Showing papers in "Journal of Economic Literature in 2003"

Forecasting Volatility in Financial Markets: A Review

Abstract: Financial market volatility is an important input for investment, option pricing, and financial market regulation. The emphasis of this review article is on forecasting instead of modelling; it compares the volatility forecasting findings in 93 papers published and written in the last two decades. Provided in this paper as well are volatility definitions, insights into problematic issues of forecast evaluation, data frequency, extreme values and the measurement of "actual" volatility. We compare volatility forecasting performance of two main approaches; historical volatility models and volatility implied from options. Forecasting results are compared across different asset classes and geographical regions.

Forecasting Output and Inflation: The Role of Asset Prices

Abstract: Because asset prices are forward-looking, they constitute a class of potentially useful predictors of inflation and output growth.

Health, inequality, and economic development

Abstract: I explore the connection between health and inequality in both poor and rich countries. My primary focus is on the relationship between income inequality and mortality, but I also discuss the effects of inequalities in other, often more important, dimensions. I discuss a range of mechanisms, including nonlinear income effects, credit restrictions, nutritional traps, public goods provision, and relative deprivation. I review the evidence on the effects of income inequality on the rate of decline of mortality over time, on geographical pattens of mortality, and on individual-level mortality. Much of the literature, both theoretical and empirical, needs to be treated skeptically, if only because of the low quality of much of the data on income inequality. Although there are many remaining puzzles, I conclude that there is no direct link from income inequality to mortality; individuals are no more likely to die or to report that they are in poor health if they live in places with a more unequal distribution of income. The raw correlations that are sometimes found are likely the result of factors other than income inequality, some of which are intimately linked to broader notions of inequality and unfairness. That income inequality itself is not a health risk does not deny the importance for health of other inequalities, nor of the social environment. Whether income redistribution can improve population health does not depend on the existence of a direct link between income inequality and health and remains an open question.

The Economic Design of Sporting Contests

Abstract: What is the optimal number of entrants in a race, or the optimal number of teams in a baseball league? What is the optimal structure of prizes for a golf tournament, or degree of revenue sharing for a football championship? How evenly balanced should the competing teams be in the NASCAR or Formula One championships? What is the maximum number of entrants per nation to the Olympic Games that should be permitted? What quota of qualifying teams to the soccer World Cup should be allocated to the developing nations?

Understanding the Soft Budget Constraint

Abstract: We propose a clarification of the notion of a soft budget constraint, a concept widely used in the analysis of socialist, transitional, and market economies. Our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences. In light of this interpretation, we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics.

Which Is the Fairest One of All? A Positive Analysis of Justice Theories

Abstract: This paper evaluates numerous positive and normative theories of justice in positive terms, i.e., in terms of how accurately they describe the impartial fairness preferences of real people. In addition, the paper proposes and defends an integrated justice theory based on preferences over four distinct and sometimes conflicting forces. These forces frame the analysis of the individual theories and inspire four corresponding theoretical classes: equality and need, utilitarianism and welfare economics, equity and desert, and context. This synthesis enables one to treat justice rigorously and to reconcile results that often appear contradictory or at odds with alternative theories.

What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules

Abstract: It is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule ,e ither ageneral targeting rule (explicit objectives for monetary policy) or a specific targeting rule (a criterion for (the forecasts of) the target variables to be fulfilled), essentially the equality of the marginal rates of transformation and substitution between the target variables. Targeting rules allow the use of judgment and extramodel information, are more robust and easier to verify than optimal instrument rules, and they can nevertheless bring the economy close to the socially optimal equilibrium.

Political institutions and policy choices: evidence from the United States

Abstract: A rich array of institutional diversity makes the United States an excellent place to study the relationship between political institutions and public policy outcomes. This essay has three main aims. It reviews empirical evidence on the relationship between institutional rules, political representation and policy outcomes; it aims to place the literature into a broader context of theoretical and empirical work in political economy. Second, it develops a parallel empirical analysis that updates studies in the literature and reexamines some of the claims, in a setting unified in terms of policy outcomes and period under study. Third, it develops new directions for research, presenting some novel exploratory results.

