permanent changes in investment share, when per capita output and per capita
investment are cointegrated. Applying
the proposed method to the post-war data of major industrial countries, it is
found that a disturbance to investment share does not produce a positive
long-run effect in France, Japan and the UK. The evidence is unfavorable to the
class of endogenous growth models.
JEL: O40, E22
Keywords: error-correction model,
presence or absencece of endogenous growth
Lawrence, Peter (Keele
University), Arijit Mukherjee
Price-Capping
regulation as a protectionist strategy in developing countries
In developing countries
undergoing liberalising reforms, there are typically local incumbents facing
the loss of protection. Strategic
lobbying by such firms for a price-capping regulatory regime can deter entry.
We show that a regulatory price can be set such that the net profit of the
entrant is lower than the entry cost thus deterring entry and that it is
possible for the profit of the incumbent to be greater under regulation than
under unregulated duopoly. We consider the case of multiple incumbents
threatened by entry and also extend our analysis to incorporate lobbying by the
entrant.
JEL: L11, L41, L51
Keywords: entrant, incumbent,
lobbying, price-capping regulation
Leech, Dennis
(University of Warwick)
Incentives to
Corporate Governance Activism
This paper considers incentives
faced by investors (financial institutions) to become actively involved in the
governance of under-performing companies in their portfolio as recently
proposed. By considering the private benefits and the costs of investor activism
separately, it questions the conventional wisdom -based on simplistic agency
theory - that share ownership is so widely held in the UK that such incentives
are too weak for shareholder activism to be a rational basis of a system of
corporate governance. It finds that in many cases, by contrast, these
incentives would be very strong indeed if conflicts of interest could be
avoided.
JEL: G34, G20, L21
Keywords: Corporate governance,
shareholder activism, incentives, free-rider problem, agency
Leith, Campbell
(University of Glasgow), Simon Wren-Lewis
Interactions Between
Monetary and Fiscal Policy Under Flexible Exchange Rates
We extend the fiscal theory of
the price level (FTPL) by developing a two-country open-economy model under
flexible exchange rates, where overlapping generations of consumers supply
labour to imperfectly competitive firms which change their prices infrequently.
We show that the fiscal response required to support an active
inflation-targeting monetary policy is greater when consumers have finite
lives. Additionally, one monetary
authority can abandon its active targeting of inflation to stabilise the debt
of a fiscal authority, even if the policy makers operate in different
countries. Finally, through simulations, we consider the impact of fiscal
shocks on key macroeconomic variables.
JEL: E10, E63
Keywords: monetary policy, fiscal
policy, new open economy macroeconomics, fiscal theory of the price level
Lemos, Sara (University
College London)
Political Variables as
Instruments: Are They Good Candidates?The international
literature on minimum wage greatly lacks empirical evidence from developing countries. In Brazil, not only are increases in the
minimum wage large and frequent but also the minimum wage has been used as
anti-inflation policy in addition to its social role. This paper estimates the effects of the minimum wage on
employment using Brazilian data. A number of conceptual and identification
questions are discussed as tentative explanation of the non-negative estimates
found in the literature, for example:
(1) The superiority of "spike" over "fraction
affected" and "Kaitz index" as a minimum wage variable; (2) Political variables as excluded
exogenous instruments; (3)
Decomposition of the minimum wage employment effect into hours worked and
number of jobs effects. (4) Informal
and public sectors sorting robustness checks.
Robust results to various alternative specifications and instrumental
variables indicate that an increase in the minimum wage has moderately small
adverse effects on employment.
JEL: J38
Keywords: minimum wage, wage
effect, employment effect, informal sector
Leonardi, Marco (London
School of Economics and IZA)
Firms'
Heterogeneity in Capital/Labor Ratios and Wage Inequality
This paper provides some
empirical evidence and a theory of the relationship between residual wage
inequality and the increasing dispersion of capital/labor ratios across firms.
I document the increasing variance of capital/labor ratios across firms in the
US labor market using Compustat data. I also show that the increase in the
variance of capital/labor ratios across firms is related to the increasing
variance of wages. To explain these empirical regularities I adopt a search
model where firms differ in their optimal composition of capital between
equipment and structure. As the relative price of equipment falls over time the
distribution of capital/labor ratios becomes more dispersed across firms. In a
frictional labor market this force generates wage dispersion among identical
workers. In the model the increase in
wage inequality is due only to job changers as they are randomly matched to an
increasingly wide variety of jobs (capital/labor ratio). This feature of the
model is consistent with recent evidence that indicates that the bulk of the
increase in wage inequality took place between plants rather than within
plants. Simple estimation of the model indicates that the dispersion of
capital/labor ratios can explain up to one half of the total increase in
residual wage inequality.
JEL: J21, J31
Keywords: wage inequality, capital
intensity, search models
Leon-Ledesma, Miguel
(University of Kent), Peter McAdam
Unemployment,
Hysterisis and Transition
We quantify the degree of persistence
in the unemployment rates of transition countries using a variety of methods
benchmarked against the EU. In doing so, we will also characterize the dynamic
behavior of unemployment in the CEECs during the past decade. In part of the
paper, we will work with the concept of linear “Hysteresis” as described by the
presence of unit roots in unemployment as in most empirical research on this
area. Given that this is potentially a rather narrow definition, we will also
take into account the existence of structural breaks and non-linear dynamics in
unemployment in order to allow for a richer set of dynamics. Finally, we
examine whether CEECs’ unemployment presents features of multiple equilibria,
that is, if it remains locked into a new level whenever a structural change
occurs. Our findings show that, in general, we can reject the unit root
hypothesis after controlling for structural changes and business cycle effects,
but we can observe the presence of a high and low unemployment equilibria. The
speed of adjustment is faster for CEECs than the EU, although CEECs tend to
move more frequently between equilibria.
JEL: E24, C22, C23
Keywords: unemployment,
hysterisis, unit root, transition
Leslie, Derek
(Manchester Metropolitan University)
Better qualified but
a lower acceptance rate: does Higher Education discriminate against women?
Using a sample of around 2.3
million observations on applications to UK Higher Education institutions from
1996-2001, the paper explores whether the selection process into Higher
Education is discriminatory. The answer
is no discrimination, even though women are better qualified and less likely to
be offered an HE place. The lower tier
Higher National Diploma sector is a key issue because women are less likely to
undertake these courses, which are `male orientated'. The policy conclusion is that to encourage less well-qualified
females to undertake Higher Education, more appropriate provision is necessary
that recognizes the reality of subject gender segregation.
JEL: J16, J33, J71
Keywords: gender, discrimination,
Higher Education
Li, Chol-Won
(University of Glasgow)
Cycles + Semi-endogenous
Growth = Endogenous Growth
One-sector R&D-based models
predict scale effects, which is empirically inconsistent. This is due to the
"knife-edge" assumption that new ideas created are linear in the
stock of knowledge. If this assumption is dropped to make a one-sector
R&D-based model consistent with data, growth becomes semi-endogenous in the
sense that public policy and consumer preferences do not affect growth in the
long run, though technical progress is endogenous. This paper challenges this
Consensus View. Using an otherwise very standard one-sector R&D-based
model, we emonstrate the possibility of endogenous cycles where public policy
and consumer preferences affect productivity growth. This result is obtained
when the knife-edge assumption is violated.
JEL: O30
Keywords: Endogenous growth,
semi-endogenous growth, R&D, technical progress
Liao, Hailin
(Loughborough University), Mark Holmes, Thomas Weyman-Jones, David Llewellyn
Productivity Growth of
East Asia Economies' Manufacturing: A Decomposition Analysis
Applying a stochastic production
frontier to sector-level data within manufacturing, this paper examines total
factor productivity (TFP) growth for eight East Asian economies during
1963-1998, using both single country and cross-country regression. The analysis
focuses on the trend of technological
progress (TP) and technical
efficiency change (TEC), and the role of productivity change in economic
growth. The empirical results reveal that although input factor accumulation is
still the main source for East Asian economiesÆ growth, TFP growth is
accounting for an increasing and important proportion of output growth, among
which the improved TEC plays a crucial role in productivity growth.
JEL: D24, L60, O30, 053, O47,
Keywords: total factor
productivity, technical efficiency change, technological progress, stochastic
production frontier, East Asian economy
Linne, Thomas
(Institute for Economic Research Halle), Axel Bruggermann
The aim of the paper is to
analyse the determinants of financial crises in a sample of nine transition
countries in Central and Eastern
Europe with a modified logit model. The modification takes explicitly into
account the rare event characteristic of a currency crisis. Our results suggest
that it is possible to explain the occurrence of crises with only a small
number of macroeconomic variables. The variables which contribute positively to
the probability of a crisis are: i) the ratio of the current account deficit to
GDP; ii) the ratio of the budget deficit to GDP; iii) the change in currency
reserves; iv) the amount of real appreciation of the currency relative to a
trend, and v) the change in exports. Short-term debt by banks, which played a
key role in the history of the Asian crises, was not an important factor in the
build up of the crisis potential in Central and Eastern Europe.
