Showing papers in "Economica in 2011"
TL;DR: The authors showed that it is not the scar from past unemployment but the expectation to become unemployed in the future that makes people unhappy, and therefore the terminology should be changed by one letter: unemployment is not "scarring" but "scaring".
Abstract: We reassess the “scarring” hypothesis by Clark et al. (2001) which states that unemployment experienced in the past reduces a person’s current life satisfaction even after the person has become reemployed. Our results suggest that it is not the scar from past unemployment but the expectation to become unemployed in the future that makes people unhappy. Hence, the terminology should be changed by one letter: unemployment is not “scarring”, but “scaring”.
283 citations
TL;DR: The history of the Phillips curve (PC) has evolved in two phases, before and after 1975, with a widespread consensus about the pre-1975 evolution, which is well understood as discussed by the authors.
Abstract: While the early history of the Phillips curve up to 1975 is well known, less well understood is the post-1975 fork in the road. The left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non-shocked sector. Its econometric implementation interacts shocks with backward-looking inertia. The right fork approach emphasizes forward-looking expectations that can jump in response to anticipated policy changes. The left fork approach is better suited to explaining the postwar US inflation process, while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments. The history of the Phillips curve (PC) has evolved in two phases, before and after 1975, with a widespread consensus about the pre-1975 evolution, which is well understood. Bifurcation begins in 1975, when the PC literature split down two forks of the road, with little communication or interaction between the two forks. The major contribution of this paper, and hence the source of 'bifurcation' in its subtitle, is to examine, contrast and test the contributions of the two post-1975 forks. The pre-1975 history is straightforward and is covered in Section I. The initial discovery of the negative inflation-unemployment relation by Phillips, popularized by Samuelson and Solow, was followed by a brief period in which policy-makers assumed that they could exploit the trade-off to reduce unemployment at a small cost of additional inflation. Then the natural rate revolution of Friedman, Phelps and Lucas overturned the policy-exploitable trade-off in favour of long-run monetary neutrality. Those who had implemented the econometric version of the trade-off PC in the 1960s reeled in disbelief when Sargent demonstrated the logical failure of their test of neutrality, and finally were condemned to the 'wreckage' of Keynesian economics by Lucas and Sargent following the twist of the inflation-unemployment correlation from negative in the 1960s to positive in the 1970s. The architects of neutrality and the opponents of the Keynesian trade-off emerged triumphant, with two major caveats that their own models based on information barriers were unconvincing, and that their core result, that business cycles were driven by monetary or price surprises, floundered without supporting evidence. After 1975 the evolution of the PC literature split in two directions, each of which has largely failed to recognize the other's contributions. Section II reviews the 'left fork of the road', the revival of the PC trade-off in a coherent and integrated dynamic aggregate supply and demand framework that emerged in the late 1970s in econometric tests, in theoretical contributions, and in intermediate macro textbooks. This approach, which I have called 'mainstream', is resolutely Keynesian, because the inflation rate is dominated by persistence and inertia in the form of long lags on past inflation. An important difference between the mainstream approach and other post-1975 developments is that the role of past inflation is not limited to the formation of expectations, but also includes a pure persistence effect due to fixed-duration wage and price contracts, and lags between
226 citations
TL;DR: In this article, the authors focus on migrants' remittances that can help to reduce output growth volatility thanks to their size, stability and low procyclicality, and they show that indeed remittance are negatively correlated to output-growth volatility.
Abstract: Output growth volatility has negative effects on growth, poverty and welfare. The empirical literature has therefore searched for country-specific factors affecting volatility and focused on financial development, policy distortions, trade and financial openness. Using the same empirical framework, we focus on migrants' remittances that can help to reduce output growth volatility thanks to their size, stability and low procyclicality. In a cross-section of about 60 emerging and developing economies over the period 1980–2003, we show that indeed remittances are negatively correlated to output growth volatility. Instrumental variable estimation suggests that the effect of remittances is of a causal nature.
