How Far From the Euro Area? Measuring Convergence of Inflation Rates in Eastern Europe
(file size: 320K, last updated: 01/2009)
We present a common factor framework of convergence which we implement using principal components analysis. We apply this technique to a dataset of monthly inflation rates of EMU and the Eastern European New Member Countries (NMC) over 1996-2007. In the earlier years, the NMC rates moved independently from an average of the three best performing countries over the past twelve months, while they moved somewhat closer in line with them in the later years. Looking at the sample of the EMU and NMC countries as a whole, there is evidence of a formation of convergence clubs across the two groups.
Measuring Convergence of the New Member Countries’ Exchange Rates to the Euro
(file size: 229K, last updated: 01/2009)
We propose a common factor approach to analyse convergence, which we implement using principal components analysis. This technique has not been used to analyse convergence of time series but is shown to provide a useful new tool. We show how it is in many ways a more natural way of approaching the convergence debate. We apply these ideas to a dataset of bilateral Euro and US-Dollar exchange rates of the new member countries of the European Union. Our empirical application gives sensible results about the convergence process of the new member countries’ exchange rates to the Euro.
Population ageing, inequality and the political economy of public education
(file size: 356K, last updated: 01/2009)
Population ageing has triggered concerns about the sustainability of public systems of education. The empirical evidence is still inconclusive, whereas some theoretical results present a somewhat optimistic view (Gradstein and Kaganovich, 2004; Levy, 2005). The present note re-examines the political economy of public education in an ageing society, using the classical median voter model. The normative analysis shows that elderly households introduce distortions that render political outcomes inefficient except in rare circumstances. It is then explained that the interplay among the political and financial consequences of ageing gives rise to a non-linear, and possibly non-monotonic (inverted-U shaped) relationship between spending per pupil and the share of childless households in the population. Income inequality is shown to play a crucial role of in the process, revealing that ageing has a stronger tendency towards underprovision in economies with high inequality. The implications for the empirical literature are discussed.
Information, Institutions and Banking Sector Development in West Africa
(file size: 383K, last updated: 02/2009)
Using a new panel dataset for banks in eight West African countries, we explore the factors that exacerbate or alleviate excess liquidity, and the factors that promote or retard the rate of growth of banks' assets. Loan default rates in the region are high, and variations in the rate impact on liquidity and asset growth. However, the size of this effect is very sensitive to bank age. Some types of improvement in the quality of governance reduce excess liquidity and promote asset growth. However, the impact of other types of improvement, particularly with regard to corruption, is ambiguous. We uncover evidence that provides an explanation for this ambiguity.
Health Care Expenditure and Income in the OECD Reconsidered: Evidence from Panel Data
(file size: 201K, last updated: 02/2009)
This paper reconsiders the long-run economic relationship between health care expenditure and income using a panel of 20 OECD countries observed over the period 1971-2004. In particular, the paper studies the non-stationarity and cointegration properties between health care spending and income. This is done in a panel data context controlling for both cross-section dependence and unobserved heterogeneity. Cross-section dependence is modelled through a common factor model and through spatial dependence. Heterogeneity is handled through fixed effects in a panel homogeneous model and through a panel heterogeneous model. Our findings suggest that health care is a necessity rather than a luxury, with an elasticity much smaller than that estimated in previous studies.
From Ordients to Optimization: Substitution Effects without Differentiability
(file size: 305K, last updated: 08/2009)
This paper introduces the concept of ordient for binary relations (pref-erences), a relative of the concept of gradient for functions (utilities). The
main motivation for this study is to replace the binary relation at the center
stage of economic analysis, rather than its representation (whenever it exists).
Moreover, ordients have a natural economic interpretation as marginal rates of substitution. Some examples of ordientable binary relations include the lexi-cographic order, binary relations resulting from the sequential applications of multiple rationales or binary relations with differentiable representations. We characterize the constrained maxima of binary relations through ordients and provide an implicit function theorem and an envelope theorem.
Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network
(file size: 474K, last updated: 02/2009)
The paper studies the regulatory design in an industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC’s incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may in fact be preferable from a welfare viewpoint.
Intergenerational Complementarities in Education and the Relationship between Growth and Volatility
(file size: 286K, last updated: 03/2009)
We construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth cycles emerge. In the absence of coordination failure, the economy moves along a uniquely determined balanced growth path. We argue that such structural differences can account for the negative correlation between volatility and growth.
Technological choice under environmentalists' participation in Emissions Trading Systems
(file size: 181K, last updated: 11/2009)
We model competition in an emissions trading system (ETS) as a game between two firms and environmental group. In a previous stage, firms endogenously choose their manufacturing technologies. Our results show that there is an inverted U-shape relationship between how polluting the chosen technology is and the degree of the environmentalists' impure altruism. Firms choose a less polluting technology in the presence of the environmentalists than in their absence only if they are characterised by intermediate degrees of impure altruism.
