Showing papers in "The Manchester School in 1998"
TL;DR: In this article, simple techniques for the graphical display of simulation evidence concerning the size and power of hypothesis tests are developed and illustrated, including P value plots, P value discrepancy plots, and size-power curves.
Abstract: Simple techniques for the graphical display of simulation evidence concerning the size and power of hypothesis tests are developed and illustrated. Three types of figures—called P value plots, P value discrepancy plots, and size-power curves—are discussed. Some Monte Carlo experiments on the properties of alternative forms of the information matrix test for linear regression models and probit models are used to illustrate these figures. Tests based on the OPG regression generally perform much worse in terms of both size and power than ecient score tests.
295 citations
TL;DR: In this paper, the authors explore the relationship between the location of production and the trade performance of 11 OECD countries since 1971, and augment a standard export demand model, which includes relative prices, market size and measures of relative innovation with indicators of both inward and outward investment levels.
Abstract: We explore the relationship between the location of production and the trade performance of 11 OECD countries since 1971. The paper augments a standard export demand model, which includes relative prices, market size and measures of relative innovation, with indicators of both inward and outward investment levels. Common long-run parameters are accepted for market size, relative prices and relative patenting, but not for the direct investment effects. The sign and magnitude of the direct investment effects vary by country. Outward investment has a generally negative impact on trade shares, while inward investment has a generally positive one.
181 citations
TL;DR: In this article, the authors study the performance of an insurance scheme for European monetary union using historical data and show that stabilizing asymmetric shocks around a common trend may amplify the univariate variance of GDP for some member countries.
Abstract: The loss of the exchange rate as an independent policy insrument implied by European monetary union calls for an insurance scheme as a buffer against asymmetric shocks. We study the performance of such a system using historical data. A reasonable insurance scheme can be implemented on the basis of a fairly complex econometric formula. Simplifying the computation of the transfers severely worsens the performance of the system. Forcing the system to balance financially is not a critical constraint. The simulations show that stabilizing asymmetric shocks around a common trend may amplify the univariate variance of GDP for some member countries.
121 citations
TL;DR: In this paper, the effects of different shocks on economic volatility change significantly depending on the presence of incompletely integrated goods and/or financial markets, and the results suggest that the effect of integration in one market is largely independent of the extent of integrated in the other market.
Abstract: The aim of this work is to determine whether increasing goods and financial market integration raises or lowers macroeconomic volatility. Shocks to money, government expenditure, and labour supply are analysed under different degrees of goods and financial market integration in a dynamic general equilibrium framework. Simulations show that the effects of the different shocks on economic volatility change significantly depending on the presence of incompletely integrated goods and/or financial markets. However, the results suggest that the effect of integration in one market is largely independent of the extent of integration in the other market.
66 citations
TL;DR: In this paper, the authors examine the dynamic implications of a shift in relative prices between traded and non-traded goods and allow for sluggish wage adjustment and increasing returns to scale in the traded goods sector.
Abstract: In this paper we examine the dynamic implications of a shift in relative prices between traded and non-traded goods. In accordance with empirical evidence we allow for sluggish wage adjustment and increasing returns to scale in the traded goods sector. The presence of increasing returns to scale gives rise to multiple equilibria, and trade liberalization and the associated short-run changes in relative prices may leave the economy outside a ‘corridor of stability’ and lead to a cumulative process of contraction of the capital stock.
49 citations
TL;DR: In this article, Monte Carlo evidence is reported that the finite-sample significance levels of such tests can be sensitive to the method used to estimate long-run coefficients that yield the error-correction term of the ECM.
Abstract: Single-equation error-correction models (ECMs) are widely used in the analysis of cointegrated variables. It is important to check the specification of ECMs using diagnostic tests. Monte Carlo evidence is reported that shows that the finite-sample significance levels of such tests can be sensitive to the method used to estimate long-run coefficients that yield the error-correction term of the ECM. Estimates of long-run coefficients based upon autoregressive distributed lag (ADL) models are recommended. The applicability of diagnostic checks to ADL models for integrated variables is examined. An indirect approach to obtaining asymptotically valid checks is proposed.