194 citations
TL;DR: This article assess the impact of the youth labour market on enrolment in post-compulsory education and find that the youth labor market has large enrolment impacts, at least twice as large as suggested by UK estimates based on time series data.
Abstract: In this paper I assess the impact of the youth labour market on enrolment in post-compulsory education. To that end, I construct data for a panel of English regions and identify youth labour market effects using variation in youth unemployment rates across regions and over time. My estimates suggest that the youth labour market has large enrolment impacts, at least twice as large as suggested by UK estimates based on time series data. This helps to explain why enrolment growth slowed down from the mid-1990s and suggests that a weakening youth labour market could cause enrolment to increase again.
163 citations
TL;DR: The authors examined empirically the relationship between crude oil prices and the ebb and flow of democratic insti-tutions, in order to test the hypothesis that high oil prices undermine democracy and sustain autocracy.
Abstract: Finalversion received19 April2011.We examine empirically the relationship between crude oil prices and the ebb and flow of democratic insti-tutions, in order to test the hypothesis that high oil prices undermine democracy and sustain autocracy.We use a variety of time series and panel data methods over a wide range of country subsamples and timeperiods, finding strictly no evidence in favour of this so-called ‘First Law of Petropolitics’ (Friedman2006).
152 citations
TL;DR: In this paper, the authors document patterns and recent developments on income inequality in Latin America (LA) and conclude that LA is a region of high inequality, although not the highest in the world.
Abstract: This paper documents patterns and recent developments on income inequality in Latin America (LA). New comparative international evidence confirms that LA is a region of high inequality, although maybe not the highest in the world. Income inequality has fallen in the 2000s, suggesting a turning point from the substantial increases of the 1980s and 1990s. The fall in inequality is significant and widespread, but it does not seem to be based on strong fundamentals.
148 citations
TL;DR: In this article, the authors put together a relatively large data set on bilateral remittances of emigrants and showed that the smoothing hypothesis of smoothing is correct and pointed out that remittance are countercyclical with respect to income in the worker's country of origin (the recipient of the remittance), while procyclical in the migrant's host country (the sender of the sending of remittance).
Abstract: By putting together a relatively large data set on bilateral remittances of emigrants, this paper is able to shed light on the important hypothesis of smoothing. The smoothing hypothesis is that remittances are countercyclical with respect to income in the worker’s country of origin (the recipient of the remittance), while procyclical with respect to income in the migrant’s host country (the sender of the remittance). The econometric results confirm the hypothesis. This affirmation of smoothing is important for two reasons. First, it suggests that remittances should be placed on the list of criteria for an optimum currency area. Second, it brings into doubt plans by governments in some developing countries to harness remittances for their own use, in that government spending in these countries generally fails the test of countercyclicality which remittances pass.
134 citations
TL;DR: In this paper, the authors investigated the effect of sanctions of unemployment insurance benefits on the exit rate from unemployment for a sample of Danish unemployed and found that even moderate sanctions have rather large effects.
Abstract: This paper investigates the effect of sanctions of unemployment insurance benefits on the exit rate from unemployment for a sample of Danish unemployed. The findings are that even moderate sanctions have rather large effects. For both males and females, the exit rate increases by more than 100% following an imposition of a sanction. The paper exploits a rather large sample to elaborate on the basic findings. It is shown that the effect of sanctions wears out after around three months and that some groups of unemployed are more responsive to sanctions than others.
89 citations
TL;DR: In this article, an instrumental variable approach based on cut-offs in the ranking of Dutch higher education graduates who applied for a scholarship programme for outstanding students was used to investigate whether studying abroad increases the propensity to live abroad later on.
Abstract: This paper investigates whether studying abroad increases the propensity to live abroad later on. We use an instrumental variable approach based on cut-offs in the ranking of Dutch higher education graduates who applied for a scholarship programme for outstanding students. Applicants ranked above the cut-off received a scholarship to study abroad. Applicants ranked below the cut-off were denied a scholarship. Assignment of a scholarship increases the probability to study abroad and the number of months spent studying abroad. Studying abroad and the number of months spent studying abroad increase the probability of currently living abroad.