JEL: F31, F47
Keywords: currency crisis,
logit-analysis, Central and Eastern Europe
Lombardelli, Clare (Bank of
England), James Proudman, James Talbot
Committees
versus individuals: an experimental analysis of monetary policy decision-making
We report the results of an
experimental analysis of monetary policy decision-making under uncertainty. A large
sample of economically literate students from the London School of Economics
played a simple monetary policy game, as both individuals and committees of
five players. Our findings - that groups make better decisions than individuals
- accord with previous work by Blinder and Morgan. The experiment also
attempted to establish why group decision-making is superior: although some
improvement was related to committees taking decisions by majority voting, a
significant additional committee benefit was associated with members being able
to share information and observe each other's voting behaviour.
JEL: C91, C92, E5
Keywords: monetary policy,
experimental economics, central banking, uncertainty
Lutz, Matthias
(University of St Gallen)
Price Convergence under
EMU? First Estimates
This paper examines whether
European monetary union has lowered the degree of price dispersion among member
countries. A number of different estimation methods are applied to four
independent datasets containing prices of identical goods. While the results
reported in the paper vary somewhat across goods, they provide little overall
support of the European Commission's claim that the single currency would
significantly deepen market integration among the euro-zone countries. Even
though this should be viewed as preliminary evidence, it does suggest that
there are other, more important impediments to market integration in the EU.
JEL: JEL: F15, F33, F36
Keywords: price convergence, EMU,
treatment effect
Ma, Ada
(University of Aberdeen), Peter Dolton
Executive Pay in the
Public Sector: The Case of CEOs in UK Universities
We analyse top management public sector
pay using a panel data of university Vice Chancellors (VC) in UK. We assess how institutional performance,
hierarchical effects, and personal characteristics determine VC pay. VC
personal data covers personal details, qualifications and career history, which
let us distinguish between internal promotions and hires from outside
academia. We use the results of three
Research Assessment Exercises as academic performance indicators, and
university financial positions as measures of sound executive management. We analysed the importance of university
salary structure and how they affect VC pay.
Fixed and random institutional effects are also identified and analysed.
JEL: M5, J3, J45
Keywords: pay, public sector,
CEO, universities
Machin, Stephen (UCL &
CEP London School of Economics), Alan
Manning, Lupin Rahman (STICERD London School of Economics
Where Minimum Wage
Bites Hard: The Introduction of the UK National Minimum Wage to a Low Wage
Sector
Between 1993 and April 1999 there
was no minimum wage in the UK (except in agriculture). In this paper we study the effects of the
introduction of a National Minimum Wage (NMW) in April 1999 on one heavily
affected sector, the residential care homes industry. This sector contains a
large number of low paid workers and as such can be viewed as being very
vulnerable to minimum wage legislation. We look at the impact on both wages and
mployment. Our results suggest that the minimum wage raised the wages of a
large number of care homes workers, causing a very big wage compression of the
lower end of the wage distribution, thereby strongly reducing wage inequality.
There is some evidence of employment and hours reductions after the minimum
wage introduction, though the estimated effects are not that sizable given how
heavily the wage structure was affected.
Keywords:
Makepeace, Gerry (Cardiff
University), Peter Dolton
Computer use and
earnings in Britain
This paper estimates various
models of the effect of computer use on earnings using recent NCDS data. The cross-section estimates are large and
significant while the standard fixed effects estimates are small or insignificant. The panel estimates change considerably once
we allow the coefficients to differ across individuals. Indeed, conditional on assumptions about
when individuals use computers, conventional panel estimates may not identify
the crucial parameters and cross-sectional methods may be needed. We conclude that there was a premium
associated with computer use for some individuals in the UK which we attribute
to better capital equipment.
JEL: J00, J30, J31
Keywords: earnings, ICT,
computers
Marrocu, Emanuela
(University of Cagliari), Gianna Boero
The aim of this paper is to
analyse the out-of-sample performance of SETAR models using daily data for the
Euro effective exchange rate. The evaluation
is conducted on point, interval and density forecasts. The benchmark
used for the comparison is a linear AR model for point forecast evaluation and
a GARCH model for interval and density forecasts. In each case the models are
evaluated unconditionally, over the whole forecast period, and conditionally,
on the regimes of the SETAR models. The results show that, in general, the
performance of the SETAR models improves significantly for the forecasts
governed by the regime(s) with fewer observations. However, overall the GARCH
model is better able to capture the distributional features of the series and
to predict higher ordered moments.
JEL: C22, C51, C53, E17
Keywords: SETAR models, point
forecasts, interval forecasts, density forecasts, Euro effective exchange rate
Mason, Robin
(University of Southampton), Helen Weeds
The Failing Firm
Defence: Merger Policy and Entry
This paper considers the `failing
firm defence'. Under this principle, found in most antitrust jurisdictions, a
merger that would otherwise be blocked due to its adverse effect on competition
is permitted when the firm to be acquired is a failing firm, and an
alternative, less detrimental merger is unavailable. Competition authorities
have shown considerable reluctance to accept the failing firm defence, and it
has been successfully used in just a handful of cases. The paper considers the
defence in a dynamic setting with uncertainty. A firm entering a market also
considers its ease of exit, foreseeing that it may later wish to leave should
market conditions deteriorate. By facilitating exit in times of financial
distress, the failing firm defence may encourage entry sufficiently that
welfare is increased overall. This view
of the defence has several implications relevant to a number of merger cases.
The conditions under which greater leniency is welfare-improving are examined.
JEL: L41, K21, D81
Keywords: merger policy, failing
firm defence, entry, exit
Mateut, Simona
(University of Nottingham), Spiros Bougheas, Paul Mizen
Trade Credit, Bank
Lending and Monetary Policy TransmissionThis paper investigates
the role of trade credit in the transmission of monetary policy. Most models of
the transmission mechanism allow the firm to access only financial markets or
bank lending according to some net worth criterion. In our model we introduce
trade credit as an dditional source of funding. We predict that when monetary
policy tightens there will be a reduction in market and bank lending, and an
increase in trade credit. This is confirmed with an empirical investigation of
16,000 manufacturing firms.
JEL: E44, E52
Keywords: trade credit, bank
lending, monetary policy transmission, credit channel
Mayer, Thierry (CERAS,
France), Pierre-Phillippe Combes, Miren Lafourcade
Can Business and
Social Networks Explain the Border Effect Puzzle?
McCallum (1995) shows in an
influential contribution that, even when controlling for the impact of
bilateral distance and region size, borders sharply reduce trade volumes
between countries. We use in this paper data on bilateral trade flows between
94 French regions, for 10 industries and 2 years (1978 and 1993) to study the
magnitude and variations over time of trade impediments, both distance-related
and (administrative) border-related. We focus on assessing the role that
business and social networks can play in shaping trade patterns and explaining
the border effect puzzle. Using a structural econometric approach, we show that
intra-national administrative borders significantly affect trade patterns
inside France. The impact is of the same order of magnitude as in Wolf (2000)
for trade inside the United States. We
show that more than 60\% of these (puzzling) intra-national border effects can
be explained by the composition of local labour force in terms of birth place
(social networks) and by inter-plants connections (business networks). In
addition, controlling for these network effects reduces the impact of transport
cost on trade flows by a comparable factor. Thus, business and social networks
that help to reduce informational trade barriers are shown to be strong
determinants of trade patterns and to explain a large part of the border
puzzle.
JEL: F12, F15
Keywords: gravity, border
effects, networks
McIntosh, Steven (CEP, London
School of Economics), Arnaud Chevalier, Peter Dolton
This paper examines the market
for teachers in the UK from 1960 to 1996 using graduate cohort data from 5
separate cohorts. We find that relative
wages in teaching compared to alternative professions have a significant impact
on the likelihood of graduates choosing to teach, although the impact depends
upon the market situation at the time.
The wage effect on the supply of teachers is strongest at times of low
relative teachers' wages, or following a period of decline in those wages. It is also strongest for those individuals
who have more recently graduated.
JEL: J2, J4
Keywords: labour supply,
teachers, relative wages
McKillop, Donal (Queen's
University Belfast), Pat McGregor
Credit Unions and
the Supply of Insurance to Low Income Households
The low-income credit union
modelled in this paper is an institution with a particular form of contract
designed to allow it to operate among agents that are excluded from using
banks. Specifically credit unions deal with those potentially on the minimum
income guarantee. The challenge facing them is to distinguish between those
whose motivation is consumption smoothing and those who seek the largest
credible loan with the intention of defaulting. This is achieved by setting the
level of the minimum deposit and the loan and deposit rates such that an
intentional defaulter has no incentive to join the credit union.
JEL: G21, D82
Keywords: credit unions,
intentional defaulter, financial contract
McVicar, Duncan (Northern
Ireland Economic Research Centre), Jan M Podivinsky
Unemployment
Duration Before and After New Deal
A major active labour market
policy - the New Deal for Young People (NDYP) - was introduced throughout the
UK in 1998. We examine its effects on unemployment duration by estimating
hazard functions for unemployment outflows before and after its introduction.
We add value to existing evaluations in the following ways. First, we examine
previously unused administrative data for Northern Ireland. Second, we examine
NDYP effects at all unemployment durations. Third, we estimate separately by
gender. Fourth, exits to employment, education and training and other benefits
are identified separately. Since NDYP's introduction, young people are 25-50%
less likely to experience year-long unemployment spells, with increased
probabilities for all types of exit. NDYP is intended, however, to largely
eradicate long term youth unemployment. We ask why this has not been the case
in Northern Ireland.
