Showing papers in "Empirical Economics in 2016"

Revolution empirics: predicting the Arab Spring

Abstract: The paper examines whether the Arab Spring phenomenon was predictable by complete elimination in the dispersion of core demands for better governance, more jobs, and stable consumer prices. A methodological innovation of the generalized methods of moments is employed to assess the feasibility and timing of the revolution. The empirical evidence reveals that from a projection date of 2007, the Arab Spring was foreseeable between 2011 and 2012. The paper contributes at the same time to the empirics of predicting revolutions and the scarce literature on modeling the future of socioeconomic events. Caveats and cautions are discussed.

Financial development and income inequality: a panel data approach

Abstract: We analyzed the link between financial development and income inequality for a broad unbalanced dataset of up to 138 developed and developing countries over the years 1960–2008. Using credit to GDP as a measure of financial development, our results reject theoretical models predicting a negative impact of financial development on income inequality measured by the Gini coefficient. Controlling for country fixed effects, possible endogeneity problems, GDP per capita and other control variables, we find that financial development increases income inequality. These results are robust to different measures of financial development, econometric specifications and control variables.

The trend–cycle decomposition of output and the Phillips curve: Bayesian estimates for Italy and the Euro area

Abstract: A standard model-based trend–cycle decomposition of Italian GDP yields a likelihood function that is relatively flat. Bayesian estimation of the model allows to impose a mildly informative prior on the parameter governing the periodicity of the cycle, and thus, it helps to achieve the preferred decomposition. In a bivariate output and Phillips curve model for Italy, it is found that (i) the median response of prices to a 1 % shock to the output gap is equal to about 0.5 % after 20 quarters, (ii) the inflation cycle lags GDP on average by about three quarters. Estimating the model with Euro area data provides evidence of a smaller impact of the output gap on prices (0.4 %) and a lower lag of the inflation cycle with respect to GDP.

The Fourier approximation and testing for the null of cointegration

Abstract: In this paper, we propose a test to investigate the null of cointegration allowing for structural breaks of unknown form in deterministic trend by using the Fourier form. The test is developed on the basis of the fact that structural breaks of unknown form can be approximated with a low-frequency Fourier component. As a result, the statistic is able to test cointegration without estimating specific break dates. The asymptotic distribution of the test is derived, and the asymptotic critical values are tabulated. Simulation experiments show that the test can deliver robust type I error for various breaks commonly seen in economic analysis and have good power, even in small sample sizes encountered in empirical studies. Our test is applied to analyze the issue of fiscal sustainability in the nine OECD countries with a high debt-to-GDP ratio.

Tourism and growth in Lebanon: new evidence from bootstrap simulation and rolling causality approaches

Abstract: A multivariate model incorporating tourist arrivals, real output, and the real exchange rate is estimated to study the causal relationship between tourism and economic growth in Lebanon. This study covers the monthly data from January 1995 to December 2011. The Granger causality between the variables of interest is determined using the TYDL bootstrap causality approach. Then, we apply the Granger causality with rolling regression technique to evaluate the stability of the tourism-led growth hypothesis in Lebanon. We find that the tourism-led growth hypothesis is supported empirically in the case of the Lebanese economy. Meanwhile, we also find some evidences of uni-directional Granger causality running from the real exchange rate to tourism and economic growth in Lebanon. Therefore, tourism can be used a policy instrument to stimulate long-term economic growth in Lebanon.

GLM estimation of trade gravity models with fixed effects

Abstract: Many empirical gravity models are now based on generalized linear models (GLM), of which the poisson pseudo-maximum likelihood estimator is a prominent example and the most frequently used estimator. Previous literature on the performance of these estimators has primarily focussed on the role of the variance function for the estimators’ behavior. We add to this literature by studying the small sample performance of estimators in a data-generating process that is fully consistent with general equilibrium economic models of international trade. Economic theory suggests that (1) importer- and exporter-specific effects need to be accounted for in estimation, and (2) that they are correlated with bilateral trade costs through general equilibrium (or balance-of-payments) restrictions. We compare the performance of structural estimators, fixed effects estimators, and quasi-differences estimators in such settings, using the GLM approach as a unifying framework.

