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E2023/4 |
Xue Dong, Patrick Minford, David Meenagh and Xiaoliang Yang (February 2023)
A heterogeneous-agent model of growth and inequality for the UK (706K, 40 pages)
Keywords: bounded rationality, monetary policy, small open economy, exchange rate channel
JEL Classification: E52, E70, F41, C51, F31 |
E2023/3 | Patrick Minford, Zhirong Ou and Zheyi Zhu (February 2023) Is there international risk-sharing between developed economies? New evidence from indirect inference (491K, 10 pages)
Keywords: consumer risk-pooling; UIP; two-country DSGE model; indirect inference test
JEL Classification: C12,E12,F41
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E2023/2 | Patrick Minford, Zhirong Ou and Zheyi Zhu (February 2023) On
the determination of the real exchange rate in free markets: do
consumer risk-pooling and uncovered interest parity differ and fit? (100K, 13 pages)
Keywords: consumer risk-pooling; UIP; two-country DSGE model; indirect inference test
JEL Classification: C12,E12,F41
|
E2023/1 |
Patrick Minford and Zheyi Zhu (January 2023) How the short run effects of Brexit on trade, investment and GDP have been miscalculated in some recent work(670K, 12 pages)
Keywords:
JEL Classification: |
E2022/18 |
Kul B Luintel and Panayiotis M. Pourpourides (December 2022)
New Results and a Model of Scale Effects on Growth(1.1M, 36 pages)
Keywords: Endogenous Technical Change; Scale Effects; Panel Integration and Cointegration
JEL Classification: O3; O4; O14; O33; O47 |
E2022/18 |
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E2022/17 |
Peng Zhou and Nikolaos Tzivanakis, Tuanfeng Wang, Yao Lu and Peng Liu (November 2022)
Editorial: Bridging the Gap between Innovation and Entrepreneurship(1.3M, 4 pages)
Keywords:
JEL Classification: |
E2022/16 | Armenak Antinyan Luca Corazzini, Miloš Fišar and Tommaso Reggiani (October 2022) Mind the framing when studying social preferences in the domain of losses (1.2M, 29 pages)
Keywords: loss; framing; altruism; dictator game; experiment; social norms.
JEL Classification: C91; D02; D64 |
E2022/15 |
Huw Dixon and Maoshan Tian (August 2022) The Confidence Interval of Cross-Sectional Distribution of Durations (466K, 23 pages)
Keywords: Fieller’s Method, Delta Method, Confidence Interval
JEL Classification: C10, C15, E50 |
E2022/14 | Sergey V. Popov (July 2022) Tactical Refereeing and Signaling by Publishing (466K, 19 pages)
Keywords: refereeing, peer review. JEL Classification: C78 |
E2022/13 | Chunping Liu, Patrick Minford and Zhirong Ou (July 2022) Modern Monetary Theory: the post-Crisis economy misunderstood?(442K,27 pages)
Keywords: Modern Monetary Theory; DSGE model; Öscal activism; Wald test; indirect inference
JEL Classification:
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E2022/12 | David Meenagh, Patrick Minford and Yongdeng Xu (July 2022)
Targeting moments for calibration compared with indirect inference(208K, 6 pages)
Keywords: Moments, Indirect Inference JEL Classification: C12, C32, C52
|
E2022/11 | Cemil Selcuk and Bilal Gokpinar (June 2022)
Incentivizing flexible workers in the gig economy: The case of ride-hailing (576K, 46 pages)
Keywords: Ride-sharing, Gig workersícompensation, Flexible commission, Sharing economy JEL Classification:
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E2022/10 | David Meenagh, Patrick Minford and Yongdeng Xu (May 2022)
Why does Indirect Inference estimation produce less small sample bias than maximum likelihood? A note (455K, 8 pages)
Keywords: Bias, Indirect Inference, Maximum Likelihood JEL Classification: C12, C32, C52
|
E2022/9 | David Meenagh and Patrick Minford (May 2022)
A structural model of coronavirus behaviour: what do four waves of Covid tell us? (518K, 12 pages)
Keywords:
JEL Classification:
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E2022/8 | Štěpán Mikula and Tommaso Reggiani (March 2022) Residential-based discrimination in the labor market(2.1 M, 18 pages)
Keywords: correspondence study, labor discrimination, housing conditions, Rapid Re-housing.
JEL Classification: C93, J08, J71
|
E2022/7 | Joshy Easaw, Roberto Golinelli and Saeed Heravi (March 2022) Professionals Forecasting Inflation: The Role of Inattentiveness and Uncertainty(761K, 41 pages)
Keywords:Inflation Forecasts, Information Rigidities, Inattentiveness,
Uncertainty, Survey Forecasts JEL Classification: E3, E4, E5.
|
E2022/6 | Iain W. Long, Kent Matthews andVaseekaran Sivarajasingam (March 2022) Overconfidence, Alcohol and the Environment: Evidence from a Lab-in-the-Field Experiment (486K, 32 pages)
Keywords: Alcohol intoxication, overconfidence
JEL Classification: C93, D91, I18
|
E2022/5 |
Yongdeng Xu (March 2022) Exponential High-Frequency-Based-Volatility (EHEAVY) Models (491K, 32 pages)
JEL Classification: C32, C53, G11, G17
|
E2022/4 | Sisi Ji and Zheyi Zhu (February 2022) Does higher education matter for health? (725K, 41 pages)
Keywords: Casual effect; Health; Higher Education; Propensity Score matching
JEL Classification: C21, I12, I23, I26
|
E2022/3 |
Xiaoliang Yang and Peng Zhou (February 2022)
Wealth Inequality and Social Mobility: A Simulation-Based Modelling Approach(1.3M, 27 pages)
Keywords: Wealth Inequality; Social Mobility; Agent-Based Model
JEL Classification: D31, E21, J60
Also See: Codes
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E2022/2 |
Jenyu Chou, Yifei Cao and Patrick Minford (January 2022)
Evaluation and Indirect Inference Estimation of Inattentive Features in a New Keynesian Framework (756K, 41 pages)
Keywords: Inattentive expectation, New Keynesian, DSGE, Indirect Inference
JEL Classification: E12,E52,C52
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E2022/1 |
Patrick W. Saart, Namhyun Kim, Yingcun Xia and Francesco Moscone (January 2022)
Varying
Coefficient Model with Correlated Error Components and Application to
Disparities Between Mental Health Service by Councils in England (62 pages)
Keywords: Spatial
models, Error components, Local maximum likelihood, Varying
coefficient, Variable selection, Mental health services and
expenditures
JEL Classification: C14; C51; C52; G12; G17
|
E2021/35 |
Jenyu Chou,Joshy Easaw and Patrick Minford (December 2021)
Does Inattentiveness Matter for DSGE Modelling? An Empirical Investigation (1.6M, 60 pages)
Keywords: Expectation formation, Inattentive expectation, New Keynesian, DSGE, Bayesian estimation
JEL Classification: C11, C32, C52, E10, E12, E17
|
E2021/34 |
Joshy Easaw, Yongmei Fang and Saeed Heravi (December 2021)
Using
Polls to Forecast Popular Vote Share for US Presidential Elections 2016
and 2020: An Optimal Forecast Combination Based on Ensemble Empirical
Model (2.8M, 23 pages)
Keywords: Forecasting Popular Votes Shares; Electoral Poll; Forecast combination, Hybrid model; Support Vector Machine
JEL Classification:
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E2021/33 |
Armenak Antinyan and Vardan Baghdasaryan and Aleksandr Grigoryan (December 2021) Charitable giving, social capital and positional concerns (2.4M, 50 pages)
Keywords: Positional Concern; Social Capital; Charitable Giving; Reference Group.
JEL Classification: D31; D63; D91; P30; Z13. |
E2021/32 | Andrea Geraci, Mattia Nardotto, Tommaso Reggiani and Fabio Sabatini(December 2021) Broadband Internet and Social Capital (1M, 50 pages)
Keywords: ICT, broadband infrastructure, networks, Internet, social capital, civic capital.
JEL Classification: D91, L82, Z13 |
E2021/31 | Helmuts Azacis and David R. Collie (December 2021) A General Model of International Tax Competition with Applications (613K,49 pages)
Keywords: Tax Competition; Proportional Taxes; Per-Unit Taxes; Capital Taxes.
JEL Classification: H21; H25; H77; F21; F23, F53, C72. |
E2021/30 | Martin Iseringhausen, Ivan Petrella and Konstantinos Theodoridis (March 2022) Aggregate Skewness and the Business Cycle (1.6M, 43 pages)
Keywords: Asymmetry, principal component analysis, quantile regression, VAR
JEL Classification: C22, C38, E32 |
E2021/29 | Armenak Antinyan and Luca Corazzini (November 2021) Money
does it better! Economic incentives, nudging interventions and reusable
shopping bags: Evidence from a natural field experiment (2.7M, 45 pages)
Keywords:pro-environmental behavior, nudge, financial bonus, reusable bag, single-use plastic bag, randomized controlled trial.
JEL Classification: C93; D12; D91; H23. |
E2021/28 |
Dong Guo and Peng Zhou (November 2021)
Green Bonds as Hedging Assets before and after COVID: A Comparative Study between the US and China(1.3M, 27 pages)
Keywords: green bonds; hedging effectiveness; COVID
JEL Classification: G110, G120 |
E2021/27 |
Abida Naurin and Panayiotis M. Pourpourides (November 2021, Updated October 2022)
On the Causality Between Household and Government Spending on Education: evidence from a panel of 40 countries (562K, 22 pages)
Keywords: Household Spending on Education, Government Spending on Education, Causality,
Credit Market
JEL Classification: C91, D70, H26, H31.
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E2021/26 |
Milos Fisar, Tommaso Reggiani, Fabio Sabatini and Jirí
Spalek (October 2021) Media negativity bias and tax compliance: Experimental evidence (3M, 69 pages)
Keywords: tax compliance, media bias, taxation game, laboratory experiment.
JEL Classification: C91, D70, H26, H31.
Forthcoming in International Tax and Public Finance
|
E2021/25 |
Tianshu Zhao, Kent Matthews and Max Munday (October 2021)
Neither True-friend nor Fairweather friend: Relationship Banking and SME borrowing under Covid-19 (607K, 38 pages)
Keywords: Covid-19, Relationship Banking, SMEs
JEL Classification: G21, G28, G40
|
E2021/24 |
Hans Degryse, Kent Matthews and Tianshu Zhao (October 2021)
Relationship lending, Trust, and SME bank financing in the UK (662K, 43 pages)
Keywords: Trust, Relationship Banking, SME Financing, Bank Organization
JEL Classification: G21, G290, L140
|
E2021/23 |
Dong Guo and Peng Zhou (September 2021)
The Rise of a New Anchor Currency in RCEP? A Tale of Three Currencies(1.7M, 18 pages)
Keywords: RCEP; TVP-VAR; Anchor Currency; Internationalization
JEL Classification: F13; F33; F45.
|
E2021/22 |
David Meenagh, Patrick Minford and Michael Wickens (September 2021)
Estimating macro models and the potentially misleading nature of Bayesian estimation (218K, 10 pages)
Keywords:
Bayesian; Maximum Likelihood; Indirect Inference; Estimation Bias
JEL Classification: C11; E12
|
E2021/21 |
Bo Zhang and Peng Zhou (September 2021)
Financial Development and Economic Growth in a Microfounded Small Open Economy Model (805K, 19 pages)
Keywords: economic growth; financial development; open economy; DSGE
JEL Classification:
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E2021/20 |
Patrick Minford, Yongdeng Xu and Xue Dong (August 2021) Testing competing world trade models against the facts
of world trade (1.7M, 31 pages)
Keywords: Bootstrap, indirect inference, gravity model, classical trade model, trad
JEL Classification: F10-14, F16-17
|
E2021/18 | Helmuts Azacis and Peter Vida (August 2021) Fighting Collusion: An Implementation Theory
Approach (688K,44 pages)
Keywords: Collusion, Antitrust, (Repeated) Implementation, Monotonicity, Price-Quantity Mechanism, Hard Evidence
JEL Classification: C72; C73; D71; D82; L41 |
E2021/18 | Patrick Minford (August 2021)
Free Trade under Brexit- why its benefits have been widely underestimated (1.7M, 24 pages)
Keywords: JEL Classification: |
E2021/17 | Armenak Antinyan, Zareh Asatryan, Zhixin Dai, Kezhi Wang (July 2021)
Does the Frequency of Reminders Matter for their
Effectiveness? A Randomized Controlled Trial (724K, 31 pages)
Keywords:Reminder Frequency; Randomized Controlled Trial; Tax Compliance
JEL Classification: C93; H24; H26. |
E2021/16 | Wenna Lu, Laurence Copeland,and Yongdeng Xu (July 2021)
The Pricing of Unexpected Volatility in the Currency
Market (724K, 31 pages)
Keywords: carry trade; asset pricing; trading strategies; currency portfolios; Markov switching model
JEL Classification: F3; G21; G15 |
E2021/15 | James Foreman-Peck and Peng Zhou (July 2021)
Innovation policy and performance of Eastern European Countries (503K, 26 pages)
Keywords: innovation policy; European Union; R&D; subsidies
JEL Classification: : L53 L21 H71 H25 |
E2021/14 | Gang Chen, Xue Dong, Patrick Minford, Guanhua Qiu,Yongdeng Xu and Zequn Xu (June 2021)
Computable General Equilibrium Models of Trade in the Modern Trade Policy Debate (3.7M, 48 pages)
Keywords: Bootstrap, indirect inference, gravity model, classical trade model, UK trade JEL Classification: F10-14, F16-17 |
E2021/13 | David Meenagh, Patrick Minford and Zhiqi Zhao (June 2021)
Should Hong Kong switch to Taylor Rule?—Evidence from DSGE
Model (1.5M, 30 pages)
Keywords: Currency Board, Monetary Policy, Hong Kong, Indirect Inference
JEL Classification: E52, F41, G5 |
E2021/12 | James Foreman-Peck (June 2021)
Public Private Partnerships in Britain: Interpreting Recent Experience (531K, 33 pages)
Keywords:
JEL Classification: |
E2021/11 | Patrick Minford, Zhirong Ou, Michael Wickens and Zheyi Zhu (June 2021) The eurozone: what is to be done? (670K, 27 pages)
Keywords: eurozone; macro stability; fiscal policy; monetary independence
JEL Classification: E32, E52, E62, F41 |
E2021/10 | Huw Dixon, Jeremy Franklin and Stephen Millard (May 2021) Sectoral shocks and monetary policy in the United Kingdom(794K, 60 pages)
Keywords: CPI inflation, Sectoral inflation rates, Generalised Taylor economy, Financial Intermediation.
JEL Classification: E17, E31, E52 |
E2021/9 | Namhyun Kim and Patrick W. Saart (May 2021)
Estimation in partially linear semiparametric models with parametric and/or nonparametric endogeneity (42 pages)
Keywords: Semiparametric Models with Endogeneity
JEL Classification: C12, C14, C22 |
E2021/8 | Patrick W. Saart, Namhyun Kim, and Ian Bateman (May 2021)
Understanding spatial heterogeneity in GB agricultural land-use for improved policy targeting (38 pages)
Keywords: Agro-environmental policy, land-use,
multivariate Tobit, system of censored equation, spatial model, error
component model.
JEL Classification: C13, C21, C23, C34, Q15, Q53 |
E2021/7 | Patrick W. Saart, Namhyun Kim, and Ian Bateman (May 2021)
Understanding spatial heterogeneity in GB agricultural land-use for improved policy targeting (38 pages)
Keywords: Agro-environmental policy, land-use,
multivariate Tobit, system of censored equation, spatial model, error
component model.
JEL Classification: C13, C21, C23, C34, Q15, Q53 |
E2021/6 | Juyi Lyu, Vo Phuong Mai Le, David Meenagh and Patrick Minford (March 2021)
Macroprudential Regulation in the Post-Crisis Era: Has the
Pendulum Swung Too Far? (39 pages)
Keywords: Bank regulation; Financial stability; Monetary policy; Public choice theory
JEL Classification: E52; E58; G28 |
E2021/5 | Ziyi Cao and Zhirong Ou (February 2021) Can debt monetisation be helpful for China's post-Covid
recovery? Some empirical evidence (383K, 15 pages)
Keywords: Debt monetisation; business cycle; VAR; China JEL Classification: E31, E32, E63, H63 |
E2021/4 | Chunping Liu and Zhirong Ou (February 2021) Revisiting the determinants of house prices in China’s
megacities: cross-sectional heterogeneity,
interdependencies and spillovers (455K,19 pages)
Keywords: house price; Chinese megacities; PVAR; cross-sectional heterogeneity and interdependencies JEL Classification: C11, R15, R31 |
|
|
E2021/3 | Tiziana Medda, Vittorio Pelligra and
Tommaso Reggiani (February 2021) Lab-Sophistication: Does Repeated Participation in
Laboratory Experiments Affect
Pro-Social Behaviour?(737K, 19 pages)
Keywords: Lab-sophistication; Experimental Methodology; External Validity; Pro-social
behaviour; Cooperation JEL Classification: D03, D83, C91, C9 |
E2021/2 | Bo Zhou, Ying Zhang and Peng Zhou (February 2021) Multilateral Political Effects on Outbound Tourism (1M, 31 pages)
Keywords: political relation; outbound tourism; China; multilateral interdependence. JEL Classification: See also: Supplementary Materials |
E2021/1 | Huw Dixon and Christian Grimme(January 2021) State-Dependent or Time-Dependent Pricing? New Evidence from a Monthly Firm-Level Survey: 1980–2017(1.5M, 62 pages)
Keywords: Survey Data, Price Setting, Extensive Margin, State-Dependent Pricing, Time-Dependent Pricing
JEL Classification: E30, E31, E32
|
E2020/15 | George Bratsiotis and Konstantinos Theodoridis(December 2020) Precautionary Liquidity Shocks, Excess Reserves and Business Cycles(721K, 23 pages)
Keywords: SVAR;
Sign and Zero Restrictions; DSGE; Precautionary Liquidity Shock; Excess
Reserves; Deposit Rate; Risk, Financial Intermediation.
JEL Classification: C10, C32, E30, E43; E51, G21 |
E2020/14 | Patrick Minford, Yue Gai and David Meenagh (November 2020, Revised August 2021) North and South: A Regional Model of the UK(827K, 48 pages)
Keywords: Regional study; DSGE model; Policy implication; Indirect Inference
JEL Classification: E32; E60; P48 |
E2020/13 |
James Foreman-Peck and Peng Zhou (November 2020) Fertility versus Productivity: A Model of Growth with Evolutionary Equilibria (1.2M, 43 pages)
Keywords: Fertility Transition, Industrial Revolution, English Economy, Economic Development JEL Classification: O11, J11, N13
See also: Supplementary Materials
Codes
Data
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E2020/12 |
Patrick Minford, Zhirong Ou and Zheyi Zhu (October 2020) Is there consumer risk-pooling in the open economy? The evidence reconsidered (427K, 12 pages)
Keywords: Open economy; consumer risk-pooling; UIP; full-model test; Indirect Inference
JEL Classification: C12,E12,F41 |
E2020/11 | Helmuts Azacis and David R. Collie ( July 2020) The Non-Equivalence of Import Tariffs and Export Taxes in Trade Wars: Ad Valorem vs Specific Trade Taxes (379K,41 pages)
Keywords: Ad Valorem Trade Tax; Specific Trade Tax; Perfect Competition; General Equilibrium; NE in Trade Taxes; Lerner Symmetry Theorem.
JEL Classification: F11; F13; C72; D51; H21
|
E2020/10 | Alessandro Bucciol and Serena Trucchi ( July 2020) Locus of Control, Savings and Propensity to Save (466K,28 pages)
Keywords: Locus of Control; Saving decisions; Propensity to save; Me- diation analysis.
JEL Classification: D14; D91.
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E2020/9 | Melanie Jones and Ezgi Kaya ( June 2020) The Gender Pay Gap: What can we learn from Northern Ireland?(435K,30 pages)
Keywords: Gender pay gap, pay discrimination, decomposition analysis, Labour Force Survey, Northern Ireland.
JEL Classification: J16; J31; J24.
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E2020/8 | Manipushpak Mitra, Indrajit Ray and Souvik Roy( May 2020) A Characterisation of Trading Equilibria in Market Games(280K,17 pages)
Keywords: strategic market game, trading equilibrium, buy and sell, buy or sell.
JEL Classification: C72, D44.
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E2020/7 | Vittorio Pelligra, Tommaso Reggiani and Daniel John Zizzo (May 2020) Responding to (Un)Reasonable Requests by an Authority(710K,33 pages)
Keywords: trust; trustworthiness; authority; reasonableness; moral wiggle room; moral licensing.
JEL Classification: C91; D01; D03; D63.
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E2020/6 | Patrick Minford, Yue Gai and Zhirong Ou (May 2020) Is housing collateral important to the business cycle? Evidence from China(827K, 25 pages)
Keywords: Housing market; DSGE model; Housing collateral; Indirect Inference; China;
JEL Classification: E32; E44; E52; R31
|
E2020/5 | Michael G. Arghyrou, Wenna Lu and Panayiotis M. Pourpourides (May 2020, Updated October 2022)
Exchange Rate Risk and Deviations from Purchasing Power Parity (1.8M, 34 pages)
Keywords: Purchasing Power Parity, risk-aversion, exchange rate, downside risk
JEL Classification: G15, F31, F41
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E2020/4 | David Meenagh and Patrick Minford (September 2020)
A structural model of corona virus behaviour for testing on data behaviour (449K, 27 pages)
Keywords: coronavirus, Covid-19, evolution, optimisation, indirect inference, lockdown
JEL Classification: C54, I12
See also: Online Appendix
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E2020/3 | Rangan Gupta, Jun Ma, Konstantinos Theodoridis and Mark E. Wohar (April 2020)
Is there a National Housing Market Bubble Brewing in the United States? (2.2M, 57 pages)
Keywords: House Prices, Time-Varying
Dynamic Factor Model, Change-Point Vector Autoregressive Model,
Macroeconomic Shocks, Bayesian Analysis
JEL Classification: C11, C32, E31, E32, E43, E52, R31 |
E2020/2 | Carlo Pizzinelli, Konstantinos Theodoridis and Francesco Zanetti (March 2020) State Dependence in Labor Market Fluctuations (1.2M, 63 pages)
Keywords: Search and Matching Models, State Dependence in Business Cycles, Threshold
Vector Autoregression JEL Classification: E24, E32, J64, C11. |
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E2020/1 | Sergey V. Popov (March 2020) Arithmetics of Research Specialization (457K, 10 pages)
Keywords: specialization, research, job market. JEL Classification: A11, D4, I23, J4 |
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E2019/19 | Joshy Easaw and Samuli Leppälä (December 2019) Democracy, State Capacity and Public
Finance (370K, 29 pages)
Keywords: democracy, state-capacity investment, electoral bias, political inclusivity, political rents, public goods provision. JEL Classification: D72, H10. |
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E2019/18 | Chunping Liu and Zhirong Ou (November 2019) Has fiscal expansion inflated house prices in China? Evidence from an estimated DSGE model (640K, 32 pages)
Keywords: Contests: fiscal policy; housing price; China; DSGE model JEL Classification: E62; R31 |
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E2019/17 | Iain W. Long (August 2019) Contests and Negotiation Between Hubristic Players (340K, 8 pages)
Keywords: Contests; Optimism bias; Overconfidence bias; Negotiation JEL Classification: C71, D74, D91. |
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E2019/16 | Effrosyni Adamopoulou and Ezgi Kaya (July 2019) Not Just a Work Permit: EU Citizenship and the Consumption Behavior of Documented and Undocumented Immigrants (1M, 66 pages)
Keywords: consumption; citizenship; informality; (un)documented immigrants; work permit JEL Classification: D12, E21, F22 |
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E2019/15 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (July 2020) State-dependent pricing turns money into a two-edged sword (438K, 34 pages)
Keywords: state-dependence; New Keynesian; Rational Expectations crises; price stability; nominal GDP JEL Classification: E2; E3 |
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E2019/14 | Jiayi Huang, Kent Matthews and Peng Zhou (May 2019) What Causes Chinese Listed Firms To Switch Bank Loan Provider? Evidence From A Survival Analysis (713K, 37 pages)
Keywords: Economic Development, Demography, Unified Growth, Overlapping Generations, English Economy JEL Classification: O11, J11, N13 |
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E2019/13 | Patrick Minford (April 2019) Post-Brexit Realism and international law: renegotiating a bad Withdrawal Agreement (567K, 7 pages)
Keywords: JEL Classification: |
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E2019/12 | Li Dai and Peng Zhou (April 2019) The Health Issues of the Homeless and the Homeless Issues of the Ill-Health (617K, 20 pages)
Keywords: JEL Classification: Socio-Economic Policy; Health Needs; Homeless; Structural Equation Model |
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E2019/11 | James Foreman-Peck and Peng Zhou (April 2019) Response to Edwards and Ogilvie (224K, 4 pages)
Keywords: JEL Classification: |
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E2019/10 | Patrick Minford, Zhirong Ou and Zheyi Zhu (April 2019) Can a small New Keynesian model of the world economy with risk-pooling match the facts? (567K, 34 pages)
Keywords: Opene conomy, UIP, risk-pooling, test, Indirect Inference
JEL Classification: C12, E12, F41 |
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E2019/9 | Iain W. Long, Kent Matthews and Vaseekaran Sivarajasingam (March 2019) Behavioural Change and Alcohol-Fuelled Violence: A Field Experiment (862K, 38 pages)
Keywords: Intoxication, over-optimism, violence JEL Classification: C93, D91, I18 |
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E2019/8 | James Foreman-Peck and Peng Zhou (March 2019) The Demographic Transition in a Unified Growth Model of the English Economy (1381K, 44 pages)
Keywords: Economic Development, Demography, Unified Growth, Overlapping Generations, English Economy JEL Classification: O11, J11, N13 |
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E2019/7 | Ezgi Kaya (February 2019) Gender wage gap across the quantiles:What is the role of firm segregation? (1M, 33 pages)
Keywords: gender wage gap, segregation, within- and between-firms, glass ceiling, sticky floor JEL Classification: C21, J31, J71 |
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E2019/6 | Michael G. Arghyrou, María Dolores Gadea (February 2019) Private bank deposits and macro/fiscal risk in the euro-area (4.1M, 92 pages)
Keywords: Private bank deposits, macro/fiscal risk, eurozone, TVP panel, fragmentation JEL Classification: : F30; F36; F45; G11; G15 |
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E2019/5 | Luc Bauwens and Yongdeng Xu (February 2019, Revised August 2021)
DCC and DECO-HEAVY: a multivariate GARCH model based on realized variances and correlations (1.1M, 55 pages)
Keywords: correlation forecasting, dynamic conditional correlation, equicorrelation, high-frequency data, multivariate volatility.
JEL Classification: C32, C58, G17 |
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E2019/4 | David R. Collie (January 2019) Trade Wars under Oligopoly: Who Wins and is Free Trade Sustainable? (682K, 58 pages)
Keywords:
Retaliation; Tariffs; Cournot Oligopoly; Bertrand Oligopoly JEL Classification: F11; F12; F13 |
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E2019/3 | Konstantinos Georgalos, Indrajit Ray and Sonali Sen Gupta (January 2019) Nash vs. Coarse Correlation (409K, 40 pages)
Keywords: Correlation, Coordination, Lottery, Risk dominance JEL Classification: C72, C91, C92, D63, D83 |
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E2019/2 | Alexey Parakhonyak, Sergey V. Popov (January 2019) Same-Sex Marriage, The Great Equalizer (419K, 27 pages)
Keywords: marriage markets, matching, gender equality, same-sex marriage JEL Classification: C78, D1 |
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E2019/1 | Patrick Minford (January 2019) The effects of Brexit on the UK economy (747K, 16 pages) Forthcoming in The World economy Keywords: JEL Classification: |
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E2018/27 | Maoshan Tian and Huw Dixon (December 2018) The Cross-sectional Distribution of Completed Lifetimes: Some New Inferences from Survival Analysis (422K, 27 pages)
Keywords: Delta Method, Survival Analysis, Kaplan-Meier Estimator JEL Classification: C19, C46 |
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E2018/26 | Michael Hatcher and Panayiotis M. Pourpourides (September 2022, First draft December 2018)
Does the impact of Private Education on Growth differ at different levels of Credit Market Development? (746K, 55 pages)
Keywords: Education, Human Capital, Credit Constraints, Economic Growth. JEL Classification: I25, O16, O41 |
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E2018/25 | Samuli Leppälä (December 2018) PARTIAL EXCLUSIVITY CAN RESOLVE THE EMPIRICAL PUZZLES ASSOCIATED WITH RENT-SEEKING ACTIVITIES (425K, 36 pages)
Keywords: rent seeking, interest groups, multiple-winner contests, rent dissipation, contest design, lobbying expenditures. JEL Classification: C72, D72 |
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E2018/24 | Ching-Wai (Jeremy) Chiu, Simon Hayes, George Kapetanios and Konstantinos Theodoridis (November 2018) A New Approach for Detecting Shifts in Forecast Accuracy (1.5M, 31 pages)
Keywords: Forecast Breaks, Statistical Decision Making, Central Banking JEL Classification: C53, E47, E58 |
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E2018/23 | Antonio Cabrales, Michalis Drouvelis, Zeynep Gurguc and Indrajit Ray (November 2018) Do we need to listen to all stakeholders?: communicating in a coordination game with private information (933K, 51pages)
Keywords: Battle of the Sexes, Private Information, Cheap talk, Coordination. JEL Classification: C72, C92, D83. |
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E2018/22 | Woon K. Wong (November 2018, updated Septermber 2022)
Can we afford defined benefit pensions in low interest rates environment? (1M, 29 pages)
Keywords: pension, defined benefit, low interest rate, cost of guarantee, prudence
JEL Classification: G1, G22, G23, G3 |
---|
E2018/21 | Haroon Mumtaz and Konstantinos Theodoridis (October 2018) Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility (5.9M, 35 pages)
Keywords: DSGE, Non-Linear SVAR, New Keynesian, Search and Matching Frictions, Epstein-Zin preferences, Stochastic Volatility JEL Classification: E30, E40, E52, C11, C13, C15, C50 |
---|
E2018/20 | Haroon Mumtaz and Konstantinos Theodoridis (August 2018) Fiscal Policy Shocks and Stock Prices in the United States (2.7M, 68 pages)
Keywords: Fiscal policy shocks, Stock prices, VAR, DSGE. JEL Classification: C5, E1, E5, E6 |
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E2018/19 | Michael Chin, Ferre De Graeve, Thomai Filippeli and Konstantinos Theodoridis (July 2018) Understanding International Long-Term Interest Rate Comovement (2.6M, 88 pages)
Keywords: DSGE Model, Small Open Economy, Yield Curve, Long-Term Interest Rates, Term Premia, Comovement JEL Classification: E43, E44, F30, F44, F65, G15 |
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E2018/18 | Peng Zhou and Huw Dixon (June 2018) The Determinants of Price Rigidity in the UK: Analysis of the CPI and PPI Microdata and Application to Macrodata Modelling (1.3M, 27 pages)
Keywords: Price Rigidity, Price Setting Behaviour, Microdata, Survival Analysis, Heterogeneous Agent Model, Persistence Puzzle JEL Classification: C41, D21, E31, E32 |
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E2018/17 | David Meenagh, Patrick Minford and Xiaoliang Yang (June 2018) A heterogeneous-agent model of growth and inequality for the UK (992K, 26 pages)
Keywords: Heterogeneous-agent Model, Entrepreneurship, Aggregate Growth, Wealth Inequality, Redistribution, Indirect Inference JEL Classification: E10; C63; O30; O40 |
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E2018/16 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (June 2018) Oil and Commodities Drive the World Business Cycle: A Long-Commodity-Cycle Model of the World Economy Over a Century and a Half (438K, 22 pages)
Keywords: Long waves; commodities; DSGE model; Indirect Inference JEL Classification: E10; E32; E52 |
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E2018/15 | Giovanni Angelini, Mauro Costantini and Joshy Easaw (June 2018) Uncertainty and spillover effects across the Euro area (2.1M, 20 pages)
Keywords:
Uncertainty, EuroArea, Spillover effects, Real Economic Activity JEL Classification: C32, C50, E32 |
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E2018/14 | David Meenagh, Patrick Minford, Michael Wickens and Yongdeng Xu (June 2018) Testing DSGE Models by indirect inference: a survey of recent findings (464K, 22 pages) Forthcoming in Open Economies Review JEL Classification: C12, C32, C52, E1 |
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E2018/13 | Nasir Aminu, David Meenagh, Patrick Minford (June 2018) The Role of Energy Prices in the Great Recession — A Two-Sector Model with Unfiltered Data (2M, 51 pages)
Keywords: JEL Classification: |
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E2018/12 | Woon K. Wong (May 2018, updated in December 2018) The Discount Rate Debate and Its Implications for Defined Benefit Pensions (1M, 24 pages)
Keywords: pension, defined benefit, discount rate, risk-free rate, equity risk premium JEL Classification: G1, G22, G23, G3 |
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E2018/11 | Xue Dong, Patrick Minford and David Meenagh (May 2018) How
Important are International Financial Market Imperfections for
Foreign Exchange Rate Dynamics: A Study of the Sterling Exchange Rate (5.2M, 28 pages)
Keywords:
Small open economy DSGE model, International financial imperfections,
Sterling exchange rates, Indirect Inference, Crisis, Policy rules JEL Classification: E63, F31, F34, F41, F47 |
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E2018/10 | Lucy Minford and David Meenagh (April 2018) Supply-side policy and economic growth:
A case study of the UK (536K, 35 pages)
Keywords: Taxation, Regulation, Labour Market Regulation, Economic Growth, DSGE JEL Classification: E02, O4, O43, O5 |
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E2018/9 | Georgios Chortareas, Vassilis Logothetis and Andreas Papandreou (April 2018) Public Opinion, Elections, and Environmental Fiscal Policy (1.2M, 47 pages)
Keywords: Environmental Protection, Taxes and Expenditures, Public Opinion, European Union, Panel Data JEL Classification: D72, Q58, C23
|
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E2018/8 | David R. Collie (March 2018) Maximum-Revenue Tariffs versus Free Trade (243K, 9 pages)
Keywords:
Maximum-Revenue Tariff; Free Trade; Perfect Competition;
Cournot Oligopoly; Bertrand Oligopoly JEL Classification: F11; F12; F13 |
---|
E2018/7 | David Meenagh, Patrick Minford, Michael Wickens and Yongdeng Xu (March 2018) The small sample properties of Indirect Inference in testing and estimating DSGE models (278K, 15 pages)
Keywords:
Indirect Inference, DGSE model, Auxiliary Models, Simulated Moments
Method, Impulse Response Functions, VAR, Moments, power, bias JEL Classification: C12; C32; C52; E1 |
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E2018/6 | Yongdeng Xu, Nick Taylor and Wenna Lu(January 2018)
Illiquidity and Volatility Spillover effects in Equity Markets during and after the Global Financial Crisis: an MEM approach (3M, 36 pages)
Keywords:
Illiquidity Spillover, Volatility Spillover, Multiplicative Error Model
JEL Classification: C32, C52, G14 |
E2018/5 | Thomai Filippeli, Richard Harrison and Konstantinos Theodoridis (January 2018)
DSGE-based Priors for BVARs & Quasi-Bayesian DSGE Estimation (1M, 38 pages)
Keywords:
BVAR, SVAR, DSGE, DSGE-VAR, Gibbs Sampling, Marginal Likelihood
Evaluation, Predictive Likelihood Evalution, Quasi-Bayesian DSGE
Estimation,
JEL Classification: C11, C13, C32, C52 |
E2018/4 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (January 2018)
Financial stability: To Regulate or Not? A public choice inquiry (350K, 17 pages)
Keywords: DSGE, Regulations, Financial Stability, Monetary Policy
JEL Classification: E10; E58; G28 |
E2018/3 | Lucy Minford and David Meenagh (January 2018) Testing a model of UK growth - a causal role for R&D subsidies (405K, 36 pages)
Keywords: R&D, subsidies, economic growth, government policy. JEL Classification: E00, O00, O38, O50 |
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E2018/2 | Ali Sina Onder, Sergey V. Popov and Sascha Schweitzer (January 2018, updated in December 2018) Leadership in Scholarship: Editors’ Influence on the Profession’s Narrative (450K, 25 pages)
Keywords: Text Search; Topical Analysis; Academia; Knowledge Dissemination; In- fluence; Journals; Editors. JEL Classification: A11, A14, O3 |
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E2018/1 | Haroon Mumtaz and Konstantinos Theodoridis (January 2018) The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis (1.6M, 70 pages)
Keywords: SVAR, DSGE model, inflation target, international transmission. JEL Classification: C5, E1, E5, E6 |
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E2017/18 | Haroon Mumtaz and Konstantinos Theodoridis (December 2017) US financial shocks and the distribution of income and consumption in the UK (2.2M, 59 pages)
Keywords: FAVAR, DSGE model, Financial Shock JEL Classification: D31, E32, E44 |
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E2017/17 | David R. Collie (December 2017) A Simple Model of Brexit under Oligopoly (371K, 39 pages)
Keywords:
Brexit; Oligopoly; International Trade; Tariffs; EU JEL Classification: F12; F13; L13 |
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E2017/16 | Helmuts Azacis (December 2017) Repeated Implementation with Overlapping Generations of Agents (275K, 25 pages)
Keywords:
Repeated Implementation, Subgame Perfect Implementa- tion, Overlapping
Generations, Necessary and Sufficient Conditions, Efficiency in the
Range JEL Classification: C72; C73; D71; D82 |
---|
E2017/15 | Georgios Magkonis and Andreas Tsopanakis (November 2017) The Financial Connectedness between Eurozone Core and Periphery: A Disaggregated View (1.9M, 48 pages)
Keywords:
Eurozone, stress transmission, connectedness analysis, spillovers, networks JEL Classification: C43, G15, F30 |
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E2017/14 | Menelaos Karanasos and Yongdeng Xu (November 2017) Matrix
Inequality Constraints for Vector (Asymmetric Power) GARCH/HEAVY Models
and MEM with spillovers: some New (Mixture) Formulations (452K, 29 pages)
Keywords:
Asymmetries; Matrix Inequality Constraints; Mixture Formulation;
Multivariate Modelling; Optimal Forecasts; Power Transformations;
Second Moment Structure JEL Classification: C32, C53, C58, G15 |
---|
E2017/13 | Patrick Minford, Yi Wang and Peng Zhou (October 2017) Resolving the Public Sector Wage Premium Puzzle by Indirect Inference (1.4M, 25 pages)
Keywords: Public Sector Wage Premium, Selection Bias, Indirect Inference, Monte Carlo JEL Classification: C21, C35, J31, J45 |
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E2017/12 | António Afonso, Michael G. Arghyrou, María Dolores Gadea and Alexandros Kontonikas (September 2017) “Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects (1.2M, 39 pages) Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy JEL Classification: E43, E44, F30, G01, G12 |
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E2017/11 | Sergey V. Popov (August 2017) On Basu’s Proposal: Fines Affect Bribes (306K, 9 pages)
Keywords: corruption, bribery, extortion, decentralizatiofines JEL Classification: H8, K4.