86 citations
TL;DR: This paper proposed an information-rich fractionalization index that takes as a primitive the individuals, as opposed to ethnic groups, and uses information on the similarities among them, which does not require that individuals are pre-assigned to exogenously determined categories or groups.
Abstract: This paper characterizes an index that is informationally richer than the commonly used ethno-linguistic fractionalization (ELF) index. Our measure of fractionalization takes as a primitive the individuals, as opposed to ethnic groups, and uses information on the similarities among them. Compared to existing indices, our measure does not require that individuals are pre-assigned to exogenously determined categories or groups. We provide an empirical illustration of how our index can be operationalized and what difference it makes as compared to the standard ELF index. This application pertains to the pattern of fractionalization in the USA.
83 citations
TL;DR: In this article, the authors reviewed the pattern of income inequality in Mexico since 1994 and concluded that the recent reduction of inequality is due to the interaction of both, the market and the State.
Abstract: This paper reviews the pattern of income inequality in Mexico since 1994. It shows that in the past few years there has been an important reduction in income inequality in Mexico, which has almost reverted the sharp increase in inequality observed between 1984 and 1994. Using a Gini decomposition exercise we conclude that labor income, transfers and remittances have all played an important role in this process. We also argue that the equalizing effect of labor income and the reduction of wage inequality in Mexico can be explained by a structural change in Mexico´s workforce composition in terms of education and experience. In general, we conclude that the recent reduction of inequality in Mexico is due to the interaction of both, the market and the State.
TL;DR: This article examined the expansion of compulsory schooling in fifteen Western European countries over 1950-2000 and found that a convergence process has occurred across these countries since 1950 and argued that the major driver of this phenomenon is the existence of decreasing aggregate returns to education that have limited the extension of compulsory education.
Abstract: This paper examines the expansion of compulsory schooling in fifteen Western European countries over 1950-2000. We show that a convergence process has occurred across these countries since 1950. We argue that the major driver of this phenomenon is the existence of decreasing aggregate returns to education that have limited the extension of compulsory schooling. Then we test whether convergence holds when confronted with other explanations described in the literature. Conditional convergence does hold and we find that openness has been another significant determinant of compulsory years of schooling, reflecting the need of a skilled labour force in an increasingly globalized world.
TL;DR: In this article, the allocation of public spending between education services and infrastructure investment in an endogenous growth model where public capital in infrastructure affects the process of human capital accumulation is studied, and the dynamics associated with a budget-neutral reallocation of spending from education to infrastructure are studied through numerical simulations.
Abstract: This paper studies the allocation of public spending between education services and infrastructure investment in an endogenous growth model where public capital in infrastructure affects the process of human capital accumulation The balanced growth path is derived and the dynamics associated with a budget-neutral reallocation of spending from education to infrastructure are studied through numerical simulations The growth-maximizing tax rate is shown to depend only on the production technology (as in standard flow models of public expenditure), whereas the optimal share of infrastructure investment depends also on the “productiveness” of infrastructure (relative to education services) in the schooling technology
TL;DR: This article showed that private schools have been successful in transforming their ability to generate the academic outputs that are most in demand in the modern economy: the private/state school wage differential has risen significantly over time, and a significant factor has been faster rising educational attainment for privately-educated individuals.
Abstract: Private schooling is an important feature of education systems across the world. Despite its relatively small size, the British private school sector has a long history and plays a prominent role in society. We provide evidence showing that private schools have been successful in transforming their ability to generate the academic outputs that are most in demand in the modern economy: the private/state school wage differential has risen significantly over time, and a significant factor has been faster rising educational attainment for privately-educated individuals.
TL;DR: In the early twenty-first century, a sharp recorded increase in flows of worker remittances to the large number of developing countries that have been the source of these flows of labor services was also accompanied by large waves of international migration as mentioned in this paper.
