---------------------------------------------------------------------------- NEP: New Economics Papers All new papers ---------------------------------------------------------------------------- Edited by: Marco Novarese http://ideas.repec.org/e/pno2.html Universita del Piemonte Orientale Date: 2005-05-23 Papers: 503 This document is in the public domain, feel free to circulate it. +++++++++++++++++++++++++++++++++++++++++++++++++++ + Access to full-text contents may be restricted. + +++++++++++++++++++++++++++++++++++++++++++++++++++ 1. Monopoly, asymmetric information, and optimal environmental taxation Manel Antelo (Universidad de Santiago de Compostela) This paper aims to examine optimal environmental taxation in an incomplete-information two-period model in which a monopolistic firm produces and pollutes. It is assumed that the polluting firm is privately informed about its costs of production, and the policymaker, which can only infer the firm's costs from observing the output produced in the first period, has the chance to set environmental taxes to affect emissions; the emitter of pollution may then choose a non-optimal level of production in such a period in order to manipulate the policymaker's beliefs concerning its costs. If the policymaker values environmental quality sufficiently, the low-cost polluter has an incentive to misrepresent itself as a high-cost firm in order to secure a low environmental tax in the second period. This leads the high-cost polluting firm to produce, in the first period, an output level that is not higher than output which would be optimal if only short-term considerations were taken into account. The optimal environmental tax rate in the first period, when the firm's output is a signal of its cost, is then lower than or equal to what it would be if the firm's output was not a signal of firm's costs. The expected emissions in the former context are also lower than or equal to those in the latter case. By contrast, when the policymaker's valuation of the environment is sufficiently low, the environmental tax is negative (a subsidy per unit of pollutant emitted) in both the signaling and non- signaling contexts and no less in the former context than in the latter. Keywords: Environmental tax and subsidy policy, monopolistic polluting firm, vertical asymmetric information, signaling and non-signaling JEL: D62 D82 L13 Date: 2005 URL: http://d.repec.org/n?u=RePEc:cea:doctra:e2005_08&r=all 2. La SAMEA y la eficiencia economica y ambiental en Espana Gaspar J. Llanes Diaz- Salazar (Univesidad Pablo de Olavide) Manuel Alejandro Cardenete (Univesidad Pablo de Olavide) Carmen Rodriguez Morilla (Univesidad de Sevilla) This paper aims to show the utility of the so-called Social Accounting Matrix and Environmental Accounts (SAMEA) for economic and environmental efficiency analysis. The article use the SAMEA for Spain in 2000, applied to the water resource and to greenhouses gases emissions. The estimation has been made from official data of the INE. This matrix is used like central core of a multisectorial model of the economic and environmental performance, and is calculated, what have been called "domestics multipliers SAMEA" and their decomposition into characteristic, direct, indirect and induced effects. These multipliers show some of the valuation economic and environmental efficiency. Also, is made an application of these multipliers that allows to appreciate that there is no causal interrelation between the sectors with a higher economic backward linkages and higher environmental deterioration backward linkages. Keywords: Input-Output Models; Evaluation of Environmental Effects; Air Pollution; Environmental Accounting JEL: C68 Q51 Q52 Q56 Date: 2005 URL: http://d.repec.org/n?u=RePEc:cea:doctra:e2005_09&r=all 3. Real Exchange Rate Misalignments and Economic Performance Alvaro Aguirre Cesar Calderon El presente trabajo se enmarca en un APT (Ross, 1976a) de la vertiente de Variables Macroeconomicas, que tiene la ventaja (en comparacion con Analisis Factorial) de permitir la interpretacion economica de los factores y los premios por riesgo factoriales. Similar a Burmeister y McElroy (1988), consideramos cuatro factores macroeconomicos medidos y un factor no observado; la presencia de factores no observados es una generalizacion del trabajo previo de Chen, Roll y Ross (1986). Partiendo del modelo de factores, la Teoria de Precios por Arbitraje (APT) impone restricciones, las que son comprobadas empiricamente en el periodo 1990-2003. Ademas, el Modelo de Valoracion de Activos de Capital (CAPM) esta anidado en el APT, lo que permite someter a prueba el modelo CAPM. Nuestros resultados son: (a) la restriccion del APT no es rechazada por los datos, (b) las sorpresas en la tasa de crecimiento del Indice Mensual de Actividad Economica (IMACEC), en el precio del cobre y en el precio del petroleo aparecen como factores con premios por riesgo estadisticamente distintos a cero en los retornos accionarios chilenos; mientras que las sorpresa en inflacion no aparecen preciadas en la muestra, y (c) el modelo CAPM es fuertemente rechazado por los datos, en favor del APT. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:316&r=all 4. Institutions, Economic Policies and Growth: Lessons From the Chilean Experience Vittorio Corbo Leonardo Hernandez Fernando Parro A pesar del esfuerzo de reformas de las decadas pasadas, el desempeno economico y social de los paises de America Latina durante los noventa fue bastante pobre. La excepcion fue Chile, que crecio a tasas promedio de 7% durante la mayor parte de la decada y redujo significativamente su tasa de pobreza. Este trabajo intenta explicar esta notable diferencia. Siguiendo la literatura mas reciente, que destaca el rol que juegan las instituciones y politicas en el crecimiento economico, argumentamos que el mejor desempeno de Chile se debio a que las reformas implementadas fueron mucho mas profundas y abarcaron mas areas que aquellas implementadas en otros paises de America Latina. Durante este proceso Chile termino con fundamentos economicos mas solidos y, aun mas importante, con mejores instituciones, lo que le permitio enfrentar de mejor manera los shocks adversos en los noventa. Basados en un modelo econometrico de corte transversal estimado para el periodo 1960- 2000, argumentamos que el mejor desempeno de Chile vis-a-vis al resto de la region puede ser explicado en partes iguales por las mejores instituciones y politicas del pais (en contraste, el mejor desempeno de Asia del Este es explicado principalmente por mejores politicas). Adicionalmente, estimamos que America Latina puede aumentar su tasa de crecimiento anual del producto per capita un 1,6%, en promedio, si tuviera la calidad de instituciones de Chile. Por otro lado, si el promedio de los paises de America Latina tuviera politicas (desarrollo financiero y sobrevaluacion cambiaria) similares a Chile, la tasa de crecimiento anual del producto per capita aumentaria en un 1,0%, en promedio. Concluimos que, para lograr tasas de crecimiento mas altas, los paises de America Latina deben avanzar en sus procesos de reformas y poner mas enfasis en el desarrollo y fortalecimiento de sus instituciones, las cuales, como muestra la experiencia de Chile, pueden ser modificadas ( aunque lentamente). Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:317&r=all 5. Financial Frictions and Real Devaluations Alvaro Aguirre Cesar Calderon In this paper I study the effects of real exchange rate devaluations on output performance using a sample of large devaluation episodes for a group of emerging and developed countries. I find that balance sheet effects, captured by the interaction between the real exchange rate devaluation and the level of external indebtedness of the country, have a significant and negative impact on output. Nevertheless, there is also evidence of a positive effect of the real devaluation associated to the traditional expansionary effect. For countries with large foreign-denominated external debt, the combined effect of the real exchange rate depreciation is likely to generate significant output losses in the short-run. However, in the medium term, the expansionary effect of the real devaluation tends to dominate the balance sheet effect, which implies a positive effect on output in the medium term. Finally, countries with deeper financial market experience lower output losses following a devaluation. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:318&r=all 6. Money as an indicator for inflation and output in Chile - not anymore? Tobias Broer This paper identifies the information content of monetary aggregates for output and inflation in Chile, using a large set of reduced-form statistics and regression specifications. Unlike almost all previous studies on money in Chile, we compare 10 traditional and new definitions of money, rather than just looking at the customary definition M1A. Also, given the changes in the financial system and disinflation in Chile over the last 20 years, as well as contrasting growth rates of GDP and narrow money in recent times, we report recursive estimations for all our statistics to highlight parameter constancy. While there seems to be a strong and often one-to-one association between money growth and inflation on average over the whole sample as indicated by Nelson (2003) type regressions, the relation drops strongly during the last 10 years, and thus seems much lower in times of low inflation. Also, an increase in nominal money growth never causes acceleration of inflation in a Granger sense. However, we do find a significant and positive impact of deviations from (an estimated or HP-filtered) equilibrium level of money holdings on inflation, as indicated by error-correction and Pstar models. But the deviations from a simple estimated equilibrium are very large for both broad money aggregates and M1A at the end of the sample, casting some doubt on the stability of their demand relation. Accordingly, cointegration tests for the existence of a stable demand for money function over the whole sample are somewhat inconclusive. We find a strong Granger causality relationship between money and output, which however vanishes once we control for the effect of past inflation and changes in the monetary policy rate. Also, the information in lags of M1A for GDP drops strongly towards the end of the sample. More generally, M1A does not seem to merit its role as the money sum par excellence in Chile, being inferior in information content for example to Notes and Coin, or a broad money sum excluding bonds (M7 minus Central Bank documents). Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:319&r=all 7. The Wage Curve in Chile Pablo Garcia Paulina Granados This paper analyses the relationship between an individual’s wage and unemployment in her region and industrial sector —the Wage Curve— in Chile from the 1990s onwards. It uses a host of national survey evidence, including the CASEN (Encuesta de Caracterizacion Socieconomica Nacional) and ESI (Encuesta Suplementaria de Ingreso) surveys. The evidence clearly points to the existence of a Wage Curve in Chile. The coefficient that relates individual wage with local unemployment rate is –0.04, and –0.13 in the case of the sectoral unemployment rate, both similar to those found in studies for other economies. Moreover, after 1999 the responsiveness of wages to local/sectoral unemployment rates seems to have increased. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:320&r=all 8. L’economie indienne : changements structurels et perspectives a long-terme Sophie Chauvin Francoise Lemoine L’economie indienne connait depuis un quart de siecle une acceleration de sa croissance et des changements structurels lents mais tangibles. A cote de secteurs traditionnels toujours dominants, les secteurs nouveaux connaissent un essor rapide. La croissance s’accompagne de tensions, liees a la montee des inegalites et du chomage, au sous-emploi, et d’une aggravation des deficits publics qui pesent sur la politique economique. Les scenarios a long terme sur les perpectives de rattrapage de l’economie indienne ont evolue ces dernieres annees d’un relatif pessimisme a l’optimisme, et les plus recents soulignent les marges de croissance importantes dont elle dispose. L’Inde se profile comme une puissance economique qui dans vingt-cinq ans aura le poids qu’a actuellement la Chine dans l’economie mondiale. Keywords: Inde; croissance; politique economique; rattrapage JEL: O53 O57 O47 O10 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cii:cepidt:2005-04&r=all 9. Institutional Determinants of Foreign Direct Investment Agnes Benassy-Quere Maylis Coupet Thierry Mayer In this paper, we contribute to the literature on the determinants of FDI in developing countries and re-evaluate the role of the quality of institutions on FDI. We use a newly available database, with unprecedented detail on institutions of a set of 52 countries, and compare the results with matched variables from more familiar datasets. The paper controls for the correlation between institutions and GDP per capita of the host country, and also accounts for potential endogeneity of institutions. Finally, we evaluate whether proximity of institutions between the host and the origin country raises bilateral FDI. Keywords: FDI; gravity model; institutions; developing countries; relocation JEL: F23 R3 Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:cii:cepidt:2005-05&r=all 10. Les conflits de localisation : le syndrome NIMBY Nicolas Marchetti

Depuis les annees 1970-1980, les reactions d’opposition a la localisation d’equipements dangereux ou generateurs de nuisances se sont diversifiees, intensifiees et structurees au point de devenir un probleme capital pour la societe.

Forge aux Etats-Unis et analyse comme un veritable syndrome affectant nos democraties, l’acronyme NIMBY caracterise de plus en plus frequemment ces conflits de localisation. Il decoule d’une metaphore qui parle d’elle-meme: « Not in my backyard ! », en francais: « Pas dans ma cour ! » Cet acronyme est cense traduire l’attitude d’opposition d’une population locale vis-a-vis d’un projet lorsque celui-ci est susceptible d’entrainer certaines nuisances ou modifications, reelles ou supposees, du cadre de vie. En Europe, l’intensification des conflits de localisation est plus recente et l’appellation NIMBY entre peu a peu dans le langage courant.

Longtemps circonscrites aux projets d’implantation d’equipements consideres comme tres polluants ou tres risques, les reactions d’opposition se sont generalisees et affectent a present un nombre considerable de projets publics comme prives : parcs eoliens, decharges, incinerateurs, stations d’epuration et, plus recemment, les projets de prisons, de centres d’aide ou d’accueil destines aux publics desherites : demandeurs d’asile, toxicomanes... Les exemples de conflits NIMBY au Quebec sont nombreux : localisation d’un port methanier a Beaumont, implantation d’une compostiere geante dans la municipalite regionale de comte de Roussillon, construction d’un parc eolien dans le nord du Quebec.

Les risques lies a la multiplication des conflits NIMBY sont nombreux. En matiere d’environnement, les victoires des militants NIMBY « ici » peuvent toujours provoquer ou aggraver les problemes « ailleurs ». En matiere d’equipement ou de services, du fait qu’elle contribue a retarder une constante et necessaire adequation entre l’offre et la demande, la multiplication des manifestations du syndrome NIMBY peut entrainer un sous- equipement chronique de certains espaces. Enfin, en matiere d’amenagement du territoire, les situations de blocage dues a ce syndrome peuvent etre a l’origine de phenomenes de relegation spatiale.

Ce Rapport bourgogne presente une vue d’ensemble du syndrome NIMBY et des mecanismes proposes par les economistes pour le surmonter. Concernant ce dernier aspect, du point de vue de l’auteur, les procedures centralisees doivent etre abandonnees car elles ne laissent qu’une place trop limitee a la participation du citoyen. Elles doivent etre remplacees par des procedures faisant appel au marche. Differents mecanismes theoriques peuvent alors etre envisages : la negociation, les encheres, les assurances ou encore les loteries. Ces mecanismes s’averent, sous certaines hypotheses, relativement efficaces. Il convient cependant de les manipuler avec precaution car ils peuvent, dans certains cas, deboucher sur des resultats difficilement applicables. L’auteur s’inquiete egalement du fait que les travaux sur le sujet sont rarement pluridisciplinaires. Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:cir:cirbur:2005rb-05&r=all 11. L’economie du logiciel libre et ouvert
Recommandations en vue d’une politique gouvernementale a l’egard du logiciel libre (open source software) Marcel Boyer Jacques Robert

Ce texte vise a circonscrire les fondements d’une politique gouvernementale a l’egard du logiciel libre et ouvert (open source software). Nous caracterisons brievement l’ampleur du phenomene du logiciel libre et nous en analysons les avantages et inconvenients pour le gouvernement tant comme moteur du developpement economique que comme grand utilisateur de technologies d’information et de communications. Nous concluons par un ensemble de recommandations a l’intention du gouvernement, tant de nature « politique economique et industrielle » que de nature « grand utilisateur » face au developpement du logiciel libre et ouvert. Keywords: , logiciel libre, propriete intellectuelle, code source libre, code source ouvert, systeme d’exploitation libre, licence GPL, licence BSD, innovation, effet d’arborescence Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:cir:cirpro:2005rp-05&r=all 12. Architecture gouvernementale ouverte:
Evolution des normes, des standards de consortium et des logiciels libres Francois Coallier Robert Gerin-Lajoie

Cette etude, realisee pour le Conseil du tresor du Quebec, a pour objectifs de presenter, dans un contexte d’architecture d’entreprise, les recents developpements dans l’evolution des normes et standards par les differents acteurs du milieu, les consortiums industriels et les comites de normalisation internationaux en s’arrimant avec les logiciels ouverts.

Pour pouvoir atteindre ses objectifs de services aupres des citoyens et de la societe, le gouvernement du Quebec doit integrer ses systemes informatiques en vue de realiser une architecture ouverte orientee service.

Une telle integration necessite, a l’instar de plusieurs gouvernements et de la Communaute europeenne, l’elaboration d’un cadre d’interoperabilite, soit un ensemble structure de normes, standards, specifications et politiques permettant a des systemes informatiques d’interoperer.

Il est donc recommande que le gouvernement du Quebec:

  • poursuive le travail d’elaboration d’un cadre d’interoperabilite pour ses systemes informatiques base sur des normes et standards ouverts. Ce cadre devrait etre conforme aux criteres enumeres dans cette etude et devrait couvrir non seulement ses systemes informatiques internes mais aussi les services Web offerts a des organismes externes au gouvernement. Ce cadre devrait explicitement donner priorite aux normes et standards ouverts et inclure une politique sur les logiciels libres. Le cadre d’interoperabilite devrait initialement s’inspirer de celui de l’etat du Massachusetts. A moyen terme, il devrait etre aussi complet que celui du gouvernement britannique;

  • integre ce cadre d’interoperabilite a son architecture d’entreprise;

  • publie ce cadre d’interoperabilite avec son architecture d’entreprise;

  • utilise ce cadre d’interoperabilite dans ses appels d’offres;

