Showing papers in "Research Papers in Economics in 1990"

Forecasting, Structural Time Series Models and the Kalman Filter

Abstract: 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.

Long Run Policy Analysis and Long Run Growth

Abstract: The wide cross-country disparity in rates of economic growth is the most puzzling feature of the development process. This paper describes a class of models in which this type of heterogeneity in growth experiences can arise as a result of cross-country differences in government policy. These differences in policy regimes can also create incentives for labor migration from slow growing to fast growing countries. In the class of models that we study growth is endogenous but the technology exhibits constant returns to scale and there is a steady state path that accords with Kaldor's stylized facts of economic development. The key to making growth endogenous in the absence of increasing returns is the presence of a "core" of capital goods that can be produced without the direct or indirect contribution of factors that cannot be accumulated, such as land.

Positive Feedback Investment Strategies and Destabilizing Rational Speculation

Abstract: Analyses of the role of rational speculators in financial markets usually presume that such investors dampen price fluctuations by trading against liquidity or noise traders This conclusion does not necessarily hold when noise traders follow positive-feedback investment strategies buy when prices rise and sell when prices fall In such cases, it may pay rational speculators to try to jump on the bandwagon early and to purchase ahead of noise trader demand If rational speculators' attempts to jump on the bandwagon early trigger positive-feedback investment strategies, then an increase in the number of forward-looking rational speculators can lead to increased volatility of prices about fundamentals

Equipment Investment and Economic Growth

Abstract: Using data from the United Nations Comparison Project and the Penn World Table, we find that machinery and equipment investment has a strong association with growth: over l9&)?l95 each percent of GDP invested in equipment is associated with an increase in GDP growth of 1/3 a percentage point per year. This is a much stronger association than found between growth and any of the other components of investment. A variety of considerations suggest that this association is causal, that higher equipment investment drives faster growth, and that the social return to equipment investment in well functioning market economies is on the order of 30 percent per year.

Optimal incentive contracts in the presence of career concerns: theory and evidence

Abstract: This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance

Information, Incentives and Bargaining in the Japanese Economy

Abstract: This book is not another parable of Japan's economic success; it provides rich and systematic descriptions of Japanese microeconomic institutions and interprets their work in terms familiar to Western economists. A systematic, in-depth analysis of Japanese institutions of this kind has never been available before. In making his comparative analysis of the Japanese system, Professor Aoki critically examines conventional notions about the microstructure of the market economy that have strongly shaped and influenced economists' approach to industrial organization (e.g., hierarchy as the alternative to the market, the firm as a propery of the stockholders, and market-oriented incentive contracts). While these notions may constitute an appropriate foundation for the analysis of the highly market-oriented Western economies, the author has found that a more complete understanding of the Japanese economy requires us to broaden such 'specific' notions. At one level, therefore, this book may be regarded as a provocative exercise in comparative industrial organization and the theory of the firm. To the extent that this approach is convincing, the book suggests a reordering of focus and emphasis in these studies.

