Political Economy Origins of Financial Markets in Europe and Asia
(file size: 299K, last updated: 09/2010)
We provide historical evidence from London, Amsterdam and Hong Kong which highlights the essential role played by governments in kick-starting financial development. In the cases of London and Amsterdam, the emergence of financial markets was a by-product of the rise of large, politically affiliated, trading monopolies. These monopolies, partly created to improve public finances, were responsible for major financial innovations and helped to strengthen investors’ property rights. In Hong Kong, where the financial development model was bank-based, a large banking monopoly with close links to both the British and Chinese governments, set up to finance international trade, played a similar role.
Minimax regret and strategic
(file size: 350K, last updated: 04/2008)
This paper introduces a new solution concept, a minimax regret equilibrium, which allows for the possibility that players are uncertain about the rationality and conjectures of their opponents. We provide several applications of our concept. In particular, we consider pricesetting environments and show that optimal pricing policy follows a non-degenerate distribution. The induced price dispersion is consistent with experimental and empirical observations (Baye and Morgan (2004)).
Pollution Abatement in a Model of Capital Accumulation and Endogenous Longevity
(file size: 207K, last updated: 02/2008)
The effort to reduce pollution entails economic benefits because improved environmental quality advances the health status of the population and reduces mortality. Yet, there are also economic costs accruing from this effort because activities towards environmental improvement require resources to be extracted away from capital investment. This paper examines the extent to which pollution abatement policies may, ultimately, increase or decrease income. This is done in the context of a dynamic general equilibrium model, in which the interactions of the dynamics between capital accumulation and environmental quality occur through the flow of pollution generated by economic activity and the beneficial effect of environmental quality on longevity.
Nonlinear Impacts of International Business Cycles on the UK — A Bayesian Smooth Transition VAR Approach
(file size: 353K, last updated: 01/2008)
Employing a Bayesian approach, we investigate the impact of international business cycles on the UK economy in the context of a smooth transition VAR. We find that British business cycle is asymmetrically influenced by the US, France and Germany. Overall, positive and negative shocks generating in the US or France affect the UK in the same directions of the shock. Yet, a shock emanating from Germany always exerts negative accumulative effects on the UK. More strikingly, a positive shock arising from Germany negatively affects UK output growth more than a negative shock from Germany of the same size. These results suggest that the appropriate UK economic policy depends upon the origin, size and direction of the external shocks.
Revisiting money-output causality from a Bayesian
logistic smooth transition VECM perspective
(file size: 290K, last updated: 01/2008)
This paper proposes a Bayesian approach to explore money-output causality within a logistic smooth transition VECM framework. Our empirical results provide substantial evidence that the postwar US money-output relationship is nonlinear, with regime changes mainly governed by the lagged inflation rates. More importantly, we obtain strong support for long-run non-causality and nonlinear Granger-causality from money to output. Furthermore, our impulse response analysis reveals that a shock to money appears to have negative accumulative impact on real output over the next fifty years, which calls for more caution when using money as a policy instrument.
Does the Chinese Banking System Promote the Growth of Firms?
(file size: 605K, last updated: 02/2008)
Using a large panel dataset of Chinese manufacturing enterprises during 1999-2005, which accounts for over 90% of China’s industrial output, and robust econometric procedures we show that the Chinese banking system has helped to support the growth of both firm value added and TFP. We find that access to bank loans is positively correlated with future value added and TFP growth. We also find that firms with access to bank loans tend to grow faster in regions with greater banking sector development. While the effects of bank loans on firm growth are more pronounced in the case of purely private-owned and foreign firms, they are positive and statistically significant even in the case of state-owned and collectively-owned firms. We show that excluding loss-making firms from the sample does not change the qualitative nature of our results.