Implementation in Mixed Nash Equilibrium
(file size: 280K, last updated: 10/2010)
A mechanism implements a social choice correspondence f in mixed Nash equilibrium if at any preference profile, the set of all pure and mixed Nash equilibrium outcomes coincides with the set of f-optimal alternatives at that preference profile. This definition generalizes Maskin’s definition of Nash implementation in that it does not require each optimal alternative to be the outcome of a pure Nash equilibrium. We show that the condition of weak set-monotonicity, a weakening of Maskin’s monotonicity, is necessary for implementation. We provide sufficient conditions for implementation and show that important social choice correspondences that are not Maskin monotonic can be implemented in mixed Nash equilibrium.
Is Government Ownership of Banks Really Harmful to Growth?
(file size: 310K, last updated: 12/2009)
We show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to adding more 'fundamental' determinants of economic growth. We also present new cross-country evidence for 1995-2007 which suggests that, if anything, government ownership of banks has been robustly associated with higher long run growth rates. While acknowledging that cross-country results need not imply causality, we nevertheless provide a conceptual framework, drawing on the global financial crisis of 2008-09, which explains why under certain circumstances government owned banks could be more conducive to economic growth than privately-owned banks.
Cooperation, Imitation and Correlated Matching
(last updated: 06/2011)
We study a setting where imitative players are matched into pairs to play a Prisoners' Dilemma game. A well know result in such setting is that under random matching cooperation vanishes for any interior initial condition. The novelty of this paper is that we add a certain correlation to the matching process: players that belong to a pair were both parties cooperate repeat partner next period whilst all other players are randomly matched into pairs. This intuitive correlation introduced in the matching process makes cooperation the unique outcome in the long run under some conditions. Furthermore, we show that no assortative equilibrium exits.
Time-Varying Coefficient Estimation In The Presence of Non-Stationarity
(file size: 124K, last updated: 09/2009)
Time-varying coefficient (TVC) estimation is a technique that has been developed to produce consistent estimates of parameters in the simultaneous face of measurement errors, unknown functional form and omitted variables. Previous work on the technique has not paid explicit attention to the issue of non-stationarity. This paper outlines the basic stages of the technique and discusses in detail how the issue of non-stationarity and cointegration affect each stage of the TVC estimation procedure.
Effects of Oil Price Changes on the Price of Russian and Chinese Oil Shares
(file size: 468K, last updated: 09/2009)
Do changes of oil prices have an effect on the stocks of oil companies in emerging markets? Do the shares of oil companies of emerging markets react to the price news in a similar way as those of the Western companies? This paper aims to answer these questions utilising various event study techniques. As expected, the results of both parametric and non-parametric tests suggest that the fluctuations of oil price have an effect on the stock prices. However, an interesting result is that the responses of stocks of Chinese and Russian oil companies are considerably different from the shares of their Western counterparts.
Bretton-Woods Systems, Old and New, and the Rotation of Exchange-Rates Regimes
(file size: 184K, last updated: 09/2009)
A recent contribution to the literature argues that the present international monetary system in many ways operates like the Bretton-Woods system. Asia is the new periphery of the system and pursues an export-led development strategy. The members of the new periphery peg their currencies to the U.S. dollar at undervalued exchange rates and accumulate foreign reserves. In contrast, the old periphery - - consisting of Western Europe, Canada and parts of Latin America - - interacts with the centre with flexible exchange rates; its aggregate current account has been roughly in balance. As under the older system, the United States remains the centre country, pursuing a monetary-policy strategy that overlooks the exchange rate. An implication of this argument is the following asymmetry hypothesis: under both regimes the United States does not take external factors into account in conducting monetary policy while the periphery does take external factors into account. We provide results of a test of the asymmetry hypothesis. Then, we present a new method for decomposition of the business cycle using a time-varying-coefficient technique that allows us to test the relationship between the cycle and macroeconomic policies. We apply this technique to five countries for three sub-periods over the 1959 to 2007 period.
The Nonexistence of Instrumental Variables
(file size: 176K, last updated: 09/2009)
The method of instrumental variables (IV) and the generalized method of moments (GMM) and their applications to the estimation of errors-in-variables and simultaneous equations models in econometrics require data on a sufficient number of instrumental variables which are (insert space)both exogeneous and relevant. We argue that in general such instruments (weak or strong) cannot exist.
Assessing the Causal Relationship between Euro-Area Money and Price in a Time-Varying Environment
(file size: 178K, last updated: 09/2009)
The paper provides new evidence on the causal relationship between money and price for the euro area using quarterly data for the period 1980 to 2006, employing two alternative methods of estimation: the vector error correction (VEC) and time-varying coefficient (TVC) estimation techniques. The latter technique has the advantage over the former technique in that it can deal with possible specification biases and spurious relationships that may have arisen from structural changes. The empirical results from the VEC method reveal a bidirectional causal relationship between money and price. Contrary, the results from the TVC technique suggest that money is acting as an exogenous process determining the price level.