The Rise of the Regulatory State

Abstract: The Progressive Era of the early twentieth-century U.S. saw significant growth of government regulation of business. We model the choice of law enforcement strategy between private litigation over accidents, regulation of precautions, a combination of the two, and doing nothing. Any of these strategies can be subverted by private parties, at a cost. Private litigation may be more vulnerable to subversion than regulation, especially as the scale of enterprise grows. The rise of regulation is seen as an efficient response to subversion of justice. The model makes sense of the progressive reform agenda. It may also help explain what institutions of law and order are appropriate in what circumstances-a crucial issue for transition economies and emerging markets.

Auctions and the Price of Art

Abstract: The value of most important works of art is established by public auction, either directly, by an actual sale, or indirectly, by reference to other sales. How the auction system works is thus a critical determinant of how the public’ s preferences are translated into the evaluation of artistic work. The auction system is central in the determination of the incentives for artistic work, and the efficiency of the auction system is a key determinant of the cost of creating and distributing works of art. This paper contains a review of the burgeoning new research of the last decade that has been designed to shed light on how the art auction system actually works, what it indicates about price formation, and how well it performs. We begin our discussion in section 2 with a short description of the mechanics of the auction system and then organize the remainder of our discussion around two major topics. The first topic concerns how auction prices can be used to determine and compare overall price movements within the art market and other markets, and the second topic concerns how the auction mechanism influences prices. We

The Gains from Pension Reform

Abstract: We classify social security pension systems in three dimensions: actuarial versus non-actuarial, funded versus unfunded, and defined-benefit versus defined contribution systems. Recent pension reforms are discussed in terms of these dimensions. Shifting to a more actuarial system reduces labor-market distortions, although limiting the scope for redistribution. Shifting to a funded system may increase saving, redistribute income to future generations and distort contermporary labor supply. A partial shift to a funded system helps individuals diversify their pension assets. A shift from a defined-benefit to a defined-contribution system means that income risk will be shifted from workers to pensioners.

Price Regulation of Access to Telecommunications Networks

Abstract: Without access of networks to each other, competition in the telecommunications sector would hardly have spread so quickly. Such mutual access is necessary for carriers to provide ubiquitous service and enable endusers to call and be called by anybody without subscribing to a system-wide monopolist. One-way access concerns bottleneck inputs provided by an incumbent network to entrants, while two-way access concerns the interconnection between networks. Whereas one-way access regulation is exclusively driven by containment of market power, two-way access is additionally affected by collusion possibilities. Among the numerous pricing rules discussed, none clearly dominates. This article provides a roadmap vis-a-vis the competing policy objectives for access price regulation.

Measurement Error in the Consumer Price Index: Where Do We Stand?

Abstract: We survey the evidence on CPI bias and provide our best estimate of its magnitude. We also identify a "weighting" bias that has not been quantified previously. We estimate that the CPI currently overstates the rate of change in the cost of living by about 0.9 percentage point per year, with a confidence interval ranging from 0.3 to 1.4 percentage points. Our estimate is boosted by new evidence that substitution bias has increased sharply since the mid-1990s, and is reduced by the cumulative impact of a variety of recent improvements to BLS procedures. The study discusses potential areas for further improvement.

Sraffa, Wittgenstein y Gramsci

Abstract: Two distinct but interrelated issues are investigated here The first concerns Sraffa's critical role in contemporary philosophy through his pivotal influence on Wittgenstein The intellectual origins of this profound influence can be traced to the philosophical interests of the activist political circle in Italy (clustered around the journal L'Ordine Nuovo) to which both Sraffa and Antonio Gramsci belonged The second inquiry concerns the influence of Sraffa's philosophical views on his economics Sraffa's economic contributions can be much better understood by paying attention to the way Sraffa changed the nature of the questions asked, rather than seeking different answers to already established questions

On Networks and Markets by Rauch and Casella, eds.