JEL: J64, J68
Keywords: unemployment duration,
new deal, hazard functions, young people
Messina, Julian
(European Central Bank)
Sectoral Structure
and Entry Regulations
The sectoral allocation of labor
differs considerably across developed economies, even in the presence of
similar patterns of structural change. A general equilibrium model that
captures the stylized facts of structural change is presented. In this
framework, economy-wide barriers to entry hinder the development of dynamic
sectors such as service industries. Moreover, higher service prices and rents
in regulated economies reduce labor supply, providing a rationale for the negative
association between product market regulations and the employment rate
previously found in the literature. Empirical evidence presented shows that
regulatory entry barriers help explaining differences in the sectoral
allocation of labor across OECD countries.
JEL: O11, O41, L5
Keywords: unbalanced growth,
entry regulations
Mitraille, Sebastien
(University of Bristol), Eric Avenel
Strategic delays of
delivery, market separation and demand discrimination
We show that an adequate choice
of delays to deliver a durable good allows a monopoly to reduce competition
between his two retailers on two different markets. Instead of preventing each
retailer from selling on both markets, the producer separates the markets by
directing the choices of consumers between the retailers. The consumer whose
willingness to pay is the lowest obtains the good later than the other, and
both pay their highest valuations for the good: the producer perfectly
discriminates the demand. The European car market where producers try to
restrict competition between retailers is an application of our findings.
JEL: L22, L12, L40
Keywords: delivery delays,
discrimination, market separation, vertical restraints, European car market
Monteiro, Natalia Pimenta
(University of Warwick)
The Impact of
Privatisation on Wages: Evidence from the Portugese Banking Industry
This paper adopts a
difference-in-differences estimator to examine the impact of privatisation on
wages in the Portuguese banking industry for the period 1989-97. The design of
the reform and the nature of dataset employed (matched employer-employee)
provided a particularly important opportunity to analyse the effects of
privatisation on different demographic groups, using multiple control groups,
and considering the timing of the effects. The empirical evidence suggests a
U-shaped relationship between wage variation and time period of restructuring,
regardless of the choice of the comparison group, for those employees, either
men or women, retained by privatised firms.
JEL: J31, J45, L33
Keywords: privatisation, wages,
Portugese banking industry, difference-in-difference
Montero, Maria
(University of Nottingham)
Two-Stage Bargaining
with Reversible Coalitions: the Case of Apex Games
This paper studies coalition
formation and payoff division in a class of majority games (apex games)
assuming that payoff division can only be agreed upon after forming the
coalition (two-stage bargaining) and that negotiations in the coalition can
break down and a new coalition be formed (reversible coalitions). In contrast
with the results of other two-stage models, all minimal winning coalitions may
form and expected payoffs coincide with the per capita nucleolus. These results
are robust to small changes in the bargaining procedure. Surprisingly, having a
two-stage process (rather than a one-stage process with simultaneous coalition
formation and payoff division) benefits the apex player.
JEL: C71, C72, C78
Keywords: coalition formation,
two-stage bargaining, reversible coalitions, apex games, per capita nucleolus
Neyer, Ulrike
(Martin-Luther-University Halle-Wittenberg)
Banks' Behaviour in
the European Money Market and the Operational Framework of the Eurosystem
The Eurosystem has stated its
intention to reformulate important aspects of its operational framework. This
paper presents a model to analyze banks' behaviour in the European money
market. Its main result is that the suggested alterations are sensible, but
that further improvements should be undertaken. Under the current framework
under- and overbidding behaviour in the main refinancing operations and wildly
differing provisions of required reserves can occur. This can be avoided if
first, the maturities of the main refinancing operations do not overlap, and
second, if the required reserves
are not remunerated at an average
rate.
JEL: E52, E58, G21
Keywords: bank behaviour,
European Central Bank, monetary policy instruments, market for reserves
Oechslin, Manuel
(University of Zurich), Reto Foellmi
Who Gains from
Non-Collusive Corruption?
We explore the impact of
non-collusive corruption on the wealth distribution. We show that the
distributional consequences depend crucially on the degree of capital market
imperfections. With perfect capital markets, corruption does not redistribute
wealth within the private sector. However, if borrowing is limited, members of
the ''middle class'' suffer most since bribery drives them out of the capital
market. This makes access to credit easier for wealthy individuals such that a
group of them even wins. Finally, we provide cross-country evidence showing
that a high level of corruption and a polarization of the distribution go
indeed hand in hand.
JEL: O11, D31, D73
Keywords: corruption, income
inequality, development
Oliveira, Alessandro
(University of Warwick)
A Competition Model
for A Brazilian Air Shuttle Market
This paper aims at developing a
competition model for a relevant subset of the Brazilian airline industry: the
air shuttle market on the route Rio de Janeiro – S*o Paulo, a pioneer service
created in 1959. The competition model presented here contains elements of both
vertical product differentiation and representative consumer. I also use the
conduct parameter approach to infer about the behaviour of airlines in the
market under three situations: a quasideregulation rocess (from 1998 on), two
price war events (1998 and 2001), and a shock in costs due to currency
devaluation (1999). Results permitted making inference on the impacts of
liberalisation on competition and investigating an alleged collusive behaviour
of 1999.
JEL: L93
Keywords: air shuttle, competition,
deregulation, product differentiation
Oswald, Andrew
(University of Warwick), Jonathan Gardner
Is it Money or
Marriage that Keeps People Alive?
It is believed that the length of
a person's life depends on a mixture of economic and social factors. Yet the relative importance of these is
still debated. We provide evidence in
this paper that marriage has a much more important (positive) effect on
longevity than high income does. For men,
it almost exactly offsets the large negative effect of smoking. Economics, however, plays little or no
role. After controlling for health at
the start of the 1990s, we find no reliable evidence that income affects the
probability of death over the subsequent decade.
JEL: I12, J12
Keywords: mortality, health,
income, marriage
Paul, Maureen
(University of Warwick)
A Cross-section
Analysis of the Fairness-of-pay Perception of UK Employers
This paper aims to contribute to
the understanding of individuals' fairness perceptions by using cross-section
data from the British Social Attitudes Survey to estimate what seem to be the
first fairness perceptions-of-pay equations in the literature. The results
suggest that, consistent with the existence of discrimination in the labour
market, non-white workers perceive their pay as disadvantageously unfair. In
contrast, a rather interesting finding is that women's fairness-of-pay
perceptions are higher than that of men. The findings suggest that tackling pay
alone will not eliminate feelings of underpayment. There is also evidence that
with age, workers feel less fairly paid.
JEL: C21, C23, C25, J28, J71, Z13
Keywords: fairness perception,
pay
Pezzini, Silvia (London
School of Economics), Robert MacCulloch
The Role of Freedom,
Growth and Religion in the Taste for Revolution
A fundamental question about the
determinants of civil conflict is the relative importance of political freedoms
versus economic development. This paper takes a new approach to provide an
answer by using micro-data based on surveys of revolutionary tastes of 130,000
people living in 61 nations between 1981 and 1997. Controlling for personal
characteristics, country and year fixed effects, more freedom and economic
growth both reduce revolutionary support. Losing one level of freedom,
equivalent to a shift from the US to Turkey, increases support for revolt by 4
percentage points. To reduce support by the same amount requires adding 14
percentage points onto the GDP growth rate. Being Muslim in a free country has
no effect on the probability of supporting revolt compared to a non-religious
person. However being Muslim in a country that is not free increases it by 13
percentage points. Being Christian in a free country decreases the chance of
supporting revolt by 4 percentage points, compared to a non-religious person,
and in a not-free country by 1 percentage point.
JEL: D74, H11, O1, O4, Z12,
Keywords: revolution, freedom,
development, growth, religion
Pfann, Gerard A (I.Z.A.
Bonn), Ben Kriechel
Heterogeneity among
Displaced Workers
We combine post-displacement
survey data with information from a displacing firm's personnel files in order
to reveal sources of worker heterogeneity in search time and wage losses.
First, we detail how experience-related characteristics affect workers' labour
market careers during a period of three years after the bankruptcy of the firm.
We find that wage losses are large. Interestingly, firm, rank, or job tenure do
not explain observed wage differences. Idiosyncratic ability, job rotations
prior to displacement, and differences in pre- and post-displacement job
characteristics contribute most to observed variations in wages. The individual
post-displacement labor market histories allow for testing the
Blanchard-Diamond (1994) ranking model for which we find no support. We then
develop a dynamic reservation wage updating model. The method of updating is
based on the simple idea that job seekers are informed about successful matches
of their former colleagues (Rees, 1966; Granovetter, 1974). The model fits the
data well.
JEL: J33, J63, J65, C42
Keywords: idiosyncratic ability,
mass lay-off, social networks, unemployment
Pfluger, Michael (DIW
Berlin), Andreas Haufler
International Commodity
Taxation under Monopolistic Competition
We analyze non-cooperative
commodity taxation in a two-country trade model characterized by monopolistic
competition and international firm and capital mobility. In this setting, taxes
in one country affect foreign welfare through the relocation of mobile firms
and through changes in the rents accruing to capital owners. With
consumption-based taxation, these fiscal externalities exactly offset each
other and the non-cooperative tax equilibrium is Pareto efficient. With
production-based taxation, however, there are additional externalities on the
foreign tax base and the foreign price level which lead non-cooperative tax
rates to exceed their Pareto efficient levels.