|
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E2017/10 | Patrick Minford and Yongdeng Xu (August 2017) Classical or Gravity? Which trade model best matches the UK facts? (340K, 34 pages)
Keywords: Bootstrap, indirect inference, gravity model, classical trade model, UK trade JEL Classification: |
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E2017/9 | Cemil Selcuk and Bilal Gokpinar
(August 2017) Fixed vs. Flexible Pricing in a Competitive
Market. (850K, 63 pages)
Keywords : pricing policy, negotiation, competition, competitive search JEL Classification:
|
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E2017/8 | Anthony Savagar and Huw Dixon (July 2017) Firm Entry, Excess Capacity and Aggregate Productivity. (867K, 51 pages)
Keywords : dynamic entry, endogenous productivity, endogenous sunk costs, business stealing, business cycle, continuous time JEL Classification: E32, D21, D43, L13, C62
|
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E2017/7 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (July 2017) How Should News Shocks Be Specified Under Rational Expectations? (178K, 6 pages)
Keywords : News shocks; DSGE; Rational Expectations JEL Classification: E2; E3
|
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E2017/6 | Kul B Luintel and Mosahid Khan (July 2017) Ideas Production and International Knowledge Spillovers: Digging Deeper into
Emerging Countries (1197K, 50 pages)
Keywords: Ideas Production; Diffusion; Fixed Effects; Panel Integration and Cointegration.
JEL Classification: O3; O4; O47 See also: Online Appendix A Online Appendix B
|
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E2017/5 | Ezgi Kaya (May 2017) Quantile regression and the gender wage gap: Is there a glass ceiling in the Turkish labor market? (1565K, 34 pages)
Keywords: Gender wage gap, quantile regression, decomposition JEL Classification: C21, J31, J71
|
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E2017/4 | Chunping Liu and Zhirong Ou (May 2017) What determines China's housing price dynamics? New evidence
from a DSGE-VAR (1003K, 48 pages)
Keywords: Housing price; Bubbles; Market spillovers; DSGE-VAR; China
JEL Classification: C11, E32, E44, R31 |
---|
E2017/3 | Piotr Denderski, Wojciech Paczos (May 2017) Foreign Banks and The Bank Lending Channel (449K, 23 pages) Keywords: banks, bank ownership, bank lending channel, monetary policy
JEL Classification: E44, E50, G21 |
---|
E2017/2 | Helmuts Azacis (March 2017) Information Disclosure by a Seller in Sequential First-Price Auctions (783K, 60 pages) Keywords: Efficiency; Information disclosure; Seller's revenue; Sequential first-price auctions JEL Classification: D44; D47; D82
|
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E2017/1 | Peng Zhou (March 2017) Separating Yolk from White: A Filter based on Economic Properties of Trend and Cycle (796K, 8 pages)
Keywords: Filter, Trend, Cycle JEL Classification: C32
|
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E2016/14 | David Meenagh, Patrick Minford, Michael Wickens and Yongdeng Xu (December 2016) What is the truth about DSGE models? Testing by indirect inference (277K, 21 pages)
Keywords: Pseudo-true inference, DSGE models, Indirect Inference; Wald tests, Likelihood Ratio tests; robustness JEL Classification: C12; C32; C52; E1
|
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E2016/13 | Ricardo Gonçalves and Indrajit Ray (December 2016) Equilibria in a Japanese-English Auction with Discrete Bid Levels for the Wallet Game (373K, 22 pages)
Keywords: Japanese-English auctions, wallet game, discrete bids, partitions, pooling equilibrium, separating equilibrium JEL Classification: C72; D44
|
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E2016/12 | Patrick Minford, Michael Wickens and Yongdeng Xu (November 2016) Testing part of a DSGE model by Indirect Inference (183K, 11 pages) Keywords: sub sectors of models, limited information, indirect inference, testing DSGE models equations, Monte Carlo, power, test size JEL Classification: C12; C32; C52; E1
|
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E2016/11 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (October 2016) A note on news about the future: the impact on DSGE models and their VAR representation (330K, 25 pages)
Keywords: News shocks; DSGE; VAR; Indirect Inference JEL Classification: E2; E3
|
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E2016/10 | Garry DA Phillips and Yongdeng Xu (September 2016) Almost Unbiased Variance Estimation in Simultaneous Equation Models (246K, 36 pages)
Keywords: Simultaneous equation models, 2SLS and Fuller's
estimators, Bias corrected variance estimation, Inference and bias
corrected variance
JEL Classification: C12; C13; C26; C30
|
E2016/9 | Woon K. Wong, Iris Biefang-Frisancho Mariscal, Wanru Yao and Peter Howells (August 2016) Liquidity and Credit Risks in the UK’s Financial Crisis: How ‘Quantitative Easing’ changed the relationship (1251K, 30 pages)
Keywords: interbank spreads, liquidity premia, credit risk, quantitative easing, financial crisis. JEL Classification:
|
E2016/8 |
Woon K. Wong (August 2016) A GMM Skewness and Kurtosis Ratio Test for Higher Moment Dependence (827K, 29 pages)
Keywords: Skewness, kurtosis, overlapping observations, moments, cumulants JEL Classification: C10, G11 |
---|
E2016/7 | James Foreman-Peck and Peng Zhou (July 2016) Migration and Tax Yields in a Devolved Economy (1381K, 38 pages) AbstractHouseholds
may migrate between jurisdictions to secure preferred mixes of
collectively sup-plied services and taxation. But devolution of taxes
to sub-national jurisdictions could reduce expected tax revenue if some
move to lower tax regimes, constraining devolved government policy.
This paper develops an indirect approach to establish lower bound tax
revenue impacts of possible tax changes by devolved governments. We
estimate and aggregate migration responses to existing tax
differentials between smaller, component administrative areas of the
devolved jurisdictions. Because such existing taxes may have different
bases from proposed devolved taxes, appropriate corrections are made in
a model of the devolved economy. This model also establishes how the
tax base and therefore the tax yield of the devolved economy, as well
as the output per capita, would be changed by implementing different
tax rates, given the migration responses estimated. The model is used
to assess the fiscal possibilities for Wales created by the UK
Government of Wales Act 2014. Keywords: Migration; Fiscal Decentralisation; Tax Revenue JEL Classification: R23; J61; H11; H22; H71; H72; H77 |
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E2016/6 | Paulo Brito, Luís F. Costa and Huw David Dixon (June 2016) From Sunspots to Black Holes: Singular dynamics in macroeconomic models (720K, 35 pages) AbstractWe
present conditions for the emergence of singularities in DGE models. We
distinguish between slow-fast and impasse singularity types, review
geometrical methods to deal with both types of singularity and apply
them to DGE dynamics. We find that impasse singularities can generate
new types of DGE dynamics, in particular temporary
determinacy/indeterminacy. We illustrate the different nature of the
two types of singularities and apply our results to two simple models:
the Benhabib and Farmer (1994) model and one with a cyclical fiscal
policy rule. Keywords: slow-fast singularities; impasse singularities; macroeconomic dynamics; temporary indeterminacy JEL Classification: C62; D43; E32 |
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E2016/5 | Patrick Minford, Michael Wickens and Yongdeng Xu (May 2016) Comparing different data descriptors in Indirect Inference tests on DSGE models (200K, 11 pages) AbstractIndirect
inference testing can be carried out with a variety of auxiliary
models. Asymptotically these different models make no difference.
However, in small samples power can differ. We explore small sample
power with three different auxiliary models: a VAR, average Impulse
Response Functions and Moments. The latter corresponds to the Simulated
Moments Method. We find that in a small macro model there is no
difference in power. But in a large complex macro model the power with
Moments rises more slowly with increasing misspecification than with
the other two which remain similar. Keywords: : Indirect Inference; DGSE model; Auxiliary Models; Simulated Moments Method JEL Classification: C12; C32; C52; E1 |
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E2016/4 | Kul B Luintel and Mosahid Khan (April 2016) R&D, Scale Effects and Spillovers: New Insights from Emerging Countries (662K, 40 pages) AbstractThere
has been a concomitant rise in R&D and the rate of economic growth
in emerging countries. Analyzing a panel of 31 emerging countries, we
find convincing evidence of scale effects which make government
policies potent for long-run growth. This contrasts sharply with the
well known findings of Jones (1995a). Innovations show increasing
returns to knowledge stock, implying that the diminishing returns
assumed by some semi-endogenous growth models might not be generalized.
International R&D spillovers raise the innovation bar. The observed
growth rates of emerging economies appear in transition therefore their
growth rates may recede with the passage of time. Keywords: Scale Effects; Ideas Production; Diffusion; Panel Integration and Cointegration JEL Classification: O3; O4; O47 |
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E2016/3 | David R. Collie (April 2016) Gains from Variety? Product Differentiation and the Possibility of Losses from Trade under Cournot Oligopoly with Free Entry (314K, 14 pages) AbstractIn
a free-entry Cournot oligopoly model with a quadratic utility function
that yields differentiated products, it is shown that there are losses
from trade when the trade cost is close to the prohibitive level.
Although the total number of varieties increases, there is a reduction
in consumer surplus. This occurs because trade leads to an increase in
imported varieties where consumer surplus is low due to the high trade
cost and a decrease in domestically-produced varieties where consumer
surplus is high. This result is in contrast with results from the
free-entry Cournot oligopoly models with homogeneous products of
Brander and Krugman (1983) and Venables (1985); the monopolistic
competition models such as Krugman (1980) and Venables (1987), and
heterogeneous firm models such as Melitz (2003) and Melitz and
Ottaviano (2008). Keywords: Gains from Trade; Trade Liberalisation; Free Entry; Cournot Oligopoly; Product Variety JEL Classification: F12 |
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E2016/2 | Kul B Luintel, Mosahid Khan, Roberto Leon-Gonzalez and GuangJie Li (March 2016) Financial Development, Structure and Growth: New Data, Method and Results (721K, 42 pages) AbstractThe
existing weight of evidence suggests that financial structure (the
classification of a financial system as bank-based versus market-based)
is irrelevant for economic growth. This contradicts the common belief
that the institutional structure of a financial system matters. We
re-examine this issue using a novel dataset covering 69 countries over
1989-2011 in a Bayesian framework. Our results are conformable to the
belief - a market-based system is relevant - with sizable economic
effects for the high-income but not for the middle-and-low-income
countries. Our findings provide a counterexample to the weight of
evidence. We also identify a regime shift in 2008. Keywords: Financial Structure; Economic Growth; Cointegration; Bayesian Model Averaging; Structural Breaks JEL Classification: G0; O4; O16 See also: Online Appendix |
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E2016/1 | Patrick Minford (March 2016) Understanding UK trade agreements with the EU and other countries (533K, 17 pages) AbstractRecent
work has exposed the extent of EU protectionism within the single
market Customs Union. If the UK leaves the EU customs union for
unilateral free trade, as a small country within the world market, it
will therefore make gains according to the standard trade model. Should
it do so, trade agreements with other small countries would simply
divert UK trade to these markets without affecting UK trade or output
overall – hence while harmless they are also pointless. Trade
agreements with large countries or country-blocs should be treated with
care, since while they might give scope for UK industries to enjoy
higher prices on all their output by diverting trade to these markets,
they could come at a cost in higher prices for imports as in the case
of the EU customs union. If having left the EU the UK finds a large
country willing to offer a beneficial free trade agreement, it is
likely to be easier to conclude with the UK outside the EU than with it
as part of the EU, because of the complex and varied industrial
interests of the EU as whole compared with the more limited interests
of the UK. Already in services which are in general not governed by EU
trade rules UK trade takes place under WTO rules and is also closely
integrated with other countries’ markets such as the US and most
Commonwealth countries. |
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E2015/19 | David Meenagh, Patrick Minford and Olayinka Oyekola (November 2015) Energy Business Cycles (671K, 38 pages) AbstractWe
find that, when estimated, a two sector computable dynamic stochastic
general equilibrium open economy model of the U.S. that formally admits
energy into the production process can generate plausible parameter
values that can be applied to deal with a broad range of economic
issues. As a benchmark, we require that the model fits the data for
output, real exchange rate, energy use, and consumption: output because
it serves as a measure of a country’s total income,real exchange rate
because it serves as a determinant of a country’s relative
competitiveness,energy use because it serves as an indicator of special
inputs into a country’s production process,and consumption because it
serves as a yardstick for evaluating a country’s standard of living.
Finally, we argue that this model, with appropriate extensions, some of
which we also propose, can help future modelers to tackle other
research questions. Keywords: Two sector; US DSGE model; Oil price volatility; Open economy; Indirect inference JEL Classification: E32; D58; F41; C52; Q43 See also: Supporting Annex |
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E2015/18 | David Meenagh, Patrick Minford and Olayinka Oyekola (November 2015) Oil Prices and the Dynamics of Output and Real Exchange Rate (881K, 32 pages) AbstractWe
examine the role of oil price shocks in effecting changes both at the
aggregate and sectoral levels using an estimated dynamic stochastic
equilibrium open economy model. Our main finding is that energy price
shocks are not able directly to generate the magnitude of the economic
downturn observed in the data. These shocks, however, do possess a
strong indirect transmission link that endogenously spreads their
effect through the system such that they account for a considerable
portion of the U.S. business cycle movements. This leads us to conclude
that previous results that attribute a minimal importance to oil price
shocks must be focusing more on the energy cost share of gross domestic
product and less on how they affect the intertemporal decisions of
economic agents. We also find that external shocks have been
responsible for explaining volatility in U.S. economic activities for a
long time. This leads us to conclude that modelling the U.S. as a
closed economy discounts a sizeable set of very relevant factors. Keywords: Two sector; non-stationary DSGE model; Oil price; Relative prices; Domestic shocks; Imported shocks JEL Classification: E32; D58; F41; C52; Q43 See also: Supporting Annex |
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E2015/17 | Patrick Minford (November 2015) Evaluating European trading arrangements (541K, 21 pages) AbstractThe
EU protects agriculture and manufacturing through its commercial
policies, namely its tariffs, its non-tariff barriers and the Common
Agricultural Policy. By leaving the EU the UK would be able to abandon
the EU’s protectionist system in favour of free trade combined with
transitional compensation for those hit by the changes. This would
raise economic welfare by around 4% (i.e. UK households would be able
to consume 4% more goods and services) and enhance the shift of the UK
economy away from manufacturing into service industries where UK growth
has been concentrated largely in the decades since 1979. As the UK is a
small country with little if any monopoly power in world markets,
bilateral trade agreements have trivial effects on it. |
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E2015/15 | David R. Collie (October 2015) Taxation under Oligopoly in a General Equilibrium Setting (505K, 45 pages) AbstractTaxation
under oligopoly is analysed in a general equilibrium setting where the
firms are large relative to the size of the economy and maximise the
utility of their shareholders. It turns out that the model is an
aggregative game, which simplifies the comparative statics for the
effects of taxation. This novel analysis of taxation leads to a number
of counterintuitive results that challenge conventional wisdom in
microeconomics. A lump-sum tax may increase the price of the
oligopolistic good and decrease welfare whereas a profits tax may
decrease the price of the oligopolistic good and increase welfare. An
ad valorem tax may decrease the price of the oligopolistic good and
increase welfare. Furthermore, in line with conventional wisdom, total
tax revenue is always higher with an ad valorem tax than with a
specific tax that leads to the same price for the oligopolistic good. Keywords: Oligopoly; General Equilibrium; Aggregative Games; Ad Valorem Taxes; Specific Taxes; Profits Taxes; Lump-Sum Taxes JEL Classification: C72; D21; D43; D51; H22; H25; L13; L21 |
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E2015/14 | Joshy Easaw (October 2015) Household Forming Inflation Expectations: Why Do They ‘Overreact’? (377K, 17 pages) AbstractThe
purpose of the present paper is to provide a simple model which
explains how households (or non-experts) form their inflation
forecasts. The paper contributes to the existing literature and the
understanding of how inflation expectations are formed in two ways.
Firstly, we present an integrated model of how non-experts form their
inflation expectations. The paper initially outlines how professionals
form inflation forecast. Subsequently, the model presents the
non-expert’s expectations formation incorporating the dynamics of the
professional’s forecast. Secondly, we explain the prevalent phenomena
where non-experts tend to overreact, or overshoot, initially as they
revise their inflation forecast. Keywords: Inflation Expectations Formation; Information Rigidities; Over-reaction JEL Classification: E3; E4; E5 |
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E2015/13 | Joshy Easaw, Saeed Heravi and Huw David Dixon (October 2015) Professionals’ Forecast of the Inflation Gap and its Persistence (737K, 33 pages) AbstractThe
purpose of the present paper is to investigate perceived inflation gap
persistence using actual data of professional forecasts. We derive the
unobserved perceived inflation gap persistence and using a state
dependent model we estimate the non-linear persistence coefficient of
inflation gap. Our main result is that for GDP deflator inflation, the
estimates of persistence largely confirm the results obtained
indirectly using a linear model. However, when we look at CPI
inflation, we find that there is strong evidence for state-dependence
and time variation. Keywords: Perceived Inflation Gaps; Professional’s Survey-based Forecasts; State-Dependent Models JEL Classification: E31; E52; E58 |
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E2015/12 | Effrosyni Adamopoulou and Ezgi Kaya (September 2015) Young Adults Living with their Parents and the Influence of Peers (528K, 38 pages) AbstractThis
paper focuses on young adults living with their parents in the U.S. and
studies the role of peers. Using data from the National Longitudinal
Study of Adolescent Health (Add Health) we analyze the influence of
high school friends on the nest-leaving decision of young adults. We
achieve identification by exploiting the differences in the timing of
leaving the parental home among peers, the individual-specific nature
of the peer groups that are based on friendship nominations, and by
including school (net-work) and grade (cohort) fixed effects. Our
results indicate that there are statistically significant peer effects
on the decision of young adults to leave parental home. This is true
even after we control for labor and housing market conditions and for a
comprehensive list of individual and family-of-origin characteristics
that are usually unobserved by the econometrician. We discuss various
mechanisms and we confirm the robustness of our results through a
placebo exercise. Our findings reconcile with the increasing trend of
young adults living with their parents that has been observed in the US
during the last 50 years. Keywords: peer effects; friends; living arrangements; leaving parental home JEL Classification: D10; J12; J60; Z13 |
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E2015/11 | Marina Kryukova and Laurence Copeland (August 2015) The CDS-bond basis puzzle in the financial sector (2714K, 59 pages) Abstract |
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E2015/10 | Hans Degryse, Kent Matthews and Tianshu Zhao (August 2015) SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK (935K, 56 pages) AbstractWe
study the sensitivity of banks’ credit supply to small and medium size
enterprises (SMEs) in the UK to banks’ financial condition before and
during the financial crisis. Employing unique data on the geographical
location of all bank branches in the UK, we connect firms’ access to
bank credit to the financial condition (i.e., bank health and the use
of core deposits) of all bank branches in the vicinity of the firm over
the period 2004-2011. Before the crisis, banks’ local financial
conditions did not influence credit availability irrespective of the
functional distance (i.e., the distance between bank branch and bank
headquarters). However, during the crisis, we find that SMEs with in
their vicinity banks that have stronger financial condition face
greater credit availability when the functional distance is low. Our
results point to a “flight to headquarters” effect during the financial
crisis. Keywords: financial crisis; credit supply; flight to headquarters; flight to quality; bank organization JEL Classification: G21; G290; L140 |
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E2015/9 | Vo Phuong Mai Le, David Meenagh, Patrick Minford, Michael Wickens and Yongdeng Xu (July 2015) Testing macro models by indirect inference: a survey for users (2545K, 29 pages) AbstractWith
Monte Carlo experiments on models in widespread use we examine the
performance of indirect inference (II) tests of DSGE models in small
samples. We compare these tests with ones based on direct inference
(using the Likelihood Ratio, LR). We find that both tests have power so
that a substantially false model will tend to be rejected by both,but
that the power of the II test is substantially greater, both because
the LR is applied after reestimation of the model error processes and
because the II test uses the false model’s own restricted distribution
for the auxiliary model’s coefficients. This greater power allows users
to focus this test more narrowly on features of interest, trading off
power against tractability. Keywords: Bootstrap; DSGE; New Keynesian; New Classical; indirect inference; Wald statistic; likelihood ratio JEL Classification: C12; C32; C52; E1 |
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E2015/8 | David Meenagh, Patrick Minford, Michael Wickens and Yongdeng Xu (July 2015) Comparing Indirect Inference and Likelihood testing: asymptotic and small sample results (367K, 18 pages) AbstractIndirect
Inference has been found to have much greater power than the Likelihood
Ratio in small samples for testing DSGE models. We look at asymptotic
and large sample properties of these tests to understand why this might
be the case. We find that the power of the LR test is undermined when
reestimation of the error parameters is permitted,this offsets the
effect of the falseness of structural parameters on the overall
forecast error. Even when the two tests are done on a like-for-like
basis Indirect Inference has more power because it uses the
distribution restricted by the DSGE model being tested. Keywords: Indirect Inference;Likelihood Ratio;DSGE model;structural parameters;error processes JEL Classification: C12; C32; C52; E1 |
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E2015/7 | Chirantan Ganguly and Indrajit Ray (June 2015) Information-Revelation and Coordination Using Cheap Talk in a Game with Two-Sided Private Information (359K, 19 pages) AbstractWe
consider a Bayesian game, namely the Battle of the Sexes with private
information, in which each player has two types, High and Low. We allow
cheap talk regarding players’ types before the game and prove that the
unique fully revealing symmetric cheap talk equilibrium exists for a
low range of prior probability of the High-type. This equilibrium has a
desirable type-coordination property: it fully coordinates on the
ex-post efficient pure Nash equilibrium when the players’ types are
different. Type-coordination is also obtained in a partially revealing
equilibrium in which only the High-type is not truthful, for a medium
range of prior probability of the High-type. Keywords: Battle of the Sexes; Private Information; Cheap Talk; Coordination; Full Revelation JEL Classification: C72 |
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E2015/6 | Nasir Aminu (June 2015) An estimation of DSGE model of Energy in the United Kingdom using indirect inference testing AbstractThis paper has been removed for revision. |
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E2015/5 | Hans Degryse, Kent Matthews and Tianshu Zhao (June 2015) SMEs and access to bank credit: Evidence on the regional propagation of the financial crisis in the UK (927K, 56 pages) AbstractWe
study the sensitivity of banks’ credit supply to small and medium size
enterprises (SMEs) in the UK to banks’ financial condition before and
during the financial crisis. Employing unique data on the geographical
location of all bank branches in the UK, we connect firms’ access to
bank credit to the financial condition (i.e., bank health and the use
of core deposits) of all bank branches in the vicinity of the firm over
the period 2004-2011. Before the crisis, banks’ local financial
conditions did not influence credit availability irrespective of the
functional distance (i.e., the distance between bank branch and bank
headquarters). However, during the crisis, we find that SMEs with in
their vicinity banks that have stronger financial condition face
greater credit availability when the functional distance is low. Our
results point to a “flight to headquarters” effect during the financial
crisis. Keywords: financial crisis; credit supply; flight to headquarters; flight to quality; bank organization JEL Classification: G21; G290; L140; |
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E2015/4 | Iain W. Long and Vito Polito (June 2015) Cash-in-Hand, Benefit Fraud and Unemployment Insurance (444K, 18 pages) AbstractRecent
evidence questions the nature of the re-employment spike as
unemployment insurance (UI) payments expire. Unemployed agents do not
appear to devote more time to search and are observed leaving the UI
scheme early without necessarily entering employment. We show that
benefit fraud is consistent with both observations. Over time, UI
recipients become increasingly willing to accept short-term
cash-in-hand work. This takes them away from job search. Immediately
before UI expiry, the risk of punishment for fraud exceeds the value of
remaining payments. Recipients may voluntarily leave the scheme to
accept cash-in-hand opportunities. Keywords: Cash-in-hand; Benefit fraud; Unemployment insurance; Re-employment spike JEL Classification: J46; J64; J65; K42 |
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E2015/3 | Samuli Leppälä (February 2015) Innovation, R&D spillovers, and the variety and concentration of the local production structure (425K, 28 pages) AbstractThis
paper presents a Cournot oligopoly model with R&D spillovers both
within and across industries. The aim is to provide an appropriate
theoretical foundation for three different hypotheses regarding the
impact of the local production structure on innovation and output, as
well as addressing mixed empirical results in this area. Both the
effective R&D and total industry output are shown to increase with
the variety of industries, which is aligned with Jacobs externalities.
With respect to the concentration, the outcome is more ambiguous, where
it depends on the variety, both spillover rates, and the R&D
efficiency. If the variety is limited, then partial support is given to
both Marshall-Arrow-Romer externalities in the case of effective
R&D, and to Porter externalities in the case of the total industry
output. The use of a relative rather than an absolute measure of
variety is also shown to be important. Keywords: concentration; innovation; knowledge spillover; regional economy; variety JEL Classification: O33; R11; L13 |
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E2015/2 | Vo Phuong Mai Le, David Meenagh, Patrick Minford and Michael Wickens (January 2015) Small sample performance of indirect inference on DSGE models (796K, 41 pages) AbstractUsing
Monte Carlo experiments, we examine the performance of indirect
inference tests of DSGE models in small samples, using various models
in widespread use. We compare these with tests based on direct
inference (using the Likelihood Ratio). We find that both tests have
power so that a substantially false model will tend to be rejected by
both,but that the power of the indirect inference test is by far the
greater, necessitating re-estimation to ensure that the model is tested
in its fullest sense. We also find that the small-sample bias with
indirect estimation is around half of that with maximum likelihood
estimation. Keywords: Bootstrap; DSGE; Indirect Inference; Likelihood Ratio; New Classical; New Keynesian; Wald statistic JEL Classification: C12; C32; C52; E1 |
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E2015/1 | Vo Phuong Mai Le, Kent Matthews, David Meenagh, Patrick Minford and Zhiguo Xiao (January 2015) China’s financial crisis – the role of banks and monetary policy (654K, 64 pages) AbstractThis
paper develops a model of the Chinese economy using a DSGE framework
that accommodates a banking sector and money. The model is used to shed
light on the period of the recent period of financial crisis. It
differs from other applications in the use of indirect inference to
estimate and test the fitted model. We find that the main shocks that
hit China in the crisis were international and that domestic banking
shocks were unimportant. Officially mandated bank lending and
government spending were used to supplement monetary policy to
aggressively offset shocks to demand. An analysis of the frequency of
crises shows that crises occur on average about every half-century,
with about a third accompanied by financial crises. We find that
monetary policy can be used more vigorously to stabilise the economy,
making direct banking controls and fiscal activism unnecessary. Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference; Money; Credit JEL Classification: E3; E44; E52; C1 |
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E2014/24 | Herve Moulin, Indrajit Ray and Sonali Sen Gupta (December 2014) Coarse Correlated Equilibria in an Abatement Game (398K, 18 pages) AbstractWe
consider the well-analyzed abatement game (Barrett 1994) and prove that
correlation among the players (nations) can strictly improve upon the
Nash equilibrium payoffs. As these games are potential games,
correlated equilibrium — CE — (Aumann 1974, 1987) cannot improve upon
Nash,however we prove that coarse correlated equilibria — CCE — (Moulin
and Vial 1978) may do so. We compute the largest feasible total utility
and hence the efficiency gain in any CCE in those games: it is achieved
by a lottery over only two pure strategy profiles. Keywords: Abatement game; Coarse correlated equilibrium; Efficiency gain JEL Classification: C72; Q52 |
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E2014/23 | Ezgi Kaya (November 2014) Gender Wage Gap Trends in Europe: The Role of Occupational Allocation and Skill Prices (482K, 59 pages) AbstractIn
this paper, we explore the recent gender wage gap trends in a sample of
European countries with a new approach that uses the direct measures of
skill requirements of jobs held by men and women. We find that, during
the 1990s and 2000s, the gender wage gap declined in the majority of
the European countries. Similar to the U.S. experience, a part of this
decline is explained by changes in returns to brain and brawn skills in
Austria and in the U.K. However, in contrast to the U.S. experience,
the changes in returns to brain and brawn skills had a widening effect
on the gender wage gap in Southern European countries and in Ireland?.