The End of Financial Repression? A Cross-Country Analysis of Investment (This paper is no longer available. It has been superseded by Discussion Paper 10/06 "Financial Restraints and Private Investment: Evidence from a Non-Stationary Panel")
(file size: 220K, last updated: 02/2008)
We estimate a model of investment under financial restrains due to Demetriades and Devereux (2000), using total and private aggregate investment data from 38 high income and low income countries during 1972-2002. Our main findings for the overall sample are that (i) the US real interest rate is a robust determinant of total investment, suggesting that US monetary policy may have unintended global consequences; (ii) a term proxying domestic financial restraints is found to have an insignificant impact both on total and private investment. These findings are, however, somewhat less conclusive when we examine low income countries on their own, where financial restraints are found to have a negative and marginally significant effect on total investment.
A Test of the Balassa-Samuelson Effect Applied to Chinese Regional Data
(file size: 162K, last updated: 03/2008)
In this paper we investigate the relevance of the Balassa-Samuelson effect to the determination of regional inflation in China, for the period 1985 – 2000. To do this, we first construct annual measures of Chinese inflation and industry input on regional and sectoral basis. Then we generalize the Asea and Mendoza (1994) settings to consider asymmetric productivity shocks across sectors. Testing this model on Chinese Regional Data aid of non-stationary panel data techniques, it shows that our extended theoretical model is a good empirical representation of the Chinese data which supports the Balassa-Samuelson effect. Moreover, we are able to test the Asea and Mendoza (1994) version of our general model and find that the restrictions are rejected.
A Portfolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment
(file size: 613K, last updated: 04/2008)
As part of its monetary policy strategy, the European Central Bank has formulated a reference value for M3 growth. A pre-requisite for the use of a reference value for M3 growth is the existence of a stable demand function for that aggregate. However, a large empirical literature has emerged showing that, beginning in 2001, essentially all euro area M3 demand functions have exhibited instability. This paper argues that a proper understanding of the determination of money requires a portfolio analysis where the demand for broad money is seen as just one element in the wealth portfolio. Under this framework, wealth is the variable that constitutes the total budget constraint on the holdings of assets, including money, and changes in equity prices are a key transmission channel of monetary policy. Understanding money behaviour thus requires good data on euro area wealth which at present do not exist. Our basic premise is that there is a stable demand-for-money function but that the models that have been used until now to estimate euro area money-demand are not well-specified because they do not include a measure of wealth. Using two empirical methodologies - - a co-integrated vector equilibrium correction (VEC) approach and a time-varying coefficient (TVC) approach - - we find that a demand-for-money function that includes wealth is stable. The upshot of our findings is that M3 behaviour continues to provide useful information about medium-term developments on inflation.
Discounting by intervals: An inconsistent theory of intertemporal choice?
(file size: 142K, last updated: 04/2008)
We show that the theory developed in Scholten and Read (2006) Discounting by Intervals: A Generalized Model of Intertemporal Choice, Management Science, 52, 1424-1436, is an inconsistent theory. We suggest a way the inconsistency can be removed.
Social Preferences and Redistribution Under Direct Democracy
(file size: 369K, last updated: 04/2008)
There is growing evidence on the roles of fairness and social preferences as fundamental human motives, in general, as well as in voting contexts. In contrast, models of political economy are based on selfish-voters who derive utility solely from 'own' payoff. We examine the implications of introducing voters with social preferences, as in Fehr and Schmidt (1999), in a simple general equilibrium model with endogenous labour supply. We demonstrate the existence of a Condorcet winner for voters, with heterogeneous social preferences (including purely selfish preferences), using the single crossing property of voters preferences. Relatively small changes in the preference of voters can have relatively large redistributive consequences. We implications for the size of the welfare state; regional integration; and issues of culture, identity and immigration.
The Frequency Analysis of the Business Cycle
(file size: 193K, last updated: 04/2008)
An account is given of some techniques of linear filtering that can be used for extracting the business cycle from economic data sequences of limited duration. It is argued that there can be no definitive definition of the business cycle. Both the definition of the business cycle and the methods that are used to extract it must be adapted to the purposes of the analysis; and different definitions may be appropriate to different eras.