  • elabore une politique de conformite de toutes les nouvelles applications a ce cadre. Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:cir:cirpro:2005rp-10&r=all 13. Dynamic Psychological Games Pierpaolo Battigalli Martin Dufwenberg Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:cla:levrem:784828000000000046&r=all 14. Costeo ABC. ?Por que y como implantarlo? Carlos Fernando Cuevas Villegas Guillermo Chavez Jhon Alberto Castillo Nelson Marino Caicedo Hoy en dia las exigencias del cliente cada vez son mayores en cuanto a calidad, servicio y precio; es por ello que las tendencias mundiales que actualmente rigen el campo empresarial reconocen que contar con informacion de costos que les permita conocer cuales de sus productos y/o servicios son rentables y cuales no, las lleva a poseer una ventaja competitiva sobre aquellas que no la tienen, pues con dicha informacion la direccion puede tomar decisiones estrategicas y operativas en forma acertada. De acuerdo con lo anterior, la Clinica de los Remedios requiere de un buen sistema de costos con el cual pueda determinar con exactitud el costo de los productos y/o servicios que ofrece, asi como la rentabilidad de los mismos; para ello es indispensable conocer no solo los insumos y los recursos que requiere el producto y/o servicio, sino tambien las areas relacionadas con ellos y las actividades que los involucran. Se pretende disenar una metodologia de costeo ABC y aplicarla como piloto en el area de imaginologia, que actualmente desconoce parcialmente el costo de los servicios que ofrece y por ende su rentabilidad. Buscamos que la implantacion de la metodologia se realice integralmente y en el contexto de un proceso de planeacion estrategica que incorpore en forma consistente una gestion administrativa, presupuestal y de costos enfocada por actividades. Date: 2004-09-30 URL: http://d.repec.org/n?u=RePEc:col:000117:000974&r=all 15. INPUT-OUTPUT STRUCTURE, INTERNATIONAL TRADE AND ECONOMIC DEVELOPMENT Carlos Humberto Ortiz Quevedo In his paper on the “Structure of Development”, Leontief ( 1963) claimed that underdeveloped countries are poorer because they are by far less economically diversified. In this paper it is shown that a model of international trade with strong international restrictions on factor mobility, a stable input- output structure, and a productivity externality due to input diversification, is consistent with Leontief?s hypothesis. The model also implies a growth-rate gap between industrialized and less industrialized economies. Keywords: Input-Output Structure JEL: F15 Date: 2005-04-20 URL: http://d.repec.org/n?u=RePEc:col:000141:000973&r=all 16. Impacto de las regalias petroleras en el Departamento del Meta German Humberto Hernandez Leal El departamento del Meta extrae petroleo crudo desde el ano 1976, ubicandose, en la actualidad, entre los tres mayores productores del pais. En consecuencia, con la influencia de su produccion y las regalias, que han elevado el PIB departamental y fortalecido sus finanzas publicas, deben garantizarse amplias oportunidades de inversion, tanto publica como privada. El objetivo de este estudio es, entonces, observar el impacto socioeconomico y el manejo dado a los recursos de las regalias petroleras a partir del ano 2000, en el que se incrementaron notablemente los recaudos de esta entidad territorial por este concepto. El Meta, esta todavia en la fase de aumento de dichos ingresos y tiene aun la oportunidad de dirigirlos hacia proyectos que contribuyan, en general, a consolidar el desarrollo economico regional y, concretamente, a mejorar el nivel de vida de su poblacion, en lo que respecta al acceso a servicios publicos basicos como: acueducto, alcantarillado, energia electrica, educacion y salud, los cuales no han registrado mejoras significativas, pese a las orientaciones dadas por la normatividad que estipula la destinacion de las regalias. Keywords: Explotacion petrolera, Date: 2004-07-31 URL: http://d.repec.org/n?u=RePEc:col:000124:000607&r=all 17. ON ASYMMETRIC BEHAVIORS IF VOTING IS COSTLY Francesco De Sinopoli Giovanna Iannantuoni Most of the voting models restrict themselves to the analysis of symmetric equilibria, i.e. equilibria in which "similar" voters make "similar" voting decisions. In this paper we investigate this assumption under costly plurality voting. In any pure strategy equilibrium, if two active voters have the same preference order over candidates, they do vote for the same candidate. However, as an example shows, this type of result cannot be hoped for mixed strategies equilibria. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cte:werepe:we053320&r=all 18. EXTREME VOTING UNDER PROPORTIONAL REPRESENTATION:THE MULTIDIMENSIONAL CASE Francesco De Sinopoli Giovanna Iannantuoni We study the strategic behavior of voters in a model of proportional representation, in which the policy space is multidimensional. Our main finding is that in large electorate, under some assumptions on voters' preferences, voters essentially vote, in any equilibrium, only for the extreme parties. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:cte:werepe:we053421&r=all 19. Fair valuation of guaranteed contracts: the interaction between assets and liabilities Charlier,Erwin Kleynen,Ruud (Tilburg University, Center for Economic Research) In this paper we study the investment behavior of an insurance company consisting of policy and equity holders and issuing fair valued guaranteed contracts. Building up on the work of Briys and De Varenne (1997) and De Munnik and Schotman (1994) an intertemporal stochastic asset model and an interest rate model are specified and a procedure to estimate the required parameters is developed. Next, simulation is used to generate risk/return profiles for different investment portfolios and various guaranteed return contracts. It is shown that hedging the guaranteed return contracts is of primary importance to derive attractive risk/return profiles for both the policyholders and the equity holders. Date: 2005 URL: http://d.repec.org/n?u=RePEc:dgr:kubcen:200564&r=all 20. The V L value for network games Hendrickx,Ruud Borm,Peter Brink,Rene van den Owen,Guillermo (Tilburg University, Center for Economic Research) In this paper we consider a proper Shapley value (the V L value) for cooperative network games. This value turns out to have a nice interpretation. We compute the V L value for various kinds of networks and relate this value to optimal strategies in an associated matrix game. JEL: C71 Date: 2005 URL: http://d.repec.org/n?u=RePEc:dgr:kubcen:200565&r=all 21. A note on the stability number of an orthogonality graph Klerk,Etienne de Pasechnik,Dimitrii (Tilburg University, Center for Economic Research) We consider the orthogonality graph (n) with 2n vertices corresponding to the vectors {0, 1}n, two vertices adjacent if and only if the Hamming distance between them is n/2. We show that, for n = 16, the stability number of (n) is ( (16)) = 2304, thus proving a conjecture by Galliard [7]. The main tool we employ is a recent semidefinite programming relaxation for minimal distance binary codes due to Schrijver [16]. Moreover, we give a general condition for Delsarte bound on the (co)cliques in graphs of relations of association schemes to coincide with the ratio bound, and use it to show that for (n) the latter two bounds are equal to 2n/n. JEL: C0 C61 Date: 2005 URL: http://d.repec.org/n?u=RePEc:dgr:kubcen:200566&r=all 22. Do Daily Retail Gasoline Prices adjust Asymmetrically? Leon Bettendorf (Faculty of Economics, Erasmus Universiteit Rotterdam) Stephanie van der Geest (Faculty of Economics, Erasmus Universiteit Rotterdam) Gerard Kuper (University of Groningen) This paper analyzes adjustments in the Dutch retail gasoline prices. We estimate an error correction model on changes in the daily retail price for gasoline (taxes excluded) for the period 1996-2004 taking care of volatility clustering by estimating an EGARCH model. It turns out the volatility process is asymmetrical: an unexpected increase in the producer price has a larger effect on the variance of the producer price than an unexpected decrease. We do not find strong evidence for amount asymmetry. However, there is a faster reaction to upward changes in spot prices than to downward changes in spot prices. This implies timing or pattern asymmetry. This asymmetry starts three days after the change in the spot price and lasts for four days. Keywords: Asymmetry; Retail gasoline prices; Volatility JEL: D43 E31 Date: 2005-04-22 URL: http://d.repec.org/n?u=RePEc:dgr:uvatin:20050040&r=all 23. Uncertainty Avoidance and the Rate of Business Ownership across 22 OECD Countries, 1976-2000 Niels Noorderhaven Andre van Stel Roy Thurik Sander Wennekers Persistent differences in the level of business ownership across economically developed nations have attracted the attention of scientific as well as political debate. Cultural rather than economic influences are assumed to play a decisive role. This paper deals with the influence of cultural attitudes towards uncertainty on the level of business ownership across OECD countries. First, the concepts of uncertainty and risk are elaborated, as well as their relevance for entrepreneurship. Second, cross-sectional regression analysis using data for three separate years in twenty Western countries and Japan and controlling for GDP per capita, yields evidence that in 1976 and 1988 uncertainty avoidance is positively correlated with the prevalence of business ownership. Possibly, a restrictive climate of large organizations in high uncertainty avoidance countries pushes enterprising individuals towards self-employment. However, in 2000 this positive correlation is no longer found, indicating that a compensating pull mechanism in countries with low uncertainty avoidance may have gained momentum in recent years. Third, we carry out pooled panel regressions with respect to business ownership rates in two distinct cultural country clusters for the years 1976, 1988 and 2000. In the group of high- uncertainty avoidance countries a strongly negative relationship between GDP per capita and the level of business ownership is found, suggesting that rising opportunity costs of entrepreneurship are the dominant perception in this cultural environment. In a group of low-uncertainty avoidance countries no such influence of per capita income is found, but the profits associated with being self-employed are positively associated with business ownership. Keywords: business ownership, uncertainty avoidance, cross country study, comparative analysis of economies, cultural economics, entrepreneurship JEL: P52 Z1 M13 O11 O57 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:esi:egpdis:2005-15&r=all 24. Fiscal incidence of unfunded pension system: an analytical investigation Vincent Touze (Observatoire Francais des Conjonctures Economiques) This paper deals with the particular fiscal incidence induced by an unfunded pension system. That consists to understand how the financing and the calculus of pensions modify the transitory and long run macroeconomic dynamics. We develop an OLG model with endogenous labour supply in an economy with productive capital. A tax on the labour income is used to finance pensions. During the retirement, a part of the amount of the pension is exogenous and the other part is linked to the contributive effort during the working period. The method of analysis is not numerical but analytical. The results concern the identification of the steady state and the transitory dynamics. Then we proceed to a sensitive study of the dynamics with respect to changes of the payroll tax or the degree of contribution. Keywords: monetary retirement, labor income tax, OLG models. JEL: D91 H55 J26 Date: 2005 URL: http://d.repec.org/n?u=RePEc:fce:doctra:0503&r=all 25. Convergence properties of the likelihood of computed dynamic models Jesus Fernandez-Villaverde Juan Francisco Rubio-Ramirez Manuel Santos This paper studies the econometrics of computed dynamic models. Since these models generally lack a closed-form solution, economists approximate the policy functions of the agents in the model with numerical methods. But this implies that, instead of the exact likelihood function, the researcher can evaluate only an approximated likelihood associated with the approximated policy function. What are the consequences for inference of the use of approximated likelihoods? First, we show that as the approximated policy function converges to the exact policy, the approximated likelihood also converges to the exact likelihood. Second, we prove that the approximated likelihood converges at the same rate as the approximated policy function. Third, we find that the error in the approximated likelihood gets compounded with the size of the sample. Fourth, we discuss convergence of Bayesian and classical estimates. We complete the paper with three applications to document the quantitative importance of our results. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-27&r=all 26. Trading institutions and price discovery: the cash and futures markets for crude oil Albert Ballinger Gerald P. Dwyer, Jr. Ann B. Gillette We provide substantial evidence that the futures market for West Texas Intermediate crude oil increased the short-term volatility of the cash price of crude oil. We show that the variability of prices increased using both published posted prices and transaction prices for producers. This increased volatility in the price of crude oil may reflect information aggregated into the price, an increase the variance of shocks to the price of crude oil, or noise in the futures price that affects the cash price. We present evidence from experiments consistent with the interpretation that information aggregation not feasible in a posted-price market can explain at least part of the increase in variance. This evidence supports the proposition that information not previously aggregated into the cash price for crude oil is at least part of the reason for the greater variability of the cash price after the opening of the futures market and provides at least one example in which a futures market increased the volatility of the cash market, and prices became more efficient. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-28&r=all 27. The role of social capital in the remittance decisions of Mexican migrants from 1969 to 2000 Kasey Q. Maggard Remittances from migrants in the United States play a major role in the Mexican economy. This paper analyzes the role that different types of social capital play in the remittances decisions of Mexican migrants. Both the decision to remit and the decision on how much to remit are analyzed. The model, based on the idea of enlightened altruism, assumes that the migrant makes his decisions based on his own well-being as well as that of his household in Mexico and his community in Mexico. Social capital is defined as the resources one gains from relationships and networks. Four different types of social capital are identified in this paper: hometown-friendship networks in the United States, family networks in the United States, other-ethnicity-based networks in the United States, and community networks in Mexico. Social capital from friendships proves to be very positively significant in both the decision to remit and how much to remit. However, for all of the observations, familial social capital is not significant in either the decision to remit or how much to remit, although familial social capital has a positive role in both tests. Other-ethnicity-based social capital negatively influences both decisions and is significant in both as well. Social capital in Mexico has a significant negative impact on the two remittance decisions. Beyond social capital, this paper provides insight into other factors that affect remittance decisions including income, bank accounts, proximity to Mexico, exchange rate, interest rate differential, community infrastructure, the number of members in the Mexican household, Mexican household consumption, and time trends. In addition, to investigate time trends further, separate regressions were run on those observations where the last migration took place before 1991 and those whose last migration occurred after 1990. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-29&r=all 28. Optimal minimum wage in a competitive economy Arantza Gorostiaga Juan Francisco Rubio-Ramirez This paper studies the use of a minimum wage law to implement the optimal redistribution policy when a distorting tax-transfer scheme is also available. The authors build a static general equilibrium model with a Ramsey planner making decisions on taxes, transfers, and minimum wage levels. Workers are assumed to differ only in their productivity. The authors find that optimal redistribution may imply the use of only taxes and transfers, only a minimum wage, or the proper combination of both policies. The key factor driving their results is the reaction of the demand for low-skilled labor to the minimum wage law. Hence, an optimal minimum wage appears to be most likely when low-skilled households are scarce, the complementarity between the two types of workers is large, or the difference in productivity is small. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-30&r=all 29. Income and education of the states of the United States: 1840–2000 Scott Baier Sean Mulholland Chad Turner Robert Tamura This article introduces original annual average years of schooling measures for each state from 1840 to 2000. The paper also combines original data on real state per-worker output with existing data to provide a more comprehensive series of real state output per worker from 1840 to 2000. These data show that the New England, Middle Atlantic, Pacific, East North Central, and West North Central regions have been educational leaders during the entire time period. In contrast, the South Atlantic, East South Central, and West South Central regions have been educational laggards. The Mountain region behaves differently than either of the aforementioned groups. Using their estimates of average years of schooling and average years of experience in the labor force, the authors estimate aggregate Mincerian earnings regressions. Their estimates indicate that a year of schooling increased output by between 8 percent and 12 percent, with a point estimate close to 10 percent. These estimates are in line with the body of evidence from the labor literature. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-31&r=all 30. Debt maturity, risk, and asymmetric information Allen N. Berger Marco A. Espinosa-Vega W. Scott Frame Nathan H. Miller We test the implications of Flannery’s (1986) and Diamond’s ( 1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data from more than 6,000 commercial loans from 53 large U.S. banks. Our results for low-risk firms are consistent with the predictions of both theoretical models, but our findings for high-risk firms conflict with the predictions of Diamond’s model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-32&r=all 31. Tax policy design in the presence of social preferences: some experimental evidence Lucy F. Ackert Jorge Martinez-Vazquez Mark Rider This paper reports the results of experiments designed to examine whether a taste for fairness affects people’s preferred tax structure. Building on the Fehr and Schmidt (1999) model, we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing among alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-33&r=all 32. Human capital and economic development Robert Tamura This paper reports the results of experiments designed to examine whether a taste for fairness affects people’s preferred tax structure. Building on the Fehr and Schmidt (1999) model, we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing among alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-34&r=all 33. The “risk-adjusted” price-concentration relationship in banking Elijah Brewer, III William E. Jackson, III Price-concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This relationship implies that highly concentrated banking markets are “bad” for depositors. It also provides support for the Structure- Conduct-Performance hypothesis and rejects the Efficient- Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and have neglected demand-side variables when estimating the reduced form price- concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. The authors find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 percent. They offer an explanation for these results based on the correlation between a bank’s risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This finding has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct- Performance-based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables. And, thus, the results from those studies may be spurious. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-35&r=all 34. Investment opportunity set, product mix, and the relationship between bank CEO compensation and risk-taking Elijah Brewer, III William Curt Hunter William E. Jackson, III The product mix changes that have occurred in banking organizations during the 1990s provide a natural experiment for investigating how firms adjust their executive compensation contracts as their mix of businesses changes. Deregulation and new technology have eroded banking organizations’ comparative advantages and have made it easier for nonbank competitors to enter banking organizations’ lending and deposit-taking businesses. In response, banking organizations have shifted their sale mix toward noninterest income by engaging in municipal revenue bond underwriting, commercial paper underwriting, discount brokering, managing and advising open- and close-ended mutual funds, underwriting mortgage-backed securities, selling and underwriting various forms of insurance products, selling annuities, and other investment banking activities via Section 20 subsidiaries. These mix changes could affect firms’ risk and the structure of CEO compensation. The authors find that as the average banking organization tilts its product mix toward fee- based activities and away from traditional activities, equity- based compensation increases. They also find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, the authors observe that equity-based compensation is more important after the Riegle-Neal Act of 1994. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-36&r=all 35. On the fit and forecasting performance of new Keynesian models Marco Del Negro Frank Schorfheide Frank Smets Raf Wouters The paper provides new tools for the evaluation of DSGE models and applies them to a large-scale New Keynesian dynamic stochastic general equilibrium (DSGE) model with price and wage stickiness and capital accumulation. Specifically, we approximate the DSGE model by a vector autoregression (VAR) and then systematically relax the implied cross-equation restrictions. Let -denote the extent to which the restrictions are being relaxed. We document how the in- and out-of-sample fit of the resulting specification (DSGE-VAR) changes as a function of --. Furthermore, we learn about the precise nature of the misspecification by comparing the DSGE model’s impulse responses to structural shocks with those of the best-fitting DSGE-VAR. We find that the degree of misspecification in large-scale DSGE models is no longer so large as to prevent their use in day-to-day policy analysis, yet it is not small enough that it cannot be ignored. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-37&r=all 36. Policy predictions if the model doesn’t fit Marco Del Negro Frank Schorfheide This paper uses a novel method for conducting policy analysis with potentially misspecified DSGE models (Del Negro and Schorfheide 2004) and applies it to a simple New Keynesian DSGE model. We illustrate the sensitivity of the results to assumptions on the policy invariance of model misspecifications. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-38&r=all 37. On the solution of the growth model with investment-specific technological change Jesus Fernandez-Villaverde Juan Francisco Rubio-Ramirez Recent work by Greenwood, Hercowitz, and Krusell (1997 and 2000) and Fisher (2003) has emphasized the importance of investment- specific technological change as a main driving force behind long- run growth and the business cycle. This paper shows how the growth model with investment-specific technological change has a closed-form solution if capital fully depreciates. This solution furthers our understanding of the model, and it constitutes a useful benchmark to check the accuracy of numerical procedures to solve dynamic macroeconomic models in cases with several state variables. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-39&r=all 38. Identifying the new Keynesian Phillips curve James M. Nason Gregor W. Smith Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under generalized methods of moments (GMM) and traces this syndrome to a lack of persistence in either exogenous variables or shocks. The authors employ analytic methods to understand the identification problem in several statistical environments: under strict exogeneity, in a vector autoregression, and in the canonical three-equation, New Keynesian model. Given U.S., U.K., and Canadian data, they revisit the empirical evidence and construct tests and confidence intervals based on exact and pivotal Anderson-Rubin statistics that are robust to weak identification. These tests find little evidence of forward- looking inflation dynamics. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-01&r=all 39. Testing the significance of calendar effects Peter Reinhard Hansen Asger Lunde James M. Nason This paper studies tests of calendar effects in equity returns. It is necessary to control for all possible calendar effects to avoid spurious results. The authors contribute to the calendar effects literature and its significance with a test for calendar- specific anomalies that conditions on the nuisance of possible calendar effects. Thus, their approach to test for calendar effects produces robust data-mining results. Unfortunately, attempts to control for a large number of possible calendar effects have the downside of diminishing the power of the test, making it more difficult to detect actual anomalies. The authors show that our test achieves good power properties because it exploits the correlation structure of (excess) returns specific to the calendar effect being studied. We implement the test with bootstrap methods and apply it to stock indices from Denmark, France, Germany, Hong Kong, Italy, Japan, Norway, Sweden, the United Kingdom, and the United States. Bootstrap p-values reveal that calendar effects are significant for returns in most of these equity markets, but end-of-the-year effects are predominant. It also appears that, beginning in the late 1980s, calendar effects have diminished except in small-cap stock indices. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-02&r=all 40. Do free trade agreements actually increase members’ international trade? Scott L. Baier Jeffrey H. Bergstrand For more than forty years, the gravity equation has been a workhorse for cross-country empirical analyses of international trade flows and, in particular, the effects of free trade agreements (FTAs) on trade flows. However, the gravity equation is subject to the same econometric critique as earlier cross- industry studies of U.S. tariff and nontariff barriers and U.S. multilateral imports: Trade policy is not an exogenous variable. The authors address econometrically the endogeneity of FTAs using instrumental-variable (IV) techniques, control-function (CF) techniques, and panel-data techniques; IV and CF approaches do not adjust for endogeneity well, but a panel-data approach does. Accounting econometrically for the FTA variable’s endogeneity yields striking empirical results: The effect of FTAs on trade flows is quintupled. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-03&r=all 41. Mimicking portfolios, economic risk premia, and tests of multi-beta models Pierluigi Balduzzi Cesare Robotti This paper considers two alternative formulations of the linear factor model (LFM) with nontraded factors. The first formulation is the traditional LFM, where the estimation of risk premia and alphas is performed by means of a cross-sectional regression of average returns on betas. The second formulation (LFM*) replaces the factors with their projections on the span of excess returns. This formulation requires only time-series regressions for the estimation of risk premia and alphas. We compare the theoretical properties of the two approaches and study the small-sample properties of estimates and test statistics. Our results show that when estimating risk premia and testing multi-beta models, the LFM* formulation should be considered in addition to, or even instead of, the more traditional LFM formulation. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-04&r=all 42. Hedging, financing, and investment decisions: a simultaneous equations framework Chen-Miao Lin Stephen D. Smith The purpose of this paper is to empirically investigate the interaction between hedging, financing, and investment decisions. This work is relevant in that theoretical predictions are not necessarily identical to those in the case where only two decisions are being made. We argue that the way in which hedging affects the firms’ financing and investing decisions differs for firms with different growth opportunities. We empirically find that high-growth firms increase their investment, but not their leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-05&r=all 43. Aggregate unemployment in Krusell and Smith’s economy: a note Marco Del Negro Using data on workers’ flows into and out of employment, unemployment, and not-in-the-labor-force, I construct transition probabilities between “employment” and “unemployment” that can be used in the calibration of economies such as Krusell and Smith’s (1998). I show that calibration in Krusell and Smith has some counterfactual features. Yet the gains from adopting alternative calibrations in terms of matching the data are not very large, unless one assumes that the duration of unemployment spells is well above what is usually assumed in the literature. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-06&r=all 44. Model confidence sets for forecasting models Peter Reinhard Hansen Asger Lunde James M. Nason The paper introduces the model confidence set (MCS) and applies it to the selection of forecasting models. An MCS is a set of models that is constructed so that it will contain the “best” forecasting model, given a level of confidence. Thus, an MCS is analogous to a confidence interval for a parameter. The MCS acknowledges the limitations of the data so that uninformative data yield an MCS with many models, whereas informative data yield an MCS with only a few models. We revisit the empirical application in Stock and Watson (1999) and apply the MCS procedure to their set of inflation forecasts. In the first pre- 1984 subsample we obtain an MCS that contains only a few models, notably versions of the Solow-Gordon Phillips curve. On the other hand, the second post-1984 subsample contains little information and results in a large MCS. Yet, the random walk forecast is not contained in the MCS for either of the samples. This outcome shows that the random walk forecast is inferior to inflation forecasts based on Phillips curve-like relationships. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-07&r=all 45. Fiscal policy and minimum wage for redistribution: an equivalence result Arantza Gorostiaga Juan Francisco Rubio-Ramirez In this paper, we derive conditions under which a minimum-wage law combined with anonymous taxes and transfers and an agent- specific tax-transfer scheme are equivalent policies. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-08&r=all 46. A, B, C’s, (and D’s) for understanding VARs Jesus Fernandez-Villaverde Juan Francisco Rubio-Ramirez Thomas Sargent The dynamics of a linear (or linearized) dynamic stochastic economic model can be expressed in terms of matrices (A, B, C, D) that define a state-space system. An associated state space system (A, K, C, S) determines a vector autoregression (VAR) for observables available to an econometrician. We review circumstances in which the impulse response of the VAR resembles the impulse response associated with the economic model. We give four examples that illustrate a simple condition for checking whether the mapping from VAR shocks to economic shocks is invertible. The condition applies when there are equal numbers of VAR and economic shocks. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2005-09&r=all 47. Social Security and unsecured debt Erik Hurst Paul Willen Most young households simultaneously hold both unsecured debt on which they pay an average of 10 percent interest and social security wealth on which they earn less than 2 percent. We document this fact using data from the Panel Study of Income Dynamics. We then consider a life-cycle model with “tempted” households, who find it impossible to commit to an optimal consumption plan and “disciplined” households who have no such problem, and we explore ways to reduce this inefficiency. We show that allowing households to use social security wealth to pay off debt while exempting young households from social security contributions (but in both cases requiring higher contributions later) leads to increases in welfare for both types of households and, for disciplined households, to significant increases in consumption and saving and reductions in debt. Keywords: Social security ; Debt relief Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:04-10&r=all 48. Massachusetts business taxes: unfair? inadequate? uncompetitive? Robert Tannenwald In debating Massachusetts business tax policy, protagonists have cited many different indicators purporting to assess the fairness, adequacy, and competitiveness of the Commonwealth’s business taxes. These statistics actually reveal very little about the degree to which Massachusetts business taxes achieve these widely accepted tax policy goals. The author explains why these indicators are misleading and presents new indicators of business tax competitiveness that, although imperfect, are more accurate than those most widely quoted. The article concludes that the fairness of Massachusetts business taxes is unclear and that the Commonwealth’s corporate income taxes are inadequate. The clearest conclusion drawn is that Massachusetts business taxes do not harm its competitive standing. Keywords: Business tax - Massachusetts Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:04-4&r=all 49. Educational opportunity and income inequality Igal Hendel Joel Shapiro Paul Willen Affordable higher education is, and has been, a key element of social policy in the United States with broad bipartisan support. Financial aid has substantially increased the number of people who complete university—generally thought to be a good thing. We show, however, that making education more affordable can increase income inequality. The mechanism that drives our results is a combination of credit constraints and the ‘signaling’ role of education first explored by Spence (1973). When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or of high ability but with low financial resources. When government programs make borrowing easier or tuition more affordable, high-ability persons become educated and leave the uneducated pool, driving down the wage for unskilled workers and raising the skill premium. Keywords: Education - Economic aspects ; Income distribution Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:04-5&r=all 50. Financial development, financial constraints, and the volatility of industrial output Borja Larrain More financially developed countries show lower volatility of industrial output. Volatility is particularly reduced in industries that are more financially dependent. Most of the reduction is in idiosyncratic volatility. Systematic volatility is reduced less strongly, implying that industries are more closely correlated with GDP in more financially developed countries. At the firm level, short-term debt is negatively correlated with output as financial development increases, suggesting that debt is used in a countercyclical way to stabilize production. The results indicate that financial development relaxes financial constraints mainly to smooth negative cashflow shocks Keywords: Financial modernization ; Industrial productivity Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:04-6&r=all 51. Do bank mergers affect Federal Reserve check volume? Joanna Stavins The recent decline in the Federal Reserve’s check volumes has received a lot of attention. Although switching to electronic payments methods and electronic check-processing has been credited for much of that decline, some of it could be caused by changes following bank mergers involving Federal Reserve customer banks. This paper evaluates the effect of bank mergers on Federal Reserve check-processing volumes. ; Using inflow-outflow and regression methods, we find that mergers between two or more Reserve Bank customers have resulted in volume losses, especially during the first quarter following the merger. On average, the estimated cumulative loss of volume during the first five post- merger quarters was 2.6 million checks. While the overall number of checks in the United States has declined during the past few years, the Federal Reserve has lost additional check-processing volume because of bank mergers. Keywords: Bank mergers ; Check collection systems Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:04-7&r=all 52. Interstate fiscal disparity in state fiscal year 1999 Robert Tannenwald Nicholas Turner This paper compares states in terms of their relative fiscal capacity, fiscal need, fiscal comfort, and tax effort in state fiscal year 1999 (FY1999). It is the most recent in a series initiated by the U.S. Advisory Commission on Intergovernmental Relations (ACIR) in 1962. As in previous studies, the authors use the representative tax system and representative expenditure system methodologies in their analysis. Compared with FY1997, the authors find less interstate disparity in fiscal capacity, fiscal need, and fiscal comfort. However, such disparity, though diminished, remains substantial. The New England and Mid-Atlantic regions remain the most “fiscally comfortable,” while the East South Central and West South Central regions are still the most “fiscally stressed.” Keywords: State finance ; Taxation Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:04-9&r=all 53. Estimating forward looking Euler equations with GMM estimators: an optimal instruments approach Jeffrey C. Fuhrer Giovanni P. Olivei This paper compares different methods for estimating forward- looking output and inflation Euler equations and shows that weak identification can be an issue in conventional GMM estimation. The authors propose a GMM procedure that imposes the dynamic constraints implied by the forward-looking relation on the instruments set. This “optimal instruments” procedure is more reliable than conventional GMM, and it provides a robust alternative to estimating dynamic macroeconomic relations. Empirical applications of this procedure suggest only a limited role for expectational terms. Keywords: Keynesian economics ; Macroeconomics Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-2&r=all 54. Trade liberalization and the politics of financial development Matias Braun Claudio Raddatz A well-developed financial system enhances competition in the industrial sector by allowing easier entry. The impact varies across industries, however. For some, small changes in financial development quickly induce entry and dissipate incumbents’ rents, generating strong incentives to oppose improvement of the financial system. In other sectors incumbents may even benefit from increased availability of external funds. The relative strength of promoters and opponents determines the equilibrium level of financial system. This may be perturbed by the effect of trade liberalization on the strength of each group. Using a sample of 41 trade liberalizers, we conduct an event study and show that the change in the strength of promoters vis-a-vis opponents is a very good predictor of subsequent financial development. The result is not driven by changes in demand for external funds or by the success of the trade policy. The relationship is mediated by policy reforms, the kind that induce competition in the financial sector, in particular. Real effects follow not so much from capital deepening but mainly through improved allocation. The effect is stronger in countries with high levels of governance, suggesting that incumbents resort to this costly but more subtle way of restricting entry where it is difficult to obtain more blatant forms of anti-competitive measures from politicians. Keywords: International trade ; Financial modernization Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-3&r=all 55. Emerging market business cycles: the cycle is the trend Mark Aguiar Gita Gopinath Business cycles in emerging markets are characterized by strongly counter-cyclical current accounts, consumption volatility that exceeds income volatility, and dramatic “sudden stops” in capital inflows. These features contrast with those of developed, small open economies and highlight the uniqueness of emerging markets. Nevertheless, we show that both qualitatively and quantitatively a standard dynamic stochastic, small open economy model can account for the behavior of both types of markets. Motivated by the observed frequent policy- regime switches in emerging markets, our underlying premise is that these economies are subject to substantial volatility in their trend growth rates relative to developed markets. ; Consequently, shocks to trend growth--rather than transitory fluctuations around a stable trend--are the primary source of fluctuations in these markets. When the parameters of the income process are structurally estimated using GMM for each type of economy, we find that the observed predominance of permanent shocks relative to transitory shocks for emerging markets and the reverse for developed markets explain differences in key features of their business cycles. Lastly, employing a VAR methodology to identify permanent shocks, we find further support for the notion that, for emerging economies, the cycle is the trend. Keywords: Emerging markets ; Business cycles Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-4&r=all 56. Defaultable debt, interest rates, and the current account Mark Aguiar Gita Gopinath World capital markets have experienced large-scale sovereign defaults on a number of occasions, the most recent being Argentina’s default in 2002. In this paper, we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates than in slumps. Our ability to match these facts within the framework of an otherwise standard business-cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets. Keywords: Default (Finance) ; Emerging markets ; Debt ; Interest rates ; Balance of payments Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-5&r=all 57. Effective labor regulation and microeconomic flexibility Ricardo Caballero Kevin N. Cowan Eduardo M. R. A. Engel Alejandro Micco Microeconomic flexibility, by facilitating the process of creative destruction, is at the core of economic growth in modern market economies. The main reason why this process is not infinitely fast is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its empirical support is rather weak. In this paper we revisit this hypothesis and find strong evidence for it. We use a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destructive process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law. Keywords: Labor market ; Productivity Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-6&r=all 58. A general-equilibrium asset-pricing approach to the measurement of nominal and real bank output Christina Wang Susanto Basu John G. Fernald This paper addresses the proper measurement of financial service output that is not priced explicitly. It shows how to impute nominal service output from financial intermediaries’ interest income and how to construct price indices for those financial services. We present an optimizing model with financial intermediaries that provide financial services to resolve asymmetric information between borrowers and lenders. We embed these intermediaries in a dynamic, stochastic, general- equilibrium model where assets are priced competitively according to their systematic risk, as in the standard consumption capital- asset-pricing model. In this environment, we show that it is critical to take risk into account in order to measure financial output accurately. We also show that even using a risk-adjusted reference rate does not solve all the problems associated with measuring nominal financial service output. Our model allows us to address important outstanding questions in output and productivity measurement for financial firms, such as: (1) What are the correct “reference rates” to use in calculating bank output? In particular, should they take account of risk? (2) If reference rates need to be risk-adjusted, does it mean that they must be ex ante rates of return? (3) What is the right price deflator for the output of financial firms? Is it just the general price index? (4) When—if ever—should we count capital gains of financial firms as part of financial service output? Keywords: Financial services industry ; Financial markets Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-7&r=all 59. Incomplete markets and trade Paul Willen In this paper, we show that incomplete markets lead to trade imbalances. We use a two-period general equilibrium model with countries composed of heterogeneous households. We look at a world where, when markets are complete, countries engage in balanced trade and we show that when some of those markets are absent, trade imbalances emerge. Market incompleteness across countries causes trade imbalances because national income in some countries is more sensitive to risky asset payoffs than in others. Market incompleteness within countries causes trade imbalances because superior risk-sharing in one country leads to a lower precautionary demand for saving. Keywords: International trade Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:04-8&r=all 60. Technological diversification Miklos Koren Silvana Tenreyro Why is GDP so much more volatile in poor countries than in rich ones? To answer this question, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. As in endogenous growth models, technological progress increases the number of varieties, raising average productivity. The new insight is that an expansion in the number of varieties also lowers the volatility of output. This is because additional varieties provide diversification benefits against variety- specific shocks. In the model, technological complexity evolves endogenously in response to profit incentives. Complexity (and hence output stability) is positively related with the development of the country, the comparative advantage of the sector, and the sector’s skill and technology intensity. Using sector-level data for a broad sample of countries, we provide extensive empirical evidence confirming the cross-country and cross-sectoral predictions of the model. Keywords: Gross domestic product ; Technology - Economic aspects Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-1&r=all 61. Contingent reserves management: an applied framework Ricardo Caballero Stavros Panageas One of the most serious problems that a central bank in an emerging market economy can face is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100’s implied volatility index (VIX) increases the expected reserves available during sudden stops by as much as 40 percent. Keywords: Banks and banking, Central ; Emerging markets ; Bank reserves Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-2&r=all 62. The liquidity trap, the real balance effect, and the Friedman rule Peter Ireland This paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates, using a model with population growth that nests, as a special case, a more conventional specification in which there is a single infinitely lived representative agent. The paper shows that with a growing population, monetary policy has distributional effects that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive. Keywords: Monetary policy ; Price levels Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-3&r=all 63. Interest sensitivity and volatility reductions: cross- section evidence F. Owen Irvine Scott Schuh As has been widely observed, the volatility of GDP has declined since the mid-1980s compared with prior years. One leading explanation for this decline is that monetary policy improved significantly in the later period. We utilize a cross-section of 2-digit manufacturing and trade industries to further investigate this explanation. Since a major channel through which monetary policy operates is variation in the federal funds rate, we hypothesized that industries that are more interest sensitive should have experienced larger declines in the variance of their outputs in the post-1983 period. We estimate interest-sensitivity measures for each industry from a variety of VAR models and then run cross-sectional regressions explaining industry volatility ratios as a function of their interest-sensitivity measures. These regressions reveal little evidence of a statistically significant relationship between industry volatility reductions and our measures of industry interest sensitivity. This result poses challenges for the hypothesis that improved monetary policy explains the decline in GDP volatility. Keywords: Gross domestic product ; Monetary policy ; Interest rates Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:05-4&r=all 64. Implications of alternative operational risk modeling techniques Patrick de Fontnouvelle Eric Rosengren John Jordan Quantification of operational risk has received increased attention with the inclusion of an explicit capital charge for operational risk under the new Basle proposal. The proposal provides significant flexibility for banks to use internal models to estimate their operational risk, and the associated capital needed for unexpected losses. Most banks have used variants of value at risk models that estimate frequency, severity, and loss distributions. This paper examines the empirical regularities in operational loss data. Using loss data from six large internationally active banking institutions, we find that loss data by event types are quite similar across institutions. Furthermore, our results are consistent with economic capital numbers disclosed by some large banks, and also with the results of studies modeling losses using publicly available “external” loss data. Keywords: Bank capital ; Risk management ; Basel capital accord Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedbwp:1&r=all 65. Inflation, output, and welfare Ricardo Lagos Guillaume Rocheteau This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i. e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers’ search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates. Keywords: Inflation (Finance) Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0407&r=all 66. Friedman meets Hosios: efficiency in search models of money Aleksander Berentsen Guillaume Rocheteau Shouyong Shi In this paper the authors study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. They show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency, and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. The authors analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, they extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities. Keywords: Monetary policy - Mathematical models ; Money - Mathematical models Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0408&r=all 67. The forecast ability of risk-neutral densities of foreign exchange Ben R. Craig Joachim G. Keller We estimate the process underlying the pricing of American options by using higher-order lattices combined with a multigrid method. This paper also tests whether the risk-neutral densities given from American options provide a good forecasting tool. We use a nonparametric test of the densities that is based on the inverse probability functions and is modified to account for correlation across time between our random variables, which are uniform under the null hypothesis. We find that the densities based on the American option markets for foreign exchange do quite well for the forecasting period over which the options are thickly traded. Further, simple models that fit the densities do about as well as more sophisticated models. Keywords: Foreign exchange futures ; Options (Finance) ; Economic forecasting Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0409&r=all 68. Thinking about monetary policy without money: a review of three books: Inflation Targeting, Monetary Theory and Policy, and Interest and Prices Charles T. Carlstrom Timothy S. Fuerst This paper reviews three recent books. Two books, one by Carl Walsh and one by Michael Woodford, focus on the development of monetary theory. In contrast, the third book is a collection of papers in an NBER volume on inflation targeting. This volume outlines some of the issues that arise when applying the tools described by Walsh and Woodford to the policy goal of targeting inflation rates. A central theme of all three works is the desirability of abstracting from money demand in the analysis of monetary policy. In our review we focus the bulk of our discussion on the absence of money in these models. Keywords: Monetary policy ; Money Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0410&r=all 69. Monetary policy, endogenous inattention, and the volatility trade-off William A. Branch John Carlson George W. Evans Bruce McGough This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "great moderation" that began in the 1980s. Keywords: Monetary policy ; Inflation (Finance) Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0411&r=all 70. The effects of minimum wages on the distribution of family incomes: a nonparametric analysis David Neumark Mark Schweitzer William Wascher The primary goal of a national minimum wage floor is to raise the incomes of poor families with members in the work force. We present evidence on the effects of minimum wages on family incomes from March CPS surveys. Using non-parametric estimates of the distributions of family income relative to needs in states and years with and without minimum wage increases, we examine the effects of minimum wages on this distribution, and on the distribution of the changes in income that families experience. Although minimum wages do increase the incomes of some poor families, the evidence indicates that their net effect is, if anything, to increase the proportions of families with incomes below or near the poverty line. Thus, it would appear that reductions in the proportions of families that are poor or near- poor should not be counted among the potential benefits of minimum wages. Keywords: Minimum wage ; Poverty Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0412&r=all 71. Asset prices, nominal rigidities, and monetary policy Charles T. Carlstrom Timothy S. Fuerst Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. Keywords: Monetary policy ; Banks and banking, Central Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0413&r=all 72. Bank seasoned equity offers: do voluntary and involuntary offers differ? O. Emre Ergungor C.N.V. Krishnan Ajai K. Singh Allan A. Zebedee Recent research has shown that for industrial and utilities’ seasoned equity offers (SEOs) the offer price discount is informative and has significant price effects. We examine whether the offer price discount for SEOs made by undercapitalized banks is different from those made by banks that were already overcapitalized prior to issue announcement. The former are labeled "involuntary" issues, and the latter "voluntary." Voluntary issues are likely made by opportunistic managers at times when their stock is overvalued. Prior research has argued and provided evidence suggesting that for involuntary issues, such timing discretion may be limited. However, we find no significant differences in the issue-date discount, and in issue- date abnormal returns between the two types of issues. We find that trading volume increases dramatically at the offer date, stays at abnormally high levels over a 60-day post–issue period, and is accompanied by a positive abnormal return in the post- offer period for both types of issues. Keywords: Bank stocks Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0414&r=all 73. Geographic redistribution of U.S. manufacturing and the role of state development policy Yoonsoo Lee Competition among state and local governments to lure businesses has attracted considerable interest from economists, as well as legislators and policymakers. This paper quantifies the role of plant relocations in the geographic redistribution of manufacturing employment and examines the effectiveness of state development policy. Only a few studies have looked at how manufacturing firms geographically locate their production facilities and have used either small manufacturing samples or small geographic regions. This paper provides broader evidence of the impact of plant relocations using confidential establishment level data from the U.S. Census Longitudinal Research Database ( LRD), covering the full population of manufacturing establishments in the United States over the period 1972 to 1992. This paper finds a relatively small role for relocation in explaining the disparity of manufacturing employment growth rates across states. Moreover, it finds evidence of very weak effects of incentive programs on plant relocations. Keywords: Industrial location ; Manufactures ; Regional planning Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0415&r=all 74. Firm-specific capital, nominal rigidities, and the business cycle David E. Altig Lawrence J. Christiano Martin Eichenbaum Jesper Linde Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on inflation inertia even though firms re- optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined within a period. Keywords: Inflation (Finance) ; Monetary policy ; Business cycles Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0416&r=all 75. Bargaining and the value of money Guillaume Rocheteau Christopher Waller Search models of monetary exchange have typically relied on Nash 1950) bargaining or strategic games that yield an equivalent outcome to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions, whereas under strongly monotonic solutions such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman Rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition. Keywords: Money ; Monetary policy ; Game theory Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0501&r=all 76. Testing near-rationality using detailed survey data Michael F. Bryan Stefan Palmqvist This paper considers the evidence of “near-rationality,” as described by Akerlof, Dickens, and Perry (2000). Using detailed surveys of household inflation expectations for the United States and Sweden, we find that the data are generally unsupportive of the near-rationality hypothesis. However, we document that household inflation expectations tend to settle around discrete and largely fixed “focal points,” suggesting that both U.S. and Swedish households gauge inflation prospects in rather broad, qualitative terms. Moreover, the combination of a low-inflation environment and an inflation target in Sweden has been accompanied by a disproportionately high proportion of Swedish households expecting no inflation. However, a similar low inflation trend in the United States, which does not have an explicit inflation target, reveals no such rise in the proportion of households expecting no inflation. This observation suggests that the way the central bank communicates its inflation objective may influence inflation expectations independently of the inflation trend it actually pursues. Keywords: Inflation (Finance) ; Rational expectations (Economic theory) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0502&r=all 77. SBA-loan guarantees and local economic growth Ben R. Craig William E. Jackson, III James B. Thomson Increasingly policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan- guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0503&r=all 78. The impact of e-business technologies on supply chain operations: a macroeconomic perspective Amit Basu Thomas F. Siems New information technologies and e-business solutions have transformed supply chain operations from mass production to mass customization. This paper assesses the impact of these innovations on economic productivity, focusing on the macroeconomic benefits as supply chain operations have evolved from simple production and planning systems to today's real-time performance-management information systems using advanced e- business technologies. While many factors can influence macroeconomic variables, the impact of IT-enabled supply chains should not be overlooked. We find evidence that the impact of e- business technologies on supply chain operations have resulted in a reduced "bullwhip effect," lower inventory, reduced logistics costs, and streamlined procurement processes. These improvements, in turn, have likely helped to lower inflation, reduce economic volatility, strengthen productivity growth, and improve standards of living. Keywords: Information technology ; Macroeconomics ; Productivity Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:04-04&r=all 79. Optimal monetary policy in economies with "sticky- information" wages Evan F. Koenig In economies with sticky-information wage setting, policymakers legitimately give attention to output stabilization as well as price-level or inflation stabilization. Consistent with Kydland and Prescott (1990), trend deviations in prices are predicted to be negatively correlated with trend deviations in output. A variant of the Taylor rule is optimal if household consumption decisions are forward-looking. Interestingly, it is essential that policy not be made contingent on the most up-to-date estimates of potential output, potential-output growth, or the natural real interest rate. New results on the “persistence problem” and a new rationalization for McCallum’s P-bar inflation equation are also presented. Keywords: Productivity Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:04-05&r=all 80. The impact of paying interest on reserves in the presence of government deficit financing Mark G. Guzman This paper re-examines the impact that paying interest on reserves has on price level indeterminacy, price level volatility, and overall economic well-being. Unlike previous papers which examined these issues, the model developed in this paper allows the return on reserves to equal the return on government securities, which is less than the prevailing return on storage. Equally important, this model also considers how deficit financing changes the impact that paying interest on reserves has on the economy. I show that the number of steady state equilibria are equal to, or greater than, the number that arise when no interest is paid on reserves. In other words, the level of economic indeterminacy is equal to or greater than in an economy without interest payments. When the level of indeterminacy is the same, then economic volatility is reduced with the introduction of interest payments. However, when there exists greater indeterminacy in the interest-on-reserves economy, then there also exists greater volatility. In addition, under certain conditions, paying interest on reserves can be welfare enhancing. When it is not, an appropriate expansionary open market operation can offset the welfare losses associated with interest payments. Finally, under a narrow set of conditions, unpleasant monetarist arithmetic may obtain. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:04-06&r=all 81. VAR estimation and forecasting when data are subject to revision N. Kundan Kishor Evan F. Koenig Conventional VAR estimation and forecasting ignores the fact that economic data are often subject to revision many months or years after their initial release. This paper shows how VAR analysis can be modified to account for such revisions. The proposed approach assumes that government statistical releases are efficient with a finite lag. It takes no stand on whether earlier revisions are “noise” or “news.” The technique is illustrated using data on employment and the unemployment rate, real GDP and the unemployment rate, and real GDP and the GDP/consumption ratio. In each case, the proposed procedure outperforms conventional VAR analysis and the more-restrictive methods for handling the data-revision problem that are found in the existing literature. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:05-01&r=all 82. Business cycle coordination along the Texas-Mexico border Keith R. Phillips Jesus Canas In this paper we use a dynamic single-factor model originally due to Stock and Watson [18, 19] to measure the business cycle in four Texas border Metropolitan Statistical Areas (MSAs) and Mexico. We then measure the degree of economic integration between border cities, the US, Texas, and Mexican economies using correlation, spectral and cluster analysis. Results suggest border MSAs are significantly integrated with the broader economies and that major changes have occurred in these relationships since 1994, the year in which NAFTA was enacted and the time maquiladora industry began to accelerate. Keywords: North American Free Trade Agreement ; Maquiladora Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:05-02&r=all 83. Industrial structure and economic complementarities in city pairs on the Texas-Mexico border Robert W. Gilmer Jesus Canas The U.S.–Mexico border provides a number of examples of pairs of neighboring cities, one in the U.S. and the other in Mexico. The advent of the North American Industrial Classification System provides a new opportunity to look at these cities using a common industrial classification system. Using U.S. data from the Bureau of Labor Statistics and Bureau of Economic Analysis, and comparable information from the 1999 Mexican economic census, we were able to compare employment by industry sector in city pairs that are located along the Texas–Mexico border: El Paso–Juarez, Laredo–Nuevo Laredo, Brownsville–Matamoros, and McAllen–Reynosa. ; This paper focuses on the distribution of employment in border city pairs. It is primarily descriptive in nature, but looks at industrial structure from several perspectives. First, we look at each city as part of its own national economy, then as part of the combined U.S.–Mexico economy. Second, we demonstrate that each city-pair has a distribution of employment by industry that complements the sister city. Different wage levels, distinct legal and regulatory systems and unlike stages of development provide each city with unique opportunities to specialize in the local marketplace. Finally, we interpret the role of these cities as part of a combined US-Mexico economy. The chief economic role played by all city-pairs is that of a manufacturing center, driven largely by maquiladora activity and its support industries. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:05-03&r=all 84. Lifecycle consistent estimation of effect of taxes on female labor supply in the US: evidence from panel data Anil Kumar Very few existing studies have estimated female labor supply elasticities using a U.S. panel data set, though cross-sectional studies abound. Also, most existing studies have modeled female labor supply in the U.S. in a static framework. I make an attempt to fill the gap in this literature, by estimating a lifecycle- consistent specification with taxes, in a limited dependent variable framework, on a panel of married females from the PSID. Both parametric random effects and semiparametric fixed effects methods are applied. The estimate of compensated elasticity for females in the sample is 0.63 (with a standard error of 0.14). These estimates are fairly robust to the choice of both random effects and semiparametric fixed effect estimators and also to the choice of instruments for the endogenous net wage and virtual full income. I estimate exact deadweight loss from taxes and find that deadweight loss from a 20 percent increase in the marginal tax rate is about 18 percent of tax revenue collected, evaluated at the sample mean. Keywords: Labor supply ; Women - Employment ; Wages Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:05-04&r=all 85. Nonparametric estimation of the impact of taxes on female labor supply Anil Kumar Econometric models with nonlinear budgets sets frequently arise in the study of impact of taxation on labor supply. Blomquist and Newey (2002) have suggested a nonparametric method to estimate the uncompensated wage and income effects when the budget set is nonlinear. This paper extends their nonparametric estimation method to censored dependent variables. The modified method is applied to estimate female wage and income elasticities using the 1987 PSID. I find evidence of bias if the nonlinearity in the budget set is ignored. The median compensated elasticity is estimated at 1.19 (with a standard error of 0.19). Keywords: Labor supply ; Women - Employment ; Wages Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:feddwp:05-05&r=all 86. On using relative prices to measure capital-specific technological progress Milton Marquis Bharat Trehan Recently, Greenwood, Hercowitz and Krusell (GHK) have identified the relative price of (new) capital with capital-specific technological progress. In a two-sector growth model, however, the relative price of capital equals the ratio of the productivity processes in the two sectors. Restrictions from this model are used with data on wages and prices to construct measures of productivity growth and test the GHK identification, which is easily rejected by the data. This raises questions about various measures of the contribution that capital-specific technological progress might make to the economy. This identification also induces a negative correlation between the resulting measures of capital-specific and economy-wide technological change, which potentially explains why papers employing this identification find that capital-specific technological change accelerated in the mid-1970s. We impose structure on the productivity measures based on their long run behavior and find evidence of a slowdown in productivity in the 1970s that is common to both sectors and an acceleration in the mid-1990s that is exclusive to the capital sector. Keywords: Prices ; Technology Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-02&r=all 87. Modeling bond yields in finance and macroeconomics Francis X. Diebold Monika Piazzesi Glenn D. Rudebusch >From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no- arbitrage term structure models. Keywords: Bonds ; Macroeconomics ; Finance ; Econometric models Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-04&r=all 88. Offshore financial centers: parasites or symbionts? Andrew K. Rose Mark M. Spiegel This paper analyzes the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-05&r=all 89. Alternative measures of the Federal Reserve banks’ cost of equity capital Michelle L. Barnes Jose Lopez The Monetary Control Act of 1980 requires the Federal Reserve System to rovide payment services to depository institutions through the twelve Federal Reserve Banks at rices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the CAPM model and compare them using econometric and materiality criteria. Our results suggests that the benchmark CAPM model applied to a large peer group of competing firms provides a COE estimate that is not clearly improved upon by using a narrow peer group, introducing additional factors into the model, or taking account of additional firm-level data, such as leverage and line- of-business concentration. Thus, a standard implementation of the benchmark CAPM model provides a reasonable COE estimate, which is needed to impute costs and set prices for the Reserve Banks’ payments business. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-06&r=all 90. The ins and outs of poverty in advanced economies: poverty dynamics in Canada, Germany, Great Britain, and the United States Robert G. Valletta Comparative analysis of poverty dynamics—incidence, transitions, and persistence—can yield important insights about the nature of poverty and the effectiveness of alternative policy responses. This manuscript compares poverty dynamics in four advanced industrial countries (Canada, unified Germany, Great Britain, and the United States) for overlapping six-year periods in the 1990s. The data indicate that poverty persistence is higher in North America than in Europe; for example, despite high incidence, poverty in Great Britain is relatively transitory. Most poverty transitions, and the prevalence of chronic poverty, are associated with employment instability and family dissolution in all four countries. The results also suggest that differences in social policy are crucial for the observed differences in poverty incidence and persistence between Europe and North America. Keywords: Poverty ; Poverty - Canada ; Poverty - Germany ; Poverty - Great Britain Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-18&r=all 91. Testing the strong-form of market discipline: the effects of public market signals on bank risk Simon H. Kwan Under the strong-form of market discipline, publicly traded banks that have constantly available public market signals from their stock (and bond) prices would take less risk than non- publicly traded banks because counterparties, borrowers, and regulators could react to adverse public market signals against publicly traded banks. In comparing the credit risk, earnings risk, capitalization, and failure risk between publicly traded and non-publicly traded banks, the evidence in this paper rejects the strong-form of market discipline. In fact, the findings indicate that banking organizations tend to take more risk when they were publicly traded than when they were privately owned. Keywords: Stock market ; Risk ; Banks and banking Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-19&r=all 92. Financial contracting and the choice between private placement and publicly offered bonds Simon H. Kwan Willard T. Carleton Private placement bonds have unique financial contracting in controlling borrower-lender agency conflicts due to direct monitoring and the relative ease of future renegotiation. Our data show that private placements are more likely to have restrictive covenants and are more likely to be issued by smaller and riskier borrowers. We find the determinants of bond yield spreads to be quite different between private placements and public issues, reflecting the different institutional arrangements between the two markets. Finally, in issuing bonds, we find that firms self-select the bond type to minimize both the financing costs and the transaction costs. Keywords: Finance ; Corporate bond Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-20&r=all 93. Investment behavior of U.S. firms over heterogeneous capital goods: a snapshot Daniel J. Wilson The 1998 Annual Capital Expenditure Survey (ACES) provides information on disaggregate investment across a wide range of detailed asset types for a representative sample of roughly 30, 000 firms. These rich data on disaggregate investment provides us with a point-in-time snapshot of investment composition choices at the firm level. This short paper uses this data to establish a number of stylized facts about disaggregate investment behavior, with a special focus on information technology. Keywords: Capital ; Investments Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-21&r=all 94. Using a long-term interest rate as the monetary policy instrument Bruce McGough Glenn D. Rudebusch John C. Williams Using a short-term interest rate as the monetary policy instrument can be problematic near its zero bound constraint. An alternative strategy is to use a long-term interest rate as the policy instrument. We find when Taylor-type policy rules are used to set the long rate in a standard New Keynesian model, indeterminacy--that is, multiple rational expectations equilibria- may often result. However, a policy rule with a long rate policy instrument that responds in a "forward-looking" fashion to inflation expectations can avoid the problem of indeterminacy. Keywords: Monetary policy ; Interest rates Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-22&r=all 95. Implications of intellectual property rights for dynamic gains from trade Michelle P. Connolly Diego Valderrama A simple intellectual property rights (IPRs) framework is introduced into a dynamic quality ladder model of technological diffusion between innovating firms in one country and imitating firms in another country. The presence of technological spillovers and feedback effects between firms in the two countries demonstrates that preferred IPR regimes are ones that positively affect world growth and hence welfare in both countries. Most existing models of international IPRs, however, generally find that high intellectual property enforcement in the imitating country leads to welfare gains in the innovating country at the expense of the imitating country. An well-designed IPR regime imposed at the time of trade liberalization will be welfare enhancing for both regions relative to trade liberalization without IPR enforcement. Moreover, the preferred IPR regime will be one that maintains competition from imitative activity but enforces some remuneration to innovators for the spillovers they generate. Keywords: Intellectual property ; Research and development ; Trade Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-23&r=all 96. North-South technological diffusion and dynamic gains from trade Michelle P. Connolly Diego Valderrama This paper revisits the question of gains from trade in a dynamic setting from the perspective of an R&D based growth model of technological diffusion. The transition paths, as well as steady-state growth paths, are analyzed for a developed and a developing nation trading in intermediate and final goods. Static computable general equilibrium (CGE) models have yielded only small welfare gain estimates (.5-1%) for trade liberalization. Dynamic models have increased these estimates (up to 10%), but often ignore feedback effects caused by technological diffusion and generally consider only steady-state welfare effects. These feedback effects are especially important due to the long transition paths they induce for both countries. ; This paper studies the transitional dynamics in a quality ladder model of endogenous growth in which North-South trade leads to technological diffusion through reverse engineering of intermediate goods. The concept of learning-to-learn is incorporated into both imitative and innovative processes, which in turn drive domestic technological progress. International trade with imitation leads to feedback effects between Southern imitators and Northern innovators who compete for the world market. Consequently, both regions face transition paths dependent on their relative technologies. When the South liberalizes its trade, world growth increases, leading to welfare gains of 5% for the South. While the North also experiences steady-state welfare gains, the transition costs borne by the North during the long transition lead to an overall loss in Northern welfare. Still, this loss is attributable to the lack of intellectual property rights (IPRs) rather than trade per se. Interestingly, imposition of IPRs not only leads to an overall welfare gain for the North, but also further boosts Southern welfare gains up to 16%, again because of the feedback effects in technology. Keywords: Trade ; Technology ; Economic development Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-24&r=all 97. The recent shift in term structure behavior from a no- arbitrage macro-finance perspective Glenn D. Rudebusch Tao Wu This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield- spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models, which exhibit a significant difference in behavior that can be largely attributed to changes over time in the pricing of risk associated with a “level” factor. Finally, we suggest a link between the shift in term structure behavior and changes in the risk and dynamics of the inflation target as perceived by investors. Keywords: Interest rates ; Monetary policy ; Econometric models Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2004-25&r=all 98. The welfare consequences of ATM surcharges: evidence from a structural entry model Gautam Gowrisankaran John Krainer We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus. We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi–experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not. We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria. Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 10 percent and lowers producer profits by about 10 percent. Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level. This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular. Keywords: Automated tellers Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2005-01&r=all 99. Government consumption expenditures and the current account Michele Cavallo This paper distinguishes between two components of government consumption, expenditure on final goods and expenditure on hours, and compares the effects of changes in these two on the current account. I find that changes in government expenditure on hours do not directly affect the current account and that their impact is considerably smaller than the impact produced by changes in government expenditure on final goods. These findings indicate that considering government consumption as entirely expenditure on final goods leads to overestimating its role in accounting for movements in the current account balance. Keywords: Expenditures, Public ; Trade ; Gross domestic product Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfap:2005-03&r=all 100. Currency crises, capital account liberalization, and selection bias Reuven Glick Xueyan Guo Michael Hutchison Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for “self selection” bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises. That is, when two countries have the same likelihood of allowing free movement of capital (based on historical evidence and a very similar set of economic and political characteristics)—and one country imposes controls and the other does not-- the country without controls has a lower likelihood of experiencing a currency crisis. This result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial. Keywords: Financial crises ; Capital Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-15&r=all 101. Asset price declines and real estate market illiquidity: evidence from Japanese land values John Krainer Mark Spiegel Nobuyoshi Yamori We develop an overlapping generations model of the real estate market in which search frictions and a debt overhang combine to generate price persistence and illiquidity. Illiquidity stems from heterogeneity in agent real estate valuations. The variance of agent valuations determines how quickly prices adjust following a shock to fundamentals. We examine the predictions of the model by studying price depreciation in Japanese land values subsequent to the 1990 stock market crash. Commercial land values fell much more quickly than residential land values. As we would posit that the variance of buyer valuations would be greater for residential real estate than for commercial real estate, this model matches the Japanese experience. Keywords: Real property ; Prices ; Japan Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-16&r=all 102. Deposit insurance, regulatory forbearance and economic growth: implications for the Japanese banking crisis Robert Dekle Kenneth Kletzer An endogenous growth model with financial intermediation is used to show how public deposit insurance and weak prudential regulation can lead to banking crises and permanent declines in economic growth. The impact of regulatory forbearance on investment, saving and asset price dynamics under perfect foresight are derived in the model. The assumptions of the theoretical model are based on essential features of the Japanese financial system and its regulation. The model demonstrates how banking and growth crises can evolve under perfect foresight. The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s. We also test our maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s. An implication of our analysis is that delaying the resolution of banking crises adversely affects future economic growth. Keywords: Financial crises - Japan ; Deposit insurance ; Bank supervision ; Economic development Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-26&r=all 103. Market price accounting and depositor discipline in Japanese regional banks Mark Spiegel Nobuyoshi Yamori We examine the determinants of Japanese regional bank decisions concerning pricing unrealized losses or gains to market. We also examine the impact of these decisions on the intensity of depositor discipline, in the form of the sensitivity of deposit growth to bank financial conditions. To obtain consistent estimates of depositor discipline, we first model and estimate the bank pricing-to-market decision and then estimate the intensity of depositor discipline after conditioning for that decision. We find that banks were less likely to price to market the larger were their unrealized securities losses. We also find statistically significant evidence of depositor discipline among banks that elected to price their assets to market. Our results indicate that depositor discipline was more intense for the subset of banks that priced-to-market, suggesting that increased transparency may enhance depositor discipline. Keywords: Banks and banking - Japan ; Accounting Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-27&r=all 104. When in peril, retrench: testing the portfolio channel of contagion Fernando A. Broner R. Gaston Gelos Carmen Reinhart One plausible mechanism through which financial market shocks may propagate across countries is through the effect of past gains and losses on investors’ risk aversion. The paper first presents a simple model examining how heterogeneous changes in investors’ risk aversion affects portfolio decisions and stock prices. Second, the paper shows empirically that, when funds’ returns are below average, they adjust their holdings toward the average (or benchmark) portfolio. In other words, they tend to sell the assets of countries in which they were “overweight”, increasing their exposure to countries in which they were “underweight.” Based on this insight, the paper discusses a matrix of financial interdependence reflecting the extent to which countries share overexposed funds. Comparing this measure to indices of trade or bank linkages indicates that our index can improve predictions about which countries are likely to be affected by contagion from crisis centers. Keywords: Risk ; Investments Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-28&r=all 105. How do trade and financial integration affect the relationship between growth and volatility M. Ayhan Kose Eswar S. Prasad Marco E. Terrones The influential work of Ramey and Ramey (1995) highlighted an empirical relationship that has now come to be regarded as conventional wisdom—that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization—a term typically used to describe the phenomenon of growing international trade and financial integration that has intensified since the mid-1980s. We employ various econometric techniques and a comprehensive new dataset to analyze the link between growth and volatility. Our findings suggest that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration attenuate this negative relationship. Specifically, countries that are more open to trade appear to face a less severe tradeoff between growth and volatility. We find a similar, although slightly less robust, result for the interaction of financial integration with volatility. We also investigate some of the channels, including investment and credit, through which different aspects of global integration could affect the growth-volatility relationship. Keywords: Trade ; Economic development ; Econometric models Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-29&r=all 106. Monetary policy and the currency denomination of debt: a tale of two equilibria Roberto Chang Andres Velasco Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating. We also show that a flexible exchange rate Pareto-dominates a fixed one. It follows that social welfare would rise if the monetary authority could precommit to floating. Keywords: Monetary policy ; Foreign exchange Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-30&r=all 107. Defaultable debt, interest rates and the current account Mark Aguiar Gita Gopinath World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina’s default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to slumps. Our ability to match these facts within the framework of an otherwise standard business cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets. Keywords: Default (Finance) ; Debt ; Interest rates Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-31&r=all 108. Putting the brakes on Sudden Stops: the financial frictions- moral hazard tradeoff of asset price guarantees Enrique G. Mendoza Ceyhun Bora Durdu The hypothesis that Sudden Stops to capital inflows in emerging economies may be caused by global capital market frictions, such as collateral constraints and trading costs, suggests that Sudden Stops could be prevented by offering price guarantees on the emerging-markets asset class. Providing these guarantees is a risky endeavor, however, because they introduce a moral-hazard- like incentive similar to those that are also viewed as a cause of emerging markets crises. This paper studies this financial frictions-moral hazard tradeoff using an equilibrium asset- pricing model in which margin constraints, trading costs, and ex- ante price guarantees interact in the determination of asset prices and macroeconomic dynamics. In the absence of guarantees, margin calls and trading costs create distortions that produce Sudden Stops driven by occasionally binding credit constraints and Irving Fisher’s debt-deflation mechanism. Price guarantees contain the asset deflation by creating another distortion that props up the foreign investors’ demand for emerging markets assets. Quantitative simulation analysis shows the strong interaction of these two distortions in driving the dynamics of asset prices, consumption and the current account. Price guarantees are found to be effective for containing Sudden Stops but at the cost of introducing potentially large distortions that could lead to ‘overvaluation’ of emerging markets assets. Keywords: Prices ; Economic development ; Investments Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-33&r=all 109. Private capital flows, capital controls, and default risk Mark L . J. Wright What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging market capital flows more efficient? If not, can controls on capital flows improve welfare? This paper shows that the answers depend on the form of default risk. When private loans are enforceable, but there is the risk that the government will default on behalf of all residents, private lending is inefficient and capital controls are potentially Pareto-improving. However, when private agents may individually default, capital flow subsidies are potentially Pareto-improving. Keywords: Capital market ; Risk Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-34&r=all 110. Dollar bloc or dollar block: external currency pricing and the East Asian crisis David Cook Michael B. Devereux This paper provides a quantitative investigation of the East Asian crisis of 1997-99. The two essential features of the crisis that we focus on are a) the crisis was a regional phenomenon; the depth and severity of the crisis was exacerbated by a large decline in regional demand, and b) the practice of setting export goods prices in dollars (which we document empirically) led to a powerful internal propagation effect of the crisis within the region, contributing greatly to the decline in regional trade flows. We construct a model with these two features, and show that it can do a reasonable job of accounting for the response of the main macroeconomic aggregates in Korea, Malaysia, and Thailand during the crisis. Keywords: Dollar, American ; Financial crises - Asia ; Prices Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-35&r=all 111. Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities Tim Bollerslev Michael Gibson Hao Zhou This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option- implied volatility measures. A small-scale Monte Carlo experiment suggests that the procedure works well in practice. Implementing the procedure with actual S&P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities results in significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of underlying macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns. Keywords: Stochastic analysis ; Risk ; Uncertainty Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-56&r=all 112. Monetary policy and inflation dynamics John M. Roberts Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises considerably less when unemployment falls and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these phenomena. The results suggest that changes in the parameters and shock volatility of monetary policy reaction functions can account for most or all of the change in the inflation-unemployment relationship. As in other work, monetary-policy changes can explain only a small portion of the output growth volatility decline. However, changes in policy can explain a large proportion of the reduction in the volatility of the output gap. In addition, a broader concept of monetary-policy changes--one that includes improvements in the central bank's ability to measure potential output--enhances the ability of monetary policy to account for the changes in the economy. Keywords: Monetary policy - United States ; Inflation (Finance) Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-62&r=all 113. Housing, consumption, and credit constraints Andreas Lehnert I test the credit-market effects of housing wealth shocks by estimating the consumption elasticity of house price shocks among households in different age quintiles. Younger households face faster expected income growth and hence would like to borrow more than older households. I estimate consumption elasticities from housing wealth by age quintile to be {4; 0; 3; 8; 3} percent. As predicted by theory, the youngest group has a higher elasticity of consumption than the next two age quintiles. That the consumption of the age quintile on the verge of retirement is responsive to housing wealth is also not surprising: I show that these households are likeliest to "downsize" their house and thus realize any capital gains. Keywords: Consumption (Economics) ; Housing - Prices ; Consumer credit Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-63&r=all 114. Reading the minds of investors: an empirical term structure model for policy analysis Jim Clouse Building on the recent macro finance literature, this paper develops an empirical term structure model in which investors' judgmental forecasts of macro variables play an important role. The model allows for a limited form of time-variation in the dynamics describing the behavior of short-term interest rates and macro variables. As a result, changes in economic forecasts over time reflect the influence of both economic shocks and perceived changes in economic structure. The latter, in particular, are shown to be important in explaining the evolution of the yield curve over time. An interest rate accounting framework based on the model is applied in parsing changes in long-term interest rates into portions associated with changes in term premiums and changes in expected future short-rates. The changes in expected future short rates are then further decomposed into portions attributable to changes in the expected future paths for inflation, the unemployment rate, and GDP growth and also to a fourth factor interpreted as changes in the "stance of monetary policy." The model results indicate that changes in long-term interest rates, on average, have been about equal parts changes in term premia and changes in expected future short rates. Changes in expected future short rates seem to be driven largely by changes in the stance of monetary policy and in the outlook for inflation while the estimated influence of changes in the outlook for the unemployment rate and GDP growth is more muted. Keywords: Econometric models ; Economic forecasting ; Interest rates ; Economic indicators Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-64&r=all 115. Measuring capital and technology: an expanded framework Carol Corrado Charles Hulten Daniel Sichel Business outlays on intangible assets are usually expensed in economic and financial accounts. Following Hulten (1979), this paper develops an intertemporal framework for measuring capital in which consumer utility maximization governs the expenditures that are current consumption versus those that are capital investment. This framework suggests that any business outlay that is intended to increase future rather than current consumption should be treated as capital investment. Applying this principle to newly developed estimates of business spending on intangibles, we find that, by about the mid-1990s, business investment in intangible capital was as large as business investment in traditional, tangible capital. Relative to official measures, our framework portrays the U.S. economy as having had higher gross private saving and, under plausible assumptions, fractionally higher average annual rates of change in real output and labor productivity from 1995 to 2002. Keywords: Capital investments ; Industrial productivity Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-65&r=all 116. Do actions speak louder than words? the response of asset prices to monetary policy actions and statements Refet Gurkaynak Brian Sack Eric Swanson We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-- changes in the federal funds rate target-and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with FOMC statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday dataset going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields. Keywords: Federal funds rate ; Federal Open Market Committee ; Securities ; Assets (Accounting) - Prices ; Monetary policy Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-66&r=all 117. Learning dynamics with private and public signals Adam Copeland This paper studies the evolution of firms' beliefs in a dynamic model of technology adoption. Firms play a simple variant of the classic two-armed bandit problem, where one arm represents a known, deterministic production technology and the other arm an unknown, stochastic technology. Firms learn about the unknown technology by observing both private and public signals. I find that because of the externality associated with the public signal, the evolution of beliefs under a market equilibrium can differ significantly from that under a planner. In particular, firms experiment earlier under the planner than they do under the market equilibrium and thus firms under the planner generate more information at the start of the model. This intertemporal effect brings about the unusual result that, on a per period basis, there exist cases where firms in a market equilibrium over- experiment relative to the planner in the latter periods of the model. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-67&r=all 118. The reliability of inflation forecasts based on output gap estimates in real time Athanasios Orphanides Simon van Norden A stable predictive relationship between inflation and the output gap, often referred to as a Phillips curve, provides the basis for countercyclical monetary policy in many models. In this paper, we evaluate the usefulness of alternative univariate and multivariate estimates of the output gap for predicting inflation. Many of the ex post output gap measures we examine appear to be quite useful for predicting inflation. However, forecasts using real-time estimates of the same measures do not perform nearly as well. The relative usefulness of real-time output gap estimates diminishes further when compared to simple bivariate forecasting models which use past inflation and output growth. Forecast performance also appears to be unstable over time, with models often performing differently over periods of high and low inflation. These results call into question the practical usefulness of the output gap concept for forecasting inflation. Keywords: Inflation (Finance) ; Phillips curve ; Input-output analysis Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-68&r=all 119. Alternative estimates of the presidential premium Sean D. Campbell Canlin Li Since the early 1980s much research, including the most recent contribution of Santa-Clara and Valkanov (2003), has concluded that there is a stable, robust and significant relationship between Democratic presidential administrations and robust stock returns. Moreover, the difference in returns does not appear to be accompanied by any significant differences in risk across the presidential cycle. These conclusions are largely based on OLS estimates of the difference in returns across the presidential cycle. We re-examine this issue using more efficient estimators of the presidential premium. Specifically, we exploit the considerable and persistent heteroskedasticity in stock returns to construct more efficient weighted least squares (WLS) and generalized autoregressive conditional heteroskedasticity (GARCH) estimators of the difference in expected excess stock returns across the presidential cycle. Our findings provide considerable contrast to the findings of previous research. Across the different WLS and GARCH estimates we find that the point estimates are considerably smaller than the OLS estimates and fluctuate considerably across different sub samples. We show that the large difference between the WLS, GARCH and OLS estimates is driven by differing stock market performance during very volatile market environments. During periods of elevated market volatility, excess stock returns have been markedly higher under Democratic than Republican administrations. Accordingly, the WLS and GARCH estimators are less sensitive to these episodes than the OLS estimator. Ultimately, these results are consistent with the conclusion that neither risk nor return varies significantly across the presidential cycle. Keywords: Stock market ; Rate of return Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-69&r=all 120. The magnitude and cyclical behavior of financial market frictions Andrew T. Levin Fabio M. Natalucci Egon Zakrajsek We quantify the cross-sectional and time-series behavior of the wedge between the cost of external and internal finance by estimating the structural parameters of a canonical debt- contracting model with informational frictions. For this purpose, we construct a new dataset that includes balance sheet information, measures of expected default risk, and credit spreads on publicly traded debt for about 900 U.S. firms over the period 1997Q1 to 2003Q3. Using nonlinear least squares, we obtain precise time-specific estimates of the bankruptcy cost parameter and consistently reject the null hypothesis of frictionless financial markets. For most of the firms in our sample, the estimated premium on external finance was very low during the expansionary period 1997-99, but rose sharply in 2000--especially for firms with higher ratios of debt to equity--and remained elevated until early 2003. Keywords: Financial markets ; Bankruptcy ; Capital Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-70&r=all 121. Precautionary savings motives and tax efficiency of household portfolios: an empirical analysis Gene Amromin Tax efficiency is the dominant consideration in theoretical portfolio models that allow for both taxable and tax-deferred accounts (TDAs). Investors are advised to locate higher-tax assets in their tax-deferred accounts, which in the Unites States commonly translates into "holding bonds inside TDAs and holding equities outside." Yet, observed portfolio allocations are not tax efficient. This paper empirically evaluates the predictions of a recent model designed to bridge the existing gap by explicitly incorporating uninsurable labor income risk and limited accessibility of TDA assets in household decisions [Amromin, 2003]. Together, these elements create tension between household's desire to maintain tax efficient allocations and its concern over the need to make costly TDA withdrawals in the event of bad income draws. This leads some borrowing-constrained households facing labor income risk and TDA access penalties to forgo tax efficiency in favor of allocations that provide more liquidity in bad income states--an outcome labeled as "precautionary portfolio choice." The empirical results based on household-level portfolio data from the Survey of Consumer Finances provide evidence that both the choice of whether to hold a tax efficient portfolio and the degree of portfolio tax inefficiency are related to the presence and severity of precautionary motives. Keywords: Households - Economic aspects ; Saving and investment Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-01&r=all 122. The reform of October 1979: how it happened and why David E. Lindsey Athanasios Orphanides Robert H. Rasche This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC's adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed. Keywords: Federal Open Market Committee ; Monetary policy - United States Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-02&r=all 123. Who competes with whom? the case of depository institutions Robert M. Adams Kenneth P. Brevoort Elizabeth K. Kiser Little empirical work exists on the substitutability of depository institutions. In particular, the willingness of consumers to substitute banks for thrifts and to switch between multimarket and single-market institutions (i.e., institutions with large vs. small branch networks) has been of strong interest to policymakers. We estimate a structural model of consumer choice of depository institutions using a panel data set that includes most depository institutions and market areas in the United States over the period 1990-2001. Using a flexible framework, we uncover utility parameters that affect a consumer's choice of institution and measure the degree of market segmentation for two institution subgroups. We use our estimates to calculate elasticities and perform policy experiments that measure the substitutability of firms within and across groupings. We find both dimensions --thrifts and banks, and single- and multimarket institutions-- to be important market segments to consumer choice and, ultimately, to competition in both urban and rural markets. Keywords: Banks and banking ; Thrift institutions ; Financial institutions Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-03&r=all 124. Econometric tests of asset price bubbles: taking stock Refet S. Gurkaynak Can asset price bubbles be detected? This survey of econometric tests of asset price bubbles shows that, despite recent advances, econometric detection of asset price bubbles cannot be achieved with a satisfactory degree of certainty. For each paper that finds evidence of bubbles, there is another one that fits the data equally well without allowing for a bubble. We are still unable to distinguish bubbles from time-varying or regime- switching fundamentals, while many small sample econometrics problems of bubble tests remain unresolved. Keywords: Stock - Prices ; Capital assets pricing model Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-04&r=all 125. The GSE implicit subsidy and the value of government ambiguity Wayne Passmore The housing-related government-sponsored enterprises Fannie Mae and Freddie Mac (the "GSEs") have an ambiguous relationship with the federal government. Most purchasers of the GSEs' debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief. In this paper, I estimate how much GSE shareholders gain from this ambiguous government relationship. I find that (1) the government's ambiguous relationship with Fannie Mae and Freddie Mac imparts a substantial implicit subsidy to GSE shareholders, ( 2) the implicit government subsidy accounts for much of the GSEs' market value, and (3) the GSEs would hold far fewer of their mortgage-backed securities in portfolio and their capital-to- asset ratios would be higher if they were purely private. Keywords: Government-sponsored enterprises ; Mortgages Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-05&r=all 126. The effect of housing government-sponsored enterprises on mortgage rates Wayne Passmore Shane M. Sherlund Gillian Burgess We derive a theoretical model of how jumbo and conforming mortgage rates are determined and how the jumbo-conforming spread might arise. We show that mortgage rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge between jumbo and conforming rates (the jumbo-conforming spread). Further, we show how the jumbo-conforming spread widens when mortgage demand is high or core deposits are not sufficient to fund mortgage demand, and tighten as the mortgage market becomes more liquid and realizes economies of scale. Using MIRS data for April 1997 through May 2003, we estimate that the GSE funding advantage accounts for about seven basis points of the 15-18 basis point jumbo-conforming spread. Keywords: Government-sponsored enterprises ; Mortgage loans ; Interest rates Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-06&r=all 127. GSEs, mortgage rates, and secondary market activities Andreas Lehnert Wayne Passmore Shane M. Sherlund Fannie Mae and Freddie Mac are government-sponsored enterprises ( GSEs) that purchase mortgages and issue mortgage-backed securities (MBS). In addition, the GSEs are active participants in the primary and secondary mortgage markets on behalf of their own portfolios of MBS. Because these portfolios have grown quite large, portfolio purchases as well as MBS issuance are likely to be important forces in the mortgage market. This paper examines the statistical evidence of a connection between GSE actions and the interest rates paid by mortgage borrowers. We find that both portfolio purchases and MBS issuance have negligible effects on mortgage rate spreads and that purchases are not any more effective than securitization at reducing mortgage interest rate spreads. We also examine the 1998 liquidity crisis and find that GSE portfolio purchases did little to affect interest rates paid by borrowers. These results are robust to alternative assumptions about causality and to model specification. Keywords: Government-sponsored enterprises ; Secondary markets Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-07&r=all 128. Does trading frequency affect subordinated debt spreads? Christopher Bianchi Diana Hancock Laura Kawano Because illiquid bonds may be relatively poorly priced, the ability to infer investor perceptions of changes in a banking organization's financial health from such bonds may be obscured. To examine the time-series effect of trading frequency on subordinated debt spreads, we consider the liquidity of subordinated debt for large, complex U.S. banking organizations over the 1987:Q2 - 2002:Q4 period. Since trade volumes are unobservable, we construct various measures of weekly trading frequency from observed bond prices. Using these indirect liquidity measures, we find evidence that trading frequency does significantly affect observed subordinated debt spreads. We also provide estimates for the premium of illiquidity. Keywords: Bonds ; Liquidity (Economics) Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-08&r=all 129. Density selection and combination under model ambiguity: an application to stock returns Stefania D'Amico This paper proposes a method for predicting the probability density of a variable of interest in the presence of model ambiguity. In the first step, each candidate parametric model is estimated minimizing the Kullback-Leibler 'distance' (KLD) from a reference nonparametric density estimate. Given that the KLD represents a measure of uncertainty about the true structure, in the second step, its information content is used to rank and combine the estimated models. The paper shows that the KLD between the nonparametric and the parametric density estimates is asymptotically normally distributed. This result leads to determining the weights in the model combination, using the distribution function of a Normal centered on the average performance of all plausible models. Consequently, the final weight is determined by the ability of a given model to perform better than the average. As such, this combination technique does not require the true structure to belong to the set of competing models and is computationally simple. I apply the proposed method to estimate the density function of daily stock returns under different phases of the business cycle. The results indicate that the double Gamma distribution is superior to the Gaussian distribution in modeling stock returns, and that the combination outperforms each individual candidate model both in- and out-of- sample. Keywords: Rate of return ; Econometric models ; Stocks Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-09&r=all 130. An empirical analysis of bond recovery rates: exploring a structural view of default Daniel Covitz Song Han A frictionless, structural view of default has the unrealistic implication that recovery rates on bonds, measured at default, should be close to 100 percent. This suggests that standard "frictions" such as default delays, corporate-valuation jumps, and bankruptcy costs may be important drivers of recovery rates. A structural view also suggests the existence of nonlinearities in the empirical relationship between recovery rates and their determinants. We explore these implications empirically and find direct evidence of jumps, and also evidence of the predicted nonlinearities. In particular, recovery rates increase as economic conditions improve from low levels, but decrease as economic conditions become robust. This suggests that improving economic conditions tend to boost firm values, but firms may tend to default during particularly robust times only when they have experienced large, negative shocks. Keywords: Bonds ; Default (Finance) ; Risk management Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-10&r=all 131. Job-hopping in Silicon Valley: some evidence concerning the micro-foundations of a high technology cluster Bruce Fallick Charles A. Fleischman James B. Rebitzer In Silicon Valley's computer cluster, skilled employees are reported to move rapidly between competing firms. If true, this job-hopping facilitates the reallocation of resources towards firms with superior innovations, but it also creates human capital externalities that reduce incentives to invest in new knowledge. Outside of California, employers can use non-compete agreements to reduce mobility costs, but these agreements are unenforceable under California law. Until now, the claim of "hyper-mobility" of workers in Silicon has not been rigorously investigated. Using new data on labor mobility we find higher rates of job-hopping for college-educated men in Silicon Valley's computer industry than in computer clusters located out of the state. Mobility rates in other California computer clusters are similar to Silicon Valley's, suggesting some role for state laws restricting non-compete agreements. Outside of the computer industry, California's mobility rates are no higher than elsewhere. Keywords: Labor mobility - California ; Computer industry - California ; High technology industries - California Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-11&r=all 132. A nonlinear look at trend MFP growth and the business cycle: result from a hybrid Kalman/Markov switching model Mark W. French The cycle in output and hours worked is not symmetric: it behaves differently around recessions than in expansions. Similarly, the trend in multifactor productivity (MFP) seems to pass through different regimes; there was an extended period of slow MFP growth from about 1973 through 1995, and faster growth thereafter. Typical linear models and linear filters such as the Kalman filter deal poorly with asymmetry and regime changes. This paper attempts to determine more accurately and quickly any shifts in trend MFP growth, using a nonlinear Kalman/Markov filter with a model of the unobserved components of output and hours. This hybrid model incorporates regime-switching in the business cycle and in the trend growth of MFP. Estimation results are promising. The hybrid model and associated filter appear to be faster than the basic Kalman filter in detecting turning points in the smoothed conditional mean estimate of trend MFP growth; in addition, the hybrid model avoids some of the Kalman filter's biases in reconstructing historical business cycles and the MFP trend. Keywords: Business cycles ; Econometric models ; Nonlinear theories Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-12&r=all 133. Housing, house prices, and the equity premium puzzle Morris A. Davis Robert F. Martin Many recent papers have claimed that when housing services are treated separately from other forms of consumption in utility, a wide range of economic puzzles such as the equity premium puzzle can be explained. Our paper challenges these claims. The key assumption embedded in this literature is that households are not very willing to substitute housing services for consumption. We show that housing services and consumption must be much more substitutable than has been assumed for a neoclassical consumption model to be consistent with U.S. house price data. Further, when forced to match both historical house prices and stock returns, the lowest risk-free rate the model can generate is 11 percent. Keywords: Housing - Prices ; Housing Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-13&r=all 134. Tracking the source of the decline in GDP volatility: an analysis of the automobile industry Valerie A. Ramey Daniel J. Vine Recent papers by Kim and Nelson (1999) and McConnell and Perez- Quiros (2000) uncover a dramatic decline in the volatility of U.S. GDP growth beginning in 1984. Determining whether the source is good luck, good policy or better inventory management has since developed into an active area of research. This paper seeks to shed light on the source of the decline in volatility by studying the behavior of the U.S. automobile industry, where the changes in volatility have mirrored those of the aggregate data. We find that changes in the relative volatility of sales and output, which have been interpreted by some as evidence of improved inventory management, could in fact be the result of changes in the process driving automobile sales. We first show that the autocorrelation of sales dropped during the 1980s, and that the behavior of interest rates may be the force behind the change in sales persistence. A simulation of the assembly plants' cost function illustrates that the persistence of sales is a key determinant of output volatility. A comparison of the ways in which assembly plants scheduled production in the 1990s relative to the 1970s supports the intuition of the simulation. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-14&r=all 135. The effects of competition from large, multimarket firms on the performance of small, single-market firms: evidence from the banking industry Allen N. Berger Astrid A. Dick Lawrence G. Goldberg Lawrence J. White We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis-on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single- market banks through revenues versus costs. The results may shed light as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-15&r=all 136. The effects of local banking market structure on the banking-lending channel of monetary policy Robert M. Adams Dean F. Amel We study the relationship between banking competition and the transmission of monetary policy through the bank lending channel. Using business small loan origination data provided from the Community Reinvestment Act from 1996-2002 in our analysis, we are able to reaffirm the existence of the bank lending channel of monetary transmission. Moreover, we find that the impact of monetary policy on loan originations is weaker in more concentrated markets. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-16&r=all 137. Are firms or workers behind the shift away from DB pension plan? Stephanie Aaronson Julia Coronado One of the most striking changes in the composition of household retirement savings over the past 20 years has been the shift from defined benefit to defined contribution pension plans. Understanding the factors underlying this shift is important for determining its impact on retirement saving adequacy. Yet previous research, which has mostly focused on factors affecting all firms, such as regulation or increased longevity, has yielded little consensus. In this study we estimate the contribution of changing workforce characteristics and production environments to the shift in pension coverage. Our findings suggest that, while aggregate factors explain a large part of the movement, changes in worker demand, due to evolving workforce characteristics, also contributed notably. On the supply side, we find support for the theory that technical change has reduced the value of DB plans. These supply and demand factors are particularly important for explaining the significant variation in cross-industry trends in pension coverage. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-17&r=all 138. Yesterday's bad times are today's good old times: retail price changes in the 1890s were smaller, less frequent, and more permanent Alan Kackmeister This paper compares nominal price rigidity in retail stores during two 28-month periods: 1889-1891 and 1997-1999. The 1889- 1891 microdata price quotes show: 1. a lower frequency of price changes; 2. a smaller average magnitude of price changes; 3. fewer "small" price changes; and, 4. fewer temporary price reductions. These differences are consistent with the 1889-1891 period having a higher cost of changing prices resulting in less adjustment to transitory price shocks. Changes in the retailing environment that may have led to a higher cost of changing prices in 1889-1891 are discussed. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-18&r=all 139. Good news is no news? The impact of credit rating changes on the pricing of asset-backed securities John Ammer Nathanael Clinton We assess the impact of credit ratings on the pricing of structured financial products, using a sample of more than 1300 changes in Moody's or Standard and Poor's (S&P) ratings of U.S. asset-backed securities (ABS). We find that rating downgrades tend to be accompanied by negative returns and widening spreads, with the average effects stronger than those that have been reported in prior research on corporate and sovereign bond ratings. A portion of the negative implications of ABS downgrades are anticipated by price movements ahead of the rating action, although to a lesser degree than has been found for bond ratings. Accordingly, ABS market participants appear to rely somewhat more on rating agencies as a source of negative news about credit risk. Nevertheless, because ABS rating downgrades are relatively rare events, their effects account for only a small fraction of the variance of returns. In contrast to our results on downgrades, market reactions to ABS rating upgrades are virtually zero, on average. Together, the results imply even greater asymmetry in the value-relevance of ABS rating changes than has been found in event studies of changes in bond ratings. Keywords: Asset-backed financing ; Credit ratings Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:809&r=all 140. Cash flows and discount rates, industry and country effects, and co-movement in stock returns John Ammer Jon Wongswan This paper examines the relative importance of global, country- specific, and industry-specific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country, all-country, global industry, and world market index returns so we can produce a richer characterization of same-industry and same-country effects in stock returns. Unlike previous equity return decomposition papers, we exploit information in equity analysts' earnings forecasts when projecting future variables from our reduced-form equation systems. Our findings confirm previous research that finds patterns of correlation that suggest a richer underlying structure than just a single common global factor. Furthermore, our results suggest that global, within- country, and same-industry effects are all important for both of the two key components of stock returns: news about future dividends and news about future discount rates. In particular, within-industry covariation in news about future discount rates appears to be just as important as within-country covariation in news about future discount rates. We also find that the idiosyncratic component of cash flow news is more important than the global component, while the reverse is true for news about future discount rates. Our results are broadly consistent with co- movement in future discount rates arising from perceptions of common elements of risk, rather than national market segmentation. Keywords: Stock market ; International finance ; Globalization Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:818&r=all 141. What makes investors over or underweight? explaining international appetites for foreign equities Carol C. Bertaut Linda S. Kole Using data from the IMF Coordinated Portfolio Investment Surveys conducted in 2001, we analyze the determinants of 31 countries' international equity holdings. We show that investors in all countries underweight U.S. equities in their portfolios, many by more than they underweight foreign equities in general. Such behavior is surprising given the common perception of the United States as a desirable investment destination due to its well- developed legal and regulatory environment. Instead we find that investors in some countries are overweight in equities from other countries with which they have close regional or political ties. Such ties, along with distance, trade, issuance of U.S. ADRs or cross-listing on the London Stock exchange, market concentration, and estimated betas, help explain patterns of diversification. However, even when all these variables are included, we find significant fixed effects for most countries, suggesting that a considerable amount of cross-country variation in investment positions and in home bias remains to be explained. Our work confirms previous findings and extends results most completely documented for the United States to other major investor countries. But it also suggests caution should be used when interpreting results derived from studies of one or a few countries. Keywords: Investments, Foreign ; International finance Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:819&r=all 142. The value of financial intermediaries: empirical evidence from syndicated loans to emerging market borrowers Gregory P. Nini Empirical estimates of the benefit of financial intermediation are constructed by examining the role played by local banks in facilitating syndicated loans to borrowers in emerging market countries. Assuming that local banks possess a superior monitoring ability, the market is ideal for studying the value of intermediation since cross-border lending into emerging markets is plagued by particularly high information and agency costs and the supply of local bank capital is in limited short run supply. Using variation in the propensity of local banks to participate in foreign arranged syndicates, there are two economically important results. First, local banks are much more likely to participate in unconditionally riskier loans. Second, after controlling for borrower characteristics, loan characteristics, and the endogeneity of the local bank lending decision, loans with local bank participation have spreads that are 10 percent lower (29 basis points) than otherwise similar loans. Combined, the results support the conclusion that local banks, a particularly special type of financial intermediary, provide value by considerably reducing financing costs, especially for riskier borrowers. Keywords: Bank loans ; Developing countries ; Syndicates ( Finance) Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:820&r=all 143. Global financial integration: a collection of new research Mark Carey This introductory note summarizes and draws together the work reported in eight research papers written by staff economists of the Board's Division of International Finance as part of a project on global financial integration. The eight papers are also International Discussion Finance Discussion Papers (IFDPs), the numbers of which are specified on the table of contents that appears herein. When viewing this introduction online, the paper titles appearing on the table-of-contents page are web links that may be used to navigate directly to each paper's on-line file. Keywords: International finance ; International economic integration Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:821&r=all 144. Growth-led exports: is variety the spice of trade? Joseph E. Gagnon Fast-growing countries tend to experience rapid export growth with little secular change in their terms of trade. This contradicts the standard Armington trade model, which predicts that fast-growing countries can experience rapid export growth only to the extent that they accept declining terms of trade. This paper generalizes the monopolistic competition trade model of Helpman and Krugman (1985), providing a basis for growth-led exports without declining terms of trade. The key mechanism behind this result is that fast-growing countries are able to develop new varieties of products that can be exported without pushing down the prices of existing products. There is strong support for the new model in long-run export growth of many countries in the post-war era. Keywords: International trade ; Product differentiation Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:822&r=all 145. The high-frequency effects of U.S. macroeconomic data releases on prices and trading activity in the global interdealer foreign exchange market Alain P. Chaboud Sergey Chernenko Edward Howorka Raj S. Krishnasami Iyer David Liu Jonathan H. Wright We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar- yen trading. We study the effects of scheduled U.S. macroeconomic data releases, first confirming the finding of recent literature that the conditional mean of the exchange rate responds very quickly to the unexpected component of data releases. We next study the effects of data releases on trading volumes. News releases cause volume to rise, and to remain elevated for a longer period. However, in contrast to the result for the level of the exchange rate, even if the data release is entirely in line with expectations, we find that there is still typically a large pickup in trading volume. Keywords: Foreign exchange ; Foreign exchange rates ; International trade Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:823&r=all 146. An assessment of the impact of Japanese foreign exchange intervention: 1991-2004 Alain P. Chaboud Owen Humpage We analyze the short-term price impact of Japanese foreign exchange intervention operations between 1991 and 2004, using official data from Japan's Ministry of Finance. Over the period as a whole, we find some evidence of a modest "against the wind" effect, but interventions do not have value as a forecast that the exchange rate will move in a direction consistent with the operations. Interventions conducted between 1995 and 2002, which were large and infrequent, met with a much higher degree of success. For the most recent episode of intervention, in 2003 and 2004, despite the record size and frequency of the overall episode, it is difficult to statistically distinguish the pattern of exchange rate movements on intervention days from that of all the days in that particular subperiod, showing little effectiveness. Still, while the evidence of Japanese intervention effectiveness is modest overall, it appears to be stronger than that found using similar techniques for U.S. intervention operations conducted in the 1980s and 1990s. Keywords: Foreign exchange administration - Japan Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:824&r=all 147. Expansionary fiscal shocks and the trade deficit Christopher J. Erceg Luca Guerrieri Christopher Gust In this paper, we use an open economy DGE model (SIGMA) to assess the quantitative effects of fiscal shocks on the trade balance in the United States. We examine the effects of two alternative fiscal shocks: a rise in government consumption, and a reduction in the labor income tax rate. Our salient finding is that a fiscal deficit has a relatively small effect on the U.S. trade balance, irrespective of whether the source is a spending increase or tax cut. In our benchmark calibration, we find that a rise in the fiscal deficit of one percentage point of GDP induces the trade balance to deteriorate by less than 0.2 percentage point of GDP. Noticeably larger effects are only likely to be elicited under implausibly high values of the short-run trade price elasticity. Keywords: Balance of trade ; Budget deficits Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:825&r=all 148. International risk-sharing and the transmission of productivity shocks Giancarlo Corsetti Luca Dedola Sylvain Leduc A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk- sharing, negatively correlated with cross-country consumption ratios. This paper shows that a standard international business cycle model with incomplete asset markets augmented with distribution services can account quantitatively for these properties of real exchange rates. Distribution services, intensive in local inputs, drive a wedge between producer and consumer prices, thus lowering the impact of terms-of-trade changes on optimal agents' decisions. This reduces the price elasticity of tradables separately from assumptions on preferences. Two very different patterns of the international transmission of positive technology shocks generate the observed degree of risk-sharing: one associated with improving, the other with deteriorating terms of trade and real exchange rate. In both cases, large equilibrium swings in international relative prices magnify consumption risk due to country-specific shocks, running counter to risk sharing. Suggestive evidence on the effect of productivity changes in U.S. manufacturing is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements in response to supply shocks invariably foster international risk-pooling. Keywords: International finance ; Foreign exchange rates ; Consumption (Economics) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:826&r=all 149. Financial market developments and economic activity during current account adjustments in industrial economies Hilary Croke Steven B. Kamin Sylvain Leduc Much has been written about prospects for U.S. current account adjustment, including the possibility of what is sometimes referred to as a "disorderly correction": a sharp fall in the exchange rate that boosts interest rates, depresses stock prices, and weakens economic activity. This paper assesses some of the empirical evidence bearing on the likelihood of the disorderly correction scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during, and after the onset of adjustment, building on the analysis of Freund (2000). We found little evidence among past adjustment episodes of the features highlighted by the disorderly correction hypothesis. Although some episodes in our sample experienced significant shortfalls in GDP growth after the onset of adjustment, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates, or declines in real stock prices. By contrast, it was among the episodes where GDP growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred. These findings do not preclude the possibility that future current account adjustments could be disruptive, but they weaken the historical basis for predicting such an outcome. Keywords: Balance of payments ; Balance of trade Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:827&r=all 150. Investment-specific and multifactor productivity in multi- sector open economies: data and analysis Luca Guerrieri Dale W. Henderson Jinill Kim In the last half of the 1990s, labor productivity growth rose in the U.S. and fell almost everywhere in Europe. We document changes in both capital deepening and multifactor productivity ( MFP) growth in both the information and communication technology ( ICT) and non-ICT sectors. We view MFP growth in the ICT sector as investment-specific productivity (ISP) growth. We perform simulations suggested by the data using a two-country DGE model with traded and nontraded goods. For ISP, we consider level increases and persistent growth rate increases that are symmetric across countries and allow for costs of adjusting capital-labor ratios that are higher in one country because of structural differences. ISP increases generate investment booms unless adjustment costs are too high. For MFP, we consider persistent growth rate shocks that are asymmetric. When such MFP shocks affect only traded goods (as often assumed), movements in `international' variables are qualitatively similar to those in the data. However, when they also affect nontraded goods (as suggested by the data), movements in some of the variables are not. To obtain plausible results for the growth rate shocks, it is necessary to assume slow recognition. Keywords: Industrial productivity ; Labor productivity Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:828&r=all 151. Optimal inflation persistence: Ramsey taxation with capital and habits Sanjay Chugh Ramsey models of fiscal and monetary policy with perfectly- competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets. Keywords: Inflation (Finance) ; Econometric models ; Monetary policy Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:829&r=all 152. Order flow and exchange rate dynamics in electronic brokerage system data David W. Berger Alain P. Chaboud Sergey V. Chernenko Edward Howorka Raj S. Iyer David Liu Jonathan H. Wright We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high- frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices. Keywords: Foreign exchange rates ; Electronic trading of securities Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:830&r=all 153. Adjusting Chinese bilateral trade data: how big is China's trade surplus John W. Schindler Dustin H. Beckett Hong Kong plays a prominent role as a re-exporter of a large percentage of trade bound for or coming from China. Current reporting practices in China and its trading partners do not fully reflect this role and therefore provide a misleading picture of the origin or ultimate destination of Chinese exports and imports. We adjust bilateral trade data for both China and its trading partners to correct for this problem. We also correct for differences due to markups in Hong Kong and different standards for reporting trade (c.i.f. versus f.o.b.). For 2003, we estimate that China's overall trade surplus was between $53 billion and $126 billion, larger than that reported in official Chinese data, but smaller than that reported by China's trading partners. We also provide evidence that, in general, the actual origin of a good that is transshipped through Hong Kong is correctly reported by the importing country, but the final destination of such goods is not correctly reported by the exporting country. Keywords: Balance of trade - China Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:831&r=all 154. A flexible finite-horizon identification of technology shocks Neville Francis Michael T. Owyang Jennifer E. Roush Recent empirical studies using infinite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming from their sensitivity to changes in model specification and the general poor performance of long run restrictions in Monte Carlo experiments. We propose a alternative identification that maximizes the contribution of technology shocks to the forecast error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its infinite horizon counterpart by producing less biased impulse responses and technology shocks that are more highly correlated with the technology shocks from the underlying model. For U.S. data, we show that the negative hours response is not robust to allowing a greater role for non-technology shocks in the forecast error variance share at a ten year horizon. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:832&r=all 155. Exchange rate pass-through to U.S. import prices: some new evidence Mario Marazzi Nathan Sheets Robert J. Vigfusson Jon Faust Joseph Gagnon Jaime Marquez Robert F. Martin Trevor Reeve John Rogers This paper documents a sustained decline in exchange rate pass- through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass- through are obtained when commodity prices are excluded from the regression. In this case, the pass-through coefficient captures both the direct effect of the exchange rate on import prices and an indirect effect operating through changes in commodity prices. Our work indicates that an increasing share of exchange rate pass- through has occurred through this commodity-price channel in recent years. While the source of the decline in pass-through is difficult to pin down with certainty, our work points to several factors, including the reduced share of (commodity-intensive) industrial supplies in U.S. imports and the increased presence of Chinese exporters in U.S. markets. We detect a particular step down in the pass-through coefficient around the time of the Asian financial crisis and document a shift in the export pricing behavior of emerging Asian firms around that time. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgif:833&r=all 156. Determinants of business cycle comovement: a robust analysis Marianne Baxter Michael Kouparitsas This paper investigates the determinants of business cycle comovement between countries. Our dataset includes over 100 countries, both developed and developing. We search for variables that are “robust” in explaining comovement, using the approach of Leamer (1983). Variables considered are (i) bilateral trade between countries; (ii) total trade in each country; (iii) sectoral structure; (iv) similarity in export and import baskets; v) factor endowments; and (vi) gravity variables. We find that bilateral trade is robust. However, two variables that the literature has argued are important for business cycles—industrial structure and currency unions—are found not to be robust. Keywords: Business cycles ; Trade Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-14&r=all 157. The occupational assimilation of Hispanics in the U.S.: evidence from panel data Maude Toussaint-Comeau This study investigates whether Hispanic immigrants assimilate in occupational status with natives and the factors that determine occupational status. A theoretical framework is proposed that models occupational status and convergence of Hispanics relative to U.S.-born non-Hispanics as a function of human capital and demographic exogenous variables, U.S. experience (assimilation effects) and periods of migration ( cohort effects). In addition, the model also controls for aggregate economic conditions and location effects. The empirical testing is based on a random effects model estimation procedure to accommodate the longitudinal PSID panel data used in the analysis. The results suggest that length of time resided in the U.S. narrows the occupational gap between Hispanic immigrants and non- Hispanic Whites and U.S.- born Hispanic counterparts. ; The level of individuals’ human capital affects the rate of occupational mobility and determines whether convergence occurs in occupational status. Mexican immigrants with low human capital start in occupations with relatively low status and they do not experience much occupational mobility. Their occupational status does not converge with that of non-Hispanic or U.S.-born Hispanic counterparts. However, Mexican immigrants with high human capital experience occupational mobility, and catch up with non-Hispanic Whites after 15 years and with U.S.-born Hispanics after 10 years of working in the U.S. Keywords: Hispanic Americans - Population ; Immigrants ; Labor mobility ; Labor market Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-15&r=all 158. Reading, writing, and raisinets: are school finances contributing to children’s obesity? Patricia M. Anderson Kristin Butcher The proportion of adolescents in the United States who are obese has nearly tripled over the last two decades. At the same time, schools, often citing financial pressures, have given students greater access to “junk” foods and soda pop, using proceeds from these sales to fund school programs. We examine whether schools under financial pressure are more likely to adopt potentially unhealthful food policies. Next, we examine whether students’ Body Mass Index (BMI) is higher in counties where a greater proportion of schools are predicted to allow these food policies. Because the financial pressure variables that predict school food policies are unlikely to affect BMI directly, this two step estimation strategy addresses the potential endogeneity of school food policies. ; We find that a 10 percentage point increase in the proportion of schools in a county that allow students access to junk food leads to about a one percent increase in students’ BMI, on average. However, this average effect is entirely driven by adolescents who have an overweight parent, for whom the effect of such food policies is much larger ( 2.2%). This suggests that those adolescents who have a genetic or family susceptibility to obesity are most affected by the school food environment. A rough calculation suggests that the increase in availability of junk foods in schools can account for about one-fifth of the increase in average BMI among adolescents over the last decade. Keywords: Overweight children ; Education ; Junk food Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-16&r=all 159. Learning by observing: information spillovers in the execution and valuation of commercial bank M&As Gayle DeLong Robert DeYoung We hypothesize that banks become better able to manage acquisitions, and investors become better able to value those acquisitions, as these parties ‘learn-by-observing’ information that spills-over from previous bank M&As. We find evidence consistent with these hypotheses for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. Our theory and our results are predicated on the idea that acquisitions of large and increasingly complex commercial banks were a relatively new phenomenon in the late-1980s, with no best practices to inform bank managers and little information upon which investors could base their valuations. Our findings provide a new explanation for why academic studies have found little evidence that bank mergers create value. Furthermore, our finding that investors become more accurate pricers of new phenomena as they observe greater quantities of those phenomena is consistent with the theory of semi-strong stock market efficiency. Keywords: Bank mergers ; Financial institutions Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-17&r=all 160. Prospects for immigrant-native wealth assimilation: evidence from financial market participation Una Okonkwo Osili Anna Paulson Because financial transactions are important for wealth accumulation, and rely on trust and confidence in institutions, the financial market behavior of immigrants can provide important insights into the assimilation process. Compared to the native- born, immigrants are less likely to own savings and checking accounts and these differences tend to persist over time. Our results suggest that a large share of the immigrant-native gap in financial market participation is driven by group differences in education, income, and geographic location. For a given immigrant, the likelihood of financial market participation decreases with higher levels of ethnic concentration in the metropolitan area. Keywords: Financial institutions ; Immigrants ; Wealth Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-18&r=all 161. Institutional quality and financial market development: evidence from international migrants in the U.S. Una Okonkwo Osili Anna Paulson A growing body of theoretical and empirical work identifies the ability of a country’s institutions to protect private property and provide incentives for investment as a key explanation for the persistent disparity in financial market development. We add to this literature by analyzing the impact of institutions on financial development using data on the financial decisions of immigrants and the native-born in the U.S. While all of the individuals whose decisions we analyze face the same formal institutional framework in the U.S., immigrants bring with them varied experiences with institutions in their home countries. We find that immigrants who come from countries with institutions that are more effective at protecting property rights are more likely to participate in U.S. financial markets. ; The effect of home country institutions is very persistent and impacts immigrants for the first 25 years that they spend in the U.S. Evidence from variation in the effect of home country institutions by age at migration, suggests that individuals appear to learn about home country institutions before the age of sixteen, probably in the home and potentially at school, rather than through direct experience. These findings are robust to alternative measures of institutional effectiveness and to various methods of controlling for unobserved individual characteristics. Keywords: Immigrants ; Financial markets Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-19&r=all 162. Are technology improvements contractionary? Susanto Basu John Fernald Miles Kimball Yes. We construct a measure of aggregate technology change, controlling for varying utilization of capital and labor, non- constant returns and imperfect competition, and aggregation effects. On impact, when technology improves, input use and non- residential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. We discuss what models could be consistent with this evidence. For example, standard one-sector real-business-cycle models are not, since they generally predict that technology improvements are expansionary, with inputs and ( especially) output rising immediately. However, the evidence is consistent with simple sticky-price models, which predict the results we find: When technology improves, input use and investment demand generally fall in the short run, and output itself may also fall. Keywords: Technology - Economic aspects Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-20&r=all 163. The minimum wage and restaurant prices Daniel Aaronson Eric French James MacDonald Using both store-level and aggregated price data from the food away from home component of the Consumer Price Index survey, we show that restaurant prices rise in response to an increase in the minimum wage. These results hold up when using several different sources of variation in the data. We interpret these findings within a model of employment determination. The model implies that minimum wage hikes cause employment to fall and prices to rise if labor markets are competitive but potentially cause employment to rise and prices to fall if labor markets are monopsonistic. Therefore, our empirical results appear to provide evidence against the hypothesis that monopsony power is important for understanding the small observed employment responses to minimum wage changes. Keywords: Labor market ; Wages ; Wages - Restaurants Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-21&r=all 164. Betcha can’t acquire just one: merger programs and compensation Richard J. Rosen This paper examines the evolution of merger programs, that is, repeated acquisitions by the same firm. Most acquisitions are made by firms with merger programs. Acquisitions that are part of programs are different from one-off acquisitions both in the effect on CEO compensation and in the reaction of the stock market. CEO compensation rises more after growth from program acquisitions than after internal growth or growth from one-off acquisitions. During a merger program, the increase in CEO compensation is much larger when the acquirer’s stock price is increasing than at other times. This is not true for other types of growth. Merger programs also show a distinct evolution. Initially, program mergers are received better by the stock market than are one- off mergers. ; As a program progresses, however, the acquisitions tend to have lower announcement reactions and long-run returns. In addition, the effect on CEO compensation is smaller for mergers later in a program. There is evidence that some firms are predisposed to make acquisitions. Firms that have made acquisitions in the recent past and that already pay their CEOs well are more likely to make future acquisitions. This suggests that there may be a managerial motivation for merger programs: firms where CEOs can expect to get large compensation increases from acquisitions are more likely to have merger programs. Keywords: Bank mergers ; Bank management Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-22&r=all 165. Not working: demographic changes, policy changes, and the distribution of weeks (not) worked Lisa Barrow Kristin F. Butcher >From 1978 to 2000 the fraction of adult men in full-year non- employment increased from 17.1 to 21.6 percent. Previous research focused on the role of disability insurance policy and wage structure changes to explain this increase. Using Current Population Surveys from 1979 to 2003 we assess how much of the changes in full-year non-employment can be explained by demographic changes, possibly linked to health. With our empirical strategy we examine how 1978 to 2000 changes in demographic characteristics would have changed the distribution of weeks worked if policies and macroeconomic conditions remained as they were in 1978. For prime-aged men, we find changes in age, race, and ethnicity can “explain” 14 to 33 percent of the increase in full-year non-employment, without any change in policy or wage structure. For prime-aged women, changes in demographics also would have predicted increases in full-year nonemployment, when in fact we saw dramatic decreases. Keywords: Demography ; Labor policy ; Labor market Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-23&r=all 166. The role of households' collateralized debts in macroeconomic stabilization Jeffrey R. Campbell Zvi Hercowitz Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases. Keywords: Households - Economic aspects ; Macroeconomics ; Labor supply Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-24&r=all 167. Advertising and pricing at multiple-output firms: evidence from U.S. thrift institutions Robert DeYoung Evren Ors We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the U. S. between 1994 and 2000. We find some support for each of our hypotheses – branding, information, Dorfman-Steiner, structure- advertising, and structure-price – with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts. Keywords: Advertising ; Thrift institutions Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-25&r=all 168. Monetary policy with state contingent interest rates Bernardino Adao Isabel Correia Pedro Teles What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate instruments under uncertainty are state- contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance. Keywords: Monetary policy ; Interest rates Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-26&r=all 169. Comparing location decisions of domestic and foreign auto supplier plants Thomas Klier Paul Ma Daniel McMillen Plant locations in the U.S. auto industry have been moving southward for some time now. This paper utilizes a comprehensive dataset of the U.S. auto industry and focuses on plant location decisions of auto supplier plants that were opened less than 15 years ago in the U.S. We find that agglomeration continues to matter: suppliers want to be close to each other as well as to their assembly plant customers. We also find evidence of differences in location factors for domestic and foreign suppliers. Foreign suppliers exhibit a stronger preference to be near highways, other foreign suppliers and foreign assembly plants. That helps explain the different location patterns observed for these two groups within the auto region. Keywords: Automobile industry and trade ; Automobiles - Prices ; Industrial location Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-27&r=all 170. China's export growth and U.S. trade policy Chad Bown Meredith Crowley This paper examines how US special import restrictions affect the growth of China's exports to countries other than the US. We estimate an empirical model of trade deflection and trade depression of roughly 5100 commodities exported by China to 37 countries between 1992 and 2001. Our estimation yields evidence that US trade restrictions deflect Chinese exports to third, non- US markets. Imposition of a US antidumping duty against China leads the growth rate of targeted commodities to increase approximately 25 percentage points. Our results on the deflection of Chinese exports vary across commodity, with the strongest evidence of trade deflection appearing in the steel, pharmaceuticals and manufactured goods industries. Keywords: Exports ; Trade Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-28&r=all 171. Where do manufacturing firms locate their headquarters? J. Vernon Henderson Yukako Ono Firms’ headquarters [HQ] support their production activity, by gathering information and outsourcing business services, as well as, managing, evaluating, and coordinating internal firm activities. In search of a better location for these functions, firms often separate the HQ function physically from their production facilities and construct stand-alone HQs. By locating its HQ in a large, service oriented metro area away from its production facilities, a firm may be better able to out-source service functions in that local metro market and also to gather information about market conditions for their products. However if the firm locates the HQ away from its production activity, that increases the coordination costs in managing plant activities. In this paper we empirically analyze the trade-off of these two considerations. Keywords: Corporations - Headquarters ; Industrial location ; Manufactures Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-29&r=all 172. Monetary policy with single instrument feedback rules Bernardino Adao Isabel Correia Pedro Teles We consider a standard cash in advance monetary model with flexible prices or prices set in advance and show that there are interest rate or money supply rules such that equilibria are unique. The existence of these single instrument rules depends on whether the economy has an infinite horizon or an arbitrarily large but finite horizon. Keywords: Monetary policy ; Prices Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-30&r=all 173. Do returns to schooling differ by race and ethnicity? Lisa Barrow Cecilia Elena Rouse Using data from the U.S. Decennial Census and the National Longitudinal Surveys, we find little evidence of differences in the return to schooling across racial and ethnic groups, even with attempts to control for ability and measurement error biases. While our point estimates are relatively similar across racial and ethnic groups, our conclusion is driven in part by relatively large standard errors. ; That said, we find no evidence that returns to schooling are lower for African Americans or Hispanics than for non-minorities. As a result, policies that increase education among the low-skilled have a good possibility of increasing economic well-being and reducing inequality. More generally, our analysis suggests further research is needed to better understand the nature of measurement error and ability bias across subgroups in order to fully understand potential heterogeneity in the return to schooling across the population. Keywords: Education ; Employees - Training of Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-05-02&r=all 174. A puzzle of card payment pricing : why are merchants still accepting card payments? Fumiko Hayashi This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. Such merchant behaviors can be explained by competition among merchants and/or the effectiveness of the merchant’s card acceptance in shifting cardholders’ demand for goods upward. The prevalent assumption used in payment card literature—merchants accept cards only when their transactional benefits are higher than the fees they pay—holds only for a monopoly merchant who faces an inelastic consumer demand. A card network that wants all merchants in a given industry to accept cards sets a lower merchant fee initially and then gradually increases it to the highest possible level, which may be higher than the sum of the merchant’s transactional benefit and the merchant’s initial margin without cards. Such merchant fees potentially create inequality between cardholders and non- cardholders. Keywords: Credit cards Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedkpw:psrwp04-02&r=all 175. Identification and normalization in Markov switching models of "business cycles" Penelope A. Smith Peter M. Summers Recent work by Hamilton, Waggoner and Zha (2004) has demonstrated the importance of identification and normalization in econometric models. In this paper, we use the popular class of two-state Markov switching models to illustrate the consequences of alternative identification schemes for empirical analysis of business cycles. A defining feature of (classical) recessions is that economic activity declines on average. Somewhat surprisingly however, this property has been ignored in most published work that uses Markov switching models to study business cycles. We demonstrate that this matters: inferences from Markov switching models can be dramatically affected by whether or not average growth in the 'low state' is required to be negative, rather than simply below trend. Although such a restriction may not be appropriate in all applications, the difference is crucial if one wants to draw conclusions about 'recessions' based on the estimated model parameters. Keywords: Business cycles ; Recessions Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp04-09&r=all 176. Improving forecast accuracy by combining recursive and rolling forecasts Todd E. Clark Michael W. McCracken This paper presents analytical, Monte Carlo, and empirical evidence on the effectiveness of combining recursive and rolling forecasts when linear predictive models are subject to structural change. We first provide a characterization of the bias-variance tradeoff faced when choosing between either the recursive and rolling schemes or a scalar convex combination of the two. From that, we derive pointwise optimal, time-varying and data- dependent observation windows and combining weights designed to minimize mean square forecast error. We then proceed to consider other methods of forecast combination, including Bayesian methods that shrink the rolling forecast to the recursive and Bayesian model averaging. Monte Carlo experiments and several empirical examples indicate that although the recursive scheme is often difficult to beat, when gains can be obtained, some form of shrinkage can often provide improvements in forecast accuracy relative to forecasts made using the recursive scheme or the rolling scheme with a fixed window width. Keywords: Forecasting Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp04-10&r=all 177. Barriers to network-specific innovation Antoine Martin Michael J. Orlando We consider an environment in which participants make payments over a network and can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and usage of the network is high or no agents invest and usage of the network is low. The high-usage equilibrium can be implemented through introduction of a coordinator. Under monopoly network ownership, however, fixed costs associated with use of the network-specific technology result in a hold-up problem that implements the low- investment equilibrium. And even where subsidies can avoid such hold-up, optimal monopoly pricing of network usage may avoid investment in the network-specific technology if demand for on- network transactions is sufficiently inelastic. Keywords: Payment systems Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp04-11&r=all 178. Why are some cities so crowded? Jordan Rappaport Population density varies widely across U.S. cities. A calibrated general equilibrium model in which productivity and quality-of-life differ across locations can account for such variation. Individuals derive utility from consumption of a traded good, a nontraded good, leisure, and quality-of-life. The traded and nontraded goods are produced by combining mobile labor, mobile capital, and non-mobile land. An eight-fold increase in population density requires an approximate 50 percent productivity differential or an approximate 20 percent compensating differential. A thirty-two-fold increase in population density requires an approximate 95 percent productivity differential or a 33 percent compensating differential. Empirical evidence suggests productivity and quality-of-life differentials of this magnitude are plausible. The model implies that broad-based technological progress can induce substantial migration to localities with high quality-of- life. Keywords: Productivity ; Population ; Quality of life ; Cities and towns Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp04-12&r=all 179. The performance of monetary and fiscal rules in an open economy with imperfect capital mobility Marcela Meirelles-Aurelio This paper studies monetary and fiscal policy rules, and investigates the characteristics of optimal policies. The central focus of the paper is on the comparison of two types of fiscal rules: a balanced budget and a target for the primary surplus. Balanced budget rules (or, more generally, numeric ceilings to the overall budget deficit) are criticized because they may dictate higher taxes in periods of weak economic activity. The primary surplus rule, in contrast, has a less pro-cyclical nature, given that it does not require higher fiscal austerity in periods when the cost of servicing public debt is higher. In a nutshell, it allows a higher degree of tax smoothing. It is not clear, however, if (inevitable) fiscal adjustments should be postponed. These issues are investigated in the context of a dynamic stochastic general equilibrium model that describes an open economy, with capital accumulation, and where nominal rigidities are present. The model shows that previous findings drawn from open economy models—in particular with respect to the characteristics of optimal monetary policy—do not hold once the implications of certain fiscal regimes are taken into account, and once different scenarios concerning the degree of capital mobility are considered. The model is calibrated and simulated for the case of Brazil, a country that since 1999 has targets for inflation and for the primary surplus. The main finding is that a fiscal regime characterized by a target for the primary surplus delivers superior economic performance, a property captured by the shape of the efficient policy frontier. Keywords: Monetary policy ; Fiscal policy ; Inflation (Finance) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-01&r=all 180. Do productivity growth, budget deficits, and monetary policy actions affect real interest rates? evidence from macroeconomic announcement data Kevin L. Kliesen Frank A. Schmid Real-business-cycle models suggest that an increase in the rate of productivity growth increases the real rate of interest. But economic theory is ambiguous when it comes to the effect of government budget deficits on the real rate of interest. Similarly, little is known about the effect of monetary policy actions on real long-term interest rates. We investigate these questions empirically, using macroeconomic announcement data. We find that the real long-term rate of interest responds positively to surprises in labor productivity growth. However, we do not reject the hypothesis that the real long-term rate of interest does not respond to surprises in the size of the government*s budget deficit (or surplus). Finally, we find no support for the proposition that the Federal Reserve has information about its actions or the state of the real economy that is not in the pubic domain and, hence, priced in the real long-term interest rate. Keywords: Interest rates ; Monetary policy ; Fiscal policy Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-019&r=all 181. Cities, skills, and inequality Christopher H. Wheeler The surge in U.S. wage inequality over the past several decades is now commonly attributed to an increase in the returns paid to skill. Although theories differ with respect to why, specifically, this increase has come about, many agree that it is strongly tied to the increase in the relative supply of skilled (i.e. highly educated) workers in the U.S. labor market. A greater supply of skilled labor, for example, may have induced skill- biased technological change or generated greater stratification of workers by skill across firms or jobs. Given that metropolitan areas in the U.S. have long possessed more educated populations than non-metropolitan areas, these theories suggest that the rise in both the returns to skill and wage inequality should have been particularly pronounced in cities. Evidence from the U.S. Census over the period 1950 to 1990 supports both implications. Keywords: Wages ; Regional economics Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-020&r=all 182. Worker turnover, industry localization, and producer size Christopher H. Wheeler Empirically, large employers have been shown to devote greater resources to filling vacancies than small employers. Following this evidence, this paper offers a theory of producer size based on labor market search, whereby a key factor in the determination of producer's total employment is the ease with which workers can be found to fill jobs that are, periodically, vacated. Since the geographic localization of industry has long been conjectured to facilitate the search process, the model provides an explanation for the observed positive association between average producer size and the magnitude of an industry's presence within local labor markets. Keywords: Regional economics ; Labor market Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-021&r=all 183. The value of foreclosed property Anthony Pennington-Cross This paper examines the expected price appreciation of distressed property and compares it to the prevailing metropolitan area appreciation rate. The results show that the simple fact that the property is foreclosed indicates that it will be sold at a substantial discount (appreciate less than expected). The magnitude of the discount is sensitive to loan characteristics, legal restrictions, housing market conditions, and the bargaining position of the selling institution. Keywords: Real property Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-022&r=all 184. Industry localization and earnings inequality: evidence from U.S. manufacturing Christopher H. Wheeler While the productivity gains associated with the geographic concentration of industry (i.e. localization) are by now well- documented, little work has considered how those gains are distributed across individual workers. This paper offers evidence on the connection between total employment and the relative wage earnings of high- and low-skill workers (i.e. inequality) within two-digit manufacturing industries across the states and a collection of metropolitan areas in the U.S. between 1970 and 1990. Using two different measures - 90-10 percentile gaps in both overall and residual wages - I find that wage dispersion falls substantially as industry employment expands. Results from a simple decomposition of this relationship into average plant- size and plant-count components indicate overwhelmingly that average plant size is the primary driving mechanism. Although not necessarily inconsistent with theories appealing to intermediate inputs or technological spillovers, such findings are particularly supportive of Marshall's (1920) labor market pooling explanation for localization. Keywords: Wages ; Regional economics Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-023&r=all 185. Productivity and the geographic concentration of industry: the role of plant scale Christopher H. Wheeler A large body of research has established a positive connection between an industry's productivity and the magnitude of its presence within locally defined geographic areas. This paper examines the extent to which this relationship can be explained by a micro-level underpinning commonly associated with productivity: establishment scale. Looking at data on two-digit manufacturing across a sample of U.S. metropolitan areas, I find two primary results. First, average