Furthermore, we find that a substantial part of the changes in the
gender wage gaps in European countries and in the U.S. cannot be
explained by the changes in brain and brawn skill prices. The findings
of this study suggest the importance of changes in labor market
institutions in explaining the gender wage gap trends. Keywords: Gender wage gap; brain skills; brawn skills; decomposition JEL Classification: J16; J24; J31; J71 |
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E2014/22 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (October 2014) Monetarism rides again? US monetary policy in a world of Quantitative Easing (578K, 47 pages) AbstractThis
paper gives money a role in providing cheap collateral in a model of
banking,besides the Taylor Rule, monetary policy can affect the
risk-premium on bank lending to firms by varying the supply of M0, so
at the zero bound monetary policy is effective,fiscal policy crowds out
investment via the risk-premium. A rule for making M0 respond to credit
conditions can enhance the economy’s stability. Both price-level and
nominal GDP targeting rules for interest rates combined with this
stabilise the economy further. With these rules for monetary control,
aggressive and distortionary regulation of banks’ balance sheets
becomes redundant. Keywords: DSGE model; Financial Frictions; Crises; Indirect Inference; money supply; QE; monetary policy; fiscal multiplier; zero bound JEL Classification: E3; E44; E52; C1 |
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E2014/21 | Joshy Easaw and Roberto Golinelli (October 2014) Inflation Expectations and the Two Forms of Inattentiveness (871K, 42 pages) AbstractThe
purpose of the present paper is to investigate the structure and
dynamics of professionals' forecast of inflation. Recent papers have
focused on their forecast errors and how they may be affected by
informational rigidities, or inattentiveness. In this paper we extend
the existing literature by considering a second form of
inattentiveness. While showing that both types of inattentiveness are
closely related, we focus on the inattentiveness that forecasters face
when undertaking multi-period forecast and, thereby, the expected
momentum of inflation. Using number survey-based data for the US and
UK, we establish a new structure for the professional's forecast error
with direct implications for the persistence of real effects Keywords: Expectations; Information Rigidity; Survey Forecasts JEL Classification: E3; E4; E5 |
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E2014/20 | Jingwen Fan, Patrick Minford and Zhirong Ou (October 2014) The role of Fiscal policy in Britain’s Great Inflation (558K, 34 pages) AbstractWe
investigate whether the Fiscal Theory of the Price Level (FTPL) can
explain UK inflation in the 1970s. We confront the identification
problem involved by setting up the FTPL as a structural model for the
episode and pitting it against an alternative Orthodox model,the models
have a reduced form that is common in form but, because each model is
over-identified, numerically distinct. We use indirect inference to
test which model could be generating the VECM approximation to the
reduced form that we estimate on the data for the episode. Neither
model is rejected, though the Orthodox model outperforms the FTPL. But
the best account of the period assumes that expectations were a
probability-weighted combination of the two regimes. Fiscal policy has
a substantial role in this weighted model. A similar model accounts for
the 1980s though the role of fiscal policy gets smaller. Keywords: UK Inflation; Fiscal Theory of the Price Level; Identification; Testing; Indirect inference JEL Classification: E31; E37; E62; E65 |
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E2014/19 | Iain W. Long (October 2014) Better Feared than Loved: Reputations and the Motives for Conflict (487K, 33 pages) AbstractThroughout
history, victory in conflict has created fearsome reputations. With it,
the victor ensures greater allegiance of the wider population,
increasing their rents at the expense of their enemy. Such reputational
concerns generate two motives for conflict. When only victory or defeat
is informative, the less scary party may attack to show that they are
tougher than expected. If the occurrence of conflict also conveys
information, the scarier party is more likely to attack. By failing to
do so, the population would perceive them as weak and switch loyalties
anyway. In this case, conflict arises to save face. Keywords: Conflict;Reputations JEL Classification: D74; C73; D83; F51; H56 |
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E2014/18 | Ezgi Kaya (October 2014) Heterogeneous Couples, Household Interactions and Labor Supply Elasticities of Married Women (585K, 61 pages) AbstractThis
paper estimates labor supply elasticities of married men and women
allowing for heterogeneity among couples (in educational attainments of
husbands and wives) and explicitly modeling how household members
interact and make labor supply decisions. We find that the labor supply
decisions of husbands and wives are interdependent unless both spouses
are highly educated (college or above). Couples with high education,
the labor supply decisions of husband and wife are jointly determined
only if they have pre-school age children. We also find that labor
supply elasticities differ greatly between households. The
participation own-wage elasticity is largest (0.77) for women with low
education married to men with low education, and smallest (0.03) for
women with high education married to men with low education. The
participation own-wage elasticities for women with low education
married to highly educated men and for women with high education
married to highly educated men are similar and fall between these two
extremes (about 0.30 for each). For all types of couples, participation
non-labor family income elasticity is small. We also find that
participation cross-wage elasticities for married women are relatively
small (less than -0.05) if they are married to men with low education
and larger (-0.37) if they are married to highly educated men. Allowing
for heterogeneity across couples yields an overall participation wage
elasticity of 0.56, a cross wage elasticity of -0.13 and an income
elasticity of -0.006 for married women. The analysis in this paper
provides a natural framework to study how changes in educational
attainments and household structure affect aggregate labor supply
elasticities. Keywords: Labor supply elasticity; household labor supply; household interactions; educational homogamy JEL Classification: J22; D10; C30 |
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E2014/17 | Wei Yin and Kent Matthews (September 2014) Why do firms switch banks? Evidence from China (543K, 25 pages) AbstractThis
paper uses a sample of matched data of firms-banks in China over the
period 1999-2012 to determine the drivers of firms switching behaviour
from one bank relationship to another. The findings conform to the
extant literature and therefore indicate that the switching behaviour
of Chinese firms is no different to firms elsewhere. The results show
that the principal driver of a switching action is the credit needs of
the firm and a mixture of firm and bank characteristics. The findings
support the extant literature that less opaque firms are able to switch
more readily than opaque firms. The results also suggest that banks
that develop there fee income services are more effective in locking-in
their borrowers. Keywords: Switching behaviour; Chinese firms; Chinese banks JEL Classification: G21; L22 |
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E2014/16 | Michael G Arghyrou (September 2014) Is Greece turning the corner? A theory-based assessment of recent Greek macro-policy (854K, 44 pages) AbstractWe
use a macro-theory framework of analysis to assess Greek economic
policy, with emphasis on the current period of the Greek debt crisis.
We argue that this is mainly the result of misguided past internal
policies deviating substantially from the policy lessons of modern
macroeconomics. The current policy, however, is consistent with
mainstream macro and provides a credible platform for achieving
sustainable growth. We argue that Greece has entered the process of
economic recovery, but this is still fragile and exposed to risks.
Overall, we support the continued participation of Greece to the euro:
Although a country’s currency is not per se a determinant of long-term
economic prosperity, supply-side reforms and institutional performance
are,and both these objectives are better served for Greece within the
EMU rather than outside. Keywords: Macroeconomics; Greece; euro JEL Classification: B22; E00; F4; |
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E2014/15 | Helmuts Azacis and David R. Collie (September 2014) Taxation and the Sustainability of Collusion: Ad Valorem versus Specific Taxes (366K, 27 pages) Abstract
Assuming constant marginal cost, it is shown that a switch from
specific to ad valorem taxation has no effect on the critical discount
factor required to sustain collusion. This result is shown to hold for
Cournot oligopoly as well as for Bertrand oligopoly when collusion is
sustained with Nash-reversion strategies or optimal-punishment
strategies. In a Cournot duopoly model with linear demand and quadratic
costs, it is shown that the critical discount factor is lower with an
ad valorem tax than with a specific tax. However, in contrast to
Colombo and Labrecciosa (2013), it is shown that revenue is always
higher with an ad valorem tax than with a specific tax. Keywords: Taxes; Imperfect Competition; Oligopoly; Cartel; Supergame JEL Classification: H21; H22; L13; L41; C72; C73 |
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E2014/14 | Kul B Luintel, Sheikh Selim and Pushkar Bajracharya (August 2014) Reforms, Incentives and Banking Sector Productivity: A Case of Nepal (578K, 41 pages) AbstractWe
model banks as profit-cum-utility maximizing firms and study, inter
alia, bankers’ incentives (optimal effort) and incentive driven
productivity following deregulations. Our model puts to test a panel of
Nepalese commercial banks which went through deep financial reforms in
the recent past. We find that (i) bankers’ efforts and productivity
have notably improved in Nepal, (ii) bankers’ efforts significantly
explain the banking sector’s productivity, (iii) the proportion of
non-performing loans has considerably declined, and (iv) banking
services have become costly, although the bank spread has moderately
declined. Our approach is different from the widely used data
envelopment analysis (DEA) of bank productivity, hence complements the
literature. It also informs the current policy debate in Nepal where
the Central Bank is seen to be geared towards regulating the financial
system and micro-managing the banking institutions. Keywords: Reforms; incentives; productivity; panel integration; cointegration; simulation JEL Classification: G21; G28; O43; O53 |
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E2014/13 | Wei Yin and Kent Matthews (July 2014) The determinants and profitability of switching costs in Chinese banking (672K, 33 pages) AbstractUsing
a sample of 151 banks over the period 2003 to 2010, this paper
estimates a model that examines the effect of switching costs in the
Chinese loan market on banking profitability. In keeping with the
extant empirical literature it reports a positive relationship between
bank profitability and switching costs. Furthermore it reports the
estimation of a systems model of switching costs and profitability. The
main result is that bank size measured by total assets is has a complex
relationship with switching costs. Competition between small banks
creates the incentive for lock-in and increased switching costs whereas
very large banks are less exercised by lock-in and switching costs. The
study also finds that concentration has a negative relationship with
switching costs and profitability, confirming the accepted view that
the large state-owned banks are concerned with social as well as profit
objectives. Keywords: Chinese banking; switching costs; bank profitability JEL Classification: G21; C51; L14 |
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E2014/12 | Yan Yang and Laurence Copeland (July 2014) The Effects of Sentiment on Market Return and Volatility and The Cross-Sectional Risk Premium of Sentiment-affected Volatility (1096K, 33 pages) AbstractWe
construct investor sentiment of UK stock market using the procedure of
principal component analysis. Using sentiment-augmented EGARCH
component model, we analyse the impacts of sentiment on market excess
return, the permanent component of market volatility and the transitory
component of market volatility. Bullish sentiment leads to higher
market excess return while bearish sentiment leads to lower excess
return. Sentiment-augmented EGARCH component model compares favourably
to the original EGARCH component model which does not take investor
sentiment into account. Furthermore, we test the cross-sectional risk
premia of the permanent and transitory components of sentiment-affected
volatility in the framework of ICAPM. Keywords: investor sentiment; principal component analysis; EGARCH component model; ICAPM; cross-sectional risk premium JEL Classification: G12; G15 |
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E2014/11 | Patrick Minford, Yongdeng Xu and Peng Zhou (July 2014) How good are out of sample forecasting Tests on DSGE models? (374K, 24 pages) AbstractOut-of-sample
forecasting tests of DSGE models against time-series benchmarks such as
an unrestricted VAR are increasingly used to check a) the specification
b) the forecasting capacity of these models. We carry out a Monte Carlo
experiment on a widely-used DSGE model to investigate the power of
these tests. We find that in specification testing they have weak power
relative to an in-sample indirect inference test,this implies that a
DSGE model may be badly mis-specified and still improve forecasts from
an unrestricted VAR. In testing forecasting capacity they also have
quite weak power, particularly on the lefthand tail. By contrast a
model that passes an indirect inference test of specification will
almost definitely also improve on VAR forecasts. Keywords: Out of sample forecasts; DSGE; VAR; specification tests; indirect inference; forecast performance JEL Classification: E10; E17 |
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E2014/10 | Samuli Leppälä (July 2014) Theoretical Perspectives on Localised Knowledge Spillovers and Agglomeration (402K, 17 pages) AbstractThere
is substantial empirical evidence that innovation is geographically
concentrated. Unlike what is generally assumed, however, it is not
clear that localised knowledge spillovers provide a theoretically valid
explanation for this. Studying spillovers of cost-reducing technology
between Cournot oligopolists we show that 1) localised knowledge
spillovers of any level do encourage agglomeration, but 2) whether this
leads to higher levels of effective R&D depends on the type and
level of knowledge spillovers, the number of firms, and the industry's
R&D efficiency. Keywords: knowledge spillovers; agglomeration economies; innovation; location JEL Classification: O33; R32; L13 |
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E2014/9 | Iain W. Long and Vito Polito (July 2014) Unemployment, Crime and Social Insurance (678K, 38 pages) AbstractWe
study an individual's incentive to search for a job in the presence of
random criminal opportunities. These opportunities extenuate moral
hazard, as the individual sometimes commits crime rather than
searching. Even when he searches, he applies less effort. We then
revisit the design of optimal unemployment insurance in this
environment. If the individual is more likely to remain unemployed and
unpunished when he commits crime than when he searches for a job (as
suggested by empirical studies), declining unemployment benefits reduce
the payoff from crime relative to that from searching. Compared to the
canonical models of optimal unemployment insurance, this provides a
further incentive to reduce benefits over time. Keywords: Unemployment insurance;Moral hazard;Crime;Recursive contracts JEL Classification: C61; D82; H55; J65; K42 |
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E2014/8 | Iain W. Long (July 2014) The Storm Before the Calm? Adverse Effects of Tackling Organised Crime (498K, 30 pages) AbstractPolicies
targeted at high-crime neighbourhoods may have unintended consequences
in the presence of organised crime. Whilst they reduce the incentive to
commit crime at the margin, those who still choose to join the criminal
organisation are hardened criminals. Large organisations take advantage
of this, substituting away from membership size towards increased
individual criminal activity. Aggregate crime may rise. However, as
more would-be recruits move into the formal labour market, falling
revenue causes a reversal of this effect. Thereafter, the policy
reduces both size and individual activity simultaneously. Keywords: Organised crime;crime policy;occupational choice JEL Classification: D82; J24; J28; K42; L21 |
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E2014/7 | Huw David Dixon, Kul B Luintel and Kun Tian (June 2014) The impact of the 2008 crisis on UK prices: what we can learn from the CPI microdata (968K, 76 pages) AbstractThis
paper takes the locally collected price-quotes used to construct the
CPI index in the UK for the period 1996-2013 to explore the impact of
the crisis on the pricing behavior of firms. We develop a time-series
framework which is able to capture the link between macro- economic
variables (in?ation and output) and the behavior of prices in terms of
the frequency of price change, the dispersion of price levels and the
dispersion of price-growth. Whilst these effects are present, they are
small and do not have significant effects for monetary policy. Keywords: Price-spell; steady state; duration JEL Classification: E50 |
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E2014/6 | James Foreman-Peck and Peng Zhou (June 2014) Firm-Level Evidence for the Language Investment Effect on SME Exporters (790K, 38 pages) AbstractBoth
analysis of international trade and the knowledge resource theory of
the firm imply that language skills should play a vital role in
exporting. This may be apparent to large multinationals with sites in
many different linguistic locations, but we show it is less obvious to
smaller companies. With data on the language used by each of a large
sample of European small and medium sized enterprises in their export
markets we test and estimate the effects of language assets on language
performance in export markets and on export sales. Controlling for the
possibility that language skills may be acquired by exporting, we find
a very substantial export return to linguistic expertise, indicative of
unexploited gains from investment in languages. There is also evidence
of greater under-investment in language skills in English-speaking
Europe, which we show can be a prediction of Konya’s (2006) trade model. Keywords: Internationalisation; language skills; SMEs JEL Classification: D22; F13; H52; R42 |
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E2014/5 | Jesus Lopez-Rodriguez and Diego Martinez (June 2014) Looking
beyond the R&D effects on innovation: The contribution of
non-R&D activities to total factor productivity growth in the EU (274K, 29 pages) AbstractAlthough
non-R&D innovation activities account for a significant portion of
innovation efforts carried out across very heterogeneous economies in
Europe, how to incorporate them in to economic models is not always
straightforward. For instance, the traditional macro approach to
estimating the determinants of total factor productivity (TFP) does not
handle them well. To counter these problems, this paper proposes
applying an augmented macro-theoretical model to estimate the
determinants of TFP by jointly considering the effects of R&D and
the impact of non-R&D innovation activities on the productivity
levels of firms. Estimations from a model of a sample of EU-26
countries covering the period 2004-2008 show that the distinction
between R&D and non-R&D effects is significant for a number of
different issues. First, the results show a sizeable impact on TFP
growth, as the impact of R&D is twice that of non-R&D. Second,
absorptive capacity is only linked to R&D endowments. And third,
the two types of endowments cannot strictly been seen as complementary,
at least for the case of countries with high R&D intensities or
high non-R&D intensities. Keywords: TFP; R&D; non-R&D expenditures; EU countries JEL Classification: O0; O3; O4 |
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E2014/4 | Li Dai, Patrick Minford and Peng Zhou (May 2014) A DSGE Model of China (743K, 32 pages) AbstractWe
use available methods for testing macro models to evaluate a model of
China over the period from Deng Xiaoping’s reforms up until the crisis
period. Bayesian ranking methods are heavily influenced by
controversial priors on the degree of price/wage rigidity. When the
overall models are tested by Likelihood or Indirect Inference methods,
the New Keynesian model is rejected in favour of one with a fair-sized
competitive product market sector. This model behaves quite a lot more
‘flexibly’ than the New Keynesian. Keywords: China; DSGE; Bayesian Inference; Indirect Inference JEL Classification: C11; C15; C18; E27 |
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E2014/3 | James Foreman-Peck and Peng Zhou (April 2014) The Rise of the English Economy 1300-1900: A Lasting Response to Demographic Shocks (2152K, 39 pages) AbstractWe
construct a Dynamic Stochastic General Equilibrium model of the
interaction between demography and the economy for six centuries of
English history. At the core of the four overlapping generations,
rational expectations model is household choice about target number and
quality of children, as well as female age at first marriage. The
parameters are formally estimated rather than calibrated. Data on
births, deaths, population and the real wage, and data moments can be
closely matched by the estimated model. We show that the marriage age
rises to reach that typical of the Western European Marriage Pattern at
the end of the high mortality epoch of the 14th century. Higher
marriage age lowers costs of child quality so that human capital
gradually accumulates over the generations. But it does so more slowly
than that of population initially, so that there is a negative
correlation between population and wage. Ultimately the growth of human
capital catches up with that of population and triggers a break out
from the Malthusian equilibrium at the end of the 18th century. Without
the contribution of late female age to human capital, human capital
would have been about 20% of what it actually was around 1800, and real
wages would only have attained about half their actual value. Keywords: Economic development; Demography; DGSE model; English economy JEL Classification: O11; J11; N13 |
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E2014/2 | Charlotte Pointon and Kent Matthews (April 2014, updated November 2014) Dynamic Efficiency in the English and Welsh Water and Sewerage Industry (745K, 34 pages) AbstractThe
English and Welsh water and sewerage industry is characterised by
indivisible capital which has a long service life. Previous studies of
efficiency for the English and Welsh water and sewerage industry take a
static framework, assuming all inputs can be adjusted instantaneously.
This paper measures dynamic efficiency by incorporating intertemporal
links of capital within the production function for the English and
Welsh water and sewerage industry for the period 1997–2011. Dynamic
Data Envelopment Analysis (DEA) considers capital as a quasi-fixed
input and is modelled as a contemporaneous output into current
production and an input from past production. The results show that the
inadequate intertemporal allocation of quasi-fixed inputs is the
largest contributor of inefficiency. Keywords: Dynamic efficiency; water and sewage industry; DEA; intertemporal allocation JEL Classification: D24; L23; L31 |
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E2014/1 | James Foreman-Peck and Peng Zhou (January 2014) Cultures of Female Entrepreneurship (996K, 30 pages) AbstractThe
present research shows how entrepreneurial culture contributes to the
widely noted difference in entrepreneurial propensities between men and
women. The consequences of the assumed differential importance of
household and family generate testable hypotheses about the gender
effects of entrepreneurial culture. The principal hypothesis is that
there is a greater chance of females in ‘unentrepreneurial’ cultures
being relatively entrepreneurial compared to males. Also women from
different entrepreneurial cultures show greater similarity of behaviour
(lower variance) than men. But proportionate gender gaps within
entrepreneurial cultures are less than those between males of different
cultures. These hypotheses are tested on US immigrant data from the
2000 census and are not rejected. Keywords: Entrepreneurship; Culture; Gender; Migrants JEL Classification: D01; J15; J23; J61; J16 |
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E2013/14 | Michael C. Hatcher and Patrick Minford (December 2013) Stabilization policy, rational expectations and price-level versus inflation targeting: a survey (450K, 37 pages) AbstractWe
survey recent literature comparing inflation targeting (IT) and
price-level targeting (PT) as macroeconomic stabilization policies. Our
focus is on New Keynesian models and areas which have seen significant
developments since Ambler’s (2009) survey: the zero lower bound on
nominal interest rates,financial frictions,and optimal monetary policy.
Ambler’s main conclusion that PT improves the inflation-output
volatility trade-off in New Keynesian models is reasonably robust to
these extensions, several of which are attempts to address issues
raised by the recent financial crisis. The beneficial effects of PT
therefore appear to hang on the joint assumption that agents are
rational and the economy New Keynesian. Accordingly, we discuss recent
experimental and survey evidence on whether expectations are rational,
as well as the applied macro literature on the empirical performance of
New Keynesian models. In addition, we discuss a more recent strand of
applied literature that has formally tested New Keynesian models with
rational expectations. Overall the evidence is not conclusive, but we
note that New Keynesian models are able to match a number of dynamic
features in the data and that behavioural models of the macroeconomy
are outperformed by those with rational expectations in formal
statistical tests. Accordingly, we argue that policymakers should
continue to pay attention to PT. JEL Classification: E52 |
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E2013/13 | Lorant Kaszab and Ales Marsal (November 2013) Fiscal Policy and the Nominal Term Premium (299K, 14 pages) AbstractDistortionary
income taxation in a standard New Keynesian model substantially
increases the nominal term-premium on long-term bonds relative to a
model with lumpsum taxes. Also the empirical level of the nominal term
premium can be matched with lower risk-aversion coefficient in case of
a model with income taxes relative to a model with long-run inflation
risks. Keywords: zero-coupon bond; nominal term premium; third-order approximation; distortionary income taxation JEL Classification: E13; E31; E43; E44; E62 |
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E2013/12 | Jingwen Fan, Patrick Minford and Zhirong Ou (November 2013) The Fiscal Theory of the Price Level - identification and testing for the UK in the 1970s (575K, 33 pages) AbstractWe
investigate whether the Fiscal Theory of the Price Level (FTPL) can
explain UK inflation in the 1970s. We confront the identification
problem involved by setting up the FTPL as a structural model for the
episode and pitting it against an alternative Orthodox model,the models
have a reduced form that is common in form but, because each model is
over-identified, numerically distinct. We use indirect inference to
test which model could be generating the VECM approximation to the
reduced form that we estimate on the data for the episode. Neither
model is rejected, though the Orthodox model outperforms the FTPL. But
the best account of the period assumes that expectations were a
probability-weighted combination of the two regimes. Keywords: UK Inflation;Fiscal Theory of the Price Level;Identification;Testing;Indirect inference JEL Classification: E31; E37; E62; E65 |
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E2013/11 | Laurence Copeland and Wenna Lu (November 2013, updated December 2013) Dodging the Steamroller: Fundamentals versus the Carry Trade (675K, 41 pages) AbstractAlthough,
according to uncovered interest rate parity, exchange rates should move
so as to prevent the carry trade being systematically profitable, there
is a vast empirical literature demonstrating the opposite. High
interest currencies more often tend to appreciate rather than
depreciate, as noted by Fama (1983). In this paper, we treat volatility
as the critical state variable and show that positive returns to the
carry trade are overwhelmingly generated in the low-volatility "normal"
state, whereas the high-volatility state is associated with lower
returns or with losses as currencies revert to the long run level
approximated by their mean real exchange rate – in other words,
purchasing-power parity (PPP) tends to reassert itself, at least to
some extent, during periods of turbulence. We confirm these results by
comparing the returns from three possible monthly trading strategies:
the carry trade, a strategy which is long the undervalued and short the
overvalued currencies (the "fundamental" strategy) and a mixed strategy
which involves switching from carry trade to fundamentals whenever
volatility is in the top quartile. The mixed strategy generates
positive returns greater than for either of the pure strategies. Keywords: carry trade; trading strategies; currency portfolios JEL Classification: F3; G21; G15 |
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E2013/10 | Iain W. Long (October 2013) Recruitment to Organised Crime (697K, 41 pages) AbstractOrganised
crime is unique within the underground economy. Unlike individual
criminals, criminal organisations can substitute between a variety of
inputs,chiefly labour and effort. This paper considers the effect of
several popular anti-crime policies in such an environment. Using a
profit maximisation framework, I find that certain policies may cause
the organisation to reduce its membership in favour of more intensive
activity. Others may lead to increases in membership. Consequently,
policies designed to reduce the social loss suffered as a result of
criminal activities may actually increase it. Results prove robust to
differences in hiring practices on the part of the criminal
organisation. Keywords: Organised crime; Crime policy; Occupational choice JEL Classification: J24; J28; K42 |
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E2013/9 | David R. Collie and George Norman (September 2013) Partial Collusion and Foreign Direct Investment (950K, 25 pages) AbstractWe
show that the static duopoly model in which firms choose between
exporting and foreign direct investment is often a prisoners' dilemma
game in which a switch from exporting to foreign direct investment
reduces profits. By contrast, we show that when the game is repeated
there is a range of parameters for which the firms can partially
collude by choosing to export rather than invest. In this range, a
reduction in export costs may undermine the partial collusion, causing
a switch from export to investment. Keywords: Foreign Direct Investment;Trade Liberalization;Partial Collusion JEL Classification: F12; F13; F23 |
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E2013/8 | Vo Phuong Mai Le and David Meenagh (June 2013) Testing and Estimating Models Using Indirect Inference (278K, 4 pages) AbstractIn
this short article we explain how to test an economic model using
Indirect Inference. We then go on to show how you can use this test to
estimate the model. JEL Classification: C01; C13; C52; E27 |
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E2013/7 | Yongdeng Xu (April 2013) The dynamics of trading duration, volume and price volatility – a vector MEM model (4269K, 41 pages) AbstractWe
propose a general form of vector Multiplicative Error Model (MEM) for
the dynamics of duration, volume and price volatility. The vector MEM
relaxes the two restrictions often imposed by previous empirical work
in market microstructure research, by allowing interdependence among
the variables and relaxing weak exogeneity restrictions. We further
propose a multivariate lognormal distribution for the vector MEM. The
model is applied to the trade and quote data from the New York Stock
Exchange (NYSE). The empirical results show that the vector MEM
captures the dynamics of the trivariate system successfully. We find
that times of greater activity or trades with larger size coincide with
a higher number of informed traders present in the market. But we
highlight that it is unexpected component of trading duration or
trading volume that carry the information content. Moreover, our
empirical results also suggest a significant feedback effect from price
process to trading intensity, while the persistent quote changes and
transient quote changes affect trading intensity in different
direction, confirming Hasbrouck (1988,1991). Keywords: Vector MEM; ACD; GARCH; intraday trading process; duration; volume; volatility JEL Classification: C15; C32; C52 |
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E2013/6 | Yongdeng Xu (April 2013) Weak exogeneity in the financial point processes (535K, 33 pages) AbstractThis
paper analyses issues related to weak exogeneity in a financial point
process. We extend the Hausman test of weak exogeneity in a time series
model and propose three cases in which weak exogeneity conditions will
break down. The simulation study suggested that a failure of the
exogeneity assumption implied biased estimators. The bias is very large
in the third case non-weak exogeneity, which makes the econometric
inferences on the parameters unreliable or even misleading. We then
derive an LM test for weak exogeneity. The LM test is attractive
because it only requires estimation of the restricted model. The
empirical results indicate that the weak exogneity of duration is often
rejected for frequently traded stocks, but is less likely to be
rejected for infrequently traded stocks. Keywords: Weak exogeneity; ACD model; LM test; point process; market microstructure |
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E2013/5 | Vo Phuong Mai Le, Kent Matthews, David Meenagh, Patrick Minford and Zhigui Xiao (April 2013) Banking and the Macroeconomy in China: A Banking Crisis Deferred? (656K, 34 pages) AbstractThe
downturn in the world economy following the global banking crisis has
left the Chinese economy relatively unscathed. This paper develops a
model of the Chinese economy using a DSGE framework with a banking
sector to shed light on this episode. It differs from other
applications in the use of indirect inference procedure to test the
?tted model. The model finds that the main shocks hitting China in the
crisis were international and that domestic banking shocks were
unimportant. However, directed bank lending and direct government
spending was used to supplement monetary policy to aggressively offset
shocks to demand. The model finds that government expenditure feedback
reduces the frequency of a business cycle crisis but that any feedback
effect on investment creates excess capacity and instability in output. Keywords: DSGE model;Financial Frictions;China;Crises;Indirect Inference JEL Classification: E3; E44; E52; C1 |
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E2013/4 | Vo Phuong Mai Le, Patrick Minford and Michael Wickens (March 2013) A Monte Carlo procedure for checking identification in DSGE models (413K, 20 pages) AbstractWe
propose a numerical method, based on indirect inference, for checking
the identification of a DSGE model. Monte Carlo samples are generated
from the model's true structural parameters and a VAR approximation to
the reduced form estimated for each sample. We then search for a
different set of structural parameters that could potentially also
generate these VAR parameters. If we can find such a set, the model is
not identified. Keywords: Identification;DSGE model;Monte Carlo;Indirect Inference JEL Classification: C13; C51; C52; E32 |
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E2013/3 | Vo Phuong Mai Le, David Meenagh, Patrick Minford and Zhirong Ou (March 2013, updated May 2013) What causes banking crises? An empirical investigation for the world economy (1312K, 35 pages) AbstractWe
add the Bernanke-Gertler-Gilchrist model to a world model consisting of
the US, the Eurozone and the Rest of the World in order to explore the
causes of the banking crisis. We test the model against
linear-detrended data and reestimate it by indirect inference,the
resulting model passes the Wald test only on outputs in the two
countries. We then extract the model's implied residuals on unfiltered
data to replicate how the model predicts the crisis. Banking shocks
worsen the crisis but 'traditional' shocks explain the bulk of the
crisis,the non-stationarity of the productivity shocks plays a key
role. Crises occur when there is a 'run' of bad shocks,based on this
sample Great Recessions occur on average once every quarter century.
Financial shocks on their own, even when extreme, do not cause crises -
provided the government acts swiftly to counteract such a shock as
happened in this sample. Keywords: DSGE model; Financial Frictions;China; Crises; Indirect Inference JEL Classification: E3; E44; E52; C1 |
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E2013/2 | Samuli Leppälä (February 2013) Arrow's paradox and markets for nonproprietary information (1413K, 27 pages) AbstractArrow's
information paradox asserts that demand for undisclosed information is
undefined. Reassessing the paradox, I argue that the value of
information for the buyer depends on its relevance, which can be known
ex ante, and the uncertainty shifts to the capability of the seller to
acquire the knowledge and her reliability in disclosing it. These three
together form the buyer’s reservation price. Consequently, differences
in capability and reliability between the sellers may revoke the
appropriation problem of nonproprietary information, where the original
source loses her monopoly after the first purchase. Keywords: Arrow’s information paradox; markets for information; knowledge; reliability; appropriability JEL Classification: D83; L15; O31; O34 |
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E2013/1 | Huw David Dixon and Kun Tian (January 2013) What
we can learn about the behavior of firms from the average monthly
frequency of price-changes: an application to the UK CPI data. (814K, 46 pages) AbstractThe
monthly frequency of price-changes is a prominent feature of many
studies of the CPI micro-data. In this paper, we see how much this ties
down the behavior of price-setters ("firms") in steady-state in terms
of the average length of price-spells across firms. We are able to
divide an upper and lower bound for the mean duration of price-spells
averaged across firms. We use the UK CPI data at the aggregate and
sectoral level and find that the actual mean is about twice the
theoretical minimum consistent with the observed frequency. We estimate
the distribution using the hazard function and find that although the
estimated hazard differs significantly from the Calvo distribution, the
means and medians are similar. However, despite the micro differences,
we find that the artificial Calvo distributions generated using the
sectoral frequencies result in very similar impulse responses to the
estimated hazards when used in the Smets-Wouters (2003) model. Keywords: Price-spell; steady state; duration JEL Classification: E50 |
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E2012/23 | Paulo Brito, Bipasa Datta and Huw David Dixon (December 2012) The evolution of mixed conjectures in the rent-extraction game (4603K, 54 pages) AbstractThis
paper adopts an evolutionary perspective on the rent-extraction model
with conjectural variations (CV). We analyze the global dynamics of the
model with three CVs under the replicator equation. We find that the
end points of the evolutionary dynamics include the pure-strategy
consistent CVs. However, there are also mixed-strategy equilibria that
occur. These are on the boundaries between the basins of attraction of
the pure-strategy sinks. We develop a more general notion of
consistency which applies to mixed-strategy equilibria. In a three
conjecture example, we find that in contrast to the pure-strategy
equilibria, the mixed-strategy equilibria are not ESS: under the
replicator dynamics, there are three or four mixed equilibria that may
either be totally unstable, or saddle-stable. There also exist
heteroclinic orbits that link equilibria together. Keywords: Rent-extraction; evolutionary dynamics; consistent conjectures; global dynamics; mixed-strategy JEL Classification: D03; L15; H0 |
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E2012/22 | Chunping Liu and Patrick Minford (August 2012, updated December 2013) How important is the credit channel? An empirical study of the US banking crisis (1169K, 32 pages) AbstractWe
examine whether by adding a credit channel to the standard New
Keynesian model we can account better for the behaviour of US
macroeconomic data up to and including the banking crisis. We use the
method of indirect inference which evaluates statistically how far a
model's simulated behaviour mimics the behaviour of the data. We find
that the model with credit dominates the standard model by a
substantial margin. Credit shocks are the main contributor to the
variation in the output gap during the crisis. Keywords: financial frictions; credit channel; bank crisis; indirect inference JEL Classification: C12; C52; E12; G01; G1 |
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E2012/21 | Chunping Liu and Patrick Minford (August 2012) Comparing behavioural and rational expectations for the US post-war economy (1059K, 19 pages) AbstractThe
banking crisis has caused a resurgence of interest in behavioural
models of expectations in macroeconomics. Here we evaluate behavioural
and rational expectations econometrically in a New Keynesian framework,
using US post-war data and the method of indirect inference. We find
that after full re-estimation the model with behavioural expectations
is strongly rejected by the data, whereas the standard rational
expectations version passes the tests by a substantial margin. Keywords: behavioural expectation; rational expectation; bank crisis; indirect inference |
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E2012/20 | Ceri Davies, Max Gillman and Michal Kejak (August 2012) Deriving the Taylor Principle when the Central Bank Supplies Money (1176K, 36 pages) AbstractThe
paper presents a human-capital-based endogenous growth, cash-in-advance
economy with endogenous velocity where exchange credit is produced in a
decentralized banking sector, and money is supplied stochastically by
the central bank. From this it derives an exact functional form for a
general equilibrium “Taylor rule”. The inflation coefficient is always
greater than one when the velocity of money exceeds one,velocity growth
enters the equilibrium condition as a separate variable. The paper then
successfully estimates the magnitude of the coefficient on inflation
from 1000 samples of Monte Carlo simulated data. This shows that it
would be spurious to conclude that the central bank has a reaction
function with a strong response to inflation in a ‘Taylor principle’
sense, since it is only meeting fiscal needs through the inflation tax.
