In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.

Forecasting, Structural Time Series Models and the Kalman Filter

Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data

The ability of a two-sector model to quantify the contribution of the housing market to business fluctuations is investigated using U.S. data and Bayesian methods. The estimated model, which contains nominal and real rigidities and collateral constraints, displays the following features: first, a large fraction of the upward trend in real housing prices over the last 40 years can be accounted for by slow technological progress in the housing sector; second, residential investment and housing prices are very sensitive to monetary policy and housing demand shocks; third, the wealth effects from housing on consumption are positive and significant, and have become more important over time. The structural nature of the model allows identifying and quantifying the sources of fluctuations in house prices and residential investment and measuring the contribution of housing booms and busts to business cycles.

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Housing Market Spillovers: Evidence from an Estimated DSGE Model

We examine the impact of Chinese import competition on broad measures of technical change—patenting, IT, and TFP—using new panel data across twelve European countries from 1996 to 2007. In particular, we establish that the absolute volume of innovation increases within the firms most affected by Chinese imports in their output markets. We correct for endogeneity using the removal of product-specific quotas following China's entry into the World Trade Organization in 2001. Chinese import competition led to increased technical change within firms and reallocated employment between firms towards more technologically advanced firms. These within and between effects were about equal in magnitude, and account for 14% of European technology upgrading over 2000–7 (and even more when we allow for offshoring to China). Rising Chinese import competition also led to falls in employment and the share of unskilled workers. In contrast to low-wage nations like China, developed countries had no significant effect on innovation.

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Trade Induced Technical Change? The Impact of Chinese Imports on innovation, IT and Productivity

This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment.

Credit and Banking in a DSGE Model of the Euro Area

The paper investigates the relationship between underground activities and financial deepening. We find a strong negative impact of the share of irregular employment on outstanding credit to the private sector. A shift of 1 per cent of employees from regular activities to irregular ones corresponds to a decline of 1-2 percentage points in lending and of 0.3 percentage points in outstanding credit to households, both expressed as ratios to GDP. By analysing the 2002 regularisation programme for immigrant workers, we also find that irregular labour has a negative effect on banks' decisions entry into local credit markets. [Il lavoro studia la relazione tra economia sommersa e sviluppo del sistema finanziario. I risultati indicano che la diffusione del lavoro irregolare ha un impatto negativo molto forte sul credito al settore privato. Uno spostamento di un punto percentuale della quota di occupati da attivita' regolari al sommerso corrisponde a un calo dei prestiti in rapporto al valore aggiunto dell'ordine di 1-2 punti percentuali per le imprese e di 0,3 punti per le famiglie. Dall'analisi degli effetti delle misure di regolarizzazione degli immigrati introdotte nel 2002 emerge che l'incidenza del lavoro sommerso ha effetti negativi anche sulle decisioni delle banche di aprire dipendenze nei mercati bancari locali.]

Does the underground economy hold back;financial deepening? Evidence from the Italian credit market [L'economia sommersa Š un freno per lo sviluppo finanziario? Evidenze dai mercati locali del credito in Italia]

The paper empirically tests the relationship between underground labour and schooling achievement for Italy, a country ranking badly in both respects when compared with other high-income economies, with a marked duality between North and South. In order to identify underground workers, we exploit the information on individuals' social security positions available from the Bank of Italy's Survey on Household Income and Wealth. After controlling for a wide range of sociodemographic and economic variables and addressing potential endogeneity and selection issues, we show that a low level of education sizeably and significantly increases the probability of working underground. Switching from completing compulsory school to graduating at college more than halves this probability for both men and women. The gain is slightly higher for individuals completing the compulsory track with respect to those having no formal education at all. The different probabilities found for self-employed and dependent workers support the view of a dual informal sector, in which necessity and desirability coexist. Copyright 2010 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd.

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Dropping the Books and Working Off the Books

We test whether and how the adoption of the euro, narrowly defined as the end of competitive devaluations, has affected member states' productive structures, distinguishing between within and across sector reallocation. We find evidence that the euro has been accompanied by a reallocation of activity within rather than across sectors. Since its adoption, productivity growth has been relatively stronger in country-sectors that once relied more on competitive devaluations to regain price competitiveness. This effect is robust to potential omitted-variable bias and correlated effects. Firm-level evidence from Italian manufacturing confirms that low-tech businesses, which arguably benefitted most from devaluations, have been restructuring more since the adoption of the euro. Restructuring has entailed a shift of business focus from production to upstream and downstream activities, such as product design, advertising, marketing and distribution, and a corresponding reduction in the share of blue collar workers.(This abstract was borrowed from another version of this item.)

The Euro and Firm Restructuring

One of the consequences of global market integration is the international fragmentation of production, i.e. the localisation abroad of phases of production which previously took place in the home country.1 This process reflects the firms’ organisational choices aimed at reducing costs and increasing productivity on international markets (Antras and Helpman, 2003; Helpman, 2006).

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Vertical Specialisation in Europe: Evidence from the Import Content of Exports

The paper investigates the relationship between underground activities and financial deepening. The access to external finance requires entrepreneurs to disclose credible information through formal documentation. This requirement may be impossible to oblige to for many informal producers who lack a proper book-keeping of their operations. For the same reason irregular workers may find difficult to borrow for financing both consumption and housing purchase. Using panel data on Italian regional credit markets we find a strong negative impact of the share of irregular employment on outstanding credit to the private sector. According to our estimates a shift of 1 per cent of the employees from regular activities to irregular ones corresponds to a decline of about 2 percentage points in the volume of business lending and of 0.3 percentage points in outstanding credit to households, both expressed as ratios to GDP. Conversely, the feedback effects from financial deepening to the size of the informal sector are weak and statistically not significant. Through a difference-in-difference approach exploiting the regularisation program for immigrant workers launched in 2002 we also identify a negative effect of the irregular labour on banks’ entry decisions in the local credit markets, now defined in terms of provinces.

Roberta Zizza

Papers

Does the underground economy hold back;financial deepening? Evidence from the Italian credit market [L'economia sommersa Š un freno per lo sviluppo finanziario? Evidenze dai mercati locali del credito in Italia]

Dropping the Books and Working Off the Books

The Euro and Firm Restructuring

Vertical Specialisation in Europe: Evidence from the Import Content of Exports

Does the underground economy hold back financial deepening? Evidence from the Italian credit market