JEL: F12, H21, H87
Keywords: tax competition, market
imperfections, international trade
Pickering, Andrew
(University of Bristol)
The oil extraction
puzzle: theory and evidence
This paper considers the
relationship between the extraction rates and remaining reserves of a
non-renewable resource. Under general
conditions the derived extraction rule is firstly linear, and secondly exhibits
a slope term common to all extractors regardless of pricing behaviour and costs
whilst differences are captured by the intercept. Data from the world oil industry supports the hypothesis of
linearity but the implied test was rejected in some cases. Latterly, it appears that either OPEC
members are discounting at a higher rate than the competitive fringe or they
are overstating their reserve levels.
JEL: N5, Q3
Keywords: oil, OPEC, extraction,
reserves, resources
Posada, Pedro
(University of Warwick), Odd Rune Straume
Merger, partial
collusion and relocation
We set up a three-firm model of
spatial competition to analyse how a merger affects the incentives for
relocation, and conversely, how the possibility of relocation affects the
profitability of the merger, particularly for the non-participating firm. The
analysis is carried out for the assumptions of both mill pricing and price
discrimination, and we also consider the case of partial collusion. For the
case of mill pricing, a merger will generally induce the merger participants to
relocate, but the direction of relocation is ambiguous, and dependent on the
degree of convexity in the consumers' transportation cost function. We also
identify a set of parameter values for which the free-rider effect of a merger
vanishes, implying that the possibility of relocation could solve the `merger
paradox', even in the absence of price discrimination.
JEL: L13, L41, R30
Keywords: spatial competition,
merger, relocation, partial collusion
Price, Simon (Bank of
England), Dimitrios Asteriou, Peter Lukacs, Nigel Pain
Manufacturing price markup equations are estimated for 15 OECD
countries using annual data. Firms have
CES production technology. The markup depends on demand, competitors' prices
and uncertainty. Cointegration is
tested with the Pedroni tests and a panel version of the Johansen test, and
evidence found for unique cointegrating vectors. Estimation of the long-run parameters is performed with a pooled mean group method, with short run heterogeneous
dynamics. Tests for homogeneity of the
long-run parameters do not reject the hypothesis. Markups are pro-cyclical
and rise with both competitors'
prices and uncertainty.
JEL: C23, E30
Keywords: pricing behaviour,
markups, panel test for order of integration, panel cointegration, dynamic
heterogeneous panels, pooled mean group estimation
Propper, Carol
(University of Bristol), Simon Burgess, Denise Abraham
Competition and
Quality: Evidence from the NHS Internal Market 1991-1999
Payer-driven competition has been
widely advocated as a means of increasing efficiency in health care markets.
The 1990s reforms to the UK health service followed this path. We examine
whether competition led to better outcomes for patients, as measured by death
rates after treatment following heart attacks. Using data on mortality as a
measure of hospital quality and exploiting the policy change during the 1990s,
we find that the relationship between competition and quality of care appears
to be negative.
JEL: I1, L8, H4
Keywords: competition, health
care, mortality, quality of care
Proto, Eugene
(University of Bristol)
International Risk
Sharing and Bank Runs
Banks act as maturity
transformers, who take liquid deposit and invest in illiquid assets. In this
classical framework, we introduce uncertainty in the asset returns. We show
that banks can insure individuals against the risk of illiquidity at the cost
of increasing the riskIness of their portfolios. In an open financial market,
they can better diversify their portfolio and decrease its risk. In that way,
they can also increase the level of insurance against the risk of illiquidity.
This improves individual welfare, but the banks' short-term deposit-reserve
ratio and the fragility of the financial system result higher in an open
economy than in an autarchic regime. For this reason, the mechanism of deposit
insurance against bank runs becomes more difficult to implement by each
country's central bank.
JEL: F36, G11, G15, G21
Keywords: bank run, international
risk sharing, fragility of financial markets, deposit insurance
Pudney, Stephen
(University of Leicester), Monica Hernandez, Ruth Hancock
The Welfare Cost of
Means-Testing: Pensioner Participation in Income Support
We estimate parametric and
semi-parametric binary choice models of benefit take-up by British pensioners
and use a revealed preference argument to infer the cash-equivalent value of disutility
arising from stigma or complexity of the claims process. These implicit costs
turn out to be relatively small, averaging about £2-4 per week across Income
Support recipients. Using the Foster-Greer-Thorbecke measure of poverty among
pensioners, we find that allowing for implicit claim costs incurred by benefit
recipients raises the measured degree of poverty by not more than 16%.
JEL: C25, D63, H55, I32, I38
Keywords: benefit take-up,
program participation, pensions, welfare, poverty
Renou, Ludovic
(European University Institute), Guillaume Carlier
Optimal debt contracts
and diversity of opinions: an extreme case of bunching
This paper studies optimal menus
of debt contracts such as secured debentures or bonds, in the presence of
diversity of opinions between borrowers and lenders. We first characterize
incentive compatible contracts, then prove the existence of optimal debt
contracts. Finally, we are able to explicitly characterize such optimal menus
within a specific case: we notably show that borrowers optimally offer at most
two contracts, which is an extreme case of bunching.
JEL: C7, D8, G3
Keywords: debt contracts,
heterogeneity of beliefs, multidimensional screening, bunching
Rigon, Massimiliano
(University of Glasgow)
Monetary Policy in
Open Economies: Price Inertia and Inflation Targeting
In this paper we consider a two-country
model. Each country is characterised by several different sources of nominal
inertia. This distinguishes our model from others in the so called New Open
Economy Macroeconomics and makes it a suitable framework within which analyse
the stabilising properties of monetary
policies. We show that the variance of inflation induced by domestic
inflationary shocks is lower under CPI targeting than when we target a measure
of output price inflation. In fact,
market segmentation and staggered wage
and price setting result in lower and more persistent foreign inflation responses
to a domestic inflationary shocks. This
inertia in foreign price adjustments is completely passed through into CPI
inflation but not into output price
inflation. These differences cannot be
detected in traditional models that usually introduce sluggish adjustments of
domestic output prices as the only source of
nertia. Furthermore, we find a
limited role for the exchange rate in affecting the stabilising properties of
the rules.
JEL: E52, E58, F41
Keywords: monetary policy,
inflation targeting, open economy, exchange rate, staggered price
Roberts, Mark
(University of Nottingham), Michael Bleaney
International labour
mobility and unemployment
We develop a two-country
labour-market model characterised by union wage-bargaining, in which the
unemployed incur individual-specific costs of seeking work abroad. We explore
the effects on equilibrium unemployment in each country of changes in union
bargaining strength, the ratio of unemployment benefits to wages, and
employers' willingness to hire foreign workers. Unfavourable labour-market institutions increase unemployment abroad
as well as at home. We find that no country has an incentive to
internationalise its own labour market unilaterally, because all the employment
gains spill over abroad, which gives countries a strong incentive to
co-ordinate on internationalisation.
JEL: F22, F42, J51, J61
Keywords: international labour
mobility, unions, wage bargaining, globalization, unemployment
Robertson, Peter
(Univerity of New South Wales), John S Landon-Lane
Can government
policies increase national long-run growth rates?
We obtain time series estimates
of the long run growth rates of 17 OECD countries, and test the hypothesis that
these are the same across countries. We find that we cannot reject this
hypothesis for the first and last three decades of the 20th century. We
conclude that: (i) there are few, if any, feasible policies available that have
a significant effect on long run growth rates, and; (ii) any policies that can
raise national growth rates must be international in scope. The results
therefore have bleak implications for the ability of countries to affect their
long run growth rates.
JEL: F0, O0, O4
Keywords: economic policy,
technological change, convergence, economic growth
Robinson, Helen (Cardiff
University)
Regional evidence
on the effect of the National Minimum Wage on the gender pay gap
We study the evidence of change
in the gender wage gap across regions around the introduction of the National
Minimum Wage (NMW) in Britain. As the
proportion of low paid workers continued to vary across British regions, so did
the relative share of men and women paid below the NMW before its introduction. This variation provides a "quasi"
natural experiment with which to try and measure the effect of the introduction
of the NMW. Using
difference-in-differences type estimation, we conclude that there is variation
in the narrowing of the overall gender pay gap across regions, consistent with
regional differences in the incidence and magnitude of low pay.
JEL: J38
Keywords: gender wage gap,
difference-in-differences
Roider, Andreas
(University of Bonn), Mathias Drehmann, Jorg Oechssler
Herding and
Contrarian Behavior in Financial Markets - An Internet Experiment
We report results of an internet
experiment designed to test the theory of informational cascades in financial
markets. More than 6000 subjects, including a subsample of 267 consultants from
an international consulting firm, participated in the experiment. As predicted
by theory, we find that the presence of a flexible market price prevents
herding. However, the presence of contrarian behavior, which can (partly) be
rationalized via error models, distorts prices, and even after 20 decisions
convergence to the fundamental value is rare. We also study the effects of
transaction costs and the expectations of subjects with respect to future
prices. Finally, we look at the behavior of various subsamples of our heterogeneous
subject pool.
JEL: C99, D8, G12, G14
Keywords: herd behavior,
informational cascades, contrarian investors, market efficiency, internet
experiment
Ruffin, Roy J
(University of Houston), Ronald W Jones
Trade and Wages: A
Deeper Investigation
A new presentation of the
specific factors model shows how labor fares under international trade by considering
how the price elasticity of the nominal wage rate responds to the terms of
trade as well as factor endowments.