The Realisation of Finite-Sample Frequency-Selective Filters
(file size: 242K, last updated: 04/2008)
This paper shows how a frequency-selective filter that is applicable to short trended data
sequences can be implemented via a frequency-domain approach. A filtered sequence
can be obtained by multiplying the Fourier ordinates of the data by the ordinates of the
frequency response of the filter and by applying the inverse Fourier transform to carry
the product back into the time domain. Using this technique, it is possible, within
the constraints of a finite sample, to design an ideal frequency-selective filter that will
preserve all elements within a specified range of frequencies and that will remove all
elements outside it.
Approximations to ideal filters that are implemented in the time domain are commonly based on truncated versions of the infinite sequences of coefficients derived from the Fourier transforms of rectangular frequency response functions. An alternative to truncating an infinite sequence of coefficients is to wrap it around a circle of a circumference equal in length to the data sequence and to add the overlying coefficients. The coefficients of the wrapped filter can also be obtained by applying a discrete Fourier transform to a set of ordinates sampled from the frequency response function. Applying the coefficients to the data via circular convolution produces results that are identical to those obtained by a multiplication in the frequency domain, which constitutes a more efficient approach.
New Perspectives On Finance And Growth
(file size: 252K, last updated: 04/2008)
This paper offers a number of new perspectives on the finance and growth literature. It starts by reviewing the empirical evidence on finance and growth, highlighting studies which suggest that financial development may be ineffective in delivering growth in the poorest of countries. The paper proceeds to examine the likely sources of financial (under-)development and argues that: (a) the legal origins view has been largely discredited by lawyers; (b) government ownership of banks is much more of a symptom of weak institutions than a cause of financial under-development. It then argues that political economy explanations of financial development, focussing on the role of incumbents, income and wealth inequality and the evolution of economic institutions, are much more promising hypotheses but remain largely untested. It calls for more work to test and develop further these ideas but warns against over-simplified notions of politics. It ends by reviewing recent work on the political economy origins of financial development and the politics of financial reforms, which suggests that politics plays a greater and more complex role than has so far been recognised by the economics literature on finance and growth.
Group formation and governance
(file size: 324K, last updated: 11/2008)
This paper studies the impact of the governance of a group, whether be it unanimity, simple majority or qualified majority, on its (endogenously derived) size, composition, and inclination to change the status quo. Somewhat surprisingly, we show that not only unanimity might favor the formation of larger groups than majority, but also a change of status quo.
Logical Omniscience at the Laboratory
(file size: 490K, last updated: 05/2009)
Homo Strategicus populates the vast plains of Game Theory. He knows all logical implications of his knowledge (logical omniscience) and chooses optimal strategies given his knowledge and beliefs (rationality). This paper investigates the extent to which the logical capabilities of Homo Sapiens Sapiens resemble those possessed by Homo Strategicus. Controlling for other-regarding preferences and beliefs about the rationality of others, we show, in the laboratory, that the ability of Homo Sapiens Sapiens to perform complex chains of iterative reasoning is much better than previously thought. Subjects were able to perform about two to three iterations of reasoning on average.
Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real Time Data are Available
(file size: 535K, last updated: 05/2008)
A canonical model is described which reflects the real time informational context of decision-making. Comparisons are drawn with ‘conventional’ models that incorrectly omit market-informed insights on future macroeconomic conditions and inappropriately incorporate information that was not available at the time. It is argued that conventional models are misspecified and misinterpret news. However, neither diagnostic tests applied to the conventional models nor typical impulse response analysis will be able to expose these deficiencies clearly. This is demonstrated through an analysis of quarterly US data 1968q4-2006q1. However, estimated real time models considerably improve out-of-sample forecasting performance, provide more accurate ‘nowcasts’ of the current state of the macroeconomy and provide more timely indicators of the business cycle. The point is illustrated through an analysis of the US recessions of 1990q3—1991q2 and 2001q1—2001q4.
