Showing papers in "Research Papers in Economics in 1994"

Economic Growth and the Environment

Abstract: Using data assembled by the Global Environmental Monitoring System we examine the reduced-form relationship between various environmental indicators and the level of a country's per capita income. Our study covers four types of indicators: concentrations of urban air pollution; measures of the state of the oxygen regime in river basins; concentrations of fecal contaminants in river basins; and concentrations of heavy metals in river basins. We find no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement. The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8,000.

By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior

Abstract: We present a consumption†based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long†horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. The model captures much of the history of stock prices from consumption data. It explains the short†and long†run equity premium puzzles despite a low and constant risk†free rate. The results are essentially the same whether we model stocks as a claim to the consumption stream or as a claim to volatile dividends poorly corelated with consumption. The model is driven by an independently and identically distributed consumption growth process and adds a slow †moving external habit to the standard power utility function. These features generate slow countercyclical variation in risk premia. The model posits a fundamentally novel description of risk premia. Investors fear stocks primarily because they do poorly in recessions unrelated to the risks of long†run average consumption growth.

Time-Varying World Market Integration

Abstract: We propose a conditional measure of capital market integration that allows us to characterize both the cross-section and time-series of expected returns in developed and emerging markets. Our measure, which arises from a conditional regime-switching model, allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. Our results suggest that a number of emerging markets exhibit time-varying integration. Interestingly, some markets appear to be more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets.

Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach

Abstract: This paper discusses the prevalence of Silicon Valley-style localizations of individual manufacturing industries in the United States Several models in which firms choose locations by throwing darts at a map are used to test whether the degree of localization is greater than would be expected to arise randomly and to motivate a new index of geographic concentration The proposed index controls for differences in the size distribution of plants and for differences in the size of the geographic areas for which data is available As a consequence, comparisons of the degree of geographic concentration across industries can be made with more confidence We reaffirm previous observations in finding that almost all industries are localized, although the degree of localization appears to be slight in about half of the industries in our sample We explore the nature of agglomerative forces in describing patterns of concentration, the geographic scope of localization, and the extent to which agglomerations involve plants in similar as opposed to identical industries

Predictable Risk and Returns in Emerging Markets

Abstract: The emergence of new equity markets in Europe, Latin America, Asia, the Mideast and Africa provides a new menu of opportunities for investors. These markets exhibit high expected returns as well as high volatility. Importantly, the low correlations with developed countries' equity markets significantly reduces the unconditional portfolio risk of a world investor. However, standard global asset pricing models, which assume complete integration of capital markets, fail to explain the cross-section of average returns in emerging countries. An analysis of the predictability of the returns reveals that emerging market returns are more likely than developed countries to be influenced by local information.

Precautionary Saving and Social Insurance

Abstract: Microdata studies of household saving often find a significant group in the population with virtually no wealth, raising concerns about heterogeneity in motives for saving. In particular, this heterogeneity has been interpreted as evidence against the life-cycle model of saving. This paper argues that a life-cycle model can replicate observed patterns in household wealth accumulation after accounting explicitly for precautionary saving and asset-based means- tested social insurance. We demonstrate theoretically that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income. In addition, we evaluate the model using a dynamic programming model with four state variables. Assuming common preference parameters across lifetime- income groups, we are able to replicate the empirical pattern that low-income households are more likely than high-income households to hold virtually no wealth. Low wealth accumulation can be explained as a utility-maximizing response to asset-based means-tested welfare programs.

Asymptotic Inference About Predictive Ability

Abstract: This paper develops procedures for inference about the moments of smooth functions of out of sample predictions and prediction errors, when there is a long time series of predictions and realizations, and each prediction is based on regression parameters estimated from a long time series. The aim is to provide tools for inference about predictive accuracy and efficiency, and, more generally, about predictive ability. The paper allows for nonlinear models and estimators, as well as for possible dependence of predictions and prediction errors on estimated regression parameters. Simulations indicate that the procedures work well.

Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption

Abstract: This paper proposes a method for computing tax rates using national accounts and revenue statistics. Using this method we construct time-series of tax rates for large industrial countries. The method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases. This method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework. These tax rates compare favorably with existing estimates of marginal tax rates, and highlight important international differences in tax policy.

Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investment in the United States

Abstract: Recent theories of economic geography suggest that firms in the same industry may be drawn to the same locations because proximity generates positive externalities or 'agglomeration effects' Under this view, chance events and government inducements can have a lasting influence on the geographical pattern of manufacturing However, most evidence on the causes and magnitude of industry localization has been based on stories, rather than statistics This paper examines the location choices of 751 Japanese manufacturing plants built in the US since 1980 Conditional logit estimates support the hypothesis that industry-level agglomeration benefits play an important role in location decisions

Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?

Abstract: Initiations and omissions of dividend payments are important changes in corporate financial policy. This paper investigates the market reaction to such changes in terms of prices, volume, and changes in clientele. Consistent with the prior literature we find that short run price reactions to omissions are greater than for initiations (-7.0% vs. +3.4% three day return). However, we show that, when we control for the change in the magnitude of dividend yield (which is larger for omissions), the asymmetry shrinks or disappears, depending on the specification. In the 12 months after the announcement (excluding the event calendar month), there is a significant positive market-adjusted return for firms initiating dividends of +7.5% and a significant negative market-adjusted return for firms omitting dividends of -11.0%. However, the post dividend omission drift is distinct from and more pronounced than that following earnings surprises. A trading rule employing both samples (long in initiation stocks and short in omission stocks) earns positive returns in 22 out of 25 years. Although these changes in dividend policy might be expected to produce shifts in clientele, we find little evidence for such a shift. Volume increases, but only slightly and briefly, and there are no important changes in institutional ownership.

Self-Nonself Discrimination in a Computer

Abstract: The problem of protecting computer systems can be viewed generally as the problem of learning to distinguish {\it self} from {\it other}. We describe a method for change detection which is based on the gereration of T cells in the immune system. Mathematical analysis reveals computational costs of the system, and preliminary experiments illustrate how the method might be applied to the problem of computer viruses.

Electoral Competition and Special Interest Politics

Abstract: We study the competition between two political parties for seats in a parliament. The parliament will set two types of policies: ideological and non-ideological. The parties have fixed positions on the ideological issues, but choose their non-ideological platforms to attract voters and campaign contributions. In this context, we ask: How do the equilibrium contributions from special interest groups influence the platforms of the parties? We show that each party is induced to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest groups. The party that is expected to win a majority of seats caters more to the special interests.

Globalization, institutions, and regional development in Europe

Abstract: Preface and Introduction Living in the Global The Local Embeddedness of Transnational Corporations Global Agro-Food Complexes and the Refashioning of Rural Europe The Uneven Landscapes of Innovation Poles: Local Embeddedness and Global Networks Growth Regions Under Duress: Renewal Strategies in Baden Wurttemberg and Emilia-Romagna Flexible Districts, Flexible Regions? The Institutional and Cultural Limits to Districts in an Era of Technological Paradigm Shifts Regulating Labour: The Social Regulation and Reproduciton of Local Labour Markets The Disembedded Regional Economy: The Transformation of East German Industrial Complexes into Western Enclaves Institutional Change, Cultural Transformation, and Economic Regeneration: Myths and Realities from Europe's Old Industrial Areas Local and Regional Broadcasting in the New Media Order Global-Local Social Conflicts: Examples from Southern Europe Holding Down the Global

Estimation, Inference and Specification Analysis

Abstract: This book examines the consequences of misspecifications ranging from the fundamental to the nonexistent for the interpretation of likelihood-based methods of statistical estimation and interference. Professor White first explores the underlying motivation for maximum-likelihood estimation, treats the interpretation of the maximum-likelihood estimator (MLE) for misspecified probability models, and gives the conditions under which parameters of interest can be consistently estimated despite misspecification, and the consequences of misspecification, for hypothesis testing in estimating the asymptotic covariance matrix of the parameters. Although the theory presented in the book is motivated by econometric problems, its applicability is by no means restricted to economics. Subject to defined limitations, the theory applies to any scientific context in which statistical analysis is conducted using approximate models.