Risk and protective factors in the development of psychopathology

Abstract: List of contributors Preface Part I. Introduction: Historical and Theoretical Roots of Developmental Psychopathology: 1. A historical perspective on the discipline of developmental psychopathology Dante Cicchetti 2. What is 'developmental' about developmental psychopathology? Thomas M. Achenbach Part II. Contributions of the High-Risk Child Paradigm: Continuities and Changes in Adaptation During Development: 3. Early contributors to developmental risk Arnold J. Sameroff and Ronald Seifer 4. Beyond diathesis: toward an understanding of high-risk environments John Richters and Sheldon Weintraub 5. Hard growing: children who survive Marian Radke-Yarrow and Tracy Sherman 6. Children born at medical risk: factors affecting vulnerability and resilience Margaret O'Dougherty and Francis S. Wright 7. A mediational model for boys' depressed mood Gerald R. Patterson and Deborah M. Capaldi 8. A temperamental disposition to the state of uncertainty Jerome Kagan, Jane L. Gibbons, Maureen O. Johnson, J. Steven Reznick and Nancy Snidman Part III. Competence Under Adversity: Individual and Family Differences in Resilience: 9. Psychosocial resilience and protective mechanisms Michael Rutter 10. Maternal stress and children's development: prediction of school outcomes and identification of protective factors Robert C. Pianta, Byron Egeland and L. Alan Sroufe 11. Competence under stress: risk and protective factors Ann S. Masten, Patricia Morison, David Pellegrini and Auke Tellegen 12. Stress-resistant families and stress-resistant children Alfred L. Baldwin, Clara Baldwin and Robert E. Cole 13. Children's adjustments to parental divorce: self-image, social relations and school performance Norman F. Watt, Olivia Moorehead-Slaughter, Debra M. Japzon and Gloria G. Keller Part IV. The Challenge of Adolescence for Developmental Psychopathology: 14. The development of psychopathology in adolescence Aaron T. Ebata, Anne C. Petersen and John J. Conger 15. Depressive symptoms in late adolescence: a longitudinal perspective on personality antecedents Jack Block and Per F. Gjerde 16. Vulnerability and resilience in the age of eating disorders: risk and protective factors for bulimia nervosa Judith Rodin, Ruth H. Striegel-Moore and Lisa R. Silberstein 17. Protected or vulnerable: the challenges of AIDS to developmental psychopathology Jon Rolf and Jeannette Johnson Part V. Factors in the Development of Schizophrenia and Other Severe Psychopathology in Late Adolescence and Adulthood: 18. Family relations as risk factors for the onset and course of schizophrenia Michael J. Goldstein 19. Long-range schizophrenia forecasting: many a slip twixt cup and lip Daniel R. Hanson, Irving I. Gottesman and Leonard L. Heston 20. Vulnerability factors in children at risk: anomalies in attentional functioning and social behaviour Keith H. Nuechterlein, Susan Phipps-Yonas, Regina Driscoll and Norman Garmezy 21. Schizophrenia: a new model of its transmission and its variations Philip S. Holzman 22. Premorbid competence and the courses and outcomes of psychiatric disorders Marion Glick and Edward Zigler 23. Relationships between adult development and the course of mental disorder John S. Strauss and Courtenay M. Harding A closing note: reflections on the future Norman Garmezy Author index Subject index.

Learning Curves In Manufacturing

Abstract: Large increases in productivity are typically realized as organizations gain experience in production. These "learning curves" have been found in many organizations. Organizations vary considerably in the rates at which they learn. Some organizations show remarkable productivity gains, whereas others show little or no learning. Reasons for the variation observed in organizational learning curves include organizational "forgetting," employee turnover, transfer of knowledge from other products and other organizations, and economies of scale.

Economic Behavior and Institutions

Abstract: An important research programme has developed in economics that extends neo-classical economic theory in order to examine the effects of institutions on economic behaviour. The body of work emerging from this line of inquiry includes contributions from various branches of economic theory, such as the economics of property rights, the theory of the firm, cliometrics and law and economics. This book is a comprehensive survey of this research programme which the author terms 'neoinstitutional economics'. The author proposes a unified approach to this research, integrating the work of various contributors and emphasising the common principles of inquiry that tie the work together. The theoretical discussion is accompanied by empirical studies dealing with a range of institutions and economic systems. This book will serve as the primary resource for economists and students who want to learn about this important branch of economic theory.

Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence

Abstract: This paper investigates the possibility, raised by Perron (1989, 1990a), that aggregate economic time series can be characterized as being stationary around broken trend lines. Unlike Perron, we treat the break date as unknown a priori. Asymptotic distributions are developed for recursive, rolling, and sequential tests for unit roots and/or changing coefficients in time series regressions. The recursive and rolling tests are based on a time series of recursively estimated coefficients, computed using increasing subsamples of the data. The sequential statistics are computed using the full data set and a sequence of regressors indexed by a "break" date. When applied to data on real postwar output from seven DECO countries, these techniques fail to reject the unit root hypothesis for five countries (including the U.S.), but suggest stationarity around a shifted trend for Japan.

The all-pay auction with complete information

Abstract: In a (first price) all-pay auction, bidders simultaneously submit bids for an item. All players forfeit their bids, and the high bidder receives the item. This auction is widelly used in economics to model rent seeking, RD asymmetric equilibria imply higher expected revenues than the symmetric Equilibrium.