Crude oil and world stock markets: volatility spillovers, dynamic correlations, and hedging

Abstract: In this paper, we investigate volatility spillovers and dynamic correlations between crude oil and stock markets using GARCH-class models We focus on the dynamic relationships of seven major oil-exporting countries and nine oil-importing countries Our main findings based on in-sample and out-of-sample evidence suggest that the volatility spillovers and dynamic correlations between global crude oil market and a country’s stock market depend on the net position of oil imports and exports of this country in the world market In addition, crude oil risk can be better hedged by investing in stocks of oil-exporting countries than in those of oil-importing countries

Foreign languages and trade: evidence from a natural experiment

Abstract: Cultural factors and common languages are well-known determinants of trade. By contrast, the knowledge of foreign languages was not explored in the literature so far. We combine traditional gravity models with data on fluency in the main languages used in EU and candidate countries. We show that widespread knowledge of languages is an important determinant for foreign trade, with English playing an especially important role. The robustness of our results is confirmed by quantile regressions.

Dynamics of investment and firm performance: comparative evidence from manufacturing industries

Abstract: This paper investigates the channels linking investment and firm performance in the French and Italian manufacturing industries and proposes a novel methodology to identify investment spikes which corrects for nonlinear size dependence. Using large data sets reporting observed investment from official sources, we provide a systematic comparison of the relation between investment and firm performance across (i) different definitions of investment spikes, our proposed measure and previous ones; (ii) different institutional settings, i.e. France and Italy; (iii) several performance proxies; and (iv) investment types. We show that the failure to account for the scaling relation between investment spikes and firm size can bias such analyses. Moreover, differences also emerge across countries in the way investment spikes translate into future firm performance.

Correlation structure and principal components in the global crude oil market

Abstract: The correlation structure of the global crude oil market is investigated using the daily returns of 71 oil price time series across the world from 1992 to 2012. We identify from the correlation matrix six clusters of time series exhibiting evident geographical traits, which supports Weiner’s (Energy J 12:95–107. doi: 10.5547/ISSN0195-6574-EJ-Vol12-No3-7 , 1991) regionalization hypothesis of the global oil market. We find that intra-cluster pairs of time series are highly correlated, while inter-cluster pairs have relatively low correlations. Principal component analysis shows that most eigenvalues of the correlation matrix locate outside the prediction of the random matrix theory and these deviating eigenvalues and their corresponding eigenvectors contain rich economic information. Specifically, the largest eigenvalue reflects a collective effect of the global market, the other four largest eigenvalues possess a partitioning function to distinguish the six clusters, and the smallest eigenvalues highlight the pairs of time series with the largest correlation coefficients. We construct an index of the global oil market based on the eigenportfolio of the largest eigenvalue, which evolves similarly as the average price time series and has better performance than the benchmark 1 / N portfolio under the buy-and-hold strategy.

Health progress and economic growth in the USA: the continuous wavelet analysis

Abstract: This study employs the continuous wavelet analysis to investigate the dynamic relationship between health progress and economic growth over the period of 1934–2010 in the USA. Our findings reconcile the counter-cyclicality of longevity in the short run with the pro-cyclicality of longevity in the long run with respect to the business cycle. Additionally, four causal relationships between health progress and economic growth: the income view, health view, feedback view, and neutrality hypotheses are identified. Our results show that the income view, health view, and feedback hypotheses could only be validated for some specific time periods and conditions. None of these four hypotheses regarding causality of health progress and economic growth prevail over the entire period of 1934–2010 in the USA.

Peer effects of non-native students on natives’ educational outcomes: mechanisms and evidence

Abstract: This paper analyzes whether the share of non-native students in a school determines externalities that affect natives’ educational outcomes. The identification strategy exploits the variation in the non-native school share between adjacent cohorts by using administrative data covering the census of Italian junior high schools. Our results show that the non-native school share has weak negative impact on the test scores of native peers: Increasing the non-native school share by 1 percentage point leads to a decrease of 0.043 % in native peers’ language school mean test scores, while no effect is detected for math. The effects are also highly nonlinear and marginally increasing with level of the non-native school share. Our findings are consistent with, though not direct evidence of, an ‘integration model’ of peer interactions between native and non-native students.

Real estate returns predictability revisited: novel evidence from the US REITs market

Abstract: In this paper, we examine the real estate returns predictability employing US real estate investment trusts (REITs) and a set of possible predictors for the period January 1991–December 2014. To this end, we employ several forecasting models to test for REITs predictability under a flexible framework that captures parameter instability. Apart from the traditional factors examined in relevant studies, we also account for a series of sentiment and uncertainty indicators that may be significant predictors of REITs returns, especially during turbulent times when sentiment determines investment decisions to a greater extent. The empirical results indicate that the good predictors of REITs returns vary over time and over the forecast horizons. Our results suggest that economy-wide indicators, monetary policy instruments and sentiment indicators are among the most powerful predictors of REITs returns. In economic terms, an investment strategy that is based on our forecasts outperforms a buy and hold strategy. The issue of the most suitable forecasting method is also discussed in detail. Our results might entail implications for investors and market authorities.