The Logic of Currency Crises

Abstract: Once one recognizes that governments borrow international reserves and exercise other policy options to defend fixed exchange rates during currency crises, the question arises: What factors determine a government's decision to abandon a currency peg or hang on? In a setting of purposeful action by the authorities, the possibility of self-fulfilling crises becomes important. Speculative anticipations depend on conjectured government responses, which depend, in turn, on how price changes that are themselves fueled by expectations affect the government's economic and political positions. The circular dynamic implies a potential for crises that need not have occurred, but that do because market participants expect them to. In contrast to this picture, most previous literature on balance-of- payments crises ignores the response of government behavior to markets. That literature, I argue, throws little light on events such as the European Exchange Rate Mechanism collapse of 1992-93. This paper then presents two different models in which crisis and realignment result from the interaction of rational private economic actors and a government that pursues well-defined policy goals. In both, arbitrary expectational shifts can turn a fairly credible exchange-rate peg into a fragile one.

Getting Interventions Right: How South Korea and Taiwan Grew Rich

Abstract: Most explanations of Korea's and Taiwan's economic growth since the early 1960s place heavy emphasis on export orientation. However, it is difficult to see how export orientation could have played a significant causal role in these countries' growth. The measured increase in the relative profitability of exports during the 1960s is too insignificant to account for the phenomenal export boom that ensued. Moreover, exports were initially too small to have a significant effect on aggregate economic performance. A more plausible story focuses on the investment boom that took place in both countries. In the early 1960s both economies had an extremely well- educated labor force relative to their physical capital stock, rendering the latent return to capital quite high. By subsidizing and coordinating investment decisions, government policy managed to engineer a significant increase in the private return to capital. An exceptional degree of equality in income and wealth helped by rendering government intervention effective and keeping it free of rent seeking. The outward orientation of the economy was the result of the increase in demand for imported capital goods.

Industrial Location and Public Infrastructure

Abstract: This paper examines the impact of public infrastructure on industrial location when increasing returns are present. Poor infrastructure implies costs of Samuelson's `iceberg' form and alter trade both within and between countries. Trade integration implies that firms tend to locate in countries with better infrastructure so that regional policies that affect the level of public infrastructure influence economic geography. The effectiveness of such policies decreases when infrastructure improves, however, because a high level of infrastructure and strong economies of scale magnify the concentration effects of differentials in infrastructure, market size and capital-labour ratios. Infrastructure policies that facilitate intra-regional trade in the poor country lead to regional convergence but policies that facilitate intra-regional trade lead to regional divergence. We also analyse the incentives for countries to inhibit industrial relocation.

An Analysis of the Real Interest rate Under Regime Shifts

Abstract: This study considers the time series behavior of the U.S. real interest rate from 1961 to 1986. We provide a statistical characterization of the series using the methodology of Hamilton (1989), by allowing three possible regimes affecting both the mean and variance of the series. The results suggest that the ex-post real interest rate is essentially random around a mean that is different for the periods 1961-1973, 1973-1980 and 1980-1986. The variance of the process is also different in these episodes being higher in both the 1973-1980 and 1980-1986 sub-periods. The inflation rate series is also analyzed using a three regime framework and again our results show interesting patterns with shifts in both mean and variance. Various model selection tests are run and both an ex-ante real interest rate and an expected inflation series are constructed. Finally, we make clear how our results can explain some recent findings in the literature. Cette etude s'interesse au comportement des series du taux d'interet reel americain de 1961 a 1986. En utilisant la methodologie d'Hamilton (1989), la modelisation statistique des series se fait en postulant trois regimes possibles affectant la moyenne et la variance de celles-ci. Les resultats suggerent que le taux d'interet reel ex-post est essentiellement un processus non correle et centre sur une moyenne qui differe sur les periodes 1961-1973, 1973-1980 et 1980-1986. La variance du processus est aussi differente pour chacune de ces periodes, etant plus elevee dans les sous periodes 1973-1980 et 1980-1986. Les series du taux d'inflation sont aussi analysees a la lumiere de ce modele a trois regimes et les resultats traduisent encore un comportement interessant de celles-ci, avec des changements dans la moyenne et la variance. Differents tests de specification sont utilises et des series, a la fois du taux d'interet reel ex-ante et de l'inflation anticipee, sont construites. Enfin, il est montre comment ces resultats peuvent expliquer certaines conclusion recentes de la litterature.