Abstract: economic integration in the early twenty-first century is conInternational ventionally thought of in terms of increased openness to trade in goods and services, as well as a dramatic increase in the volume of capital flows. The twenty-first-century experience is sometimes contrasted with that of the last wave of globalization at the end of the nineteenth century, when increased integration in both of those dimensions was also accompanied by large waves of international migration. However, this contrast is probably overdrawn, as increases in international flows of labor services have also been characteristic of the current wave of globalization, and the impact of these factor movements is increasingly being felt in the international economy. A particularly dramatic manifestation of this fact is the sharp recorded increase in flows of worker remittances to the large number of developing countries that have been the source of these flows of labor services. In recent years, many such countries have witnessed significant increases in remittance flows, to the point that their scale has come to dwarf that of other types of resource inflows, whether development assistance, foreign direct investment, or other types of capital flows. In 2007 remittance flows to sub-Saharan Africa were equal in magnitude to flows of official development assistance, for example. Remittance flows now account for some 17 percent of GDP and 77 percent of exports in El Salvador, and over 20 percent of GDP and nearly 50 percent of exports in Honduras. In these countries, remittance flows are more than five times larger than foreign direct investment flows. Unlike capital flows, remittances do not entail the creation of external debt with future repayment obligations; unlike foreign development assistance, they do not come encumbered with a variety of political and economic conditions with which the recipient country must comply. Despite these virtues, however, large inflows of worker remittances have been perceived as posing 45
TL;DR: The authors investigated policy deviations from linear Taylor rules motivated by the risk management approach followed by the Fed during the Greenspan era and found that ignoring judgment-induced nonlinearities while estimating Taylor rules has remarkable costs in terms of fit.
Abstract: This paper investigates policy deviations from linear Taylor rules motivated by the risk management approach followed by the Fed during the Greenspan era. We estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy-makers' judgment, proxied by economically meaningful variables, drives the transition across policy regimes. We find that ignoring judgment-induced nonlinearities while estimating Taylor rules has remarkable costs in terms of fit: above 250 bps in 10 quarters. Although linear Taylor rules describe well the broad contours of monetary policy, they fail to detect relevant policy decisions driven by policy-makers' judgment.
TL;DR: The authors found that elections provoke increases in the fiscal deficit for Latin American democracies, but that this pattern is not contingent on a country being in the early phase of its democratic transition, and that the selection criteria utilized to define democracy and competitive elections when testing for political budget cycles.
Abstract: We test for political budget cycles in a panel of eighteen Latin American democracies from 1973 to 2008. Recent studies have argued that the pattern of deficit cycles in a large cross-section of countries is driven by the experience of ``new democracies. As a large share of the countries that underwent democratization during this period are in Latin America, we seek to verify if these patterns are robust using an updated data set on fiscal expenditures, democratization and elections. Our results confirm that elections provoke increases in the fiscal deficit for Latin American democracies, but that this pattern is not contingent on a country being in the early phase of its democratic transition. We argue that these findings suggest that greater attention should be directed at the selection criteria utilized to define democracy and competitive elections when testing for political budget cycles. "
TL;DR: The authors found that, ceteris paribus, the work-sharing aspects of the PRA created nearly 2.5 million new employment opportunities in around four months, however, the programme also required firms to raise hourly wage rates, offsetting close to half of these gains.
Abstract: The President's Reemployment Agreement (PRA) of 1933 directed firms to reduce workweeks during the Great Depression so existing jobs could be spread into additional employment opportunities. Similar ‘work-sharing’ policies have recently been implemented across Europe in hopes of reducing unemployment. I find that, ceteris paribus, the work-sharing aspects of the PRA created nearly 2.5 million new employment opportunities in around four months. However, the programme also required firms to raise hourly wage rates, offsetting close to half of these gains. Furthermore, most of the remaining employment gains were wiped out after cartel-oriented industry-specific codes of fair competition supplanted the PRA.
TL;DR: In this article, a human capital tax that decreases output growth and the real interest rate, but increases the investment rate is proposed to resolve this puzzle by requiring exchange for investment as well as consumption.