Abstract: This essay reviews Networks and Markets, edited by James E. Rauch and Alessandra Casella. This book provides a useful vehicle for clarifying the main conceptual and operational issues facing the growing study of economic networks. Three types of networks are discussed: networks as concentrated or patterned exchange; as primordial relations; and, the most general, networks as structures of mutual orientation. An overview is provided of the challenges faced by research on the economic implications of three types of networks. The strengths and weaknesses of current research on economic networks are examined via a review of the contributions in the book.

Globalization and the Politics of International Finance: The Stiglitz Verdict

Abstract: There are many "outsiders" who have written critiques of the global financial system. Insiders typically do not; they have too much to lose. What makes Stiglitz's book, Globalization and Its Discontents, unusual is that it is an insider's critique. This book sketches the unfairness of the global system and how institutions, like the IMF, perpetuate the asymmetries of power and wealth. Though the book provides a morally compelling account of recent global crises, and its plea that we must think about radical change is hard to dismiss, it does not break new analytical ground nor offer concrete suggestions of alternatives.

The Marketization of New Zealand Schools: Assessing Fiske and Ladd

Abstract: Edward Fiske and Helen Ladd's review of market-based educational reforms in New Zealand are assessed in light of recent developments. We agree that predicted benefits were overstated, that there were both losers and winners, and that educational nirvana did not result. In our view, however, the main impact was to make schools' problems more transparent, creating discomforting pressures and attempts to undermine this transparency. We examine responses to changes in zoning laws, the effects of socioeconomic status on observed outcomes, signalling and value-added behavior, and school accountability. We find that educational reforms produce substantial short-term changes, largely on the demand-side.

Meltzer's History of the Federal Reserve

Abstract: This review argues that Allan Meltzer's account of the Fed. between 1913-1951 complements Friedman and Schwartz's in their Monetary History. Meltzer emphasises policy making within the System, rather than the evolution of the money supply and its effects on the economy. He stresses the uncertainty of the Fed's independence before the 1951 Accord, and the effects of economic ideas, notably the real bills and Riefler-Burgess doctrines, on policy. Many virtues in the book are noted, and one weakness, a failure to explain why inadequate ideas became dominant within the Fed when sounder alternatives were available in contemporary monetary thought.

Review of Hoshi and Kashyap's Corporate Financing and Governance in Japan

Abstract: Examining the development of the Japanese financial system since the Meiji era, Hoshi and Kashyap derive a number of interesting propositions on the evolution of bank-centered financing, its contribution to rapid growth, and its future transformation. They argue that the piecemeal approach to deregulation is one of the main reasons for the current banking crisis, and conclude that Japan will shift to a capital market-based financial system like the one in the United States or in prewar Japan. Hoshi and Kashyap's work makes an important contribution as a coherent long-term overview of Japan's bank-centered financial system.

Review of Drug War Heresies by MacCoun and Reuter 1

Abstract: MacCoun and Reuter's primary goal is to understand how current U.S. drug policies can be improved. They carefully describe the facts and trends regarding drug usage, criminal justice enforcement, and the harms associated with drug use, then discuss the public debate surrounding drug prohibition and give an informal treatment of the theory underlying the competing positions. The authors study policies towards other vices like gambling, cigarettes, alcohol, and prostitution, as well as drug policies in other times and places. The broader implication that emerges is that there is a desperate need for better data and increased research if there is any hope for making truly informed policy on illicit drugs.

Review of The Ordinary Business of Life by Backhouse

Abstract: Roger Backhouse's book The Ordinary Business of Life is a comprehensive history of economic thought, from the ancient Greeks to the present day. It will be useful both to specialist economists and to people with a smattering of economic ideas who want to fill in the historical gaps. Backhouse's book provides much of the material for anyone brave enough to tackle the big issues.