Assessing Specification Errors in Stochastic Discount Factor Models

Abstract: In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on x2 statistics associated with null hypothesis that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature.

International Differences in Male Wage Inequality: Institutions versus Market Forces

Abstract: While changes in the demand for skilled labor appear to have led to a widening of the wage structures in many countries during the 198Os,considerable differences in the level of wage inequality remain In this paper, we examine the sources of these differences, focusing primarily on explaining the considerably higher level of wage inequality in the US We find that the greater overall dispersion of the US wage distribution reflects considerably more compression at the bottom of the distribution in the other countries, but relatively little difference in the degree of wage inequality at the top While differences in the distribution of measured characteristics help to explain some aspects of the international differences, US labor market prices--that is, higher rewards to labor market skills-are an important factor Labor market institutions, chiefly the relatively decentralized wage-setting mechanisms in the US compared to other countries, appear to provide the most persuasive explanation for these international differences in prices In contrast, the pattern of cross-country differences in relative supplies of and demands for skills does not appear to be consistent with the pattern of observed differences in wage inequality

Poverty and household size

Abstract: The widely held view that larger families tend to be poorer in developing countries has influenced research and policies. But the basis for this"stylized fact"is questionable, the authors argue. Widely cited evidence of a strong negative correlation between size and consumption per person is unconvincing, given that even poor households face economies of size in consumption. The authors find that the correlation between poverty and household size vanishes in Pakistan when the size elasticity of the cost of living is about 0.6. This turns out to be the elasticity implied by a modified version of the food-share method of setting scales. By contrast, some measures of child nutritional status indicate an elasticity closer to unity. Consideration of the weight attached to child versus adult welfare may help resolve the nonrobustness of demographic profiles of poverty. The authors show that the incidence of severe child stunting is more elastic to household size than their Engel curve estimate suggests, although the latter is still a fair predictor of child wasting. A consideration of the purpose of measuring poverty - notably the extent to which it is used to inform policies aimed at promoting child welfare - may go some way toward resolving the issues.

Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey

Abstract: In this paper we show that some of the predictions of models of consumer intertemporal optimization are not inconsistent with the patterns of non-durable expenditure observed in US household-level data Our results and our approach are new in several respects First, we use the only US micro data set which has direct and complete information on household consumption The microeconomic data sets used in most of the consumption literature so far contained either very limited information on consumption (like the PSID) or none at all, in which case consumption had to be obtained indirectly from income and changes in assets Second, we propose a flexible and novel specification of preferences which is easily estimable and allows a general treatment jof multiple commodities We show that aggregation over commodities can be important, both theoretically and in practice Third, we present empirical results that show that it is possible to find a reasonably simple specification of preferences, which controls for the effects of changes in demographics and labor supply behavior over the life cycle and which is not rejected by the available data On our preferred specification, we obtain sharp estimates of key behavioral parameters (including the elasticity of intertemporal substitution) and no rejections of theoretical restrictions Our results contrast sharply with most of the previous evidence, which has typically been interpreted as rejection of the theory We show that previous rejections can be explained by the simplifying assumptions made to derive empirically tractable equations We also show that results obtained using food consumption or aggregate data can be extremely misleading

Learning and Wage Dynamics

Abstract: We develop a dynamic model of learning and wage determination. Education may convey initial information about ability, but subsequent performance observations also are informative. Although the role of schooling in the labor market's inference process declines as performance observations accumulate, the estimated effect of schooling on the level of wages is predicted to be independent of labor-market experience. The model also predicts that time-invariant variables correlated with ability but unobserved by employers should be increasingly correlated with wages as experience increases and that wage residuals should be a martingale. We present evidence from the National Longitudinal Survey of Youth that is generally consistent with the model's predictions, but a chi-squared goodness-of-fit test does reject the martingale prediction for wage residuals even after accounting for classical measurement error. We investigate alternative specifications and find that a modification of the learning model that allows for worker ability to evolve as an AR1 process fits the data quite well.