Abstract: Output growth, investment and the real interest rate in long-run evidence tend to be negatively affected by inflation. Theoretically, inflation acts as a human capital tax that decreases output growth and the real interest rate, but increases the investment rate, opposing evidence. This paper resolves this puzzle by requiring exchange for investment as well as consumption. Inflation then decreases the investment rate, and still decreases both output growth and real interest up to some moderately high rate of inflation, above which increasingly low investment finally causes capital to fall relative to labour, and the real interest rate to rise.
TL;DR: In this paper, the authors exploit high-frequency household expenditure data to examine the use of changes in shopping intensity as a method of mitigating the effects of the 2002 Argentine economic crisis.
Abstract: Households allocating time between market and non-market uses should respond to income variations by adjusting the time devoted to shopping search and other home production activities In this paper, we exploit high-frequency household expenditure data to examine the use of changes in shopping intensity as a method of mitigating the effects of the 2002 Argentine economic crisis Although the total quantity and real value of goods purchased fell during the crisis, consumers are found to be doing more shopping search This increase in shopping is shown to enable households to seek out lower prices and locate substitutes, allowing a given level of expenditure to buy more goods The magnitude and prevalence of these effects suggest that this non-market use of labor can be an important coping strategy for households during a recession
TL;DR: In this article, the effect of wealth on the early retirement rate of Dutch male workers was investigated and the authors found evidence for a positive effect of the wealth on (early) retirement.
Abstract: Theoretical models predict a positive effect of the level of private wealth on retirement. In many countries, there is a trend towards the introduction of more individual freedom of choice in pension schemes. The level of private wealth will become an increasingly important factor in the retirement decision. Empirical analysis of retirement behaviour of elderly workers so far has concentrated on properties of the pension system. For a sample of elderly male workers in the Netherlands, we empirically analyse the effect of wealth on the retirement rate. We find evidence for a positive effect of wealth on (early) retirement. © The Author. Economica © 2010 The London School of Economics and Political Science.
TL;DR: In this article, the authors characterize the evolution of financial globalization in emerging markets using alternative measures, and find that, in the 2000s, financial globalization has grown only marginally and international portfolio diversification has been limited and declining over time.
Abstract: Financial globalization, defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets as they integrate financially with the rest of the world. This paper argues that, because of the way it is often measured, it has also led to the misperception that financial globalization in emerging markets has been growing in recent years. The authors characterize the evolution of financial globalization in emerging markets using alternative measures, and find that, in the 2000s, financial globalization has grown only marginally and international portfolio diversification has been limited and declining over time. The paper revisits the empirical literature on the implications of financial globalization for local market deepening, international risk diversification, financial contagion, and financial dollarization, and finds them to be rather limited. Whereas financial globalization has indeed fostered domestic market deepening in good times, it has yielded neither the dividends of consumption smoothing (in line with limited portfolio diversification) nor the costs of amplifying global financial shocks. In turn, financial de-dollarization has largely reflected the undoing of financial offshoring and the valuation effects of real appreciation.
TL;DR: In this article, the authors provide evidence supporting the hypothesis that lower risk-aversion of entrepreneurs may explain the private equity premium puzzle, and they show that both the ownership probability and the conditional portfolio share of private business equity significantly increase with higher risk-tolerance.
Abstract: The empirical finding that entrepreneurs invest a large share of their wealth in their own firms, despite comparably low returns and high risk, has become known as the private equity premium puzzle. This paper provides evidence supporting the hypothesis that lower risk-aversion of entrepreneurs, and thus not necessarily credit constraints, may explain this puzzle. The analysis is based on a representative panel survey for Germany, which provides information on asset portfolios and experimentally validated risk attitudes. The results show that both the ownership probability and the conditional portfolio share of private business equity significantly increase with higher risk-tolerance.
TL;DR: In this article, the authors investigate the 1996 and 2001 RAE ratings of economics departments using independent rankings from the academic literature as quality controls, and find that the ratings are largely in agreement with the profession's view of research quality as documented by independent rankings.