43 citations
TL;DR: The authors examined the practical application of monetary policy rules in the United States during the 1990s and examined how simple policy rules that describe how the central bank's interest rate responds to the economy have provided a useful framework for actual decision making.
Abstract: Recent progress in the practical application of research on monetary policy rules in the United States during the 1990s is examined. The paper focuses on how simple policy rules that describe how the central bank’s interest rate responds to the economy have provided a useful framework for actual decision making. It is argued that the process by which economic research is put into practice—called translational economics—is fascinating and worthy of careful study in general; several recent examples from research on monetary policy rules are offered to show why.
42 citations
TL;DR: In this paper, the authors investigated the relationship between the short-run and the long-run savings investment correlation in the UK and found that the short run correlation is signi cantly higher than the long run correlation.
Abstract: In this paper we investigate the diierence between the short-run and the long-run savings^investment correlation coe¤cient, in order to shed light both on the validity of the Feldstein^Horioka regression as a means of measuring the degree of capital mobility and on its implications. Using quarterly UK data, we also examine the eiectiveness of the abolition of exchange control which, in October 1979, ended a long period of restrictions on capital £ows between the UK and the international economy. We ¢nd that, consistent with the logical implication of the Feldstein^Horioka regression, the short-run correlation is signi¢cantly higher than the long-run correlation. In contrast with much of the literature employing the Feldstein^Horioka interpretation, however, the results suggest that the UK is highly ¢nancially integrated with the global economy post 1979.
41 citations
TL;DR: In this paper, a macroeconomic perspective on the interaction between the financial system and the level of economic activity is presented, focusing on the relationship between liquidity preference, investment and the role of confidence.
Abstract: This essay offers a macroeconomic perspective on the interaction between the financial system and the level of economic activity, focusing on the relationship between liquidity preference, investment and the role of confidence. The analysis builds on the distinction between portfolio decisions on the one hand, and production and spending decisions on the other. Two prominent Keynesian theories of liquidity preference, those of Tobin and Hicks, are assessed. It is argued that while both of these theories offer illuminating insights into particular aspects of Keynes’s monetary thought, they must be qualified in respect of their bearing on the theory of liquidity preference.
37 citations
TL;DR: In this paper, the gilt-equity yield ratio (GEYR) is used as a signal to switch profitably between equity and bonds provided that the GEYR threshold value indicating a profitable switch is adjusted to incorporate changes in variables such as expected inflation and the equity risk premium.
Abstract: In principle the gilt–equity yield ratio (GEYR) can be used as a decision criterion for choosing between equity and bonds because it is sensitive to mispricing. However, the GEYR is also influenced by other variables. Consequently, observed movement in the GEYR cannot be confidently attributed to mispricing without controlling for the other variables which might cause the GEYR to vary. This paper demonstrates that the GEYR can be used as a signal to switch profitably between equity and bonds provided that the GEYR threshold value indicating a profitable switch is adjusted to incorporate changes in variables such as expected inflation and the equity risk premium. Simple empirical experiments are carried out aimed at evaluating how well the GEYR performs as a trading rule.
33 citations
TL;DR: In this paper, the authors consider the formal modelling of hysteresis in the light of the notion that this process is a special case, contingent on the existence of unit roots in first-order difference equations.
Abstract: We consider the formal modelling of hysteresis in the light of the notion that this process is a special case, contingent on the existence of unit roots in first-order difference equations. It is argued that variables displaying adjustment asymmetries along disequilibrium time paths can generate hysteresis, irrespective of the existence of unit roots. Examples of adjustment asymmetries and hysteresis in investment and in the Phillips curve are provided.
TL;DR: In this article, the authors extend the model of Bernanke and Blinder to consider formally interactions between the monetary authorities and the banking sector, which is characterized in terms of the authorities' control over prices in the base money market.
Abstract: We extend the model of Bernanke and Blinder (‘Credit, Money, and Aggregate Demand’, American Economic Review, Papers and Proceedings (1988), pp. 435–439) to consider formally interactions between the monetary authorities and the banking sector. Monetary policy is characterized in terms of the authorities' control over prices in the base money market, rather than quantities. But those market rates directly impinging upon real activity are distinct from—although not independent of—this administered rate. Imperfect control over market interest rates obtains. An empirical illustration is given for the UK, and the model is then extended into a stochastic setting.