The paper also estimates several deliberately misspecified models to
show how an inflation coefficient of less than one can result from
model misspecification. An inflation coefficient greater than one holds
theoretically along the balanced growth path equilibrium, making it a
sharply robust principle based on the economy’s underlying structural
parameters. Keywords: Taylor rule; velocity; forward-looking; misspecification bias JEL Classification: E13; E31; E43; E52 |
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E2012/19 | Panagiotis Tziogkidis (August 2012, updated November 2012) The Simar and Wilson’s Bootstrap DEA approach: a critique AbstractThis paper has been removed for revision JEL Classification: C14; C15; C61; C67 |
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E2012/18 | Panagiotis Tziogkidis (August 2012) Bootstrap DEA and Hypothesis Testing AbstractThis paper has been removed for revision Keywords: Data Envelopment Analysis; Efficiency; Bootstrap; Bootstrap DEA; Hypothesis Testing JEL Classification: C12; C14; C15; C61; C67 |
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E2012/17 | David Meenagh, Patrick Minford and Michael Wickens (July 2012) Testing macroeconomic models by indirect inference on unfiltered data (1249K, 22 pages) AbstractWe
extend the method of indirect inference testing to data that is not
filtered and so may be non-stationary. We apply the method to an open
economy real business cycle model on UK data. We review the method
using a Monte Carlo experiment and find that it performs accurately and
has good power. Keywords: Bootstrap; DSGE; VECM; indirect inference; Monte Carlo JEL Classification: C12; C32; C52; E1 |
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E2012/16 | Patrick Minford and Naveen Srinivasan (July 2012) Can the learnability criterion ensure determinacy in New Keynesian Models? (1066K, 16 pages) AbstractForward-looking
RE models such as the popular New Keynesian (NK) model do not provide a
unique prediction about how the model economy behaves. We need some
mechanism that ensures determinacy. McCallum (2011) says it is not
needed because models are learnable only with the determinate solution
and so the NK model, once learnt in this way, will be determinate. We
agree: the only learnable solution that has agents converge on the true
NK model is the bubble-free one. But once they have converged they must
then understand the model and its full solution therefore including the
bubble. Hence the learnability criterion still fails to pick a unique
RE solution in NK models. Keywords: New-Keynesian; Taylor Rule; Determinacy; E-stability; Learnability JEL Classification: C62; D84 |
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E2012/15 | Vo Phuong Mai Le, David Meenagh, Patrick Minford and Michael Wickens (June 2012) Testing DSGE models by Indirect inference and other methods: some Monte Carlo experiments (4321K, 35 pages) AbstractUsing
Monte Carlo experiments, we examine the performance of Indirect
Inference tests of DSGE models, usually versions of the Smets-Wouters
New Keynesian model of the US postwar period. We compare these with
tests based on direct inference (using the Likelihood Ratio), and on
the Del Negro–Schorfheide DSGE–VAR weight. We ?nd that the power of all
three tests is substantial so that a false model will tend to be
rejected by all three,but that the power of the indirect inference
tests are by far the greatest, necessitating re-estimation by indirect
inference to ensure that the model is tested in its fullest sense. Keywords: Bootstrap; DSGE; New Keynesian; New Classical; indirect inference; Wald statistic; likelihood ratio; DSGE-VAR weight JEL Classification: C12; C32; C52; E1 |
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E2012/14 | Vo Phuong Mai Le, David Meenagh and Patrick Minford (June 2012, updated April 2013) What causes banking crises? An empirical investigation (623K, 31 pages) AbstractWe
add the Bernanke-Gertler-Gilchrist model to a modified version of the
Smets-Wouters model of the US in order to explore the causes of the
banking crisis. We test the model against the data on HP-detrended data
and reestimate it by indirect inference,the resulting model passes the
Wald test on output, inflation and interest rates. We then extract the
model’s implied residuals on US unfiltered data since 1984 to replicate
how the model predicts the crisis. The main banking shock tracks the
unfolding ‘sub-prime’ shock, which appears to have been authored mainly
by US government intervention. This shock worsens the banking crisis
but ‘traditional’ shocks explain the bulk of the crisis,the
non-stationarity of the productivity shock plays a key role. Crises
occur when there is a ‘run’ of bad shocks,based on this sample they
occur on average once every 40 years and when they occur around half
are accompanied by financial crisis. Financial shocks on their own,
even when extreme, do not cause crises — provided the government acts
swiftly to counteract such a shock as happened in this sample. Keywords: DSGE; Banking; Crisis; Bootstrap JEL Classification: C32; C52; E1 |
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E2012/13 | Lorant Kaszab (June 2012, updated April 2013) Rule-of-Thumb Consumers and Labor Tax Cut Policy in the Zero Lower Bound (1290K, 29 pages) AbstractThis
paper finds that labor tax cut can be an effective policy tool to
mitigate the negative effects of a shock that made the zero lower bound
on the nominal interest rate binding if the economy features
rule-of-thumb households (besides Ricardian ones) and nominal
rigidities in prices and wages. Our results are meant to contribute to
the discussion initiated by Eggertsson (2010a) who found labor tax cut
policy destabilising under zero nominal interest rate in a New
Keynesian economy consisting only Ricardian consumers. Keywords: Fiscal policy; zero lower bound; labor tax cut; New Keynesian JEL Classification: E52; E62 |
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E2012/12 | Max Gillman (May 2012) AS-AD in the Standard Dynamic Neoclassical Model: Business Cycles and Growth Trends (583K, 41 pages) AbstractThe
paper shows how a dynamic neoclassical AS-AD can be derived and used to
describe business cycles and growth trends to undergraduates. Derived
within the Ramsey-Cass-Koopmans (RCK) model, the AS-AD is the
stationary equilibrium of the deterministic dynamic general equilibrium
framework. Allowing Solow exogenous growth, the AS-AD is derived along
the balanced growth path equilibrium. The derivation first builds
consumption demand, aggregate demand, and then aggregate supply through
the equilibrium conditions and a closed form solution for the capital
stock. Through a comparative static change in goods sector
productivity, the paper shows the basic failing of the standard RBC
model. Allowing a second comparative static change in the consumer's
time endowment, this captures a change in the "external margin" of
labor supply. These comparative statics enable explanation of the
business cycle, and "Solow-plus" growth trends including education time
and working time. In extension of RCK, the paper shows beyond the
undergraduate level, how to derive AS-AD when including human capital
and endogenous growth. This allows an endogenous change in the time
endowment for work and leisure through a change in human capital
productivity, with a similar but more fundamental AS-AD story of
business cycles and growth trends. Keywords: Ramsey-Cass-Koopmans; supply; demand; state variable JEL Classification: A22; A23; E13 |
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E2012/11 | Helmuts Azacis and Péter Vida (May 2012) Collusive Communication Schemes in a First-Price Auction (1231K, 50 pages) AbstractWe
study optimal bidder collusion at first-price auctions when the
collusive mechanism only relies on signals about bidders’ valuations.
We build on Fang and Morris (2006) when two bidders have low or high
private valuation of a single object and additionally each receives a
private noisy signal from an incentiveless center about the opponent’s
valuation. We derive the unique symmetric equilibrium of the first
price auction for any symmetric, possibly correlated, distribution of
signals, when these can only take two values. Next, we find the
distribution of 2-valued signals, which maximizes the joint payoffs of
bidders. We prove that allowing signals to take more than two values
will not increase bidders’ payoffs if the signals are restricted to be
public. We also investigate the case when the signals are chosen
conditionally independently and identically out of n = 2 possible
values. We demonstrate that bidders are strictly better off as signals
can take on more and more possible values. Finally, we look at another
special case of the correlated signals, namely, when these are
independent of the bidders’ valuations. We show that in any symmetric
2-valued strategy correlated equilibrium, the bidders bid as if there
were no signals at all and, hence, are not able to collude. Keywords: Bidder-optimal signal structure;Collusion; (Bayes) correlated equilibrium; First price auction; Public and private signals JEL Classification: D44; D82 |
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E2012/10 | Péter Vida and Helmuts Azacis (May 2012) A Detail-Free Mediator (1312K, 28 pages) AbstractWe
present an extension to any finite complete information game with two
players. In the extension, players are allowed to communicate directly
and, additionally, send private messages to a simple, detail-free
mediator, which, in turn, makes public announcements as a deterministic
function of the private messages. The extension captures situations in
which people engage in face-to-face communication and can observe the
opponent's face during the conversation before choosing actions in some
underlying game. We prove that the set of Nash equilibrium payoffs of
the extended game approximately coincides with the set of correlated
equilibrium payoffs of any underlying game. Keywords: Correlated equilibrium; detail-free mechanism; mediated pre-play communication JEL Classification: C72 |
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E2012/9 | Patrick Minford, Zhirong Ou and Michael Wickens (May 2012, updated April 2014) Revisiting the Great Moderation: policy or luck? (484K, 43 pages) AbstractWe
investigate the relative roles of monetary policy and shocks in causing
the Great Moderation, using indirect inference where a DSGE model is
tested for its ability to mimic a VAR describing the data. A New
Keynesian model with a Taylor Rule and one with the Optimal Timeless
Rule are both tested. The latter easily dominates, whether calibrated
or estimated, implying that the Fed’s policy in the 1970s was neither
inadequate nor a cause of indeterminacy,it was both optimal and
essentially unchanged during the 1980s. By implication it was largely
the reduced shocks that caused the Great Moderation – among them
monetary policy shocks the Fed injected into inflation. Keywords: Great Moderation;Causes;Indirect inference;Test;Wald statistics JEL Classification: E42; E52; E58 See also: Supporting Annex |
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E2012/8 | Huw David Dixon and Engin Kara (April 2012) Taking Multi-Sector Dynamic General Equilibrium Models to the Data (1131K, 43 pages) AbstractWe
estimate and compare two models, the Generalized Taylor Economy (GTE)
and the Multiple Calvo model (MC), that have been built to model the
distributions of contract lengths observed in the data. We compare the
performances of these models to those of the standard models such as
the Calvo and its popular variant, using the ad hoc device of
indexation. The estimations are made with Bayesian techniques for the
US data. The results indicate that the data strongly favour the GTE. Keywords: DSGE models; Calvo; Taylor; price-setting JEL Classification: E32; E52; E58 |
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E2012/7 | Paulo Brito and Huw David Dixon (April 2012) Fiscal policy, entry and capital accumulation: hump-shaped responses (1928K, 48 pages) AbstractIn
this paper we consider the entry and exit of firms in a Ramsey model
with capital and an endogenous labour supply. At the firm level, there
is a fixed cost combined with increasing marginal cost, which gives a
standard U-shaped cost curve with optimal firm size. The costs of entry
(exit) are quadratic in the flow of new firms. The number of firms
becomes a second state variable and the entry dynamics gives rise to a
richer set of dynamics than in the standard case: in particular, there
is likely to be a hump shaped response of output to a fiscal shock with
maximum impact after impact and before steady-state is reached. Output
and capital per firm are also likely to be hump shaped. Keywords: Entry; Ramsey; fiscal policy; macroeconomic dynamics JEL Classification: E22; D92; E32; D92 |
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E2012/6 | Kul B Luintel and Mosahid Kahn (March 2012) Ideas Production in Emerging Economies (957K, 13 pages) AbstractWe
model ‘new ideas’ production in a panel of 17 emerging countries. Our
results reveal: (i) ideas production is duplicative, (ii) externality
associated with domestic knowledge stocks is of above unit factor
proportionality, (iii) OECD countries raise the innovation-bar for
emerging countries, (iv) there is no significant knowledge diffusion
across emerging countries, and (v) growth in emerging countries appear
far from a balanced growth path. Keywords: Ideas Production; Knowledge Diffusion; Panel Co-integration JEL Classification: C2; O3; O4 |
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E2012/4 | James Foreman-Peck (January 2012) Effectiveness and Efficiency of SME Innovation Policy (1833K, 44 pages) Forthcoming in Small Business Economics AbstractThis
paper assesses UK innovation policy impact on a large, population
weighted, sample of both service and manufacturing SMEs. By focussing
on self-reported innovation the study achieves a wider coverage of the
effects of SME innovation policy than possible with more traditional
indicators. Propensity score matching indicates that SMEs receiving UK
state support for innovation were more likely to innovate than
unsupported comparable enterprises. Innovating enterprises are shown to
have grown significantly faster over the years 2002-4 when other growth
influences are appropriately controlled. Combining these two results
and comparing the outlays on SME innovation policy with the estimated
effects suggests that policy was efficient as well as effective. There
is evidence that SME tax credits were expensive compared with earlier
support instruments. But the overall high returns estimated suggest
that, even in times of public spending cuts, persisting with SME
innovation policy would be prudent. Keywords: Innovation; State Aid; SME; Policy Evaluation JEL Classification: L25; R38 |
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E2012/3 | Huw David Dixon and Panayiotis M. Pourpourides (January 2012) On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints (523K, 61 pages) AbstractWe
depart from the assumption of perfect competition in the final goods
sector, commonly used in cash-in-advance (CIA) models, providing
extensive theoretical analysis of the general equilibrium of an economy
with imperfect competition, endogenous production and fully flexible
prices in the presence of occasionally binding CIA constraints, under
general assumptions about the velocity of money. Homothetic preferences
generate Marshallian demands which are linear in own price allowing for
any combination of equilibrium number of firms and demand elasticity.
Whether the CIA constraint binds or not depends, among others, on the
degree of imperfect competition. As the market becomes more competitive
it is certainly no less likely that the CIA constraint will bind. The
degree of imperfect competition directly affects the distribution of
consumption and indirectly the level of output and work effort via the
CIA constraint. With perfect foresight, there is an optimal negative
steady-state inflation rate. We also consider how the introduction of
capital and bonds would fit into the framework. |
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E2012/2 | Erhan Artuç and Panayiotis M. Pourpourides (January 2012) R&D and Aggregate Fluctuations (1279K, 51 pages) AbstractUsing
US data for the period 1959-2007, we identify sectoral productivity
shocks and capital investment-specific shocks by employing a Vector
Autoregression whose shock structure is disciplined by a general
equilibrium model. Controlling for real and nominal factors, we find
that capital investment-specific shocks explain 70 percent of
fluctuations of R&D investment while R&D technology shocks
explain 30 percent of the variation of aggregate output net of R&D
investment (i.e. the output of the non-R&D sector). Technology
shocks jointly explain almost all the variation of output in the
R&D sector and 78 percent of the variation of output in the
non-R&D sector. Keywords: Productivity Shocks; Investment-specific Shocks; R&D; VAR JEL Classification: C13; C32; C68; E32; O3 |
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E2012/1 | Cemil Selcuk (January 2012) Seasonal Cycles in the Housing Market (1141K, 10 pages) AbstractThe
housing market exhibits a puzzling yet repetitive seasonal boom and
bust cycle where prices and trade volume rise in summers and fall in
winters. This paper presents a search model that analytically generates
the observed deterministic cycle. Keywords: housing; search; thin and thick markets; seasonality JEL Classification: D39; D49; D83 |
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E2011/29 | Tianshu Zhao, Kent Matthews and Victor Murinde (November 2011) Cross-Selling, Switching Costs and Imperfect Competition in British Banks (1650K, 32 pages) AbstractThis
paper attempts to evaluate the competitiveness of British banking in
the presence of cross-selling and switching costs during 1993-2008. It
presents estimates of a model of banking behaviour that encompasses
switching costs as well as cross-selling of loans and off-balance sheet
transactions. The evidence from panel estimation of the model lends
support to our theoretical priors on the cross-selling behaviour of
British banks, which helps explain the rapid growth of non-interest
income during the last two decades. We also find that the consumer
faced high switching costs in the loan market in the latter part of the
sample period, as a result of lower competitiveness. JEL Classification: G21; L13 |
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E2011/28 | Jenifer Daley and Kent Matthews (November 2011) Competitive Conditions in the Jamaican Banking Market 1998-2009 (1370K, 18 pages) AbstractThis
paper presents an empirical assessment of the degree of competition
within the Jamaican banking sector during the period 1998 to 2009. We
employ a dynamic version of the Panzar-Rosse Model to estimate market
power among the sample of banks that constitute over 90 percent of the
banking market. Using the conventional statistical tests, we are unable
to reject monopoly/perfect collusion for the merchant banking sector in
Jamaica but find competitive conditions in the commercial banking
sector. This contrasts with earlier findings using alternative
estimators that find monopolistic competition in the market as a whole.
Keywords: Competition; banking; Rosse-Panzar H statistic; dynamic panel estimation; Jamaica JEL Classification: G21; G28 |
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E2011/27 | Jenifer Daley, Kent Matthews and Tiantian Zhang (November 2011) Post-crisis cost efficiency of Jamaican banks (1454K, 26 pages) AbstractDeregulation,
re-regulation and continuing globalisation embody an imperative that
banks increase efficiency in order to survive. We employ the
Simar-Wilson (2007) two-step double bootstrap Data Envelopment Analysis
method to measure whether cost efficiency among Jamaican banks has
improved between 1999 and 2009 following a number of post-crisis
responses aimed at strengthening and improving the sector. Efficiency
is extracted from a meta-frontier construction for the full sample
period. In addition we conduct tests for unconditional beta- and sigma-convergence
and overall, the results suggest that there has been a tendency towards
improvement in bank efficiency levels for the industry as a whole but
there is also evidence that foreign banks show a higher trend
improvement in efficiency. Keywords: Bank efficiency; DEA; bootstrap; convergence; Jamaica JEL Classification: G21; G28 |
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E2011/26 | David R. Collie and Vo Phuong Mai Le (November 2011) Product Differentiation, the Volume of Trade and Profits under Cournot and Bertrand Duopoly (1147K, 24 pages) AbstractThis
paper analyses how product differentiation affects the volume of trade
under duopoly using Shubik-Levitan demand functions rather than the
Bowley demand functions used by Bernhofen (2001). The Shubik-Levitan
demand functions have the advantage that an increase in product
differentiation does not increase the size of the market as happens
with the Bowley demand functions. It is shown that the volume of trade
in terms of quantities is decreasing in the degree of product
differentiation when the trade cost is relatively low, but increasing
in the degree of product differentiation when the trade cost is
relatively high. Keywords: Product Differentiation; Cournot Oligopoly; Bertrand Oligopoly JEL Classification: F12; F13 |
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E2011/25 | Huw David Dixon and Hervé Le Bihan (October 2011) Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications (1173K, 38 pages) AbstractThe
Generalized Calvo and the Generalized Taylor models of price and
wage-setting are, unlike the standard Calvo and Taylor counterparts,
exactly consistent with the distribution of durations observed in the
data. Using price and wage micro-data from a major euro-area economy
(France), we develop calibrated versions of these models. We assess the
consequences for monetary policy transmission by embedding these
calibrated models in a standard DSGE model. The Generalized Taylor
model is found to help rationalizing the humpshaped and persistent
response of inflation, without resorting to the counterfactual
assumption of systematic wage and price indexation. Keywords: Contract length; steady state; hazard rate; Calvo; Taylor; wage-setting; price-setting JEL Classification: E31; E32; E52; J30 |
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E2011/24 | Michael C. Hatcher (October 2011) Inflation versus price-level targeting and the zero lower bound: Stochastic simulations from the Smets-Wouters US model (1235K, 28 pages) AbstractUsing
a version of the Smets-Wouters model of the US economy augmented to
include both New Keynesian and New Classical sectors, this paper
investigates the performance of inflation targeting and price-level
targeting when the zero lower bound on nominal interest rates is
occasionally-binding. Several notable results emerge. First, the
unconditional probability of hitting the lower bound is lower under
price-level targeting than inflation targeting, with 'lower bound
episodes' being less frequent and lasting for shorter periods of time.
Second, the volatilities of key macroeconomic variables are lower under
price-level targeting than inflation targeting. Third, the lower
frequency and severity of lower bound episodes under price-level
targeting appears to have a first-order impact on consumption,
investment and output, raising their mean values. Intuitively,
price-level targeting performs well because inflation expectations act
as automatic stabilisers, reducing the chance of hitting or remaining
at the lower bound whilst also providing stability when the economy is
away from the lower bound. Keywords: Zero lower bound; occasionally-binding constraint; price-level targeting; inflation targeting JEL Classification: E52; E58 |
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E2011/23 | Vito Polito and Peter Spencer (September 2011) UK Macroeconomic Volatility and the Welfare Costs of Inflation (1560K, 60 pages) AbstractThis
paper explores the implications of time varying volatility for optimal
monetary policy and the measurement of welfare costs. We show how
macroeconomic models with linear and quadratic state dependence in
their variance structure can be used for the analysis of optimal policy
within the framework of an optimal linear regulator problem. We use
this framework to study optimal monetary policy under inflation
conditional volatility and Find that the quadratic component of the
variance makes policy more responsive to inflation shocks in the same
way that an increase in the welfare weight attached to inflation does,
while the linear component reduces the steady state rate of inflation.
Empirical results for the period 1979-2010 underline the statistical
significance of inflation-dependent UK macroeconomic volatility.
Analysis of the welfare losses associated with inflation and
macroeconomic volatility shows that the conventional homoskedastic
model seriously underestimates both the welfare costs of inflation and
the potential gains from policy optimization. Keywords: Monetary policy; Macroeconomic volatility; Optimal control; Welfare costs of inflation JEL Classification: C32; C61; E52 |
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E2011/22 | Michael C. Hatcher (August 2011) Comparing inflation and price-level targeting: A comprehensive review of the literature (1319K, 54 pages) AbstractThis
paper provides a detailed survey of the economic literature comparing
inflation and price-level targeting as macroeconomic stabilisation
policies. Its contributions relative to past surveys are as follows.
First, rather than focusing on any particular topic, the survey gives
equal emphasis to all key areas of the literature. Second, the paper
discusses 'new results' in several areas, including the zero lower
bound on nominal interest rates,the long-term impact of price-level
targeting,and financial market considerations. Finally, the survey is
written in such a way that it can be understood by economists with
little or no prior knowledge of price-level targeting and the related
academic literature. The survey concludes that whilst price-level
targeting has a number of potential advantages, further research is
needed to accurately quantify its costs and benefits and to test
robustness. Potential obstacles to the introduction of price-level
targeting in practice include: concerns about its credibility,lack of
public understanding,and lack of prior experience with price-level
targeting regimes. Keywords: Price-level targeting; inflation targeting; macroeconomic stabilisation JEL Classification: E52; E58 |
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E2011/21 | James Foreman-Peck and Leslie Hannah (August 2011) Extreme Divorce: the Managerial Revolution in UK Companies before 1914 (1100K, 54 pages) AbstractWe
present the first broadly representative study for any early twentieth
century economy of the extent to which quoted company ownership was
already divorced from managerial control. In the 337 largest,
independent, UK companies in the Investor's Year Book (those
with \pounds 1m or more share capital in 1911) the two million outside
shareholders were fewer than today's shareholding population, but they
held 97.5% of the shares in the median company and their directors only
2.5%. This indicates a lower level of personal ownership by
boards, and of director voting control, in the largest securities
market of the early twentieth century than in any of the world.s major
securities markets toward the end of that century. Berle,
Means, Gordon and others later quantified the USA's delayed (and on
this dimension less advanced) managerial "revolution." Their evidence
has been widely misinterpreted: some erroneously concluded that America
pioneered this aspect of "modernity" and that the "divorce" of
ownership from control, globally, was a new and continuing trend. |
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E2011/20 | Garry D.A. Phillips and Gareth Liu-Evans (August 2011) The Robustness of the Higher-Order 2SLS and General k-Class Bias Approximations to Non-Normal Disturbances (1109K, 28 pages) AbstractIn
a seminal paper Nagar (1959) obtained first and second moment
approximations for the k-class of estimators in a general static
simultaneous equation model under the assumption that the structural
disturbances were i.i.d and normally distributed. Later Mikhail (1972)
obtained a higher-order bias approximation for 2SLS under the same
assumptions as Nagar while Iglesias and Phillips (2010) obtained the
higher order approximation for the general k-class of estimators. These
approximations show that the higher order biases can be important
especially in highly overidentified cases. In this paper we show that
Mikhail.s higher order bias approximation for 2SLS continues to be
valid under symmetric, but not necessarily normal, disturbances with an
arbitrary degree of kurtosis but not when the disturbances are
asymmetric. A modified approximation for the 2SLS bias is then obtained
which includes the case of asymmetric disturbances. The results are
then extended to the general k-class of estimators. |
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E2011/19 | Emma M. Iglesias and Garry D.A. Phillips (August 2011) Almost Unbiased Estimation in Simultaneous Equations Models with Strong and / or Weak Instruments (1180K, 38 pages) AbstractWe
propose two simple bias reduction procedures that apply to estimators
in a general static simultaneous equation model and which are valid
under reatively weak distributional assumptions for the errors.
Standard jackknife estimators, as applied to 2SLS, may not
reduce the bias of the exogenous variable coefficient estimators since
the estimator biases are not monotonically non-increasing with sample
size (a necessary condition for successful bias reduction) and they
have moments only up to the order of overidentification. Our proposed
approaches do not have either of these drawbacks. (1) In the first
procedure, both endogenous and exogenous variable parameter estimators
are unbiased to order T-2 and when implemented for k-class estimators for which k < 1, the higher order moments will exist. (2) An alternative second approach is based on taking linear combinations of k-class estimators for k < 1. In general, this yields estimators which are unbiased to order T-1 and which possess higher moments. We also prove theoretically how the combined k-class estimator produces a smaller mean squared error than 2SLS when the degree of overidentification of the system is larger than 8. Moreover, the combined k-class estimators remain unbiased to order T-1
even if there are redundant variables (including weak instruments) in
any part of the simultaneous equation system, and we can allow for any
number of endogenous variables. The performance of the two procedures
is compared with 2SLS in a number of Monte Carlo experiments
using a simple two equation model. Finally, an application shows the
usefulness of our new estimator in practice versus competitor
estimators. Keywords: Combined k-class estimators;Bias correction;Weak instruments;Endogenous and exogenous parameter estimators;Permanent Income Hypothesis JEL Classification: C12; C13; C30; C51; D12; D31; D91; E21; E40 |
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E2011/18 | Hao Hong (July 2011) Money, interest rates and the real activity (1119K, 25 pages) AbstractThis
paper examines the effectiveness of monetary aggregates through various
nominal interest rates by integrating the financial sector into the
Cash-in-Advance (CIA) economy. The model assumes that there are two
types of representative agents in the financial sector, which are:
productive banks and financial intermediates. The productive banks
supply a financial service, which is an exchange technology service to
households and financial intermediates receive savings fund from savers
and offer loans to borrowers. The monetary expansions are increased
banking costs through the rate of inflation. It leads households to use
more exchange credit relative to cash at the goods market. Since the
number of savings funds is equal to the number of exchange credits used
at the goods market, money injections are lower the nominal interest
rate on saving as the saving fund increases with exchange credit. By
assuming that firms are the only borrowers at the capital market from
Fuerst (1992), a lower nominal interest rate on the saving fund reduces
the marginal cost of labour and increases labour demand. Meanwhile, the
increasing marginal cost of money through the expected inflation effect
has a negative effect on labour supply. With labour demand dominating
labour supply effects, both output and employment increase with
monetary expansion. The paper is able to generate a decreasing nominal
interest rate with an increasing money supply with an absence of
limited participation monetary shocks from Lucas (1990),and by allowing
firms to borrow wage bills payment from financial intermediates, it
examines the positive response of aggregate output subject to monetary
expansion under flexible price framework. Keywords: monetary transmission; business cycles; banking sector; interest rates JEL Classification: E10; E44; E51 |
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E2011/17 | Kateryna Onishchenko (June 2011) Can a pure real business cycle model explain the real exchange rate: the case of Ukraine (1640K, 30 pages) AbstractReal
exchange rate (RER) is an important instrument for restoring
sustainable economic growth in the small open economy with large export
share. RER of Ukrainian currency can be explained within the real
business cycle (RBC) framework without any forms of nominal rigidities.
Fitting Ukrainian quarterly data for the period of 1996:Q1-2009:Q3 into
the small open economy real business cycle model and testing it by
method of indirect inference shows that RER can be reproduced by RBC
framework. The generated pseudo-samples for RER by method of
bootstrapping allow to obtain the distribution of the best fit
ARIMA(2,1,4) parameters and to show with the Wald statistics that those
parameters lie within 95% confidence intervals of those estimated for
bootstrapped pseudo Q parameters. Keywords: sustainable economic growth; business cycle; real exchange rates; small open economy; indirect inference; ARIMA JEL Classification: E31; E32; E37; F31; F37 |
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E2011/16 | Hao Hong (June 2011) Monetary aggregates, financial intermediate and the business cycle (1056K, 17 pages) AbstractThis
paper explains and evaluates the transmissions and effectiveness of
monetary policy shock in a simple Cash-in-Advance (CIA) economy with
financial intermediates. Lucas-Fuerst's (1992) limited participation
CIA models are able to explain decreasing nominal interest rates and
increasing real economic activity with monetary expansion through
limited participation monetary shock and the cost channel of monetary
policy. Calvo's (1983) sticky price monetary model examines the real
effects of money injections through firms price setting behaviour, but
it fails to generate a negative correlation between nominal interest
rates and money growth rate, which has been observed in the data. This
paper employs McCandless (2008) financial intermediates CIA model to
explain the transmissions and impacts of monetary shocks. The model
does not request limited participation monetary shock or Keynesian type
of sticky price/wage, to examine the lower nominal interest rate and
increasing real economic activity with monetary expansion. By extending
the model with Stockman's (1981) CIA constraint, it is able to account
for both positive response of consumption subject to monetary
innovations, which has been found in Leeper et al. (1996) and the
positive correlation between output and consumption which has been
observed in the data. Keywords: Monetary business cycle; financial intermediate; cash-in-advance model JEL Classification: E44; E52 |
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E2011/15 | Ernesto Longobardi and Vito Polito (June 2011) Capital income taxation incentives during economic downturns: re-thinking theory and evidence (1288K, 39 pages) AbstractThis
paper studies the effectiveness of corporate tax incentives in reducing
the effective tax rate (ETR) on income from capital to stimulate
business investment during economic downturns. We focus on tax rate
incentives (TRIs), such as corporate tax rate cuts, and tax base
incentives (TBIs), such as increased capital allowances. The standard
economic theory states that TRIs reduce the ETR by decreasing tax
payments on corporate profits. TBIs instead reduce the ETR as they
defer firms tax payments, in turn increasing the present value of
dividend distribution. However, this theory does not consider that, in
reality, firms face accounting constraints preventing any distribution
of cash flows arising from TBIs. For this reason, the standard economic
analysis overstates the benefit of any TBI relative to that of TRIs.
The paper incorporates accounting constraints on dividend policy into
the model for the computation of the ETR and employs the new model to
recalculate ETRs in the US and in the UK during 1980-2010. The
empirical results confirm that the benefit of TBIs is significantly
overstated by the standard theory, and tax rate cuts are more effective
in reducing the ETR. We show that this result holds regardless of the
form of investment finance (retained earning, new equity and debt), the
type capital asset (building and plant and machinery), the level of
capital income taxation (corporate and shareholders), and the value of
accounting depreciation relative to economic depreciation. Keywords: Capital income taxation; dividend policy; effective marginal tax rates; financial constraints JEL Classification: H3 |
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E2011/14 | Vito Polito (June 2011) Deferred Taxation and Effective Tax Rates on Income from Capital in the United States, 2000-2010 (1161K, 43 pages) AbstractThe
accounting and economic literature have long highlighted the potential
implications of deferred taxation for tax policy analysis. This paper
incorporates deferred taxation into the neoclassical investment model
for the computation of the Effective Tax Rate (ETR) on business
investment and revisits the empirical evidence on the evolution of ETRs
in the United States over the last decade. The numerical results show
that after including deferred taxation there is little differential in
the ETRs across assets,ETRs in the 2000s have been essentially in line
with statutory rates,and partial expensing had little effect on ETRs.
These results hold whether investment is financed by equity or
debt,profits are distributed to individual shareholders through
dividends, interests or capital gains,and regardless of the
differential between book and economic depreciation. Keywords: Deferred taxation; effective marginal tax rates; taxation of income from capital JEL Classification: H3 |
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E2011/13 | Vito Polito (June 2011) Up or down? Capital income taxation in the United States and the United Kingdom (1126K, 29 pages) AbstractEmpirical
evidence suggests that the Effective Marginal Tax Rate (EMTR) on income
from capital has increased considerably in both the United States and
the United Kingdom over the period 1982-2005. This evidence contradicts
the corporate tax literature which predicts that the EMTR should
instead fall over time as a result of increasing international capital
mobility and higher tax competition between governments. This paper
argues that this inconsistency is entirely due to the fact that EMTRs
on income from capital are currently computed from versions of the
neoclassical investment model which do not take into account financial
constraints on dividend policy faced by firms investing in both the
United States and the United Kingdom. The paper incorporates financial
constraints on dividend policy into the analytical framework for the
computation of the EMTR and employs the new model to re-calculate time
series of the EMTRs in both countries. The new empirical results show
that, in contrast to the existing evidence, the EMTR on investment
financed by either retained earnings or new equity has indeed declined
over time in both countries, while the EMTR on debt-financed investment
has remained relatively stable. Keywords: Capital income taxation; dividend policy; effective marginal tax rates; financial constraints JEL Classification: H3 |
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E2011/12 | Tiantian Zhang and Kent Matthews (April 2011) Efficiency Convergence Properties of Indonesian Banks 1992-2007 (1445K, 28 pages) AbstractThis
paper examines the convergence properties of cost efficiency for
Indonesian banks for the period 1992-2007. It employs the Simar and
Wilson's (2007) two stage semi-parametric double bootstrap DEA
procedure to estimate cost efficiency. Using panel data estimation, the
paper examines ß-convergence and σ,-convergence, to test the speed at
which Indonesian banks are converging, towards the best practice and
country average. We find evidence that in general the post-crisis
structural reform process improved the average level of efficiency and
improved the distribution of efficiency across banks significantly. The
Asian financial crisis and the structural reform had the effect of
slowing the adjustment speed of bank efficiency. Keywords: Banks; Efficiency; Indonesia; Convergence JEL Classification: G21; G28 |
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E2011/11 | Lorant Kaszab (April 2011) Fiscal Policy Multipliers in a New Keynesian Model under Positive and Zero Nominal Interest Rate (1290K, 42 pages) AbstractThis
paper uses a simple new-Keynesian model (with and without capital) and
calculates multipliers of four types. That is, we assume either an
increase in government spending or a cut in sales/labor/capital tax
that is financed by lump-sum taxes (Ricardian evidence holds). We argue
that multipliers of a temporary fiscal stimulus for separable
preferences and zero nominal interest rate results in lower values than
what is obtained by Eggertsson (2010). Using Christiano et al. (2009)
non-separable utility framework which they used to calculate spending
multipliers we study tax cuts as well and find that sales tax cut
multiplier can be well above one (joint with government spending) when
zero lower bound on nominal interest binds. In case of a permanent
stimulus we show in the model without capital and assuming
non-separable preferences that it is the spending and wage tax cut
which produce the highest multipliers with values lower than one. In
the model with capital and assuming that the nominal rate is fixed for
a one-year (or two-year) duration we present an impact multiplier of
government spending that is very close to the one in Bernstein and
Romer (2009) but later declines with horizon in contrast to their
finding and in line with the one of Cogan et al. (2010). We also
demonstrate that the long-run spending multiplier calculated similarly
to Campolmi et al. (2010) implies roughly the same value for both types
of preferences for particular calibrations. For comparison, we also
provide long-run multipliers using the method proposed by Uhlig (2010). Keywords: New-Keynesian model; fiscal multipliers; zero lower bound; monetary policy; government spending; tax cut; permanent; transitory JEL Classification: E52; E62 |
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E2011/10 | Lucun Yang (April 2011) An Empirical Analysis of Current Account Determinants in Emerging Asian Economies (1392K, 49 pages) AbstractLimited
empirical work has been done to the diverging current account balances
of the individual emerging Asian economies. Based on the intertemporal
approach to current account, this paper empirically examines both the
long-run and short-run impacts of initial stock of net foreign assets,
degree of openness to international trade, real exchange rate and
relative income on current account balances for eight selected emerging
Asian economies over the period 1980-2009, making use of the
cointegrated VAR (Vector Autoregression) methodology. This paper finds
that current account behaviours in emerging Asian economies are
heterogeneous. Initial stock of net foreign assets and degree of
openness to international trade are important factors in explaining the
long-run behaviour of current accounts. Moreover, the current accounts
of all sample economies have a self-adjusting mechanism except China.