plant size - defined in terms of numbers of workers - increases substantially as an industry's employment in a metropolitan area rises. Second, results from a decomposition of localization effects on labor earnings into plant-size and plant-count components reveal that the widely observed, positive association between a worker's wage and the total employment in his or her own metropolitan area-industry derives predominantly from the former, not the latter. Localization economies, therefore, appear to be the product of plant-level organization rather than pure population effects. Keywords: Industrial productivity ; Regional economics Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-024&r=all 186. Near-rational exuberance James B. Bullard George W. Evans Seppo Honkapohja We study how the use of judgement or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria. Keywords: Monetary policy ; Macroeconomics Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-025&r=all 187. The monetary instrument matters William T. Gavin Benjamin D. Keen Michael R. Pakko This paper revisits the issue of money growth versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, we examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables. We show that inflation persistence and the variability of inflation relative to money growth depends on whether the central bank follows a money growth rule or an interest rate rule. With a money growth rule, inflation is not persistent and the price level is much more volatile than the money supply. Those counterfactual implications are eliminated by the use of interest rate rules whether prices are sticky or not. A central bank's utilization of interest rate rules, however, obscures the information content of monetary aggregates and also leads to subtle problems for econometricians trying to estimate money demand functions or to identify shocks to the trend and cycle components of the money stock. Keywords: Monetary policy ; Prices Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-026&r=all 188. Aggregate idiosyncratic volatility in G7 countries Hui Guo Robert Savickas The paper analyzes aggregate idiosyncratic volatility (IV) in G7 countries using recent data up to 2003. Consistent with Campbell, Lettau, Malkiel, and Xu's (2001) results obtained from U.S. data over the period 1962-97, we find that the equal-weighted IV exhibits a significant upward trend in the U.S. and some other countries in the extended sample. The trend, however, appears to be mainly due to the increasing number of publicly traded companies since we fail to uncover a similar trend in the value- weighted IV of all seven countries. IV is highly correlated across countries and we document a significant Granger causality from the U.S. to the other countries and vice versa. Moreover, while U.S. value-weighted IV has significant predictive power for international stock returns, the value-weighted IV of other countries helps forecast U.S. stock returns as well because of its co-movements with U.S. data. The results indicate that IV is a proxy for systematic risk. Keywords: Stock exchanges Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-027&r=all 189. International transmission of inflation among G-7 countries: a data-determined VAR analysis Jian Yang Hui Guo Zijun Wang We investigate the international transmission of inflation among G-7 countries using a data-determined vector autoregression analysis, as advocated by Swanson and Granger (1997). Over the period 1973 to 2003, we find that U.S. innovations have a large effect on inflation in the other countries, although they are not always the dominant international factor. Similarly, shocks to some other countries also have a statistically and economically significant influence on U.S. inflation. Moreover, our evidence indicates that U.S. inflation has become less vulnerable to foreign shocks since the early 1990s, mainly because of the diminished influence from Germany and France Keywords: International finance ; Time-series analysis Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-028&r=all 190. Is foreign exchange delta hedging risk priced? Hui Guo Christopher J. Neely If there is no priced risk - including volatility risk - associated with hedging an option, then expected delta hedging errors should be zero. This paper finds that delta hedging errors of a synthetic at-the-money call option on foreign exchange futures are significantly positive and cannot be explained by standard asset pricing models. However, we cannot rule out the hypothesis that delta hedging errors reflect rational pricing; foreign exchange volatility and stock market volatility predict them. Moreover, foreign exchange volatility also predicts excess stock market returns, indicating that foreign exchange volatility risk might be priced because of its relation to foreign exchange level risk. Keywords: Foreign exchange ; Assets (Accounting) ; Prices Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-029&r=all 191. Non-Markovian regime switching with endogenous states and time-varying state strengths Siddhartha Chib Michael J. Dueker This article presents a non-Markovian regime switching model in which the regime states depend on the sign of an autoregressive latent variable. The magnitude of the latent variable indexes the 'strength' of the state or how deeply the system is embedded in the current regime. In this model, regimes have dynamics, not only persistence, so that one regime can gradually give way to another. In this framework, it is natural to allow the autoregressive latent variable to be endogenous so that regimes are determined jointly with the observed data. We apply the model to GDP growth, as in Hamilton (1989), Albert and Chib (1993) and Filardo and Gordon (1998) to illustrate the relation of the regimes to NBER-dated recessions and the time-varying expected durations of regimes. The article makes use of the Metropolis- Hastings algorithm to make multi-move draws of the latent regime strength variable, where the extended Kalman filter provides a valid proposal density for the latent variable. Keywords: Time-series analysis ; Business cycles Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-030&r=all 192. The case for foreign exchange intervention: the government as a long-term speculator Christopher J. Neely This paper argues that major governments should act as long-term speculators by intervening to profit from floating exchange rates reversion to fundamentals. Such transactions would improve welfare by transferring risk from private agents to the risk- tolerant government. Interventions explicitly designed to profit the intervening authority would be more likely to be successful and, to the extent that they are, would reduce resource misallocation. Keywords: Foreign exchange Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-031&r=all 193. The importance of nonlinearity in reproducing business cycle features James Morley Jeremy M. Piger This paper considers the ability of simulated data from linear and nonlinear time-series models to reproduce features in U.S. real GDP data related to business cycle phases. We focus our analysis on a number of linear ARIMA models and nonlinear Markov- switching models. To determine the timing of business cycle phases for the simulated data, we present a model-free algorithm that is more successful than previous methods at matching NBER dates in the postwar data. We find that both linear and Markov- switching models are able to reproduce business cycle features such as the average growth rate in recessions, the average length of recessions, and the total number of recessions. However, we find that Markov-switching models are better than linear models at reproducing the variability of growth rates in different business cycle phases. Furthermore, certain Markov-switching specifications are able to reproduce high-growth recoveries following recessions and a strong correlation between the severity of a recession and the strength of the subsequent recovery. Thus, we conclude that nonlinearity is important in reproducing business cycle features. Keywords: Business cycles Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-032&r=all 194. Using extraneous information to analyze monetary policy in transition economies William T. Gavin David M. Kemme Empirical work in macroeconomics is plagued by small sample size and large idiosyncratic variation. This problem is especially severe in the case of transition economies. We use a mixed estimation method incorporating information from OECD country data to estimate the parameters of a reduced-form transition economy model. An exactly identified structural VAR model is then constructed to analyze monetary policy. The OECD information increases the precision of the impulse response functions in the transition economies. The method provides a systematic way to use extraneous information to analyze monetary policy in the transition economies where data availability is limited. Keywords: Monetary policy ; Macroeconomics Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-034&r=all 195. Term structure of risk under alternative econometric specifications Massimo Guidolin Allan Timmerman This paper characterizes the term structure of risk measures such as Value at Risk (VaR) and expected shortfall under different econometric approaches including multivariate regime switching, GARCH-in-mean models with student-t errors, two- component GARCH models and a non-parametric bootstrap. We show how to derive the risk measures for each of these models and document large variations in term structures across econometric specifications. An out-of-sample forecasting experiment applied to stock, bond and cash portfolios suggests that the best model is asset- and horizon specific but that the bootstrap and regime switching model are best overall for VaR levels of 5% and 1%, respectively. Keywords: Time-series analysis ; Econometric models Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-001&r=all 196. Strategic asset allocation and consumption decisions under multivariate regime switching Massimo Guidolin Allan Timmerman This paper studies strategic asset allocation and consumption choice in the presence of regime switching in asset returns. We find evidence that four separate regimes - characterized as crash, slow growth, bull and recovery states - are required to capture the joint distribution of stock and bond returns. Optimal asset allocations vary considerably across these states - both among bonds and stocks and among large and small stocks - and change over time as investors revise their estimates of the underlying state probabilities. In the crash state investors always allocate more of their portfolio to stocks the longer their investment horizon, while the optimal allocation to stocks declines as a function of the investment horizon in bull markets. The joint effects of learning about the underlying state probabilities and predictability of asset returns from the dividend yield give rise to a non-monotonic relationship between the investment horizon and the demand for stocks. Consumption-to-wealth ratios are found to depend on the underlying state and welfare costs from ignoring regime switching are substantial even after accounting for parameter uncertainty. Out-of- sample forecasting experiments confirm the economic importance of accounting for the presence of regimes in asset returns. Keywords: Investments ; Consumption (Economics) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-002&r=all 197. An econometric model of nonlinear dynamics in the joint distribution of stock and bond returns Massimo Guidolin Allan Timmerman This paper considers a variety of econometric models for the joint distribution of US stock and bond returns in the presence of regime switching dynamics. While simple two- or three-state models capture the univariate dynamics in bond and stock returns, a more complicated four state model with regimes characterized as crash, slow growth, bull and recovery states is required to capture their joint distribution. The transition probability matrix of this model has a very particular form. Exits from the crash state are almost always to the recovery state and occur with close to 50 percent chance suggesting a bounce-back effect from the crash to the recovery state. Keywords: Time-series analysis ; Stocks ; Bond market Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-003&r=all 198. Diamonds are forever, wars are not. Is conflict bad for private firms? Massimo Guidolin Eliana La Ferrara This paper studies the relationship between civil war and private investment in a poor, resource abundant country using microeconomic data for Angola. We focus on diamond mining firms and conduct an event study on the sudden end of the conflict, marked by the death of the rebel movement leader in 2002. We find that the stock market perceived this event as *bad news* rather than *good news* for companies holding concessions in Angola, as their abnormal returns declined by 4 percentage points. The event had no effect on a control portfolio of otherwise similar diamond mining companies. This finding is corroborated by other events and by the adoption of alternative methodologies. We also use nonparametric techniques with daily data on the intensity of conflict, and find that moderate levels of violence increased the abnormal returns of the *Angolan* portfolio. We interpret our results in the light of the widespread rent seeking in the Angolan mineral industry. Keywords: Microeconomics ; Mineral industries Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-004&r=all 199. Pessimistic beliefs under rational learning: quantitative implications for the equity premium puzzle Massimo Guidolin In the presence of infrequent but observable structural breaks, we show that a model in which the representative agent is on a rational learning path concerning the real consumption growth process can generate high equity premia and low risk-free interest rates. In fact, when the model is calibrated to U.S. consumption growth data, average risk premia and bond yields similar to those displayed by post- depression (1938-1999) U.S. historical experience are generated for low levels of risk aversion. Even ruling out pessimistic beliefs, recursive learning inflates the equity premium without requiring a strong curvature of the utility function. Simulations reveal that other moments of equilibrium asset returns are easily matched, chiefly excess volatility and the presence of ARCH effects. These findings are robust to a number of details of the simulation experiments, such as the number and dating of the breaks. Keywords: Assets (Accounting) ; Rational expectations (Economic theory) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-005&r=all 200. Optimal portfolio choice under regime switching, skew and kurtosis preferences Massimo Guidolin Allan Timmerman This paper proposes a new tractable approach to solving multi- period asset allocation problems. We assume that investor preferences are defined over moments of the terminal wealth distribution such as its skew and kurtosis. Time-variations in investment opportunities are driven by a regime switching process that can capture bull and bear states. We develop analytical methods that only require solving a small set of difference equations and thus are very convenient to use. These methods are applied to a simple portfolio selection problem involving choosing between a stock index and a risk-free asset in the presence of bull and bear states in the return distribution. If the market is in a bear state, investors increase allocations to stocks the longer their time horizon. Conversely, in bull markets it is optimal for investors to decrease allocations to stocks the longer their investment horizon. Keywords: Assets (Accounting) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-006&r=all 201. Size and value anomalies under regime shifts Massimo Guidolin Allan Timmerman This paper finds strong evidence of time-variations in the joint distribution of returns on a stock market portfolio and portfolios tracking size- and value effects. Mean returns, volatilities and correlations between these equity portfolios are found to be driven by underlying regimes that introduce short-run market timing opportunities for investors. The magnitude of the premia on the size and value portfolios and their hedging properties are found to vary significantly across regimes. Regimes are also found to have a large impact on the optimal asset allocation - especially under rebalancing - and on investors' welfare. Keywords: Assets (Accounting) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-007&r=all 202. Modelling the MIB30 implied volatility surface. Does market efficiency matter? Gianluca Cassesse Massimo Guidolin We analyze the volatility surface vs. moneyness and time to expiration implied by MIBO options written on the MIB30, the most important Italian stock index. We specify and fit a number of models of the implied volatility surface and find that it has a rich and interesting structure that strongly departs from a constant volatility, Black-Scholes benchmark. This result is robust to alternative econometric approaches, including generalized least squares approaches that take into account both the panel structure of the data and the likely presence of heteroskedasticity and serial correlation in the random disturbances. Finally we show that the degree of pricing efficiency of this options market can strongly condition the results of the econometric analysis and therefore our understanding of the pricing mechanism underlying observed MIBO option prices. Applications to value-at-risk and portfolio choice calculations illustrate the importance of using arbitrage-free data only. Keywords: Assets (Accounting) ; Prices Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-008&r=all 203. Properties of equilibrium asset prices under alternative learning schemes Massimo Guidolin Allan Timmerman This paper characterizes equilibrium asset prices under adaptive, rational and Bayesian learning schemes in a model where dividends evolve on a binomial lattice. The properties of equilibrium stock and bond prices under learning are shown to differ significantly compared with prices under full information rational expectations. Learning causes the discount factor and risk-neutral probability measure to become path-dependent and introduces serial correlation and volatility clustering in stock returns. We also derive conditions under which the expected value and volatility of stock prices will be higher under learning than under full information. Finally, we derive restrictions on prior beliefs under which Bayesian and rational learning lead to identical prices. Keywords: Assets (Accounting) ; Rational expectations (Economic theory) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-009&r=all 204. Predictable dynamics in the S&P 500 index options implied volatility surface Silvia Goncalves Massimo Guidolin One key stylized fact in the empirical option pricing literature is the existence of an implied volatility surface (IVS). The usual approach consists of fitting a linear model linking the implied volatility to the time to maturity and the moneyness, for each cross section of options data. However, recent empirical evidence suggests that the parameters characterizing the IVS change over time. In this paper we study whether the resulting predictability patterns in the IVS coefficients may be exploited in practice. We propose a two-stage approach to modeling and forecasting the S&P 500 index options IVS. In the first stage we model the surface along the cross-sectional moneyness and time-to- maturity dimensions, similarly to Dumas et al. (1998). In the second-stage we model the dynamics of the cross-sectional first- stage implied volatility surface coefficients by means of vector autoregression models. We find that not only the S&P 500 implied volatility surface can be successfully modeled, but also that its movements over time are highly predictable in a statistical sense. We then examine the economic significance of this statistical predictability with mixed findings. Whereas profitable delta- hedged positions can be set up that exploit the dynamics captured by the model under moderate transaction costs and when trading rules are selective in terms of expected gains from the trades, most of this profitability disappears when we increase the level of transaction costs and trade multiple contracts off wide segments of the IVS. This suggests that predictability of the time-varying S&P 500 implied volatility surface may be not inconsistent with market efficiency. Keywords: Assets (Accounting) ; Prices Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-010&r=all 205. High equity premia and crash fears. Rational foundations Massimo Guidolin We show that when in Lucas trees model the process for dividends is described by a lattice tree subject to infrequent but observable structural breaks, in equilibrium recursive rational learning may inflate the equity risk premium and reduce the risk- free interest rate for low levels of risk aversion. The key condition for these results to obtain is the presence of sufficient initial pessimism. The relevance of these findings is magnified by the fact that under full information our artificial economy cannot generate asset returns matching the empirical evidence for any positive relative risk aversion. Keywords: Assets (Accounting) ; Rational expectations (Economic theory) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-011&r=all 206. Home bias and high turnover in an overlapping generations model with learning Massimo Guidolin This paper develops a two-country OLG model under the assumption that investors are on a Bayesian learning path. While investors from both countries receive identical information flows, domestic investors start off with less precise prior beliefs concerning foreign fundamentals. On a learning path, differences in beliefs and estimation risk generate portfolio biases similar to those observed empirically: home bias in equity portfolios and trend- chasing in international flows. In addition, due to the higher volatility of the estimates of foreign state variables, our model produces excessive turnover in foreign securities as reported by Tesar and Werner (1995). We use real GDP data for the US and Europe to calibrate the model and produce simulations that show that under the assumption of a financial liberalization during the 1970s, substantial home bias and excess turnover should have been observed in the subsequent years. Keywords: International finance ; Investments Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-012&r=all 207. Why did income growth vary across states during the Great Depression? Thomas A. Garrett David C. Wheelock State per capita incomes became more disperse during the contraction phase of the Great Depression, and less disperse during the recovery phase. We investigate the effects of geography, industry structure, bank failures and fiscal policies on state income growth during each phase. We find that industrial composition and spatial interdependencies contributed to negative state income growth during the contraction, whereas New Deal spending and spatial interdependencies contributed to positive state income growth during the expansion phase. We find no evidence that banking conditions or state government expenditures influenced state income growth during the Great Depression. Keywords: Depressions Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-013&r=all 208. Search, money, and inflation under private information Huberto M. Ennis I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright’s model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmem:142&r=all 209. Patrick Kehoe’s comment on “Determinants of business cycle comovement: a robust analysis” by Marianne Baxter and Michael Kouparitsas Patrick J. Kehoe This paper by Baxter and Kouparitsas is an ambitious attempt to explore which variables are robust in explaining the correlations of bilateral GDP between countries at business cycle frequencies. Most of the variables turned out to be fragile. The main contribution is to show that countries with large amounts of bilateral trade tend to have robustly higher business cycle correlations. Another interesting finding is that neither currency unions nor industrial structure are robustly related to business cycle correlations. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:349&r=all 210. Productivity and the post-1990 U.S. economy Ellen R. McGrattan Edward C. Prescott In this paper, we show that ignoring corporate intangible investments gives a distorted picture of the post-1990 U.S. economy. In particular, ignoring intangible investments in the late 1990s leads one to conclude that productivity growth was modest, corporate profits were low, and corporate investment was at moderate levels. In fact, the late 1990s was a boom period for productivity growth, corporate profits, and corporate investment. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:350&r=all 211. Latin America in the rearview mirror Harold L. Cole Lee E. Ohanian Alvaro Riascos James A. Schmitz, Jr. Latin American countries are the only Western countries that are poor and that aren’t gaining ground on the United States. This paper evaluates why Latin America has not replicated Western economic success. We find that this failure is primarily due to TFP differences. Latin America’s TFP gap is not plausibly accounted for by human capital differences, but rather reflects inefficient production. We argue that competitive barriers are a promising channel for understanding low Latin TFP. We document that Latin America has many more international and domestic competitive barriers than do Western and successful East Asian countries. We also document a number of microeconomic cases in Latin America in which large reductions in competitive barriers increase productivity to Western levels. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:351&r=all 212. Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics Aubhik Khan Julia Thomas We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant- specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S, s) rules with respect to capital; thus, their investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though, with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, increase the persistence of aggregate investment, yielding a better match with the data. In general equilibrium, aggregate nonlinearities disappear, and investment rates are very persistent, regardless of adjustment costs. While the aggregate implications of lumpy investment change substantially in equilibrium, the inclusion of fixed costs or idiosyncratic shocks makes the average distribution of plant investment rates largely invariant to market-clearing movements in real wages and interest rates. Nonetheless, we find that understanding the dynamics of plant-level investment requires general equilibrium analysis. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:352&r=all 213. Sudden stops and output drops V. V. Chari Patrick J. Kehoe Ellen R. McGrattan We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working children provide a large fraction of family income. Since child labor income depends on family size, fertility decisions lock agents into specific political preferences, and multiple steady states can arise. The introduction of child labor laws can be triggered by skill-biased technological change that induces parents to choose smaller families. The model replicates features of the history of the U.K. in the nineteenth century, when regulations were introduced after a period of rising wage inequality, and coincided with rapidly declining fertility rates. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:353&r=all 214. The macroeconomics of child labor regulation Matthias Doepke Fabrizio Zilibotti We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working children provide a large fraction of family income. Since child labor income depends on family size, fertility decisions lock agents into specific political preferences, and multiple steady states can arise. The introduction of child labor laws can be triggered by skill-biased technological change that induces parents to choose smaller families. The model replicates features of the history of the U.K. in the nineteenth century, when regulations were introduced after a period of rising wage inequality, and coincided with rapidly declining fertility rates. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:354&r=all 215. Real effects of inflation through the redistribution of nominal wealth Matthias Doepke Martin Schneider This paper provides a quantitative assessment of the effects of inflation through changes in the value of nominal assets. We document nominal positions in the U.S. across sectors as well as different groups of households, and estimate the redistribution brought about by a moderate inflation episode. Redistribution takes the form of “ends-against-the-middle:” the middle class gains at the cost of the rich and poor. In addition, inflation favors the young over the old, and hurts foreigners. A calibrated OLG model is used to assess the macroeconomic implications of this redistribution under alternative fiscal policy rules. We show that inflation-induced redistribution has a persistent negative effect on output, but improves the weighted welfare of domestic households. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:355&r=all 216. Deflation and the international Great Depression: a productivity puzzle Harold L. Cole Lee E. Ohanian Ron Leung This paper presents a dynamic, stochastic general equilibrium study of the causes of the international Great Depression. We use a fully articulated model to assess the relative contributions of deflation/monetary shocks, which are the most commonly cited shocks for the Depression, and productivity shocks. We find that productivity is the dominant shock, accounting for about 2/3 of the Depression, with the monetary shock accounting for about 1/3. The main reason deflation doesn’t account for more of the Depression is because there is no systematic relationship between deflation and output during this period. Our finding that a persistent productivity shock is the key factor stands in contrast to the conventional view that a continuing sequence of unexpected deflation shocks was the major cause of the Depression. We also explore what factors might be causing the productivity shocks. We find some evidence that they are largely related to industrial activity, rather than agricultural activity, and that they are correlated with real exchange rates and non-deflationary shocks to the financial sector. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:356&r=all 217. The economics of ideas and intellectual property Michele Boldrin David K. Levine Innovation and the adoption of new ideas are fundamental to economic progress. Here we examine the underlying economics of the market for ideas. From a positive perspective, we examine how such markets function with and without government intervention. >From a normative perspective, we examine the pitfalls of existing institutions, and how they might be improved. We highlight recent research by ourselves and others challenging the notion that government awards of monopoly through patents and copyright are “the way” to provide appropriate incentives for innovation. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:357&r=all 218. A model of job and worker flows Nobuhiro Kiyotaki Ricardo Lagos We develop a model of gross job and worker flows and use it to study how the wages, permanent incomes, and employment status of individual workers evolve over time. Our model helps explain various features of labor markets, such as the size and persistence of the changes in income that workers experience due to displacements or job-to-job transitions, the length of job tenures and unemployment duration, and the amount of worker turnover in excess of job reallocation. We also examine the effects that labor market institutions and public policy have on the gross flows, as well as on the resulting wage distribution, employment, and aggregate output in the equilibrium. From a theoretical standpoint, we study the extent to which the competitive equilibrium achieves an efficient allocation of resources. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:358&r=all 219. Fertility and Social Security Michele Boldrin Mariacristina De Nardi Larry E. Jones The data show that an increase in government provided old-age pensions is strongly correlated with a reduction in fertility. What type of model is consistent with this finding? We explore this question using two models of fertility: one by Barro and Becker (1989), and one inspired by Caldwell (1978, 1982) and developed by Boldrin and Jones (2002). In Barro and Becker’s model parents have children because they perceive their children’s lives as a continuation of their own. In Boldrin and Jones’ framework parents procreate because children care about their parents’ utility, and thus provide them with old-age transfers. The effect of increases in government provided pensions on fertility in the Barro and Becker model is very small, whereas the effect on fertility in the Boldrin and Jones model is sizeable and accounts for between 55 and 65% of the observed Europe-U.S. fertility differences both across countries and across time. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:359&r=all 220. Intellectual property and market size Michele Boldrin David K. Levine Intellectual property protection involves a trade-off between the undesirability of monopoly and the desirable encouragement of creation and innovation. As the scale of the market increases, due either to economic and population growth or to the expansion of trade through treaties such as the World Trade Organization, this trade-off changes. We show that, generally speaking, the socially optimal amount of protection decreases as the scale of the market increases. We also provide simple empirical estimates of how much it should decrease. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:360&r=all 221. Culture: an empirical investigation of beliefs, work, and fertility Raquel Fernandez Alessandra Fogli We study the effect of culture on important economic outcomes by using the 1970 census to examine the work and fertility behavior of women born in the U.S. but whose parents were born elsewhere. We use past female labor force participation and total fertility rates from the country of ancestry as our cultural proxies. These variables should capture, in addition to past economic and institutional conditions, the beliefs commonly held about the role of women in society (i.e., culture). Given the different time and place, only the beliefs embodied in the cultural proxies should be potentially relevant. We show that these cultural proxies have positive and significant explanatory power for individual work and fertility outcomes, even after controlling for possible indirect effects of culture. We examine alternative hypotheses for these positive correlations and show that neither unobserved human capital nor networks are likely to be responsible. Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedmsr:361&r=all 222. A critique of structural VARs using real business cycle theory V. V. Chari Patrick J. Kehoe Ellen R. McGrattan The main substantive finding of the recent structural vector autoregression literature with a differenced specification of hours (DSVAR) is that technology shocks lead to a fall in hours. Researchers have used these results to argue that standard business cycle models in which technology shocks leads to a rise in hours should be discarded. We evaluate the DSVAR approach by asking the following: Is the specification derived from this approach misspecified when the data is generated by the very model the literature is trying to discard, namely the standard business cycle model? We find that it is misspecified. Moreover, this misspecification is so great that it leads to mistaken inferences that are quantitatively large. We show that the other popular specification which uses the level of hours (LSVAR) is also misspecified with respect to the standard business cycle model. We argue that an alternative approach, the business cycle accounting approach, is a more fruitful technique for guiding the development of business cycle theory. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmwp:631&r=all 223. Taxation, entrepreneurship and wealth Marco Cagetti Mariacristina De Nardi Entrepreneurship is a key determinant of investment, saving, wealth holdings, and wealth inequality. We study the aggregate and the distributional effects of several tax reforms in a model that recognizes the key role played by the entrepreneurs, and that matches very well the extreme degree of wealth inequality observed in the U.S. data. We find that the effects of tax reforms on output and capital formation can be particularly large when they affect the majority of small and medium-size businesses, which face the most severe financial constraints, rather than a small number of big businesses. We show that the consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system seems to insulate most of the businesses from the negative effects of estate taxation thus minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing progressivity of the income tax can generate large increases in output, as this stimulates entrepreneurial savings and capital formation, but at the cost of large increases in wealth concentration. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmwp:632&r=all 224. The size distribution of firms in an economy with fixed and entry costs Erzo G.J. Luttmer This paper describes an analytically tractable model of balanced growth that allows for extensive heterogeneity in the technologies used by firms. Firms enter with fixed characteristics that determine their initial technologies and the levels of fixed costs required to stay in business. Each firm produces a different good, and firms are subject to productivity and demand shocks that are independent across firms and over time. Firms exit when revenues are too low relative to fixed costs. Conditional on fixed firm characteristics, the stationary distribution of firm size satisfies a power law for all sizes above the size at which new firms enter. The tail of the size distribution decays very slowly if the growth rate of the initial productivity of potential entrants is not too far above the growth rate of productivity inside incumbent firms. In one interpretation, this difference in growth rates can be related to learning-by-doing inside firms and spillovers of the information generated as a result. As documented in a companion paper, heterogeneity in fixed firm characteristics together with idiosyncratic firm productivity growth can generate entry, exit, and growth rates, conditional on age and size, in line with what is observed in the data. Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedmwp:633&r=all 225. Forecasting and estimating multiple change-point models with an unknown number of change points Gary M. Koop Simon M. Potter This paper develops a new approach to change-point modeling that allows for an unknown number of change points in the observed sample. Our model assumes that regime durations have a Poisson distribution. The model approximately nests the two most common approaches: the time-varying parameter model with a change point every period and the change-point model with a small number of regimes. We focus on the construction of reasonable hierarchical priors both for regime durations and for the parameters that characterize each regime. A Markov Chain Monte Carlo posterior sampler is constructed to estimate a change-point model for conditional means and variances. We find that our techniques work well in an empirical exercise involving U.S. inflation and GDP growth. Empirical results suggest that the number of change points is larger than previously estimated in these series and the implied model is similar to a time-varying parameter model with stochastic volatility. Keywords: Econometric models ; Time-series analysis Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:196&r=all 226. Prior elicitation in multiple change-point models Gary M. Koop Simon M. Potter This paper discusses Bayesian inference in change-point models. Current approaches place a possibly hierarchical prior over a known number of change points. We show how two popular priors have some potentially undesirable properties, such as allocating excessive prior weight to change points near the end of the sample. We discuss how these properties relate to imposing a fixed number of change points in the sample. In our study, we develop a hierarchical approach that allows some change points to occur out of the sample. We show that this prior has desirable properties and handles cases with unknown change points. Our hierarchical approach can be shown to nest a wide variety of change-point models, from time-varying parameter models to those with few or no breaks. Data-based learning about the parameter that controls this variety occurs because our prior is hierarchical. Keywords: Econometric models ; Time-series analysis Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:197&r=all 227. Comparing forecast-based and backward-looking Taylor rules: a "global" analysis Stefano Eusepi This paper examines the performance of forecast-based nonlinear Taylor rules in a class of simple microfunded models. The paper shows that even if the policy rule leads to a locally determinate and stable) inflation target, there exist other learnable "global" equilibria such as cycles and sunspots. Moreover, under learning dynamics, the economy can fall into a liquidity trap. By contrast, more backward-looking and "active" Taylor rules guarantee that the unique learnable equilibrium is the inflation target. This result is robust to different specifications of the role of money, price stickiness, and the trading environment. Keywords: Econometric models ; Monetary policy ; Uncertainty ; Business cycles ; Banks and banking, Central Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:198&r=all 228. Central bank transparency under model uncertainty Stefano Eusepi This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the "correct" model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. ; The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policies. Keywords: Monetary policy ; Inflation (Finance) ; Banks and banking, Central ; Uncertainty Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:199&r=all 229. Vehicle currency use in international trade Linda S. Goldberg Cedric Tille Although currency invoicing in international trade transactions is central to the transmission of monetary policy, the forces motivating the choice of currency have long been debated. We introduce a model wherein agents involved in international trade can invoice in the exporter's currency, the importer's currency, or a third-country vehicle currency. The model is designed to contrast the contribution of macroeconomic variability with that of industry-specific features in the selection of an invoice currency. We show that producers in industries with high demand elasticities are more likely than producers in other industries to display herding in their choice of currency. This industry- related force is more influential than local macroeconomic performance in determining producers' choices. ; Drawing on data on invoice currency use in exports and imports for twenty-four countries, we document that the dollar is the currency of choice for most transactions involving the United States. The dollar is also extensively used as a vehicle currency in international trade flows that do not directly involve the United States. Consistent with the results of our model, this last finding is largely attributable to international trade in reference-priced goods and goods traded on organized exchanges. Although the magnitude of business cycle volatility matters for invoicing of more differentiated products, it is less central for invoicing nondifferentiated goods. Keywords: Currency substitution ; International trade ; Dollar, American Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:200&r=all 230. Productivity spillovers, terms of trade, and the "home market effect" Giancarlo Corsetti Philippe Martin Paolo Pesenti This paper analyzes the welfare implications of international spillovers related to productivity gains, changes in market size, or government spending. We introduce trade costs and endogenous varieties in a two-country general-equilibrium model with monopolistic competition, drawing a distinction between productivity gains from manufacturing efficiency and those related to firms' lower cost of entry or product differentiation. Our model suggests that countries with lower manufacturing costs have higher GDP but supply a smaller number of goods at a lower international price. Countries with lower entry and differentiation costs also have higher GDP, but supply a larger array of goods at improved terms of trade. The sign of the international welfare spillovers depends not only on terms of trade, but also on consumers' taste for variety. Higher domestic demand has macroeconomic implications that are similar to those of a reduction in firms' entry costs. Keywords: Productivity ; Manufactures ; Gross domestic product ; Supply and demand Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:201&r=all 231. Reexamining the consumption-wealth relationship: the role of model uncertainty Gary Koop Simon M. Potter Rodney W. Strachan In their influential work on the consumption-wealth relationship, Lettau and Ludvigson found that while consumption responds to permanent changes in wealth in the expected manner, most changes in wealth are transitory with no effect on consumption. We investigate the robustness of these results to model uncertainty using Bayesian model averaging. We find that there is model uncertainty with regard to the number of cointegrating vectors, the form of deterministic components, lag length, and whether the cointegrating residuals affect consumption and income directly. Whether this uncertainty has important implications depends on the researcher's attitude toward this economic theory used by Lettau and Ludvigson. If we work with their exact model, our findings are very similar. However, if we work with a broader set of models, we find that the exact magnitude of the role of permanent shocks is difficult to estimate precisely. Thus, although some support exists for the view that the role of shocks is small, we cannot rule out the possibility that they have a substantive effect on consumption. Keywords: Consumption (Economics) ; Wealth ; Econometric models ; Uncertainty Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:202&r=all 232. A search for a structural Phillips curve Timothy Cogley Argia M. Sbordone The foundation of the New Keynesian Phillips curve (NKPC) is a model of price setting with nominal rigidities that implies that the dynamics of inflation are well explained by the evolution of real marginal costs. In this paper, we analyze whether this is a structurally invariant relationship. We first estimate an unrestricted time-series model for inflation, unit labor costs, and other variables, and present evidence that their joint dynamics are well represented by a vector autoregression (VAR) with drifting coefficients and volatilities. We then apply a two- step minimum distance estimator to estimate deep parameters of the NKPC. Given estimates of the unrestricted VAR, we estimate parameters of the NKPC by minimizing a quadratic function of the restrictions that this theoretical model imposes on the reduced form. Our results suggest that it is possible to reconcile a constant-parameter NKPC with the drifting-parameter VAR; therefore, we argue that the price-setting model is structurally invariant. Keywords: Phillips curve ; Vector autoregression ; Inflation ( Finance) ; Keynesian economics ; Econometric models Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:203&r=all 233. Do expected future marginal costs drive inflation dynamics? Argia M. Sbordone This article discusses a more general interpretation of the two- step minimum distance estimation procedure proposed in earlier work by Sbordone. The estimator is again applied to a version of the New Keynesian Phillips curve, in which inflation dynamics are driven by the expected evolution of marginal costs. The article clarifies econometric issues, addresses concerns about uncertainty and model misspecification raised in recent studies, and assesses the robustness of previous results. While confirming the importance of forward-looking terms in accounting for inflation dynamics, it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting. Keywords: Phillips curve ; Keynesian economics ; Econometric models ; Inflation (Finance) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:204&r=all 234. The politics of central bank independence: a theory of pandering and learning in government Gauti Eggertsson Eric Le Borgne We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. Applied to monetary policy, this theory (i) formalizes the rationale for delegation highlighted by Alexander Hamilton, the first Secretary of the Treasury of the United States, and by Alan S. Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System; and (ii) does not rely on the inflation bias that underlies most existing theories of central bank independence. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) has less incentive to pander to public opinion than a politician. Our key theoretical predictions are broadly consistent with the data. Keywords: Banks and banking, Central ; Monetary policy ; Political science Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fednsr:205&r=all 235. Financial intermediaries, markets, and growth. Falko Fecht Kevin X. D. Huang Antoine Martin We build a model in which financial intermediaries provide insurance to households against a liquidity shock. Households can also invest directly on a financial market if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. This can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies should grow slower than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and market that maximizes welfare under a given level of financial development depends on economic fundamentals. We also show the optimal mix of two structurally very similar economies can be very different. Keywords: Intermediation (Finance) ; Financial markets ; Risk Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:04-24&r=all 236. Schooling and the AFQT: evidence from school entry laws Elizabeth Cascio Ethan Lewis Is the Armed Forces Qualifying Test (AFQT) a measure of achievement or ability? The answer to this question is critical for drawing inferences from studies in which it is employed. In this paper, we test for a relationship between schooling and AFQT performance in the NLSY 79 by comparing test-takers with birthdays near state cutoff dates for school entry. We instrument for schooling at the test date with academic cohort—the year in which an individual should have entered first grade—in a model that allows age at the test date to have a direct effect on AFQT performance. This identification strategy reveals large impacts of schooling on the AFQT performance of racial minorities, providing support for the hypothesis that the AFQT measures school achievement. Keywords: Education Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-1&r=all 237. Implications of state-dependent pricing for dynamic macroeconomic models. Michael Dotsey Robert G. King State-dependent pricing (SDP) models treat the timing of price changes as a profit-maximizing choice, symmetrically with other decisions of firms. Using quantitative general equilibrium models that incorporate a “generalized (S,s) approach,” we investigate the implications of SDP for topics in two major areas of macroeconomic research: the early 1990s SDP literature and more recent work on persistence mechanisms. First, we show that state-dependent pricing leads to unusual macroeconomic dynamics, which occur because of the timing of price adjustments chosen by firms as in the earlier literature. In particular, we display an example in which output responses peak at about a year, while inflation responses peak at about two years after the shock. Second, we examine whether the persistence-enhancing effects of two New Keynesian model features, namely, specific factor markets and variable elasticity demand curves, depend importantly on whether pricing is state dependent. In an SDP setting, we provide examples in which specific factor markets perversely work to lower persistence, while variable elasticity demand raises it. Keywords: Price levels Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-2&r=all 238. Can the standard international business cycle model explain the relation between trade and comovement? M. Ayhan Kose Kei-Mu Yi Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pair’s business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model. Keywords: Business cycles ; International trade Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-3&r=all 239. Pricing, production, and persistence. Michael Dotsey Robert G. King Though built with increasingly precise microfoundations, modern optimizing sticky price models have displayed a chronic inability to generate large and persistent real responses to monetary shocks, as recently stressed by Chari, Kehoe, and McGrattan [2000]. This is an ironic finding, since Taylor [1980] and other researchers were motivated to study sticky price models in part by the objective of generating large and persistent business fluctuations. ; The authors trace this lack of persistence to a standard view of the cyclical behavior of real marginal cost built into current sticky price macro models. Using a fully- articulated general equilibrium model, they show how an alternative view of real marginal cost can lead to substantial persistence. This alternative view is based on three features of the "supply side" of the economy that we believe are realistic: an important role for produced inputs, variable capacity utilization, and labor supply variability through changes in employment. Importantly, these "real flexibilities" work together to dramatically reduce the elasticity of marginal cost with respect to output, from levels much larger than unity in CKM to values much smaller than unity in this analysis. These "real flexibilities" consequently reduce the extent of price adjustments by firms in time-dependent pricing economies and the incentives for paying fixed costs of adjustment in state- dependent pricing economies. The structural features also lead the sticky price model to display volatility and comovement of factor inputs and factor prices that are more closely in line with conventional wisdom about business cycles and various empirical studies of the dynamic effects of monetary shocks. Keywords: Prices ; Production (Economic theory) Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-4&r=all 240. Do technological improvements in the manufacturing sector raise or lower employment? Yongsung Chang Jay H. Hong We find that technology's effect on employment varies greatly across manufacturing industries. Some industries exhibit a temporary reduction in employment in response to a permanent increase in TFP, whereas far more industries exhibit an employment increase in response to a permanent TFP shock. This raises serious questions about existing work that finds that a labor productivity shock has a strong negative effect on employment. There are tantalizing and interesting differences between TFP and labor productivity. We argue that TFP is a more natural measure of technology because labor productivity reflects shifts in the input mix as well as in technology. Keywords: Technology - Economic aspects ; Manufactures ; Employment Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-5&r=all 241. Benchmark revisions and the U.S. personal saving rate. Leonard Nakamura Tom Stark Initially published estimates of the personal saving rate from 1965 Q3 to 1999 Q2, which averaged 5.3 percent, have been revised up 2.8 percentage points to 8.1 percent, as we document. We show that much of the initial variation in the personal saving rate across time was meaningless noise. Nominal disposable personal income has been revised upward an average of 8.4 percent: one dollar in 12 was originally missing! We use both conventional and real-time estimates of the personal saving rate to forecast real disposable income, gross domestic product, and personal consumption and show that the personal saving rate in real-time almost invariably makes forecasts worse. Thus, while the personal saving rate may have some forecasting power once we know the true saving rate, as Campbell (1987) and Ireland (1995) have argued, as a practical matter it is useless to forecasters. Keywords: Saving and investment Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-6&r=all 242. The life-cycle effects of house price changes Wenli Li Rui Yao The authors develop a life-cycle model to study the effects of house price changes on household consumption and welfare. The model explicitly incorporates the dual feature of housing as both a consumption good and an investment asset and allows for costly adjustments in housing and mortgage positions. Li and Yao's analysis indicates that although house price changes have small aggregate effects, their consumption and welfare consequences on individual households vary significantly. In particular, the non- housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle-aged homeowners. More importantly, while house price appreciation increases the net worth and consumption of all homeowners, it only improves the welfare of middle-aged and old homeowners. Young homeowners and renters are worse off due to higher life- cycle housing consumption costs. Keywords: Consumption (Economics) ; Saving and investment ; Housing ; Mortgages Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-7&r=all 243. Immigration, skill mix, and the choice of technique Ethan Lewis Using detailed plant-level data from the 1988 and 1993 Surveys of Manufacturing Technology, this paper examines the impact of skill mix in U.S. local labor markets on the use and adoption of automation technologies in manufacturing. The level of automation differs widely across U.S. metropolitan areas. In both 1988 and 1993, in markets with a higher relative availability of less skilled labor, comparable plants – even plants in the same narrow (4-digit SIC) industries – used systematically less automation. Moreover, between 1988 and 1993 plants in areas experiencing faster less-skilled relative labor supply growth adopted automation technology more slowly, both overall and relative to expectations, and even de-adoption was not uncommon. This relationship is stronger when examining an arguably exogenous component of local less-skilled labor supply derived from historical regional settlement patterns of immigrants from different parts of the world. ; These results have implications for two long-standing puzzles in economics. First, they potentially explain why research has repeatedly found that immigration has little impact on the wages of competing native- born workers at the local level. It might be that the technologies of local firms – rather than the wages that they offer – respond to changes in local skill mix associated with immigration. A modified two-sector model demonstrates this theoretical possibility. Second, the results raise doubts about the extent to which the spread of new technologies have raised demand for skills, one frequently forwarded hypothesis for the cause of rising wage inequality in the United States. Causality appears to at least partly run in the opposite direction, where skill supply drives the spread of skill-complementary technology. Keywords: Immigrants ; Technology - Economic aspects ; Labor market Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-8&r=all 244. The effects of technical change on labor market inequalities Andreas Hornstein Per Krussell Giovanni L. Violante In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labor market. A key focus is on the rise of U.S. wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labor share of income, variables that remained stable in the U.S. We hypothesize that these changes in labor market inequalities can be accounted for by the wave of capital- embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and "luck" in the labor market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the U. S.-Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labor market inequalities for welfare and for economic policy. Keywords: Labor market ; Technology Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedrwp:04-08&r=all 245. Productivity, employment, and inventories Yongsung Chang Andreas Hornstein Pierre-Daniel G. Sarte Whether or not inventories can be used to break the link between production and sales is crucial for understanding firms’ employment response to productivity shocks. In a Taylor-type sticky-price model with inventories, we show that the employment response to a productivity shock depends on the extent to which goods are storable. Whereas in conventional sticky-price models without inventories, productivity shocks reduce employment, the same shocks cause firms in our economy to expand output relative to sales, build up inventories and, as a result, hire more workers. We then estimate the employment response to productivity shocks in disaggregated U.S. manufacturing data from 1958 to 1996. Consistent with our theory, we find that an industry’s employment response to productivity shifts is strongly correlated with measures of inventory holding costs. Keywords: Employment ; Productivity Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedrwp:04-09&r=all 246. Alfred Marshall and the quantity theory of money Thomas M. Humphrey Marshall made at least four contributions to the classical quantity theory. He endowed it with his Cambridge cash-balance money-supply-and-demand framework to explain how the nominal money supply relative to real money demand determines the price level. He combined it with the assumption of purchasing power parity to explain (i) the international distribution of world money under metallic standards and fixed exchange rates, and (ii) exchange rate determination under floating rates and inconvertible paper currencies. He paired it with the idea of money wage and/or interest rate stickiness in the face of price level changes to explain how money-stock fluctuations produce corresponding business-cycle oscillations in output and employment. He applied it to alternative policy regimes and monetary standards to determine their respective capabilities of delivering price-level and macroeconomic stability. In his hands the theory proved to be a powerful and flexible analytical tool. Keywords: Economists ; Money Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedrwp:04-10&r=all 247. The replacement problem in frictional economies : a near equivalence result Andreas Hornstein Per Krusell Giovanni L. Violante We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labor market. We distinguish between two polar cases studied in the literature: a "creative destruction" economy where new machines enter chiefly through new matches and an "upgrading" economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the U.S. economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to the inclusion of machine-specific or match-specific heterogeneity into the benchmark model. Keywords: Contracts ; Technology Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedrwp:05-01&r=all 248. Banking markets in a decade of mergers : a preliminary examination of five North Carolina markets John A. Weinberg In the 1990s, a wave of merger activity altered the structure of the banking industry at both the national and local levels. While banking remains a relatively unconcentrated industry at the national level, markets for some banking services continue to be primarily local. Concentration looks greater at the local level and generally increased in the 1990s. One can classify the possible motivations for mergers into two categories—those having to do with market power and those having to do with the efficient allocation of capacity among market participants. This article begins an examination of these motives through the behavior of the banking market structures in five North Carolina metropolitan areas from 1990 to 2002. Keywords: Banks and banking Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedrwp:v.91no.1&r=all 249. An analysis of the potential competitive impacts of Basel II capital standards on U.S. mortgage rates and mortgage securitization Diana Hancock Andreas Lehnert Wayne Passmore Shane M. Sherlund Keywords: Bank capital - Law and legislation ; Mortgages ; Mortgage-backed securities Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgwp:4&r=all 250. The potential impact of explicit Basel II operational risk capital charges on the competitive environment of processing banks in the United States Patrick de Fontnouvelle Victoria Garrity Scott Chu Eric Rosengren Basel II replaces Basel I’s implicit capital charge on operational risk with an explicit charge. Certain U.S. banks concentrated in processing-related business lines – which have significant operational risk – could thus face an increase in overall minimum regulatory capital requirements. Some have argued that, as a result, these so-called “processing banks” would be disadvantaged vis-a-vis competitors not subject to regulatory capital requirements for operational risk. This paper evaluates these concerns. Keywords: Bank capital ; Risk management ; Basel capital accord Date: 2005 URL: http://d.repec.org/n?u=RePEc:fip:fedgwp:5&r=all 251. A unified analysis of executive pay: the case of the banking industry Gregory E. Sierra Eli Talmor James S. Wallace This study examines executive compensation determinants in the U. S. banking industry. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an in-depth look at the corporate governance and ownership structure of the companies selected. We explore the simultaneous relationship between compensation, firm performance, and board strength, exploiting variables unique to the banking industry. Our primary finding is that after controlling for both regulatory oversight and external market discipline, a strong board is associated with higher firm performance and lower levels of executive pay, consistent with such a board of directors providing a strong monitoring function. Keywords: Executives - Salaries Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlsp:2004-02&r=all 252. Economies of integration in banking: an application of the survivor principle Timothy J. Yeager Despite the growing concentration of U.S. banking assets in mega- banks, most academic research finds that scale and scope economies are small. I apply the survivor principle to the banking industry between 1984 and 2002 and find that the so- called economies of integration are significant. These results hold after accounting for off-balance- sheet activities and after replicating the results at the holding company level. Regression analysis reveals that deregulation of branching restrictions, especially at the state level, played a significant role in allowing banks to exploit these economies. The results also suggest that, although the absolute number of community banks will decrease over time, community banks of all sizes will remain viable in the future. A likely explanation for the paradox of significant economies of integration and small estimated cost economies is that the size benefits to a bank come from sources other than cost efficiencies. Keywords: Financial institutions ; Banks and banking Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlsp:2004-04&r=all 253. The Financial Modernization Act: evolution or revolution? Timothy J. Yeager Fred C. Yeager Ellen Harshman The Gramm-Leach-Bliley Act (GLBA) removed the barriers that separated commercial banking from investment banking, merchant banking, and insurance activities. Did this legislation revolutionize the financial services industry by allowing Financial Holding Companies (FHCs) to exploit revenue efficiencies and cost economies, or did it merely formalize an evolutionary process of deregulation that was already well underway? Our evidence refutes the notion that the GLBA was a revolutionary event, at least in the short run. Using a combination of market and accounting data, we find that, to date, FHC status has had little effect on bank performance. We do find, however, limited evidence that FHCs that were Section 20 affiliates before passage of the GLBA were able to further exploit the synergies between investment banking and commercial banking. Keywords: Gramm-Leach-Bliley Act ; Banking law - United States ; Bank holding companies Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlsp:2004-05&r=all 254. Executive compensation at Fannie Mae and Freddie Mac William R. Emmons Gregory E. Sierra Corporate governance-and executive-compensation arrangements in particular-should be an important component of the agenda to reform the housing GSEs. The GSEs' safety-and-soundness regulator- who is essentially the debtholders' and taxpayers' representative- must be admitted to the GSEs' boardroom in a way that is atypical of an ordinary publicly held company. This intrusion into the board's oversight of executive-compensation plans is justified given the GSEs' public purposes and their large potential cost to taxpayers. Prudent public policy requires greater supervisory control over executive compensation at the GSEs, which would follow a precedent set in banking. Keywords: Government-sponsored enterprises ; Executives - Salaries Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlsp:2004-06&r=all 255. Are the causes of bank distress changing? can researchers keep up? Thomas B. King Timothy J. Yeager Since 1990, the banking sector has experienced enormous legislative, technological and financial changes, yet research into the causes of bank distress has slowed. One consequence is that current supervisory surveillance models may no longer accurately represent the banking environment. After reviewing the history of these models, we provide empirical evidence that the characteristics of failing banks has changed in the last ten years and argue that the time is right for new research employing new empirical techniques. In particular, dynamic models that utilize forward-looking variables and address various types of bank risk individually are promising lines of inquiry. Supervisory agencies have begun to move in these directions, and we describe several examples of this new generation of early- warning models that are not yet widely known among academic banking economists. Keywords: Bank failures ; Bank supervision Date: 2004 URL: http://d.repec.org/n?u=RePEc:fip:fedlsp:2004-07&r=all 256. A Multiple Indicators Model For Volatility Using Intra- Daily Data. Robert F. Engle (New York University, Stern School of Business, Finance Department) Giampiero M. Gallo (Universita degli Studi di Firenze, Dipartimento di Statistica "G. Parenti") Many ways exist to measure and model financial asset volatility. In principle, as the frequency of the data increases, the quality of forecasts should improve. Yet, there is no consensus about a "true" or "best" measure of volatility. In this paper we propose to jointly consider absolute daily returns, daily high-low range and daily realized volatility to develop a forecasting model based on their conditional dynamics. As all are non-negative series, we develop a multiplicative error model that is consistent and asymptotically normal under a wide range of specifications for the error density function. The estimation results show significant interactions between the indicators. We also show that one-month-ahead forecasts match well (both in and out of sample) the market-based volatility measure provided by an average of implied volatilities of index options as measured by VIX. Keywords: volatility modeling, volatility forecasting, GARCH, VIX, high-low range, realized volatility. JEL: C22 C32 C53 URL: http://d.repec.org/n?u=RePEc:fir:econom:wp2003_07&r=all 257. On-line Bayesian estimation of AR signals in symmetric alpha-stable noise. Marco J. Lombardi (Universita degli Studi di Firenze, Dipartimento di Statistica "G. Parenti") Simon J. Godsill (Cambridge University Engineering Department, Signal Processing Lab) In this paper we propose an on-line Bayesian filtering and smoothing method for time series models with heavy-tailed alpha- stable noise, with a particular focus on TVAR models. alpha- stable processes have been shown in the past to be a good model for many naturally occurring noise sources. We first point out how a filter that fails to take into account the heavy-tailed character of the noise performs poorly and then examine how an alpha-stable based particle filter can be devised to overcome this problem. The filtering methodology is based on a scale mixtures of normals (SMiN) representation of the alpha-stable distribution, which allows efficient Rao-Blackwellised implementation within a conditionally Gaussian framework, and requires no direct evaluation of the alpha-stable density, which is in general unavailable in closed form. The methodology is shown to work well, outperforming the traditional Gaussian methods both on simulated data and on real audio data sets. Keywords: Particle filters, Kalman filter, Alpha-stable distributions, Scale mixture of normals. Date: 2004-05-01 URL: http://d.repec.org/n?u=RePEc:fir:econom:wp2004_05&r=all 258. Indirect estimation of alpha-stable distributions and processes. Marco J. Lombardi (Universita degli Studi di Firenze, Dipartimento di Statistica "G. Parenti") Giorgio Calzolari (Universita degli Studi di Firenze, Dipartimento di Statistica "G. Parenti") The alpha-stable family of distributions constitutes a generalization of the Gaussian distribution, allowing for asymmetry and thicker tails. Its practical usefulness is coupled with a marked theoretical appeal, as it stems from a generalized version of the central limit theorem in which the assumption of the finiteness of the variance is replaced by a less restrictive assumption concerning a somehow regular behavior of the tails. Estimation difficulties have however hindered its diffusion among practitioners. Since simulated values from alpha-stable distributions can be straightforwardly obtained, the indirect inference approach could prove useful to overcome these estimation difficulties. In this paper we provide a description of how to implement such a method by using a skew-t distribution as an auxiliary model. The indirect inference approach will be introduced in the setting of the estimation of the distribution parameters and then extended to linear time series models with alpha-stable disturbances. The performance of this estimation method is then assessed on simulated data. An application on time- series models for the inflation rate concludes the paper. Keywords: Indirect inference, Alpha-stable distributions, Heavy tails. Date: 2004-06-01 URL: http://d.repec.org/n?u=RePEc:fir:econom:wp2004_07&r=all 259. Bayesian inference for alpha-stable distributions: a random walk MCMC approach. Marco J. Lombardi (Universita degli Studi di Firenze, Dipartimento di Statistica "G. Parenti") The alpha-stable family of distributions constitutes a generalization of the Gaussian distribution, allowing for asymmetry and thicker tails. Its practical usefulness is coupled with a marked theoretical appeal, given that it stems from a generalized version of the central limit theorem in which the assumption of the finiteness of the variance is replaced by a less restrictive assumption concerning a somehow regular behavior of the tails. The absence of the density function in a closed form and the associated estimation difficulties have however hindered its diffusion among practitioners. In this paper I introduce a novel approach for Bayesian inference in the setting of alpha-stable distributions that resorts to a FFT of the characteristic function in order to approximate the likelihood function; the posterior distributions of the parameters are then produced via a random walk MCMC method. Contrary to the other MCMC schemes proposed in the literature, the proposed approach does not require auxiliary variables, and so it is less computationally expensive, especially when large sample sizes are involved. A simulation exercise highlights the empirical properties of the sampler; an application on audio noise data demonstrates how this estimation scheme performs in practical applications. Keywords: Alpha-stable distributions, Infinite variance, MCMC. Date: 2004-09-01 URL: http://d.repec.org/n?u=RePEc:fir:econom:wp2004_11&r=all 260. A Comparison of Complementary Automatic Modeling Methods: RETINA and PcGets. Teodosio Perez-Amaral (Universidad Complutense de Madrid, Departamento de Economia Cuantitativa) Giampiero M. Gallo (Universita degli Studi di Firenze, Dipartimento di Statistica "G. Parenti") Halbert L. White (University of California, San Diego, Department of Economics) In Perez-Amaral, Gallo, and White (2003), the authors proposed an automatic predictive modelling tool called Relevant Transformation of the Inputs Network Approach (RETINA). It is designed to embody flexibility (using nonlinear transformations of the predictors of interest), selective search within the range of possible models, control of collinearity, out-of-sample forecasting ability, and computational simplicity. In this paper we compare the characteristics of RETINA with PcGets, a well- known automatic modeling method proposed by David Hendry. We point out similarities, differences, and complementarities of the two methods. In an example using US telecommunications demand data we find that RETINA can improve both in- and out-of-sample over the usual linear regression model, and over some models suggested by PcGets. Thus, both methods are useful components of the modern applied econometrician’s automated modelling tool chest. Keywords: Model selection, cross-validation, flexible modelling, information criteria, forecasting. Date: 2004-10-04 URL: http://d.repec.org/n?u=RePEc:fir:econom:wp2004_12&r=all 261. (UBS Pensions Series 038) Dynamic portfolio and mortgage choice for homeowners Frank de Jong Joost Driessen Otto van Hemert We investigate the impact of owner-occupied housing on financial portfolio and mortgage choice under stochastic inflation and real interest rates. To this end we develop a dynamic framework in which investors can invest in stocks and bonds with different maturities. We use a continuous-time model with CRRA preferences and calibrate the model parameters using data on inflation rates and equity, bond, and house prices. For the case of no short-sale constraints, we derive an implicit solution and identify the main channels through which the housing to total wealth ratio and the horizon affect financial portfolio choice. This solution is used to interpret numerical results that we provide when the investor has short-sale constraints. We also use our framework to investigate optimal mortgage size and type. A moderately risk- averse investor prefers an adjustable-rate mortgage (ARM), while a more risk-averse investor prefers a fixedrate mortgage (FRM). A combination of an ARM and an FRM further improves welfare. Choosing a suboptimal mortgage leads to utility losses up to 6%. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp538&r=all 262. Institutional Separation between Supervisory and Monetary Agencies Charles Goodhart (Financial Markets Group, London School of Economics) Dirk Schoenmaker This paper investigates whether monetary policy and banking supervision should be separated, or not. It starts with an account of the historical evolution of the Central Bank's micro- function (banking supervision). The role of the lender of last resort and the introduction of deposit insurance is discussed. There is currently a diversity of institutional arrangements, but the differences are found to be greater in appearance than in reality. The main argument of divorcing the monetary from the regulatory authority is that the combination of functions might lead to a conflict of interest. This conflict can arise in different ways. The most important instance is that interest rates are held down because of concern with the "health" of the banking system, when purely monetary considerations suggest higher rates. It is argued that this conflict between "regulatory" and "monetary" objectives depends to some extent on the structure of the banking and financial systems (i.e. whether banks are dependent on wholesale or retail markets for short term funding). A First argument against separation is the role of the Central Bank in the payment system, in particular with respect to preventing systemic risk. The massive intra-day credit exposures in large value payment systems could give rise to settlement failure(s), which in turn could generate a systemic crisis. Settlement risk is therefore increasingly an area of supervisory concern for Central Banks. In so far as the Central Bank as lender of last resort is likely to support a failing participant, it is assuming the risks and effectively becoming the implicit guarantor of the system. Although Central Banks implement risk reduction policies, some risks originate beyond the settlement system, e.g. in foreign exchange trading, securities transactions and interbank transactions. It is argued that Central Banks should have a regulatory and oversight role in the payment system, although it does not follow that they should also operate them. Turning to the broader concern of the Central Bank of systemic stability, it is claimed that the Central Bank usually has to use its lender of last resort function not only in cases of liquidity difficulties, but also where the solvency of banks is uncertain. A cross-country survey of 104 bank failures is assembled in an appendix. We focus on the provision of funding for rescues: central bank, deposit insurance, government or other banking system should lie with the agency which pays if, and when , banks are to be rescued. So long as rescue and insurance is undertaken on an implicit Central Bank basis, then the Central Bank would naturally want to undertake regulation and supervision. However, there is a trend towards using tax-payer money for bank rescues which strengthens the case for separation of the monetary and supervisory functions and establishment of a government agency for the latter. It would, however, be difficult to have a complete division, since the Central Bank would generally remain the only source of immediate funding. Keywords: Finance; Banking JEL: G0 URL: http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp0052&r=all 263. Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since The Crash? Paul H. Kupiec (Division of Research and Statistics, Board of Governors of the Federal Reserve System) This study assesses the state of the policy debate that surrounds the Federal regulation of margin requirements. A relatively comprehensive review of the literature finds on undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of "excess" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market. JEL: G0 URL: http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp0097&r=all 264. The Inflation Target Five Years On Mervyn King (Bank of England) Mervyn King is the Deputy Governor of the Bank of England and a co-founder of the LSE Financial Markets Group. On Wednesday 29 October 1997 he gave a public lecture at the LSE to mark the 10th anniversary of the Financial Markets Group and the 5th annivesay of the Bank of England Inflation Target. This Special Paper is the Transcript of that lecture. URL: http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp0099&r=all 265. Roots and features of researches about tourist economy (In French) Josette MESPLIER-PINET (IERSO, IFReDE-GRES) Of an economic approach of the tourism, made by applications of the instruments of the economist for this new field of investigation, we are gradually spent in a research on a tourist economy based on the specificities of this last one : Its temporal dimension (saisonnality of the activities, variation of the prices, market’s deformations); its spatial economic dimension (transfer of consumptions, incomes, employments, mobility of capital); its micro economic dimension (creation of a tourism’s product – assembly of ill-assorted services-, marketing by package price, imperfect competition, barriers in the entry). More recently it is its registration in yard of savings services societies and its potential of innovations which were revealed. Research in touristic economy needs rigour, coherence to progress in a world of uncertainties; It must necessarily explain, in other words to answer the question: how? While referring to the economists, for many users, the models can help there. But this research, by its characteristics, cannot be satisfied some, because it must aim also to help to understand, in other words to answer the question: why? Try to answer it, widens the field of the approaches possible and joined multidisciplinarity: It is necessary that tourist economy considers that the tourist is not only a consumer of tourism and the Tour operator a producer of services, but that they are, one and the other, consumer and producer of meaning. The force and the difficulty in interpreting this meaning also lie in culture, history, space and its organization. Keywords: Services assembling, Economy of tourism, Tourist economy, Tourist multiplier, Tourist product, Tourist system JEL: A12 A13 B2 O17 Q26 Date: 2005 URL: http://d.repec.org/n?u=RePEc:grs:wpegrs:2005-10&r=all 266. Two-part pricing under revenue cap regulation Lantz, Bjorn (Department of Business Administration, School of Economics and Commercial Law, Goteborg University) This paper aims at developing the theoretical understanding of revenue capping as a way of regulating monopolistic firms. It is shown that the fact that a standard monopolist regulated by a fixed revenue cap will raise its price above the unregulated monopoly level is robust to two-part pricing. It is also shown that when regulation of a two-part pricing monopolist is based on a hybrid revenue cap defined as a linear function of quantity, it is the slope of the cap that determines its incentives for efficiencient behaviour while the intercept of the cap only affects the profit level of the firm. This also holds if the cap is defined as a hybrid price-revenue cap. The general conclusion of this is that the slope of the hybrid cap needs to be steeper that the slope of the firm’s cost function in order to prevent the incentive to raise price above the unregulated monopoly level.