TL;DR: In this paper, the expectation hypothesis (EH) of the term structure using UK and German weekly data on short-dated instruments with maturities up to one year was tested and it was shown that the rank of the cointegrating space is k-1.
Abstract: We test the expectations hypothesis (EH) of the term structure using UK and German weekly data on short-dated instruments with maturities up to one year. For both data sets comprising k interest rates we find that the rank of the cointegrating space is k-1; but we can only accept that the cointegrating parameter estimates are of the form (-1, 1,0,…) etc. when considering bilateral combinations of interest rates. When we test the joint null that the set ofk-1 spreads forms a basis for the cointegration space, this is rejected. However, the point estimates of the cointegration parameters are close to unity and there is no diminution in outside sample forecasting performance of the error correction model equations when the spread restrictions are imposed. On balance, one might conclude that the EH is not grossly at variance with the data.
TL;DR: In this article, means-tested and universal transfer systems are compared, using numerical examples involving a small number of individuals, in order to highlight the precise effects on incomes and the implications of fixed incomes and of endogenous incomes, using constant elasticity of substitution utility functions.
Abstract: This paper illustrates the use of different criteria used to evaluate alternative tax and transfer systems. Means-tested and universal transfer systems are compared, using numerical examples involving a small number of individuals, in order to highlight the precise effects on incomes. The implications of fixed incomes and of endogenous incomes, using constant elasticity of substitution utility functions, are examined. Comparisons between tax systems involve fundamental value judgements concerning inequality and poverty, and no tax structure can be regarded as unambiguously superior to another. Judgements depend on the degree of inequality aversion and attitudes to poverty. However, in cases where means-testing is preferred, the desired tax or taper rate applying to benefits is substantially less than 100 per cent.
TL;DR: In this article, a new empirical model of pricing, market share and market conduct for a differentiated products industry is proposed, which exhibits the property of a variable elasticity of firm demand: as a firm's market share increases, it faces increasingly inelastic demand.
Abstract: In this paper we set out a new empirical model of pricing, market share and market conduct for a differentiated products industry. The model exhibits the property of a variable elasticity of firm demand: as a firm’s market share increases, it faces increasingly inelastic demand. Price–cost margins therefore increase as market share rises. Market conduct is described using conjectural variations. The model has a flexible functional formulation and is particularly suitable for time series estimation. We illustrate its use by investigating the structure of market competition in pricing strategies between domestic and importing firms in different sectors of US industry during the 1980s.
TL;DR: In this paper, electoral and partisan effects in inflation are identified for 18 OECD countries via regression analysis, building on the work of Alesina, Cohen and Roubini, and the correlation of the size of these effects across countries with the level of central bank independence is investigated; the results suggest a negative correlation.
Abstract: In this paper, electoral and partisan effects in inflation are identified for 18 OECD countries via regression analysis, building on the work of Alesina, Cohen and Roubini. The correlation of the size of these effects across countries with the level of central bank independence is investigated; the results suggest a negative correlation.
TL;DR: In this paper, it was shown that if the relative risk aversion associated with the utility function does not exceed unity, then any Lorenz-consistent income tax function will make the post-tax distribution no more deprived than the pre tax distribution according to the utilitarian deprivation rule.
Abstract: Of two income distributions x and y, over a given population size, we say that the former dominates the latter by the utilitarian deprivation rule if, for any person, the aggregate utility shortfall from richer persons under x is at least as large as that under y. In this paper we show that if the relative risk aversion associated with the utility function does not exceed unity, then any Lorenz-consistent income tax function will make the post-tax distribution no more deprived than the pre-tax distribution according to the utilitarian deprivation rule. The converse of this proposition holds if the risk-aversion measure is not less than one. It then follows that if the utility function is of logarithmic type then consistency between the two criteria holds. Finally, we relate our results to the equal sacrifice principle.
TL;DR: This paper used time-varying parameter estimation techniques to discover whether countries in the exchange rate mechanism experienced a regime change to a lower degree of persistence for both wage inflation and unemployment in the 1980s.