Gains to labor are decomposed into measurable terms of trade effects and
production bias effects. If trade is
caused by differences in technology, trade can harm the interests of labor when
the elasticities of substitution are sufficiently small. If trade is caused by differences in labor
endowments, trade raises real wages in the labor abundant country, even if
exports are capital intensive.
JEL: F1
Keywords: trade, real wages, beta
function, specific factors
Sanchez-Fung, Jose R
(Kingston University),
Inflation
targeting and monetary analysis in Chile and Mexico
This paper studies the role of
monetary and open economy indicators in inflation targeting (IT) economies
through the analysis of a nested Phillips curve/ P-star model for Chile and
Mexico. For Chile a real money gap and a money growth indicator are found to be
relevant in predicting deviations of observed from target inflation. In
contrast, for Mexico real exchange rate measures are robust predictors of
deviations of actual from (i) expected inflation during the pre-IT (1999)
period, and (ii) target inflation in the post-IT span.
JEL: E30, E40, E50, F41
Keywords: inflation targeting,
monetary policy, money demand, PPP, P-star, Phillips curve, cointegration,
Kalman filter, block Granger non-causality, VARs
Santoni, Michele
(University degli Studi di Milano)
Product market
integration and endogenous bargaining structure
This paper focuses on the effects of product market integration on
wage-bargaining institutions in a one-way trade model of an international
Cournot oligopoly. It shows that product market integration (i.e. a reduction
in trade costs either from an arbitrary or from its optimal level) lowers the
incentives to centralisation for home unions, given that firms always prefer decentralisation,
making it more likely that a decentralised wage bargaining structure occurs in
equilibrium.
JEL: F1, J51, L13.
Keywords: Bargaining institutions, unionised oligopolies, trade
integration
Saporta, Victoria (Bank of
England), Andrew G Haldane, Gregor Irwin
Bail-Out or
Work-Out? Theoretical Considerations
In recent years, we appear to
have entered an era of capital account crises.
In response, a number of new crisis resolution ideas have been put
forward, including the establishment of supranational institutions such as an
international lender of last resort or an international bankruptcy court,
temporary payments standstills and the inclusion of collective action clauses in
debt contracts. This paper assesses
these proposals using a theoretical model of crisis. The model underscores the importance of adapting policy
interventions to the nature of the crisis at hand. For example, it finds that payments standstills and last-resort
lending are an equally efficient means of dealing with liquidity crises, both
ex-ante and ex-post, while creditor committees are second-best. It finds that debt-write-downs are a
preferred means of dealing with solvency crises than subsidized IMF financing
because of the negative moral hazard implications of the latter tool. And it finds that international bankruptcy
court proposals may be superior to contractual approaches in securing such
write-downs
JEL: F33, F34
Keywords: crisis resolution, international
lender of last resort, standstills, IMF
Sarangi, Sudipta
(Louisiana State University), Raj Kannan, Lydia Ray
The Structure of
Information Networks
We develop a model of information
acquisition in a network where agents pay for all the information they acquire
including those through indirect links. The cost of information depends on the
value of information itself and the distance it traverses in the network. We
find that when the costs of information increase with distance, the complete
network is the only Nash network. When costs of information decrease with
distance capturing delay, all equilibrium information networks are minimally
connected, though not all trees are Nash. We analyze the popular star and chain
networks and identify strict Nash networks. We show that there is almost no
divergence between efficient and equilibrium information networks. We explore
the implications of a spatial model and information decay and discuss the
relationship with experimental evidence.
JEL: D82, D83
Keywords: Nash networks,
information networks, efficient networks
Sarno, Lucio
(University of Warwick), Daniel l Thornton,
Giorgio Valente
Recent research has reported that
both the federal funds rate futures market and the federal funds target contain
valuable information for explaining the behavior of the US effective federal
funds rate. A parallel literature on
interest rate modelling has recorded evidence that the dynamics of interest
rates displays significant regime-switching behavior. In this paper we produce out of sample forecasts of the federal
funds rate at horizons up to 8 weeks ahead using linear and nonlinear,
regime-switching equilibrium correction models of the funds rate and employing
both point and density measures of forecast accuracy. We cannot discriminate among the models considered in terms of
point forecast accuracy. However, in
terms of density forecast accuracy, we find that the term structure model of
the federal funds futures rate is significantly better than the other models
considered, and that regime-switching models provide a substantial forecasting
improvement relative to their linear counterparts and relative to individual
series of the futures rate.
JEL: E43, E47
Keywords: federal funds rate,
term structure of interest rates, forecasting, nonlinearity
Schabert, Andreas
(University of Cologne)
Interactions of
monetary and fiscal policy in a business cycle model with open market
operations
Consensus monetary business cycle
theory is hardly able to rationalize why fiscal policy is repeatedly found to
stimulate private consumption and why monetary policy should care about
Ricardian fiscal policy. In this paper we demonstrate that this changes when
government bonds provide liquidity services. We develop a simple business
cycle, which can be solved analytically, where money is supplied via open
market operations. When only government bonds are accepted as a collateral for
money and private debt earns a higher interest, real public debt eases households'
access to money and Ricardian equivalence does not hold. Interest rate policy
is not restricted by requirements for equilibrium determinacy and its effects
are consistent with common priors. Shocks are propagated via changes in
financial wealth and persistence is altered by the stance of fiscal and
monetary policy. overnment expenditures, which are not completely tax financed,
can raise private consumption when monetary policy is not too reactive.
Similarly, a moderate interest rate policy allows a deficit financed tax cut to
stimulate real activity.
JEL: E63, E52, E32
Keywords: interaction of monetary
and fiscal policy, open market operations, cash-in-advance, interest rate
rules, fiscal policy shocks
Schmalenbach, Anke
(University of Bonn), Manisha Chakrabarty
The
Representative Agent Hypothesis: An Empirical Test
This paper empirically tests the
validity of using only /mean /income as a representative variable in the aggregate
consumption relation and of assuming time-invariance of the coefficients in
this relation, as done in macromodels. We use a statistical distributional
approach of aggregation to test these properties on the UK-Family Expenditure
Survey [1974-1993]. The time-invariance assumption is rejected in most cases. A
bootstrap test also suggests that in addition to mean income, the /dispersion
/of income matters significantly for the commodity group /services /in several
years and for /total/ /nondurable/ in some years, thus invalidating the
/representative agent hypothesis/.
JEL: C12, C14, D12, E21
Keywords: representative agent
hypothesis, time invariance, heterogeneity
Shields, Michael
(University of Melbourne), Paul Frijters, John P Haisken-DeNew
The Value of
Reunification in Germany: An Analysis of Changes in Life Satisfaction
Recent years have seen a
considerable increase in the number of economists researching the role of
income, employment status and other demographic characteristics in determining
individual life satisfaction or happiness. In this paper we investigate how
life satisfaction is affected by a large exogenous shock, namely, reunification
for East Germans. In particular, we identify the effects of the substantial
increase in real household income and increased unemployment. We implement a
new fixed-effect estimator for ordinal life satisfaction in the German
Socio-Economic Panel and develop a decomposition approach that accounts for new
entrants and panel attrition. We find that average life satisfaction in East
Germany increased by around 20% in the years following reunification, leading
to a clear convergence with West Germany. Importantly, increased real household
incomes in East Germany accounted for around 35-40% of this increase.
JEL: Z1, C23, C25, I31
Keywords: life satisfaction,
German reunification, random and fixed-effects panel models, causal
decomposition
Shields, KalvInder
(University of Melbourne), Kevin B Grier, Olan T Henry, Nilss Olekalns
The Asymmetric
Effects of Uncertainty on Inflation and Output Growth
We study the effects of growth volatility
and inflation volatility on average rates of output growth and inflation for
post-war U.S. data. Our results suggest
that growth uncertainty is associated with higher average growth and lower
average inflation. Inflation uncertainty is significantly negatively correlated
with both output growth and average inflation. Both inflation and growth
display evidence of significant asymmetric response to positive and negative
shocks of equal magnitude.
JEL: E390
Keywords: growth, inflation,
uncertainty, asymmetry, generalised impluse response functions
Simmons, Peter
(University of York), G Garino
Truth-telling and
the Role of Limited Liability in Costly State Verification Loan Contracts
Recent literature has considered
the form of loan contract between two or more risk neutral parties where the
revelation principle is inappropriate due to the lack of commitment to an
auditing policy by the lender. The privately informed debtor has a stochastic
return; once he knows the state realisation, auditing and cheating are
determined as Nash equilibria. The literature assumes that this leads to
randomised cheating and auditing. In this paper we verify that the contract may
involve this randomisation; but that it may also involve truthtelling with
random auditing and one or more investors in line with Persons (1996); or a
single state independent repayment with no auditing. We define conditions on
the state observation cost and the distribution of returns which determine
which of these three forms of contract is optimal. We find that under unlimited
liability when the loan size is fixed the two investor truthtelling contract
dominates all the other forms; and that this is also true when the loan size is
optimally chosen. On the other hand under limited liability if the cost of
observation is large relative to the lowest state revenue, the random auditing
contract or a constrained two investor truthtelling contract may be optimal.
The limited liability condition in the constrained truthtelling contracts
forces the level of finance to be higher than under unlimited liability.