    Keywords: Monopoly regulation; incentive regulation; revenue cap regulation Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:hhb:gunwba:2005_408&r=all 267. Swedish Premium Pension Funds: Attributes and Performance Jern, Benny (Swedish School of Economics and Business Administration) This study investigates the relationship between fund attributes and performance. The focus is on funds available in the Swedish Premium Pension system (PPM-funds). The aim has been to investigate whether administration fees, manager tenure or past performance are of importance for pension savers when they pick their PPM-funds. The results indicate that high fees are a disadvantage to pension savers investing in bond funds but not to those investing in stock funds. Manager tenure has no relationship with performance. There is evidence of performance persistency in most of the investigated fund categories. Keywords: Mutual funds; Sweden; Premium pension; PPM; Attributes and performance Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:hhb:hanken:0509&r=all 268. Entry into Local Retail Food Markets in Sweden: A Real- Options Approach Daunfeldt, Sven-Olov (The Swedish Research Institute of Trade (HUI)) Orth, Matilda (Department of Economics, School of Economics and Commercial Law, Goteborg University) Rudholm, Niklas (Department of Economics, Umea University) A real-options approach was used, incorporating uncertainty and irreversibility of investments, to study the number of stores entering the Swedish retail food market during the period 1994- 2002. It was found that uncertainty affected the entry-decision. Entry was less frequent in highly concentrated local retail food- markets characterized by a high degree of uncertainty, whereas higher profit opportunities seem to have increased the probability of entry.