The Intertemporal Approach to the Current Account

Abstract: The intertemporal approach views the current-account balance as the outcome of forwardlooking dynamic saving and investment decisions. This paper, a chapter in the forthcoming third volume of the Handbook of International Economics, surveys the theory and empirical work on the intertemporal approach as it has developed since the early 1980s. After reviewing the basic one-good, representative-consumer model, the paper considers a series of extended models incorporating relative prices, complex demographic structures, consumer durables, asset-market incompleteness, and asymmetric information. We also present a variety of empirical evidence illustrating the usefulness of the intertemporal approach, and argue that intertemporal models provide a consistent and coherent foundation for openeconomy policy analysis. As such, the intertemporal approach should supplant the expanded versions of the Mundell-Fleming IS-LM model that currently furnish the dominant paradigm used by central banks, finance ministries, and international economic agencies.

Accounting for Excess Zeros and Sample Selection in Poisson and Negative Binomial Regression Models

Abstract: We present several modifications of the Poisson and negative binomial models for count data to accommodate cases in which the number of zeros in the data exceed what would typically be predicted by either model. The excess zeros can masquerade as overdispersion. We present a new test procedure for distinguishing between zero inflation and overdispersion. We also develop a model for sample selection which is analogous to the Heckman style specification for continuous choice models. An application is presented to a data set on consumer loan behavior in which both of these phenomena are clearly present.

Perspectives on PPP and long-run real exchange rates

Abstract: This paper reviews the large and growing literature which tests PPP and other models of the long-run real exchange rate. We distinguish three different stages of PPP testing and focus on what has been learned from each. The most important overall lesson has been that the real exchange rate appears stationary over sufficiently long horizons. Simple, univariate random walk specifications can be rejected in favor of stationary alternatives. However, we argue that multivariate tests, which ask whether any linear combination of prices and exchange rates are stationary, have not necessarily provided meaningful rejections of nonstationarity. We also review a number of other theories of the long run real exchange rate -- including the Balassa-Samuelson hypothesis -- as well as the evidence supporting them. We argue that the persistence of real exchange rate movements can be generated by a number of sensible models and that Balassa- Samuelson effects seem important, but mainly for countries with widely disparate levels of income of growth. Finally, this paper presents new evidence testing the law of one price on 200 years of historical commodity price data for England and France, and uses a century of data from Argentina to test the possibility of sample-selection bias in tests of long-run PPP.

Fiscal Policy and Economic Growth: An Empirical Investigation

Abstract: This paper describes the empirical regularities relating fiscal policy variables, the level of development and the rate of growth. We employ historical data, recent cross-section data, and newly constructed public investment series. Our main findings are: first, there is a strong association between the development level and the fiscal structure: poor countries rely heavily on international trade taxes, while income taxes are only important in developed economies; second, fiscal policy is influenced by the scale of the economy, measured by its population; and third, investment in transport and communication is consistently correlated with growth while the effects of taxation are difficult to isolate empirically.

Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes

Abstract: CONTENTS: Preliminary remarks; Brownian motion, poisson process, alpha-stable Levy motion; Computer simulation of alpha-stable random variables; Stochastic integration; Spectral representations of stationary processes; Computer approximations of continuous time processes; Examples of alpha-stable stochastic modelling; Convergence of approximate methods; Chaotic behaviour of stationary processes; Hierarchy of chaos for stable and ID stationary processes. Appendix - A guide to simulation.

Do the poor insure? A synthesis of the literature on risk and consumption in developing countries

Abstract: Income risk is a central feature of rural areas of developing countries. A major topic in development economics is how well households are able to mitigate the adverse effects of income risk. There are several sensible reasons why households will not be able to fully insure consumption against income fluctuations. The well-known problems of moral hazard, information asymmetries, and deficiencies in the ability to enforce contracts may result in incomplete or absent insurance markets. The dearth of formal insurance markets in developing countries is evidence that these problems are considerable. However, a large body of literature indicates that households in developing countries make use of a wide variety of mechanisms, often informal, to at least partially limit consumption risk. A key piece of information required to guide policy design is how, and how well, different households mitigate risk. This paper reviews various strategies for insuring consumption against income fluctuations, and examines evidence on how effectively these strategies work.