Suggestions for a New Set of Fiscal Indicators

Abstract: There are four sets of questions that fiscal indicators can help answer: (1) Of the changes in the fiscal position, what part is due to changes in the economic environment and what part is due to policy? (2) Can the current course of fiscal policy be sustained, or will the government have to adjust taxes or spending? (3) What is the effect of fiscal policy on activity, through its effects on relative prices, be it the price of labour or the price of capital? (4) What is the macroeconomic impact of fiscal policy, through deficit and debt finance?This paper is one of three in this Working Paper Series, along with those by Chouraqui et al. and Gramlich, in which the assessment of fiscal policy is reconsidered. It argues that no single indicator can give even rough answers to all those questions. It then develops four (sets of) indicators, aimed at answering each of the questions ...

Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries

Abstract: According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption. Only the empirical evidence can distinguish which view is the more appropriate, that is, how often the contractionary effect of a fiscal consolidation prevails over its expansionary expectational effect. This paper presents new evidence, drawing on the European exercise in fiscal rectitude of the 1980s and focusing on its two most extreme cases, Denmark and Ireland. We find that at least in the experience of these two countries the "expectations" view has a serious claim to empirical relevan.

Trade, Knowledge Spillovers, and Growth

Abstract: In this paper, we examine one channel through which the trade regime might affect growth in the long run. We model endogenous technological progress that results from profit maximizing investments by far-sighted entrepreneurs. Productivity in the research lab depends upon the "stock of knowledge capital", a variable reflecting the state of scientific, engineering and industrial know-how in the local economy. We argue that local knowledge capital is likely to vary positively with the extent of contact between domestic agents and their counterparts in the international research and business communities, and that the number of such contacts increases with the level of commercial exchange. We derive the implications of this for the relationship between trade and growth.

Rational Learning Leads to Nash Equilibrium

Abstract: Two players are about to play a discounted infinitely repeated bimatrix game. Each player knows his own payoff matrix and chooses a strategy which is a best response to some private beliefs over strategies chosen by his opponent. If both players' beliefs contain a grain of truth (each assigns some positive probability to the strategy chosen by the opponent), then they will eventually (a) accurately predict the future play of the game and (b) play a Nash equilibrium of the repeated game. An immediate corollary is that in playing a Harsanyi-Nash equilibrium of a discounted repeated game of incomplete information about opponents' payoffs, the players will eventually play an equilibrium of the real game as if they had complete information.

Stock Returns and Real Activity: A Century of Evidence

Abstract: This paper analyzes the relation between real stock returns and real activity from 1889-1988. It replicates Fama's (1990) results for the 1953-87 period using an additional 65 years of data. It also compares two measures of industrial production in the tests: (1) the series produced by Babson for 1889-1918, spliced with the Federal Reserve Board index of industrial production for 1919-1988, and (2) the new Miron and Romer (1989) index spliced with the Fed index in 1941. Fama's findings are robust for a much longer period -- future production growth rates explain a large fraction of the variation in stock returns. The new Miron-Romer measure of industrial production is less closely related to stock price movements than the older Babson and Federal Reserve Board measures.

Game Theory and Economic Modelling

Abstract: Over the past two decades, academic economics has undergone a mild revolution in methodology. The language, concepts and techniques of noncooperative game theory have become central to the discipline. This book provides the reader with some basic concepts from noncooperative theory, and then goes on to explore the strengths, weaknesses, and future of the theory as a tool of economic modelling and analysis. The central theses are that noncooperative game theory has been a remarkably popular tool in economics over the past decade because it allows analysts to capture essential features of dynamic competition and competition where some parties have proprietary information. The theory is weakest in providing a sense of when it - and equilibrium analysis in particular - can be applied and what to do when equilibrium analysis is inappropriate. Many of these weaknesses can be addressed by the consideration of individuals who are boundedly rational and learn imperfectly from the past. Written in a non-technical style and working by analogy, the book, first given as part of the Clarendon Lectures in Economics, is readily accessible to a broad audience and will be of interest to economists and students alike. Knowledge of game theory is not required as the concepts are developed as the book progresses.