JEL: C7, G0
Keywords: loan contracts, costly
state verification, commitment, limited liability
Smith, Jennifer
(University of Warwick)
This paper tests the `morale'
theory of downward nominal wage rigidity. This theory relies on workers disliking
nominal pay cuts: cuts should make workers less happy. We investigate this
using panel data on individual employees' pay and satisfaction. We confirm that
nominal cuts do make workers less happy than if their pay had not fallen. But
we find no difference in the effect on happiness of cuts and pay freezes. This
represents important information about the nature of wage rigidity in practice
and the applicability of the morale theory. The morale theory may be able to
explain generalised downward wage rigidity, but apparently fails to explain
downward nominal rigidity.
JEL: J30, E24
Keywords: wage rigidity,
satisfaction
Sonedda, Daniela
(University of Piemonte Orientale)
Wealth Inequality,
Income Redistribution and Growth in 15 OECD countries
We model the individuals'
investment in physical capital and education decisions in presence of borrowing
constraints and a progressive taxation system. Our empirical evidence for 15
OECD countries supports the theoretical model predictions according to which
the effects on growth of higher redistribution are ambiguous. We find that in
those countries characterized by a high (low) taxation level and a high (low)
degree of tax progressivity, further redistribution has a negative (positive)
impact on growth since the disincentive effects on individuals' effort prevail
(is dominated by) the positive effect of allowing more people to have access to
the capital market.
JEL: O5, E25, H24
Keywords: growth, income
distribution, progressive taxation
Stahler, Frank
(University of Kiel)
Market Entry and
Foreign Direct Investment
This paper discusses the impact
of foreign direct investment (FDI) on market entry and welfare. It assumes that
firms may enter markets in the first period as national firms only. In the
second period, however, FDI is possible. The paper demonstrates that FDI
reduces market entry because equilibrium profits in the second period decline
with a decrease in the fixed cost of FDI. Therefore, compared to a trade regime
without any FDI, prices rise in the first period but decline in the second
period. The paper shows, however, that FDI will unambiguously improve the
discounted sum of consumer surplus.
JEL: F12, F15
Keywords: foreign direct
investment, multinational enterprises, imperfect competition, free entry
Stark, Oded
(University of Bonn), C Simon Fan
Enabling educated individuals to
work abroad entails a brain drain and results in educated unemployment at home.
Because the prospect of migration raises the expected returns to higher
education it also facilitates a "brain gain": a eveloping economy
ends up with a higher fraction of educated individuals. Due to the positive externality effect of the
prevailing, economy-wide endowment of human capital on the formation of human
capital, a relaxation of migration policy pursued in both the current period
and the preceding period can greatly facilitate the "take-off" of a
developing economy in the current period. Thus we identify a new policy tool
that could yield an improvement in the well-being of the population of a
developing economy: a controlled migration of educated workers.
JEL: F22, H23, I30, J61, O40,
Keywords: Brain drain, human
capital formation, externalities, economic growth, social welfare
Stevens, Phillip Andrew (NIESR),
Richard Kneller
Absorptive Capacity
and Frontier Technology: Evidence from OECD Manufacturing Industries
This paper investigates whether
differences in absorptive capacity help to explain cross-country differences in
the level of productivity. We utilise stochastic frontier analysis to
investigate two potential sources of this inefficiency: differences in human
capital and R&D for nine industries in twelve OECD countries over the
period 1973-92. We find that inefficiency in production does indeed exist and
it depends upon the level of human capital of the country’s workforce.Evidence
that the amount of R&D an industry undertakes is also important is less robust.
JEL: O3, O4
Keywords: absorptive capacity,
human capital, R&D, SFA
Stewart, Mark B
(University of Warwick)
The relationship
between the financial position of pensioners and their working-life earnings
levels
This paper investigates the link
between the incomes and wealth of pensioners and their working-life earnings
levels. It uses the combination of detailed income and asset information and
working-life history information available in the British Household Panel
Survey. The proportionality predicted by a simple "stripped down"
form of the life-cycle model is supported for pensioner couples and male single
pensioners, but not for female single pensioners.
JEL: D91, D31
Keywords: incomes, wealth,
pensions, housing wealth, life-cycle model
Stewart, Mark B
(University of Warwick)
Estimating the employment effects
of minimum wage increases in the pesence of cyclical differences between
comparison groups
Keywords: minimum wage, employment
determination, labour demand, difference-in-differences estimator
Strachan, Rodney
(University of Liverpool), Brett Inder
Bayesian Analysis of
Stochastic and Deterministic Processes in The Error Correction Model
In this article a method for
joint estimation of the number of stochastic trends and the deterministic
processes in a multivariate error correction model is presented. This approach
takes advantage of the Laplace method of approximating integrals and, the
second important contribution of the paper, careful elicitation of the prior
for the cointegrating vectors from a prior on the cointegrating space. The
approach follows the classical approaches of James (1969), Anderson (1951) and
Johansen (1988 and 1991) and performs well when used to estimate the number of
stochastic trends compared with information criteria in finite samples in Monte
Carlo experiments.
JEL: C11, C32
Keywords: stochastic trend,
deterministic trend, posterior probability, Grassman manifold, Stiefel manifold
Sunde, Uwe (IZA
Bonn, University of Bonn), Matteo Cervellati
Human Capital Accumulation,
Lifetime Duration and the Process of Economic Development
This paper presents a
microfounded theory of long-term development.
We model the interplay between economic variables, namely the process of
human capital formation and technological progress, and the biological
constraint of finite lifetime expectancy. All these processes affect each other
and are endogenously determined. The model is analytically solved and simulated
for illustrative purposes. The resulting dynamics reproduce a long period of
stagnant growth as well as an endogenous and rapid transition to a situation
characterized by permanent growth. This transition can be interpreted as
industrial revolution. Historical and empirical evidence is discussed and shown
to be in line with the predictions of the model.
JEL: E19, J10, O10, O40, O41
Keywords: long-term development,
endogenous lifetime duration, endogenous life expectancy, human capital,
technological progress, growth externalities
Surico, Paolo
(Universita Bocconi)
US Monetary Policy
Rules: the Case for Asymmetric Preferences
This paper investigates the
empirical relevance of a new framework for monetary policy analysis in which
decision makers are allowed to weight differently positive and negative
deviations of inflation and output from
the target values. The specification of the central bank objective is
general enough to nest the symmetric quadratic form as a special case, thereby
making the derived policy rule potentially nonlinear. This forms the basis of
our identification strategy which is used to evelop a formal hypothesis testing
for the presence of asymmetric preferences. Reduced-form estimates of postwar
US policy rules indicate that the preferences of the Fed have been highly
asymmetric with respect to both inflation and output gaps, with the latter
being the dominant source of nonlinearity after 1983.
JEL: C52, E52
Keywords: nonlinear optimal
monetary policy rules, asymmetric loss function, linearized central bank Euler
equation
Tekin, Erdal (Georgia
State University)
Child Care Subsidies,
Wages, And Employment of Single Mothers
This paper provides a
comprehensive analysis of employment and child care payment decisions of single
mothers in the early post-welfare reform environment, using data from the
National Survey of America's Families (NSAF).
I develop and estimate a model that examines the effects of the price of
child care and the wage rate on employment decision as well as the decision to
use paid child care among single mothers.
The model distinguishes between the full-time and part-time employment
decisions as well as the prevailing wages in these two employment markets. A semi-parametric random effects estimator
and the Gaussian Quadrature are used together to estimate the system of
equations for the discrete outcomes of full-time and part-time employment, and
child care payment, and the linear equations of the price of child care, and
part-time and full-time wages in a unified framework. The econometric model also controls for the endogeneity of child
care subsidy receipt and adjusts the hourly price of child care for the amount
of subsidy for mothers who receive one.
The results show that full-time working mothers are more sensitive to
the price of child care than part-time working mothers. A lower price of child care leads to
increases in overall employment and the use of paid child care. However, much of the increase in employment
is in the form of full-time employment.
An increase in the full-time wage rate leads to increases in overall
employment and the use of paid child care.
The effects of full-time wage rate are estimated to be much larger than
those of the price of child care.
Part-time wage effects are found to be so small to have significant
implications.
JEL: J13, C14, J23
Keywords: child care, employment,
wage rate, child care subsidies
Temple, Jonathan
(Unifversity of Bristol)
This paper shows how to calibrate
a two-sector general equilibrium model of production using a small number of
parameter assumptions and readily available data. The framework is then used to
analyze the costs of labor market dualism. The paper quantifies the effects of
rural-urban wage differentials and urban unemployment on total output, wages
and returns to capital, factor shares,
and sectoral structure. One of the main findings is that labor market
rigidities can have a major impact on the extent of industrialization.
JEL: D61, O40
Keywords: dualism, productivity,
wage differentials, minimum wages
Thompson, Steve
(University of Leicester), Sourafel Girma, Peter W Wright
Corporate
Governance Reforms and Executive Compensation Determination: Evidence from the
UK
This paper examines the effect
that the ‘Cadbury reforms’ have had on the pay determination process of
executives in the UK Our results suggest that, on average, the impact has been
disappointing. The relationship between pay and performance remains weak and
the link to firm size has, if anything, been strengthened. However, our results
suggest considerable heterogeneity in the impact of the reforms, and for those
firms above median employment the link between pay and profits appears to have
strengthened.