On the optimal allocation of students when peer effect works: Tracking vs Mixing
(file size: 367K, last updated: 06/2008)
The belief that both the behavior and outcomes of students are affected by their peers is important in shaping education policy. I analyze two polar education systems - tracking and mixing - and propose several criteria for their comparison. I find that tracking is the system that maximizes average human capital in societies where the distribution of pre-school achievement is not very dispersed. I also find that when peer effects and individuals’ pre-school achievement are close substitutes, all risk averse individuals prefer mixing.
Environmental Quality, Life Expectancy, and Sustainable Economic Growth
(file size: 296K, last updated: 06/2008)
I construct a model of a growing economy with pollution. The analysis of the model shows that the interactions between capital accumulation, endogenous longevity and environmental quality determine both the long-run growth rate of the economy and the pattern of convergence (i.e., monotonic or cyclical) towards the balanced growth path. I argue that such interactions can provide a possible explanatory factor behind the, empirically observed, negative correlation of longrun growth with its short-term cycles. Furthermore, the model may capture the observed pattern whereby economic growth and mortality rates appear to be negatively related in the long-run, but positively related in the short-run.
(file size: 423K, last updated: 06/2008)
We consider non-cooperative environments in which two players have the power to commit but cannot sign binding agreements. We show that by committing to a set of actions rather than to a single action, players can implement a wide range of action profiles. We give a complete characterization of implementable profiles and provide a simple method to find them. Profiles implementable by bilateral commitments are shown to be generically inefficient. Surprisingly, allowing for gradualism (i.e., step by step commitment) does not change the set of implementable profiles.
IDEOLOG: A Program for Filtering Econometric Data - A Synopsis of Alternative Methods
(file size: 262K, last updated: 06/2008)
An account is given of various filtering procedures that have been implemented in a computer program, which can be used in analysing econometric time series. The program provides some new filtering procedures that operate primarily in the frequency domain. Their advantage is that they are able to achieve clear separations of components of the data that reside in adjacent frequency bands in a way that the conventional time-domain methods cannot.
Several procedures that operate exclusively within the time domain have also been implemented in the program. Amongst these are the bandpass filters of Baxter and King and of Christiano and Fitzgerald, which have been used in estimating business cycles. The Henderson filter, the Butterworth filter and the Leser or Hodrick–Prescott filter are also implemented. These are also described in this paper.
Econometric filtering procedures must be able to cope with the trends that are typical of economic time series. If a trended data sequence has been reduced to stationarity by differencing prior to its filtering, then the filtered sequence will need to be re-inflated. This can be achieved within the time domain via the summation operator, which is the inverse of the difference operator. The effects of the differencing can also be reversed within the frequency domain by recourse to the frequency-response function of the summation operator.
A general theory of time discounting: The reference-time theory of intertemporal choice
(file size: 470K, last updated: 07/2008)
We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the generalized hyperbolic model (Loewenstein and Prelec 1992), the quasi-hyperbolic model (Phelps and Pollak 1968, Laibson 1997) and subadditivity of time discounting (Roelofsma and Read 2000, Read 2001 and Scholten and Read 2006a). These models are extended to allow for (i) reference points for time and wealth, and (ii) different discount functions for gains and losses. RT is able to account for all the 6 main anomalies of time discounting: gain-loss asymmetry, magnitude effect, common difference effect, delay-speedup asymmetry, apparent intransitivity of time preferences, and non-additivity of time discounting. We provide a class of utility functions compatible with RT. We show how RT can be extended to incorporate uncertainty and attribute models of intertemporal choice.
Inequality and size of the government when voters have other regarding preferences
(file size: 351K, last updated: 07/2008)
The celebrated relation between inequality and redistribution is based on selfish voters who care solely about own-payoffs. A growing empirical literature highlights the importance of other regarding preferences (ORP) in voting over redistribution. We reexamine the relation between inequality and redistribution, within a simple general equilibrium model, when voters have ORP. Our contribution is five-fold. First, we demonstrate the existence of a Condorcet winner. Second, poverty can lead to increased redistribution (which implies a countercyclical social spending to GDP ratio). Third, we show that disposable income 'strongly median-dominates' factor income. Fourth, we show that fair voters respond to an increase in 'strong median-dominance' by engaging in greater redistribution. Fifth, an illustrative empirical exercise using OECD data points to the importance of fairness in explaining redistribution.