Abstract: RAE ratings have been criticized as biased in favour of universities that are old, in England, large and represented on the panel. We investigate these accusations for the 1996 and 2001 RAE ratings of economics departments using independent rankings from the academic literature as quality controls. We find RAE ratings to be largely in agreement with the profession's view of research quality as documented by independent rankings, although the latter appear to be more focused on research quality at the top end of academic achievement. Accusations of bias find no support in the data, except for panel membership in 1996.
TL;DR: In this article, the authors review how tensions involving stability versus efficiency, and regulation versus laissez faire have for centuries run through macroeconomic analysis of these questions, and suggest that a government or a central bank offer explicit deposit insurance or implicit deposit insurance by acting as a lender of last resort.
Abstract: What kinds of assets should financial intermediaries be permitted to hold? What kinds of liabilities should they be allowed to issue? Should a government or a central bank offer explicit deposit insurance or implicit deposit insurance by acting as a lender of last resort? This paper reviews how tensions involving stability versus efficiency, and regulation versus laissez faire, have for centuries run through macroeconomic analysis of these questions.
TL;DR: In this article, the effects of changes in US monetary policy on asset prices in 51 countries to evaluate the validity of the event-study approach are evaluated. And the authors find that the event study estimates contain a significant bias, but this bias is fairly small and the ordinary least squares approach tends to outperform in an expected squared error sense the heteroscedasticity-based estimator for both small and large sample sizes.
Abstract: This paper documents the effects of changes in US monetary policy on asset prices in 51 countries to evaluate the validity of the event-study approach. We find that the event-study estimates contain a significant bias. However, this bias is fairly small and the ordinary least squares approach tends to outperform in an expected squared error sense the heteroscedasticity-based estimator for both small and large sample sizes. Hence in general the event-study methodology should be preferred. Moreover, we show that US monetary policy has been an important determinant of global financial markets.
TL;DR: The authors discusses the impact of A.W.H. Phillips' seminal work in macroeconomic stabilization policy on subsequent developments in that field and discusses some of the more contemporary aspects of stabilization policy.
Abstract: This paper discusses the impact of A.W.H. Phillips’ seminal work in macroeconomic stabilization policy on subsequent developments in that field. We begin by reviewing the various stabilization rules adopted by Phillips and show how these relate to optimal stabilization rules that emerge from linear-quadratic optimization problems. Most of the early st abilization literature was associated with “backward looking” variables. The development of rational expectations in the 1960’s and 1970’s posed a challenge for stabilization policy. This arose from the role of “forward -looking” inflationary expectations in the Phillips curve, and the effect this had on the design of optimal stabilization rules, through issues such as the “Lucas Critique” and the “time consistency” of policy. We also briefly comment on a long-standing debate, pertaining to the merits of fixed policy rules versus discretionary or optimal policy. The latter part of the paper discusses some of the more contemporary aspects of stabilization policy, thereby serving to illustrate the durability of Phillips’ contributions.
TL;DR: The authors investigated whether Japanese banks followed herd behavior during the 1980s and 1990s and found evidence for the inefficient herding in the behaviour of banks that made loans to new borrowers, and in the behavior of the type of Japanese banks that were more informed on lending to new customers.
Abstract: This paper investigates whether Japanese banks followed herd behaviour during the 1980s and 1990s. The results indicate the existence of herding during the sample period, while the inefficiency of herding is concentrated in the early to mid 1980s, the period immediately after financial deregulation began. Evidence for the inefficient herding is observed in the behaviour of banks that made loans to new borrowers, and in the behaviour of banks that followed the type of banks that were more informed on lending to new borrowers. On the other hand, inefficient herd behaviour is rarely observed in the 1990s.
TL;DR: In this article, the authors provide a simple behavioural explanation of why manufacturers frequently announce non-binding suggested retail prices for their products, based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward.
Abstract: We provide a simple behavioural explanation of why manufacturers frequently announce non-binding suggested retail prices for their products. Our model is based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward. We show that this may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium, although the latter price is non-binding. This, in turn, leads to a shift of profits from the retailer to the manufacturer.