Abstract: Time-varying parameter estimation techniques are used to discover whether countries in the exchange rate mechanism (ERM) experienced a regime change to a lower degree of persistence for both wage inflation and unemployment in the 1980s. The results show that the persistence of wage inflation may have changed over the 1980s for some countries but that this experience was not unique to ERM membership (although the time profile of the persistence parameter for some ERM member countries corresponds to policy shifts related to ERM membership). Furthermore, only a few countries show a decline in the persistence of unemployment in the 1980s.
TL;DR: In this paper, a general approach to monetary policy, treating information as a scarce commodity allocated optimally by rational agents, is presented. But it does not consider the role of information in the transmission mechanism.
Abstract: Classical economists developed a surprisingly sophisticated analysis of money supply variations that, anticipating the main features of contemporary theory, emphasizes the role of information in the transmission mechanism. Drawing on the classical contributions, this paper outlines a general approach to monetary policy, treating information as a scarce commodity allocated optimally by rational agents.
TL;DR: In this paper, the authors propose a macroeconomic model suitable for policy analysis for an emerging market economy (EME), which neither uncritically applies conventional macro theory nor departs altogether from orthodoxy; rather, it modifies the conventional framework and captures the distinctive features of EMEs.
Abstract: We propose a macroeconomic model suitable for policy analysis for an emerging market economy (EME). The model neither uncritically applies conventional macro theory nor departs altogether from orthodoxy; rather, it modifies the conventional framework and captures the distinctive features of EMEs. The structure of the model is reduced to three equations: aggregate demand, aggregate supply and the balance of payments. We use these directly to derive policy multipliers. The model innovatively encompasses competing hypotheses from the neoclassical and new-structuralist paradigms, and the three-equation format is particularly convenient for simulation experiments and other empirical work for EMEs with finite macroeconomic series.
TL;DR: In this paper, it is shown that long-term prices depend on distribution in a complex way, especially when choice of technique is allowed, and that the movement of prices in terms of wage obeys certain laws.
Abstract: Long-term prices depend on distribution in a complex way, especially when choice of technique is allowed. It is shown, however, that the movement of prices in terms of wage obeys certain laws. More precisely the movement is characterized in terms of linear programming problems. Necessary or sufficient conditions connected with the convexity of the wage–profit curves are also obtained. But, with regard to the relative prices of commodities, they vary arbitrarily, so that the Wicksell price effects are not under control.
TL;DR: In this paper, the effects of exchange rate changes in a three-sector small open economy are analyzed, first under full employment and then under conditions of labour-market hysteresis.
Abstract: The effects of exchange rate changes in a three-sector small open economy are analysed, first under full employment and then under conditions of labour-market hysteresis. The model is used to critique the response of the Irish authorities to the exchange rate crisis of 1992–93 that resulted from the sharp depreciation of sterling relative to the deutschmark and the Irish pound.
TL;DR: This article argued that Anderson's analysis is of relevance today, and he was more objective in his approach than was Adam Smith and his followers, arguing that Anderson stressed the crucial importance of externalities and the adverse developmental effects of moral hazard and considered active intervention, such that the forces of self-interest are allowed positive play, to be essential to the development process.
Abstract: James Anderson, 1739–1808, analysed the relatively backward and underdeveloped Scottish economy of his time. Anderson stressed the crucial importance of externalities and the adverse developmental effects of moral hazard and considered active intervention, such that the forces of self-interest are allowed positive play, to be essential to the development process. His approach and analysis are compared with those of Sir James Steuart, John Rae, and Adam Smith and the classical school. It is argued that Anderson’s analysis is of relevance today, and he was more objective in his approach than was Adam Smith and his followers.
TL;DR: In this article, the authors show that when goods market imperfections cause the equilibrium level of output to be below its corresponding Walrasian level, an exogenous demand stimulus can raise employment and output if households' preferences exhibit some substitution between current leisure and future consumption.
Abstract: This paper illustrates that, when goods market imperfections cause the equilibrium level of output to be below its corresponding Walrasian level, an exogenous demand stimulus can raise employment and output if households’ preferences exhibit some substitution between current leisure and future consumption. The elasticity of substitution is shown to provide a channel for an effective and stable fiscal intervention, enabling the government to formulate a combined tax- and borrowing-based fiscal policy which can raise the level of output without having any crowding-out consequences for the private sector.