Short-run current account adjustment towards long-run equilibrium path
is gradual, with the disequilibrium term being the main determinant of
the short-run current account variations. Keywords: Current account;Emerging Asia;Structural and macroeconomic determinants;Saving-investment balance;Cointegration JEL Classification: E21; F10; F32; F41 |
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E2011/9 | Jingwen Fan and Michael G Arghyrou (March 2011) UK Fiscal Policy Sustainability, 1955-2006 (1124K, 26 pages) AbstractWe
test for fiscal policy sustainability in the UK for the period
1955-2006. We find evidence of sustainability with three structural
breaks, respectively occurring in the early 1970s, early 1980s and late
1990s. UK fiscal policy has been sustainable throughout the sample
period except from 1973-1981 when a non-Ricardian regime applied. For
the remaining periods correction of fiscal disequilibrium occurs
through adjustments in public revenue rather than expenditure. Finally,
we find evidence of non-linear fiscal adjustment, with UK authorities
not reacting to relatively small deficits,but correcting exceedingly
large deficits and any temporary surpluses relatively fast. Keywords: Fiscal policy; Sustainability; UK; Structural breaks; Non-linear adjustment JEL Classification: E62; H60 |
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E2011/8 | Jing Dang, Max Gillman and Michal Kejak (March 2011) Real Business Cycles with a Human Capital Investment Sector and Endogenous Growth: Persistence, Volatility and Labor Puzzles (1209K, 43 pages) AbstractA
positive joint two-sector productivity shock causes Rybczynski (1955)
and Stolper and Samuelson (1941) effects that release leisure time and
initially raises the relative price of human capital investment so as
to favor it over goods production. This enables a basic RBC model,
modified by having the household sector produce human capital
investment sector, to succeed along related major dimensions of output,
consumption, investment and labor, similar to the international
approach of Maodifying the dynamics relative to the important work of
Jones et al. (2005), two key US facts stressed by Cogley and Nason
(1995) are captured: persistent movements in the growth rates of output
and hump-shaped impulse responses of output. Further, physical capital
investment has data consistent persistence within a hump-shaped impulse
response. And Gali's (1999) challenging empirical finding that labour
supply decreases upon impact of a positive productivity shock is
reproduced, while volatility in working hours is also data-consistent
because of the substitution between market and nonmarket sectors. Keywords: Real business cycle; human capital; persistence; volatility; labor JEL Classification: E24; E32; O41 |
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E2011/7 | Hongru Zhang (March 2011) Financial Sector Shocks, External Finance Premium and Business Cycle . (1304K, 45 pages) AbstractThis
paper extends Nolan and Thoenissen (2009), hence NT, model with an
explicit financial intermediary that transfer funds from households to
entrepreneurs subject to a well defined loan production function. The
loan productivity shock is treated as the supply side financial
disturbance. Together with NT.s net worth shock that resembles the
credit demand perturbation, both of the two-sided shocks are robustly
extracted by combining the model with US quarterly data. The two shocks
are found to be tightly linked with the post-war recessions. Each
recession happens when both of the two shocks become contractionary. A
few potential economic downturns seem to have been avoided because of
the expansion of credit which offset the simultaneous contraction of
entrepreneurial net wealth. This new introduced shock has significant
explanatory power for the variance of EFP and the model simulated EFP
holds high correlation with various spreads as proxies for empirical
EFP. Keywords: DSGE modeling; corporate net
wealth shock; loan productivity shock; external financing; shock
construction; historical decomposition; variance decomposition JEL Classification: E32; E44; G21 |
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E2011/6 | Sheikh Selim (March 2011) Optimal Taxation and Redistribution in a Two Sector Two Class Agents' Economy (1049K, 19 pages) AbstractWe
examine the optimal taxation problem in a two sector neoclassical
economy with workers and capitalists. We show that in a steady state of
this economy the optimal policy may involve a capital income tax or
subsidy, differential taxation of labour income and redistribution. The
level and the direction of the redistribution associated with such an
optimal policy depends on the pre tax allocation of capital but not on
the social weights attached to the different groups of taxpayers.
Excess production of consumption goods creates a difference between the
social marginal values of consumption and investment which in turns
violates the production efficiency condition. Such a difference can be
undone by taxing capital income from the consumption sector, and with
this optimal policy the government can implement a redistribution
scheme where both workers and capitalists bear the burden of distorting
taxes. On the contrary, an optimal policy that involves a capital
income subsidy in the production of consumption can implement
allocations that minimize the relative price difference between
consumption and investment that resulted from the excess production of
investment goods. Keywords: Optimal taxation; Ramsey problem; Two Sector Economy; Redistribution JEL Classification: C61; E13; E62; H21 |
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E2011/5 | Michael C. Hatcher (March 2011) Price-level targeting versus inflation targeting over the long-term (1368K, 50 pages) AbstractThis
paper investigates the long-term impact of price-level targeting on
social welfare in an overlapping generations model in which the young
save for old age by investing in productive capital and indexed and
nominal government bonds. A key feature of the model is that the extent
of bond indexation is determined endogenously in response to monetary
policy as part of an optimal commitment Ramsey policy. Due to the
absence of base-level drift under price-level targeting, long-term
inflation risk is reduced by an order of magnitude compared to
inflation targeting. Consequently, real bond returns are stabilised
somewhat, and consumption volatility for old generations is reduced by
around 15 per cent. The baseline welfare gain from price- level
targeting is equivalent to a permanent increase in aggregate
consumption of only 0.01 per cent, but this estimate is strongly
sensitive on the upside. Keywords: inflation targeting; price-level targeting; optimal indexation; government bonds JEL Classification: E52; E58 |
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E2011/4 | Max Gillman (February 2011, updated May 2011) A Simple Theory of Structural Transformation (1164K, 40 pages) AbstractThe
paper presents a theory of the industrial transformation amongst
sectors using endogenous growth theory. Allowing only a slight upward
trend in the productivity of the human capital sector, combined with
ascending degrees of human capital shares of sectoral output, in say,
agriculture, manufacturing and services, output gradually shifts
relatively over time from agriculture to manufacturing and to services.
Abstracting from international trade theory, sectors intensive in the
factor that is becoming relatively more plentiful find their relative
outputs expanding. Adding more sectors of greater human capital
intensity causes labor time to decrease within each sector, as shown
for agriculture, and in general for any number of sectors. Keywords: Human Capital Intensity; Sectoral Allocation; Labor Shares; Secular Endogenous Growth JEL Classification: E25; F11; J24; O14 |
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E2011/3 | Michael C. Hatcher (January 2011, updated March 2011) Optimal indexation of government bonds and monetary policy (1350K, 46 pages) AbstractUsing
an overlapping generations model in which the young save for old age
using indexed and nominal government bonds, this paper investigates how
optimal indexation is influenced by monetary policy. In order to do so,
two monetary policies with markedly different long run implications are
examined: inflation targeting and price-level targeting. Optimal
indexation differs significantly under the two regimes. Under inflation
targeting, long-term inflation uncertainty is substantial due to
base-level drift in the price level. Nominal bonds are thus a poor
store of value and optimal indexation is relatively high (76 per cent).
With price-level targeting, by contrast, long-term inflation
uncertainty is minimal because the price level is trend-stationary.
This makes nominal bonds a better store of value compared to indexed
bonds, reducing optimal indexation somewhat (26 per cent). Importantly
for these results, the model captures two imperfections of indexation
(indexation bias and lagged indexation) that are calibrated to the UK
case. Keywords: optimal indexation; government bonds; inflation targeting; price-level targeting JEL Classification: E52; E58 |
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E2011/2 | Sheikh Selim (January 2011) The Impact of Price Regulations on Regional Welfare and Agricultural Productivity in China (1077K, 9 pages) AbstractThe
nineties' agricultural reform in China that was aimed at deregulating
the agricultural market eventually resulted in a huge drop in
agricultural production and a high rate of inflation in agricultural
prices,this apparently motivated the government to take over the
control of agricultural prices in 1998. We examine how and to what
extent this reform affected the productivity and welfare of grain
farmers in China at the regional level. We find that the price
regulation that destroyed the incentive to exert more effort adversely
affected the growth in agricultural productivity but contributed to the
growth in farmers. welfare. Although the price regulations resulted in
short term improvement in welfare across all the regions, for the long
run such regulations can result in larger drop in agricultural
production because of its negative impact on incentives to produce
more. Keywords: China; Welfare; TFP; Agriculture; Grain Production JEL Classification: N55; O13; O53; Q12 |
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E2011/1 | Kul B Luintel and Mosahid Kahn (January 2011) Basic, Applied and Experimental Knowledge and Productivity: Further Evidence (960K, 11 pages) AbstractAnalyzing
a novel dataset we find significantly positive effects of basic, and
applied and experimental knowledge stocks on domestic output and
productivity for a panel of 10 OECD countries. This letter updates the
work of, among others, Mansfield (1980), Griliches (1986) and Adams
(1990), at an international setting. Keywords: Basic and Applied Research;TFP;Panel Co-integration JEL Classification: F12; F2; O3 |
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E2010/17 | Sheikh Selim, Naima Parvin and Vasita Patel (December 2010) Interaction and Non-neutral Effects of Factors in Chinese Wheat Production (1152K, 26 pages) AbstractIn
this paper we examine the role of the interaction between labour
productivity and the use of factors in explaining the recent
(1998-2007) 11% decline in wheat production in China. We employ a
non-neutral stochastic production frontier approach that enables us to
identify the interaction and non-neutral effects of factors that are
used in wheat production. For regional level wheat production in China
we find that identifying the technical inefficiency effects and the
non-neutral effects of factors assist big time in explaining the recent
decline in wheat production. A higher level of labour productivity can
stimulate efficiency gains in production, but adding more labour to the
workforce or adding to the stock of machinery power can depress this
potential marginal efficiency gain. We also find significant marginal
efficiency gain of land reforms that add to the stock of cultivable
land. Our results indicate that future agricultural reforms in China
should address the incentive scheme for labour. Keywords: China; Stochastic Frontier; Factor Interaction; Non neutrality; Agriculture; Wheat Production JEL Classification: N55; O13; O53; Q12 |
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E2010/16 | Vasita Patel and Sheikh Selim (December 2010, updated January 2011) Reforms, Incentives, Welfare and Productivity Growth in Chinese Wheat Production (1202K, 32 pages) AbstractFollowing
the rural reform in 1978 a series of agricultural reforms were
introduced in China with an aim to create incentives for the farmers to
produce more. The nineties. price reform that was aimed at deregulating
the agricultural market eventually resulted in a huge drop in
agricultural production,this apparently motivated the government to
take over the control of agricultural prices in 1998. For a dataset
that covers all the major rural reforms undertaken in China, we examine
how and to what extent these reforms affected the productivity and
welfare of wheat farmers in China. We find that the nineties. price
reforms resulted in a high magnitude of effort-response from wheat
farmers which led to a faster growth of the incentive component of
productivity. Due to random weather shocks this response did not result
in the expected level of profit and as a result the farmers suffered a
decline in welfare. The regulations introduced in 1998 destroyed the
incentive-induced growth in TFP. In general wheat farmers in China
responded highly when markets were made more competitive, and their
effort-response for flat subsidies (e.g. the ones introduced in the
eighties) was very marginal. Keywords: China; Incentives; TFP; Agriculture; Wheat Production JEL Classification: N55; O13; O53; Q12 |
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E2010/15 | Sheikh Selim (November 2010) Optimal Tax Policy and Wage Subsidy in an Imperfectly Competitive Economy (1009K, 9 pages) AbstractIn
an imperfectly competitive economy with direct and indirect taxes, the
first best wage subsidy overcompensates workers and provides the
incentive to misreport working hours. We show that in the second best
optimum where the government cannot use a wage subsidy, the optimal
policy is to tax labour income at a zero rate. This policy is optimal
because it minimizes the incentive to misreport working hours. Keywords: Optimal Taxation; Ramsey Problem; Wage Subsidy JEL Classification: D42; E62; H21; H30 |
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E2010/14 | Michael G Arghyrou and John D. Tsoukalas (November 2010) The Option Of Last Resort: A Two-Currency Emu (1003K, 5 pages) AbstractThis
article, originally published at www.roubini.com on 7 February 2010,
spells out our two-currency EMU proposal as a plan of last resort for
resolving the present EMU sovereign-debt crisis. The key ingredients of
our proposal involve a temporary split of the euro into two currencies,
both run by the European Central Bank. The hard euro will be maintained
by the core-EMU members whereas periphery EMU countries will adopt for
a suitable period of time the weak euro. All existing debts will
continue to be denominated in strong-euro terms. The plan involves a
one-off devaluation of the weak euro versus the strong one,
simultaneously with the introduction of far-reaching reforms and rapid
fiscal consolidation in the periphery EMU countries. We argue that due
to enhanced market credibility, our two-tier euro plan has a realistic
chance of success in resolving the EMU crisis, if all other approaches
fail. Keywords: euro; two-currency EMU JEL Classification: E44; F30; G01 |
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E2010/13 | James Davidson, David Meenagh, Patrick Minford and Michael Wickens (November 2010) Why crises happen - nonstationary macroeconomics (1573K, 27 pages) AbstractA
Real Business Cycle model of the UK is developed to account for the
behaviour of UK nonstationary macro data. The model is tested by the
method of indirect inference, bootstrapping the errors to generate 95%
confidence limits for a VECM representation of the data,we find the
model can explain the behaviour of main variables (GDP, real exchange
rate, real interest rate) but not that of detailed GDP components. We
use the model to explain how `crisis' and `euphoria' are endemic in
capitalist behaviour due to nonstationarity,and we draw some policy
lessons. Keywords: Nonstationarity; Productivity; Real Business Cycle; Bootstrap; Indirect Inference; Banking Crisis; Banking Regulation JEL Classification: E32; F32; F41 |
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E2010/12 | Kent Matthews (November 2010) Banking Efficiency in Emerging Market Economies (1168K, 19 pages) AbstractThis
paper reviews the different ways to measure bank efficiency and
highlight the results of research on bank efficiency in Asian emerging
economies. In particular it will outline the extent of research thus
far conducted on the efficiency of banks in Pakistan and comment on how
to build and improve upon them. Keywords: bank efficiency; bootstrap; Pakistan JEL Classification: G20; G21 |
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E2010/11 | Peng Zhou (October 2010, updated November 2010) An Empirical Study on Price Rigidity (1953K, 32 pages) AbstractThis
paper uses unpublished retailer-level microdata underlying UK consumer
price indices to investigate price rigidity. Based on the conventional
method, little rigidity is found in frequency of price change, since
the implied price duration is only 5.5 months. However, it
significantly underestimates the true duration (9.3 months) as
suggested by cross-sectional method. Results also exhibit conspicuous
heterogeneities in rigidity across sectors and shop types but weak
difference across regions and time. The overall distribution of
duration can be decomposed by sector into a decreasing component and a
cyclical component with 4-month cycles. Both time and state dependent
features exist in pricing. These findings support New Keynesian
theories and enable a better calibration to improve the performances of
macroeconomic models. Keywords: Price Rigidity; Price Duration; Microdata; Cross-Sectional JEL Classification: C41; D22; E31; L11 |
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E2010/10 | Patrick Minford and Zhirong Ou (October 2010) US post-war monetary policy: what caused the Great Moderation? (1557K, 34 pages) AbstractUsing
indirect inference based on a VAR we confront US data from 1972 to 2007
with a standard New Keynesian model in which an optimal timeless policy
is substituted for a Taylor rule. We find the model explains the data
both for the Great Acceleration and the Great Moderation. The
implication is that changing variances of shocks caused the reduction
of volatility. Smaller Fed policy errors accounted for the fall in
inflation volatility. Smaller supply shocks accounted for the fall in
output volatility and smaller demand shocks for lower interest rate
volatility. The same model with differing Taylor rules of the standard
sorts cannot explain the data of either episode. But the model with
timeless optimal policy could have generated data in which Taylor rule
regressions could have been found, creating an illusion that monetary
policy was following such rules. Keywords: Great Moderation; Shocks; Monetary policy; New Keynesian model; Bootstrap; VAR; Indirect inference; Wald statistic JEL Classification: E32; E42; E52; E58 |
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E2010/9 | Michael G Arghyrou and Alexandros Kontonikas (September 2010) The EMU sovereign-debt crisis: Fundamentals, expectations and contagion (1630K, 48 pages) AbstractWe
offer a detailed empirical investigation of the European sovereign debt
crisis based on the theoretical model by Arghyrou and Tsoukalas (2010).
We find evidence of a marked shift in market pricing behaviour from a
'convergence-trade' model before August 2007 to one driven by
macro-fundamentals and international risk thereafter. The majority of
EMU countries have experienced contagion from Greece. There is no
evidence of significant speculation effects originating from CDS
markets. Finally, the escalation of the Greek debt crisis since
November 2009 is confirmed as the result of an unfavourable shift in
country specific market expectations. Our findings highlight the
necessity of structural, competitiveness-inducing reforms in periphery
EMU countries and institutional reforms at the EMU level enhancing
intra-EMU economic monitoring and policy co-ordination. Keywords: euro-area; crisis; spreads; fundamentals; expectations; contagion; speculation JEL Classification: E43; E44; F30; G01; G12 |
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E2010/8 | Michael G Arghyrou (September 2010) Corruption as a form of extreme individualism: An economic explanation based on geography and climate conditions (1324K, 42 pages) AbstractWe
present a simple model explaining corruption on geography and climate
conditions. We test the model's validity in a cross-section of 115
countries. Controlling for all other corruption's determinants we find
evidence supporting the model's predictions. Corruption increases with
temperature and declines with precipitation and non-cultivatable land.
Corruption also declines with per capita GDP, democracy, median age and
British colonial heritage,and increases with natural resources,
bureaucracy and communist past. Finally, corruption declines with the
ratio of internet users to total population. This new finding is
interpreted as capturing the beneficial interaction of economic
development, human capital/education and independent news. Keywords: individualism; fairness; corruption; geography and climate conditions JEL Classification: D73; H11 |
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E2010/7 | Kul B Luintel, Mosahid Khan and Konstantinos Theodoridis (September 2010) How Robust is the R&D-Productivity relationship? Evidence from OECD Countries (1096K, 44 pages) AbstractWe
examine the robustness of R&D and productivity relationship in a
panel of 16 OECD countries. We control for fifteen productivity
determinants predicted by different theoretical models. Following the
advances in non-stationary panel data econometrics, we estimate four
variants of thirteen specifications. All models appear co-integrated.
Results are rigorously scrutinized through extensive bootstrap
simulations and sensitivity checks. R&D and human capital emerge
robust in all specifications making them universal drivers of
productivity across nations. Most other determinants are also
significant. Productivity relationships are heterogonous across
countries depending on their accumulated stocks of knowledge and human
capital. Keywords: R&D Capital Stocks; Multifactor Productivity; Heterogeneity; Panel Cointegration; Bootstrap Simulations JEL Classification: F12; F2:; O3; O4; C15 |
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E2010/6 | Huw David Dixon and Panayiotis M. Pourpourides (July 2010) General Equilibrium with Monopolistic Firms and Occasionally Binding Cash-in-Advance Constraints (1107K, 28 pages) AbstractWe
show a simple way to introduce monopolistic competition in a general
equilibrium model where prices are fully flexible, the velocity of
money is variable and cash-in-advance (CIA) constraints occasionally
bind. We establish the conditions under which money has real effects
and demonstrate that an equilibrium that occurs at a binding CIA
constraint is welfare inferior to any equilibrium that occurs at a
non-binding CIA constraint with the same level of technology. We argue
that even though the probability of a binding CIA constraint can be
increasing with money supply, under certain conditions, expansionary
money supply is welfare improving. Keywords: general equilibrium; monopolistic competition JEL Classification: D43; E31; E41; E51 |
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E2010/5 | Stefano Battilossi, Regina Escario and James Foreman-Peck (July 2010) Economic Policy and Output Volatility in Spain, 1950-1998: Was Fiscal Policy Destabilizing? (1288K, 39 pages) AbstractWas
Spanish fiscal policy destabilizing? We estimate policy reaction
functions and test the impact of fiscal shocks on growth volatility
over the period 1950-1998. We find that a transition from pro-cyclical
to countercyclical fiscal policy occurred in the late years of the
Franco regime, contributing to the stabilization of the growth pattern.
The timing of the shift, between the late 1960s and early 1970s, was
not determined by a single policy change, but rather by gradual
pressure from economic liberalization, the external constraint imposed
by a fixed exchange rate regime and the modernization of fiscal policy
instruments. The aggressiveness of fiscal shocks also decreased over
time, thus contributing to the progressive stabilization of output
growth. There appears to be little necessity to appeal to a 'Great
Moderation' of monetary policy to understand the greater stability of
the Spanish economy from the 1980s Keywords: fiscal reaction function; fiscal shocks; SVAR; growth volatility JEL Classification: E32; E62; N14 |
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E2010/4 | David R. Collie (June 2010) Multilateral Trade Liberalisation, Foreign Direct Investment and the Volume of World Trade (1088K, 11 pages) Forthcoming in Economics Letters AbstractA
paradox in international trade is that multilateral trade
liberalisation has resulted in increases in both the volume of world
trade and the amount of foreign direct investment (FDI). This note
presents a Cournot duopoly model with two regions, each consisting of
two countries, and with an inter-regional transport cost. It is shown
that multilateral trade liberalisation may lead firms to switch from
exporting to undertaking export-platform FDI when the interregional
transport cost is high. Also, when the inter-regional transport cost is
high, the switch to FDI leads to an increase in the volume of world
trade in this industry. Keywords: Trade Liberalisation; Foreign Direct Investment; Cournot oligopoly JEL Classification: F12; F13; F23 |
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E2010/3 | Michael G Arghyrou and John D. Tsoukalas (April 2010) The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes (1188K, 32 pages) Forthcoming in The World economy AbstractWe
use insights from the literature on currency crises to offer an
analytical treatment of the crisis in the market for Greek government
bonds. We argue that the crisis itself and its escalating nature are
very likely to be the result of: (a) steady deterioration of Greek
macroeconomic fundamentals over 2001-2009 to levels inconsistent with
longterm EMU participation,and (b) a double shift in markets.
expectations, from a regime of credible commitment to future EMU
participation under an implicit EMU/German guarantee of Greek fiscal
liabilities, to a regime of non-credible EMU commitment without fiscal
guarantees, respectively occurring in November 2009 and February/March
2010. We argue that the risk of contagion to other periphery EMU
countries is significant,and that without extensive structural reforms
the sustainability of the EMU is in question. Keywords: Currency crises; bonds market; expectations; fiscal guarantees; contagion JEL Classification: F31; F33; F34; F41; F42; F50 |
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E2010/2 | Cemil Selcuk (March 2010) Motivated Sellers in the Housing Market (1141K, 29 pages) AbstractWe
present a search-and-matching model of the housing market where
potential buyers' willingness to pay is private information and sellers
may become desperate as they are unable to sell. A unique steady state
equilibrium exists where desperate sellers offer sizeable price cuts
and sell faster. If the number of distressed sales rises then even
relaxed sellers are forced to lower their prices. Buyers, on the other
hand, become more selective and search longer for better deals. The
model yields a theoretical density function of the time-to-sale, which
is positively skewed and may be hump-shaped. These results are
consistent with recent empirical findings. Keywords: housing; private information; random search; motivated sellers JEL Classification: D39; D49; D83; |
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E2010/1 | Kent Matthews (February 2010, updated April 2010) Risk Management and Managerial Efficiency in Chinese Banks: A Network DEA Framework (1161K, 38 pages) AbstractRisk
Management in Chinese banks has traditionally been the Cinderella of
its internal functions. Political stricture and developmental
imperative have often overridden standard practice of risk management
resulting in large non-performing loan (NPL) ratios. One of the stated
aims of opening up the Chinese banks to foreign strategic investment is
the development of risk management functions. In recent years NPL
ratios have declined through a mixture of recovery, asset management
operation and expanded balance sheets. However, the training and
practice of risk managers remain second class compared with foreign
banks operating in China. This paper evaluates bank performance using a
Network DEA approach where an index of risk management practice and an
index of risk management organisation are used as intermediate inputs
in the production process. The two indices are constructed from a
survey of risk managers in domestic banks and foreign banks operating
in China. The use of network DEA can aid the manager in identifying the
stages of production that need attention. Keywords: Risk management; risk organisation; managerial efficiency; Network DEA JEL Classification: D23; G21; G28; |
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E2009/32 | James Foreman-Peck and Peng Zhou (December 2009, updated August 2010) The Strength and Persistence of Entrepreneurial Cultures (1213K, 34 pages) AbstractThe
twentieth century United States provides a natural experiment to
measure the strength and persistence of entrepreneurial cultures.
Assuming immigrants bear the cultures of their birth place, comparison
of revealed entrepreneurial propensities of US immigrant groups in 1910
and 2000 reflected these backgrounds. According to this test
North-western Europe, where modern economic growth is widely held to
have originated, did not host unusually strong entrepreneurial
cultures. Instead such cultures were carried by persons originating
from Greece, Turkey and Italy, together with Jews. The rise of
widespread female entrepreneurship provides additional evidence by
showing that this trait systematically responded less strongly, but in
the same way, to cultural background as did male entrepreneurship. Keywords: Entrepreneurship; Culture; Migration JEL Classification: D01; J15; J23; J61 |
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E2009/31 | Vo Phuong Mai Le, Patrick Minford and Michael Wickens (December 2009) Some problems in the testing of DSGE models (983K, 6 pages) AbstractWe
review the methods used in many papers to evaluate DSGE models by
comparing their simulated moments and other features with data
equivalents. We note that they select, scale and characterise the
shocks without reference to the data,crucially they fail to use the
joint distribution of the features under comparison. We illustrate this
point by recomputing an assessment of a two-country model in a recent
paper,we find that the paper's conclusions are essentially reversed. Keywords: Boostrap; US-EU model; DSGE; VAR; indirect inference; Wald statistic; anomaly; puzzle JEL Classification: C12; C32; C52; E1 |
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E2009/30 | Jenifer Daley and Kent Matthews (December 2009) Efficiency and Convergence in the Jamaican banking sector 1998-2007 (1140K, 24 pages) AbstractDeregulation,
re-regulation and continuing globalisation embody an imperative that
banks increase efficiency to survive. We employ non-parametric
bootstrap DEA to measure technical efficiency among Jamaican banks
between 1998 and 2007. In addition, we test for conditional convergence
to identify pointing variables for technical efficiency. Overall, the
results suggest that there has been a tendency towards improvement in
bank efficiency levels for the largest banks. The findings show strong
evidence of conditional convergence, which means that each bank is
converging to its own steady-state and that GDP growth, ownership and
size are the major influences on levels of technical efficiency. Keywords: Bank efficiency; DEA; bootstrap; convergence; Jamaica JEL Classification: G21; G28 |
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E2009/29 | Jenifer Daley and Kent Matthews (December 2009) Measuring post-crisis productivity for Jamaican banks (1323K, 22 pages) AbstractThe
study examines the changes to total factor productivity of Jamaican
banks between 1998 and 2007. Using Data Envelopment Analysis with
bootstrap to construct a Malmquist index, bank productivity is measured
and decomposed into technical progress and efficiency. The results
suggest an inconsistent growth pattern for banks between 1998 and 2007
driven mainly by efficiency gains in the immediate post-crisis period
to 2002, and by technological progress towards the end of the sample
period. The second largest banks along with merchant and locally-owned
banks showed significant productivity growth in some models, with
modest growth for commercial and foreign-owned banks. Keywords: Bank productivity; Malmquist Productivity index; DEA; bootstrapping; Jamaica JEL Classification: G21; G28 |
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E2009/28 | Jenifer Daley and Kent Matthews (December 2009) Out of many, dominance by a few? Market power in the Jamaican banking sector. (1124K, 23 pages) AbstractThis
paper presents an empirical assessment of the degree of competition
within the Jamaican banking sector during the period 1998 to 2007. The
popular H-statistic by Panzar and Rosse is utilised to
estimate market power among the sample of banks. Using usual
statistical tests, we are unable to reject monopoly/perfect collusion
for the banking market in Jamaica. This contrasts with earlier findings
using alternative estimators. Therefore, the use of a dynamic
reformulation of the model with a dynamic estimator highlights some
collusive behaviour among banks. Keywords: Competition; banking; Rosse-Panzar H-statistic; Dynamic panel estimation; Jamaica JEL Classification: G21; G28 |
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E2009/27 | Kent Matthews and Owen Matthews (December 2009) Controlling Banker's Bonuses: Efficient Regulation or Politics of Envy? (1003K, 21 pages) Published in Economic Affairs, 30, 1, March, 2010, 71-76 AbstractThe
positive relationship between bank CEO compensation and risk taking is
a well established empirical fact. The global banking crisis has
resulted in a chorus of demands to control banker's bonuses and thereby
curtail their risk taking activities in the hope that the world can
avoid a repeat in the future. However, the positive relationship is not
a causative one. In this paper we argue that the cushioning of banks
downside risks provide the incentive for banks to take excessive risk
and design compensation packages to deliver high returns.
Macro-prudential regulation will have a better chance of curbing excess
risk taking than controlling banker's compensation. Keywords: Banker's bonus;risk taking;Too-big-to-Fail;macro-prudential regulation JEL Classification: G21; G28 |
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E2009/26 | Jingwen Fan and Patrick Minford (November 2009, updated March 2011) Can the Fiscal Theory of the price level explain UK inflation in the 1970s? (1207K, 28 pages) AbstractWe
investigate whether the Fiscal Theory of the Price Level can explain UK
inflation in the 1970s. We find that fiscal policy was non-Ricardian
and money growth entirely endogenous in this period. The implied model
of inflation is tested in two ways: for its trend using cointegration
analysis and for its dynamics using the method of indirect inference.
We find that it is not rejected. We also find that the model's errors
indicate omitted dynamics which merit further research. Keywords: UK Inflation; Fiscal Theory of the Price Level; Bootstrap simulation; Indirect inference; Wald statistic JEL Classification: E31; E37; E62; E65 |
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E2009/25 | Szilárd Benk, Max Gillman and Michal Kejak (November 2009) A Banking Explanation of the US Velocity of Money: 1919-2004 (1231K, 33 pages) AbstractThe
paper shows that US GDP velocity of M1 money has exhibited long cycles
around a 1.25% per year upward trend, during the 1919-2004 period. It
explains the velocity cycles through shocks constructed from a DSGE
model and annual time series data (Ingram et al., 1994). Model velocity
is stable along the balanced growth path, which features endogenous
growth and decentralized banking that produces exchange credit.
Positive shocks to credit productivity and money supply increase
velocity, as money demand falls, while a positive goods productivity
shock raises temporary output and velocity. The paper explains such
velocity volatility at both business cycle and long run frequencies.
With filtered velocity turning negative, starting during the 1930s and
the 1987 crashes, and again around 2003, results suggest that the money
and credit shocks appear to be more important for velocity during less
stable times and the goods productivity shock more important during
stable times. Keywords: Volatility; business cycle; credit shocks; velocity JEL Classification: E13; E32; E44 |
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E2009/24 | Jenifer Daley and Kent Matthews (November 2009) Measuring bank efficiency: tradition or sophistication? - A note (1105K, 11 pages) AbstractThe
recent literature on measuring bank performance indicates a preference
for sophisticated techniques over simple accounting ratios. We explore
the results and relationships between bank efficiency estimates using
accounting ratios and Data Envelope Analysis (DEA) with bootstrap among
Jamaican banks between 1998 and 2007. The results indicate different
outcomes for the traditional accounting ratios and the sophisticated
DEA methodology in the measurement of bank efficiency. GLS random
effects two-variable regression tests for superiority using a risk
index for insolvency suggest an advantage in favour of the DEA. Keywords: Bank efficiency; Jamaica; Accounting Ratios JEL Classification: G21; G28; G29 |
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E2009/23 | Michael G Arghyrou, Andros Gregoriou and Panayiotis M. Pourpourides (November 2009) Exchange rate uncertainty and deviations from Purchasing Power Parity: Evidence from the G7 area (1124K, 14 pages) AbstractArghyrou,
Gregoriou and Pourpourides (2009) argue that exchange rate uncertainty
causes deviations from the law of one price. We test this hypothesis on
aggregate data from the G7-area. We find that exchange rate uncertainty
explains to a significant degree deviations from Purchasing Power
Parity. Keywords: Purchasing power parity; exchange rate uncertainty JEL Classification: F31; F41 |
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E2009/22 | Vo Phuong Mai Le, Patrick Minford and Michael Wickens (November 2009) The 'Puzzles' methodology: en route to Indirect Inference? (1305K, 24 pages) AbstractWe
review the methods used in many papers to evaluate DSGE models by
comparing their simulated moments with data moments. We compare these
with the method of Indirect Inference to which they are closely
related. We illustrate the comparison with contrasting assessments of a
two-country model in two recent papers. We conclude that Indirect
Inference is the proper end point of the puzzles methodology. Keywords: Bootstrap; US-EU model; DSGE; VAR; indirect inference; Wald statistic; anomaly; puzzle JEL Classification: C12; C32; C52; E1 |
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E2009/21 | Patrick Minford and Naveen Srinivasan (October 2009, updated April 2011) Determinacy in New Keynesian models: a role for money after all? (1073K, 25 pages) AbstractThe
New-Keynesian Taylor-Rule model of inflation determination with no role
for money is incomplete. As Cochrane (2007a) argues, it has no credible
mechanism for ruling out bubbles and as a results fails to provide a
reason for private agents to pick a unique stable path. We propose a
way forward. Our proposal is in effect that the New-Keynesian model
should be formulated with a money demand and money supply function. It
should also embody a terminal condition for money supply behaviour. If
an unstable path occurred the central bank would switch to a money
supply Rule explicitly designed to stop it via the terminal condition.
This would be therefore a 'threat/trigger strategy' complementing the
Taylor Rule - only to be invoked if inflation misbehaved. Thus we
answer the criticisms levelled at the Taylor Rule that it has no
credible mechanism for ruling out bubbles. However it does imply that
money cannot be avoided int he New Keynesian set-up, contrary to
Woodford (2008). Keywords: New-Keynesian; Taylor Rule; Determinacy JEL Classification: E31; E52; E58 |
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E2009/20 | Huw David Dixon (October 2009) A unified framework for understanding and comparing dynamic wage and price setting models (1205K, 45 pages) AbstractThis
paper argues that the cross-sectional approach to durations is
essential to understand nominal rigidity because this captures the fact
that price-spells are generated by firms' price-setting behavior. Since
the distribution of durations is dominated by a proliferation of short
contracts, the cross-sectional measure corrects for this by
length-biased sampling. Modelling the price-spell durations in this way
enables us to see how Taylor, Calvo and their generalizations relate to
each other, and enable us to compare price-setting behavior for a given
distribution of durations. We also show how the micro-data can be
directly related to the macroeconomic pricing models in this setting. Keywords: Price-spell; steady state; hazard rate; Calvo; Taylor JEL Classification: E50 |
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E2009/19 | Patrick Minford and Zhirong Ou (September 2009, updated May 2010) Taylor Rule or Optimal Timeless Policy? Reconsidering the Fed's behaviour since 1982 (1530K, 37 pages) AbstractWe
calibrate a standard New Keynesian model with three alternative
representations of monetary policy - an optimal timeless rule, a Taylor
rule and another with interest rate smoothing - with the aim of testing
which if any can match the data according to the method of indirect
inference. We find that the only model version that fails to be
strongly rejected is the optimal timeless rule. Furthermore this
version can also account for the widespread finding of apparent 'Taylor
rules' and 'interest rate smoothing' in the data, even though neither
represents the true monetary policy Keywords:
Monetary policy; Kew Keynesian model; the 'target rule'; Taylor-type
rules; Bootstrap simulation; VAR; Indirect inference; Wald statistic JEL Classification: E12; E17; E42; E52; E58 See also: Supporting Annex |
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E2009/18 | Rhys ap Gwilym (September 2009) The Monetary Policy Implications of Behavioral Asset Bubbles (1391K, 39 pages) AbstractI
introduce behavioral asset pricing rules into a wider dynamic
stochastic general equilibrium framework. Asset price bubbles emerge
endogenously within the model. I find that in this model the only
monetary policy that would be likely to enhance welfare is a
counter-intuitive 'running with the wind' policy. I conclude that the
optimal policy is highly dependent on the nature of the behavioral
rules that are stipulated. Given that monetary authorities have limited
information about the ways in which agents actually behave, a
systematic monetary policy response to asset price misalignments is
unlikely to enhance welfare. |
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E2009/17 | Rhys ap Gwilym (September 2009) Can behavioral finance models account for historical asset prices? (1129K, 10 pages) AbstractI
construct a behavioral model of asset pricing in which agents choose
whether to base their expectations on chartist or fundamental
forecasts. I simulate the model in order to test its efficacy in
explaining the moments and time series properties of the FTSE All-Share
index, and find that the model cannot be rejected as the data
generating process. Keywords: Behavioral finance; Asset pricing JEL Classification: G12; D03 |
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E2009/16 | Parantap Basu, Max Gillman and Joseph Pearlman (September 2009) Inflation, Human Capital and Tobin's q (1130K, 36 pages) AbstractA
pervasive empirical finding for the US economy is that inflation is
negatively correlated with the normalized market price of capital
(Tobin's q) and growth. A dynamic stochastic general
equilibrium model of endogenous growth is developed to explain these
stylized facts. In this model, human capital is the principal driver of
self-sustained growth. Long run comparative statics analysis suggests
that inflation diverts scarce time resource to leisure which lowers
human capital utilization. This impacts growth adversely and modulates
capital adjustment cost downward resulting in a decline in Tobin's q. For the short run, a Tobin effect of inflation on growth weakens the negative association between inflation and q. |
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E2009/15 | James Foreman-Peck (September 2009) The Western European Marriage Pattern and Economic Development (1139K, 32 pages) AbstractFor
several centuries, women's age at first marriage in Western Europe was
higher than in the east (and in the rest of the world). Over the same
period Western Europe began slow but sustained economic development
relative to elsewhere. A model based on the economics of the household
explains this association in two related ways. Both connect mortality,
and the exercise of fertility restraint through higher marriage age,
with greater human capital accumulation. The first explanation is
simply an association but the second proposes a causal link where
higher age of motherhood reduced the cost of investment in children.