Does oil price respond to macroeconomic uncertainty? New evidence

Abstract: Using a new measure of economic policy-related uncertainty (EPU), this study evaluates whether macroeconomic uncertainty affects oil price or vice versa. Specifically, we investigate mean and volatility spillovers between the EPU index and oil returns and the underlying drivers for the time-varying correlation. Our results illustrate the importance of policy uncertainty. Although the mean spillover of EPU on oil returns is negligible in the long run, the mean spillover in the short term and the volatility spillover of EPU are significant for oil spot and futures returns. Moreover, we provide evidence that both oil supply shocks and real economic shocks lead the correlation between the EPU and oil returns to fluctuate over time.

Foreign direct investment, trade integration and the home bias: evidence from the European Union

Abstract: This paper combines two fields in the economic literature by examining empirically the pattern of foreign direct investment (FDI) flows within the European Union (EU) and the relevance of trade integration as an influence upon investment flows over the period 1995–2009. We capture trade integration primarily by means of the home bias, rather than by using other indicators such as tariffs and non-tariff barriers. In turn, the home bias is computed for the countries in our sample by a standard gravity model. Our results find a positive and robust correlation between trade integration and FDI activity for the countries in our sample. For the particular case of the EU, it is not possible to strictly discriminate between horizontal or vertical FDI. FDI flows seem to be more consistent with a knowledge-capital hybrid model, where considerations about the market size of the partners and their relative endowment of skilled labour are relevant.

Effects of US policy uncertainty on Swedish GDP growth

Abstract: In this paper, we study the effects of US policy uncertainty—measured as the policy uncertainty index of Baker et al. (Measuring economic policy uncertainty, 2013)—on Swedish GDP growth. Another source of spillovers of shocks to small open economies is thereby examined. We apply both Bayesian VAR models and spectral analysis to quarterly data from 1988 to 2013. Results show that increasing US policy uncertainty has significant negative effects on Swedish GDP growth. The effect seems to primarily stem from effects on investment growth and export growth. Our findings should prove useful to those who analyse and forecast the Swedish economy and potentially also other similar small open economies.

Fiscal multipliers in turbulent times: the case of Spain

Abstract: What are the output responses to fiscal policy? Although important contributions have been made in the literature, quantifying the size of the fiscal multiplier remains a challenge. Indeed, the challenge of estimating a unique fiscal multiplier is probably an ill-posed one. The magnitude of the multiplier may well depend on country- and time-specific characteristics of the fiscal stance under scrutiny. In this paper, we estimate state-specific multipliers for Spain depending on the state of the economy along several dimensions. The government spending multiplier is estimated to be larger during recessions and banking stress periods, but much smaller (or even negative) during periods of weak public finances. Combining these three dimensions into a single global turmoil indicator via principal component analysis, the estimated multipliers are 1.4 for crisis (or turbulent) times and 0.6 for tranquil times.

The impact of preferences on developing countries’ exports to the European Union: bilateral gravity modelling at the product level

Abstract: Unilateral preferences aim at increasing exports from developing countries via reductions on applied tariffs and the incentives created by the preference margin. After decades of existence the evidence as to the extent to which preferential schemes have been genuinely effective in increasing exports is mixed. This paper evaluates the impact of the European Union’s (EU) unilateral preferential regimes on the exports of developing countries using a bilateral gravity model at the product level. We use a unique dataset that allows us to determine the actual tariff rate paid by each export flow at the product level (Combined Nomenclature CN-10 digits) to the EU and the preferential regime of entry. This allows us to accurately specify the impact of each trade regime and to properly address the issue of utilisation and non-utilisation of trade preferences. The most important findings of the paper are that unilateral preferences have been effective in increasing exports to the EU both as a result of the direct effect of lower tariffs and positive preference margin, and because of secondary effects associated with the preference regimes; although the outcome of these secondary effects depends on the margin of trade considered.

The price elasticity of marijuana demand: evidence from crowd-sourced transaction data

Abstract: This paper uses crowd-sourced transaction data from a cross section of the USA to examine demand for marijuana. State and regional variations in consumption, price, and quality are also explored. Our data are a unique cross section of over 23,000 actual marijuana transactions where price, quantity, and quality are reported, allowing for an estimation of the full demand elasticity rather than the participation elasticity. In addition, we account for the endogeneity of price by using instrumental variable estimation to calculate price elasticity. Price elasticity of demand estimates ranges between $$-$$ 0.67 and $$-$$ 0.79. Noticeable price differences are found between high-, medium-, and low-quality marijuana, with high-quality marijuana, at $13.77 per gram, 144 % greater than low-quality marijuana, at $5.63 a gram. Significant price variation is also found by medical marijuana status and census region, although this variation depends critically on the quality of the marijuana.