The Behaviour of Dickey Fuller Test in the Case of Noisy Data: To What Extent We Can Trust the Outcome
(file size: 340K, last updated: 09/2009)
We examine the behaviour of Dickey Fuller test (DF) in the case of noisy data using Monte Carlo simulation. The findings show clearly that the size distortion of DF test becomes larger as the noise increases in the data.
The Design of the University System
(file size: 437K, last updated: 09/2009)
This paper compares the organisation of the university sector under private provision with the structure which would be chosen by a welfare maximising government. It studies a general equilibrium model where universities carry out research and teach students. To attend university and earn higher incomes in the labour market, students pay a tuition fee. Each university chooses its tuition fee to maximise the amount of resources it can devote to research. Research bestows an externality on society because it increases labour market earnings. Government intervention needs to balance labour market efficiency considerations — which would tend to equalise the number of students attending each university — with considerations of efficiency on the production side, which suggest that the most productive universities should teach more students and carry out more research. We find that government concentrates research more that the private market would, but less than it would like to do if it had perfect information about the productivity of universities. It also allows fewer universities than would operate in a private system.
Mixed Oligopoly: Old and New
(file size: 373K, last updated: 09/2009)
Many industries and “sectors” of a modern economy display the interaction
of private and public agents which forms the topic of this seminar. A first
approximation classification identifies three broad types of situations, which
beyond the prima facie similarity, are however radically different in origin and
Measuring the Natural Output Gap using Actual and Expected Output Data
(file size: 337K, last updated: 10/2009)
An output gap measure is suggested based on the Beveridge-Nelson decomposition of
output using a vector-autoregressive model that includes data on actual output and on
expected output obtained from surveys. The paper explains the advantages of using survey
data in business cycle analysis and the gap is provided economic meaning by relating
it to the natural level of output defined in Dynamic Stochastic General Equilibrium models.
The measure is applied to quarterly US data over the period 1970q1-2007q4 and the
resultant gap estimates are shown to have sensible statistical properties and perform well
in explaining inflation in estimates of New Keynesian Phillips curves.
Decision-Making in Hard Times: What is a Recession, Why Do We Care and How Do We Know When We Are in One?
(file size: 309K, last updated: 10/2009)
Defining a recessionary event as one which impacts adversely on individuals’ economic
well-being, the paper argues that recession is a multi-faceted phenomenon whose
meaning differs from person to person as it impacts on their decision-making in real
time. It argues that recession is best represented through the calculation of the
nowcast of recession event probabilities. A variety of such probabilities are produced
using a real-time data set for the US for the period, focusing on the likelihood of
various recessionary events through 1986q1-2008q4 and on prospects beyond the end
of the sample.
Who is left-wing, and who just thinks they are?
(file size: 169K, last updated: 04/2010)
This paper suggests that there are consistent patterns in how different groups of individuals perceive their relative ideological position. Using data from a large-scale cross-country survey on individuals views and personal characteristics it compares who reports themselves as being left(right) wing and who on an objective measure are actually left(right) wing. It finds, for example, the more educated on average believe themselves to be more left wing than their actual beliefs on a substantive issue might suggest.
Implementation in Minimax Regret Equilibrium
(file size: 137K, last updated: 10/2009)
This note studies the problem of implementing social choice correspondences
in environments where individuals have doubts about the rationality of their opponents.
We postulate the concept of "-minimax regret as our solution concept and
show that social choice correspondences that are Maskin monotonic and satisfy
the no-veto power condition are implementable in "-minimax regret equilibrium
for all " ∈ [0, 1).
(file size: 273K, last updated: 11/2009)
We study a quality-ladder model of endogenous growth that produces stochastic leadership cycles. Over a cycle, industry leaders can innovate several successive times in the same industry, gradually increasing the magnitude of their technological lead before being replaced by a new en-trant. Initially, new leaders are eager to enlarge their lead and do much of the research, but if they innovate repeatedly, their propensity to invest in R&D decreases. Eventually they stop doing research ltogether, and as they are overtaken a new cycle starts. The model generates a skewed firm size distribution and a deviation from Gibrat's law that accord with the empirical evidence. We also consider various policy measures, showing that in some cases policy should favour R&D by incumbents, not out-siders, and that stronger patent protection may reduce innovation and growth.
Social Background in School Attainment and Job Market
(file size: 191K, last updated: 09/2010)
This paper proposes a theory on how students' social background affects school teaching and job opportunities. We study a set-up where students di¤er in ability and social background, and we analyse the interaction between a school and an employer. Students with disadvantaged background are penalised compared to other students: they receive less teaching and/or are less likely to be hired. A surprising result is that policy aiming to subsidise education for disadvantaged students might in fact decrease their job opportunities.