Rational Addictive Behavior and Cigarette Smoking

Abstract: After a discussion of cigarette smoking in the context of the Becker-Murphy (1988) model of rational addictive behavior, demand equations are derived accounting for the tolerance, reinforcement, and withdrawal characteristic of addictive consumption These are contrasted to equations developed under the competing hypotheses that smoking is not addictive or that cigarettes are addictive but individuals behave myopically The demand equations are estimated using adults interviewed as part of the Second National Health and Nutrition Examination Survey Estimates support the assumptions that cigarette smoking is an addictive behavior and that individuals do not behave myopically Long run price elasticities of demand, fall in the range from -038 to -027 These estimates suggest that increased excise taxation would be an effective way of reducing cigarette smoking Estimates for samples of current and ever smokers indicate that price increases would lead to lower cigarette consumption among both groups Finally, the Becker-Murphy model's implications concerning the rate of tine preference and addictive consumption are tested by estimating the demand for cigarettes separately using samples based on age or education Less educated and younger individuals are found to behave much more myopically than their more educated or older counterparts Additionally, more addicted (myopic) individuals are found to be more responsive, in the long run, to changes in price than less addicted (myopic) individuals

Stock prices, news, and business conditions

Abstract: Previous research finds that fundamental macroeconomic news has little effect on stock prices. This study shows that after allowing for different stages of the business cycle, a stronger relationship between stock prices and news is evident. In particular, the empirical results suggest that the effect of news about real economic activity depends on the varying responses of expected cash flows relative to equity discount rates. When the economy is strong, for example, the stock market responds negatively to good news about real economic activity, reflecting the larger effect on discount rates relative to expected cash flows.

Political Cycles in OECD Economies

Abstract: This paper studies whether the dynamic behaviour of GNP growth, unemployment and inflation is systematically affected by the timing of elections and of changes of governments. The sample includes the last three decades in 18 OECD economies. We explicitly test the implication of several models of political cycles, both of the "opportunistic" and of the "partisan" type. Also, we confront the implication of recent "rational" models with more traditional approaches. Our results can be summarized as follows: (a) The "political business cycles" hypothesis, as formulated in Nordhaus (1975) on output and unemployment is generally rejected by the data; (b) inflation tends to increase immediately after elections, perhaps as a result of pre-electoral expansionary monetary and fiscal policies; (c) we find evidence of temporary partisan differences in output and unemployment and of long-run partisan differences in the inflation rate as implied by the "rational partisan theory" by Alesina (1987); (d) we find virtually no evidence of permanent partisan differences in output growth and unemployment.

Contracts and Market for Executives

Abstract: The paper reviews empirical findings on executive compensation in light of marginal productivity and contract theories. The executive labor market performs three functions. First, control must be distributed and assigned among executives. The most talented executives are efficiently assigned to control positions in the largest firms when talent and the marginal product of control are complements. These gains or rents are partially captured in larger earnings. In fact, the elasticity of top executive pay lies within a tight band around .25 among industries, time periods, and countries where it has been estimated. Second, executive contracts must provide incentives for managers to act in the interests of shareholders. Potential loss of reputation, bonding and takeovers probably substitute for direct monetary incentives in this task. Nevertheless, the elasticity of top executive pay with respect to accounting rates of return lie near 1.0. The elasticity with respect to stock market returns is much smaller, though precisely estimated, near 0.1. Differences of opinion remain on whether the market provides enough incentives to align interests between ownership and control. Third, the market must identify new talent and reassign control over careers from older to younger generations. Competition among executives for top positions and the diminishing incentive effect of future rewards with age implies that compensation should increasingly tilt rewards to current performance over the course of a career. Available evidence supports this prediction. (This abstract was borrowed from another version of this item.)

Human Capital, Product Quality, and Growth

Abstract: A growth model is developed in which finite-lived individuals invest in human capital, and investments have a positive external effect on the human capital of later cohorts. Heterogeneous labor is the only factor of production, and higher-quality labor produces higher-quality goods. Stationary growth paths, along which human capital and the quality of consumption goods grow at a common, constant rate, are studied. It is also shown that if a small economy is very advanced or very backward relative to the rest of the world, then its rate of investment in human capital is lower under free trade than under autarky.