    Keywords: Real options; uncertainty; retail food; entry; negative binomial regression JEL: L13 L81 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:hhs:gunwpe:0170&r=all 269. Simulating the Future Pension Wealth and Retirement Saving in Sweden Rostberg, Anna (Uppsala University) Andersson, Bjorn (Sveriges Riksbank) Lindh, Thomas (Institute for Futures Studies) In this paper the wealth consequences of the Swedish pension system in the transition from a defined benefit to notional defined contribution system are simulated with almost exact institutional detail, using life cycle profiles estimated from detailed longitudinal micro data. Projected wealth, including different types of pension wealth, are computed and compared between cohorts, gender, wealth deciles and occupational categories. Consistent saving rates and replacement rates allowing consumption to stay constant after retirement are computed. Two different macroeconomic scenarios are considered, one using stylised values for growth, inflation etc. and another using demographically based forecasts. Some conclusions are that the cohorts born in the 1940s are relatively favoured, and so are the wealthiest deciles. Stylised macro assumptions yield more optimistic wealth projections than those corresponding to demographically based projections. Keywords: Future Pension Wealth; Retirement Saving in Sweden JEL: G23 H55 J14 Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:hhs:ifswps:2005_006&r=all 270. How Does Financial Liberalization affect Economic Growth? Bonfiglioli, Alessandra (Institute for International Economic Studies, Stockholm University) This paper assesses the effects of international financial liberalization and banking crises on investments and productivity in a sample of 93 countries (at its largest) observed between 1975 and 1999. I provide empirical evidence that financial liberalization spurs productivity growth and marginally affects capital accumulation. Banking crises depress both investments and TFP. Both levels and growth rates of productivity respond to financial liberalization and banking crises. The paper also presents evidence of conditional convergence in productivity across countries. However, the speed of convergence is unaffected by financial liberalization. These results are robust to a number of econometric specifications. Keywords: Capital account liberalization; equity market liberalization; financial development; banking crises; growth; productivity; investments; convergence JEL: C23 F43 G15 O40 Date: 2005-05-10 URL: http://d.repec.org/n?u=RePEc:hhs:iiessp:0736&r=all 271. Equities and Inequality Bonfiglioli, Alessandra (Institute for International Economic Studies, Stockholm University) This paper studies the relationship between investor protection, the development of financial markets and income inequality. In the presence of market frictions, investor protection promotes financial development by raising confidence and reducing the costs of external financing. Developed financial systems spread risk among financiers and firms, allocating them to the agents bearing them best. Therefore, financial development plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between financial development and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty- nine countries, as well as a panel of fifty-two countries over the period 1976-2000, supports the predictions of the model. Keywords: Income inequality; financial development; capital market frictions; investor protection; instrumental variables; dynamic panel data JEL: D31 E44 G30 O15 O16 Date: 2005-05-11 URL: http://d.repec.org/n?u=RePEc:hhs:iiessp:0737&r=all 272. Factor Supplies and the Direction of Technical Change Svaleryd, Helena (The Research Institute of Industrial Economics) Vlachos, Jonas (The Research Institute of Industrial Economics) In this paper, we empirically address the hypothesis that there is a relationship between the supply of human capital and the rate and direction of skill-biased technical change (SBTC). Using country- and industry-level data on OECD countries, we find R&D to be positively related to the supply of human capital. There is, however, no indication that this translates into higher rates of SBTC, when SBTC is measured as changes in the wage bill share of skilled labor. Interestingly, both R&D and the rate of SBTC seem to be relatively high in low-skill industries in countries where the supply of human capital is relatively high. Keywords: Skilled-biased Technical Change; Supply of Human Capital JEL: J32 O31 Date: 2005-05-12 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0640&r=all 273. Assymetric Effects of Corruption on FDI: Evidence from Swedish Multinational Firms Hakkala, Katariina (The Research Institute of Industrial Economics) Norback, Pehr-Johan (The Research Institute of Industrial Economics) Svaleryd, Helena (The Research Institute of Industrial Economics) We examine the effect of corruption on foreign direct investments. Our model shows that corruption may have different effects on investments aimed at selling to a local market, in comparison to investments aimed at selling from the corrupt market. Using Swedish firm-level data, we find that affiliate local sales decrease with corruption, while affiliate exports increase. Finally, corruption has a negative effect on the probability that a foreign firm will invest in a country. These results are consistent with theory when bribing reduces production costs and local firms have an advantage in bribing vis a vis foreign firms. Keywords: FDI; Corruption; Multinational Firm JEL: D73 F21 F23 Date: 2005-05-12 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0641&r=all 274. Peers and Culture Saez-Marti, Maria (The Research Institute of Industrial Economics) Sjogren, Anna (The Research Institute of Industrial Economics) We analyze the evolution of cultural traits when parents purposefully invest resources in order to socialize their children to the cultural traits that maximize child lifetime utility. We assume that children are not passive in their adoption of traits from peers. Instead they are guided by an evaluation of the merit of traits. We show that such evaluation is likely to render this process of "oblique transmission" biased. We then show that when transmission of traits from society is biased or frequency dependent, cultural diversity is sustainable even when all parents strive to transmit the same trait. We also show that demand for cultural pluralism on the part of parent does not guarantee cultural diversity. Keywords: Peer Groups; Cultural Transmission; Cultural Diversity; Oblique Transmission JEL: D10 I20 J13 Date: 2005-05-12 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0642&r=all 275. Are Objective, Official Measures of Disability Reliable? Johansson, Per (Institute for Labour Market Policy Evaluation (IFAU)) Skedinger, Per (The Research Institute of Industrial Economics) The issue considered in this study is whether objective, official reports on disability status are reliable. While there is a rather large literature on the reliability of self-reported disability, evidence regarding objective data is scant. It seems to be a widely held view among researchers that, since individuals out of work are inclined to respond towards poor health, it would be best to have official data provided by the relevant administrative bodies. But we argue that such administrative data should be regarded with some suspicion, since the administrators also may have incentives to misreport. The empirical evidence, based on a large sample of Swedish jobseekers, suggests systematic misreporting by the Public Employment Service of objective, official disability measures due to incentives to exaggerate disability. Keywords: Work Disability; Classification Error; Public Employment Service JEL: I12 J28 J68 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:iuiwop:0643&r=all 276. A framework for understanding inflation - with or without money Bengtsson, Ingemar (Department of Economics, Lund University) This paper presents a model that pictures how inflation is determined in a decentralized market process where prices are set in both simultaneous and sequential contracts. Price setting is seen as a coordination game between the price setters of sequential contracts. An important property of the model is that inflation thus can be explained without any reference to the quantity of money.Following up the finding that inflation is determined in a coordination game, it is subsequently claimed that whenever inflation does not follow a random path, people do seem to follow some rule of thumb when predicting future price levels. In the last section of the paper, it is finally claimed that this rule is best understood as a focal point, and furthermore that the central banks provides the focal point for inflation in the western world today. Central banks could thus be shown to be able to influence inflation rates, although the quantity of money plays no part in this process. Keywords: Central Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory JEL: C70 E31 E42 E43 E44 E51 E52 E58 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_028&r=all 277. Transaction Costs, Money and Units of Account Bengtsson, Ingemar (Department of Economics, Lund University) In the paper, an analogy with length measurement is applied in order to explore the nature of the unit for value measurement, i. e. the unit of account. As the meter is defined as the length traveled by light in vacuum during 1/299 792 458 of a second, the unit of account krona is defined as the purchasing power of the medium of exchange krona. However, one should be cautious when drawing conclusions from this analogy. Our unit of account is defined in our medium of exchange, but it is meaningful only because we can observe prices on real goods expressed in it. As it would be pointless to define the meter as the length traveled by light in vacuum during 1/299 792 458 of a second if we could not compare this length with anything else, it would be pointless to define our unit of account in something that is not priced. In the paper it is explained how different payment techniques help to overcome transaction costs in the market. In particular, following Alchian (1977), it is argued that to reap the full benefit from the use of payment techniques, it has to be combined with the use of both a unit of account and specialist middlemen. The use of payment techniques helps to reduce costs due to sequential payment, but to reduce costs due to sequential quality evaluation, you need unit of account as well as reputable middlemen. Keywords: Medium of Exchange; Money; Payment Techniques; Quantity Theory; Transaction Costs; Unit of Account JEL: B52 D23 E31 E41 E42 E51 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_029&r=all 278. The Fear of Exclusion: Individual Effort when Group Formation is Endogenous Brekke, Kjell Arne (Ragnar Frisch Centre for Economic Research) Nyborg, Karine (Ragnar Frisch Centre for Economic Research) Rege, Mari (Department of Economics, Case Western Reserve University) To secure their membership in a popular group, individuals may contribute more to the group’s local public good than they would if group formation were exogenous. Those in the most unpopular group do not have this incentive to contribute to their group. Substantial differences in individual efforts levels between groups may be the result. A principal may prefer either exogenous or endogenous group formation, depending on whether an increase in contributions to the local public good coincides with the principal’s interests. We analyze two examples: Social interaction in schools, and multiple-task teamwork. Keywords: Local public goods; opportunity costs; popularity; multiple-task principalagent analysis. JEL: C72 D11 D23 L24 Z13 Date: 2005-04-21 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_009&r=all 279. Downward Nominal Wage Rigidity in the OECD Holden, Steinar (Dept. of Economics, University of Oslo) Wulfsberg, Fredrik (Norges Bank) This paper explores the existence of downward nominal wage rigidity (DNWR) in 19 OECD countries, over the period 1973–1999, using data for hourly nominal wages at industry level. Based on a novel nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 70 percent in the 1970s to 11 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when inflation is high, unemployment is low, union density is high and employment protection legislation is strict. Keywords: Downward nominal wage rigidity; OECD; employment protection legislation; wage setting JEL: C14 C15 E31 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_010&r=all 280. Identifying the Interdependence between US Monetary Policy and the Stock Market Bjornland, Hilde C. (Dept. of Economics, University of Oslo) Leitemo, Kai (Norwegian School of Management) We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long- run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks. Keywords: VAR; monetary policy; asset prices; identification JEL: E43 E52 E61 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_012&r=all 281. A new equity condition for infinite utility streams and the possibility of being Paretian Asheim, Geir B. (Dept. of Economics, University of Oslo) Tungodden, Bertil (Department of Economics, Norwegian School of Economics and Business Administration) We investigate the properties of a new equity condition, "Hammond Equity for the Future" (HEF), capturing the following ethical intuition: A sacrifice by the present generation leading to a uniform gain for all future generations cannot lead to a less desirable utility stream if the present remains better off than the future. Since HEF is a weak condition when compared to other consequentialist equity conditions, it is of interest to establish whether it to a greater extent can be combined with Paretian conditions. We show that this is not the case: HEF is not compatible with the "Strong Pareto" condition when social preferences are upper semi-continuous in the sup norm topology. If we impose that the social preferences are complete, transitive and continuous in the sup norm topology, and satisfy an "Independent future" condition, then HEF cannot even be combined with the "Weak Pareto" condition. Keywords: Intergenerational equity; Pareto condition JEL: D63 D71 Q01 Date: 2005-04-21 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_008&r=all 282. An analytical model of required returns to equity under taxation with imperfect loss offset Lund, Diderik (Dept. of Economics, University of Oslo) Lund (2002a) showed in a CAPM-type model how tax depreciation schedules affect required expected returns after taxes. Even without leverage higher tax rates implied lower betas when tax deductions were risk free. Here they are risky, and marginal investment is taxed together with inframarginal in an analytical model of decreasing returns. With imperfect loss offset tax claims are analogous to call options. The beta of equity is still decreasing in the tax rate, but increasing in the underlying volatility. The results are important if market data are used to infer required expected returns, and in discussions of tax design. Keywords: Corporate tax; depreciation; imperfect loss offset; cost of capital; uncertainty JEL: F23 G31 H25 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:hhs:osloec:2005_013&r=all 283. Exploring Interactions between Real Activity and the Financial Stance Jacobson, Tor (Research Department, Central Bank of Sweden) Linde, Jesper (Research Department, Central Bank of Sweden) Roszbach, Kasper (Research Department, Central Bank of Sweden) In this paper we empirically study interactions between real activity and the financial stance. Using aggregate data we examine a number of candidate measures of the financial stance of the economy. We find strong evidence for substantial spillover effects on aggregate activity from our preferred measure. Given this result, we use a large micro data-set for corporate firms to develop a macro-micro model of the interaction between the financial and real economy. This approach implies that the impulse responses of a given aggregate shock will depend on the portfolio structure of firms at any given point in time. Keywords: Default-risk models; Business Cycles; Financial Stability; Price stability; Financial and real economy interaction JEL: C41 G21 G33 G38 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0184&r=all 284. Job-search Assistance Using the Internet - Evidence from a Swedish Randomised Experiment Hagglund, Pathric (Swedish Institute for Social Research) This paper reports the experience from a randomised experiment offering voluntary job search assistance on the Internet to job seekers at Swedish public employment offices. Among those applying for participation, youth, highly educated and people living in big city areas were overrepresented. The evidence suggests that common difficulties inherent in the experimental approach, such as ethical concerns, bureaucratic behaviour and randomisation bias, have been circumvented. However, due to the voluntariness, the programme suffers from compliance problems in terms of both no-shows and drop-outs. The experimental intent-to- treat impact estimate fail to reject the hypothesis of a zero programme effect. Finally, a methodological comparison suggests that standard nonexperimental