TL;DR: This article argued that Cairnes' recasting of the classical wage fund doctrine did fit entirely within the classical framework. But they also pointed out that the final form bore little resemblance to the doctrine held by his classical predecessors.
Abstract: John Elliot Cairnes is primarily remembered for his defence of the classical wage fund doctrine, and for his attempt to revive the classical system of economic thought in the mid-1870s. In contrast with this standard textbook appraisal of Cairnes, the Jevons–Marshall–Vint thesis contends that, in attempting to revitalize the doctrine, Cairnes in fact explained away so much of what characterized it that its final form bore little resemblance to the doctrine held by his classical predecessors. In this paper we dispute the Jevons–Marshall–Vint thesis and argue that Cairnes’s recasting of the doctrine did fit entirely within the classical framework. Why Cairnes should have rallied in support of a doctrine by then widely condemned, partly because of Mill’s alleged retraction of it and partly because of newly emerging ideas on wages and unions, is not difficult to explain. The recurring economic stagnation in Ireland, which acted as a bulwark against industrialization there, together with the social, moral and economic dilemma created by the growth of trade unionism in Britain, presented political economists with a particular set of problems. For these, as Cairnes saw it, classical political economy, as a coherent method of analysis, provided the best hope of showing the way towards possible remedies.
TL;DR: In this article, the authors study partisan business and budget cycles in a set-up where only fiscal policy is under the full control of the elected government, while an independent central bank makes monetary policy decisions.
Abstract: We study partisan business and budget cycles in a set-up where only fiscal policy is under the full control of the elected government, while an independent central bank makes monetary policy decisions. The government and the central bank are therefore engaged in a non-cooperative game. It is shown that a leftist government produces higher inflation but, contrary to the earlier results, lower output than a rightist government in all election and non-election periods. A leftist government also taxes and spends more than a rightist government. The model produces both partisan business and budget cycles due to the timing of elections. Partisan budget cycles are a novel concept and are analyses of post-election fiscal movements as opposed to the pre-election analyses in political budget cycles literature.
TL;DR: In this paper, the authors present a microeconomic efficiency cost framework for discriminating between fixed and floating exchange rate systems, and illustrate it with UK data over 1975-90. And they find that a fixed parity system would have been unambiguously preferred to a floating system over this period, unless the parity were set sufficiently noncentrally or costs from persistent currency overvaluation were sufficiently high.
Abstract: We present a microeconomic efficiency cost framework for discriminating between fixed and floating exchange rate systems, and illustrate it with UK data over 1975–90. It is found that a fixed parity system would have been unambiguously preferred to a floating system over this period, unless the parity were set sufficiently non-centrally or costs from persistent currency overvaluation were sufficiently high. Under no circumstances could a floating parity have been unambiguously preferred to a fixed parity system.
TL;DR: In this paper, the presence of a futures market gives risk-averse dealers in the spot asset opportunities for arbitrage that reduce the spot market bid-ask spread through reducing the dealers' risk exposure.
Abstract: We analyse how the presence of a futures market gives risk-averse dealers in the spot asset opportunities for arbitrage that reduce the spot market bid–ask spread through reducing the dealers’ risk exposure. In particular if the spot and futures risks are perfectly correlated then the spot bid–ask spread is zero in equilibrium and all spot dealer risk can be diversified away. We also analyse the equilibrium futures price in this two-market scenario.
TL;DR: In this paper, a reduced form equation for aggregate output supply is estimated in a cointegrating framework and the equilibrium error is identified as the conditional variance, and there is no evidence for a corresponding shift in the variance of output once proper account has been taken of supply-side changes.
Abstract: Macroeconomic theory suggests that the choice of exchange rate regime (or, equivalently, monetary regime) is affected by the incidence of real or monetary shocks. Anecdotally, the Bretton Woods period in world economic history is thought to have been characterized by nominal, rather than real, shocks. We examine this proposition and find some evidence for it. A reduced form equation for aggregate output supply is estimated in a cointegrating framework. The equilibrium error is identified as the conditional variance. Despite the increase in the unconditional variance of output, there is no evidence for a corresponding shift in the variance of output once proper account has been taken of supply-side changes.