Keywords: executive,
compensation, governance, Cadbury
Thompson, Jamie (Bank of
England), Hasan Bakhshi, Nick Oulton
Modelling
Investment When Relative Prices Are Trending: Theory and Evidence for the UK
This paper investigates the
ability of aggregate and disaggregate equations to account for the boom in UK
plant and machinery investment in the second half of the 1990s. We extend previous US research by Tevlin and
Whelan (2002) by explaining the failure of the aggregate equations more
formally in terms of misspecification when relative prices are trending; and by
conducting the econometric analysis in a formal cointegration framework. In line with the US research, we find
asset-level equations can explain the UK investment boom over this period,
whereas the aggregate equation completely fails.
JEL: C51, E22
Keywords: investment, computers,
relative prices
Thoron, Sylvie (GREQAM)
Which Acceptable
Agreements are Equilibria?
I propose a normal form game of agreement
formation in which each player's strategy is to say for each size of agreement
whether it is acceptable or not. I propose a refinement, which guarantees that
each one of these choices is self-enforcing. For general payoff functions,
which exhibit positive externalities, I analyse situations in which symmetric
players have the possibility to reach a unique agreement. I prove the
uniqueness of this equilibrium. I give two specific examples: a cartel and an
agreement to contribute to a public good.
JEL: C70, C72
Keywords: coalition formation,
normal form games, agreement, cartel, environmental agreement, public good
To, Thuy Duong
(University of Technology, Sydney), Carl Chiarella
We propose a generalization of
the Shirakawa (1991) model to capture the jump component in fixed income
markets. The model is formulated under the Heath, Jarrow and Morton (1992)
framework, and allows the presence of a Wiener noise and a finite number of
Poisson noises, each associated with a time deterministic volatility function.
We derive the evolution of the futures price and use this evolution to estimate
the model parameters via the likelihood transformation technique of Duan
(1994). We apply the method to the short term futures contracts traded on CME,
SFE, LIFFE and TIFFE, and find that each market is characterized by very
different behaviour.
JEL: C51, E43, G12, G13
Keywords: term structure,
Heath-Jarrow-Morton, Jump-diffusion, FIML, likelihood transformation, interest
rate futures
Trabold, Harald (DIW
Berlin), Parvati Trubswetter, Philipp J H Schroder
Intermediation in
Foreign Trade: When do Exporters Rely on Intermediaries?
The paper explores theoretically
and empirically why trade intermediaries (TIs) are frequently used as agents
for exports to some countries but not to others. We adapt a standard
intra-industry trade model with variable export costs (e.g. transport) and
fixed export costs (e.g. market access) to include a TI that is able to pool
market access cost. From this framework explanatory factors for the TI share in
a country’s exports are derived and subsequently tested with a new data set
based on French customs information. The paper finds that: (i) higher market
access costs increase the TI share, (ii) smaller export markets feature a
larger TI share, (iii) the TI share is independent from variable
(distance-dependent) export costs.
JEL: D23, F10, F12, F15, F23
Keywords: trade intermediation,
indirect exports, monopolistic competition
Tudela, Merxe (Bank of
England), Garry Young
A Merton Model
Approach to Assessing the Default Risk of UK Public Companies
This paper shows how a
Merton-model approach can be used to develop measures of the probability of failure
of quoted UK companies. Probability estimates are constructed for a group of
failed companies and their properties as leading indicators of failure
assessed. Probability estimates of failure for a control group of surviving
companies are also constructed. These are used in Probit-regressions to
evaluate the information content of the Merton-based estimates relative to
information available in company accounts. The paper shows that there is much
useful information in the Merton-style estimates.
JEL: G12, G13
Keywords: Merton models,
corporate failure, implied default probabilities
Turon, Helene
(University of Bristol), Simon Burgess
Unemployment
equilibrium and on-the-job search
This paper uses the search and
matching framework to explore the impact of employed job search on the labour
market. We allow for endogenous employed job search, endogenous job destruction
and heterogenous job creation. Job flows and workers flows do not coincide as
we allow for job-to-job flows, firms' churning of workers and labour force
entries and exits. Employed job search is shown to have a substantial impact on
unemployment dynamics but a negligible one on the level of unemployment. It
also plays a key role in propagating a shock to institutions or to the economy
to the labour market.
Keywords: unemployment,
on-the-job search, job destruction, business cycles, matching
Upward, Richard
(University of Nottingham), Martyn Andrews, Steve Bradley, Dave Stott
Testing theories of
labour market matching
This paper estimates a model of
two-sided search using micro-level data for a well-defined labour market. It examines the assumption of random
matching and contrasts it with the stock-flow (or non-random) matching model of
Coles and collaborators. Given a
dataset of contacts, matches, and complete labour-market histories for both
sides of the market, we estimate hazard functions for both (unemployed)
job-seekers and vacancies. For
job-seekers, the tests adds the stock of new vacancies to a standard job-seeker
hazard which itself depends on the stocks of vacancies and unemployed. Our tentative results find very weak
evidence of stock-flow matching.
JEL: C41, E24, J41, J63, J64
Keywords: two-sided search,
random matching, hazards
Vecchi, Michela (NIESR),
Mary O'Mahony
In Search of An ICT
Impact on TFP: Evidence from Industry Panel Data
This paper uses a new set of
industry data for the US and the UK non-agricultural market economy, to provide
new evidence on the impact of ICT on TFP. We compare the results from standard
panel data techniques with newly developed dynamic panel data estimation
methods. The traditional industry panel data analysis fails to find a
significant impact of ICT on output/TFP growth. This paper argues that this is
due to heterogeneity across industries, particularly in the time dimension. An
alternative technique which allows the dynamic specification to vary across
industries yields a positive and significant long-run impact of ICT on TFP.
JEL: C33, C44, D24, O3
Keywords: productivity, ICT
capital, heterogeneous dynamic panels
Viitanen, Tarja K (University
College Dublin), Arnaud Chevalier
The Supply of
Childcare in Britain: Do Mothers Queue for Childcare?
This paper presents a model of
partial observability applied to the childcare market in Britain. We simultaneously estimate the demand and
use and calculate the excess demand for childcare. We find a large queue with
nearly half of the mothers demanding childcare queuing for it. We also find that formal and informal care
are not substitute, implying that policies increasing the supply of formal care
lead to an increase in the use of care rather than solely a shift from informal
to formal care. This has implication on the efficiency of policies aiming at
increasing the labour supply of mothers.
JEL: J130, J220
Keywords: supply of childcare
Vlieghe, Gertjan (Bank of
England), Stephen Bond, Alexander Klemm, Rain Newton-Smith, Murtaza Syed
Evidence that cash flow has a
significant effect on investment after controlling for Tobin's average Q has
been interpreted as suggesting the importance of financing constraints. Recent
work shows that the Q model may not be identified if there are `bubbles' in
stock market valuations that are persistent and correlated with fundamental
values. Cash flow may then provide additional information about expected
profitability that is not captured by average Q. Using data on UK companies, we find severe measurement error in
average Q. We find that cash flow
becomes insignificant after controlling for expected profitability using
analysts' earnings forecasts (I/B/E/S).
JEL: C23, E22, E44, G3
Keywords: panel data, investment,
financing constraints, Q Model, share prices
von Kalckreuth, Ulf
(Deutsche Bundesbank), Jorg Breitung, Robert S Chirinko
This paper proposes a new
framework for studying the effects of monetary policy on business investment,
modeling investment spending as a VAR.
Based on a panel of financial statement data for 6,408 German firms
(44,345 datapoints) supplemented with user costs of capital and confidential
measures of creditworthiness, we generate GMM estimates of a
Vectorautoregressive Investment Model (VIM) containing investment, cash flow,
sales, and the user cost of capital.
Apart from reporting several substantive findings, this paper
demonstrates that the panel VAR approach is useful for modeling firm dynamics
and real/financial interactions and for assessing monetary policy transmission.
JEL: E5, C33, E22
Keywords: panel data VARs,
monetary policy trmonetary policy transmission, panel data VARs, firm-level
investment, Germany
Waisman, Gisela
(Stockholm University)
Decision making in
the ECB's Governing Council - Should minutes and forecasts be published?
Governments seem to influence the
decisions taken by the Governing Council of the ECB. It's been argued that the
publication of forecasts and minutes of the Governing Council's meetings would
have a negative effect due to the influence of governments on their
representatives' votes. In my model, such information reduces their influence
and benefits the Executive Board. Governments benefit from the publication of
minutes, while they sometimes disagree with respect to the forecasts. The model
suggests that the EMU members may want to withhold the publication of forecasts
when taking enlargement with a more heterogeneous group of countries into
account.
JEL: E42, E58, F33
Keywords: European central bank,
EMU, monetary union, voting, transparency
Wakerly, Elizabeth C
(University of East Anglia), Elena Loukoianova, Shaun P. Vahey
A Real Time Tax
Smoothing Based Fiscal Policy Rule
We consider the real-time
implementation of a fiscal policy rule based on tax smoothing (Barro (1979),
Bohn (1998)). We show that the tax
smoothing approach, augmented by fiscal habit considerations, provides a surprisingly
accurate description of US budget surplus movements. In order to investigate the robustness of the policy implications
of the rule, we construct a real-time US fiscal data set, complementing the
data documented by Croushore and Stark (2001).