Evidence is provided that the causal process was operative in later
nineteenth century Europe Keywords: Human Capital; Household Production; Economic Development; 19th Century Europe JEL Classification: N13; N33; O15; J12; J24 |
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E2009/14 | Kent Matthews and Nina Zhang (September 2009) Bank Productivity in China 1997-2007: An Exercise in Measurement (1281K, 41 pages) AbstractThis
study examines the productivity growth of the nationwide banks of China
and a sample of city commercial, banks for the eleven years to 2007.
Estimates of total factor productivity growth are constructed with
appropriate confidence intervals, using a bootstrap method for the
Malmquist index. The study adjusts for the quality of the output by
accounting for the non-performing loans on the balance sheets of the
banks and tests for the robustness of the results by examining
alternative sets of outputs. The productivity growth of the state-owned
commercial banks (SOCBs) is compared with the joint-stock banks (JSCBs)
and city commercial banks (CCBs). The results show that average total
factor productivity for the joint-stock banks was better than that of
the state-owned banks for some models of measurement but not others.
But the average city commercial banks improved its productivity growth
both in terms of frontier shift and efficiency gain throughout the
whole period. The study also shows that individual state-owned and
joint-stock banks did improve their productivity growth and defined an
improving production frontier. Most other banks lagged behind so that
the gap between the inefficient banks and the most efficient banks
widened. While individual banks improved their productivity growth
there is no evidence that the average productivity growth of Chinese
banks as a whole improved in the run-up to WTO. Keywords: Bank Efficiency; Productivity; Malmquist index; Bootstrap JEL Classification: D24; G21; |
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E2009/13 | Kent Matthews, Zhiguo Xiao and Xu Zhang (September 2009) Rational Cost Inefficiency in Chinese Banks (1262K, 34 pages) AbstractAccording
to a frequently cited finding by Berger et al (1993), X-inefficiency
contributes 20% to cost-inefficiency in western banks. Empirical
studies of Chinese banks tend to place cost-inefficiency in the region
of 50%. Such estimates would suggest that Chinese banks suffer from
gross cost inefficiency. Using a non-parametric bootstrapping method,
this study decomposes cost-inefficiency in Chinese banks into
X-inefficiency and allocative-inefficiency. It argues that allocative
inefficiency is the optimal outcome of input resource allocation
subject to enforced employment constraints. The resulting analysis
suggests that allowing for rational allocative inefficiency,Chinese
banks are no better or worse than their western counterparts. Keywords: Bank Efficiency; China; X-inefficiency; DEA; Bootstrapping JEL Classification: D23; G21; G28 |
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E2009/12 | James Foreman-Peck and Simon Moore (August 2009) Gratuitous Violence and the Rational Offender Model (1214K, 32 pages) AbstractRational
offender models assume that individuals choose whether to offend by
weighing the rewards against the chances of apprehension and the
penalty if caught. While evidence indicates that rational theory is
applicable to acquisitive crimes, the explanatory power for gratuitous
non-fatal violent offending has not been evaluated. Lottery-type
questions elicited risk attitudes and time preferences from respondents
in a street survey. Admitted violent behaviour was predictable on the
basis of some of these responses. Consistent with the rational model,
less risk averse and more impatient individuals were more liable to
violence. Such people were also more likely to be victims of violence.
In line with a 'subjective' version of the rational model, respondents
with lower estimates of average violence conviction chances and of
fines were more prone to be violent. Keywords: Violence; alcohol; risk; intertemporal choice; rational offending JEL Classification: D81; D9; K14 |
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E2009/11 | David R. Collie (July 2009) Immiserizing Growth and the Metzler Paradox in the Ricardian Model (1150K, 25 pages) Forthcoming in International Economic Journal AbstractConditions
for the occurrence of immiserizing growth and the Metzler paradox are
analysed in the Ricardian model when consumers in the foreign country
have Leontief preferences while consumers in the home country have
Cobb-Douglas preferences. By using specific functional forms, the
conditions for the occurrence of the two paradoxes are defined in terms
of the exogenous parameters of the model rather than endogenous
variables such as the elasticity of demand for exports in the
conditions of Bhagwati (1958) and Metzler (1949a and b). It is shown
that the simultaneous occurrence of both paradoxical results is
possible for some parameter values. Keywords: Immiserizing Growth; Metzler Paradox; Import Tariffs; Ricardian Model JEL Classification: F11; F13 |
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E2009/10 | Patrick Minford (July 2009) The Banking Crisis - A Rational Interpretation (1010K, 9 pages) Published in Political Studies Review, vol. 8(1) (2010), 40-54 AbstractModern
macroeconomic models have been widely criticised as relying too much on
rationality and market efficiency. However, basically their predictions
about this crisis are being borne out by events. 'Crashes' are an
integral part of an 'efficient market' capitalism and are brought on by
swings in the news about productivity growth,this time nearly two
decades of strong computer-based productivity growth were brought to a
crashing halt by raw material shortages. This presages a slow recovery
until innovation in material use frees growth up again as it did in the
1990s after the shortages of the 1970s. Keywords: Macroeconomic models; Banking Crisis JEL Classification: E0 |
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E2009/9 | Mark A Clatworthy, Christopher K.M. Pong and Woon K. Wong (August 2009, updated October 2011) Auditor Quality and the Role of Accounting Information in Explaining UK Stock Returns (1380K, 34 pages) AbstractIn
this paper, we examine the relative importance of the cash flow and
accruals components of earnings in explaining the variation in UK
company equity returns, together with the extent to which these
relationships vary by auditor quality. We use a multivariate
time-series approach that can be reconciled to a log-linear theoretical
valuation model and, unlike the standard linear regression of returns
on earnings components, accommodates time varying discount rates. Based
on a decomposition of the variance of equity returns, cash flows and
accruals, our results indicate that both cash flow news and accruals
news are important drivers of equity returns, though cash flows are
more influential than accruals. We also find that auditor quality
moderates these relationships, since variation in both earnings
components has a more significant effect for clients of large auditors.
Finally, our results indicate that the impact of auditor quality is
highest for the accruals component of earnings. |
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E2009/8 | David R. Collie (June 2009) Tacit Collusion over Foreign Direct Investment under Oligopoly (1308K, 36 pages) AbstractA
two-country model of the FDI versus export decisions of firms is
analysed. The analysis considers both the Cournot duopoly and the
Bertrand duopoly models with differentiated products. It is shown that
the static game is often a prisoners' dilemma where both firms are
worse off when they both undertake FDI. To avoid the prisoners'
dilemma, in an infinitely-repeated game, the firms can collude over
their FDI versus export decisions. Then, a reduction in trade costs may
lead firms to switch from exporting to undertaking FDI when trade costs
are relatively high. Also, collusion over FDI may increase welfare. Keywords: Collusion; Trade Liberalisation; Foreign Direct Investment; Cournot Oligopoly; Bertrand Oligopoly; Infinitely-Repeated Game JEL Classification: F12; F23; L13; L41; M16 |
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E2009/7 | Saeed Al-Muharrami and Kent Matthews (June 2009) Market Power versus Efficient-Structure in Arab GCC Banking (978K, 21 pages) Copyright NoticeAuthor Posting. (c) 'Copyright Holder', 2009. This
is the author's version of the work. It is posted here by permission of
'Copyright Holder' for personal use, not for redistribution. The
definitive version was published in Applied Financial Economics, Volume
19 Issue 18, September 2009. doi:10.1080/09603100902845478 Published in Applied Financial Economics, Volume 19 Issue 18, September 2009, pp. 1487-1496. AbstractThis paper evaluates the performance of the Arab GCC banking industry in the context of the Structure-Conduct-Performance
hypothesis in the period 1993-2002. The paper uses panel estimation
differentiating between bank fixed effects and country fixed effects.
It examines the Relative-Market-Power and the Efficient-Structure
hypotheses differentiating between the two by employing a
non-parametric measure of technical efficiency, and finds that the
banking industry in the Arab GCC countries is best explained by the
mainstream SCP hypothesis. The empirical results do not find any
support for the Hicks (1935) "Quiet Life" version of the market power
hypothesis. Keywords: GCC Banking; Structure Conduct Performance JEL Classification: G2; L1 |
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E2009/6 | GuangJie Li and Roberto Leon-Gonzalez (March 2009) A Correction Function Approach to Solve the Incidental Parameter Problem (1411K, 44 pages) AbstractFollowing
Lancaster (2002), we propose a strategy to solve the incidental
parameter problem. The method is demonstrated under a simple panel
Poisson count model. We also extend the strategy to accomodate cases
when information orthogonality is unavailable, such as the linear AR(p)
panel model. For the AR(p) model, there exists a correction function to
fix the incidental parameter problem when the model is stationary with
strictly exogenous regressors. MCMC algorithms are developed for
parameter estimation and model comparison. The results based on the
simulated data sets suggest that our method could achieve consistency
in both parameter estimation and model selection. Keywords:
dynamic panel data model with fixed effect; incidental parameter
problem; consistency in estimation; model selection; Bayesian model
averaging; Markov chain Monte Carlo (MCMC) JEL Classification: C52; C11; C12; C13; C15 |
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E2009/5 | GuangJie Li (March 2009) Consistent Estimation, Model Selection and Averaging of Dynamic Panel Data Models with Fixed Effect (1322K, 44 pages) AbstractIn
the context of an autoregressive panel data model with fixed effect, we
examine the relationship between consistent parameter estimation and
consistent model selection. Consistency in parameter estimation is
achieved by using the transformation of the fixed effect proposed by
Lancaster (2002). We find that such transformation does not necessarily
lead to consistent estimation of the autoregressive coefficient when
the wrong set of exogenous regressors are included. To estimate our
model consistently and to measure its goodness of fit, we argue for
comparing different model specifications using the Bayes factor rather
than the Bayesian information criterion based on the biased maximum
likelihood estimates. When the model uncertainty is substantial, we
recommend the use of Bayesian Model Averaging. Finally, we apply our
method to study the relationship between financial development and
economic growth. Our findings reveal that stock market development is
positively related to economic growth, while the effect of bank
development is not as significant as the classical literature suggests. Keywords:
dynamic panel data model with fixed effect; incidental parameter
problem; consistency in estimation; model selection; Bayesian Model
Averaging; finance and growth JEL Classification: C52; C11; C13; C15 |
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E2009/4 | GuangJie Li (March 2009, updated August 2009) The Horizon Effect of Stock Return Predictability and Model Uncertainty on Portfolio Choice: UK Evidence (1391K, 44 pages) AbstractWe
study how stock return's predictability and model uncertainty affect a
rational buy-and-hold investor.s decision to allocate her wealth for
different lengths of investment horizons in the UK market. We consider
the FTSE All-Share Index as the risky asset, and the UK Treasury bill
as the risk free asset in forming the investor's portfolio. We identify
the most powerful predictors of the stock return by accounting for
model uncertainty. We find that though stock return predictability is
weak, it can still affect the investor's optimal portfolio decision
over different investment horizons. Keywords: stock return predictability; portfolio choice; Bayesian Model Averaging; SUR model JEL Classification: C11; G11; G15 |
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E2009/3 | Vo Phuong Mai Le, David Meenagh, Patrick Minford and Michael Wickens (March 2009, updated December 2009) Two Orthogonal Continents: Testing a Two-country DSGE Model of the US and EU Using Indirect Inference (1768K, 51 pages) Published in Open Economies Review 21(1) pp. 23-44 February 2010. AbstractWe
examine a two country model of the EU and the US. Each has a small
sector of the labour and product markets in which there is wage/price
ridigity, but otherwise enjoys flexible wages and prices with a one
quarter information lag. Using a VAR to represent the data, we find the
model as a whole rejected. Howerver it is accepted for particular
features of the data, such as output and (marginally) inflation
behaviour. The model highlights a lack of spillovers between the US and
the EU. Keywords: Bootstrap; Open economy model; DGSE; VAR; New Keynesian; New Classical; indirect inference; Wald statistic JEL Classification: C12; C32; C52; E1 |
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E2009/2 | Michael G Arghyrou, Andros Gregoriou and Panayiotis M. Pourpourides (January 2009, updated July 2009) A
new solution to the purchasing power parity puzzles? Risk-aversion,
exchange rate uncertainty and the law of one price: Insights from the
market of online air-travel tickets (1188K, 27 pages) Forthcoming in Canadian Journal of Economics AbstractWe
argue that even in perfectly frictionless markets risk aversion driven
by exchange rate uncertainty may cause a wedge between the domestic and
foreign price of a totally homogeneous good. We test our hypothesis
using a natural experiment based on a unique micro-data set from a
market with minimum imperfections. The empirical findings validate our
hypothesis, as accounting for exchange rate uncertainty we are able to
explain a substantial proportion of deviations from the law of one
price. Overall, our analysis suggests the possibility of a new solution
to the purchasing power parity puzzles. Keywords: Law of one price; purchasing power parity; risk aversion; exchange rate uncertainty JEL Classification: F31; F41 |
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E2009/1 | Vo Phuong Mai Le, Patrick Minford and Eric Nowell (January 2009) Economic Policy: protectionism as an elite strategy (1128K, 22 pages) Published in The European Union and World Politics (eds. Andrew Gamble and David Lane), Palgrave Macmillan, ISBN 9780230221499, 2009 AbstractThe
EU has pursued protectionist policies not merely in food but also in
manufacturing at the customs union level. In services it has not
dismantled much of the existing national protectionism. The economic
costs are calculated here at some 3% of GDP for the UK and some 4% for
the rest of the EU - or much larger under liberal planning assumptions.
Added to its social interventionism, these costs suggest that the EU
has put political integration before economic efficiency. This
policymaking pattern suggests that European elites believe their
position would be threatened by the domestic effects of world
competition. Keywords: protectionism; manufactures; anti-dumping; tariff equivalent; customs union; competition JEL Classification: F13; F14 |
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E2008/32 | Vo Phuong Mai Le, David Meenagh, Patrick Minford and Michael Wickens (December 2008, updated July 2011) How much nominal rigidity is there in the US economy? Testing a New Keynesian DSGE Model using indirect inference (1327K, 37 pages) Forthcoming in Journal of Economic Dynamics and Control AbstractWe
evaluate the Smets-Wouters New Keynesian model of the US postwar
period, using indirect inference, the bootstrap and a VAR
representation of the data. We find that the model is strongly
rejected. While an alternative (New Classical) version of the model
fares no better, adding limited nominal rigidity to it produces a
`weighted' model version closest to the data. But on data from 1984
onwards - the `great moderation' - the best model version is one with a
high degree of nominal rigidity, close to New Keynesian. Our results
are robust to a variety of methodological and numerical issues. Keywords:
Bootstrap; US model; DGSE; VAR; New Keynesian; New Classical; indirect
inference; Wald statistic; regime change; structural break; great
moderation JEL Classification: C12; C32; C52; E1 See also: Supporting Annex |
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E2008/31 | Eric Scheffel (December 2008) Consumption Velocity in a Cash Costly-Credit Model (1447K, 34 pages) AbstractIn
a seminal study Hodrick et al. (1991) evaluate the ability of a simple
cash-credit model to produce realistic variability in consumption
velocity while at the same time successfully explaining other key
statistics. Sufficient variability in the latter is found to be
associated with far too volatile interest rate behaviour. Introducing
habit-formation in consumption into a production-based cash
costly-credit model (see Gillman and Benk, 2007) makes the evolution of
deposits more rigid relative to credit. The same deposit rigidity leads
to a more volatile price of credit, causing credit production
overshooting relative to deposits. But only by introducing adjustment
costs to investment in addition to habit persistence does credit
production overshoot sufficiently to produce realistic variability in
consumption velocity. The model succeeds in capturing sufficient
variability in consumption velocity without obtaining too volatile
interest rates. Also, this model of endogenous velocity does not suffer
from indeterminacy problems discussed in Auray et al. (2005). In
contrast to Gillmand and Benk (2007), the present study examies the
role of the price-channel of credit production at business cycle
frequency, ignoring or holding fixed the marginal cost channel stemming
from credit productivity shocks. Keywords: Velocity; Consumption; Interest Rates JEL Classification: E0; E2; E3; E4 |
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E2008/30 | Eric Scheffel (December 2008) A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles (1725K, 67 pages) AbstractMicro-founded
de-centralized financial intermediation in a cash and costly-credit
model (see Gillmand and Kejak, 2008) results in a cost-distortion of
returns implying a lower average nominal and real risk-free rate when
compared to standard cah-in-advance RBC models. Failure of both
short-run and long-run Fisher equation relationships based on
observable real and nominal rates and inflation are obtained. The
cost-distortion also leads to an unconditionally upward-sloping average
yield curve of interest rates which is also convex in shape. The model
is capable of producing a positive correlation between the nominal rate
and velocity, and a negative correlation between the ex-post real rate
and inflation. More importantly, the model also predicts a negative
correlation between the ex-ante real rate and the ex-ante expected rate
of inflation. Finally, the condition spread between the usual CCAPM
rate as defined by Canzoneri and Diba (2005) and the model-implied
money market rate is positively correlated with the stance of monetary
policy, offering a new perspective on this systematic link recently
studied empirically by Canzoneri et al. (2007a) and theoretically by
Canzoneri and Diba (2005). Keywords: Business cycles;Money;Term structure of interest rates JEL Classification: E4; E44 |
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E2008/29 | Kul B Luintel and Mosahid Khan (December 2008) Heterogeneous Ideas Production and Endogenous Growth: An Empirical Investigation (1103K, 47 pages) Published in Canadian Journal of Economics, vol. 42 (2009), 1176-1205 AbstractWe
examine the dynamics of ideas production and knowledge-productivity
relationship in a panel of 19 OECD countries. A new data set of triadic
patents is used. We rigorously address the issues of cross-country
heterogeneity and endogeneity. Domestic and foreign ideas stocks exert
positive but heterogeneous effects on ideas production. We find
evidence of duplicate R&D but little support for endogenous growth.
Countries with low domestic ideas bases could considerably improve
productivity through ideas accumulation,however, this effect is modest
for countries with sizeable ideas bases. An implication is that
country-specific R&D policy appears potentially more effective than
the one-size-fits-all approach. Keywords: Knowledge Stocks;Dynamic Heterogeneity;TFP;Methods of Moments JEL Classification: F12; F2; O3; O4; C15 |
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E2008/28 | Szilárd Benk, Max Gillman and Michal Kejak (November 2008) US Volatility Cycles of Output and Inflation, 1919-2004: A Money and Banking Approach to a Puzzle (1525K, 43 pages) AbstractThe
post-1983 moderation coincided with an ahistorical divergence in the
money aggregate growth and velocity volatilities away from the downward
trending GDP and inflation volatilities. Using an endogenous growth
monetary DSGE model, with micro-based banking production, enables a
contrasting characterization of the two great volatility cycles over
the historical period of 1919-2004, and enables this puzzle to be
addressed more easily. The volatility divergence is explained by the
upswing in the credit volatility that kept money supply variability
from translating into inflation and GDP volatility. Keywords: Volatility; money and credit shocks; growth; inflation JEL Classification: E13; E32; E44 |
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E2008/27 | David R. Collie and Vo Phuong Mai Le (November 2008) Anti-Dumping Regulations: Anti-Competitive and Anti-Export (996K, 20 pages) Published in Review of International Economics, Vol. 18, No. 5, 2010, pp. 796-806. AbstractIn
a Bertrand duopoly model, it is shown that an anti-dumping regulation
can be strategically exploited by the domestic firm to reduce the
degree of competition in the domestic market. The domestic firm commits
not to export to the foreign market which gives the foreign firm a
monopoly in its own market. As a result the foreign firm will increase
its price allowing the domestic firm to increase its price and its
profits. If the products are sufficiently close substitutes then the
higher profits in the domestic market are large enough to compensate
for the loss of profits on exports. Keywords: anti-dumping regulations; Bertrand oligopoly; strategic behaviour JEL Classification: F13; L13 |
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E2008/26 | Kent Matthews, Jianguang Guo and Xu Zhang (November 2008) X-efficiency versus Rent Seeking in Chinese banks: 1997-2006 (1195K, 34 pages) AbstractThis
study demarcates cost-inefficiency in Chinese banks into X-inefficiency
and rent-seeking-inefficiency. A protected banking market not only
encourages weak management and X-inefficiency but also public ownership
and state directed lending encourages moral hazard and bureaucratic
rent seeking. This paper uses bootstrap non-parametric techniques to
estimate measures of X-inefficiency and rent-seeking inefficiency for
the 4 state owned banks and 10 joint-stock banks over the period
1997-2006. The paper adjusts for the quality of loans by treating NPLs
as a negative output. The paper shows that Chinese banks have reduced
cost inefficiency and reduced X-inefficiency at a faster rate than
rent-seeking inefficiency. Keywords: Bank Efficiency;China;X-inefficiency;DEA;Bootstrapping JEL Classification: D23; G21; G28; |
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E2008/25 | Max Gillman and Mark N. Harris (October 2008) The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries (1065K, 20 pages) Published in Economics of Transition, Volume 18, Issue 4 (October), pages 697-714. AbstractThe
paper examines the effect of inflation on growth in transition
countries. It presents panel data evidence for 13 transition countries
over the 1990-2003 period,it uses a fixed effects, full-information
maximum likelihood, panel approach to account for possible bias from
correlations among the unobserved effects and the observed country
heterogeniety. The results find a strong, robust, negative effect of
inflation on growth, and one that declines in magnitude as the
inflation rate increases. These results include a role for a normalized
money demand, by itself and as part of a nonlinearity in the
inflation-growth effect. And these results derive from both a baseline
single equation model and one that is then expanded into a three
equation simultaneous system. This allows for possible simultaneity
bias in the baseline model. Keywords: Growth; transition; panel data; inflation; money demand; endogeneity JEL Classification: C23; E44; O16; O42 |
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E2008/24 | Soubarna Pal (October 2008) Does Public Investment Boost Economic Growth? Evidence from An Open-Economy Macro Model for India (1109K, 30 pages) AbstractUsing
annual data for India for the period 1984-2003 and employing parametric
technique (GMM), the present paper jointly determines GDP growth, real
exchange rate and net foreign assets in Indian economy. There is
evidence that public investment exerts a significant influence on real
exchange rate and the growth rate and does so non-linearly. A
comparison of the Indian estimates with those available for the UK and
the USA economies is also revealing and highlights the role of
governance on the effects of public investment. Keywords: Public investment;Economic growth;Real exchange rate;Simultaneous model;Generalised method of moments |
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E2008/23 | Michael G Arghyrou and Maria Dolores Gadea (October 2008) The single monetary policy and domestic macro-fundamentals: Evidence from Spain (1202K, 33 pages) AbstractWe
model pre-euro Spanish monetary policy and use our findings to assess
the compatibility of the interest rates set by the ECB since 1999 with
Spanish macrofundamentals. We find that in the 1990s Spain implemented
successfully a monetary strategy tailored to its own domestic
fundamentals,and by abolishing it to join the euro she has paid a cost
in the form of a sub-optimal monetary policy. Spain.s experience
suggests a cautious approach with regards to the timing of further EMU
enlargement. Keywords: Spain;ECB;monetary policy;domestic fundamentals;compatibility JEL Classification: C51; C52; E43; E58; F37 |
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E2008/22 | Huw David Dixon and Engin Kara (September 2008) Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity? (1109K, 27 pages) Published in Journal of Money, Credit and Banking, Volume 42, Number 1, February 2010 , pp. 151-170. AbstractThis
paper adopts the Impulse-Response methodology to understand inflation
persistence. It has often been argued that existing models of pricing
fail to explain the persistence that we observe. We adopt a common
general framework which allows for an explicit modelling of the
distribution of contract lengths and for different types of price
setting. We also evaluate how far the theories are consistent with
recent evidence on price and wage rigidity. We find that allowing for a
distribution of durations can take us a long way to solving the puzzle
of inflation persistence, but not all the way yet. Keywords: DSGE models; inflation; persistence; price-setting JEL Classification: E17; E3 |
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E2008/21 | Paulo Brito, Luís F. Costa and Huw David Dixon (September 2008, updated July 2010) Non-smooth Dynamics and Multiple Equilibria in a Cournot-Ramsey Model with Endogenous Markups (1330K, 47 pages) AbstractWe
consider a Ramsey model with a continuum of Cournotian industries where
free entry generates an endogenous markup. The model produces two
different regimes: monopoly and oligopoly. We study the non-smooth
dynamics and analyze the global dynamics of the model, demonstrating
the model exhibits robust heteroclinic orbits, either of the smooth or
the non-smooth type. Similar economies may be in any of these regimes
and they may change regime along its convergence path. Productivity,
fixed costs and elasticities of demand, play a crucial role and
changing their values may induce a discontinuous transition or
hysteresis. Keywords: endogenous mark-ups; non-smooth dynamics; discontinuous induced bifurcations; heteroclinic orbits JEL Classification: C62; D43; E32 |
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E2008/20 | Michael C. Hatcher (September 2008) Speed Limit Policies versus Inflation Targeting: A Free Lunch? (982K, 13 pages) AbstractInflation
targeting is currently popular with central banks. Is this popularity
justified? I investigate this question by comparing a speed limit
policy and inflation targeting with a Lucas-type Phillips curve
capturing output gap persistence. If the output gap is at least
moderately persistent, a speed limit policy can: (1) partly eliminate
the state-contingent inflation bias, and (2) reduce inflation
variability at no output gap variability cost. Keywords: inflation targeting;speed limit policy;inflation bias;discretion;stabilisation JEL Classification: E50; E52; E58 |
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E2008/19 | Christopher Otrok and Panayiotis M. Pourpourides (August 2008, updated March 2009) On The Cyclicality of Real Wages and Wage Differentials (1191K, 34 pages) AbstractWe
show that two models of the labor market, a Walrasian model and a labor
contracting model, both have an approximate dynamic factor structure.
We use this result to motivate our empirical approach to estimating the
cyclical properties of real wages, which does not impose any structure
between real wages and observed cyclical indicators. In particular, we
employ a Bayesian dynamic factor model and longitudinal microdata to
estimate common latent factors driving real wages. We find that the
comovement of real wages is related to a common factor that exhibits a
mild correlation with the national unemployment rate. Our findings
indicate that overall, roughly half of the wages move procyclically
while half move countercyclically. In addition, we find that the
estimated common factor can explain only a small portion of wage
variability. We conclude that these facts are inconsistent with the
prediction of a Walrasian labor market model, but consistent with the
prediction of a labor contracting model. Finally, our findings suggest
that although skilled and unskilled wages are driven by different
common skill factors, these factors cannot explain a significant
portion of wage variability. Keywords: Wages; Wage Differentials; Business Cycles; Bayesian Analysis JEL Classification: C11; C13; C22; C23; C81; C82; J31 |
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E2008/18 | Max Gillman and Michal Kejak (August 2008, updated October 2008) Inflation, Investment and Growth: a Banking Approach (1191K, 35 pages) Published in Economica, 78 (310, April 2011): 260-282. AbstractOutput
growth, investment and the real interest rate are all found empirically
to be negatively affected by inflation. But a seeming puzzle arises of
opposite Tobin-like inflation effects because theory indicates a
negative Tobin effect when investment falls and a positive Tobin effect
when the real interest rate rises. We define inflation's Tobin effect
more specifically in terms of the effect on the capital to effective
labor ratio and resolve the puzzle by showing the simultaneous
occurrence of all three negative inflation effects, on growth,
investment and real interest rates, in a model calibrated to postwar US
data. Here, investment along with consumption are exchanged for within
a monetary endogenous growth economy with human capital and a
decentralized credit-producing sector. Keywords: Inflation; investment; growth; Tobin JEL Classification: C23; E44; O16; O42 |
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E2008/17 | Kent Matthews, Jianguang Guo and Nina Zhang (November 2007, updated August 2008) Non-Performing Loans and Productivity in Chinese Banks: 1997-2006 (1188K, 43 pages) Published in The Chinese Economy, 42, 2, pp. 30-47 AbstractThis
study examines the productivity growth of the nationwide banks of China
over the ten years to 2006. Using a bootstrap method for the Malmquist
index estimates of productivity growth are constructed with appropriate
confidence intervals. The paper adjusts for the quality of the output
by accounting for the non-performing loans on the balance sheets and
test for the robustness of the results by examining alternative sets of
outputs. The productivity growth of the state-owned banks is compared
with the Joint-stock banks and it determinants evaluated. The paper
finds that average productivity of the Chinese banks improved modestly
over this period. Adjusting for the quality of loans, by treating NPLs
as an undesirable output, the average productivity growth of the
state-owned banks was zero or negative while productivity of the
Joint-Stock banks was markedly higher. Keywords: Bank Efficiency; Productivity; Malmquist index; Bootstrapping JEL Classification: D24; G21; |
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E2008/16 | Patrick Minford (July 2008) Commentary on Economic Projections and Rules of Thumb for Monetary Policy (by Athanasios Orphanides and Volker Wieland) AbstractThe
Taylor rule is widely seen as a good summary of what the Federal
Reserve does. Though the rule cannot easily be fitted to actual data as
subsequently revised, at least for a full postwar sample, it can be
fitted to real-time data (i.e., data as seen at the time), as shown by
earlier work by Orphanides (2003). But in practice the Fed.s Federal
Open Market Committee (FOMC), if it is using a Taylor rule, will look
at its own forecasts or projections. Orphanides and Wieland (2008)
examine whether a Taylor rule can be fitted to the FOMC.s own
projections since 1988. They find that it can with appropriate
parameters that satisfy the Taylor principle.that is, that give a
unique stable solution under rational expectations. Furthermore, they
find that the rule works better with these projections and resolves
various puzzles regarding the data on outcomes. |
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E2008/15 | Max Gillman and Anton Nakov (July 2008, updated November 2009) Monetary Effects on Nominal Oil Prices (1151K, 30 pages) Published in North American Journal of Economics and Finance, December 2009, Vol 20, Issue 3, pp. 239-254 AbstractThe
paper presents a theory of nominal asset prices for competitively owned
oil. Focusing on monetary effects, with flexible oil prices the US
dollar oil price should follow the aggregate US price level. But with
rigid nominal oil prices, the nominal oil price jumps proportionally to
nominal interest rate increases. We find evidence for structural breaks
in the nominal oil price that are used to illustrate the theory of oil
price jumps. The evidence also indicates strong Granger causality of
the oil price by US inflation as is consistent with the theory. Keywords: oil prices; inflation; cash-in-advance; multiple structural breaks; Granger causality JEL Classification: E31; E4; |
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E2008/14 | Woon K Wong and Laurence Copeland (July 2008) Risk Measurement and Management in a Crisis-Prone World (1071K, 27 pages) AbstractThe
current subprime crisis has prompted us to look again into the nature
of risk at the tail of the distribution. In particular, we investigate
the risk contribution of an asset, which has infrequent but huge
losses, to a portfolio using two risk measures, namely Value-at-Risk
(VaR) and Expected Shortfall (ES). While ES is found to measure the
tail risk contribution effectively, VaR is consistent with intuition
only if the underlying return distribution is well behaved. To
facilitate the use of ES, we present a power function formula that can
calculate accurately the critical values of the ES test statistic. This
in turn enables us to derive a size-based multiplication factor for
risk capital requirement. Keywords: Value-at-Risk; expected shortfall; tail risk contribution; saddle point technique; risk capital JEL Classification: G11; G32 |
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E2008/13 | Yanhui Zhu and Laurence Copeland (July 2008, updated October 2008) The Credit Risk Premium in a Disaster-Prone World (1265K, 22 pages) AbstractThe
seminal Barro (2006) closed-economy model of the equity risk premium in
the presence of extreme events ("disasters") allowed for leverage in
the form of risky corporate debt which defaulted only in states when
the Government defaulted on its debt. The probability of default was
therefore exogenous and independent of the degree of leverage. In this
paper, we take the model a step closer to reality by assuming that, on
the one hand, the Government never defaults, and on the other hand,
that the .corporate sector. in the form of the Lucas tree owner pays
its debts in full if and only if its asset value is sufficient, which
is always the case in non-crisis states. Otherwise, in exceptionally
severe crises, it defaults and hands over the whole .firm. to its
creditors. The probability of default by the tree owner is thus
endogenous, dependent both on the volume of debt issued (taken as
exogenous) and on the uncertain value of output. We show, using data
from both Barro (2006) and Barro and Ursua (2008), that the model can
generate values of the riskless rate, equity risk premium and credit
risk spread broadly consistent with those typically observed in the
data. Keywords: equity risk premium; default risk; credit spread; leverage; corporate debt JEL Classification: F3; G1 |
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E2008/12 | Woon K Wong, Laurence Copeland and Ralph Lu (July 2008) The Other Side of the Trading Story: Evidence from NYSE (995K, 24 pages) AbstractWe
analyse the well-known TORQ dataset of trades on the NYSE over a
3-month period, breaking down transactions depending on whether the
active or passive side was institutional or private. This allows us to
compare the returns on the different trade categories. We find that,
however we analyse the results, institutions are best informed, and
earn highest returns when trading with individuals as counter party. We
also confirm the conclusions found elsewhere in the literature that
informed traders often place limit orders, especially towards the end
of the day (as predicted on the basis of laboratory experiments in
Bloomfield, O.Hara, and Saar (2005)). Finally, we find that trading
between institutions accounts for the bulk of trading volume, but
carries little information and seems to be largely liquidity-driven. Keywords: liquidity trade; informed trades JEL Classification: G14; G12 |
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E2008/11 | David Meenagh, Patrick Minford and Michael Wickens (May 2008, updated December 2008) Testing a DSGE model of the EU using indirect inference (1454K, 41 pages) Published in Open Economies Review, vol. 20(4) (2009), 435-471 AbstractWe
use the method of indirect inference, using the bootstrap, to test the
Smets and Wouters model of the EU against a VAR auxiliary equation
describing their data,the test is based on the Wald statistic. We find
that their model generates excessive variance compared with the data.