Robust estimation of the Pareto tail index: a Monte Carlo analysis

Abstract: The Pareto distribution is often used in many areas of economics to model the right tail of heavy-tailed distributions. However, the standard method of estimating the shape parameter (the Pareto tail index) of this distribution—the maximum likelihood estimator (MLE), also known as the Hill estimator—is non-robust, in the sense that it is very sensitive to extreme observations, data contamination or model deviation. In recent years, a number of robust estimators for the Pareto tail index have been proposed, which correct the deficiency of the MLE. However, little is known about the performance of these estimators in small-sample setting, which often occurs in practice. This paper investigates the small-sample properties of the most popular robust estimators for the Pareto tail index, including the optimal B-robust estimator (Victoria-Feser and Ronchetti in Can J Stat 22:247–258, 1994), the weighted maximum likelihood estimator (Dupuis and Victoria-Feser in Can J Stat 34:639–658, 2006), the generalized median estimator (Brazauskas and Serfling in Extremes 3:231–249, 2001), the partial density component estimator (Vandewalle et al. in Comput Stat Data Anal 51:6252–6268, 2007), and the probability integral transform statistic estimator (PITSE) (Finkelstein et al. in N Am Actuar J 10:1–10, 2006). Monte Carlo simulations show that the PITSE offers the desired compromise between ease of use and power to protect against outliers in the small-sample setting.

Markup and efficiency of Indian banks: an input distance function approach

Abstract: This paper examines market power and efficiency in Indian banking using a unified theoretical framework based on the primal approach. Empirical results show that due to high level of concentration, large banks hold the capacity to impose higher prices, particularly on advances, and enjoy significant market power. Indian banks, particularly Indian private and foreign banks, are operating below their efficient scale and cost savings can be obtained by increasing their size of operations. The impact of financial deregulation led to a decline in average markup of banks initially, but this trend got reversed in 2002. The increasing trend of market power is mostly determined by bank size. Large banks enjoy greater market power due to either cost advantages or to their capacity to impose higher prices. Lower marginal cost and higher return of the so-called efficient structure have helped the large banks to maintain higher efficiency level. Finally, higher market power was also reflected in higher profit.

Efficiency, innovation and competition: evidence from Vietnam, China and India

Abstract: Given a number of common features in both the economy and banking markets across Vietnam, China and India, this study investigates the comparative levels of efficiency, innovation and competition and then examines the effect of competition on innovation of banks in the three countries over the period 1995–2011. Applying for the first time a recently developed stochastic meta-frontier framework to the banking sector, this study finds that Indian banks are the most cost-efficient, followed by Chinese banks and Vietnamese banks. Indian banks are also more innovative in reducing the operating costs compared to Chinese and Vietnamese banks. Using the Lerner index, the banking markets of India and Vietnam are found to be more competitive than that of China. The relationship between competition and cost-reducing innovation follows an inverse U-shape curve, which is consistent with the literature. This study also finds that the optimal Lerner index to achieve the greatest innovation in reducing operating costs is 55 %. Based on the results of the Lerner index, this study recommends that to improve cost-reducing innovation, policy makers should promote bank competition in all the three countries, but to a greater extent in China than in Vietnam and India.

Estimation of structural gravity quantile regression models

Abstract: This paper demonstrates that observable trade cost measures in logs are not linearly related to the overall log trade costs nor to the conditional mean of log bilateral trade flows. This is shown using a simultaneous quantiles regression model and data on bilateral exports in 2008. This is modeled as a function of geographical, cultural, and historical observables and a host of unobservable trade cost measures in a structural model of bilateral trade. In this model, trade costs differ not only statistically but also quantitatively across the quantiles of the conditional distribution of bilateral exports. As a consequence, comparative static effects of these trade costs vary as well.

The U.S. Oil Supply Revolution and the Global Economy

Abstract: This paper investigates the global macroeconomic consequences of falling oil prices due to the oil revolution in the USA, using a global VAR model estimated for 38 countries/regions over the period 1979Q2–2011Q2. Set identification of the US oil supply shock is achieved through imposing dynamic sign restrictions on the impulse responses of the model. The results show that there are considerable heterogeneities in the responses of different countries to a US supply-driven oil price shock, with real GDP increasing in both advanced and emerging market oil-importing economies, output declining in commodity exporters, inflation falling in most countries, and equity prices rising worldwide. Overall, our results suggest that a US supply-driven oil price shock (equivalent to a 10–12% fall per quarter in the price of oil) results in an increase in global growth by 0.16–0.37 percentage points in the medium term. This is mainly due to an increase in spending by oil-importing countries, which exceeds the decline in expenditure by oil exporters.