A Dynamic Mechanism and Surplus Extraction Under Ambiguity
(file size: 398K, last updated: 07/2008)
In the standard independent private values (IPV) model, each bidder's beliefs about the values of any other bidder is represented by a unique prior. In this paper we relax this assumption and study the question of auction design in an IPV setting characterized by ambiguity: bidders have an imprecise knowledge of the distribution of values of others, and are faced with a set of priors. We also assume that their preferences exhibit ambiguity aversion; in particular, they are represented by the epsilon-contamination model. We show that a simple variation of a discrete Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV without ambiguity as well as with optimal static auctions with ambiguity - in all of these, types other than the lowest participating type obtain a positive surplus. An important point of departure is that the modified Dutch mechanism we consider is dynamic rather than static, establishing that under ambiguity aversion – even when the setting is IPV in all other respects – a dynamic mechanism can have additional bite over its static counterparts.
Creditor Protection and Banking System Development in India
(file size: 421K, last updated: 08/2008)
We use a new legal dataset tracking changes in creditor protection law over several decades to study the impact of legal reforms on banking system development in India. Cointegration analysis is used to show that the strengthening of creditor rights in relation to the enforcement of security interests in the 1990s and 2000s led to an increase in bank credit. We show that the change in the law was not endogenous to trends in stock market development and GDP per capita, and that the direction of causation ran from legal reform to banking development, rather than the reverse.
The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?
(file size: 326K, last updated: 08/2008)
The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period's expectation of future inflation. Most empirical estimates of the NKPC, typically based on Generalized Method of Moments (GMM) estimation, have found a significant role for lagged inflation, producing a "hybrid" NKPC. Using U.S. quarterly data, this paper examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying-coefficient (TVC) estimation, a procedure that allows us to directly confront specification biases and spurious relationships. Using three separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.
Estimation of Parameters in the Presence of Model misspecification and Measurement Error
(file size: 530K, last updated: 08/2008)
Misspecifications of econometric models can lead to biased coefficients and error terms, which in turn can lead to incorrect inference and incorrect models. There are specific techniques such as instrumental variables which attempt to deal with some individual forms of model misspecification. However these can typically only address one problem at a time. This paper proposes a general method for estimating underlying parameters in the presence of a range of unknown model misspecifications. It is argued that this method can consistently estimate the direct effect of an independent variable on a dependent variable with all of its other determinants held constant even in the presence of a misspecified functional form, measurement error and omitted variables.
Spatial Interdependencies of FDI Locations: A Lessening of the Tyranny of Distance?
(file size: 532K, last updated: 08/2008)
Recent theoretical approaches stress the importance of complex integration strategies of multinationals and the interdependence between locations. Up till now little has been done to incorporate the potential cross-country dependencies into the empirical analysis of the determinants and the structure of foreign direct investment. By utilizing a panel data set that consists of real FDI stocks for 476 country pairs for the years 1994-2004 and a distance weighted spatial matrix, we find significant third country effects. Interestingly, the bilateral variables seem to be in concordance with the notion of horizontally motivated FDI while the spatial third country effects seem to comply with the notion of vertical FDI and production fragmentation. While bilateral variables seem to dominate location decisions the results confirm the existence and importance of international interdependence.