But their model passes the Wald test easily if the errors have the
properties assumed by SW but scaled down. We compare a New Classical
version of the model which also passes the test easily if error
properties are chosen using New Classical priors (notably excluding
shocks to preferences). Both versions have (different) difficulties
fitting the data if the actual error properties are used. However, a
version embedding a small sector with Calvo contracts in an otherwise
New Classical economy fits the data well without any scaling. Keywords: Bootstrap; DSGE Model; VAR model; Model of EU; indirect inference; Wald statistic JEL Classification: C12; C32 See also: Supporting Annex |
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E2008/10 | Woon K Wong (April 2008) A Unique Orthogonal Variance Decomposition (1033K, 19 pages) AbstractLet e
and Σ,be respectively the vector of shocks and its variance covariance
matrix in a linear system of equations in reduced form. This article
shows that a unique orthogonal variance decomposition can be obtained
if we impose a restriction that maximizes the trace of A, a positive definite matrix such that Az = e where z
is vector of uncorrelated shocks with unit variance. Such a restriction
is meaningful in that it associates the largest possible weight for
each element in e with its corresponding element in z. It turns out that A = Σ,1/2, the square root of Σ,. Keywords: Variance decomposition; Cholesky decomposition; unique orthogonal decomposition and square root matrix JEL Classification: C01 |
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E2008/9 | James Foreman-Peck and Tom Nicholls (April 2008, updated July 2012) Peripherality and the Impact of SME Takeovers (1845K, 42 pages) AbstractNew
Economic Geography models typically predict centripetal economic
development. One process by which this might be brought about is if
large companies based in the core of the economy buy up and remove
small dynamic enterprises from peripheral regions, thereby suppressing
development outside the core. This hypothesis is investigated by
analysing the very large UK administrative firm-level Business
Structure Database. Contrary to the experience of big firms, more
productive small businesses are more subject to takeover - although
this effect is weaker if they are located in peripheral regions than in
the core. Takeovers also increase the chances of a small and medium
size enterprise (SME) closing, but the exit consequence is greater for
the core region. Takeovers raise productivity after acquisition in all
regions but by less for the most productive SMEs. Ignoring any
productivity gains to acquiring firms, the positive impact in the core
region during the years considered is slightly larger than in the
periphery, principally because takeovers are more common in the core.
As this impact is a contributor to regional divergence, policy should
aim to improve the operation of the market for SMEs in the periphery. Keywords: SMEs; takeovers; regional development; exits JEL Classification: L23; D21; R11 |
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E2008/8 | Woon K Wong, Dijun Tan and Yixiang Tian (April 2008) Nonlinear ACD Model and Informed Trading: Evidence from Shanghai Stock Exchange (1077K, 31 pages) AbstractDufour
and Engle (J. Finance (2000) 2467) find evidence of an increased
presence of informed traders when the NYSE markets are most active. No
such evidence, however, can be found by Manganelli (J. Financial
Markets (2005) 377) for the infrequently traded stocks. In this paper,
we fit a nonlinear log-ACD model to stocks listed on Shanghai Stock
Exchange. When trading volume is high, empirical findings suggest
presence of informed trading in both liquid and illiquid stocks. When
volume is low, market activity is likely due to liquidity trading.
Finally, for the actively traded stocks, our results support the price
formation model of Foster and Viswanathan (Rev. Financial Studies
(1990) 593). Keywords: Informed trading; Liquidity trading; Duration; Volume; Volatility JEL Classification: G11; G14; G15 |
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E2008/7 | David Meenagh, Patrick Minford, Eric Nowell, Prakriti Sofat and Naveen Srinivasan (April 2008, updated April 2010) Can the Facts of UK Inflation Persistence be Explained by Nominal Rigidity? (1284K, 21 pages) Published in Economic Modelling, vol. 26(5) (2009), 978-992 AbstractIt
has been widely argued that inflation persistence since WWII has been
widespread and durable and that it can only be accounted for by models
with a high degree of nominal rigidity. We examine UK post-war data
where after confirming previous studies, findings of varying
persistence due to changing monetary regimes, we find that models with
little nominal rigidity are best equipped to explain it. Keywords: inflation persistence; New Keynesian; New Classical; nominal rigidity; monetary regime shifts JEL Classification: E31; E37 See also: Supporting Annex |
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E2008/6 | Helmuts Azacis and Max Gillman (February 2008, updated October 2008) Baltic Tax Reform (1264K, 52 pages) Forthcoming in Journal of Macroeconomics AbstractThe
paper presents an endogenous growth economy with a representation of
the tax rate system in the Baltic countries. Assuming that government
spending is a given fraction of output, the paper shows how a flat tax
system balanced between labor and corporate tax rates can be second
best optimal. It then computes how actual Baltic tax reforms from 2000
to 2007 affect the growth rate and welfare, including transition
dynamics. Comparing the actual reform effects to hypothetical tax
experiments, it results that equal flat tax rates on personal and
corporate income would have increased welfare in all three Baltic
countries by 24% more on average than the actual reforms. This shows
how equal, balanced, flat rate taxes can be optimal in both theory and
practice. Further, movement towards a more equal balance between labor
and capital tax rates, through changing just one tax rate, achieved
almost as high or higher utility gains as in actual law for all three
countries under both open and closed economy cases. This shows benefits
of moving towards the optimum. Keywords: tax reforms; endogenous growth; transitional dynamics; flat taxes JEL Classification: E13; H20; O11; O14 |
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E2008/5 | Patrick Minford and Naveen Srinivasan (February 2008) Are Central Bank Preferences Asymmetric? A Comment (1048K, 13 pages) Published in Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(1) (2008), 119-126 AbstractA
recent paper by Ruge-Murcia [European Economic Review 48 (2004),
91-107] on asymmetric central bank objectives provides a new
perspective on the policy roots of inflation in developed economies.
More precisely, the paper demonstrates that if the distribution of the
supply shocks is normal, then the reduced form solution for inflation
implies a positive (or negative) relation between average inflation and
the variance of shocks. We argue that the evidence offered in support
of this hypothesis suffers from lack of identification because Phillips
curve nonlinearity combined with quadratic central bank preferences
yield the same reduced form solution for inflation. If so, estimating
reduced form for inflation will not be able to discriminate between
these models. Yet they have quite different implications for policy.
Other, structural, evidence is needed. Keywords: Preference asymmetry;Phillips curve nonlinearity;Identification JEL Classification: E52; E58; E61 |
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E2008/4 | Kyriacos Kyriacou, Kul B Luintel and Bryan Mase (February 2008) Private Information in Executives' Option Trades: Evidence from the UK (1112K, 45 pages) Published in Economica, vol. 77 (2010), 751-774 AbstractThis
paper investigates whether UK executives use private information in the
trading decisions associated with the exercise of their executive stock
options. We find that UK executives' exercise and sell decisions are
motivated by their private information but not by their anticipation of
future return volatility. These findings appear robust when we control
for additional motivating factors that include option moneyness, the
previous stock return and the value of the exercise. We argue that the
disparity in the informativeness of US and UK executives' trades at
exercise is related to important differences in executive remuneration,
and in the regulation and taxation of executive stock options. Keywords: Executive remuneration; executive stock options; trade informativeness JEL Classification: G14; G18 |
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E2008/3 | Kul B Luintel, Mosahid Khan, Philip Arestis and Konstantinos Theodoridis (January 2008) Financial Structure and Economic Growth (1132K, 43 pages) Published in Journal of Development Economics, 86 (2008) 181-200 AbstractRecent
empirical work on financial structure and economic growth analyzes
multicountry dataset in panel and/or cross-section frameworks and
conclude that financial structure is irrelevant. We highlight their
shortcomings and re-examine this issue utilizing a time series and a
dynamic heterogeneous panel methods. Our sample consists of fourteen
countries. Tests reveal that cross-country data cannot be pooled.
Financial structure significantly explains output levels in most
countries. The results are rigorously scrutinized through bootstrap
exercises and they are robust to extensive sensitivity tests. We also
test for several hypotheses about the prospective role of financial
structure and financial development on economic growth. Keywords: Financial Structure; Economic Growth; Co-integration; Bootstrap; Dynamic Heterogeneous Panels JEL Classification: O16; G18; G28 |
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E2008/2 | Laurence Copeland, Woon K Wong and Y Zeng (January 2008) Information-Based Trade in the Shanghai StockMarket (1036K, 20 pages) AbstractWe
show that the probability of information-based trade (PIN) played a
significant role in explaining monthly returns on Shanghai A shares
over the period 2001 to 2006. In particular, PIN, as approximated by
order imbalance as a proportion of total transactions, appears to
explain returns even after controlling for risk in the much-cited Fama
and French (1992) three-factor model. However, we also find that some
of the PIN effect appears to be indistinguishable from a turnover
effect. |
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E2008/1 | Patrick Minford and Soubarna Pal (January 2008) Real Exchange Rate Overshooting in Real Business Cycle Model - An Empirical Evidence From India (1352K, 63 pages) AbstractThe
objective of this paper is to establish the ability of a Real Business
Cycle (RBC) model to account for the behaviour of the real exchange
rate, using Indian data (1966-1997). We calibrate the dynamic general
equilibrium open economy model (Minford, Sofat 2004) based on
optimising decisions of rational agents, using annual data for India.
The first order conditions from the households' and firms' optimisation
problem are used to derive the behavioural equations of the model. The
interaction with the rest of the world comes in the form of uncovered
real interest rate parity and current account both of which are
explicitly micro-founded. The paper discusses the simulation results of
1 percent per annum productivity growth shock, which shows that the
real exchange rate appreciates and then goes back to a new equilibrium
(lower than the previous one), producing a business cycle. Thus the
behaviour of the real exchange rate may be explicable within the RBC
context. Finally we test our model and evaluate statistically whether
our calibrated model is seriously consistent with the real exchange
rate data, using bootstrapping procedure. We bootstrap our model to
generate pseudo real exchange rate series and find that the ARIMA
parameters estimated for the actual real exchange rate data lie within
the 95% confidence limits constructed by bootstrapping. We find the
same result for the nominal rigidity version of the RBC model. So we
conclude that the behaviour of the Indian real exchange rate (US $ /
Indian Rupees) can be explained by RBC. |
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E2007/30 | Kent Matthews, Jianguang Guo and Nina Zhang (November 2007) Non-Performing Loans and Productivity in Chinese Banks: 1997-2006 (1212K, 29 pages) AbstractThis
study examines the productivity growth of the nationwide banks of China
over the ten years to 2006. Using a bootstrap method for the Malmquist
index estimates of productivity growth are constructed with appropriate
confidence intervals. The paper adjusts for the quality of the output
by accounting for the non-performing loans on the balance sheets and
test for the robustness of the results by examining alternative sets of
outputs. The productivity growth of the state-owned banks is compared
with the Joint-stock banks and it determinants evaluated. The paper
finds that average productivity of the Chinese banks improved modestly
over this period. Adjusting for the quality of loans, by treating NPLs
as an undesirable output, the average productivity growth of the
state-owned banks was zero or negative while productivity of the
Joint-Stock banks was markedly higher. Keywords: Bank Efficiency; Productivity; Malmquist index; Bootstrapping JEL Classification: D24; G21; |
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E2007/29 | Vo Phuong Mai Le, Max Gillman and Patrick Minford (November 2007) An Endogenous Taylor Condition in an Endogenous Growth Monetary Policy Model (1131K, 20 pages) AbstractThe
paper derives a Taylor condition as part of the agent's equilibrium
behavior in an endogenous growth monetary economy. It shows the
assumptions necessary to make it almost identical to the original
Taylor rule, and that it can interchangably take a money supply growth
rate form. From the money supply form, simple policy experiments are
conducted. A full central bank policy model is derived that includes
the Taylor condition along with equations comparable to the standard
aggregate-demand/aggregate-supply model. Keywords: Taylor Rule; endogenous growth; money supply; policy model JEL Classification: E51; E52; O0 |
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E2007/28 | Luís F. Costa and Huw David Dixon (October 2007) A Simple Business-Cycle Model with Shumpeterian Features (1138K, 45 pages) AbstractWe
develop a dynamic general equilibrium model of imperfect competition
where a sunk cost of creating a new product regulates the type of entry
that dominates in the economy: new products or more competition in
existing industries. Considering the process of product innovation is
irreversible, introduces hysteresis in the business cycle. Expansionary
shocks may lead the economy to a new 'prosperity plateau,' but
contractionary shocks only affect the market power of mature industries. Keywords: Entry; Hysteresis; Mark-up JEL Classification: E62; L13; L16 |
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E2007/27 | Helmuts Azacis and David R. Collie (October 2007) The optimality of optimal punishments in Cournot supergames (1092K, 10 pages) Published in Economics Letters, Vol. 105, 2009, pp. 56-57. AbstractThe
result of Colombo and Labrecciosa (2006) that optimal punishments are
inferior to Nash-reversion trigger strategies with decreasing marginal
costs is due to the output when a firm deviates from the punishment
path being allowed to become negative. Keywords: Optimal punishments; trigger strategies; collusion; cartels JEL Classification: C73; D43; L13 |
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E2007/26 | Michael G Arghyrou, Andros Gregoriou and Alexandros Kontonikas (September 2007) Do real interest rates converge? Evidence from the European Union (1425K, 35 pages) Published in Journal of International Financial Markets, Institutions & Money, vol. 19, July 2009, 447-460 AbstractWe
test for real interest parity (RIP) in the EU25 area. Our contribution
is two-fold: First, we account for the previously overlooked effects of
structural breaks on real interest rate differentials. Second, we test
for RIP against the EMU average. For the majority of our sample
countries we obtain evidence of real interest rate convergence towards
the latter. Convergence, however, is a gradual process subject to
structural breaks, typically falling close to the launch of the euro.
Our findings have important implications relating to the single
monetary policy and the progress new EU members have achieved towards
joining the euro. Keywords: real interest rate parity; convergence; structural breaks; EU; EMU JEL Classification: F21; F32; C15; C22 |
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E2007/25 | David R. Collie (August 2007) Auctioning Immigration Visas (965K, 15 pages) Published in Review of Development Economics, Vol. 13, 2009, pp. 687-694. AbstractFreeman
(2006) suggested that auctioning immigration visas and redistributing
the revenue to native residents in the host country would increase
migration from low-income to high-income countries. The effect of the
auctioning of immigration visas, in the Ricardian model from Findlay
(1982), on the optimal level of immigration for the host country is
considered. It is shown that auctioning immigration visas will lead to
a positive level of immigration only if the initial wage difference
between the host country and the source country is substantial. The
cost of the immigration visa is more than half the earnings of the
immigrant worker. Keywords: Immigration; migration; international trade JEL Classification: F22; F12; J61 |
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E2007/24 | Qaisar Abbas and James Foreman-Peck (August 2007) The Mincer Human Capital Model in Pakistan: Implications for Education Policy (1040K, 32 pages) Published in South Asian Economic Journal (2008), Vol 9, 2, 435-462 AbstractThis
paper estimates and interprets returns to education for three
sub-sectors of labour market by gender in Pakistan, using the most
recent data set of Pakistan Social and Living Standards Measurement
(PSLM) Survey 2004-05. The results show two distinctive features of
Pakistani education, the high apparent returns to female education
outside agriculture, and the remarkable increase of returns with
successive levels of education, are to be explained primarily by two
departures from the basic Mincer model,generally poor quality primary
schooling and family unwillingness to invest in female education
because of lack of earning opportunities. There is some signaling in
Pakistani education investment but mainly the education is
productivity-enhancing investment in human capital, according to a
comparison of self-employed and paid employed earnings equations.
Returns to public spending of education are extremely high, suggesting
very considerable state underinvestment. The policy challenge is in the
low wages and high education in the female paid employment sector, and
the low participation rate. Keywords: Rates of return; gender; occupation; Pakistan JEL Classification: J16; J18; J24 |
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E2007/23 | David R. Collie (August 2007) Migration and trade with external economies of scale (1055K, 34 pages) AbstractThe
analysis of migration in Findlay (1982) is extended by adding external
economies of scale to the Ricardian model as in Ethier (1982). With
external economies, the larger country always gains from trade but the
smaller country may lose from trade unless the external economies of
scale are sufficiently strong. The smaller country will always gain
from emigration but the larger country may lose from immigration unless
the external economies of scale are sufficiently strong. Both countries
gain from complete economic integration (free labour migration with
free trade). Finally, the optimal migration policies of the two
countries are derived. Keywords: Immigration; emigration; international trade; factor mobility JEL Classification: F22; F12; J61 |
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E2007/22 | Qaisar Abbas and James Foreman-Peck (July 2007, updated December 2007) Human Capital and Economic Growth: Pakistan, 1960-2003 (1129K, 22 pages) Published in The Lahore Journal of Economics, (2008), Vol. 13, No.1, 1-27. AbstractThis
paper investigates the relationship between human capital and economic
growth in Pakistan with time series data. Estimated with the Johansen
(1991) approach, the aggregate production function rejects one version
of the endogenous growth formulation. But the fitted model indicates
that the output elasticity of human capital may be expected to increase
with foreign technical progress. Higher productivity of secondary
schooling than in OECD economies is consistent with the low levels so
far attained in Pakistan. High returns to health spending compare very
favourably with industrial investment. Human capital is estimated to
have accounted for just under one fifth of the increase in GDP per
head, a figure that is probably biased downwards because of the
unmeasured dimensions of human capital. Keywords: Human Capital; Economic Growth; Cointegration; Pakistan JEL Classification: C13; C22; C51; O15; O53 |
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E2007/19 | Panayiotis M. Pourpourides (June 2007, updated April 2010) Implicit Contracts and the Cyclicality of the Skill-Premium (1272K, 47 pages) Published in Journal of Economic Dynamics and Control, Volume 35, 2011, 963-979 AbstractTo
examine the cyclical behavior of the skill-premium, this paper
introduces implicit labor contracts in a DSGE model where production is
characterized by capital-skill complementarity and the utilization of
capital is endogenous. It is shown that this model can reproduce the
observed cyclical patterns of wages and the skill-premium. The feature
of capital-skill complementarity coupled with variable capital
utilization rates does not come at odds with the acyclical behavior of
the skill-premium. The paper argues that the skill-complementarity of
capital is not a quantitatively significant factor at high frequencies.
The key aspects are the contracts and the capital utilization margin. Keywords: Implicit Contracts;Wages;Skill-Premium;Business Cycles;Capital-Skill Complementarity JEL Classification: E13; E24; E32 |
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E2007/18 | Sheikh Selim (June 2007) Optimal Taxation in a Two Sector Economy with Heterogeneous Agents (995K, 23 pages) AbstractIn
this paper we show that in a two sector economy with heterogeneous
agents and competitive markets, in a steady state the optimal capital
income tax rate is in general different from zero. The optimal tax
policy in this setting depends on the relative price difference. In a
two sector economy capital and labour margins are interdependent, which
is why a difference between investment good's price and consumption
good's price allows the government to tax capital income in one sector
and undo the tax distortion by differential labour income taxation.
This policy serves efficiency purpose as it restores production
efficiency. For instance, if investment goods are more expensive than
consumption goods, it is optimal to tax capital income in consumption
sector, and set zero capital income tax and lower labour income tax in
investment sector. This policy discourages work and investment in
consumption sector, and encourages agents to shift capital and working
time to investment sector. This increases production in investment
sector and restores production efficiency. In a model with two classes
of agents, we show that this policy can also serve redistributive
purpose. Keywords: Optimal taxation; Ramsey problem; Two Sector model JEL Classification: C61; E13; E62; H21 |
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E2007/17 | Juan Páez-Farrell (June 2007) Optimal Monetary Policy Under Inflation Targeting: Is Zero the Optimal Perception of Inflation Inertia? (1067K, 13 pages) AbstractRecent
research has suggested that in deriving optimal policy under
discretion, policymakers should react as if there were no structural
inflation persistence in order to improve welfare. This paper considers
whether such a strong result extends to an inflation targeting central
bank with a more general Phillips curve formulation. The findings
indicate that if anything, a central banker that assumes a high degree
of inflation inertia is often preferable. Keywords: optimal monetary policy; discretion; uncertainty; inflation persistence JEL Classification: E31; E52; E61; E63 |
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E2007/16 | Paulo Brito and Huw David Dixon (June 2007, updated October 2007) Entry and the accumulation of capital: a two state-variable extension to the Ramsey model (1626K, 60 pages) Published in International Journal of Economic Theory,, 5, 333-357 AbstractIn
this paper we consider the entry and exit of firms in a dynamic general
equilibrium model with capital. At the firm level, there is a fixed
cost combined with increasing marginal cost, which gives a standard
U-shaped cost curve with optimal firm size. Entry is determined by a
free entry condition such that the costs of entry are equal to the
present value of incumbent firms, the cost of entry (exit) depends on
the flow of entry (exit). Then equilibrium is saddle-point stable and
the stable manifold is two-dimensional. Transitional dynamics can,
under certain circumstances, be non-monotonic. Keywords: Entry; dynamics; Ramsey JEL Classification: D92; C62; E32; O41 |
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E2007/15 | Konstantinos Theodoridis (June 2007) Dynamic Stochastic General Equilibrium (DSGE) Priors for Bayesian Vector Autoregressive (BVAR) Models: DSGE Model Comparison (1076K, 8 pages) AbstractThis
Paper describes a procedure for constructing theory restricted prior
distributions for BVAR models. The Bayes Factor, which is obtained
without any additional computational effort, can be used to assess the
plausibility of the restrictions imposed on the VAR parameter vector by
competing DSGE models. In other words, it is possible to rank the
amount of abstraction implied by each DSGE model from the historical
data. Keywords: BVAR; DSGE Model Evaluation; Gibbs Sampling; Bayes Factor JEL Classification: C11; C13; C32; C52 |
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E2007/14 | Szilárd Benk, Max Gillman and Michal Kejak (May 2007) Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks (1119K, 18 pages) Published in Journal of Money Credit and Banking Vol. 40, No. 6 (September 2008): 1281-1293. AbstractThe
explanation of velocity in neoclassical monetary business cycle models
relies on a goods productivity shocks to mimic the data's procyclic
velocity feature,money shocks are not important,and the financial
sector plays no role. This paper sets the model within endogenous
growth, adds exchange credit shocks, and finds that money and credit
shocks explain much of the velocity variation. The role of the shocks
varies across sub-periods in an intuitive fashion. Endogenous growth is
key to the construction of the money and credit shocks since these have
similar effects on velocity, but opposite effects upon growth. The
model matches the data's average velocity and simulates most of the
velocity volatility that is found in the data. Its underlying money
demand is Cagan-like in its interest elasticity, so that money and
credit shocks cause greater velocity variation the higher is the
nominal interest rate. Keywords: Velocity; business cycle; credit shocks; endogenous growth JEL Classification: E13; E32; E44 |
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E2007/13 | Juan Páez-Farrell (May 2007) Monetary Policy Rules in Theory and in Practice: Evidence from the UK and the US (1083K, 30 pages) AbstractGiven
the large amount of interaction between research on monetary policy and
its practice, this paper examines whether some simple monetary policy
rules that have been proposed in the academic literature, part of which
has originated from within central banks, provide a reasonable
characterisation of actual policy in the UK and the US. The paper finds
that the simple rule that describes best actual US monetary policy is a
speed limit rule with dynamics, whilst for the UK it is a
forward-looking rule. The simpler dynamics in the UK's monetary policy
rule are reflective of the lower persistence of inflation as a result
of its policy of inflation targeting. |
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E2007/12 | Patrick Minford, David Meenagh and Jiang Wang (April 2007) Growth and relative living standards - testing Barriers to Riches on post-war panel data (1165K, 40 pages) AbstractThe
effect of business tax and regulation on growth, together with
potential effects of government spending on education and R&D, is
embodied in a model of a small open economy with growth choices. The
structural model is estimated on post-war panel data for 76 countries
and the bootstrap is used to produce the model's sampling variation for
the analysis of panel regressions of growth. Statistical rejection can
occur at either the structural or the growth regression stage. The
models featuring government spending on education and R&D are
rejected while that with business taxation is accepted. Keywords:
growth; living standards; business regulation; business taxation;
public education; government R&D; structural model; bootstrap
testing JEL Classification: O41; O57; C52 |
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E2007/11 | Sheikh Selim and Naima Parvin (April 2007) Policy Reforms and Incentives in Rice Production in Bangladesh (962K, 12 pages) AbstractWe
estimate an institutional production function to capture incentive
induced growth in total factor productivity (TFP) of rice production in
Bangladesh. The incentive component of TFP assists in explaining
farmers' response to incentives due to major policy reforms during
1980s and 1990s. Keywords: Bangladesh; Incentives; TFP JEL Classification: C33; C51; O13; Q12 |
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E2007/10 | Sheikh Selim (April 2007, updated February 2010) Labour Productivity and Rice Production in Bangladesh: A Stochastic Frontier Approach (1072K, 22 pages) AbstractIn
this paper we examine the significance of labour productivity and use
of inputs in explaining technical efficiency of rice production in
Bangladesh. We find that higher labour productivity can stimulate high
efficiency gains, but increased use of inputs (except land) induces
negative marginal effect on technical efficiency. While more use of
land, improved seeds and fertilizers contributes to the rate of
labour-productivity induced marginal efficiency gain, any additional
labour depresses this rate. Given the agricultural policy reform
history in Bangladesh, our findings imply that rather than providing
input subsidy or output price support, future reforms should put more
emphasis on providing incentives to enhance labour productivity and
encourage formalization of the agricultural labour market. Keywords: Stochastic frontier; non-neutral frontier; technical efficiency JEL Classification: C33; C51; O13; Q12 |
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E2007/9 | Sheikh Selim (April 2007) Optimal Capital Income Taxation in a Two Sector Economy (1025K, 26 pages) AbstractWe
extend the celebrated Chamley-Judd result of zero capital income tax
and show that the steady state optimal capital income tax is nonzero,
in general. In particular, we find that the optimal plan involves zero
capital income tax in investment sector and a nonzero capital income
tax in consumption sector. In a two sector neoclassical economy,
interdependence of labour and capital margins allows the government to
choose an optimal policy that involves nonzero tax on capital income.
The distortion created by capital income tax in consumption sector can
be undone by setting different rates of labour income taxes. The
optimal plan thus involves zero capital income tax in both sectors only
if optimal labour income taxes are equal. This may not be the optimal
policy if marginal disutility of work is different across sectors
and/or the social marginal value of capital is different across
sectors. The difference in social marginal value of capital can be
undone by setting different labour income taxes across sectors. We also
show that if the government faces a constraint of keeping same capital
and labour income tax rates across sectors, optimal capital income tax
is nonzero. Keywords: Optimal taxation; Ramsey problem; Primal approach; Two-sector model JEL Classification: C61; E13; E62; H21 |
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E2007/8 | Vo Phuong Mai Le and Patrick Minford (March 2007, updated October 2008) Calvo Contracts - Optimal Indexation in General Equilibrium (1155K, 38 pages) AbstractCalvo
contracts, which are the basis of the current generation of New
Keynesian models, widely include indexation to general inflation. We
argue that the indexing formula should be expected inflation rather
than lagged inflation. This is likely to optimise the welfare of the
representative agent in a general equilibrium model of the New
Keynesian type. The economy's behaviour under rational indexation is
similar to that of a New Classical model, with shocks producing an
immediate fluctuation in both prices and output followed by a fairly
rapid return to steady state. A monetary policy that targets the price
level increases economic stability. Keywords: Calvo contracts; general equilibrium; rational indexation JEL Classification: F41; F42; E42 |
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E2007/7 | Vo Phuong Mai Le and Patrick Minford (March 2007) Optimising indexation arrangements under Calvo contracts and their implications for monetary policy (1150K, 21 pages) AbstractThis
paper investigates optimal indexation in the New Keynesian model, when
the indexation choice includes the possibility of partial indexation
and of varying weights on rational and lagged indexation. It finds that
the Calvo contract adjusted for rationally expected indexation under
both inflation and price level targeting regimes delivers the highest
expected welfare under both restricted and full current information.
Rational indexation eliminates the effectiveness of monetary policy on
welfare when there is only price-level targeting under the current
micro information. If including both wage setting and full current
information, monetary policy is effective,and a price-level targeting
rule delivers the highest benefits because it minimises the size of
shocks to prices and thus dispersion. However, even less than full
rational indexation ensures that there is very little nominal rigidity
in the adapted world of Calvo contracts. Keywords: optimal indexation; price-level target; inflation target; Calvo contracts; rational expectation; New Keynesian model JEL Classification: E50; E52 |
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E2007/6 | Laurence Copeland and Yanhui Zhu (March 2007) Rare Disasters and the Equity Premium in a Two-Country World (1130K, 22 pages) AbstractWe
extend the Barro (2006) closed-economy model of the equity risk premium
in the presence of extreme events ("disasters") to a two-country world.
In this more general setting, both the output risk of rare disasters
and the associated risk of a default on Government debt, can be
diversified. The extent to which agents in one country can diversify
away the risk of extreme events depends on the relative size of the two
countries, and critically on the probability of a disaster in one
country conditional on a disaster in the other. We show that, using
Barro's own calibration in combination with a broad range of plausible
values for the additional parameters, the model implies levels of the
equity risk premium far lower than those typically observed in the
data. We conclude that the model is unlikely to explain the equity risk
premium Keywords: equity risk premium; default risk; international diversification JEL Classification: F3; G1 |
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E2007/5 | Kent Matthews, Jianguang Guo and Nina Zhang (February 2007) Rational Inefficiency and non-performing loans in Chinese Banking: A non-parametric Bootstrapping Approach. (1009K, 29 pages) Published in China Finance Review, 2007, 3, 1 , 55-75 AbstractThe
existing Chinese banking system was born out of a state-planning
framework focussed on the funding of state-owned enterprises. Despite
the development of a modern banking system, numerous studies of Chinese
banking point to its high level of average inefficiency. Much of this
inefficiency relates to the high level of non-performing loans held on
the banks books. This study argues that a significant component of
inefficiency relates to a defunct bureaucratic incentive structure.
Using bootstrap non-parametric techniques the paper decomposes
cost-inefficiency into X-inefficiency and rational inefficiency caused
by bureaucratic rent seeking. In contrast to other studies of the
Chinese banking sector, the paper argues that a change in the incentive
structure and the competitive threat of the opening up of the banking
market in 2007 has produced reduced inefficiency and improved
performance. Keywords: Bank Efficiency; China; X-inefficiency; DEA JEL Classification: D23; G21; G28; |
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E2007/4 | Kent Matthews, Jianguang Guo, Nina Zhang and Lina Wang (February 2007, updated March 2007) Bank Efficiency in China, Rent Seeking versus X-inefficiency: A non-parametric Bootstrapping Approach. (1033K, 39 pages) AbstractThis
study demarcates cost-inefficiency in Chinese banks into X-inefficiency
and rent-seeking-inefficiency. A protected banking market not only
encourages weak management and X-inefficiency but also public ownership
and state directed lending encourages moral hazard and bureaucratic
rent seeking. This paper uses bootstrap non-parametric techniques to
estimate measures of X-inefficiency and rent-seeking inefficiency for
the 4 state owned banks and 11 joint-stock banks over the period
1997-2004. In contrast to other studies of the Chinese banking sector,
the paper argues that reduced inefficiency is an indicator that the
competitive threat of the opening up of the banking market in 2007 has
produced tangible benefits in improved performance. This paper finds
evidence of declining trend in both types of inefficiency. Keywords: Bank Efficiency; China; X-inefficiency; DEA; Bootstrapping JEL Classification: D23; G21; G28; |
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E2007/3 | Huw David Dixon (February 2007) New Keynesian macroeconomics: Entry For New Palgrave Dictionary of Economics, 2nd Edition (1044K, 11 pages) Forthcoming in New Palgrave Dictionary of Economics and Law, 2nd Edition AbstractThis
dictionary entry defines the development of new Keynesian
macroeconomics (NKM) since the 1980s. I argue that the key defining
feature NKM is the introduction of imperfect competition, making price
and/or wage setting endogenous and hence allowing for a rigorous
understanding of nominal rigidity. This has led to a shift away from
perfect competition in macroeconomics. The combination of NKM with
dynamic macroeconomic modelling has led to the current orthodoxy: the
new-neoclassical synthesis. Dynamic wage and price models lead to
monetary neutrality in steady-state, non-neutrality out of
steady-state. Other themes in NKM include efficiency wage theory and
coordination failure. Keywords: Keynesian; nominal; rigidity; new JEL Classification: E1; E3; E4; B22 |
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E2007/2 | Patrick Minford, Konstantinos Theodoridis and David Meenagh (January 2007, updated April 2008) Testing a model of the UK by the method of indirect inference (1334K, 31 pages) Published in Open Economies Review, vol. 20(2) (2009), 265-291 AbstractWe
use the method of indirect inference to test a full open economy model
of the UK that has been in forecasting use for three decades. The test
establishes, using a Wald statistic, whether the parameters of a
time-series representation estimated on the actual data lie within some
confidence interval of the model-implied distribution. Various forms of
time-series representations that could deal with the UK's various
changes of monetary regime are tried,two are retained as adequate. The
model is rejected under one but marginally accepted under the other,
suggesting that with some modifications it could achieve general
acceptability and that the testing method is worth investigating
further. Keywords: Bootstrap; Model Evaluation; Non-Linear Time Series Models; Indirect inference; open economy models; UK models JEL Classification: C12; C32 |
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E2007/1 | Huw David Dixon and Engin Kara (January 2007) Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts (1201K, 41 pages) Forthcoming in European Economic Review AbstractWe develop the Generalized Taylor Economy (GTE)
in which there are many sectors with overlapping contracts of different
lengths. In economies with the same average contract length, monetary
shocks will be more persistent when longer contracts are present. Using
the Bils-Klenow distribution of contract lengths, we find that the
corresponding GTE tracks the US data well. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner. Keywords: Persistence; Taylor contract; Calvo JEL Classification: E50; E24; E32; E52 |
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E2006/26 | Michael G Arghyrou (November 2006) Monetary policy before and after the euro: Evidence from Greece (1053K, 38 pages) Published in Empirical Economics, vol. 36, June 2009, 621-643. AbstractWe
model Greek monetary policy in the 1990s and use our findings to
address two interrelated questions. First, how was monetary policy
conducted in the 1990s so that the hitherto highest-inflation EU
country managed to join the euro by 2001? Second, how compatible is the
current ECB monetary policy with Greek economic conditions? We find
that Greek monetary policy in the 1990s was: (i) primarily determined
by foreign (German/ECB) interest rates though still influenced, to some
degree, by domestic fundamentals,(ii) involving non-linear output gap
effects,(iii) subject to a deficit of credibility culminating in the
1998 devaluation. On the question of compatibility our findings depend
on the value assumed for the equilibrium post-euro real interest rate
and overall indicate both a reduction in the pre-euro risk premium and
some degree of monetary policy incompatibility. Our analysis has policy
implications for the new EU members and motivates further research on
fast-growing EMU economies. Keywords: monetary policy; reaction function; non-linear; compatibility; Greece; EMU JEL Classification: C51; C52; E43; E58; F37 |
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E2006/25 | Kent Matthews, Patrick Minford and Ruthira Naraidoo (January 2006, updated November 2006) Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA (1260K, 33 pages) Published in European Journal of Political Economy Volume 24, Issue 3, September 2008, Pages 605-614 AbstractThis
paper develops a political economy model of multiple unemployment
equilibria to provide a theory of an endogenous natural rate of
unemployment. This model is applied to the UK and the US interwar
period which is remembered as the decade of mass unemployment. The
theory here sees the natural rate and the associated path of
unemployment as a reaction to shocks (mainly demand in nature) and the
institutional structure of the economy. The channel through which these
two forces feed on each other is a political economy process whereby
voters with limited information on the natural rate react to shocks by
demanding more or less social protection. The reduced form results
obtained confirm a pattern of unemployment behaviour in which
unemployment moves between high and low equilibria in response to
shocks. Keywords: Equilibrium unemployment; political economy; 'vicious' and 'virtuous' circles; bootstrapping JEL Classification: E24; E27; P16 |
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E2006/24 | Max Gillman and Glen Otto (September 2006, updated October 2006) Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity (1119K, 32 pages) Published in Quantitative and Qualitative Analysis in Social Sciences (QASS). Vol. 1 (1), Spring, 2007, 1-25, http://www.qass.org.uk/2007/vol1_1/p1-gillman_07_apr2.pdf AbstractThe
paper presents and tests a theory of the demand for money that is
derived from a general equilibrium, endogenous growth economy, which in
effect combines a special case of the shopping time exchange economy
with the cash-in-advance framework. The model predicts that both higher
inflation and financial innovation - that reduces the cost of credit -
induce agents to substitute away from money towards exchange credit.