Lending for Growth? A Granger Causality Analysis of China's Finance-Growth Nexus

Abstract: China’s banking sector is dominated by four distinct organizational forms: policy banks (PBs), state-owned commercial banks (SOCBs), joint stock commercial banks (JSCBs), and rural credit cooperatives (RCCs) Economic analyses have especially focused on the development of bank efficiency and profitability over time The equally important question, which of China’s banking institutions promote economic growth, has not been explored using macroeconomic data Our study uses a novel data set covering the period 1997–2008 and employs Granger causality tests to estimate the finance–growth nexus of each of these bank types Our results show that SOCBs and RCCs do not Granger-cause GDP growth and that SOCBs even have a negative effect on manufacturing growth By contrast, PBs and JSCBs promote economic growth

Determinants of survival of newly created SMEs in the Brazilian manufacturing industry: an econometric study

Abstract: This paper investigates the survival of newly created small and medium enterprises in Brazilian manufacturing. It takes as a reference newly created firms in 1996 that are followed until 2005. The econometric analysis relies on a time-varying version of Cox’s proportional hazards model. The evidence mostly corroborates previous findings for developed countries. Salient results include the positive role played by firm size, industry size and industry growth on survival and the negative influence exerted by the minimum efficient scale and the suboptimal scale.

Are handheld cell phone and texting bans really effective in reducing fatalities

Abstract: This paper aims at evaluating if texting and handheld cell phone bans are effective in reducing the number of fatalities occurring in motor vehicle crashes using US county-level data. In the past two decades, many debates have been going on among policy makers regarding the impact of using mobile phone devices while driving. This political debate is partially motivated by the lack of clear empirical evidence on the relationship between cell phone use, bans and driving performance. Our results show that states that enacted primary cell phone bans experienced a significant reduction in the number of fatalities. Primary texting bans also affected fatalities, but this effect was significantly smaller than that estimated for handheld cell phone bans. This is an important and contradicting result, given most of the legislative activity in 2012 focused on text messaging behind the wheel, considered the most dangerous of the distracted driving activities. Additionally, we looked at how heterogeneous were these effects among states that enacted such bans. We observed that all states benefited from the ban in terms of fatality reduction; however, some were highly affected (such as CA and DC) and some affected in small scale (such as UT and WA).

Heterogeneity in spatial growth clusters

Abstract: This paper sets forth an approach which allows for dealing with both model uncertainty and threshold effects of unknown form in spatial growth regression models. The estimation of threshold effects designates different spatial growth regimes which account for unknown structural heterogeneities in the parameter estimates. Using stochastic search variable selection priors, the paper deals with the issue of model uncertainty in a flexible and computationally efficient way. The paper uses Bayesian Markov chain Monte Carlo to simultaneously account for threshold effects, model uncertainty, and spatial dependence in regional growth regression models. The approach is illustrated for both identifying model covariates and unveiling growth regimes present in pan-European growth data.

How linear is pricing-to-market? Empirical assessment of hysteresis and asymmetry of PTM

Abstract: Pricing decisions of exporters who are facing imperfect competition in their destination markets might depend on exchange rate changes. While empirical literature often assumes that the impact of the exchange rate on the exporters’ prices is linear and the markup adjustment does not depend on magnitude or direction of the exchange rate change (or allows for short-run asymmetries only), we question this statement and test for the long-run hysteresis and asymmetry of pricing-to-market (PTM). Using the German export beer market as an example, we show that both types of nonlinearities play an important role in PTM decisions.

Fiscal and monetary policy effects in three South Eastern European economies

Abstract: This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Bulgaria, Croatia and Macedonia. We employ recursive vector autoregressions in order to study the linkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicators, inflation rate and output gap. We obtain the following main results: first, domestic economic activity exerts significant effects on inflation, provoking a strong reaction of monetary policy, especially in case of procyclical or erratic behavior of fiscal policy; second, we find evidence for the expansionary effects of fiscal consolidation since fiscal tightening leads to an increase in economic activity; third, the effects of monetary policy on output and inflation are generally as expected; fourth, monetary policy acts as a strategic substitute to tight fiscal policy, while in case of monetary tightening, fiscal authorities behave in a countercyclical manner.