    techniques succeed in reproducing the nonbiased experimental results. Keywords: Internet job search; policy evaluation; social experiment JEL: C93 J64 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:hhs:sofiwp:2005_003&r=all 285. Comparing Supply Function Equilibria of Pay-as-Bid and Uniform-Price Auctions Holmberg, Par (Department of Economics) This paper derives a Supply Function Equilibrium (SFE) of a pay- as-bid auction, also called discriminatory auction. Such an auction is used in the balancing market for electric power in Britain. For some probability distributions of demand a pure- strategy equilibrium does not exist. If demand follows an inverse polynomial probability distribution, SFE always exists. Assuming this probability distribution, the pay-as-bid procurement auction is compared to a SFE of a uniform-price procurement auction, the auction form of most electric power markets. The demand-weighted average price is found to be equal or lower in the pay-as-bid procurement auction. Keywords: Supply function equilibrium; pay-as-bid auction; uniform-price auction; discriminatory auction; oligopoly; capacity constraint; wholesale electricity market JEL: C62 D43 D44 L11 L13 L94 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:hhs:uunewp:2005_017&r=all 286. Testable restrictions of general equilibrium in production economies Andres Carvajal (Yale University and Royal Holloway, University of London) This note shows that the testability result obtained by Brown and Matzkin (1996) for an exchange economy survives the introduction of standard, aggregate production, even without the observation of production levels. Date: 2005-01 Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0501&r=all 287. Clustering of Trading Activity in the DAX Index Options Market Alexander K. Koch (Department of Economics, Royal Holloway, University of London) Zdravetz Lazarov (Bonn Graduate School of Economics, University of Bonn) A common contention is that more liquid financial contracts draw trading volume from contracts for which they are close substitutes. This paper tests this hypothesis by analyzing clustering of trading activity in DAX index options. Contracts with identical maturities cluster around particular classes of strike prices. For example, options with strikes ending on 50 are less traded than options with strikes ending on 00. The degree of substitution between options with neighboring strikes depends on the strike price grid and options’ characteristics. Our empirical analysis finds a positive relation between clustering and substitutiability between option contracts, providing support to the initial hypothesis. Keywords: Clustering, Incidental Truncation, Index Options, Volume. JEL: C24 G10 Date: 2005-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0502&r=all 288. Aligning Ambition and Incentives Alexander K. Koch (Department of Economics, Royal Holloway, University of London) Eloic Peyrache (HEC School of Management, Paris) In many economic situations several principals contract with the same agents sequentially. Asymmetric learning about agents’ abilities provides the first principal with an informational advantage and has profound implications for the design of incentive contracts. We show that the principal always strategically distorts information revelation to future principals about the ability of her agents. The second main result is that she can limit her search for optimal incentive schemes to the class of relative performance contracts that cannot be replicated by contracts based on individual performance only. This provides a new rationale for the optimality of such compensation schemes. Keywords: relative performance contracts, reputation, asymmetric learning. JEL: D82 J33 L14 Date: 2005-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0503&r=all 289. A Theory of Bicameralism Giovanni Facchini (University of Illinois, Department of Economics) Cecilia Testa (Department of Economics, Royal Holloway, University of London) We model the role of a parliament’s structure in shaping the accountability of elected representatives. In a setting in which lawmakers interact with a lobby through a bargaining process and with voters by means of elections, we show that only a single legislative body who can make take it or leave it offers to the lobby can be held unambiguously accountable to voters. Whenever the pressure group enjoys some bargaining power, two chambers might instead provide better discipline, depending on the rules governing their interaction, and in particular the allocation of the decision powers among them. We show that bicameralism with restricted amendment rights provides the best incentives, while unrestricted amendment rights result in a status quo bias. Furthermore, by adding complexity of the legislative process, the presence of a second chamber might lead to an undesirable outcome, i.e. a decline in the legislator’s bargaining power vis `a vis the lobby and a reduction in his accountability. Arguments suggesting that bicameralism is a panacea against the abuse of power by elected legislators should therefore be taken with due caution. Keywords: Lobbying, bargaining, elections, accountability, bicameralism. JEL: D72 C78 Date: 2005-03 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0504&r=all 290. Behaviour in a Two-Stage Public Goods Experiment Massimo Finocchiaro Castro (Royal Holloway, University of London; and DEMQ, University of Catania) In a two-stage public goods experiment, we study the effect that subjects’ possibility of contributing to a public good in the first stage of the game has on the voluntary contributions to the second public good. Our results show that subjects do not follow either the Nash strategy or the Pareto efficient strategy and that they perceive the two public goods as substitutes. Keywords: public goods, experiments, voluntary provision. JEL: A13 H41 C92 Date: 2005-05 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0505&r=all 291. Cultural Goods and Laboratory Experiments Massimo Finocchiaro Castro (Royal Holloway, University of London; and DEMQ, University of Catania) In a two-stage public goods experiment, we study the framing effect due to the adoption of a cultural context. Our results show a slight increase in the allocations of subjects’ endowments to the cultural good when the cultural context is implemented in the laboratory. In particular, in one treatment, the framing effect has a strong impact in the last two periods only. Keywords: cultural education, cultural good, framing, experiments, voluntary provision. JEL: A13 H41 C92 Z10 Date: 2005-05 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:hol:holodi:0506&r=all 292. Transitions to Retirement: A Review Jeff Borland (Department of Economics, The University of Melbourne) This paper presents a conceptual framework for thinking about issues associated with the transition to retirement by older workers, and then reviews available Australian and international empirical evidence and literature on this topic. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n03&r=all 293. The Effects on Firm Profits of the Stock of Intellectual Property Rights William E. Griffiths (Centre for Microeconometrics, Department of Economics, The University of Melbourne) Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) The effects of innovation on firm performance is conventionally analysed using R&D or patent applications as measures for innovation capital and market value as the measure of firm performance. We argue that such studies fall short in three important respects. First, the proxies used for innovation capital are flows not stocks as the theory suggests. Secondly, while they are derived from the theory of intangible capital, their estimations ignore other important intangible capital such as organisational and marketing capital; and thirdly, by using market value, the studies heroically assume that stock markets work efficiently. In this paper, we develop a model of the effects of intangible capital, including, but not limiting to, innovation capital, on firm profits, using new measures for the former. Our results indicate that profits vary, ceteris paribus, according to the type of IP rights held by the firm, the age of the firm, the size of the firm, and the lifespan of the IP right. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n04&r=all 294. Patent Application Outcomes across the Trilateral Patent Offices Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) Alfons Palangkaraya (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, and Intellectual Property Research Institute of Australia, The University of Melbourne) While most developed countries apply the same criteria to determine whether an invention is eligible to be protected by a patent, there are substantial procedural differences in the way in which different patent offices examine a patent application. This means that a patent application may be granted in one jurisdiction but rejected in others, which raises welfare concerns about the ability of patents to provide an ex ante incentive for investment. In this article, we analyze whether there are systematic differences in patent application outcomes across the trilateral patent offices. In order to determine how much “disharmony” exists, we examine whether the patent offices make consistent decisions for a given invention using a dataset of 70,000 patent applications that have been granted in the US and submitted in Japan and Europe and have a single, common priority application. Specifically, we model the patent application outcomes using a multinomial logit to see how the decisions made by the patent offices vary across different patent characteristics such as technology area, non-obviousness of the invention and priority country. Date: 2005-04 URL: http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n05&r=all 295. Estimating pension wealth of ELSA respondents James Banks (Institute for Fiscal Studies and University College London) Carl Emmerson (Institute for Fiscal Studies) Gemma Tetlow (Institute for Fiscal Studies) This paper explains the methodology used for calculating pension wealth for all individuals in the first wave of the English Longitudinal Study of Ageing (ELSA). We focus on the pension wealth of individuals aged between 50 and the state pension age. Both state and private pension wealth has been calculated and each has been calculated both on the basis of immediate retirement in 2002 and on the basis of retirement at the state pension age. Sensitivity analysis of our assumptions is also presented, which shows that the distribution of pension wealth is sensitive to our assumptions about the discount rate and contracting out histories but insensitive to assumptions about future earnings growth, future annuity rates and future asset returns. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/09&r=all 296. Radio Frequency Identification Tagging as a Mechanism of Creating a Viable Producer’s Brand in the Cattle Industry Mennecke, Brian Townsend, Anthony This manuscript reports on a project to examine the feasibility of extensive radio frequency identification (RFID) tagging to determine product provenance in the meat production industry. The investigators examined existing technologies and meat production processes as well as emerging technologies in RFID tagging to assess the potential of RFID technologies for provenance assurance. While RFID technologies hold tremendous promise for traceability, the current state of the technology and production process creates challenges for effectively creating full traceability. However, RFID holds tremendous potential for improving processing throughput, which will help make RFID-based traceability more attractive for adoption by meat processors. Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:isu:genres:12359&r=all 297. World Interest Rate, Business Cycles, and Financial Intermediation in Small Open Economies Oviedo, P. Marcelo The consensus about the ability of the standard open-economy neoclassical growth model to account for interest-rate driven business cycles has changed over time: whereas early research concluded that business cycles are neutral to interest-rate shocks, more recent investigations suggest that these shocks can explain a large extent of the business cycles of a small open economy when firms borrow to pay for their labor cost before cashing their sales. The first goal of this paper is to show that the recently found effectiveness of interest-rate shocks to cause business cycles rests more on the statistical properties of the shocks than on the working-capital constraint; in particular, recent results are only valid when the level and volatility of the interest rate are high and when the interest rate is negatively correlated with total factor productivity. The paper also shows that interest-rate shocks cannot be the sole driving force of business cycles even when the canonical model is augmented to include a working-capital constraint. The second goal of the paper is to quantitatively explore the dynamic properties of the neoclassical growth model extended to include financial intermediation. It is shown that the extended model with external effects in financial intermediation can match the negative correlation between GDP and a domestic borrowing-lending spread in emerging countries if the economy is subject to productivity shocks but not when the model is subject to both productivity and interest-rate shocks. JEL: F3 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:isu:genres:12360&r=all 298. International Migration: A Panel Data Analysis of Economic and Non-Economic Determinants Anna Maria Mayda (Georgetown University and IZA Bonn) In this paper I empirically investigate economic and non- economic determinants of migration inflows into fourteen OECD countries by country of origin, between 1980 and 1995. The annual panel data set used makes it possible to exploit both the time- series and crosscountry variation in immigrant inflows. I focus on both supply and demand determinants of migration patterns and find results broadly consistent with the theoretical predictions of a standard international-migration model. Both first and second moments of the income distribution in the destination and origin countries shape international migration movements. In particular, I find evidence of robust and significant pull effects, that is the positive impact on immigrant inflows of improvements in the mean income opportunities in the host country. Inequality in the origin and destination economies affects the size of migration rates as predicted by Borjas (1987) selection model. Finally, among the non-economic determinants, I investigate the impact on emigration rates of geographical, cultural, and demographic factors as well as the role played by changes in destination countries’ migration policies. Keywords: international migration, push and pull factors, network effects JEL: F22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1590&r=all 299. Is Marriage Poisonous? Are Relationships Taxing? An Analysis of the Male Marital Wage Differential in Denmark Nabanita Datta Gupta (Danish National Institute of Social Research, CIM and IZA Bonn) Nina Smith (Aarhus School of Business, CIM and IZA Bonn) Leslie S. Stratton (Virginia Commonwealth University, CIM and IZA Bonn) The word for ‘married’ in Danish is the same as the word for ‘poison’. The word for 'sweetheart' in Danish is the same as the word for 'tax'. In this paper we expand upon the literature documenting a significant marital wage premium for men in the United States to see if a similar differential exists for married men in Denmark - or if the homonyms have perhaps less of a double meaning. Unlike most other research in this area, our study is based on a large panel sample with complete relationship histories, consisting of about 35,000 young Danish men observed before and after their first marriage or cohabitation during the years 1984-2001. Since the majority of young Danes cohabit before they marry, if they ever marry, cohabitation is allowed for as a separate state. Pooled OLS estimates indicate a marital wage premium of 4-5%, which drops to 2% after controlling for selectivity. The cohabitation premium is found to be of the same size as the marital wage premium. Our results indicate that a part of the marriage or cohabitation premium is not due to marriage or cohabitation itself, but to fatherhood. When information on becoming a father and years spent in fatherhood is added to the empirical model, the results show that fathers receive a ‘fatherhood’ premium during their first few years as fathers and that the initial marital wage premium is reduced. Keywords: marriage premium, cohabitation, fatherhood JEL: J12 J31 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1591&r=all 300. Economic Integration, Market Power and Technological Change Tapio Palokangas (University of Helsinki, HECER and IZA Bonn) We examine a common market which expands by integrating new regions. Capitalists are strategically interdependent through the goods market and they improve their productivity through R&D. Production and R&D employ unionized workers. The purpose of integration is to maximize a weighed average of workers’ and capitalists’ utilities. The main findings are as follows. Integration benefits capitalists more than workers. If labour unions are strong enough, then the common market can expand indefinitely. Otherwise, there is an upper limit for integration. This is the higher, the higher producer market power or the stronger the capitalists’ political influence. Keywords: economic integration, market power, endogenous growth JEL: F15 J50 O40 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1592&r=all 301. Piecework versus Timework in British Wartime Engineering Robert A. Hart (University of Stirling and IZA Bonn) The British engineering industry experienced extreme production and employment pressures during the rearmament period that preceded the Second World War and in the early war years. Did it react by placing a greater emphasis on incentive-compatible payment methods? This paper examines the relative employment and wage effects on pieceworkers and timeworkers. Empirical work is based on detailed firm-level payroll data produced by the Engineering Employers Federation covering the period 1935 to 1942. The paper investigates the effects of war on piecework and timework in relation to (a) labour market arguments concerning substitution between payment methods, (b) piece rate/time rate adjustments to changes in product demand, (c) relative changes in employment and hours, and (d) relative changes in hourly and weekly pay. Keywords: piecework, timework, British engineering, World War II JEL: J31 J33 N34 N44 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1593&r=all 302. Food Insecurity and Insufficiency at Low Levels of Food Expenditures Craig Gundersen (Iowa State University) David C. Ribar (George Washington University and IZA Bonn) This study uses data from the December 2003 Food Security Supplement of the CPS to compare the food insufficiency and insecurity measures with objective measures of food expenditures and objective and subjective measures of food needs. The study examines the general relationships between these variables and finds that reports of food hardships are positively associated with food expenditures and negatively associated with needs. The study goes on to examine reports of food hardships at low very levels of food expenditures, where we conjecture that most people should experience food problems. When expenditures are scaled by an objective measure of needs, there is no point along the expenditure distribution where more than half of the survey respondents report experiencing being food insufficient or insecure. However, when expenditures are scaled by a subjective threshold, we observe near-universal reporting of food problems at low levels of expenditures. The findings indicate that the food insufficiency and insecurity measures each incorporate a large subjective component, which limits the usefulness of the measures for comparing the extent of food hardships across populations or over time or evaluating the effects of assistance programs. Keywords: food insecurity, food insufficiency, expenditures, non- parametric regression JEL: I3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1594&r=all 303. Social Pressure Influences Decisions of Individuals: Evidence from the Behavior of Football Referees Thomas J. Dohmen (IZA Bonn) Analyzing the neutrality of referees during twelve German premier league (1st Bundesliga) football seasons, this paper documents evidence that social forces influence agents’ preferences and decisions. Those, who are appointed to be impartial, tend to favor the home team as they systematically award more injury time in close matches when the home team is behind. Referees also tend to favor the home team in decisions to award goals and penalty kicks. The composition of the crowd affects the size and the direction of the bias. The intensity of social pressure as measured by the crowd’s proximity to the field determines how strongly referees’ decisions are influenced. Not all agents are, however, affected to the same degree by social pressure. Keywords: favoritism, principal-agent relationship, personnel economics JEL: J00 M50 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1595&r=all 304. Labour Use and Its Adjustment in Indian Manufacturing Industries Amit K. Bhandari (University of Kalyani) Almas Heshmati (MTT Economic Research, Seoul National University and IZA Bonn) This study provides an empirical investigation of the adjustment process of labour in Indian manufacturing industries, which evolved through structural transformation in the era of globalization. The analysis is based on a dynamic model applied to a panel of 22 two-digit manufacturing industries for the time period of 22 years covering 1980/81 to 2001/02. We assume that as competition increases industries adjust their employment to a desired level which is both industry and time specific. The results indicate that the manufacturing sector has shown a considerable dynamism in adjusting its workforce. The long run labour demand responds greatest to the output, followed by capital and least by wages. It is observed that Indian manufacturing is not inefficient in labour use as modest speed of adjustment has led employment size closer to the optimal level. Keywords: labour use, employment, adjustment, globalization, manufacturing, India JEL: C23 J23 L60 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1596&r=all 305. Time Discounting and the Body Mass Index Lex Borghans (ROA, University of Maastricht and IZA Bonn) Bart H. H. Golsteyn (ROA, University of Maastricht) In many Western countries, the relative weight of people - measured by the Body Mass Index (BMI) - has increased substantially in recent years, leading to an increasing incidence of overweight and related health problems. As with many forms of risky behavior, it is plausible that overweight is related to the individual discount rate. Increases in credit card debts, the rise in gambling and the development of a more hedonic life style, suggest that the average discount rate has increased over time. This increase may have been the cause of the increase in BMI. Applying a large set of indicators for the individual discount rate, this paper analyzes whether changes in time discounting can account for differences in body mass between individuals at a given point in time and whether changes in the average individual discount rate can explain the remarkable increase in BMI experienced in recent years. We find some evidence for a link between time discounting and differences in BMI between people, but this relationship depends strongly on the choice of the proxy for the discount rate. Giving our hypothesis the best chance, we analyze the development of the time discounting proxies that are most strongly related to BMI. We find no evidence for a change of these proxies over time. Our main conclusion therefore is that overweight might be related to the way people discount future health benefits, but the increase in BMI has to be explained by shifts in other parameters that determine the intertemporal decisions regarding the trade-off of current and future health and satisfaction. Keywords: body mass index (BMI), risky behavior, time discounting JEL: I1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1597&r=all 306. The Determinants of Return Intentions of Turkish Students and Professionals Residing Abroad: An Empirical Investigation Nil Demet Gungor (Middle East Technical University) Aysit Tansel (Middle East Technical University and IZA Bonn) The study estimates an empirical model of return intentions using a dataset compiled from an internet survey of Turkish professionals and Turkish students residing abroad. In the migration literature, wage differentials are often cited as an important factor explaining skilled migration. The findings of the study suggest, however, that other factors are also important in explaining the non-return of Turkish professionals. Economic instability in Turkey is found to be an important push factor, while work experience in Turkey also increases non-return. In the student sample, higher salaries offered in the host country and lifestyle preferences, including a more organized environment in the host country, increase the probability of notreturning. For both groups, the analysis also points to the importance of prior intentions and the role of the family in the decision to return to Turkey or stay overseas. Keywords: skilled migration, brain drain, return intentions, higher education, Turkey JEL: F20 F22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1598&r=all 307. Brain Gain: Claims about Its Size and Impact on Welfare and Growth Are Greatly Exaggerated Maurice Schiff (World Bank and IZA Bonn) Based on static partial equilibrium analysis, the "new brain drain" literature argues that, by raising the return to education, a brain drain generates a brain gain that is, under certain conditions, larger than the brain drain itself, and that such a net brain gain results in an increase in welfare and growth due to education’s positive externalities. This paper, on the other hand, argues that these claims are exaggerated. In the static case, and based on both partial and general equilibrium considerations, the paper shows that i) the size of the brain gain is smaller than suggested in that literature; ii) the impact on welfare and growth is smaller as well (for any brain gain size) iii) a positive brain gain is likely to result in a smaller human capital gain and may even have a negative impact on the stock of human capital; iv) an increase in the stock of human capital may have a negative impact on welfare and growth; and v) in a dynamic framework, the paper shows that the brain drain is unambiguously larger than the brain gain, i.e., that the steady state is characterized by a net brain loss. Keywords: brain gain size, welfare, growth, exaggerated claims JEL: D61 D62 F22 H20 H41 I12 J61 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1599&r=all 308. Migration, Co-ordination Failures and EU Enlargement Tito Boeri (Bocconi University Milan, IGIER and IZA Bonn) Herbert Brucker (DIW Berlin, Aarhus School of Business and IZA Bonn) European migration policies are characterised by a fundamental paradox: they are getting tighter and tighter just while public opinion is becoming more favourable to migrants and the immobility of European citizens expands the scope for spatial arbitrage, accruing the benefits, of immigration. In this paper we consider two possible explanations for this puzzle. At first, based on a computable general equilibrium model, we evaluate whether migration to "rigid labour markets" a-la European involves cost, which are neglected by economic theory. Our results suggest that the economic benefits from international migration are, at a GDP gain of 0.2-0.3% at a migration of 1% of the labour force, but that natives in the receiving countries may lose out especially when generous unemployment benefits are provided to the migrants. Then, we evaluate effects of co- ordination failures in the setting of national migration policies, documenting that a race-to-the-top in migration restrictions has indeed occurred in the case of the Eastern Enlargement of the EU and has involved significant diversion of migration from more restrictive to less restrictive countries. Finally we discuss two potential ways to invert the trend towards stricter barriers to migration, namely i) restricting access to welfare and ii) adopting an EU-wide migration policy. Keywords: migration, enlargement, welfare door JEL: J61 F16 F2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1600&r=all 309. Happiness and the Human Development Index: The Paradox of Australia David G. Blanchflower (Dartmouth College and IZA Bonn) Andrew J. Oswald (University of Warwick, Harvard University and IZA Bonn) According to the well-being measure known as the U.N. Human Development Index, Australia now ranks 3rd in the world and higher than all other English-speaking nations. This paper questions that assessment. It reviews work on the economics of happiness, considers implications for policymakers, and explores where Australia lies in international subjective well-being rankings. Using new data on approximately 50,000 randomly sampled individuals from 35 nations, the paper shows that Australians have some of the lowest levels of job satisfaction in the world. Moreover, among the sub-sample of English-speaking nations, where a common language should help subjective measures to be reliable, Australia performs poorly on a range of happiness indicators. The paper discusses this paradox. Our purpose is not to reject HDI methods, but rather to argue that much remains to be understood in this area. Keywords: well-being, happiness, HDI, macroeconomics JEL: E6 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1601&r=all 310. When and How to Create a Job: The Survival of New Jobs in Austrian Firms Rene Boheim (University of Linz and IZA Bonn) Alfred Stiglbauer (Austrian National Bank) Rudolf Winter-Ebmer (University of Linz, Institute for Advanced Studies Vienna, CEPR and IZA Bonn) While the volatility of job creations has been studied extensively, the survival chances of new jobs are less researched. The question when and how to expand a firm is of importance, both from the firms and from a macro perspective. Adjustment cost theories and arguments about option values of investment in firm expansion make predictions about the timing, sequencing and form of firm expansions. When we analyze 21 years of job creation in Austria, we find that the survival of new jobs (and of new firms) depends upon the state of the business cycle at the time of job creation, on the number of jobs created, and on firm age. Jobs in new firms last longer than new jobs in continuing firms. Keywords: job creation, business cycle, reallocation, persistence JEL: J23 J63 E24 E32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1602&r=all 311. Opening the Black Box of Intra-Household Decision-Making: Theory and Non-Parametric Empirical Tests of General Collective Consumption Models Laurens Cherchye (University of Leuven and FWO-Vlaanderen) Bram De Rock (University of Leuven) Frederic Vermeulen (Tilburg University, CentER and IZA Bonn) We non-parametrically test a general collective consumption model with public consumption and externalities inside the household. We further propose a novel approach to model special cases of the general collective model. These special cases include alternative restrictions on the 'sharing rule' that applies to each household, and which defines the distribution of the household budget over the household members. A limiting case is the unitary model. Our application uses data from the Russia Longitudinal Monitoring Survey (RLMS); the panel structure of this data set allows non-parametric testing of the behavioral models without relying on preference homogeneity assumptions across similar individuals. This application includes test results but also a power analysis for different specifications of the collective consumption model. Our main findings are that the most general collective model, together with a large class of special but still fairly general cases, cannot be rejected by the data, while other, restricted, versions of the general model, including the unitary alternative, are rejected. Since these tests are entirely nonparametric, this provides strong evidence in favor of models focusing on intra-household decision-making. Keywords: collective household models, intra-household allocation, revealed preferences, non-parametric analysis JEL: D11 D12 C14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1603&r=all 312. "An Eye for an Eye, a Tooth for a Tooth." A Study of Political Violence and Counter-insurgency in Egypt David Fielding Anja Shortland This paper analyses a newly collected time-series database measuring the dimensions of violent political conflict in Egypt. Attention is focused on the interaction between politically motivated attacks by Islamists and the counter-insurgency measures used by the Egyptian government. The intensity of security force activities responds immediately to all kinds of Islamist violence, regardless of the target of the attack. However, there are significant asymmetries in the way that the different forms of Islamist violence respond to the different security force activities. Keywords: Egypt, Islamist violence; counter-insurgency; political rights; civil liberties Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:lec:leecon:05/11&r=all 313. The Political Economy of Financial Liberalisation Sourafel Girma Anja Shortland Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be deliberately obstructed to deny access to finance to potential competitors. This paper empirically examines whether the level of liberalisation of the banking system, the stock market and capital account depend on regime characteristics, using panel data from 26 countries from 1973 - 1999. Our results show that it is predominantly fully democratic regimes that have liberalised financial systems. Countries that are not fully democratic have a lower probability of having liberal banking systems and capital accounts and this probability decreases with increasing democratisation. This suggests that the attractiveness of using financial levers to allocate funds in the economy increases with the amount of competition the government faces. Keywords: Financial Repression; Liberalisation;Politics JEL: O16 D78 D72 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:lec:leecon:05/12&r=all 314. Experiments and Economic Development: Lessons from Field Labs in the Developing World Juan Camilo Cardenas Jeffrey P. Carpenter Along with the traditional primitives of economic development ( material preferences, technology, and endowments), there is a growing interest in exploring how psychological and sociological factores (e.g., bounded rationality, norms, or social preferences) also influence economic decisions, the evolution of institutions, and outcomes. Simultaneously, a vast literature has arisen arguing that economic experiments are important tools in identifying and quantifying the role of institutions, socialnorms and preferences on behavior and outcomes. Reflecting on our experience conducting experiments in the field over more than five years, we survey the growing literature at the intersection of these two research areas. Our review has four components. In the introduction we set the stage identifying a set of behavioral factors that seem to be central for understanding growth and economic development./ We then divide the existing literature in two piles: standard experiments conducted in the field and on how to econometrically identify sociological factors in experimental data. We conclude by suggesting topics for future research. Keywords: experimental economics, behavioral economics, institutions, social preferences, poverty, development JEL: C9 O1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:mdl:mdlpap:0505&r=all 315. Intelligenza e Coscienza. L’IA tra Searle e Dennett: sviluppi del l’Intelligenza Artificiale Matteo FINI Paola MILANI This work is focused on Artificial Intelligence and the complex d iscussion about the possibilities of creating a machine thinking as man does. Through this analysis, it emerges that the chances of success of IA program change according to the different theori es about mind which were faced in the last years. In this sense, a big part of the matter depends on the meaning attributed to so me mental elements as counsciousness and intentionality: who thin ks that they can be reduced to physical processes, is usually agr ee with the aims of IA and optimist about results. Instead, who doesn’t believe that mental elements can be reduced to physical o nes is sceptical about IA studies and the possible outcome. In t he last part of the article, the argument is the principal themes of IA, starting from the first programs arriving to neural netwo rks and genetic algorithms; in spite of successes that were reach ed, it seems we are still far from reproducing the human mind in all its components. For this reason, recently, some scientists em phasize the importance to support IA with another subject: the Ar tificial Counsciousness, AC. Keywords: Artificial Intelligence, counsciousness, intentionality, neural networks, genetic algorithms, Artificial Counsciousness. URL: http://d.repec.org/n?u=RePEc:mil:wpdepa:2005-10&r=all 316. 25 Years of IIF Time Series Forecasting: A Selective Review Jan G. De Gooijer Rob J. Hyndman We review the past 25 years of time series research that has been published in journals managed by the International Institute of Forecasters (Journal of Forecasting 1982-1985; International Journal of Forecasting 1985-2005). During this period, over one third of all papers published in these journals concerned time series forecasting. We also review highly influential works on time series forecasting that have been published elsewhere during this period. Enormous progress has been made in many areas, but we find that there are a large number of topics in need of further development. We conclude with comments on possible future research directions in this field. Keywords: Accuracy measures; ARCH model; ARIMA model; Combining; Count data; Densities; Exponential smoothing; Kalman Filter; Long memory; Multivariate; Neural nets; Nonlinearity; Prediction intervals; Regime switching models; Robustness; Seasonality; State space; Structural models; Transfer function; Univariate; VAR. JEL: C53 C22 C32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:msh:ebswps:2005-12&r=all 317. Another Look at Measures of Forecast Accuracy Rob J. Hyndman Anne B. Koehler We discuss and compare measures of accuracy of univariate time series forecasts. The methods used in the M-competition and the M3-competition, and many of the measures recommended by previous authors on this topic, are found to be inadequate, and many of them are degenerate in commonly occurring situations. Instead, we propose that the mean absolute scaled error become the standard measure for comparing forecast accuracy across multiple time series. Keywords: Forecast accuracy, Forecast evaluation, Forecast error measures, M-competition, Mean absolute scaled error. JEL: C53 C52 C22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:msh:ebswps:2005-13&r=all 318. Faith-Based Charity and Crowd Out during the Great Depression Jonathan Gruber Daniel M. Hungerman Interest in religious organizations as providers of social services has increased dramatically in recent years. Churches in the U.S. were a crucial provider of social services through the early part of the twentieth century, but their role shrank dramatically with the expansion in government spending under the New Deal. In this paper, we investigate the extent to which the New Deal crowded out church charitable spending in the 1930s. We do so using a new nationwide data set of charitable spending for six large Christian denominations, matched to data on local New Deal spending. We instrument for New Deal spending using measures of the political strength of a state's congressional delegation, and confirm our findings using a different instrument based on institutional constraints on state relief spending. With both instruments we find that higher government spending leads to lower church charitable activity. Crowd-out was small as a share of total New Deal spending (3%), but large as a share of church spending: our estimates suggest that church spending fell by 30% in response to the New Deal, and that government relief spending can explain virtually all of the decline in charitable church activity observed between 1933 and 1939. JEL: H3 N4 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11332&r=all 319. Banker Fees and Acquisition Premia for Targets in Cash Tender Offers: Challenges to the Popular Wisdom on Banker Conflicts Charles W. Calomiris Donna M. Hitscherich We analyze data on fees paid to investment bankers and acquisition premia paid for targets in cash tender offers. Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent ( and, therefore, risky) the fees, the higher they tend to be, all else held constant. Variation in acquisition premia also can be explained by fundamental deal attributes. Contrary to the jaundiced view of fairness opinions, greater fixity of fees is not associated with higher acquisition premia, and there is no evidence that investment banks are suborned by acquirors with whom they have had a prior banking relationship. JEL: G24 G28 G34 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11333&r=all 320. An Empirical Analysis of 'Acting White' Roland G. Fryer, Jr. Paul Torelli There is a debate among social scientists regarding the existence of a peer externality commonly referred to as 'acting white.' Using a newly available data set (the National Longitudinal Study of Adolescent Health), which allows one to construct an objective measure of a student's popularity, we demonstrate that there are large racial differences in the relationship between popularity and academic achievement; our ( albeit narrow) definition of 'acting white.' The effect is intensified among high achievers and in schools with more interracial contact, but non-existent among students in predominantly black schools or private schools. The patterns in the data appear most consistent with a two-audience signaling model in which investments in education are thought to be indicative of an individual's opportunity costs of peer group loyalty. Other models we consider, such as self-sabotage among black youth or the presence of an oppositional culture, all contradict the data in important ways. JEL: J0 I2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11334&r=all 321. Is China's FDI Coming at the Expense of Other Countries? Barry Eichengreen Hui Tong We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason -- limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations -- firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions. JEL: F0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11335&r=all 322. Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition Barry Eichengreen This paper provides an historical perspective on reserve currency competition and on the prospects of the dollar as an international currency. It questions the conventional wisdom that competition for reserve-currency status is a winner-take-all game, showing that several currencies have often shared this role in the past and arguing that innovations in financial markets make it even more likely that they will do so in the future. It suggests that the dollar and the euro are likely to share this position for the foreseeable future. Hopes that the yuan could become a major international currency 20 or even 40 years from now are highly premature. JEL: F0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11336&r=all 323. Adolescent Drinking and High School Dropout Pinka Chatterji Jeff DeSimone This paper estimates the effect of binge and frequent drinking by adolescents on subsequent high school dropout using data from the National Longitudinal Survey of Youth 1979 Young Adults. We estimate an instrumental variables model with an indicator of any past month alcohol use, which is by definition correlated with heavy drinking but should have minimal additional impact on educational outcomes, as the identifying instrument, and also control for a rich set of potentially confounding variables, including maternal characteristics and dropout risk factors measured before and during adolescence. In comparison, OLS provides conservative estimates of the causal impact of heavy drinking on dropping out, implying that binge or frequent drinking among 15 %uF81816 year old students lowers the probability of having graduated or being enrolled in high school four years later by at least 11 percent. Overidentification tests using two measures of maternal youthful alcohol use as additional instruments support our identification strategy. JEL: I12 I21 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11337&r=all 324. The Wage Curve Reloaded David G. Blanchflower Andrew J. Oswald This paper provides evidence for the existence of a wage curve -- a micro-econometric association between the level of pay and the local unemployment rate -- in modern U.S. data. Consistent with recent evidence from more than 40 other countries, the wage curve in the United States has a long-run elasticity of approximately %uF8180.1. In line with the paper%u2019%u2019s theoretical framework: (i) wages are higher in states with more generous unemployment benefits, (ii) the perceived probability of job- finding is lower in states with higher unemployment, and (iii) employees are less happy in states that have higher unemployment. We conclude that it is reasonable to view the wage curve as an empirical law of economics. JEL: J3 E2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11338&r=all 325. Trade Responses to Geographic Frictions: A Decomposition Using Micro-Data Russell Hillberry David Hummels A large literature has shown that geographic frictions reduce trade, but has not clarified precisely why. We provide insights into why such frictions matter by examining which parts of trade these frictions reduce most. Using data that tracks manufacturers' shipments within the United States on an exceptionally fine grid, we find that the pattern of shipments is extremely localized. Shipments within 5-digit zip codes, which have a median radius of just 4 miles, are 3 times larger than shipments outside the zip code. We decompose aggregate shipments into extensive and intensive margins, and show that distance and other frictions reduce aggregate trade values primarily by reducing the number of commodities shipped and the number of establishments shipping. We consider two broad reasons for these facts and conclude that trade in intermediate goods is the most likely explanation for highly localized shipments and the dominant role of the extensive margin. In addition, we find no evidence of state-level home bias when distances are measured precisely and trade is observed over a very fine grid. JEL: F1 R3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11339&r=all 326. New-Keynesian Macroeconomics and the Term Structure Geert Bekaert Seonghoon Cho Antonio Moreno This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro- model with an unobservable time-varying inflation target and the natural rate of output which are filtered from macro and term structure data. We obtain large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the "level factor" whereas the monetary policy shocks dominate the variation in the "slope and curvature factors". JEL: E4 E5 G2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11340&r=all 327. The Simple Geometry of Transmission and Stabilization in Closed and Open Economies Giancarlo Corsetti Paolo Pesenti This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies. JEL: E31 E52 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11341&r=all 328. The Effects of Living Wage Laws: Evidence from Failed and Derailed Living Wage Campaigns Scott Adams David Neumark Living wage campaigns have succeeded in about 100 jurisdictions in the United States but have also been unsuccessful in numerous cities. These unsuccessful campaigns provide a better control group or counterfactual for estimating the effects of living wage laws than the broader set of all cities without a law, and also permit the separate estimation of the effects of living wage laws and living wage campaigns. We find that living wage laws raise wages of low-wage workers but reduce employment among the least- skilled, especially when the laws cover business assistance recipients or are accompanied by similar laws in nearby cities. JEL: J38 J58 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11342&r=all 329. Gender, Body Mass and Economic Status Dalton Conley Rebecca Glauber Previous research on the effect of body mass on economic outcomes has used a variety of methods to mitigate endogeneity bias. We extend this research by using an older sample of U.S. individuals from the PSID. This sample allows us to examine age- gender interactive effects. Through sibling-random and fixed effects models, we find that a one percent increase in a woman's body mass results in a .6 percentage point decrease in her family income and a .4 percentage point decrease in her occupational prestige measured 13 to 15 years later. Body mass is also associated with a reduction in a woman's likelihood of marriage, her spouse's occupational prestige, and her spouse's earnings. However, consistent with past research, men experience no negative effects of body mass on economic outcomes. Age splits show that it is among younger adults where BMI effects are most robust, lending support to the interpretation that it is BMI causing occupational outcomes and not the reverse. JEL: I0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11343&r=all 330. The Worldwide Economic Impact of the Revolutionary and Napoleonic Wars Kevin H. O'Rourke The paper provides a comparative history of the economic impact of the Revolutionary and Napoleonic Wars. By focussing on the relative price evidence, it is possible to show that the conflict had major economic effects around the world. Britain's control of the seas meant that it was much less affected than other nations, such as France and the United States. Explicit welfare calculations are provided for four countries, Britain, France, Sweden and the United States. Welfare losses were largest in the US, where they were of the order of 5-6% per annum; by contrast, they lay between 3-4% per annum in France, and between 1.7-1.8% per annum in Britain. On the other hand, the conflict helped pave the way for the more liberal international economic environment of the long 19th century. JEL: F1 N7 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11344&r=all 331. Adjustment in Property Spce Markets: Estimates from the Stockholm Office Market Peter Englund Ake Gunnelin Patric H. Hendershott Bo Soderberg We analyze the joint dynamics of property space markets using an error-correction model, where rent and vacancies adjust to deviations from equilibrium rent and vacancies. The analysis is based on a new lease rent series for the Stockholm office rental market for the time-period 1977 %uF8182002 constructed by standard hedonic methods applied to a data-set of some 2,400 individual leases. Simulations illustrate the separate roles of rent and vacancy rate movements in the adjustment process. We calculate the natural vacancy rate assuming a trending equilibrium. Property markets may be slow to adjust because tenants are constrained by long-term leases and may be slow to adjust to current rents for other reasons. This gives rise to %u201Chidden vacancies%u201D (the difference between space occupancy and demand at the current lease rate). Using our market rent series and the lease-length distribution, we estimate a time series on the average rent on existing leases. We find that most of the variation in hidden vacancies is explained by the difference between demand at current and average rent. JEL: R1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11345&r=all 332. What Remains from the Volcker Experiment? Benjamin M. Friedman Under conventional representations of economic policymaking, any innovation is either (1) a change in the objectives that policymakers are seeking to achieve, (2) a change in the choice of policy instrument, or (3) a change in the way auxiliary aspects of economic activity are used to steer policy in the context of time lags. Most public discussion of the 1979 Volcker experiment at the time, and likewise most of the subsequent academic literature, emphasized either the role of quantitative targets for money growth (3) or the use of an open market operating procedure based on a reserves quantity rather than a short-term interest rate (2). With time, however, neither has survived as part of U.S. monetary policymaking. What remains is the question of whether 1979 brought a new, greater weight on the Federal Reserve%u2019s objective of price stability vis-a-vis its objective of output growth and high employment (1). That is certainly one interpretation of the historical record. But the historical evidence is also consistent with the view that the 1970s were exceptional, rather than that the experience since 1979 has differed from what went before as a whole. JEL: E52 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11346&r=all 333. School Quality, Neighborhoods and Housing Prices: The Impacts of school Desegregation Thomas J. Kane Douglas O. Staiger Stephanie K. Riegg We study the relationship between school characteristics and housing prices in Mecklenburg County, North Carolina between 1994 and 2001. During this period, the school district was operating under a court-imposed desegregation order and redrew a number of school boundaries. We use two different sources of variation to disentangle the effect of schools and other neighborhood characteristics: differences in housing prices along assignment zone boundaries and changes in housing prices following the change in school assignments. We find systematic differences in house prices along school boundaries, although the impact of schools is only one-quarter as large as the naive cross-sectional estimates would imply. Moreover, house prices seem to react to changes in school assignments. Part of the impact of school assignments is mediated by subsequent changes in the characteristics of the population living in the school zone. JEL: J0 R0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11347&r=all 334. The Determinants of Faculty Patenting Behavior: Demographics or Opportunities? Pierre Azoulay Waverly Ding Toby Stuart We examine the individual, contextual, and institutional determinants of faculty patenting behavior in a panel dataset spanning the careers of 3,884 academic life scientists. Using a combination of discrete time hazard rate models and fixed effects logistic models, we find that patenting events are preceded by a flurry of publications, even holding constant time-invariant scientific talent and the latent patentability of a scientist's research. Moreover, the magnitude of the effect of this flurry is influenced by context --- such as the presence of coauthors who patent and the patent stock of the scientist's university. Whereas previous research emphasized that academic patenters are more accomplished on average than their non-patenting counterparts, our findings suggest that patenting behavior is also a function of scientific opportunities. This result has important implications for the public policy debate surrounding academic patenting. JEL: O31 O32 O33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11348&r=all 335. Volatility and Growth: Credit Constraints and Productivity- Enhancing Investment Philippe Aghion George-Marios Angeletos Abhijit Banerjee Kalina Manova We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long- term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth. JEL: E22 E32 O16 O30 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11349&r=all 336. Venture Capital as Human Resource Management Antonio Geldson de Carvalho Charles W. Calomiris Joao Amaro de Matos Venture capitalists add value to portfolio firms by obtaining and transferring information about senior managers across firms over time. Information transfer occurs on a significant scale and takes place both among a single venture capitalist%u2019s portfolio firms and between different venture capitalists%u2019 firms via a network of venture capitalists, which venture capitalists use to locate and relocate managers. Cross-sectional differences are associated with differences in the intensity with which venture capitalists network. The observable factors relevant in explaining the intensity with which venture capitalists network include: 1) the value of the information transmitted through the network, 2) the riskiness of the activities of portfolio firms, 3) the size of the venture capital fund, 4) the degree of difficulty in enticing executives to manage portfolio firms, and 5) the reputation of the venture capitalist for successfully recycling managers. These factors reflect costs and benefits to venture capitalists of participating in the network. JEL: G14 G24 J23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11350&r=all 337. Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston Charles W. Calomiris Thanavut Pornrojnangkool The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium- sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium- sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements. JEL: G21 L13 D43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11351&r=all 338. Studying Texts: A Gemara of the Israel Economy Michael W. Klein This paper reviews six English-language books on the economy of Israel. Each book was written or edited by Israelis, and each is from a different decade. The earliest book, Don Patinkin%u2019s The Israel Economy: The First Decade, was written in the late 1950s, and the most recent volume, The Israeli Economy, 1985 - 1998: From Government Intervention to Market Economics (edited by Avi Ben-Bassat), was published in 2002. While each book considers the Israeli economy at a different stage of its development, five common themes appear: (i) the relevant comparison group for considering the Israeli economy, (ii) the challenges of immigration, integration and inequality, (iii) the appropriate roles of the government and markets, (iv) openness and dependence, and (v) inflation, crisis, and stabilization. Overall, the chronology of economic views presented in these books corresponds to an increasing acceptance of the role of markets and an increasing desire for open trade in goods and assets. JEL: N0 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11352&r=all 339. International Borrowing and Macroeconomic Performance in Argentina Kathryn M.E. Dominguez Linda L. Tesar This paper provides an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. We focus on the relationship between the credibility of the currency board and capital flows, and the inescapable link between fiscal and monetary policy. Argentina inadvertently entered into a vicious circle with financial markets -- one in which it felt compelled to raise the exit costs from the currency board in order to maintain the regime%u2019s credibility. As exit costs mounted, financial markets became increasingly concerned about the dire implications of a devaluation, which in turn, compelled the government to raise exit costs further. In the late 1990s, when Argentina went into recession, it required some sort of stimulus - either a loosening of monetary policy (i.e. a devaluation) or fiscal stimulus. But either way spelled disaster. The added pressure of capital outflow, first by international investors and then the withdrawal of deposits from the Argentine banking system, eventually tipped the scales. JEL: O54 F3 F21 F42 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11353&r=all 340. The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle William Nordhaus Productivity has rebounded in the last decade while manufacturing employment has declined sharply. The present study uses data on industrial output and employment to examine the sources of these trends. It finds that the productivity rebound since 1995 has been widespread, with approximately two-fifths of the productivity rebound occurring in New Economy industries. Moreover, after suffering a slowdown in the 1970s, productivity growth since 1995 has been at the rapid pace of the earlier 1948- 73 period. Finally, the study investigates the relationship between employment and productivity growth. If finds that the relevant elasticities indicate that more rapid productivity growth leads to increased rather than decreased employment in manufacturing. The results here suggest that productivity is not to be feared - at least not in manufacturing, where the largest recent employment declines have occurred. This shows up most sharply for the most recent period, since 1998. Overall, higher productivity has led to lower prices, expanding demand, and to higher employment, but the partial effects of rapid domestic productivity growth have been more than offset by more rapid productivity growth and price declines from foreign competitors. JEL: O4 E1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11354&r=all 341. Contracts and the Division of Labor Daron Acemoglu Pol Antras Elhanan Helpman We present a tractable framework for the analysis of the relationship between contract incompleteness, technological complementarities and the division of labor. In the model economy, a firm decides the division of labor and contracts with its worker-suppliers on a subset of activities they have to perform. Worker-suppliers choose their investment levels in the remaining activities anticipating the ex post bargaining equilibrium. We show that greater contract incompleteness reduces both the division of labor and the equilibrium level of productivity given the division of labor. The impact of contract incompleteness is greater when the tasks performed by different workers are more complementary. We also discuss the effect of imperfect credit markets on the division of labor and productivity, and study the choice between the employment relationship versus an organizational form relying on outside contracting. Finally, we derive the implications of our framework for productivity differences and comparative advantage across countries. JEL: D2 J2 L2 O3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11356&r=all 342. A Proposed Method for Monitoring U.S. Population Health: Linking Symptoms, Impairments, Chronic Conditions, and Health Ratings Susan T. Stewart Rebecca M. Woodward David M. Cutler We propose a method of quantifying non-fatal health that details the mechanisms through which chronic conditions affect health. Self-rated health status and time-tradeoff ratings of current health are regressed on impairments and symptoms from the Quality of Well-Being Scale, using OLS regression and ordered probit. This yields estimates of their effects analogous to disutility weights but not based on counterfactual scenarios, and accounts for complex non-additive relationships. Data are from 1420 adults age 45-89 in the Beaver Dam Health Outcomes Study. Chronic condition weights and summary measures of health are derived, laying the groundwork for a detailed national summary measure of health. JEL: I10 I12 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11358&r=all 343. Age and Great Invention Benjamin F. Jones Great achievements in knowledge are produced by older innovators today than they were a century ago. Using data on Nobel Prize winners and great inventors, I find that the age at which noted innovations are produced has increased by approximately 6 years over the 20th Century. This trend is consistent with a shift in the life-cycle productivity of great minds. It is also consistent with an aging workforce. The paper employs a semi-parametric maximum likelihood model to (1) test between these competing explanations and (2) locate any specific shifts in life-cycle productivity. The productivity explanation receives considerable support. I find that innovators are much less productive at younger ages, beginning to produce major ideas 8 years later at the end of the 20th Century than they did at the beginning. Furthermore, the later start to the career is not compensated for by increasing productivity beyond early middle age. I show that these distinct shifts for knowledge-based careers are consistent with a knowledge-based theory, where the accumulation of knowledge across generations leads innovators to seek more education over time. More generally, the results show that individual innovators are productive over a narrowing span of their life cycle, a trend that reduces -- other things equal -- the aggregate output of innovators. This drop in productivity is particularly acute if innovators' raw ability is greatest when young. JEL: O3 O4 J2 I2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11359&r=all 344. The Burden of Knowledge and the 'Death of the Renaissance Man': Is Innovation Getting Harder? Benjamin F. Jones This paper investigates, theoretically and empirically, a possibly fundamental aspect of technological progress. If knowledge accumulates as technology progresses, then successive generations of innovators may face an increasing educational burden. Innovators can compensate in their education by seeking narrower expertise, but narrowing expertise will reduce their individual capacities, with implications for the organization of innovative activity - a greater reliance on teamwork - and negative implications for growth. I develop a formal model of this "knowledge burden mechanism" and derive six testable predictions for innovators. Over time, educational attainment will rise while increased specialization and teamwork follow from a sufficiently rapid increase in the burden of knowledge. In cross-section, the model predicts that specialization and teamwork will be greater in deeper areas of knowledge while, surprisingly, educational attainment will not vary across fields. I test these six predictions using a micro-data set of individual inventors and find evidence consistent with each prediction. The model thus provides a parsimonious explanation for a range of empirical patterns of inventive activity. Upward trends in academic collaboration and lengthening doctorates, which have been noted in other research, can also be explained by the model, as can much-debated trends relating productivity growth and patent output to aggregate inventive effort. The knowledge burden mechanism suggests that the nature of innovation is changing, with negative implications for long-run economic growth. JEL: O3 O4 J2 I2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11360&r=all 345. Optimism and Economic Choice Manju Puri David Robinson This paper presents some of the first large-scale survey evidence linking optimism to major economic choices. We create a novel measure of optimism using the Survey of Consumer Finance by comparing a person's self-reported life expectancy to that implied by statistical tables. Optimists are more likely to believe that future economic conditions will improve. Self- employed respondents are more optimistic than regular wage earners. In general, more optimistic people work harder and anticipate longer age-adjusted work careers. They are more likely to remarry, conditional on divorce. In addition, they tilt their investment portfolios more toward individual stocks. JEL: G1 D1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11361&r=all 346. Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia Jianping Mei Jose Scheinkman Wei Xiong The market dynamics of technology stocks in the late nineties has stimulated a growing body of theories that analyze the joint effects of short-sales constraints and heterogeneous beliefs on stock prices and trading volume. This paper examines implications of these theories using a unique data sample from China, a market with stringent short-sales constraints and perfectly segmented dual-class shares. The identical rights of the dual-class shares allow us to control for stock fundamentals. We find that trading caused by investors' speculative motive can help explain a significant fraction of the price difference between the dual- class shares. JEL: G0 G1 F3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11362&r=all 347. Bank Credit Cycles Gary Gorton Ping He Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner%u2019s curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches." Empirical tests are constructed based on parameterizing public information about relative bank performance that is at the root of banks%u2019 beliefs about rival banks%u2019 behavior. Consistent with the theory, we find that the relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, we show that the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. We also find that the relative bank performance is a priced risk factor for both banks and nonfinancial firms. The factor-coefficients for non-financial firms are decreasing with size. JEL: E3 G2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11363&r=all 348. Eat or Be Eaten: A Theory of Mergers and Merger Waves Gary Gorton Matthias Kahl Richard Rosen In this paper, we present a model of defensive mergers and merger waves. We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. A technological or regulatory change that makes acquisitions profitable in some future states of the world can induce a preemptive wave of unprofitable, defensive acquisitions. The timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry. JEL: G3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11364&r=all 349. The International Exposure of U.S. Banks Linda S. Goldberg This paper documents the changing international exposures of U.S. bank balance sheets since the mid-1980s. U.S. banks have foreign positions heavily concentrated in Europe, with more volatile flows to other regions of the world. In recent years some cross- border claims on Latin American countries have declined, while claims extended locally by the branches and subsidiaries of U.S. banks have grown. The foreign exposures of larger U.S. banks tend to be less volatile than claims of smaller banks, and locally- issued claims tend to be more stable than cross-border flows. Business cycle variables have mixed influence on U.S. bank cross- border and local claims. The cross-border claims of U.S. banks on European customers tend to be procyclical. By contrast, locally generated and cross border claims on Latin American customers of U.S. banks are not robustly related to either U.S. or country- specific business cycle variables. U.S. banks do not appear to be strong conduits for transmitting U.S. cycles to these smaller markets, and may instead serve a positive role in stabilizing the amplitude of foreign country cycles. JEL: F3 G2 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11365&r=all 350. International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence Joshua Aizenman Jaewoo Lee This paper tests the importance of precautionary and mercantilist motives in accounting for the hoarding of international reserves by developing countries, and provides a model that quantifies the welfare gains from optimal management of international reserves. While the variables associated with the mercantilist motive are statistically significant, their economic importance in accounting for reserve hoarding is close to zero and is dwarfed by other variables. Overall, the empirical results are in line with the precautionary demand. The effects of financial crises have been localized, increasing reserve hoarding in the aftermath of crises mostly in countries located in the affected region, but not in other regions. We also investigate the micro foundation of precautionary demand, extending Diamond and Dybvig (1983)'s model to an open, emerging market economy where banks finance long-term projects with short-term deposits. We identify circumstances that lead to large precautionary demand for international reserves, providing self-insurance against the adverse output effects of sudden stop and capital flight shocks. This would be the case if premature liquidation of long-term projects is costly, and the economy is de-facto integrated with the global financial system, hence sudden stops and capital flight may reduce deposits sharply. We show that the welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude. JEL: F15 F31 F43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11366&r=all 351. Asset Float and Speculative Bubbles Harrison Hong Jose Scheinkman Wei Xiong We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, turnover and volatility decrease with float and prices drop on the lock-up expiration date. JEL: G0 G1 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11367&r=all 352. Ageing, welfare services and municipalities in Finland Jens Lundsgaard With population ageing setting in sooner and more forcefully than in other OECD countries, Finland needs to get its fiscal priorities right quickly. That will require considerable reform as public spending currently expands vigorously. While GDP growth has slowed from the exceptionally rapid pace of the late 1990s, public consumption has continued to grow fast, as new obligations by central government and popular demand led municipalities to expand service provision. After some consolidation in 2003, local government spending has accelerated again and the deficit has widened to ? per cent of GDP in 2004 for the municipalities considered as a whole – despite still larger transfers from central government. At the same time, the tax burden is high, especially on labour. Ensuring the sustainability of public finances over the long term, while maintaining the essential parts of the welfare society will only be possible by i) raising the effectiveness of public spending, ii) reforming the financing of municipalities to encourage better control of spending and limit future rises in municipal income taxation and iii) rebalancing the mix between public and private provision and funding of services. This working paper discusses ways in which progress could be made on such a policy agenda. It relates to the 2004 OECD Economic Survey of Finland (www.oecd. org/eco/surveys/finland) updating the Survey’s analysis by incorporating data for 2004 and recent developments.