The implied interest elasticity of money demand rises with the
inflation rate and financial innovation rather than being constant as
is typical in shopping time specifications. Using quarterly data for
the US and Australia, we find evidence of cointegration for the money
demand model. This money demand stability results because of the extra
series that capture financial innovation,included are robustness checks
and comparison to a standard money demand specification. JEL Classification: C23; E41; O42 |
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E2006/23 | Michael G Arghyrou and Georgios Chortareas (September 2006) Current Account Imbalances and Real Exchange Rates in the Euro Area (1035K, 29 pages) AbstractGlobal
current account imbalances have been one of the focal points of
interest for policymakers during the last few years. Less attention has
been paid, however, to the diverging current account balances of the
individual euro area countries. In this paper we consider the dynamics
of current account adjustment and the role of real exchange rates in
current account determination in the EMU. After controlling for the
effects of income growth, we find the relationship between real
exchange rates and the current account to be substantial in size and
subject to non-linear effects. Overall, we argue that real exchange
rates can offer further insights, beyond the effects of the income
catch-up process, relevant to current account determination in the EMU. Keywords: current account; real exchange rate; EMU; nonlinearities JEL Classification: C51; C52; F31; F32; F41 |
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E2006/22 | Roger Clarke and David R. Collie (August 2006) Maximum-Revenue versus Optimum-Welfare Export Taxes (1173K, 31 pages) Published in Review of International Economics, Vol. 16, No. 5, pp. 919-929. AbstractIn
a game between two exporting countries, both countries may be better
off if they both delegate to policymakers who maximise tax revenue
rather than welfare. However, both countries delegating to policymakers
who maximise revenue is not necessarily a Nash equilibrium. The game
may be a prisoner's dilemma where both countries are better off
delegating to policymakers who maximise revenue, but both will delegate
to policymakers who maximise welfare in the Nash equilibrium. This
result is obtained in the Bertrand duopoly model of Eaton and Grossman
(1986) and the perfectly competitive model of Panagariya and Schiff
(1995). Keywords: Trade Policy; Export Taxes; Game Theory; Delegation JEL Classification: C72; F11; F12; F13 |
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E2006/21 | Laurence Copeland and Saeed Heravi (July 2006) Structural Breaks in the Real Exchange Rate Adjustment Mechanism (1523K, 35 pages) Published in Applied Financial Economics,19:2,121-134. DOI: 10.1080/09603100701765216 AbstractWe
show that the behaviour of the real exchange rates of the UK, Germany,
France and Japan has been characterised by structural breaks which
changed the adjustment mechanism. In the context of a Time-Varying
Smooth Transition AutoRegressive of the kind introduced by Lundbergh et
al (2003), we show that the real exchange rate process shifted in the
aftermath of Black Wednesday in the case of the Pound, in 1984-5 in the
case of the Franc and, more tentatively, during the Asian crisis of
1997-8 in the case of the Yen. |
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E2006/20 | Sheikh Selim (April 2006, updated February 2010) Revisiting the Capital Tax Ambiguity Result (1177K, 16 pages) AbstractWe
provide a welfare based interpretation of the capital tax ambiguity
result (due to Guo & Lansing, 1999). We show that the sign
ambiguity of optimal capital tax rate in an imperfectly competitive
economy is mainly due to the welfare cost of investment. The
substitution and income effects of profit seeking investment reinforce
each other which create a deadweight loss in welfare. Investors cannot
perceive this effect and never invest at the right level. This loss is
perceived only by the government which motivates capital taxation. Keywords: Optimal taxation; Monopoly power; Ramsey policy JEL Classification: D42; E62; H21; H30 |
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E2006/19 | Sheikh Selim (March 2006, updated July 2006) On Policy Relevance of Ramsey Tax Rules (1032K, 34 pages) Published in economics-ejournal economics discussion Papers, No 2007-31. http://www.economics-ejournal.org/economics/discussionpapers/2007-31 AbstractThe
Ramsey approach to optimal taxation and Ramsey tax rules have amassed
substance in economic theory. However, they are often criticized on
grounds of practicality, fairness, feasibility and some other aspects
of designing actual tax policy. This paper contests these criticisms,it
discusses how closely or remotely Ramsey rules are followed in
designing tax policy. It argues that the most of these common
criticisms, be it realistic, such as administrative and compliance
costs, or be it rather abstract, such as fairness, are either
unimportant or irrelevant for Ramsey taxation. The more important
inadequacy of the traditional Ramsey tax models is the selective
modelling of incentive effects of tax reforms and their limited
applicability for designing tax policy in developing countries. Keywords: Optimal taxation; Ramsey tax rules; Policy relevance JEL Classification: E61; E62; H21; H30 |
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E2006/18 | Juan Páez-Farrell (March 2006) Output and Inflation in Models of the Business Cycle with Nominal Rigidities: Some Counterfactual Evidence (1050K, 28 pages) Published in Scottish Journal of Political Economy, September 2007 pp. 479-495, Vol. 54, No. 4 AbstractThis
paper examines the relationship between cyclical output and inflation
in models commonly used for monetary policy analysis. This includes
models that incorporate the New Keynesian, Fuhrer-Moore and
backward-looking Phillips curves. The main finding is that these models
imply a strong negative relationship between inflation and output, a
result that is at odds with the data. The fact that New Keynesian
models yield counterfactual implications is not new,the novelty of the
paper lies in the fact that the finding extends to the other variants,
such as the backward-looking Phillips Curve, which has been put forward
as displaying superior dynamics. Keywords: nominal rigidities; monetary policy; Phillips Curve; Output; Inflation; Correlation JEL Classification: E20; E31; E32; E52; E61 |
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E2006/17 | Juan Páez-Farrell (March 2006) Assessing Sticky Price Models Using the Burns and Mitchell Approach (979K, 27 pages) Forthcoming in Applied Economics AbstractThis
paper evaluates sticky-price models using the methods proposed by Burns
and Mitchell, focusing on the monetary aspects of the business cycle.
Recent research has emphasised the responses of models to shocks at the
expense its systematic component. Whereas sticky-price models have been
successful at replicating impulse response functions from VARs, this
paper highlights that they are unable to mimic the data for nominal
variables. Moreover, the results are robust to the specification of the
Phillips curve, including its backward-looking variant,calibrated
values and the inclusion of fiscal policy shocks. Since being able to
mimic the data is the lowest hurdle a model must pass, these results
pose a challenge for New Keynesian-type models. Keywords: New Keynesian Models; Business Cycles; Correlations; Burns and Mitchell JEL Classification: E32; E52; E58 |
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E2006/16 | Roger Clarke and David R. Collie (February 2006) Welfare in the Nash Equilibrium in Export Taxes under Bertrand Duopoly (1071K, 9 pages) Published in Bulletin of Economic Research, Vol. 60, Issue 2, pp. 183-189. AbstractIn
the Eaton and Grossman (1986) model of export taxes under Bertrand
duopoly, it is shown that welfare in the Nash equilibrium in export
taxes is always higher than welfare under free trade for both countries. Keywords: Trade Policy; Imperfect Competition; Oligopoly JEL Classification: F12; F13; L13 |
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E2006/15 | Roger Clarke and David R. Collie (February 2006) Export Taxes under Bertrand Duopoly (1105K, 17 pages) Published in Economics Bulletin, Vol. 6, No. 6, pp. 1-8, 2006. AbstractThis
article analyses export taxes in a Bertrand duopoly with product
differentiation, where a home and a foreign firm both export to a
third-country market. It is shown that the maximum-revenue export tax
always exceeds the optimum-welfare export tax. In a Nash equilibrium in
export taxes, the country with the low cost firm imposes the largest
export tax. The results under Bertrand duopoly are compared with those
under Cournot duopoly. It is shown that the absolute value of the
export subsidy or tax under Cournot duopoly exceeds the export tax
under Bertrand duopoly. Keywords: Trade Policy; Imperfect Competition; Oligopoly JEL Classification: F12; F13; L13 |
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E2006/14 | Helen Robinson and Jonathan Wadsworth (February 2006) The Impact of the Minimum Wage on the Incidence of Second Job Holding in Britain (1163K, 34 pages) AbstractThe
advent of any earnings boost, such as provided by the introduction of a
minimum wage, might be expected to reduce the supply of low paid
individuals wanting to hold a second job. This paper uses
difference-in-differences estimation on a panel of individuals matched
across successive Labour Force Surveys around the time of the
introduction of the national minimum wage in the United Kingdom in
order to estimate the impact of the minimum wage and its subsequent
upratings on second job working. There is little evidence to suggest
that the extra pay provided by the introduction of the minimum wage was
sufficient to affect the incidence of second job holding significantly.
However, hours worked in the main job by second job holders may have
risen relative to those not covered by the minimum wage,and hours
worked in second jobs may have fallen for those whose second job was
initially below the minimum. Keywords: Second jobs; minimum wages JEL Classification: J23; J31 |
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E2006/13 | David Meenagh, Patrick Minford and David Peel (February 2006) Simulating Stock Returns under switching regimes - a new test of market efficiency (1016K, 9 pages) Published in Economics Letters, 94 (2007), pp. 235-239 AbstractA
model of profits switches between four regimes with fixed
probabilities,the rationally expected profits stream implies the stock
market value. This efficient market model is not rejected by UK
post-war time-series behaviour of either profits or the FTSE index. Keywords: regime switching; stock returns; efficient markets; rational expectations JEL Classification: C15; C5; G14 |
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E2006/12 | Kent Matthews, David Meenagh, Patrick Minford and Bruce Webb (February 2006) Monetary regimes: is there a trade-off between consumption and employment variability? (1133K, 40 pages) AbstractMacro
models generally assume away heterogeneous welfare in assessing
policies. We investigate here within two aggregative models - one with
a representative agent, the other a long-used forecasting model of the
UK - whether allowing for differences in welfare functions
(specifically between those in continuous employment and those with
frequent unemployment spells) alters the rankings of monetary policies.
We find that it does but that a set of policies (money supply targeting
implemented by money supply control) can be found that are robust in
the sense of avoiding very poor outcomes for either of the two groups. Keywords: Robustness; heterogenous welfare; money supply rules; interest rate setting; price level targeting JEL Classification: E52 |
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E2006/11 | Laurence Copeland (February 2006) Arbitrage Bounds and the Time Series Properties of the Discount on UK Closed-End Mutual Funds (1266K, 37 pages) AbstractIn
a dataset of weekly observations over the period since 1990, the
discount on UK closed-end mutual funds is shown to be nonstationary,
but reverting to a nonzero long run mean. Although the long run
discount could be explained by factors like management expenses etc.,
its short run arbitrage-free equilibrium. In time series terms, there
is evidence of long memory in discounts consistent with a bounded
random walk. This conclusion is supported by explicit nonlinearity
tests, and by results which suggest the behaviour of the discount is
perhaps best represented by one of the class of Smooth-Transition
Autoregressive (STAR) models. Keywords: Mutual Funds; ESTAR |
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E2006/10 | Laurence Copeland and Yanhui Zhu (February 2006) Hedging Effectiveness in the Index Futures Market Forthcoming
in Gregoriou, G.N. and R. Pascalau (eds.) Financial Econometrics
Modelling: Derivatives Pricing and Hedge Funds and Term Structure
Models, Palgrave-MacMillan, 2011. AbstractThis
paper addresses the question of how far hedging effectiveness can be
improved by the use of more sophisticated models of the relationship
between futures and spot prices. Working with daily data from six major
index futures markets, we show that, when the cost of carry is
incorporated in to the model, the two series are cointegrated, as
anticipated. Fitting an ECM with a GJR-GARCH model of the variance
process, we derive the implied optimal hedge ratios and compare their
out-of-sample hedging effectiveness with OLS-based hedges. The results
suggest little or no improvement over OLS. |
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E2006/9 | Sheikh Selim (January 2006) Current Account Dynamics and Capital Mobility in Asian Small Economies (1146K, 30 pages) Published in ICFAI Journal of Financial Economics, 4(2), pp. 66-86, June 2006. AbstractThis
paper explores current account dynamics in eight small economies of
Asia to examine whether or not capital flows have been excessive in
these countries. Standard assumptions of perfect capital mobility and
small open economy are jointly instrumental in simplifying theoretical
tractability of many open economy models. In empirical estimations,
however, the identification of a small open economy is often
oversimplified, which makes celebrated results, such as excessive or
too low capital flows in OECD economies, questionable. This paper
establishes that the actual extent of capital mobility in small open
economies cannot be generally too high or too low. This in turns
implies that the general idea of excessive capital flows in small open
economies requires revision. Keywords: Current account dynamics; intertemporal approach; consumption-smoothing; capital mobility |
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E2006/8 | Saeed Al-Muharrami, Kent Matthews and Yusuf Khabari (January 2006) Market Structure and Competitive Conditions in the Arab GCC Banking System (990K, 25 pages) Published in Journal of Banking and Finance, 30, 2006, pp. 3487-3501. AbstractThis
paper investigates the market structure of Arab GCC banking industry
during the years of 1993 to 2002 using the most frequently applied
measures of concentration k-bank concentration ratio (CRk) and Herfindahl-Hirschman Index (HHI) and evaluates the monopoly power of banks over the ten years period using the "H statistic"
by Panzar and Rosse. The results show that Kuwait, Saudi Arabia and UAE
have moderately concentrated markets and are moving to less
concentrated positions. The measures of concentration also show that
Qatar, Bahrain and Oman are highly concentrated markets. The
Panzar-Rosse H-statistics suggest that banks in Kuwait, Saudi Arabia
and the UAE operate under perfect competition,banks in Bahrain and
Qatar operate under conditions of monopolistic competition,and we are
unable to reject monopolistic competition for the banking market in
Oman. Keywords: GCC countries; Concentration; Market structure; Competition; Panzar-Rosse model; k-bank concentration ratio (CRk) and Herfindahl-Hirschman Index (HHI) JEL Classification: G21; L1; D40 |
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E2006/7 | Kent Matthews, Patrick Minford and Ruthira Naraidoo (January 2006) Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA Published in European Journal of Political Economy, vol. 24() (2008), 605-614 AbstractThe
1930s in the UK and USA is remembered as the decade of mass
unemployment. We develop a model of equilibrium unemployment based on
the Meltzer and Richard (1981) model of redistribution financed by
distortionary taxation. This model is extended to the UK and the US
interwar period to provide a theory of an endogenous natural rate of
unemployment. The theory here sees the natural rate and the associated
equilibrium path of unemployment as a reaction to shocks (mainly demand
in nature) and the institutional structure of the economy. The channel
through which these two forces feed on each other is a political
economy process whereby voters react to shocks by demanding more or
less social protection. The reduced form results obtained confirm a
pattern of unemployment behaviour in which unemployment moves between
high and low equilibria in response to shocks,and further evidence is
obtained by structural estimates for the UK. Keywords: Equilibrium unemployment; political economy; 'vicious' and 'virtuous' circles; threshold model; bootstrapping JEL Classification: E24; C10 |
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E2006/6 | Kent Matthews, Victor Murinde and Tianshu Zhao (January 2006) Competitiveness and Market Contestability of Major UK Banks (1087K, 33 pages) Published in Journal of Banking and Finance 2007, 31, 7, pp. 2025-2042. AbstractWe
undertake an empirical assessment of the competitiveness and market
contestability of the major British banks post-1980 - a period of major
structural changes, mergers, demutualizations and acquisitions.
Specifically, we estimate and test the Rosse-Panzar model on a panel of
12 banks for the period 1980-2004,furthermore, we buttress the
Rosse-Panzar methodology by estimating the ratio of Lerner indices
obtained from interest rate setting equations. The sample of banks
corresponds closely to the major British Banking Groups as specified by
the British Banking Association. Our results confirm the consensus
finding that the British banking market can be described as
monopolistically competitive. We also find that on the core business of
balance sheet activity, British banks have remained as competitive in
the 1990s as in the 1980s. This finding is further supported by
evidence from the ratio of Lerner indices for loans and deposits.
However, we find a significant worsening of competitiveness on the
non-core (off-balance sheet) business of the banks. Keywords: Competitive conditions in banking; market contestability; UK JEL Classification: G210; D240 |
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E2006/5 | Kent Matthews, Jonathan Shepherd, Vaseekaran Sivarajasingham and Sally Benbow (January 2006) Violence, Gender and the Price of Beer in England and Wales (993K, 25 pages) AbstractThis
paper examines the influence of the real price of beer on
violence-related injuries split by gender across the economic regions
in England and Wales. It was concluded that alcohol prices and injury
sustained in violence is causally related in both males and females.
Injury of females is causally related to poverty but injury of males.
However, nationwide sports events were associated only with male
assault injury. Violence-related harm was significantly and
independently linked to other socio-economic and demographic factors.
Our results suggest that the real price of alcohol (using beer as an
example) has a part to play in controlling the consumption of alcohol
and the incidence of violent injury. Keywords: Alcohol; gender; violence; price of beer JEL Classification: K40; I30; C50; |
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E2006/4 | J Daley, Kent Matthews and Keith Whitfield (January 2006) Too-Big-To-Fail: Bank Failure and Banking Policy in Jamaica (979K, 26 pages) AbstractResearch
on the causes of bank failure has focused on developed countries,
particularly the United States of America. Relatively little empirical
work has examined developing countries. We examine the total population
of banks in Jamaica between 1992 and 1998 and find that real GDP
growth, size, and managerial efficiency were the most significant
factors contributing to the failure of banks. Bank failure is defined
to include bailout and regulator-induced or supervised merger. Our
results suggest that there were implicit 'Too-big-to-Fail' policies
during this period. Keywords: Bank failures; Too-big-to-Fail; developing economies; Jamaica JEL Classification: G21; G28 |
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E2006/3 | Kent Matthews, Jonathan Shepherd and Vaseekaran Sivarajasingham (January 2006) Violence-related injury and the Price of Beer in England and Wales (981K, 21 pages) Published in Applied Economics 38, 2006, pp. 661-670. AbstractThis
paper examines the influence of the real price of beer on
violence-related injuries across the economic regions in England and
Wales. The data are monthly frequency of violent-injury collected from
a stratified sample of 58 National Health Service Emergency Departments
1995-2000. An econometric model based on economic, socio-demographic
and environmental factors was estimated using panel techniques. We show
that the rate of violence-related injury is negatively related to the
real price beer, as well as economic, sporting and socio-demographic
factors. The principal conclusion of the paper is that the regional
distribution of the incidence of violent injury is related to the
regional distribution of the price of beer. The major policy conclusion
is that increased alcohol prices would result in substantially fewer
violent injuries and reduced demand on trauma services. Keywords: Violence; Alcohol; Price of Beer JEL Classification: I18; K42 |
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E2006/2 | Kent Matthews and Mahadzir Ismail (January 2006) Efficiency and Productivity Growth of Domestic and Foreign Commercial Banks in Malaysia (1029K, 24 pages) AbstractThis
study examines the technical efficiency and productivity of domestic
and foreign commercial banks in Malaysia 1994-2000. We find that
foreign banks have a higher efficiency level than domestic banks, and
that efficient banks are characterised by size but not profitability or
loan quality. The main source of productivity growth is technical
change rather than improvement in efficiency. The productivity of
domestic banks is more susceptible to macroeconomic shocks than foreign
banks but over the medium term foreign banks are only marginally
superior to domestic banks. Keywords: domestic and foreign banks; technical efficiency; Malmquist productivity index JEL Classification: D2; G2; |
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E2006/1 | Laurian Lungu, Kent Matthews and Patrick Minford (January 2006) Partial Current Information and Signal Extraction in a Rational Expectations Macroeconomic Model: A Computational Solution. (1142K, 29 pages) Published in Economic Modelling, 25(2), March 2008, pp. 255-273 AbstractPrevious
attempts at modelling current observed endogenous financial variables
in a macroeconomic model have concentrated on only one observed
endogenous variable - namely the short-term rate of interest. The
solution method for dealing with more than one observed endogenous
variable has thus far been computationally intractable. This paper
applies a general search algorithm to a macroeconomic model with an
observed interest rate and exchange rate to solve the signal extraction
problem. The informational advantage of applying the signal extraction
algorithm to all the current observed endogenous variables is examined
in terms of the implication for policy from the misperceptions of
specific macroeconomic shocks. Keywords: Rational Expectations; Partial Current Information; Signal Extraction; Macroeconomic modelling JEL Classification: E370 |
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E2005/16 | Simon Feeny, Max Gillman and Mark N. Harris (December 2005) Econometric Accounting of the Australian Corporate Tax Rates: a Firm Panel Example (1064K, 25 pages) AbstractThe
paper presents an econometric accounting of the effective corporate tax
rate in Australia for the years 1993 to 1996. The estimation is a panel
of Australian firms that uses a specially gathered financial data base.
Using fixed and random effects, the model specifies that the statutory
tax rate is estimated as the constant term of the model. An ability to
find an estimated statutory tax rate that is close to the actual rate
suggests a certain confidence in the estimated effects of the others
factors affecting the effective tax rate. The results show importance
for interest expenses, depreciation allowances, debt/asset structures,
and the foreign ownership of firms. There is support for an Australian
role as a preferential tax location. Keywords: Effective tax rate; accounting model; panel data; random and fixed effects JEL Classification: H25; E62 |
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E2005/15 | Max Gillman and Michal Kejak (December 2005) Inflation and Balanced-Path Growth with Alternative Payment Mechanisms (1236K, 36 pages) Published in Economic Journal, Vol 115 (January): 247-270. AbstractThe
paper shows that contrary to conventional wisdom an endogenous growth
economy with human capital and alternative payment mechanisms can
robustly explain major facets of the long run inflation experience. A
negative inflation-growth relation is explained, including a striking
non-linearity found repeatedly in empirical studies. A set of Tobin
(1965) effects are also explained and, further, linked in magnitude to
the growth effects through the interest elasticity of money demand.
Undisclosed previously, this link helps fill out the intuition of how
the inflation experience can be plausibly explained in a robust fashion
with a model extended to include credit as a payment mechanism. Keywords: Human capital; cash-in-advance; interest-elasticity; credit production JEL Classification: O42; E31; E22 |
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E2005/14 | Szilárd Benk, Max Gillman and Michal Kejak (December 2005) A Comparison of Exchange Economies within a Monetary Business Cycle (1103K, 28 pages) Published in The Manchester School AbstractThe
paper sets out a monetary business cycle model with three alternative
exchange technologies, the cash-only, shopping time, and credit
production models. The goods productivity and money shocks affect all
three models, while the credit model has in addition a credit
productivity shock. The paper compares the performance of the models in
explaining the puzzles of the monetary business cycle theory. The
credit model improves the ability to explain the procyclic movement of
monetary aggregates, inflation and the nominal interest rate. Keywords: Cash-in-advance; credit production; cycle; inflation JEL Classification: E13; E32; E44 |
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E2005/13 | Szilárd Benk, Max Gillman and Michal Kejak (December 2005) Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects (1213K, 30 pages) Published in Review of Economic Dynamics AbstractThe
paper constructs credit shocks using data and the solution to a
monetary business cycle model. The model extends the standard
stochastic cash-in-advance economy by including the production of
credit that serves as an alternative to money in exchange. Shocks to
goods productivity, money, and credit productivity are constructed
robustly using the solution to the model and quarterly US data on key
variables. The contribution of the credit shock to US GDP movements is
found, and this is interpreted in terms of changes in banking
legislation during the US financial deregulation era. The results put
forth the credit shock as a candidate shock that matters in determining
GDP, including in the sense of Uhlig (2003). Keywords: Business cycle; credit shocks; financial deregulation JEL Classification: E32; E44 |
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E2005/12 | Patrick Minford, Eric Nowell and Bruce Webb (December 2005) Would price-level targeting destabilise the economy? (1244K, 26 pages) AbstractWhen
indexation is endogenous price level targeting slightly adds to
economic stability, contrary to widespread fears to the contrary. The
aggregate supply curve flattens and the aggregate demand curve
steepens, increasing stability in the face of supply shocks. Keywords:
Inflation; targeting; price-level rule; Price level target; indexation;
monetary regime; endogenous contracts; stationarity; stability JEL Classification: E31; E42; E52 |
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E2005/11 | Helmuts Azacis and Roberto Burguet (December 2005) Incumbency and Entry in License Auctions: The Anglo-Dutch Auction Meets Other Simple Alternatives (1128K, 32 pages) Published in International Journal of Industrial Organization, 26(3), pp. 730-745, May 2008 AbstractThe
existence of ex-ante strong incumbents may constitute a barrier to
entry in auctions for goods such as licenses. Introducing
inefficiencies that favor entrants is a way to induce entry and thus
create competition. Designs such as the Anglo-Dutch auction have been
proposed with this goal in mind. We first show that indeed the Anglo-
Dutch auction fosters entry and increases the revenues of the seller.
However, we argue that a more eective way could be to stage the
allocation of the good so that each stage reveals information about the
participants. We show that a sequence of English auctions, with high
reserve prices in early rounds, is a procedure with this property that
is more efficient than any one-stage entry auction. Moreover, it also
dominates the Anglo-Dutch auction in terms of seller's revenues. |
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E2005/10 | Helmuts Azacis (December 2005) Double Implementation in a Market for Indivisible Goods with a Price Constraint (1098K, 22 pages) Published in Games and Economic Behaviour, 62(1), pp. 140-154, January 2008. AbstractI
consider the problem of assigning agents to indivisible objects, in
which each agent pays a price for his object and all prices sum to a
given constant. The objective is to select an assignment-price pair
that is envy-free with respect to the agents' true preferences. I
propose a simple mechanism whereby agents announce valuations for all
objects and an envy-free allocation is selected with respect to these
announced preferences. I prove that the proposed mechanism implements
both in Nash and strong Nash equilibrium the set of true envy-free
allocations. Keywords: Indivisible Goods; Envy-Freeness; Implementation; Strong Nash Equilibrium JEL Classification: C78; C71; D78 |
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E2005/9 | Patrick Minford and Naveen Srinivasan (December 2005) Opportunistic Monetary Policy: an Alternative Rationalization (1084K, 17 pages) Published in Journal of Economics and Business, 58, October-November 2006, pp. 366-372 AbstractThis
paper offers an alternative rationalization for opportunistic behaviour
i.e., a gradual disinflation strategy where policymakers react
asymmetrically to supply shocks, opting to disinflate only in
recessionary period. Specifically, we show that adaptive expectations
combined with asymmetry in the Phillips curve of a specific sort
together provide an optimizing justification for opportunism. However,
the empirical basis for these conditions to be satisfied in the current
low-inflation context of most OECD countries remains however to be
established. Keywords: Deliberate disinflation; Opportunistic disinflation JEL Classification: E52; E58 |
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E2005/8 | James Foreman-Peck and Laurian Lungu (December 2005) Fiscal Devolution and Dependency (996K, 31 pages) Forthcoming in Applied Economics AbstractPublic
spending devolution in practice is widely seen as more appropriate for
addressing varied political aspirations within state boundaries than is
tax devolution. A drawback is that devolved public spending may be
subject to irresistible upward pressure, as illustrated by 'formula
drift' of the United Kingdom devolved administrations. By crowding out
the private sector such public spending can exacerbate the problem it
was originally intended to alleviate. When taxpayers do not value
increases in government output at least as highly as the private goods
and services they must forgo to finance them, then the public sector is
too large. This paper estimates a three sector Hecksher-Ohlin model of
the economy with the greatest relative rise of the public spending
ratio in the United Kingdom, Wales. Simulation of the model shows a net
gain in emp loyment from a one percent cut in income tax matched by a
corresponding reduction in government spending. This result is
consistent with the current level of intergovernmental transfers being
excessive. Keywords: Fiscal Devolution; Small Open Economy Modelling; Crowding Out JEL Classification: R15; R58 |
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E2005/7 | Max Gillman and Dario Cziráky (December 2005) Money Demand in an EU Accession Country: A VECM Study of Croatia (1115K, 32 pages) Published in Bulletin of Economic Research, April 2006 58(2) pp. 73-159 AbstractThe
paper estimates the money demand in Croatia using monthly data from
1994 to 2002. A failure of the Fisher equation is found and adjustment
to the standard money demand function is made to include the inflation
rate as well as the nominal interest rate. In a two-equation
cointegrated system, a stable money demand shows rapid convergence back
to equilibrium after shocks. This function performs better than an
alternative using the exchange rate instead of the inflation rate, as
in the "pass-through" literature on exchange rates. The results provide
a basis for inflaton rate forecasting and suggest the ability to use
inflation targeting goals in transition countries during the EU
accession process. Finding a stable money demand also limits the scope
for central bank "inflation bias". |
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E2005/6 | Sheikh Selim (November 2005, updated November 2010) The Social Cost of Optimal Taxes in an Imperfectly Competitive Economy (1405K, 33 pages) AbstractIn
this paper we calibrate the social cost of optimal taxes in a class of
imperfectly competitive economies and examine the correspondence of
this social cost with the number of tax instruments and the number and
the sources of distortions. We calibrate the Ramsey equilibrium for
three standard models of imperfect competition. These settings are
different in number of sources of market distortion and number of tax
instruments. Our calibration clearly shows that optimal taxes in an
imperfectly competitive economy incur lower social cost than those in a
competitive economy, implying that they are generally more efficient as
competition enhancing policy tools. We find that optimal taxes in our
models can cost up to 48% less forgone consumption relative to those in
a competitive market economy. Keywords: Optimal taxation; Ramsey Problem; Welfare Cost JEL Classification: D42; E62; H21; H30 |
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E2005/5 | Sheikh Selim (November 2005, updated July 2006) Taxing Capital in an Imperfectly Competitive Economy (1053K, 30 pages) AbstractEvidence
of declining trend in OECD economies' income tax rates and the concern
of enhancing competition in the US and the EU product markets subtly
motivate the question if low income tax rates are optimal in an
imperfectly competitive economy. This paper examines optimal income tax
policy in a dynamic neoclassical model with monopoly distortions. A
capital subsidy, motivated by low private returns to capital, provides
strong incentive to invest, but the adverse welfare effect of
investment is not perceived by capital owners. Since profit seeking
investment worsens second best welfare, and this effect is only
perceived by the government, there is a strong motivation to tax
capital. The paper presents a numerical characterization of the Ramsey
policy and shows that switching to a Ramsey policy involving a capital
tax is welfare improving. Keywords: Optimal taxation; Monopoly power; Ramsey policy JEL Classification: D42; E62; H21; H30 |
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E2005/4 | James Foreman-Peck (November 2005) Lessons from Italian Monetary Unification (1079K, 24 pages) AbstractThis
paper examines whether the states brought together in the Italian
monetary union of the nineteenth century constituted an optimum
monetary area, either before or after unification. Interest rate shocks
indicate close relations between states in northern Italy but negative
correlations between the North and the South before unification,
suggesting some advantages of continued Southern monetary independence.
The proportion of Southern Italian trade with the North was small, in
contrast to intra- Northern trade, and therefore monetary independence
imposed a light burden. Changes in the wheat market indicate that the
South and North after unification (though not probably because of it)
increasingly specialised according to their comparative advantages.
Coupled with differences in economic behaviour of the Southern economy,
this meant that monetary policies appropriate for the North were less
so for the South. In the face of agricultural shocks originating in the
New World and in France, the South would have gained from depreciating
its exchange rate against the North or against the non-Italian world.
As it was, nineteenth century Italian monetary union did not create the
conditions for its own success, contrary to the findings of Frankel and
Rose (1998) for the later twentieth century. JEL Classification: E42; N23; F15; F33 |
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E2005/3 | Patrick Minford and David Peel (November 2005) On the equality of Real Interest Rates across borders in Integrated Capital Markets (1044K, 9 pages) Published in Open Economies Review, 18(1), 2007 AbstractThe
purpose in this letter is first to review briefly the empirical results
on the relationship between real interest rates and real exchange
rates,this empirical literature provides little support for the
hypothesis of Roll that expected real interest rates are equal in
general. Our second aim is to discuss the theoretical conditions that
have to be met for his hypothesis to hold. Keywords: Real interest rates; Real Exchange rates; Roll JEL Classification: F31; C22; C51 |
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E2005/2 | David Meenagh, Patrick Minford, Eric Nowell and Prakriti Sofat (November 2005, updated March 2010) Can a Real Business Cycle Model without price and wage stickiness explain UK real exchange rate behaviour? (1152K, 21 pages, previously published as "Can a pure Real Business Cycle Model explain the real exchange rate?") AbstractThis
paper establishes the ability of a Real Business Cycle model to account
for real exchange rate behaviour, using UK data. We show that a
productivity simulation is capable of explaining initial real
appreciation with subsequent depreciation to a lower steady state. The
model is tested by the method of indirect inference, bootstrapping the
errors to generate 95% confidence limits for a time-series
representation of the real exchange rate, as well as for various key
data moments. The results suggest RBC models can explain real exchange
rate movements. Keywords: Real Exchange Rate; Productivity; Real Business Cycle; Bootstrap; Indirect Inference JEL Classification: E32; F31; F41 |