Continuity, Chance and Change

Abstract: The Industrial Revolution brought into being a distinct world, a world of greater affluence, longevity and mobility, an urban rather than a rural world. But the great surge of economic growth was balanced against severe constraints on the opportunities for expansion, revealing an intriguing paradox. This book, published to considerable critical acclaim, explores the paradox and attempts to provide a distinct model' of the changes that comprised the industrial revolution.

Integration and the competitiveness of peripheral industry

Abstract: This paper analyses economic integration between two economies; one central, with a large local market, and the other peripheral, with a small local market. Each economy has an imperfectly competitive manufacturing sector. Trade liberalization creates a strong incentive for the imperfectly competitive industry to concentrate in the central region, near the large market. This may cause the direction of net trade to be the opposite of that predicted by factor endowments. This effect may be offset by a lower wage in the periphery than in the centre; we find that in the early stages of integration relative wages in the centre and periphery diverge, with convergence occurring only in the later stages.

On the power of Dickey-Fuller tests against fractional alternatives

Abstract: We examine the properties of Dickey-Fuller unit root tests under fractionally-integrated alternatives and find that these tests have quite low power

The Sustainnability of Budget Deficit in a Stochastic Economy

Abstract: The transversality condition on government debt requires a zero limit of discounted future debt. The paper shows that, in a stochastic economy, the relevant discount rate depends on the probability distribution of future debt over states of nature. Discount rates on future government debt, spending, and taxes are generally not related to the rates of return on government debt. The correct choice of discount rates is important because debt discounted at the safe interest rate may well diverge to infinity under sustainable policies. This result raises questions about some recent empirical papers testing the sustainability of U.S. fiscal policy. Copyright 1995 by Ohio State University Press.(This abstract was borrowed from another version of this item.)

On Ranking Opportunity Sets in Terms of Freedom of Choice

Abstract: The paper explores the notion of freedom of choice which is of considerable importance in welfare economics and the theory of social choice. Three plausible axioms are introduced for ranking alternative opportunity sets in terms of the degrees of freedom that they offer to the agent making choices. It is shown that, under these axioms, judgements about degrees of freedom of choice have to be based on the naive principle of simply counting the number of available options.

Marriage, Motherhood, and Wages

Abstract: We explore several problems in drawing causal inferences from cross-sectional relationships between marriage, motherhood, and wages. We find that heterogeneity leads to biased estimates of the "direct" effects of marriage and motherhood on wages (i.e., effects net of experience and tenure); first-difference estimates reveal no direct effect of marriage or motherhood on women's wages. We also find statistical evidence that experience and tenure nay be endogenous variables in wage equations; IV estimates suggest that both OLS cross-sectional and first-difference estimates understate the direct (negative) effect of children on wages.

Bequest behavior and the effect of heirs' earnings: testing the altruistic model of bequests

Abstract: That parents transfer resources to children because of altruistic concern is a reasonable a priori assumption. However, economic theories of altruistic transfers have produced many counterintuitive conclusions and, consequently, much debate. When applied to bequests, these theories predict that inheritances will compensate for earnings differences between siblings as well as between parents and children. This paper tests these implications. Using a new data set centered on federal estate tax returns, little support can be found for an altruistic theory of bequests. This finding has implications for macroeconomic policy, government transfer programs, and inequality. Copyright 1996 by American Economic Association.(This abstract was borrowed from another version of this item.)

Tax harmonization and tax competition in Europe

Abstract: Opening Europe's borders in 1993 makes the allocation of resources more vulnerable to differences in the national tax rates. The first part of the paper demonstrates that direct consumer purchases will imply distortions resulting from diverging VAT rates and it clarifies why the frequently cited exchange rate argument is of no help. The second part shows that, in the case of direct taxation, a harmonization of tax bases is more important than a harmonization of tax rates. Either the combination of true economic depreciation and residence taxation or the combination of immediate write-off and source taxation will result in an efficient international allocation of capital, independent of the national tax rates. The paper concludes with a verdict on tax competition arguing that free migration renders a policy of income redistribution, which is interpreted as insurance against the risk of lifetime careers, impossible.