For each variable, we record the different vintages, reflecting the
remeasurements that occur over time. We
demonstrate that the rule provides a useful benchmark for policy analysis that
is robust to real-time remeasurements.
JEL: C82, E62, E66
Keywords: fiscal rules, tax
smoothing, fiscal habits, real-time data
Walde, Klaus
(University of Dresden)
Capital accumulation
in a model of growth and creative destruction
Capital accumulation and creative
destruction is modeled together with risk-averse households. The novel aspect -
risk-averse households - allows to use well-known models not only for analyzing
long-run growth as in the literature but also short-run fluctuations. The model
remains analytically tractable due to a very convenient property of the
household’s investment decision in this stochastic continuous-time setup.
E32, O41, O31
Keywords: creative destruction, risk
averse households, capital accumulation, endogenous fluctuations and growth
Wallis, Gavin (Office
for National Statistics/University of Warwick)
The Effect of Skill shortages
on Unemployment and Real Wage Growth: A Simultaneous Equation Approach
This paper attempts to quantify
the effect of skill shortages on the UK labour market by developing a
simultaneous equation model of unemployment and real wage growth. The model is developed following a
structural approach based on a priori economic information and is initially
estimated using a two-stage least squares procedure. The model is also estimated using Zellner's seemingly unrelated
regressions estimation technique, with similar results. It is shown that skill shortages have a
positive effect on real wage growth and a negative effect on unemployment, with
both these effects economically and statistically significant.
JEL: C32, C51, C52, E24
Keywords: skill shortages,
unemployment, wages, 2SLS
Wang, Yong (City
University of Hong Kong), Michael C M Leung
Endogenous Health Care,
Life Expectancy, and Economic Development
We study the endogenous
relationship between health care, life expectancy and output in a modified
neoclassical growth model. While health care competes resources away from goods
production, it prolongs life expectancy which in turn leads to higher capital
accumulation. We show that savings and health care are complements in
equilibrium, with both rising with economic development. Our model is therefore
consistent with several stylized facts, namely, (i) countries spend more on
health care as they prosper, (ii) individuals in rich countries tend to live
longer, and (iii) population aging is more pronounced in rich countries.
Moreover, through simulation, health care and health production technology are
found to be growth and welfare enhancing.
JEL: E13, E21, I12, J10, O11
Keywords: life expectancy, health
care, economic growth, population aging
Waterson, Michael
(University of Warwick), Joanne Sault, Otto Toivanen
Fast Food - the
early years: Geography and the growth of a chain-store in the UK
We examine the development of UK
outlets of a major fast food chain, from inauguration in 1974 until 1990, after
which industry structure changed somewhat.
The chain effectively introduced the counter-service burger
concept. Locational spread across local
authority district markets is explained by the characteristics of the areas
where the outlets are sited. Of special
interest is the effect of scale economies, measured by outlet numbers in neighboring
districts. Both first and second entry
are examined. We find that the hazard
of first entry is positively influenced by market size and population density
and negatively by distance from company headquarters.
JEL: L21, L81, R11, R12
Keywords: fast food, diffusion,
regional economic activity, entry
Wheatley Price, Stephen
(University of Leicester), Michael A Shields
Immigrant Job
Search in the UK
Most immigrant groups in the UK
experience higher unemployment rates than otherwise similar UK born whites.
Empirical research to date has attributed this finding to discrimination, lack
of English Language fluency and the (non-) transferability of skills acquired
before immigration. In this paper, we investigate how the job search methods of
unemployed white and ethnic minority immigrants, and their success in exiting
unemployment, compare with the UK born, using the panel element of the
Quarterly Labour Force Survey, pooled over 1997-2001. We condition, amongst
other things, on some observable immigrant characteristics and discuss the
policy implications of our findings.
JEL: J61, J64
Keywords: unemployment, job
search, immigrants
Woessmann, Ludger (Kiel
Institute for World Economics)
How Does East Asia
Achieve Its High Educational Performance?
East Asian students regularly
take top positions in international league tables of educational performance. Using
internationally comparable student-level data, I estimate how family background
and schooling policies affect student performance in five high-performing East
Asian economies. Family background is a strong predictor of student performance
in South Korea and Singapore, while Hong Kong and Thailand achieve more
equalized outcomes. There is no evidence that smaller classes improve student
performance in East Asia. By contrast, school autonomy over salaries and
regular homework assignments are related to higher student performance in
several of the considered countries.
JEL: O15, I20, H52
Keywords: education production
function, East Asia, family background, class size, school autonomy
Wren, Colin
(University of Newcastle upon Tyne)
Informational Rents and
Discretionary Industrial Assistance
The paper analyses the existence
and efficiency of discretionary industrial assistance schemes under asymmetric
information between an uninformed government and a uniform distribution of
firms with differing productivities.
Discretionary assistance allows the government to scrutinise projects in
an effort to learn the type to reduce the 'informational rents' of automatic
assistance, where firms take up any contract on offer. Two discretionary grant schemes are
analysed, which either exclude 'non-additional' projects or reduce the
assistance to the minimum necessary for a project to proceed. The paper finds the conditions under which
discretionary assistance exists and is more efficient than automatic
assistance.
JEL: H2, D8
Keywords: subsidies, asymmetric
information, discretionary assistance, investment grants
Wright, Peter
(University of Nottingham), Joanne Lindley, Richard Upward
Regional mobility and
unemployment transitions in the UK and Spain
If the distribution of industrial
employment is uneven across regions, changes in patterns of production will
require the reallocation of labour across regions as well as industries. In
this paper we consider this aspect of the adjustment process. Specifically, we
compare the geographical mobility of the workforce in the UK and Spain, and
examine the extent to which differences in mobility explain differences in the
probability of exiting unemployment between the two countries.
JEL: J61, J64
Keywords: unemployment, mobility,
regional migration
Xavier, Ana
(Catholic University of Leuven, Belgium), Robin Thompson
We consider a discriminatory pricing
and service differentiation model where: a)state physicians exploit their
monopoly position and adjust quality to the unofficial payment made, and
b)patients, perceiving state provision as poor, pay unofficially to improve it.
Applying OLS and probit analysis to survey data on patients discharged from
Almaty City hospitals, and using admission wait, length of stay (LOS) and a
subjective categorical variable as quality measures. Unofficial payments are
positively associated with surgical admission wait and the subjective quality
of care while negatively associated with hospital LOS. Evidence suggests that
price discrimination and service differentiation takes place in Kazakhstan.
JEL: I1, P3
Keywords: transition economies,
unofficial or informal payments for health care, length of stay, ordered probit
and marginal effects
Yates, Tony (Bank of
England), Richard Harrison, George Kapetanios
Forecasting with
measurement errors in dynamic models
This paper explores the effects
of measurement error on dynamic forecasting models. The paper sets out to
illustrate a trade off that confronts forecasters and policymakers when they
use data that are measured with error. On the one hand, observations on recent
data give valuable clues as to the shocks that are hitting the system and will
be propagated into the variables to be forecast (and which ultimately will
inform monetary policy). But on the other, those recent observations are likely
to be those least well measured. Two broad classes of results are illustrated.
The first relates to cases where it is imagined that the forecaster takes the
coefficients in the data generating process as a given, and has to choose how
much of the historical time series of data to use to form a forecast. It is
shown that if recent data is sufficiently badly measured, relative to older
data, that it can be optimal in this case not to use old data at all. The
second class of results is more general. Here, it is shown that for a general
class of linear autoregressive forecasting models, the optimal weight to place
on a data observation of some age, relative to the weight in the true data
generating process, will depend on the measurement error in that data. The
gains to be had in forecasting are illustrated using a model of UK business
investment growth.
JEL: C53
Keywords: measurement error,
forecasting, signal-extraction
Zangelidis, Alexandros N
(University of Warwick)
Profitable Career
Paths: Accumulated Skills in Work, Their Degree of Transferability and Wage
Premia
In this paper we challenge the
conventional assumption that accumulated human capital can be divided into
employer-specific and general labour market skills and explore the possibility
of industry and occupational specificity. The estimates of a Mincer wage
equation, on a BHPS sample, suggest some interesting patterns. Occupational
expertise, so far overlooked in the literature, appears to play a major role on
workers’ earnings profiles. Antithetically, the evidence on industry experience
is limited and in some cases mixed. Furthermore, the estimated occupational
effect is actually driven by some particular occupations, implying that
expertise is important only in these specific career paths.
JEL: J24, J31
Keywords: human capital,
occupational expertise, industry experience, wages
Zhang, Lei
(University of Warwick), Marcus Miller, Kannika Thampanishvong
Learning to Forget?
Contagion and Political Risk in Brazil
We examine whether Brazilian
sovereign spreads of over 20 percent in 2002 could be due to contagion from
Argentina or to domestic politics, or both. Treating unilateral debt
restructuring as a policy variable gives rise to the possibility of
self-fulfilling crisis, which can be triggered by contagion. We explore an
alternative political-economy explanation of panic in financial markets
inspired by Alesina (1987), which stresses exaggerated market fears of an
untried Left-wing candidate. To account for the fall of sovereign spreads since
the election, we employ a model of Bayesian learning and analyse the effects of
contagion and IMF commitments.
JEL: E61, E62, F34
Keywords: sovereign spreads,
political risk, Bayesian learning, time-consistency