New Labour? The Impact of Migration from Central and Eastern European Countries on the UK Labour Market
(file size: 2,571K, last updated: 08/2008)
The UK was one of only three countries that granted free movement of workers to accession nationals following the enlargement of the European Union in May 2004. The resulting large, rapid and concentrated migration inflow can be seen as a natural experiment that arguably corresponds closely to an exogenous supply shock. We evaluate the impact of this migration inflow – one of the largest in British history – on the UK labour market. We use new monthly micro level data and an empirical approach that ascertains which particular labour markets in the UK – with varying degrees of native's mobility and migrants' self-selection – might have been affected. Our results suggest modest effects throughout the labour market. Despite anecdotal evidence, we found little hard evidence that the inflow of accession migrants contributed to a fall in wages or a rise in claimant unemployment in the UK between 2004 and 2006.
Financial Liberalisation and Political Variables: a response to Abiad and Mody
(file size: 416K, last updated: 09/2008)
We challenge recent findings by Abiad and Mody (2005) which suggest that financial liberalization has little to do with political variables. This analysis is at odds with some of the established literature, and only with difficulty comes to terms with the considerable cross-national variation in the pace, phasing, and extent of financial reforms over time. Using Abiad and Mody's own index of financial liberalization, but slightly unbundling and refining their measures of 'ideological affinity' and 'regime type', we examine what Abiad and Mody call the 'triggers' of liberalisation and the dynamics of the subsequent 'cumulative transformation'. We demonstrate the role of political variables in relation to initial liberalisation episodes, and as variables affecting the cumulative dynamics and sustainability of ongoing financial reform processes, including those which affect the acceptability and costs of liberalization. These factors include (i) shifts to - as opposed to levels in - Left government; (ii) the incidence of Left governments combined with low levels of democracy; (iii) international voter support for free markets; (iv) the extent of social safety nets; (v) the presence of multilateral and bilateral aid programs. Our empirical investigation confirms these factors as statistically significant determinants of financial liberalization, and reveal what Abiad and Mody identify as 'learning' to be a highly political process.
A value function that explains the magnitude and sign effects
(file size: 208K, last updated: 09/2008)
Two of the anomalies of the exponentially discounted utility model are the 'magnitude effect' (larger magnitudes are discounted less) and the 'sign effect' (a loss is discounted less than a gain of the same magnitude). The literature has followed Loewenstein and Prelec (1992) in attributing the magnitude effect to the increasing elasticity of the value function and the sign effect to a higher elasticity for losses as compared to gains. We provide a simple, tractable, functional form that has these two properties, which we call the simple increasing elasticity value function (SIE). These functional forms underpin the main explanation of the magnitude and sign effects and may aid applications and further theoretical development.
Realisations of Finite-Sample Frequency-Selective Filters
(file size: 258K, last updated: 09/2008)
A filtered data sequence can be obtained by multiplying the Fourier ordinates of
the data by the ordinates of the frequency response of the filter and by applying the
inverse Fourier transform to carry the product back to the time domain. Using this
technique, it is possible, within the constraints of a finite sample, to design an ideal
frequency-selective filter that will preserve all elements within a specified range of
frequencies and that will remove all elements outside it.
Approximations to ideal filters that are implemented in the time domain are commonly based on truncated versions of the infinite sequences of coefficients derived from the Fourier transforms of rectangular frequency response functions. An alternative to truncating an infinite sequence of coefficients is to wrap it around a circle of a circumference equal in length to the data sequence and to add the overlying coefficients.
The coefficients of the wrapped filter can also be obtained by applying a discrete Fourier transform to a set of ordinates sampled from the frequency response function. Applying the coefficients to the data via circular convolution produces results that are identical to those obtained by a multiplication in the frequency domain, which constitutes a more efficient approach.
The Classical Econometric Model
(file size: 342K, last updated: 09/2008)
A compendium is presented of the various approaches that may be taken in deriving the estimators of the simultaneous-equations econometric model according to the principle of maximum likelihood. The structural equations of the model have the character both of a regression equation and of an errors-in-variables equation. This partly accounts for way in which the various approaches that have been followed appear to differ widely. In the process of achieving a synthesis of the methods of estimation, some elements that have been missing from the theory are supplied.
A general theory of time discounting: The
reference-time theory of intertemporal choice
(file size: 393K, last updated: 09/2008)
We develop a general theory of intertemporal choice: the reference-time theory, RT. RT is a synthesis of ideas from the hyperbolic model and subadditivity of time discounting. These models are extended to allow for a reference point for time as well as wealth. RT is able to account for all the 6 main anomalies of time discounting: gain-loss asymmetry, magnitude effect, common difference effect, delay-speedup asymmetry, apparent intransitivity of time preferences, and non-additivity of time discounting. We provide a class of utility functions compatible with RT. We show how RT can be extended to incorporate uncertainty and attribute models of intertemporal choice.
Mechanism Design and Communication Networks
(file size: 405K, last updated: 09/2008)
This paper characterizes the class of communication networks for which, in any environment (utilities and beliefs), every incentive-compatible social choice function is (partially) implementable. Among others, in environments with either common and independent beliefs and private values or a bad outcome, we show that if the communication network is 2-connected, then any incentive-compatible social choice function is implementable. A network is 2-connected if each player is either directly connected to the designer or indirectly connected to the designer through at least two disjoint paths. We couple encryption techniques together with appropriate incentives to secure the transmission of each player's private information to the designer.
Statistical Fourier Analysis: Clarifications and Interpretations
(file size: 670K, last updated: 10/2008)
This paper expounds some of the results of Fourier theory that are essential
to the statistical analysis of time series. It employs the algebra of
circulant matrices to expose the structure of the discrete Fourier transform
and to elucidate the filtering operations that may be applied to finite data
An ideal filter with a gain of unity throughout the pass band and a gain of zero throughout the stop band is commonly regarded as incapable of being realised in finite samples. It is shown here that, to the contrary, such a filter can be realised both in the time domain and in the frequency domain.
The algebra of circulant matrices is also helpful in revealing the nature of statistical processes that are band limited in the frequency domain. In order to apply the conventional techniques of autoregressive moving-average modelling, the data generated by such processes must be subjected to antialiasing filtering and sub sampling. These techniques are also described.
It is argued that band-limited processes are more prevalent in statistical and econometric time series than is commonly recognised.
Health and Wages: Panel Evidence on Men and Women using IV Quantile Regression
(file size: 258K, last updated: 10/2008)
Using panel data from a developing country on individuals aged 16 to 59 who reported their monthly wages, we estimated a relationship between health (nutrition) measures (i.e. height and BMI) and wages (which proxies productivity/growth). We controlled for endogeneity of BMI and found heterogeneous returns to different human capital indicators. Our findings indicate that productivity is positively and significantly affected by education, height and BMI. The return to BMI is important both at the lower and upper end of the wage distribution for men while women at the upper end of the distribution suffer a wage penalty due to BMI. Height has been a significant factor affecting men’s productivity but not women. The results in general support the high-nutrition and high-productivity equilibrium story. Returns to schooling showed a declining trend as we move from lower to higher quantiles for both sub-samples. This might suggest that schooling is more beneficial for the less able. In addition, the returns to schooling of women are higher than men. The results have important implications for policy making in the form of nutrition interventions and targeted education on women.
On the Joint Dynamics of Pollution and Capital Accumulation
(file size: 322K, last updated: 01/2009)
I construct an overlapping generations model in which (the endogenous) longevity is impeded by the stock of pollution and promoted by public health spending. I provide an alternative explanation for the so-called environmental Kuznets curve – an explanation which gives an active role to environmental quality as a contributing factor to capital accumulation and growth. I also examine how variations in environment-related parameters determine the effect of taxation in economic development.
Economic Aspects of the Microsoft Case: Networks, Interoperability and Competition
(file size: 252K, last updated: 11/2008)
In this paper, we discuss the main economic aspects of the European Microsoft case; in particular, Microsoft’s refusal to supply the necessary information to make the competitors’ work group server systems interoperable with Windows Operating System. The case can be seen as an example of competition between networks. We review the relevant economics literature with the objective of understanding the motivations behind Microsoft’s strategies.