    Vieillissement, services sociaux et collectivites locales en Finlande

    Avec une population qui vieillit plus rapidement et plus fortement que dans les autres pays de l’OCDE, la Finlande se trouve dans l’obligation d’ajuster rapidement ses priorites budgetaires. Il faudra pour cela des reformes considerables, car l’expansion des depenses publiques est actuellement tres forte. Bien que la croissance du PIB se soit ralentie par rapport a son rythme exceptionnellement rapide du debut des annees 90, la consommation publique a continue a progresser rapidement, les nouvelles obligations imposees par l’administration centrale et par la pression des usagers ayant amene les municipalites a accroitre leur offre de services publics. Apres une certaine stabilisation en 2003, les depenses des collectivites locales se sont a nouveau accelerees et le deficit a ete porte a ? pour cent du PIB en 2004 pour les municipalites considerees dans leur ensemble – malgre le versement de transferts encore plus importants par l’administration centrale. Quant a la charge fiscale, elle reste elevee, surtout celle qui pese sur la main d’?uvre. Il ne sera possible d’assurer la stabilisation a long terme des finances publiques tout en maintenant les elements essentiels de la protection sociale qu’a condition i) d’ameliorer l’efficacite des depenses publiques, ii) de reformer le financement des communes pour les inciter a mieux controler leurs depenses et limiter les augmentations futures de l’impot municipal sur le revenu et iii) de reequilibrer le partage entre le secteur public et le secteur prive dans l’offre et dans le financement des services publics. Ce document de travail examine les moyens de progresser dans la realisation de ce programme. Il se refere a l’Etude economique de 2004 de l’OCDE sur la Finlande (www.oecd. org/eco/surveys/finland) et met a jour les analyses effectuees dans cette etude en y inserant des donnees pour 2004 et en prenant en compte l’evolution recente. Keywords: Fiscal policy; fiscal federalism; local governments; property tax; income tax; public sector efficiency; welfare services; contracting out; vouchers; ageing; pensions; Finland JEL: H2 H4 H5 H7 L3 Date: 2005-05-10 URL: http://d.repec.org/n?u=RePEc:oed:oecdec:428&r=all 353. The Employment Effects of the October 2003 Increase in the National Minimum Wage Richard Dickens (Queen Mary, University of London) Mirko Draca (Centre for Economic Performance, London School of Economics) Initial research on the employment impact of the introduction of the National Minimum Wage has shown no evidence of any significant employment loss (Stewart, 2002, 2003, 2004). Against this background the NMW was raised substantially in October 2003 from ?4.20 to ?4.50 and again in October 2004 to ?4.85. These are quite large increases in the NMW and they have been predicted to raise the wages for a substantial proportion of employees in the UK. Some concerns have been raised in the business community about the size of these increases, with some large employers claiming that for the first time the NMW will affect their pay structures. In this report we examine the impact of the October 2003 increase in the NMW on employment. We use a methodology first proposed by Linneman (1982) and used more recently by Stewart (2003, 2004) to examine the introduction of the minimum wage. This essentially examines individual transitions out of employment, comparing a group of workers directly affected by the NMW with a similar but unaffected group. Keywords: Minimum wages, Employment transitions, Wages. JEL: J31 J63 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp532&r=all 354. Variable Selection using Non-Standard Optimisation of Information Criteria George Kapetanios (Queen Mary, University of London) The question of variable selection in a regression model is a major open research topic in econometrics. Traditionally two broad classes of methods have been used. One is sequential testing and the other is information criteria. The advent of large datasets used by institutions such as central banks has exacerbated this model selection problem. This paper provides a new solution in the context of information criteria. The solution rests on the judicious selection of a subset of models for consideration using nonstandard optimisation algorithms for information criterion minimisation. In particular, simulated annealing and genetic algorithms are considered. Both a Monte Carlo study and an empirical forecasting application to UK CPI infation suggest that the new methods are worthy of further consideration. Keywords: Simulated Annealing, Genetic Algorithms, Information criteria, Model selection, Forecasting, Inflation. JEL: C11 C15 C53 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp533&r=all 355. Choosing the Optimal Set of Instruments from Large Instrument Sets George Kapetanios (Queen Mary, University of London) It is well known that instrumental variables (IV) estimation is sensitive to the choice of instruments both in small samples and asymptotically. Recently, Donald and Newey (2001) suggested a simple method for choosing the instrument set. The method involves minimising the approximate mean square error (MSE) of a given IV estimator where the MSE is obtained using refined asymptotic theory. An issue with the work of Donald and Newey ( 2001) is the fact that when considering large sets of valid instruments, it is not clear how to order the instruments in order to choose which ones ought to be included in the estimation. The present paper provides a possible solution to the problem using nonstandard optimisation algorithms. The properties of the algorithms are discussed. A Monte Carlo study illustrates the potential of the new method. Keywords: Instrumental Variables, MSE, Simulated Annealing, Genetic Algorithms. JEL: C12 C15 C23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp534&r=all 356. Cluster Analysis of Panel Datasets using Non-Standard Optimisation of Information Criteria George Kapetanios (Queen Mary, University of London) Panel datasets have been increasingly used in economics to analyse complex economic phenomena. One of the attractions of panel datasets is the ability to use an extended dataset to obtain information about parameters of interest which are assumed to have common values across panel units. However, the assumption of poolability has not been studied extensively beyond tests that determine whether a given dataset is poolable. We propose an information criterion method that enables the distinction of a set of series into a set of poolable series for which the hypothesis of a common parameter subvector cannot be reject and a set of series for which the poolability hypothesis fails. The method can be extended to analyse datasets with multiple clusters of series with similar characteristics. We discuss the theoretical properties of the method and investigate its small sample performance in a Monte Carlo study. Keywords: Panel datasets, Poolability, Information criteria, Genetic Algorithm, Simulated Annealing. JEL: C12 C15 C23 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp535&r=all 357. Alternative Approaches to Estimation and Inference in Large Multifactor Panels: Small Sample Results with an Application to Modelling of Asset Returns George Kapetanios (Queen Mary, University of London) M. Hashem Pesaran (Cambridge University and USC) This paper considers alternative approaches to the analysis of large panel data models in the presence of error cross section dependence. A popular method for modelling such dependence uses a factor error structure. Such models raise new problems for estimation and inference. This paper compares two alternative methods for carrying out estimation and inference in panels with a multifactor error structure. One uses the correlated common effects estimator that proxies the unobserved factors by cross section averages of the observed variables as suggested by Pesaran (2004), and the other uses principal components following the work of Stock and Watson (2002). The paper develops the principal component method and provides small sample evidence on the comparative properties of these estimators by means of extensive Monte Carlo experiments. An empirical application to company returns provides an illustration of the alternative estimation procedures. Keywords: Cross section dependence, Large panels, Principal components, Common correlated effects, Return equations. JEL: C12 C13 C33 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp536&r=all 358. Nonlinear Modelling of Autoregressive Structural Breaks in a US Diffusion Index Dataset George Kapetanios (Queen Mary, University of London) Elias Tzavalis (Queen Mary, University of London) This paper applies a new model of structural breaks developed by Kapetanios and Tzavalis (2004) to investigate if there exist structural changes in the mean reversion parameter of US macroeconomic series. Ignoring such type of breaks may lead to spurious evidence of unit roots in the autoregressive parameters of economic series. Our model specifies that both the timing and size of breaks are stochastic. We apply the model to a variety of macroeconomic and finance series from the US. Keywords: Structural breaks, State space model, Nonlinearity. JEL: E32 C13 C22 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp537&r=all 359. Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis Andrea Cipollini (Queen Mary, University of London) George Kapetanios (Queen Mary, University of London) In this paper we compare the performance of a regional indicator of vulnerability in predicting, out of sample, the crisis events affecting the South East Asian region during the 1997-98 period. A Dynamic Factor method was used to retrieve the vulnerability indicator and stochastic simulation is used to produce probability forecasts. The empirical findings suggest evidence of financial contagion. Keywords: Financial contagion, Dynamic factor model. JEL: C32 C51 F34 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp538&r=all 360. Tests for Deterministic Parametric Structural Change in Regression Models George Kapetanios (Queen Mary, University of London) The problem of structural change justifiably attracts considerable attention in econometrics. A number of different paradigms have been adopted ranging from structural breaks which are sudden and rare to time-varying coefficient models which exhibit structural change more frequently and continuously. This paper is concerned with parametric econometric models whose coefficients change deterministically and smoothly over time. In particular we provide and discuss tests for the null hypothesis of no structural change versus the alternative hypothesis of smooth deterministic structural change. We provide asymptotic tests for this null hypothesis. However, the finite sample performance of these tests is not good as they overreject significantly. To address this problem we propose and justify bootstrap based tests. These tests perform well in an extensive Monte Carlo study. Keywords: Structural change, Non-stationarity, Deterministic time-variation. JEL: C10 C14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp539&r=all 361. Estimating Deterministically Time-Varying Variances in Regression Models George Kapetanios (Queen Mary, University of London) The problem of structural change justifiably attracts considerable attention in econometrics. A number of different paradigms have been adopted ranging from structural breaks which are sudden and rare to time varying coefficient models which exhibit structural change more frequently and continuously. This paper is concerned with parametric econometric models whose coefficients change deterministically and smoothly over time. In particular we provide a new estimator for unconditional time varying variances in regression models. A small Monte Carlo study indicates that the method works reasonably well for moderately large sample sizes. Keywords: Structural change, Non-stationarity, Deterministic time-variation. JEL: C10 C14 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp540&r=all 362. Statistical Tests of the Rank of a Matrix and Their Applications in Econometric Modelling Gonzalo Camba-Mendez (European Central Bank) George Kapetanios (Queen Mary, University of London) Testing the rank of a matrix of estimated parameters is key in a large variety of econometric modelling scenarios. This paper describes general methods to test for the rank of a matrix, and provides details on a variety of modelling scenarios in the econometrics literature where these tests are required. Keywords: Multiple time series, Model specification, Tests of rank. JEL: C12 C15 C32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp541&r=all 363. ACE Models of Endogenous Interactions Nicolaas J. Vriend (Queen Mary, University of London) Various approaches used in Agent-based Computational Economics ( ACE) to model endogenously determined interactions between agents are discussed. This concerns models in which agents not only ( learn how to) play some (market or other) game, but also (learn to) decide with whom to do that (or not). Keywords: Endogenous interaction, Agent-based Computational Economics (ACE). JEL: C6 C7 D1 D2 D3 D4 D5 D6 D8 L1 M3 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp542&r=all 364. China?s emergence in the global economy and Brazil Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper focuses on the impact of China’s emergence on Brazil trade and investment flows and also on the policies and initiatives taken by the Brazilian public and private sectors seeking to meet the challenge raised by it. Based on this evidence alternative scenarios of future developments concerning China and its impact on Brazil will be outlined and Brazilian policies considered. The paper is divided into four sections. The first section describes the effects of China’s expanded role in the world economy on trade and investment flows from a Brazilian perspective. Section 2 examines the complementarity between trade and outward investment flows for Brazil and China. Diversion of foreign direct investment from Brazil to China is briefly considered. The third section focuses on Brazilian policies and China.The conclusive section centers on future developments concerning the Chinese economy and how they may effect Brazil and considers policy suggestions to complement what has already been done to face the challenges and exploit opportunities raised by China’s increasing role in the world economy. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:491&r=all 365. The Brazilian economy, 1980-1994 Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper on the Brazilian Economy is the draft of a chapter to be included in volume IX of the Cambridge History of Latin America, edited by Leslie Bethell . The 1929-1980 period has been covered by the material circulated in Texto para Discussao 0433, November 2000. A third chapter on the period after 1994 will conclude the sequence. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:492&r=all 366. Which "industrial policies" are meaningful for Latin America? Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper’s main concern is to assess which "industrial policies" would be meaningful for Latin America nowadays. The first section considers definitions of "industrial policies" and their nature in the past. The second section centers on national growth experiences that may serve as paradigms for LAC economies. Section 3 is on economies which are growth paradigms and on their relevant policies. Section 4 is on present multilateral constraints on "industrial policies", especially in the case of subsidies and trade-related investment measures, as these have been considerably tightened as a result of the Uruguay Round of multilateral trade negotiations. The following section analyses the link between macroeconomics and "industrial policies" both in relation to limitations imposed by macroeconomic instability on industrial policy and to how growth depends on the cost of investment on both micro and macroeconomic factors. Section 6 analyses industrial policy alternatives. The paper concludes with section 7 which is on policy recommendations seeking to improve criteria to pick winners where market failures are especially costly. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:493&r=all 367. The FTAA and the political economy of protection in Brazil and the US Marcelo de Paiva Abreu (Department of Economics PUC-Rio) This paper is divided in nine sections. A short introduction puts the subject matter in perspective in the context of the FTAA negotiations. Section 1 deals with obstacles to a successful conclusion of the FTAA both in Mercosur - especially in Brazil. The following section considers briefly how notions about reciprocity and balance of concessions have been applied in multilateral negotiations and how they may be adjusted in the case of negotiations involving free trade areas. The following two triads of sections refer to the United States (sections 3, 4 and 5) and Brazil (sections 6, 7 and 8). Sections 3 and 6 analyze in both economies how protectionist interests are distributed from the point of view of sectors affected and of their location ( states and, for the United States, congressional districts). The relative importance of export interests by state is gauged in sections 4 and 7. The relative net balance of protectionist and export interests is evaluated in sections 5 and 8 under different assumptions in an effort to cope with the limitations of the measures used. Section 9 concludes. Date: 2005-01 URL: http://d.repec.org/n?u=RePEc:rio:texdis:494&r=all 368. The Modigliani-Miller Theorems: A Cornerstone of Finance Marco Pagano (Universita di Napoli "Federico II", CSEF and CEPR) The Modigliani-Miller (MM) theorems are a cornerstone of finance for two reasons. The first is substantive and it stems from their nature of “irrelevance propositions”: by providing a crystal- clear benchmark case where capital structure and dividend policy do not affect firm value, by implication these propositions help us understand when these decisions may affect the value of firms, and why. Indeed, the entire subsequent development of corporate finance can be described essentially as exploring the consequences of relaxing the MM assumptions. The second reason for the seminal importance of MM is methodological: by relying on an arbitrage argument, they set a precedent not only within the realm of corporate finance but also (and even more importantly) within that of asset pricing. Keywords: Modigliani-Miller theorem, capital structure, leverage, dividend policy Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:sef:csefwp:139&r=all 369. The Life-Cycle Hypothesis, Fiscal Policy, and Social Security Tullio Jappelli (Universita di Salerno, CSEF and CEPR) The paper reviews some of the most important results of the Life Cycle Hypothesis for understanding individual and aggregate saving behaviour. It then turns to the implications for fiscal policy and social security, highlighting Modigliani’s seminal contributions. Over time competing theories have emerged, and some empirical findings are difficult to reconcile with LCH; chiefly aspects of inertia, myopia, and irrational behaviour documented by the recent behavioural literature. But the LCH is still the benchmark model to think about individual saving decisions, the aggregate evidence and policy issues. Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:sef:csefwp:140&r=all 370. "Productivity Convergence at the Firm Level" Kiyohiko G. Nishimura (Policy Board, Bank of Japan) Takanobu Nakajima (Faculty of Business and Commerce, Keio University) Kozo Kiyota (Faculty of Business Administration, Yokohama National University) Productivity convergence among countries has been investigated extensively with mixed results. This paper extends the analysis to the firm level to shed light on the debate of convergence or non-convergence. We find productivity convergence among firms widely in Japan, in both manufacturing industries and non- manufacturing ones. We obtain these results taking explicit account of exiting firms as a source of selection biases. The convergence rate is much faster among firms than countries. We also find that there are substantial differences among industries in the convergence speed. IT industries that heavily rely on technological progress show faster rates of convergence. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:tky:fseres:2005cf341&r=all 371. "Modeling Credit Risk: A Structural Approach with Long-term and Short-term Debts" (in Japanese) Ryoichi Ikeda (Graduate School of Economics, University of Tokyo) Takao Kobayashi (Faculty of Economics, University of Tokyo) Akihiko Takahashi (Faculty of Economics, University of Tokyo) This paper proposes a structural model to price credit risk of firms with short-term and long-term debts. This enables one to distinguish between default probabilities in the short run and in the long run, and to identify how the composition of debts affects credit risk. We endogenize the banks' decision to bankrupt or save firms in insolvency, and analyze the influence of the governance structure on credit risk valuation. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:tky:jseres:2005cj131&r=all 372. Nuevos instrumentos de politica ambiental Joan Pasqual Rocabert (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona) El proposito de este papel es describir los principales instrumentos economicos que pueden utilizarse en la politica medio ambiental. Se examinan criticamente las soluciones clasicas, sin olvidar las espurias. Se introduce el tiempo en el analisis, se examina la importancia de la tasa de descuento en el calculo economico y se presenta el concepto de economias de duracion, para estudiar el conflicto entre los intereses individuales y el social y generar propuestas de solucion. Se presta especial atencion al conflicto entre los intereses de las generaciones presentes y las futuras, apuntando algunas vias para solventarlo. Keywords: externalidades, bienes publicos, medio ambiente, desarrollo sostenible,generaciones futuras JEL: H23 H41 H43 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea0510&r=all 373. Endogenous Institutions and the Dynamics of Corruption Esther Bruegger While empirical studies which analyze large cross section country data find that corruption lowers investment and thereby economic growth, this result cannot be established for certain subsamples of countries. We argue that one reason for these mixed findings may be that a country's corruption and growth rates are tightly linked as variables of a dynamic process which can have several equilibria or have different sets of equilibria. In order to understand the circumstances in which a country converges towards a certain equilibrium, we model the individual decisions to invest and corrupt as an evolutionary game. In this model the quality of government institutions is an endogenous variable, depending on the corruption rate, the population income, and the type of institutions; the quality of institutions itself then determines the future incentives to corrupt. The comprehension of these feedback effects allows us to study the role of the type of institutions for the dynamics of corruption. We present the equilibria for different types of institutions and discuss the resulting dynamics. The results suggest that cross country studies may significantly underestimate the impact of corruption on growth for certain countries. Depending on how the quality of institutions depends on corruption and income, corruption can either lower growth, suppress it entirely, or be positively correlated with growth in some special situations Keywords: Corruption; Institutions; Feedback Effects; Evolutionary Game JEL: C73 D73 Date: 2005-02 URL: http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0504&r=all 374. Replicator Dynamics with Frequency Dependent Stage Games Esther Bruegger We analyze evolutionary games with replicator dynamics that have frequency dependent stage games. In such an evolutionary game, the payoffs of a strategy at any point in time are functions of the strategy shares given by the players' strategy choices at that time. This framework is suited to model feedback effects between population variables and individual incentives, indirect network effects, and behavior under social norms. We show that the replicator dynamics with frequency dependent stage games is well behaved, i.e. has unique solutions and is simplex invariant for all initial strategy states. Moreover, we present an extension of Liapunov's Theorem that facilitates the analysis of evolutionary equilibria for frequency dependent evolutionary games Keywords: Replicator Dynamics; Frequency Dependent; State Dependent; Evolutionary Games; Liapunov JEL: C73 Date: 2005-03 URL: http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0505&r=all 375. Children of international migrants in Indonesia, Thailand, and the Philippines: a review of evidence and policies John Bryant This paper considers three groups of children affected by international migration: (i) children left behind by international labour migrants from the Philippines, Indonesia, and Thailand; (ii) children of Thai nationals in Japan; and (iii) children brought along by irregular migrants in Malaysia and Thailand. Based on the limited data available from published sources, the paper constructs preliminary estimates of numbers of children involved. It then synthesizes available evidence on problems and opportunities faced by the children, and on policies towards them. [...more] JEL: F22 Date: 2005 URL: http://d.repec.org/n?u=RePEc:ucf:inwopa:inwopa05/32&r=all 376. Shadow Profit Maximization and a Generalized Measure of Inefficiency Subhash C. Ray (University of Connecticut) Determining the profit maximizing input-output bundle of a firm requires data on prices. This paper shows how endogenously determined shadow prices can be used in place of actual prices to obtain the optimal input-output bundle where the firm.s shadow profit is maximized. This approach amounts to an application of the Weak Axiom of Profit Maximization (WAPM) formulated by Varian 1984) based on shadow prices rather than actual prices. At these prices the shadow profit of a firm is zero. Thus, the maximum profit that could have been attained at some other input-output bundle is a measure of the inefficiency of the firm. Because the benchmark input-output bundle is always an observed bundle from the data, it can be determined without having to solve any elaborate programming problem. An empirical application to U.S. airlines data illustrates the proposed methodology. Keywords: DEA, Shadow Prices, Non-radial Efficiency JEL: C61 D21 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uct:uconnp:2005-14&r=all 377. Minimum Quality Standards in Baseball and the Paradoxical Disappearance of the .400 Hitter Thomas J. Miceli (University of Connecticut) This paper argues (following Gould, 2003) that the disappearance of the .400 hitter in major league baseball is due, not to a decrease in ability at the top end of the talent distribution, but to better methods of screening out players at the low end of the distribution. The argument is related to the economic literature on minimum quality standards in markets with imperfect information. Keywords: Minimum quality standards, .400 hitters JEL: D82 L83 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:uct:uconnp:2005-15&r=all 378. Financial Dollarisation: Evaluating The Consequences Eduardo Levy Yeyati Financial dollarisation, defined as the holding by residents of foreign currency assets and liabilities, has been placed at the forefront of the policy debate in developing economies. The reasons include its alleged influence on the conduct of monetary policy and, most prominently, the deleterious impact of exchange rate depreciations on the solvency of dollar debtors (the balance sheet effect). However, the vast analytical literature on these issues contrasts with the scarcity of empirical work to support or refute these implications. This paper contributes to fill this gap. Using a new updated database, the paper revisits the evidence on the determinants of financial dollarisation, and tests whether the impact on monetary and financial stability, and economic performance predicted by the theory is verified in the data. It finds that financially dollarised economies display a more unstable demand for money, a greater propensity to suffer banking crises after a depreciation of the local currency, and slower and more volatile output growth, without significant gains in terms of domestic financial depth. In this light, the case for an active de-dollarisation policy is discussed. Date: 2005 URL: http://d.repec.org/n?u=RePEc:udt:wpbsdt:findollarisation&r=all 379. Efficienza di Costo e Profitto nel Sistema Bancario Italiano (1994-2000). Rilevanza degli Aspetti Istituzionali, Geografici e Dimensionali nella Dinamica Evolutiva Luca Giordano Antonio Lopes Il sistema bancario italiano e' stato interessato da un profondo processo di ristrutturazione a partire dagli anni novanta. Gli esiti della liberalizzazione del settore e del conseguente fenomeno di concentrazione sono tuttora non completamente indagati. Questo lavoro utilizza tecniche econometriche di costruzione di frontiere stocastiche al fine di misurare l'evoluzione dell'efficienza di costo e di profitto delle banche italiane negli anni 1994-2000. I risultati mostrano un significativo processo di convergenza verso la frontiera efficiente per quanto riguarda i prodotti ed una sostanziale invarianza nel tempo per quanto riguarda l'efficienza di costo. Si osserva anche il permanere di significativi differenziali di efficienza tra banche localizzate in diverse aree geografiche e una dinamica dell'efficienza di costo e profitto che per le banche Popolari e Cooperative si discosta in modo marcato da quelle Spa. Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ufg:qdsems:11-2005&r=all 380. Determinazione di strategie nello sfruttamento di una risorsa rinnovabile Marta Elena Biancardi In this paper we propose a static model describing the commercial exploitation of a common property renewable resource by a population of agents. Players can cooperate or compete; cooperators maximize the utility of their group while defectors maximize their own profit. The model provide for one utility function which can be used for every kind of player. Agents aren't assumed to be divided into the two groups from the beginning; by solving the static game we obtained the best response function of i-th player without making other agents positions. Then, the Nash equilibria we calculated point out how different strategies - all the players cooperate, all the players compete or players can be divided into cooperators and defectors - can coexist. In any case we have analyzed, it's possible to observe how the total harvest depend on renewable resource stock, and how it influences agents' positions. Keywords Resource Exploitation, Game Theory Date: 2004-09 URL: http://d.repec.org/n?u=RePEc:ufg:qdsems:09-2004&r=all 381. Currency Derivatives under a Minimal Market Model with Random Scaling David Heath (School of Finance and Economics, University of Technology, Sydney) Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) This paper uses an alternative, parsimonious stochastic volatility model to describe the dynamics of a currency market for the pricing and hedging of derivatives. Time transformed squared Bessel processes are the basic driving factors of the minimal market model. The time transformation is characterized by a random scaling, which provides for realistic exchange rate dynamics. The pricing of standard European options is studied. In particular, it is shown that the model produces implied volatility surfaces that are typically observed in real markets. Keywords: currency derivatives; stochastic volatility; random scaling; minimal market model JEL: G10 G13 D52 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:uts:rpaper:154&r=all 382. Benford’s Law and Naturally Occurring Prices in Certain ebaY Auctions David E. Giles (Department of Economics, University of Victoria) We show that certain the winning bids for certain ebaY auctions obey Benford’s Law. One implication of this is that it is unlikely that these bids are subject to collusion among bidders, or “shilling” on the part of sellers. Parenthetically, we also show that numbers from the naturally occurring Fibonacci and Lucas sequences also obey Benford’s Law. Keywords: Benford’s Law, auction prices, football, Kuiper test, Watson test JEL: C12 C14 C16 D44 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:vic:vicewp:0505&r=all 383. Foreign Exchange Interventions in Croatia and Turkey: Should We Give a Damn? Balazs Egert Maroje Lang This paper studies the impact of daily official foreign exchange interventions on the exchange rates of two EU candidate countries, namely Croatia and Turkey for the periods from 1996 to 2004 and from 2001 to 2004, respectively. Using the event study methodology and a variety of GARCH models reveals that both the Croatian and the Turkish central banks were in a position to influence, to some extent, the level of the exchange rate during the period studied. This lends support to the view that foreign exchange intervention may be effective to a limited extent in emerging market economies. Keywords: central bank intervention, foreign exchange intervention, official interventions, foreign exchange market, effectiveness, exchange rate volatility, emerging economies, transition economies JEL: F31 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-755&r=all 384. Barter, Credit, and Welfare: A theoretical inquiry into the barter phenomenon in Russia Jose Noguera Susan J. Linz This paper develops a model to investigate the welfare implications of barter in Russia and other transition economies during the 1990s. We argue that barter is a welfare-improving phenomenon that acts as a defense mechanism against monetary instability. When firms react to tighter credit markets by switching to barter, the risk they face diminishes, allowing for a higher level of production. Keywords: Barter, welfare, Russia, money, credit, payment system, interest rate JEL: E0 E6 P20 P21 P23 P26 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-757&r=all 385. Attitudes and Performance: An Analysis of Russian Workers Susan J. Linz Anastasia Semykina This paper investigates the relationship between locus of control and performance among Russian employees, using survey data collected at 28 workplaces in 2002 in Taganrog and at 47 workplaces in 2003 in Ekaterinburg. We develop a measure that allows us to categorize the Russian employees participating in our survey as exhibiting an internal or external locus of control. We then assess the extent to which there are significant differences between “internals” and “externals” in work- related attitudes that may affect performance. In particular, we focus on (1) attitudes about outcomes associated with hard work, ( 2) level of job satisfaction, (3) expectation of receiving a desired reward, and (4) loyalty to and involvement with one’s organization. In each case we identify where gender and generational differences emerge. Our main objective is to determine whether Russian employees who exhibit an internal locus of control perform better than employees with an external locus of control. Our performance measures include earnings, expected promotions, and assessments of the quantity and quality of work in comparison to others at the same organization doing a similar job. Controlling for a variety of worker characteristics, we find that (1) individuals who exhibit an internal locus of control perform better, but this result is not always statistically significant; (2) even among “internals,” women earn significantly less than men and have a much lower expectation of promotion; (3) even among “internals,” experience with unemployment has a negative influence on performance. Keywords: locus of control, Russia, motivation, performance, gender JEL: P23 J24 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-758&r=all 386. Resolution, Recovery and Survival: The Evolution of Payment Disputes in Post-Socialist Europe William Pyle What determines the mechanism chosen to resolve a commercial dispute? To what degree does the aggrieved recover damages? And does the relationship survive in the aftermath? The answers to these questions affect expectations as to the costs of transacting and, thereby, the development of markets. But they have received almost no attention in the economic literature on the post-socialist transition. This article exploits a rich survey of small and medium-sized manufacturing enterprises in three post-socialist countries to explain behavioral responses to an inter-firm payment dispute. Particular attention is given to how the evolution of disputes is sensitive to both the geographic distance between trade partners and membership in a business association. Keywords: commercial dispute, business association, transition JEL: D23 D74 K40 K41 P37 Date: 2005-03-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-761&r=all 387. State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector Maxim Bouev This paper analyses the emergence of the informal economy in the environment characterised by non-competitive labour markets with wage bargaining. We develop a simple extension of the standard search model a la Pissarides (2000) with formal and informal sectors to show how a government’s auditing of informal firms and barriers to firms’ entry erected in the formal sector by corrupt bureaucracy can make for stable coexistence of formal and informal jobs in the long term. In equilibrium, wage differentials for homogeneous and risk-neutral workers emerge because different types of jobs have different lifetimes and/or have different creation costs. The former are explained by the auditing activities of the government that in the simple set-up destroy informal matches, while keeping formal jobs intact; the latter are due to varying capital costs, or costs associated with red tape and bureaucratic extortion (bribing). Search frictions introduce rent sharing between firms and workers in both formal and informal sectors. This has an important implication for policy making. In particular, we show that if ceteris paribus a firms’ bargaining position vis-a-vis workers is stronger in the formal rather than in the informal sector, governments can afford to appropriate a larger part of a productive match surplus e.g. by levying higher taxes), without endangering the qualitative outcome in the long run. Rent sharing also implies that both formal and informal sector employees may receive wages above marginal product. We investigate efficiency properties of an equilibrium with formal and informal jobs and discuss the role of the government in creating and eliminating such inefficiencies partially arising from a version of the hold-up problem (Grout, 1984). Some lessons are drawn for normative analyses of policies aimed at reduction of informality in set-ups with non-competitive labour markets. In particular, the conditions are given under which a reduction in size of the informal sector is likely to be detrimental for economic welfare. Keywords: informal economy, regulations, wage bargaining, labour markets, search models JEL: E24 H26 J31 J41 J42 J64 O17 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-764&r=all 388. Do Regional Integration Agreements Increase Business-Cycle Convergence? Evidence From APEC and NAFTA Viviana Fernandez Ali M. Kutan Using monthly industrial sector data from January 1971 to March 2004, we test for business cycles convergence among the major APEC members: Japan, South Korea, Malaysia, Mexico, USA, and Canada. In addition, we examine the synchronization of business cycles among Australia, Japan, and South Korea, based on the quarterly data for the 1957-2003 period, as well as among the different economic sectors of the NAFTA countries from January 1970 through March 2004. We apply different techniques to identify business cycles. In particular, we propose a new trend- cycle decomposition method based on wavelet analysis. The results show that convergence of business cycles of Asia-Pacific countries is far from complete, but joining the APEC has increased the mean correlation of industrial production cycles of the member economies. On the other hand, although some economic sectors of the NAFTA countries already exhibited some degree of business cycle co-movement even during pre-NAFTA period, the volatility of pair-wise correlation of business cycles declined during NAFTA. In addition, we conclude that, in general, the transmission of business cycles is relatively slow, and, consequently, business cycles appear to be asynchronous. Keywords: business-cycles convergence, wavelets, APEC, NAFTA JEL: B41 E32 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-765&r=all 389. Formation of social capital in Central and Eastern Europe: Understanding the gap vis-a-vis developed countries Jan Fidrmuc Klarita Gerxhani Recent Eurobarometer survey data are used to document and explain the stock of social capital in 27 European countries. Social capital in Central and Eastern Europe – measured by civic participation and access to social networks – lags behind that in Western European countries. Using regression analysis of determinants of individual stock of social capital, we find that this gap persists when we account for individual characteristics and endowments of respondents but disappears completely after we control for aggregate measures of economic development and quality of institutions. Informal institutions such as prevalence of corruption appear particularly important. Keywords: social capital, institutions, capitalism, transition JEL: Z13 P37 O57 O17 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-766&r=all 390. Labor Mobility during Transition: Evidence from the Czech Republic Jan Fidrmuc In this paper, I analyze the development of inter-regional mobility in the Czech Republic during the transition from central planning to a market economy. I show that the intensity of migration is low and even has fallen during the transition regional disparities in unemployment rates and earnings have increased. More importantly, labor mobility is little effective in facilitating labormarket adjustment to employment shocks. Using aggregate inter-regional migration data and survey data on past and prospective migration and the willingness to move. I find that economic factor play little role in explaining migration patterns. There is, nonetheless, some tentative evidence of the greater importance of economic considerations in explaining future migration intentions and the willingness to move. Thus, while at present migration appears more of a social or demographic rather than economic phenomenon, its economic role may strengthen in the future. Keywords: Migration, Mobility, Labor-market Adjustment, Regional Shocks, Survey data. JEL: F22 J61 P23 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-767&r=all 391. Testing for inflation convergence between the Euro Zone and its CEE partners Imed Drine Christophe Rault We investigate inflation convergence between the Euro Zone and its CEE partners using panel data methods that incorporate structural shifts. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the East-European countries for the 1995:1 to 2000:4 period. Keywords: Purchasing power parity, inflation convergence, developing country, panel unit-root tests allowing structural breaks JEL: E31 F0 F31 C15 Date: 2005-04-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-768&r=all 392. Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis Balazs Egert Laszlo Halpern This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates. Keywords: equilibrium exchange rate, Balassa-Samuelson effect, meta-analysis JEL: C15 E31 F31 O11 P17 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-769&r=all 393. Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased? Balazs Egert This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands. Keywords: Balassa-Samuelson, Dutch Disease, Bulgaria, Croatia, Romania, Russia, Ukraine, Turkey JEL: E31 O11 P17 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-770&r=all 394. Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States Jesus Crespo-Cuaresma Balazs Egert Ronald MacDonald This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of Bessec ( 2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies. Keywords: target zone, ERM, non-linearity, SETAR. JEL: F31 G15 O10 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-771&r=all 395. Organized Labor and Restructuring: Coal Mines in the Czech Republic and Romania Jan Bruha Delia Ionascu Byeongju Jeong We examine the role of organized labor in the restructuring experience of two coal mining regions in the 1990’s: Ostrava in the Czech Republic and the Jiu Valley region in Romania. Under similar external circumstances, the Ostrava region undertook gradual restructuring from early on whereas in Jiu Valley there was no restructuring until 1997, followed by massive layoffs over two years. We conduct a quantitative exercise that accounts for the mine productivity, the labor market conditions, and the constraints in compensating the laid-off miners. We show that the delay in restructuring in Jiu Valley was inefficient: gradual restructuring with compensation would have benefited both the miners and the government. The proximate reason for the delay was the Jiu Valley miners’ action against restructuring. We interpret their action in part as a behavioral pattern under a perceived threat to their livelihood. This accords with their history of militancy in contrast to Ostravian miners. Keywords: organized labor; restructuring; coal; transition; welfare JEL: O17 J50 P31 R11 Date: 2005-05-01 URL: http://d.repec.org/n?u=RePEc:wdi:papers:2005-773&r=all 396. Output, Capital, and Labor in the Short, and Long-Run Daniel Levy (Bar-Ilan University) Using a new series of capital stock and frequency domain analysis, this paper provides new empirical evidence on the relative importance of capital and labor in the determination of output in the short and long- run. Contrary to the common practice in the traditional growth accounting literature of assigning weights of 0.3 and 0.7 to capital and labor inputs respectively, the evidence presented here suggests that capital is a far more important factor than labor for determination of output at and near the zero frequency band. Furthermore, I show that the zero-frequency labor elasticity of output may well be close to zero, or even zero. Additional findings reported here support the traditional accelerator model of investment as a good description of the long-run investment process. Keywords: Growth Accounting, Capital Investment, Output Fluctuation, Employment, Business Cycles and Aggregate Fluctuation, Frequency Domain Analysis, Spectrum and Cross-Spectrum, Coherence, Phase Shift, Gain, Zero- Frequency, Capital and Labor Elasticity of Output, Short-Run, Long- Run, Capital's and Labor's Share in Output, Accelerator Model of Investment JEL: O47 E22 E24 E32 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505012&r=all 397. Singing all the Way to the Bank: The Case for Economic Development through Music in Cape Verde Samer Saab (International Monetary Fund) There has been an increasing awareness within the developed world that the cultural industries may play an important role in economic development. The fact that most of the commercial cultural industries have relatively low distribution costs, and that the gains from the mass production of a ‘hit’ recording can be substantial, have alerted policy makers to the possibility of a more dispersed location pattern; one that possibly need not concentrate at the core. Moreover, there is acknowledgement that all countries have a potential cultural heritage elements of which might be translated into cultural industries products; in fact, in a market place where novelty is king, new ideas and novel formulations are likely to be at the leading edge. Put simply, the cultural industries have been shown to be net positive contributors to economic growth; the cultural industries are not necessarily rooted in one place, production can move to the talent and visa versa; both can still have access to a market. Nations and regions that are able to make a contribution to cultural industries production may reap considerable local benefits. Cape Verde's prosperity resides in the intellectual capacity of its people; and Cape Verde’s history has many examples of how challenge and adversity can be transformed into hope and opportunity. Cesaria Evora put Cape Verde on the map for many people to listen to and enjoy: this has been welcomed news. The even better news is that Cape Verde has a seemingly never- ending source of talented singers and performers waiting to be discovered and promoted on the international scene, just like Brazil with its young soccer players. This paper will try to show how the development of a vibrant and active music industry in Cape Verde can provide this country with a medium for long term economic growth and development. It uses a few case studies to illustrate this point: Senegal, Austin, and Jamaica. Finally, it provides a way forward for what should be the key elements of a strategy that Cape Verdeans should develop to brand and build a globally competitive Cape Verdean Music industry. Keywords: Cape Verde, Economic Development, Music JEL: O P Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505013&r=all 398. Application of Method of System Potential in Analysis of Economic System Evolution (english version). Grigorii Pushnoi (International Bogdanov Institute) The mathematical formulation of new System Method based on ideas of “system potential” and “conditions of its realization” is given. Cyclical dynamics of “efficiency of work” of a complex adaptive system follows from this Method. These cycles have the properties like to the properties of typical business cycles. It is proposed to identify these evolution cycles of complex adaptive systems as applied to economic system with business cycles. Keywords: business cycle, catastrophe jump, economic potential, complex adaptive system JEL: O P Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0505014&r=all 399. Periodic Properties of Interpolated Time Series Hashem Dezhbakhsh (Emory University) Daniel Levy (Bar-Ilan University) Although linearly interpolated series are often used in economics, little has been done to examine the effects of interpolation on time series properties and on statistical inference. We show that linear interpolation of a trend tationary series superimposes a ‘periodic’ structure on the moments of the series. Using conventional time series methods to make inference about the interpolated series may therefore be invalid. Also, the interpolated series may exhibit more shock persistence than the original trend stationary series. Keywords: Linear Interpolation, Trend-Stationary Series, Shock Persistence, Periodic Properties of Time Series JEL: C10 C22 C82 E37 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505004&r=all 400. On Tail Index Estimation Using Dependent, Heterogenous Data Jonathan B. Hill (Florida International University) In this paper we analyze the asymptotic properties of the popularly used distribution tail estimator by B. Hill (1975), for heavy-tailed heterogenous, dependent processes. We prove the Hill estimator is weakly consistent for functionals of mixingales and L0-approximable processes with regularly varying tails, covering ARMA, GARCH, and many IGARCH and FIGARCH processes. Moreover, for functionals of processes near-epoch- dependent on a mixing process, we prove a Gaussian distribution limit exists. In this case, as opposed to all existing prior results in the literature, we do not require the asymptotic variance of the Hill estimator to be bounded, and we develop a Newey-West kernel estimator of the variance. We expedite the theory by defining 'extremal mixingale' and 'extremal NED' properties to hold exclusively in the extreme distribution tails, disbanding with dependence restrictions in the non- extremal support, and prove a broad class of linear processes are extremal NED. We demonstrate that for greater degrees of serial dependence more tail information is required in order to ensure asymptotic normality, both in theory and practice. Keywords: Hill estimator; regular variation; infinite variance; near epoch dependence; mixingales JEL: C1 C2 C3 C4 C5 C8 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505005&r=all 401. Active versus Passive Sample Attrition: The Health and Retirement Study Honggao Cao (University of Michigan) Daniel H. Hill (University of Michigan) This paper investigates sample attrition in the Health and Retirement Study (HRS). We compare attrition behavior in two of the HRS cohorts: original HRS cohort and AHEAD cohort. We distinguish attrition due to death (passive attrition) from attrition due to other causes (active attrition), examining potential effects of different attrition modes on the representativeness of the remaining samples. This distinction is justified based on a specification test on a multinomial logistic regression model. Among other results from the study are differences between passive and active attritors in a set of demographic, economic, and health measures, and a finding that active attrition occurring in the HRS is perhaps not selective and, thus, is statistically ignorable. Keywords: active attrition, passive attrition, sample attrition, HRS JEL: C1 C2 C3 C4 C5 C8 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpem:0505006&r=all 402. Simulating a Multiproduct Barter Exchange Economy Daniel Levy (Bar-Ilan University) Mark Bergen (University of Minnesota) We describe a multiproduct barter trading experiment in which students exchange real goods in an open market based on their own personal preference. The experiment is designed for simulating a pure exchange market in order to demonstrate the role of money and its functions in real economies by showing the limitations and inefficiencies of the traditional barter economy. In addition, the simulation is very effective in highlighting some of the key features that an object that serves as money needs to possess in order to function as an efficient medium of exchange, unit of account, and store of value. Keywords: Roles of Money, Functions of Money, Barter, Exchange Economy, Medium of Exchange, Store of Value, Unit of Account, Experiment, Efficient and Inefficient Medium of Exchange, Types of Money, Fiat Money, Commodity Money, Features of Money, Homogeneity, Divisibility, Durability, Storability, Portability, Scarcity, Efficiency versus Equity, Information Cost JEL: A22 C90 C91 C92 E40 E41 E42 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpex:0505002&r=all 403. CORPORATE CREDIT RISK MODELING: QUANTITATIVE RATING SYSTEM AND PROBABILITY OF DEFAULT ESTIMATION Joao Fernandes (Banco BPI) The literature on corporate credit risk modeling for privately- held firms is scarce. Although firms with unlisted equity or debt represent a significant fraction of the corporate sector worldwide, research in this area has been hampered by the unavailability of public data. This study is an empirical application of credit scoring and rating techniques applied to the corporate historical database of one of the major Portuguese banks. Several alternative scoring methodologies are presented, thoroughly validated and statistically compared. In addition, two distinct strategies for grouping the individual scores into rating classes are developed. Finally, the regulatory capital requirements under the New Basel Capital Accord are calculated for a simulated portfolio, and compared to the capital requirements under the current capital accord. Keywords: Credit Scoring, Credit Rating, Private Firms, Discriminatory Power, Basel Capital Accord, Capital Requirements JEL: C13 C14 G21 G28 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505013&r=all 404. Modelo Cost-Of-Carry: Mispricing, Retornos e Volatilidades do Indice PSI-20 e dos Futuros PSI-20 Manuela Magalhaes Carlos carvalhosa Perante a evidencia de um mispricing entre o preco do contracto de Futuros PSI-20 e o preco teorico do Futuro PSI-20, modelizado segundo a teoria do cost-of-carry, procedemos a analise da dinamica da rentabilidade e da volatilidade entre o indice PSI-20 e o Futuro PSI-20. A evidencia empirica mostra que existe interdependencia entre os retornos dos dois mercados, no curto prazo. No que concerne a volatilidade, transmissao que se verifica, no curto prazo, e dentro do proprio mercado, nao se verificando volatilidade cruzada. A volatilidade dos mercados decorre, tambem, da sazonalidade intraday. Keywords: Contracto Futuro, Mispricing, Cost-of-carry JEL: G Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505014&r=all 405. The Financing of Higher Education – A Broader View P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The article talks about the development of higher education in India and addresses possible means of financing it. The current educational system in the country is discussed and the concentration by the State on higher and technical education is looked at. The article further says that the financing of Higher Education in the country by the State, is a drain on its exchequer and that more methods have to be found out to move the financial obligations outside the State coffers. The experience of other countries is looked at briefly, and parameters are looked at, which need to be concentrated on to get results. For money to flow to this sector, it is very important also, to look at providing adequate legislative protection to these self- financed universities, which attract funds from sponsors, financing agencies and corporates. The need for adaptability to the job market and the synchronization between job creation and higher education has been explained in detail. Various development models are hinted at with concentration on specific parameters, but the article stops short of getting into very definitive models itself, due to the still complicated setup, as regards the status of private educational institutions in India. Once the ground rules are clearly laid down, it may become possible to develop several models, which may be accepted by the financial agencies, for funding higher education in India. Keywords: Higher education ,India JEL: G Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505015&r=all 406. Roles of the Banking Sector in Indian Agriculture -A Paradigm Shift Deepak Kumar (ICFAI University Press) A changing environment and government policies are forcing banks to lend more to the agricultural sector. Both private and public banks are now involving themselves in a lot of agri-based lending activities.Besides financing traditional activities, banks are also involved in training and setting up consultancies, agri clinics, the export and marketing of agricultural produce, etc. The tie up of HDFC with NAFED and SBI with Cargill India will see a new revolution in the agricultural sector in India. Keywords: Banking Sector ,Indian Agriculture JEL: G Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0505016&r=all 407. Inequity Aversion May Increase Inequity in Majoritarian Bargaining Maria Montero (University of Nottingham) Inequity aversion models have been used to explain equitable payoff divisions in bargaining games. I show that inequity aversion can actually increase the asymmetry of payoff division inside the coalition that forms in majoritarian bargaining games. Keywords: noncooperative bargaining, majority games, inequity aversion JEL: C78 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpga:0505007&r=all 408. Optimal growth path in an OLG economy without time- preference assumptions : main results Mohamed Mabrouk (Ecole Superieure de Statistique et d'Analyse de l'Information de Tunis) The aim is to characterize optimal growth paths in an OLG economy where capital accumulation is achieved through bequests, without using the assumption of time preference theory on a social level, because such an assumption, that leads to use a discounted infinite horizon sum, introduce necessarily inequality between the different generations of the society. I investigated two optimality concepts: Pareto-optimality and consensual optimality. I considered the case without technical change. I found that all steady-state optimal growth paths converge necessarily to a level of capital where the marginal gain from a decrease of bequest is equal to the marginal loss from a similar decrease of heritage. With the use of an intergenerational altruistic utility, I showed that spontaneous equilibrium cannot be an optimal growth path unless generations feel (asymptotically) for their heirs as they feel for themselves. Keywords: optimal growth, OLG economy, time-preference assumption, Pareto-optimality, egalitarianism, golden rule JEL: C6 D5 D9 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0505004&r=all 409. Does Inequality Cause Trade Cycle G. Moheyuddin (GC Univeristy, Lahore) Trade cycle means the cyclical fluctuations in aggregate economic activity. Different theories have presented to explain the causes of Trade Cycle. In which different causes of it discussed but one of the major cause of it is usually ignored i.e. the Inequality. Inequality and Trade Cycle are closely related. Inequality in income distribution is one of the major causes of the trade cycle. Inequality may cause the trade cycle and also speedup the intensity of the different phases of trade cycle, caused by some other factors.This Paper studies the role of Inequality in the different phases of trade cycle one by one and then “The Measure to Control the Trade Cycles' Note: This is an initail idea I am interested in further reserch in topic for my PhD dissertation. Keywords: Inequelity, Business Cycle, Income Distribution, Trade Cycle, economic fluctuations JEL: C6 D5 D9 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpge:0505005&r=all 410. Beans as a Medium of Exchange Harold Fried (Union College) Daniel Levy (Bar-Ilan University) This note describes an experiment, which is an extension of the experiment proposed by Levy and Bergen (1993). The experiment is designed to simulate an environment where something that is very similar to fiat money (i.e., is homogenous, durable, portable, storable, divisible, has no intrinsic value of its own, etc.) will be accepted in market transactions and thus will have a “value.” This is accomplished through an implementation of a taxation mechanism in the spirit of legal restriction theory of monetary economics. Keywords: Roles of Money, Functions of Money, Barter, Exchange Economy, Medium of Exchange, Store of Value, Unit of Account, Experiment, Efficient and Inefficient Medium of Exchange, Types of Money, Fiat Money, Commodity Money, Features of Money, Homogeneity, Divisibility, Durability, Storability, Portability, Scarcity, Efficiency versus Equity, Information Cost JEL: A22 C90 C91 C92 E40 E41 E42 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0505001&r=all 411. Who Are Schooled in Urban Pakistan? Rana Ejaz Ali Khan (Islamia University Bahawalpur. Pakistan) Karamat Ali (Bahauddin Zakarya University Multan. Pakistan) Pakistan is severely disadvantaged by its failure to achieve higher levels of human development. Low enrolment thirty years ago is reflected in the lower educational level of today’s labor force, lower productivity and lower adaptation of technology. Even today less than half of the school-age children are going to school. Some common but many of them disputed perceptions about lower school-enrolment rate, at the household level are that the younger age children, younger in their brothers and sisters, male children, and the children from educated parents; high-income households; smaller households; wealthy households are more likely to be in school. We have analyzed these determinants for urban Pakistani children and framed some policy recommendations. Keywords: Schooling, Education, Gender, Poverty, Children, JEL: I Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwphe:0505003&r=all 412. Investment-Saving Comovement under Endogenous Fiscal Policy Daniel Levy (Bar-Ilan University) I expand Feldstein’s (1983) model by including flexible exchange rate and by introducing endogenous fiscal policy. Using this model, I demonstrate how a positive investment-saving correlation can arise in a world with endogenous fiscal policy. I show that this correlation does not depend on capital mobility and therefore is compatible with any degree of capital mobility. This implies that the observed investment- saving comovement is not necessarily due to imperfect capital mobility. The model has a testable implication: it predicts a lack of Granger causality from private saving to private investment. Empirical examination of this prediction indicates that U.S. time series data is compatible with the hypothesis of endogenous fiscal policy during a flexible exchange rate period, but not during a fixed exchange rate period. Keywords: Feldstein-Horioka Puzzle, Investment, Saving, Capital Mobility, Endogenous Fiscal Policy JEL: F41 E62 H39 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505008&r=all 413. FOREIGN EXCHANGE INTERVENTION AND THE POLITICAL BUSINESS CYCLE: A PANEL DATA ANALYSIS Axel Dreher (Thurgau Institute of Economics & University of Konstanz) Roland Vaubel (University of Mannheim) By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique. Keywords: Foreign exchange interventions, political business cycles JEL: F31 E58 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505009&r=all 414. Purchasing power parity: an empirical study of three EMU countries Antonio Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) We apply Purchasing Power Parity (PPP) theory to the analysis of long- run equilibrium in the foreign exchange market. We study the case of Portugal vis-a-vis Germany and Spain, and the case of Spain vis-a-vis Germany, in the period 1960-1990. The empirical analysis was based on unit-root testing (using ADF tests) and Johansen’s methodology for the study of co- integration. We worked with linear long-run relationships based exclusively on PPP, as well as with long-run relations that also allowed for the effect of interest rates. In a situation in which PPP does not hold, one could think that on account of some “natural reason” agents believe that, as time goes by, the dominant currency, which is also the reference currency of the EMS (the German Mark), will appreciate. We concluded, on the contrary, that the weaker currencies were the ones that with the passing of time appreciated in real terms. The fact that PPP theory was applied to two southern European countries deserves a special mention, because it may serve as an example for other countries that come to be in a position similar to that of Portugal and Spain before their adhered to the European Union. Keywords: Purchasing Power Parity, Unit Roots, EMU, Economic Integration and Co-integration JEL: F31 F41 C32 G15 C51 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505010&r=all 415. Can Domestic Institutions Explain Exchange Rate Regime Choice? The Political Economy of Monetary Institutions Reconsidered Beth Simmons (Harvard University) Jens Hainmueller (Harvard University) Recent articles in International Organization and elsewhere have explored the role of domestic institutions in shaping exchange rate regime choice. These articles use some variation on the information reported by governments to the International Monetary Fund as their dependent variable. Even more recently, new data have become available that reflect actual (de facto) rather than declaratory (de jure) policies with respect to exchange rate regimes. The findings of the domestic institutionalists are significantly weakened, and in some cases reversed, when this more appropriate measure is used to test their claims. These tests cast doubt on whether a domestic institutional focus is the most fruitful way to study exchange rate regimes. Keywords: Exchange rate choiche, Political Economy of Monetary Institutions JEL: F3 F4 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505011&r=all 416. Trade Balance and Exchange-Rate for a Small Open Economy during the EMS: The Hellenic Case 1983:1-1995:12 Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.) We are interested on assessing the effectiveness of the Bank of Greece (BoG) exchange rate policy, to achieve the objective of adjusting balance of payments des-equilibrium, during the period 1983:1-1995:12. The traditional theory of the balance of payments adjustment process through exchange rate changes is used for this purpose. We found evidence, first, about the doubtful effectiveness of this policy due to the marginal verification of the critical elasticities condition; second, about the success of the exchange rate policy in the short-run, since the monthly data of bilateral exchange rates (USD, DEM, ITL, FRF, GBP, JPY) of the Hellenic Drachma (GRD) Granger cause the respective trade balances; third, about the significant co-movement in the series which in the long-run, are driven by the same stochastic trend. We are much aware of the tentative nature of these conclusions. However, our findings suggest that the loss of the exchange rate policy was costly in the case of Hellas because an efficient policy sacrificed by the BoG to the European Central Bank (ECB). Keywords: Optimum Currency Area, EMS, EMU, Traditional Adjustment Process for Merchandise Payments, Granger Causality, Integration and Co- integration Analysis JEL: F32 F36 F41 E58 C32 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505012&r=all 417. Prices and Exchange Rate of Hellenic Drachma (GRD), during 1981- Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.) The paper presents empirical results on an import prices equation to the case of the small open Hellenic economy, during her course to the European Monetary Union, in the 1980s until mid- 1990s. The analysis employs cointegration theory to examine the long-run co-movements of prices, effective exchange rate of GRD and unit labour cost of the European countries, which export to Greece. Innovation accounting is also used so as to detect the dynamics of the data set. We found slight evidence to support long run equilibrium, however, it was only the Hellenic inflation rate, which was adjusting to the deviations from this. The fragile stability of the system is confirmed by the impulse response functions examination where the exchange rate of the GRD do not converge to its long-run values, even after a 3 years period from the one unit-shock in various innovations. The determinant role of the growth rate of the unit labour cost and therefore of European countries’ prices to the exchange rate of GRD, to the Hellenic inflation rate, and less to the growth rate of the import prices is (1) justified by its high proportion to their variance decomposition and (2) became apparent approximately after 9 months. The latter seems to amount to the “contract-period” in the Magee’s terminology. Keywords: Trade Balance Adjustment through exchange rate policies; European Monetary Integration; Unit Root Tests; Co-integration Analysis; Innovation Accounting JEL: F3 F4 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505013&r=all 418. Capital account liberalization and exchange rate regime choice, what scope for flexibility in tunisia ? Ben Ali Mohamed Sami (CADRE, Universite de Lille, France) The monetary crises of the Nineties which shook the capital market of several countries highlight the incompatibility of the intermediary exchange rate regimes with the high volatility of international capital account mobility induced by the financial globalisation. Certain economists suggested that a greater flexibility would be necessary to prevent the speculative attacks. Others on the contrary, assert the merits of the rigid fixed exchange regimes. The adoption by Tunisia of structural reform of its economy in a context of gradual opening since 1986 had allowed in January 1993 the instauration of the convertibility of its current account. The total convertibility of the Tunisian dinar which is already at an advanced stage remains a top priority in the immediate future like finality of a more close integration and opening of the Tunisian economy to the world economy. So the total liberalization of the exchange in Tunisia poses the problematic of the prospective choice of its exchange rate regime. We analyze within the framework of this research, the various alternatives which could prove to be optimal. The option of the flexibility is particularly considered. Keywords: Exchange rate regimes, Tunisia. JEL: F3 F4 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505014&r=all 419. Price Adjustment at Multiproduct Retailers Daniel Levy (Bar-Ilan University) Shantanu Dutta (University of Southern California) Mark Bergen (University of Minnesota) Robert Venable (Robert W. Baird, Co.) We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the U.S., to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores’ pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stock outs or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes. Keywords: Cost of Price Adjustment, Price Adjustment Process, Menu Cost, Posted Prices, Multiproduct Retailer, Price rigidity, Sticky Prices, Frequency of Price Changes, Time Dependent Pricing, Retail Supermarket and Drugstore Chains JEL: E31 E12 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505005&r=all 420. Determinants of Profit in the Broadcasting Industry | Evidence from Japanese Micro Data| Norihiro KASUGA (Faculty of Economics, Nagasaki University) Manabu Shishikura (Institute for Information & Communications Policy) The operating areas of each terrestrial broadcasting station in Japan are geographically divided by a licensing system and form oligopolies in each of their respective markets. These institutional constraints define the market structure, and as a result, affect the business performance of the broadcasting industry. The primary purpose for regulation is based on the gMedia Ownership Rule,h a rule designed for preserving gplurality, h gdiversityh and hlocalismh of stations. Similar rules exist in many countries, but benchmarks differ. To this end, if the regulative authority introduced a new regulation framework, it might be useful to improve the financial foundation of the licensed stations, thus preserving the original purpose of the rule. With the rapid progress of digital technology and the increasingly diversified selection of media types, the government needs to urgently review Japanfs old regulations with the aim of giving more freedom in the operation of terrestrial stations and so promote voluntary restructuring. Based on the above viewpoints, we implemented an econometric analysis with respect to factors that affect on the business performance (especially on profit) of each station. We focus on the terrestrial broadcasting industry because it plays a central role in the Japanese broadcasting system. As a result, we ascertained the following points. (1) Structural parameters: market share of each station has a positive correlation with profit, although market concentration appears to have no correlation. (2) Geographical parameters: the number of households per station and the income per household have positive correlations. (3) Business parameters: the aired ratio of self-produced TV programs has a positive correlation with revenue, although it has a negative correlation with profit. It is said that geographical environment is quite important for business performance in the broadcasting industry. This hypothesis is strongly supported by our results. Therefore deregulation and subsequent voluntary rearrangement may reinforce the operating basis of each station. Keywords: Terrestrial Broadcasting Station, Determinants of profit, Principle of Media Ownership Rule, Audience Share, Oligopoly JEL: D43 L13 L82 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505006&r=all 421. The Economics of Privacy Kai-Lung Hui (National University of Singapore) I.P.L. Png (National University of Singapore) In this chapter, we review economic analyses of privacy. We begin by scrutinizing the “free market” argument against privacy regulation, and highlight why it may not work well for personal information because welfare may be non-monotone in the quantity of information, there may be excessive incentives to collect information that has no social value, and cross-market externalities may arise from the exploitation of information. We then discuss research on property rights and suggest some challenges in determining their optimal allocation. We conclude by summarizing the insights provided by recent empirical research and highlighting directions for future research in the economics of privacy. JEL: L Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpio:0505007&r=all 422. HAS EXCHANGE RATE VARIABILITY AFFECTED TROPICAL NON- TRADITIONAL David Kihangire (Bank of Uganda) David Potts (University of Bradford) Prof. Sam Cameron (University of Bradford) This study examines the effects of exchange rate variability on Uganda’s flowers exports during 1994-2001 by testing the central hypothesis that following the floating exchange rate regime, ‘Uganda’s exports of tropical flowers are negatively and significantly correlated with exchange rate variability.’ The absence of pure I(0) or I(1) in the data, and lack of endogeneity and simultaneous bias problems invites us to apply ARDL approach to cointegration and OLS. The results suggest that although Uganda’s flower exports are negatively correlated with exchange rate variability, the measured effects are insignificant. Keywords: Exchange rate variability, flowers exports, Uganda, dependent- economy JEL: F1 F2 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0505010&r=all 423. Learning to Love Globalization? Education and Individual Attitudes Toward International Trade Jens Hainmueller (Harvard University) Michael J. Hiscox (Harvard University) Recent studies of public attitudes toward trade have converged upon one central finding: support for trade restrictions is highest among respondents with the lowest levels of education. This has been interpreted as strong support for the Stolper- Samuelson theorem, the classic economic treatment of the income effects of trade which predicts that trade openness benefits those owning factors of production with which their economy is relatively well endowed (those with skills in the advanced economies) while hurting others (low skilled workers). We re- examine the available survey data, showing that the impact of education on attitudes toward trade is almost identical among respondents in the active labor force and those who are not (even those who are retired). We also find that, while individuals with college-level educations are far more likely to favor trade openness than others, other types of education have no significant effects on attitudes, and some actually reduce the support for trade, even though they clearly contribute to skill acquisition. Combined, these results strongly suggest that the effects of education on individual trade preferences are not primarily a product of distributional concerns linked to job skills. We suggest that exposure to economic ideas and information among college-educated individuals plays a key role in shaping attitudes toward trade and globalization. This is not to say that distributional issues are not important in shaping attitudes toward trade – just that they are not clearly manifest in the simple, broad association between education levels and support for free trade. Keywords: International Trade, Trade Preferences, Stolper- Samuelson, Education Effects JEL: F1 F2 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0505011&r=all 424. THE EFFECTS OF EXCHANGE RATE VARIABILITY ON EXPORTS: EVIDENCE FROM UGANDA (1988 – 2001) David Kihangire (Phd) Using monthly data, this study investigates the effects of exchange rate variability on Uganda’s aggregate export growth under the floating exchange rate policy regime (1994-2001), benchmarked on the fixed exchange rate regime (1988-1993). The main research question it posits is: “What is the effect of exchange rate variability on Uganda’s exports?” Premised on risk-aversion, the study tests the main hypothesis that ‘Uganda’s exports are negatively and significantly correlated with exchange rate variability.’ Due to lack of pure I(0) or I( 1) for all the series, and absence of endogeneity and simultaneous bias problems between export supply and export demand, the ARDL approach to cointegration and OLS are applied in the study. The results suggest support for the research hypothesis. The policy implication is that intervention targeting the minimisation of excessive volatility in the real effective exchange rate under the floating regime may contribute to supporting export sector growth, economic growth, and overall external macroeconomic stability in Uganda. Keywords: Uganda, Exports, Exchange Rate Variability JEL: F1 F2 Date: 2005-05-21 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpit:0505013&r=all 425. Does a Slump Really Make You Thinner? Finnish Micro-level Evidence 1978-2002 Petri Bockerman (Labour Institute for Economic Research) Edvard Johansson (The Research Institute of the Finnish Economy) Satu Helakorpi (National Public Health Institute) Ritva Prattala (National Public Health Institute) Erkki Vartiainen Antti Uutela (National Public Health Institute) This paper explores the relationship between obesity and economic conditions in Finland, using individual microdata from 1978 to 2002. The results reveal that an improvement in regional economic conditions measured by the employment-to-population ratio produces a decrease in obesity over the period of investigation, other things being equal. This effect arises from the decline in the height-adjusted weight of people who are deeply overweight, (BMI>35). In addition, the effect is strongest for the people in later middle age (aged 45-65). The incidence of obesity is unrelated to the regional growth rate. All in all, the Finnish evidence presented does not support the conclusions reported for the USA, according to which temporary economic slowdowns are good for health. In contrast, at least overweight increases during slumps. Keywords: overweight, business cycles, health JEL: E32 I12 R11 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505011&r=all 426. Is Variation in Hours of Work Driven by Supply or Demand? Evidence from Finnish Manufacturing Industries Petri Bockerman (Labour Institute for Economic Research) Markus Jantti (Abo Akademi) This paper uses panel data from 1989 to 1995 on blue-collar workers in Finnish manufacturing industries and their establishments to assess the extent to which hours of work are affected by individual or establishment characteristics - observed as well as unobserved. We argue that recent research on working hours has focused almost exclusively on the supply of labor, but that insights into the extent to which hours variation is driven not by supply but by demand will affect the likelihood that supply-side policies will succeed. Our estimates suggest that both individual and establishment characteristics matter, but that establishment level effects account for the bulk of the variation in hours. Keywords: labour supply, labour demand, employment JEL: H2 J21 J22 J23 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505012&r=all 427. Trabalho Infantil-Aplicacao do Modelo Multinomial Manuela Magalhaes As criancas fazem parte da vida economica das sociedades. A evidencia historica mostra que o contributo das criancas para o rendimento das familias e consistentemente significativo. O trabalho infantil e, ainda nos dias de hoje, um fenomeno expressivo, quer nas sociedades menos desenvolvidas, quer nas mais desenvolvidas. Este estudo analisa os factores determinantes na decisao das familias, relativamente a afectacao do tempo das criancas entre a escola; a escola e o trabalho, o trabalho ou o lazer. O modelo logit multinomial e o modelo utilizado para identificar as caracteristicas pessoais, familiares, locais e sazonais que influenciam a decisao das familias Ukranianas. Os resultados mostram que todos estes factores sao considerados pelas familias nas suas decisoes. Assim, politicas que promovam o desenvolvimento economico, a reducao do agregado familiar e alternativas a escola no terceiro trimestre, podem contribuir significativamente para a reducao do trabalho infantil na Ukrania Keywords: Trabalho Infantil, Logit Multinomial JEL: J Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505013&r=all 428. “Dynamic Effects of Migrant Remittances on Growth: An Econometric Model with an Application to Mediterranean Countries”. Discussion Paper, No. 74, KEPE, Athens, 2002. NICHOLAS GLYTSOS This paper builds a Keynesian type econometric model with a dynamic perspective and a sound theoretical basis, for investigating the impact of remittances on consumption, investment, imports and output. It estimates short and long-run multiplier effects of exogenous shocks of remittances, with data from five Mediterranean countries. The analysis reveals a uniform country performance of instability and uncertainty, with great temporal and inter-country fluctuations of remittance effects. The findings point to different inter-country priorities of remittance spending and to an asymmetric impact of remittance changes, in the sense that the good done to growth by rising remittances is not as great as the bad done by falling remittances. Keywords: Keywords: Migration, Remittances, Growth, Dynamic Model, Mediterranean Countries JEL: F22 O11 O19 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505014&r=all 429. OLD AGE POVERTY IN THE INDIAN STATES: WHAT THE HOUSEHOLD DATA CAN SAY? Sarmistha Pal (Brunel University) Robert Palacios (World Bank) In the absence of any official measures of old age poverty, this paper uses National Sample Survey household-level data to investigate the extent and nature of living standards and incidence of poverty among elderly in sixteen major states in India. We construct both individual and household-level poverty indices for the elderly and examine the sensitivity of these poverty indices to different equivalence scales and size economies in consumption. In general, these adjusted estimates indicate that households with elderly members have lower incidence of poverty in all of the states, albeit to different degrees. Part of the explanation appears to be related to differences in dependency ratios in households with and without elderly, where a significant percentage of elderly, especially men, continue to work well past the age of sixty. The favourable effect of the presence of elderly on household living standards and incidence of poverty is however weakened once we control for dependency ratio, among other things, with significant inter- state variation noted in our sample. Keywords: Old age poverty, Living standards, Poverty indices, Equivalence scale, Size economies in consumption, Social protection of the elderly, Inter-state disparity in India. JEL: J Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505015&r=all 430. A Model of Remittance Determination Applied to Middle East and North Africa Countries NICHOLAS GLYTSOS (CENTER OF PLANNING & ECONOMIC RESEARC, ATHENS, GREECE) The objective is to construct and estimate a model of remittance determination which reflects individual behaviour of the migrant and his family, treating remittances as an endogenous variable in the migration system. Behind this model is found the idea of the relative bargaining power, inherent in the implicit contract theory, which determines priorities for present or future consumption of remittances. The model has two purposes: estimate the relative significance of behavioural and macroeconomic variables in remittance determination, and interpret, in a feedback manner, the results with respect to the theoretical postulates. All countries concerned are found to demonstrate unstable and volatile income expectations, with implications to remitting behaviour, and to present-future priorities. Keywords: Model, Migration, Remittances, Determinants, MENA JEL: J Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505016&r=all 431. Work Disability is a Pain in the *****, Especially in England, The Netherlands, and the United States James Banks (Institute for Fiscal Studies & University College, London) Arie Kapteyn (RAND Corporation) James P. Smith (RAND Corporation) Arthur van Soest (RAND Corporation & Tilburg University) This paper investigates the role of pain in determining self- reported work disability in the US, the UK, and The Netherlands. Even if identical questions are asked, cross-country differences in reported work disability remain substantial. In the US and The Netherlands, respondent evaluations of work limitations of hypothetical persons described in pain vignettes are used to identify the extent to which differences in self-reports between countries or socio-economic groups are due to systematic variation in the response scales. Keywords: Work limiting disability, Vignettes, Reporting bias JEL: J Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505017&r=all 432. Unraveling the SES-Health Connection James P. Smith (RAND Corporation) While a debate rages on about competing reasons why SES may affect health, there is little recognition that the so-called reverse causation from health to economic status may be pretty fundamental as well. Even if the direction of causation is that SES mainly affects health, what dimensions of SES actually matter—the financial aspects such as income or wealth or non- financial dimensions like education? Finally, is there a life course component to the health gradient so that we may be mislead in trying to answer these questions by only looking at people of a certain age—say those past 50. This paper, which is divided into four sections, provides my answers to these questions. The first section examines the issue of reverse causation or whether a new health event has a significant impact on four dimensions of SES—out-of-pocket medical expenses, labor supply, household income, and household wealth. The next section switches the perspective by asking whether the so-called direct causation from SES to health really matters all that much. If the answer is yes and it will be, a sub-theme in this section concerns which dimensions of SES—income, wealth, or education—matter for individual health. Since the answer to that question turns out to be education, Section 3 deals with the very much more difficult issue of why education matters so much. The evidence in these first three sections relies on data for people above age 50. In the final section of the paper, I test the robustness of my answers to these basic questions of the meaning of the SES-health gradient using data that span the entire life-course. JEL: J Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpla:0505018&r=all 433. Electricity Bill Act'2003 P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The Electricity Bill, 2003 passed by Parliament promises to usher in sweeping changes. The Bill seeks to provide a legal framework for enabling reforms and restructuring of the power sector. It simplifies administrative procedures by integrating the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity Regulatory Commissions Act, 1998 into a single Act. The Bill has become an Act now after the Presidential assent and notification by the Ministry of Power on June 10, 2003. The Electricity Act, 2003 is based on the principles of promoting competition, protecting consumers’ interests and providing power to all. The Act has freed the generation of electricity from licensing, and has liberalized the captive power policy. Moreover, it provides open access to transmission and distribution network, and has laidout the stringent penalties for power theft. The new legislation can usher in paradigm shifts in the power sector. Competition will be possible not just in generation,but also in every facet of the sector including distribution. Moreover, private sector investment will be facilitated by greater transparency that will come about. The Bill is a consolidation of the laws relating to generation, transmission, distribution, trading and use of electricity and facilitates all measures that are conducive for the development of the sector. Keywords: Electricity , Bill , JEL: K Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwple:0505005&r=all 434. The Indo-US Summit Partnership in Building India’s Infrastructure—A Summary of Events P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) Keywords: Infrastructure , India -US JEL: K Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwple:0505006&r=all 435. Analysis of Power Sector in India: A Structural Perspective Deepak Kumar (ICFAI University Press) J P Singh (BHU) Niranjan Swain (ICFAI) The inhibitors to growth in power sector were many—small and big but the main roadblock in the growth path was Government Policy, which made it difficult or rather impossible for a private player to enter. This further aggravated the problem that Indian entrepreneurs didn’t have enough knowledge and experience in developing power projects. To worsen the scenario, the SEBs and other Government Agencies became financially weak to propel any future expansion or growth in the sector. Electricity Act, 2003 was a major step in solving the above underlying problems of the power sector. A whole new system was evolved where private players were invited to be an active participant. The system demanded financial, political and other infrastructural growth—with major requirement in roads and communication. Some of the bold steps taken in the Act were moving generation and distribution out of ‘License Raj’ regime, opening access to national grid and demolishing the ‘Single Buyer’ model. The failure of the huge federal structure and the changing global scenario have forced Government to think of ways to revive this fundamental infrastructure sector. Two of the avenues that government can count on for future growth of this sector is “Midgets or Small Power Plants” and “CDM—Clean Development Mechanism” . Keywords: Power Sector , India JEL: K Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwple:0505008&r=all 436. Consumption Dynamics under Information Processing Constraints Yulei Luo (Princeton University) This paper studies consumption dynamics and welfare losses under information processing constraints (it is also called 'rational inattention' (RI) in Sims (2003)) in the permanent income hypothesis (PIH) model. It is shown that incorporating RI into the otherwise standard PIH model can substantially affect the intertemporal allocation of consumption, which makes the models better explain the data in some important aspects. Specifically, the main contributions of this paper are: first, we propose a tractable analytical approach to solve the multivariate state PIH model with RI and show that consumption reacts to the shocks to wealth gradually and with delay; second, after aggregating, we show that incorporating RI into the model can help resolve the excess sensitivity puzzle and the excess smoothness in; third, we also find that the utility costs due to RI are very trivial, which can rationalize a key assumption in Sims (2003) that consumers only devote low channel capacity in observing and processing information; fourth, we investigate which factors determine optimal channel capacity endogeneously; finally, we compare our RI model with the standard internal habit formation model and the Campbell-Mankiw's rule-of-thumb model. JEL: C61 D81 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505011&r=all 437. The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains Daniel Levy (Bar-Ilan University) Mark Bergen (University of Minnesota) Shantanu Dutta (University of Sourthern California) Robert Venable (Robert W. Baird, Co.) We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multi- store supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105, 887/year per store, comprising 0.70% of revenues, 35.2% of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws which require a separate price tag on each item) changes prices 2 1/2 times less frequently than the other four chains; (2) within this chain, the prices of products exempt from the law are changed over three times more frequently than the products subject to the law. Keywords: Menu Cost, Posted Prices, Multiproduct Retailer, Price Rigidity, Sticky Prices, Rigid Prices, Cost of Price Adjustment, New Keynesian Economics, Time Dependent Pricing JEL: E12 E31 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505012&r=all 438. Beyond the Cost of Price Adjustment: Investments in Pricing Capital Mark Zbaracki (The Wharton) Mark Bergen (University of Minnesota) Shantanu Dutta (University of Sourthern California) Daniel Levy (Bar-Ilan University) Mark Ritson (London Business School) The literature on costs of price adjustment has long argued that changing prices is a complex and costly process. In fact, some authors have suggested that we should think of firms’ price- setting activities as “producing” prices, similar to the way firms use production processes to produce goods and services. In this paper we explore one natural extension of this view, that besides observing costs of price adjustment, we should also expect to see firm-level investments in capital expenditures into these “pricing” production processes. We coin the term “pricing capital” for these investments, and suggest that they can improve the efficiency of the “pricing production” activities by both reducing the costs of adjusting prices, and improving the effectiveness of price adjustments in future periods. Using two types of data sources, we find compelling evidence of the existence as well as the importance of pricing capital in firms. The existence of firm-level “pricing capital” has the potential of fundamentally altering the way we think about pricing and price adjustment in many areas of economics. It suggests looking toward the “pricing capital” to decipher the likely degree and causes of price rigidity and its variation across price setters, markets, and industries. Moreover, “pricing capital” introduces a new, higher-level, pricing decision made by individual firms. Decisions to invest in pricing capital compete with traditional capital investment decisions that have long been studied in economics, such as capital investments in plant, equipment, and R&D. Furthermore, since pricing capital is a choice variable, it implies that costs of price adjustment often used in models of price rigidity are endogenous. As such, pricing capital offers new insights into the micro-foundations of the costs of price adjustment. The most provocative implication of the new theory of pricing, however, is that the allocative efficiency of the price system itself may be determined endogenously by individual price setters who choose whether and how much to invest in pricing capital. Keywords: Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Pricing Production Process (PPP), Price Rigidity, Sticky Prices, Rigid Prices, Microfoundations of the Costs of Price Adjustment, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost JEL: E31 D21 D4 L11 L16 L22 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505013&r=all 439. The Three Capitals of Pricing – Human, Systems and Social Capital Mark Ritson (London Business School) Mark Zbaracki (The Wharton) Shantanu Dutta (University of Sourthern California) Daniel Levy (Bar-Ilan University) Mark Bergen (University of Minnesota) In this paper we explore the possibility, heretofore unexplored in the marketing literature, that firms “invest funds” in their pricing processes. This builds on some of the recent economic work on the costs of price adjustment. To do this we undertook a two-year, cross- disciplinary, ethnographic study on the nature of investments made by senior managers to enhance the effectiveness of the pricing processes within their firms. We discovered at least three distinct types of investments that managers at these firms made to price more effectively, which we term as the three capitals of pricing - human capital, systems capital and social capital. Our evidence suggests that pricing is really about managing both prices and investments in the pricing capital used to set and adjust those prices. The existence of these three forms of pricing capital provides a new perspective on pricing strategy, suggesting that firms compete on prices simultaneously in three different ways within their organizations. First, they compete on whether to invest in pricing capital versus or other areas of capital investment, such as plant, equipment, etc. Second, they decide what form of pricing capital to invest in – human, systems or social. Third, they set and adjust prices constrained by the existing pricing capital they have in place at the time of their pricing actions. We discuss the implications of these three forms of pricing capital and these new perspectives on pricing for the marketing, economics and strategy literature. Keywords: Cost of Price Adjustment, Menu Cost, Managerial and Customer Costs of Price Adjustment, Pricing Capital, Pricing Production Process (PPP), Price Rigidity, Sticky Prices, Rigid Prices, Microfoundations of the Costs of Price Adjustment, Allocative Efficiency, Price System, Endogenous Price Adjustment Cost, Pricing, Human Capital, Systems Capital, Social Capital, Resource Based View of the Firm, Ethnography JEL: A22 C90 C91 C92 E40 E41 E42 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505014&r=all 440. The Price Puzzle and Indeterminacy Efrem Castelnuovo (University of Padua) Paolo Surico (Bank of England & University of Bari) This paper re-examines the empirical evidence on the price puzzle and proposes a new theoretical interpretation. Using structural VARs that consistently with the theory include the output gap as a measure of real activity, we find that the positive response of price to a monetary policy shock is historically limited to the sub-samples associated with a ‘weak’ central bank response to inflation. These sub-samples correspond to the pre-Volcker period for the US and the pre- inflation targeting regime for the UK. Then, using a micro- founded New-Keynesian model of the US economy, this paper shows that a structural VAR on the simulated data is capable of reproducing the price puzzle only when monetary policy is ‘passive’ and hence multiple equilibria arise. The omission of a variable capturing the high persistence of inflation expectations under indeterminacy is found to bias the impulse response functions of the structural VAR relative to the structural model. This bias appears to account for most of the price puzzle observed in actual data. Keywords: Price puzzle, New-Keynesian Model, Taylor principle, Indeterminacy, SVAR. JEL: C32 C52 E52 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505015&r=all 441. Development Power and Its Power Model: The Analytic Approach for Continuous Motivity of Economic Growth Feng Dai (Zhengzhou Information Engineering University) Ying Wang (Zhengzhou Information Engineering University) Zifu Qin (Zhengzhou Information Engineering University) Based on the Partial Distribution [F. Dai, 2001] and the theory of Development Power [F. Dai, 2004], this paper discusses the power model of relation between development power (DP) and productivity. The power model also supports the hypothesis [F. Dai, 2005] that there are three kinds of energy states in economy, i.e. normal state, strong state and super state, and DP is the continuous motivity to economic growth. By the power model of DP, we could interpret in analytic way that the diffusion of DP and the diversifications of economic development also might be occurred after the super state. Finally, the conclusions in this paper are researched in the empirical way, the results indicate the power model is better than the exponential model of DP in many cases, and we could get the inimitable outcomes in describing the macroeconomic process by the power model of DP. Keywords: Development Power (DP), Partial Distribution, power model, macroeconomic analysis JEL: E Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505016&r=all 442. Comment on 'Chaotic Monetary Dynamics with Confidence' William Barnett (University of Kansas) This paper is a comment on Serletis and Shintani, 'Chaotic Monetary Dynamics with Confidence,' which is to appear in a special issue of the Journal of Macroeconomics on chaos in economics. The Editor of the special issue invited comments from discussants of all papers in the special issue, with the comments to be published in the special issue. This invited comment is to appear in the special issue along with Serletis and Shintani's paper. Keywords: chaos bifurcation Divisia money aggregation JEL: C14 C22 E37 E32 Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505017&r=all 443. How the gold standard functioned in Portugal: an analysis of some macroeconomic aspects Antonio Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) Joao Sousa Andrade (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal. Keywords: Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR and Unit Roots JEL: B10 C32 E42 E58 F31 F33 N23 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmh:0505002&r=all 444. Social ties within school classes –- the roles of gender, ethnicity, and having older siblings Adriaan R. Soetevent (University of Amsterdam) Peter Kooreman (University of Groningen) In this paper we identify the lines along which social ties between high school teenagers are primarily formed. To this end, we introduce interaction weights between pupils in the same school class that are a function of exogenous individual background characteristics, like gender, ethnicity, and having older siblings. The resulting model with endogenous interactions and school specific fixed effects is estimated using data from the Dutch National School Youth Survey (NSYS), a survey in which in principle all students in a sampled class are interviewed. By combining the 1992, 1996, 1999 and 2001 NSYS data, we are able identify trends in social relationships of teenagers. We find that the roles that gender and ethnicity play in how teenagers interact varies strongly across different types of behavior. For example, going out shows strong within-ethnicity interactions, while expenditures on cell phone and on clothing exhibit mainly between-girls interactions. Having older siblings has a minor effect on within school class social interactions. There is weak evidence of decreased ethnic segregation within school classes during the decade considered. Keywords: teenage behavior, social interactions, segregation, time use, expenditures JEL: D12 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505004&r=all 445. Power Law Tails in the Italian Personal Income Distribution Fabio Clementi (Department of Public Economics, University of Rome 'La Sapienza') Mauro Gallegati (Department of Economics, Universita Politecnica delle Marche) We investigate the shape of the Italian personal income distribution using microdata from the Survey on Household Income and Wealth, made publicly available by the Bank of Italy for the years 1977-2002. We find that the upper tail of the distribution is consistent with a Pareto power-law type distribution, while the rest follows a two-parameter lognormal distribution. The results of our analysis show a shift of the distribution and a change of the indexes specifying it over time. As regards the first issue, we test the hypothesis that the evolution of both gross domestic product and personal income is governed by similar mechanisms, pointing to the existence of correlation between these quantities. The fluctuations of the shape of income distribution are instead quantified by establishing some links with the business cycle phases experienced by the Italian economy over the years covered by our dataset. Keywords: Personal income; Pareto law; Lognormal distribution; Income growth rate; Business cycle JEL: D1 D2 D3 D4 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505005&r=all 446. Pareto's Law of Income Distribution: Evidence for Grermany, the United Kingdom, and the United States Fabio Clementi (Department of Public Economics, University of Rome 'La Sapienza') Mauro Gallegati (Department of Economics, Universita Politecnica delle Marche) We analyze three sets of income data: the US Panel Study of Income Dynamics (PSID), the British Household Panel Survey (BHPS), and the German Socio-Economic Panel (GSOEP). It is shown that the empirical income distribution is consistent with a two- parameter lognormal function for the low-middle income group ( 97\%-99\% of the population), and with a Pareto or power law function for the high income group (1\%- 3\% of the population). This mixture of two qualitatively different analytical distributions seems stable over the years covered by our data sets, although their parameters significantly change in time. It is also found that the probability density of income growth rates almost has the form of an exponential function. Keywords: Personal income; Lognormal distribution; Pareto's law; Income growth rate JEL: D1 D2 D3 D4 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0505006&r=all 447. Capital Stock Depreciation, Tax Rules, and Composition of Aggregate Investment Daniel Levy (Bar-Ilan University) I estimate time varying aggregate capital stock depreciation rates for the post-war U.S. economy using capital-investment evolution equation along with the data on the annual net capital stock and corresponding quarterly gross investment series. I estimate depreciation rates of consumer durable goods, producer durable goods, and nonresidential business structures. The estimation results suggest that the three depreciation rate series have been behaving very differently over time. In particular, I find that over time the implied depreciation rate of nonresidential business structures has remained stable, the implied depreciation rate of consumer durable goods has been steadily declining, while the implied depreciation rate of producer durable goods has been increasing, especially during the last 10–15 years. These findings are interpreted in terms of the changes in the composition of the aggregate nonresidential business fixed and producer durable good capital stocks. In addition, I discuss the implications of the changes introduced during the 1980s in rules and regulations governing a depreciation accounting for tax purposes, and their effect on the estimates of capital depreciation rates derived in this paper. The main argument the paper makes is that technological progress may be leading to accelerated depreciation of producer durable goods and equipment since newer and more advanced technology makes older equipment obsolete. The empirical evidence reported in this paper supports this argument. Keywords: Time Varying Depreciation Rate, Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Technological Progress JEL: E22 C82 Date: 2005-05-15 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505007&r=all 448. Estimates of the Aggregate Quarterly Capital Stock for the Post- War U.S. Economy Daniel Levy (Bar-Ilan University) Haiwei Chen (Westminster College) We construct quarterly aggregate gross and net capital stock series for the post-war U.S. economy using annual capital stock, capital depreciation, and capital discard figures along with quarterly investment series. We construct nominal and real measures of all three categories in the aggregate capital stock: consumer durable goods, producer durable goods, and business structures. In constructing the nominal series we take into account the changes in capital goods’ prices. The series are constructed using four different methods. Using time- and frequency domain techniques, we compare the constructed series and characterize their short-run, business cycle, and long-run cyclical properties. We find that the constructed series exhibit very different cyclical and shock persistence dynamics. Practical implications are discussed. Keywords: Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Capital Depreciation and Discard, Capital Goods Prices, Frequency Domain, Cyclical Behavior, Linear Interpolation, Numerical Iteration JEL: E22 C82 E32 Date: 2005-05-15 Date: 2005-05-16 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505008&r=all 449. Genuine Dissaving and Optimal Growth Simone Valente (ETH Zurich - Institute of Economic Research) Green accounting theories have shown that negative genuine savings at some point in time imply unsustainability. Consequently, recent studies advocate the use of the genuine savings measure for empirical testing: a negative index implies sustainability be rejected. This criterion is not forward-looking: positive current genuine savings do not rule out ’genuine dissaving’ in the future. This paper derives a one-to-one relationship between the sign of longrun genuine savings and the limiting sustainability condition in the capital-resource model: if the sum of the rates of resource regeneration and augmentation exceeds (falls short of) the discount rate, long-run genuine savings are positive (negative). Testing this limiting condition allows to reveal whether current genuine savings are delivering a false message. Keywords: Genuine Saving, Green Accounting, Renewable Resources, Sustainable Development, Technological Progress. JEL: O47 D90 Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505009&r=all 450. Liquidity Constraint and Household Portfolio in Japan Norihiro KASUGA (Faculty of Economics, Nagasaki University) Katsumi Matsuura (Department of Economics, Hiroshima University) In this paper, we analyze the financial asset selection behavior of Japanese households. Especially, we focus on whether or not liquidity constraint decreases the amount of a householdfs risky assets. To investigate this, we first empirically examine which types of household suffer from liquidity constraint. Then, based on the probability obtained from this first stage, we use the Tobit model to estimate the risky asset ratio (=risky asset/total financial asset), and examine the relationship between liquidity constraint and household portfolio. Our results show that the more households suffer from liquidity constraint, the less the households hold risky assets. This is consistent with previous empirical research on Italian households, implemented by Guiso et al.(1996). Our research suggests that the Japanese post-war financial system, which has provided money primarily to the industrial sector rather than the household sector (e.g. consumer loans), might lower the amount of risky assets held by Japanese households. Keywords: risky asset ratio, liquidity constraint, household portfolio, saving rate JEL: D12 E2 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505010&r=all 451. Nutritional Aspects of Poverty among Casual Labourer Households in Shillong (India) SK Mishra (Department of Economics, North Eastern Hill University, Shillong India) JW Lyngskor (Department of Economics, North Eastern Hill University, Shillong India) In this paper we report our findings as to the extent of poverty among the casual labourers of Shillong, the capital city of Meghalaya, India. Two views of poverty have been considered; first at the per capita (per month) income level and the second at the nutritional level. Nutritional level has been defined in terms of calorie, carbohydrate, protein and fat intakes of the casual labourer households. We find that income elasticites of calorie availability and carbohydrate availability move close to each other. Income elasticities of protein are always higher than carbohydrate (and calorie). Elasticities of fat are initially larger than others, but with an increase in per capita income they slide down others. At small income levels relatively high- fat-low-protein articles are consumed while with an increase in income relatively low- fat-high-protein articles are consumed. The contribution of carbohydrates to calorie intake decreases with an increase in per capita income. Our findings do not corroborate Behrman and Deolalikar (1987), who showed that the income elasticity of calorie intake was quite low, and not significantly different from zero in statistical terms. If the income elasticity were close to zero, its implication is that improvement in the income of the poor will have little impact on the extent of malnutrition. Then the developmental policies intended to improve nutrition will have to use policy instruments which attack malnutrition directly rather than relying simply on raising income. But that is not the case as shown by our study. However, our findings support Strauss and Thomas (1990), Ravallion (1990). Bouis and Haddad (1992), and Subramanian and Deaton (1996), who find that income elasticities of energy component of food, although small, are yet significantly different from and much larger than zero. Subramanian and Deaton ( 1996), based on the National Sample Survey data, estimated the expenditure elasticity of calorie intake to lie in the range of 0. 3-0.5 and in any case statistically different from zero. In our study, we find that income elasticities of calorie availability ( to casual labourers in Shillong) are close to 0.4, which corroborate Subramanian and Deaton. We also find that not only calories, but other nutritional ingredients of food such as carbohydrate, protein and fat availabilities (intakes) also have income elasticities significantly larger than zero and, therefore, raising income to Rs. 800 (per capita per month) or so we may overcome the mal-nutrition problem among the poor. Keywords: Poverty, Shillong, Meghalaya, India, Nutritional intakes, carbohydrate, protein, fat, calorie, income elasticity, malnutrition JEL: I12 I31 I32 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505011&r=all 452. Poverty, Dietary Imbalance and Sickness among Casual Labourer Households in Shillong (India) SK Mishra (Dept. of Economics, NEHU, Shillong) JW Lyngskor (Department of Economics, North Eastern Hill University, Shillong India) The objective of this study is to bring out the case of poverty, undernourishment and health conditions of casual labourers in Shillong, the capital city of Meghalaya, India. A large section of the unskilled labourers work as casual workers. Casual labourers are those workers who work for a very short duration ( for a few hours, a day or at most a few days under a single contract) for an employer, and who are (usually) paid for their labour either at the end of the contract or at the end of a day. Casual workers are often unskilled or semi-skilled; they usually do not own any other factors of production (such as land, capital or implements needed to perform the job) except their labour power. Casual labourers earn their livelihood by selling their labour power and often regenerate their labour power by 'investing', so to say, a very large part of their wage earning on food articles. Thus, in case of a casual labourer, the dichotomy of consumption and investment collapses into a single category. Due to low level of consumption, casual labourers are often poor performers - their efficiency is low. The market forces often impose on them the vicious circle of inefficiency - low wage rates - deficient consumption - inefficiency. The study is based on the primary data collected from 125 casual labourer households with 688 family members. Overall, it is found that casual labourer households in Shillong are poor; their per capita income (per month) is Rs. 516.6 on an average and they spend a meager amount (Rs. 252.9 only or 48.95 percent of income) on food articles yielding energy. Some 38.4 percent of these households are below poverty line (fixed at Rs. 396 per capita per month). Poorer households have larger family size. Consequently, some 46. 5 percent persons in the sample households are below poverty line. The mean energy intake of these households is slightly less than 1600 calories per person per day. The average energy intake among the BPL households is a meager 1307.66 calories per person per day. Only 19 households have calorie intake larger than 2000, and of them only 14 get more than 2200 calories. Of 125 households, the majority (93) have no milk consumption. Overall, carbohydrates supply 76.5 percent of the energy intake and the contribution of proteins to the calorie intake is ranging between 9.55 and 10.64 percent across different income and food habit groups with the mean value of 10.16 percent. Irrespective of the per capita income group that they belong to, the casual labourer households, without a single exception, eat diets deficient in proteins far below the prescribed norms. Of the total number of 688 persons in 125 households, 72 (10.47 percent) are found chronically sick. Among the 72 sick persons, 56 (77.78 percent) are in the BPL income group, 34 (47.22 percent) are children in 0- 14 years age group, and 23 (31.94 percent) are adult women. Among the sick, the overwhelming majority indicates nutritional deficiency. Children and women are hit most hard by the dietary imbalance in food. Logit analysis on incidence of sickness suggests that the probability of a person being sick is very high 0.5 or more) in the extremely poor households. The probability of finding a sick person at about per capita income of Rs. 600 per month is 0.10 and it declines sharply with an increase in income. Keywords: Poverty, malnutrition, nutrition, deficiency disease, Shillong, Meghalaya, India, primary data, calorie, carbohydrate, protein, fat, logit analysis JEL: I12 I31 I32 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505012&r=all 453. Educated Preferences: Explaining Attitudes Toward Immigration in Europe Jens Hainmueller (Harvard University) Michael J. Hiscox (Harvard University) Recent studies of individual attitudes toward immigration emphasize concerns about labor market competition as a potent source of anti- immigrant sentiment, in particular among less- educated or less-skilled citizens who fear being forced to compete for jobs with low-skilled immigrants willing to work for much lower wages. We examine new data on attitudes toward immigration available from the 2003 European Social Survey. In contrast to predictions based upon conventional arguments about labor market competition, which anticipate that individuals will oppose immigration of workers with similar skills to their own, but support immigration of workers with different skill levels, we find that people with higher levels of education and occupational skills are more likely to favor immigration regardless of the skill attributes of the immigrants in question. Across Europe, higher education and higher skills mean more support for all types of immigrants. These relationships are almost identical among individuals in the labor force (i.e., those competing for jobs) and those not in the labor force. Contrary to the conventional wisdom, then, the connection between the education or skill levels of individuals and views about immigration appears to have very little, if anything, to do with fears about labor market competition. This finding is consistent with extensive economic research showing that the income and employment effects of immigration in European economies are actually very small. We find that a large component of the effect of education on attitudes toward immigrants can be accounted for by differences among individuals in cultural values and beliefs. More educated respondents are significantly less racist and place greater value on cultural diversity; they are also more likely to believe that immigration generates benefits for the host economy as a whole. Together, these factors account for around 65% of the estimated effect of education on support for immigration. Keywords: Immigration Preferences, Immigration Attitudes, Trade Preferences, Factor-Proportion Model, Education Effects, Skill Effects JEL: F22 J61 P16 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpot:0505013&r=all 454. Estate Taxes and Charitable Bequests: Evidence from Two Tax Regimes David Joulfaian (Government of the United States, Department of the Treasury) Much of the literature on the effects of estate taxation on charitable bequests has relied on cross sectional data, reflecting the uniqueness of death. Few have explored longitudinal data to exploit exogenous variations in tax regimes. The latter, however, continue to be susceptible to omitted variable as well as measurement error biases attributable to changes in the treatment of spousal bequests and frequent changes in tax regimes. This paper explores the effects of the estate tax on charitable bequests using administrative data from two tax regimes where earlier biases are minimized. The deductibility of charitable bequests is found to have significant implications for giving. However, the effects of estate tax repeal are much smaller. These findings are sensitive to expectations of the tax regime in effect at time of death. Keywords: Bequests, Taxes, Charitable Giving JEL: D19 H24 H31 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505004&r=all 455. The Role of Endogenous Skill Choice in an Aging Economy Christian Jaag (IFF-HSG) This chapter analyzes the effects of an aging population on individual skill choices and the production structure by means of a dynamic general equilibrium model with overlapping generations and probabilistic aging. The model allows for capital-skill complementarity, which strongly affects the outcomes in a small open economy setting vs. a closed (or equivalently worldwide) economy. In an open economy with a fixed real interest rate, the necessary increase in the contribution rate discourages labor supply and depresses GDP. With a variable real interest rate, however, capital usage increases and - by the capital- skill complementarity - also employment of high skilled labor. The mobilization of highly productive labor gives a boost to GDP. Hence, the often cited adverse effects of aging are mitigated and can be overcome when taking into account a more realistic production structure. Keywords: Aging, Human Capital, Demographics, Education, Capital- Skill Complementarity, Life-Cycle JEL: D58 D91 H55 J24 Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505005&r=all 456. Is Lebanon’s Debt Sustainable? A Closer Look at Lebanon’s Debt Dynamics Samer Saab (International Monetary Fund) 1. Lebanon has one of the highest public debt stocks (relative to GDP) in the world, currently at over 185 percent of 2003 GDP. Economic policy continues to be dominated by chronic imbalances in government finances which have seen the budget deficit average over 17 percent of GDP over the past five years. 2. Recent data suggests that there are tentative signs of a certain reversal in direction of the overall debt-to-GDP ratio in Lebanon. The most recent IMF projections notes that lower financing costs and higher revenue and spending restraint have improved debt dynamics. However, in the absence of additional fiscal adjustment, and in an environment of rising interest rates, debt dynamics would again become unstable in the medium-to-long term. 3. Progress with many of the fiscal measures the government agreed to undertake in the context of Paris II has been poor, partly as a result of political bickering and the easing of the immediate pressure on the budget, sapping the reform programme of its urgency. Recent political developments ( the de facto sacking of Prime Minister Hariri after a bitter power struggle with President Lahoud and the passing of a critical resolution at the UN Security Council condemning the handling of the issue) only add to the uncertainty that the reform train will pick up steam anytime soon . 4. IMF previous medium-term projections of debt-to- GDP ratios for Lebanon in the Article IV context have been systematically over-optimistic and off-target. Projections done in 1994, 1996, 1997, 1999, and 2001 projected a conversion point in the debt-to-GDP curve within 2 to 3 years of the projection date. None of these conversion points materialized. The aim of this paper is to offer an alternative medium- term projection of the debt ratio, while trying to refine the judgment on variables and assumptions that enter into the projection. More specifically, more emphasis will be given to political and social factors that often through Lebanon’s history hindered or dwarfed any reform momentum. Consistent with a Debt Sustainability Analysis framework, a set of assumptions on public debt, primary balance, revenue and expenditure structure and trend, gross financing, and interest rate and growth dynamics will be formulated. The analysis will be complemented with a look at a reduced set of vulnerability indicators for public sector debt sustainability. Keywords: Debt sustainability, Lebanon, Political economy JEL: D6 D7 H Date: 2005-05-17 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505006&r=all 457. Judgment aggregation in general logics Franz Dietrich (University of Konstanz, Germany) Within social choice theory, the new field of judgment aggregation aims to merge many individual sets of judgments on logically interconnected propositions into a single collective set of judgments on these propositions. Commonly, judgment aggregation is studied using standard propositional logic, with a limited expressive power and a problematic representation of conditional statements ('if P then Q') as material conditionals. In this methodological paper, I present a generalised model, in which most realistic decision problems can be represented. The model is not restricted to a particular logic but is open to several logics, including standard propositional logic, predicate calculi, modal logics and conditional logics. To illustrate the model, I prove an impossibility theorem, which generalises earlier results. Keywords: judgement aggregation, discursive dilemma, modelling methodology, formal logics, impossibility theorem JEL: D6 D7 H Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505007&r=all 458. Intergenerational Transfers, Lifetime Welfare and Resource Preservation Simone Valente (ETH Zurich - Institute of Economic Research) This paper studies the welfare properties of distortionary transfers in a life-cycle growth model where natural capital is private property. The main result is that, under credible pre- commitment, each newborn generation prefers positive taxes- subsidies to laissez-faire conditions when the resource share in production is sufficiently high. By increasing the degree of natural preservation, resource-saving policies raise welfare of all generations except that of the first resource owner, who suffers a deadweight loss due to taxation of the initial stock. If the first owner renounces part of his claims over initial endowments, all successive generations support resource-saving policies for purely selfish reasons. Keywords: Distortionary Taxation, Intergenerational Transfers, Overlapping Generations, Renewable Resources, Sustainability. JEL: H30 Q20 Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505008&r=all 459. Incumbency Effects in German and British Elections: A Quasi- Experimental Approach Jens Hainmueller (Harvard University) Holger Lutz Kern (Cornell University) Following the recent turn towards quasi-experimental approaches in the US literature on the incumbency advantage (Lee, 2001; Lee, forthcoming), we employ a Regression Discontinuity Design (RDD) to identify the causal effects of party incumbency in British and German post-World War II elections. The RDD framework exploits the randomized variation in incumbency status that occurs when a district race is close. Based on the assumption that parties do not exert perfect control over their observed vote shares, incumbents that barely won a race should be similar in their distribution of observed and unobserved confounders to non- incumbents that barely lost. This provides us with a naturally occurring counterfactual exploitable for causal inference under a weaker set of assumptions than conventional regression designs commonly used in the incumbency literature. In both British and German federal elections, we find that party incumbency has a signifcant positive impact on vote shares and the probability of winning in marginal districts, the sub- population of interest for which incumbency advantage is likely to make a difference. This stands in contrast to previous more ambiguous findings. Keywords: incumbency advantage, quasi-experiment, Germany, Great Britain, elections, causal inference JEL: D6 D7 H Date: 2005-05-19 URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0505009&r=all 460. Does Geography Play a Role in Domestic Takeovers? Theory and Finnish Micro-level Evidence Petri Bockerman (Labour Institute for Economic Research) Eero Lehto (Labour Institute for Economic Research) This paper explores domestic mergers and acquisitions (M&As) from the regional perspective. The Finnish firm-level evidence reveals that geographical closeness matters a lot for M&As within a single country. Thus, a great number of domestic M&As occur within narrowly defined regions. Interestingly, domestic M&As reinforce the core-periphery dimension. The results from matched firm-level data show that the strong ability by an acquiring company to monitor the target (measured by the knowledge embodied in human capital) is able to support M&As that occur across distant locations. Keywords: mergers, acquisitions, monitoring, agglomeration JEL: G34 R12 Date: 2005-05-13 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505002&r=all 461. Towards the Development of a Definitive Infrastructure Policy in P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The Government of AP , India , needs to rethink its Infrastructure strategy in the light of current state priority. Unless these are in line with state priorities, the strategies will not work and will perpetually be at cross purposes. The current direction taken by the state appears to point towards the development of rural infrastructure,such as irrigation facility and linkages. The paper attempts to assess the need for these linkages and evolve broad policies to be implemented by these strategies. Keywords: Infrastructure Policy JEL: R Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505005&r=all 462. Mumbai Urban Transport Project—Development and Challenges P Nair (ICFAI University) Deepak Kumar (ICFAI University Press) The Suburban Railway system in Mumbai is perhaps the most complex, densely loaded and intensively utilized system in the world. Due to the magnitude of the project and the need for continuous assistance and involvement of the Government of Maharashtra, a separate corporation, the Mumbai Railway Vikas Corporation (MRVC) was set up jointly between the Ministry of Railways and the Government of Maharashtra. MRVC has made substantial improvements in the Mumbai suburban railway system since its inception, but it has to go a long way. This paper discusses the developments and the challenges of MRVC and a brief description of suburban systems of different Indian metro cities has also been presented. Keywords: Urban Transport Project JEL: R Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505006&r=all 463. Vallarpadam Container Terminal Project: Enabling Port Infrastructure N Janardhan Rao (ICFAI University Press) Deepak Kumar (ICFAI University Press) Vallarpadam Container Terminal Project (VCTP) will be a unique one in infrastructure to boost the containerization in India. The establishment of VCTP will help in bringing larger ships to India and therefore will decrease the dependence on foreign ports. Keywords: Vallarpadam Container Terminal Project JEL: R Date: 2005-05-18 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505007&r=all 464. Online Data Management System for On-farm Trials Deepak Kumar (ICFAI University Press) AP Maurya (Baak of Maharasthra , India) The online data management system for on-farm trials (WebFarm) is a prototype software to customize recording of on-farm trials under the Indian Agricultural Statistics Research Institute, New Delhi. The prototype WebFarm is a three-layered design. Client Side is the Interface Layer, implemented in HTML and JavaScript. Server Side is the Application Layer connecting the client side layer and the database and is implemented in Java Server Pages. Database layer is implemented using Microsoft Access 2000. The developed WebFarm can be implemented as a network-based system with a server, so that information is available online. WebFarm runs on any node of the Internet through a browser. Security features are provided in such a way that only the administrator can access the database. It has facilities for browsing and searching the information and online help for smooth navigation. There is a provision for interacting with the System Administrator through e-mail. This will reduce the delay in receiving the data. Further, IASRI can distribute the work, like—checking of schedules, coding of data and converting data to electronic form to various centers conducting on-farm trials. As a result, they can be directly used for statistical analysis. Keywords: Online Data Management System JEL: R Date: 2005-05-20 URL: http://d.repec.org/n?u=RePEc:wpa:wuwpur:0505008&r=all 465. The relationship between stock prices, house prices and consumption in OECD Ludwig, Alexander (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504) Slok, Torsten (OECD) This paper analyzes the relationship between stock prices, house prices and consumption using data for 16 OECD countries. The panel data analysis suggests that the long-run responsiveness of consumption to permanent changes in stock prices is higher for countries with a market-based financial system than for countries with a bank-based financial system. Splitting the sample into the 1980s and 1990s further shows an increased sensitivity in the 1990's of consumption to permanent changes in stock prices for both countries with bank-based financial systems as well as countries with market-based financial systems. The relationship between changes in consumption and changes in house prices is positive for the second sample period across all specifications and financial systems. Date: 2004-03-04 URL: http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-12&r=all 466. Bank Capital, Liquidity and Systemic Risk Eichberger, Jurgen (Sonderforschungsbereich 504) Summer, Martin (Oesterreichische Nationalbank) We analyze the impact of capital adequacy regulation on bank insolvency and aggregate investment. We develop a model of the banking system that is characterized by the interaction of many heterogeneous banks with the real sector, interbank credit relations as a consequence of bank liquidity management and an insolvency mechanism. This allows us to study the impact of capital adequacy regulation on systemic risk. In particular we can analyze the impact of regulation on contagious defaults arising from mutual credit relations. We show that the impact of capital adequacy on systemic stability is ambiguous and that systemic risk might actually increase as a consequence of imposing capital constraints on banks. Furthermore we analyze the indirect consequences of capital adequacy regulation that are transmitted to the real economy by their impact on equilibrium interbank rates and thus the opportunity costs of liquidity within the banking system. Date: 2004-11-24 URL: http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-45&r=all 467. Preference for Diversification with Similarity Considerations Guerdjikova, Ani (Cornell University) The paper studies the connection between the form of the similarity function of a decision-maker and his willingness to diversify. It is shown that preference for diversification obtain for both high and low aspiration levels if the similarity function is convex in the Euclidean distance. However, a decision- maker with a concave similarity function and relatively high aspiration level will fail to choose diversified acts, even if his utility function is concave. Date: 2004-11-24 URL: http://d.repec.org/n?u=RePEc:xrs:sfbmaa:04-48&r=all 468. Allocating Resources within a Big City School District: New York City after Campaign for Fiscal Equity v. New York Ross Rubenstein (Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY) Lawrence Miller (Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY) In this brief we take a closer look at the mechanisms used to distribute resources across public schools. We first present what we know about the current distribution of educational resources within New York City and other large city districts. Then we discuss current efforts to promote greater equity in the distribution of resources and improve student performance. We conclude with lessons and policy implications for New York State as it implements the CFE decision in New York City. These findings also apply toother large districts in the state, such as Buffalo, Rochester, Syracuse, and Albany. Our focus in this brief is on vertical equity--ensuring that schools serving students with different levels of need receive appropriately different levels of resources--rather than adequacy. But the two concepts are closely related. If we ensure that students with a variety of needs have ample resources to achieve agreed upon educational goals, we will achieve both school-level adequacy and vertical equity. Keywords: intradistrict resource allocation; interdistrict resource allocation; vertical equity; across-school disparities; school-based funding; weighted student funding. JEL: I22 I28 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:max:cprpbr:31&r=all 469. The Y2K scare: causes, costs and cures John Quiggin (Department of Economics, University of Queensland) The worldwide scare over the 'Y2K bug result in the expenditure of hundreds of billions of dollars on Y2K compliance and conversion policies. Most of this can be seen, in retrospect, to have been unproductive or, at least, misdirected. In this paper, the technological and institutional factors leading to the adoption of these policies are considered, along with suggestions as to how such policy failures could be avoided in future. Keywords: Y2K, moral panics JEL: H89 Date: 2004-02 URL: http://d.repec.org/n?u=RePEc:rsm:pubpol:p04_1&r=all 470. Economic evaluation of the proposed Free Trade Agreement between Australia and the United States John Quiggin (Department of Economics, University of Queensland) This paper is a critical evaluation of the proposed Free Trade Agreement between Australia and the United States Keywords: FTA, PBS JEL: F13 H40 Date: 2004-04 URL: http://d.repec.org/n?u=RePEc:rsm:pubpol:p04_2&r=all 471. Asset Price Instability and Policy Responses: The Legacy of Liberalisation Stephen Bell (University of Queensland) John Quiggin (Department of Economics, University of Queensland) The debate about the dynamics and potential policy responses to asset inflation has intensified in recent years. Some analysts, notably Borio and Lowe, have called for 'subtle' changes to existing monetary targeting frameworks to try to deal with the problems of asset inflation and have attempted to developed indicators of financial vulnerability to aid this process. In contrast, this paper argues that the uncertainties involved in understanding financial market developments and their potential impact on the real economy are likely to remain too high to embolden policy makers. The political and institutional risks associated with policy errors are also significant. The fundamental premise that a liberalised financial system is based on 'efficient' market allocation cannot be overlooked. The corollary is that any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation. JEL: G18 Date: 2004-06 URL: http://d.repec.org/n?u=RePEc:rsm:pubpol:p04_3&r=all 472. Local Economic Development: Theory and the Ontario Experience Almos T. Tassonyi (Ontario Ministry of Finance, Strategic Policy Unit, Property Tax Policy Branch) Subnational governments are faced with increased pressure to initiate policies to further local economic development. This paper traces the changes in the theory and practice of local development initiatives in North America. The paper uses Ontario and its municipal sector as a case study of the transition from an emphasis on physical accommodation to the current emphasis on broader amenities. Keywords: Regional development policy, subsidies JEL: R11 H25 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ttp:itpwps:0511&r=all 473. An Economic Anatomy of Culture: Attitudes and Behaviour in Inter- and Intra-National Ultimatum Game Experiments Swee Hoon Chuah (Nottingham University Business School) Robert Hoffmann (Nottingham University Business School) Martin Jones (Department of Economic Studies, University of Dundee) Geoffrey Williams (Nottingham University Business School) The processes by which culture influences economic variables need to be exposed in order for the concept to be a useful tool for prediction and policy formulation. We investigate the attitudes and experimental behaviour of Malaysian and UK subjects to shed light on the nature of culture and the mechanisms by which it aects economic behaviour. Attitudinal dimensions of culture which significantly influence experimental game play are identified. This approach is offered towards a method to suitably quantify culture for economic analysis. Keywords: culture, ultimatum game, attitudes, world values survey, experiments JEL: C72 C91 D64 Date: 2005-05-14 URL: http://d.repec.org/n?u=RePEc:nub:occpap:13&r=all 474. Evaluating the Role of Brown vs. Board of Education in School Equalization, Desegregation, and the Income of African Americans Orley Ashenfelter (Department of Economics, Princeton University) William J. Collins (Department of Economics, Vanderbilt University) Albert Yoon (School of Law, Northwestern University) In this paper we study the long-term labor market implications of school resource equalization before Brown and school desegregation after Brown. For cohorts born in the South in the 1920s and 1930s, we find that racial disparities in measurable school characteristics had a substantial influence on black males? earnings and educational attainment measured in 1970, albeit one that was smaller in the later cohorts. When we examine the income of male workers in 1990, we find that southern-born blacks who finished their schooling just before effective desegregation occurred in the South fared poorly compared to southern-born blacks who followed behind them in school by just a few years. Keywords: Discrimination, schooling, South, NAACP JEL: J7 I28 N32 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:van:wpaper:0515&r=all 475. Changing wage structure and education in Vietnam 1993-1998: The roles of demand Amy Y.C. Liu This paper examines the changes in relative earnings of workers with different education levels during Vietnam’s transition. It is found that females enjoy a higher return to education than males do in 1998, reversing the situation observed five years ago. A large fall in the returns to vocational training for males, amid the rapid growth in the representation of better-educated females in the private sector where education is valued higher could be responsible for what have occurred. A direct assessment of the role of demand using a simple demand and supply framework developed by Katz-Murphy (1992) is undertaken. The result suggests an increase in the relative demand for better-educated workers appears to play an important role in explaining the earnings differentials between workers of different education groups. Education reform to better suit the needs of the post- reform emerging market, on-the-job training for workers, as well as equal access to education are some policy options that hold thekey to reduce wage inequality between different education groups. JEL: I21 J31 P2 Date: 2005 URL: http://d.repec.org/n?u=RePEc:idc:wpaper:idec05-4&r=all 476. Sunk Investments Lead to Unpredictable Prices George Mailath (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) Larry Samuelson (Department of Economics, University of Wisconsin-Madison) We study transactions that require investments before trading in a competitive market, when forward contracts fixing the transaction price are absent. We show that, despite the market being perfectly competitive and subject to arbitrarily little uncertainty, the inability to jointly determine investment levels and prices may make it impossible for buyers and sellers to predict the prices at which they will trade, leading to inefficient levels of investment and trade. Keywords: General equilibrium, sunspots, incomplete markets JEL: D50 D51 D91 Date: 2003-06-03 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-014&r=all 477. How good is the Exponential Function discounting Formula? An Experimental Study Uri Benzion (The Technion-Israel Institute of Technology and Department of Economics, Ben-Gurion University) Yochanan Shachmurove (Department of Economics, University of Pennsylvania and City College of the City University of New York) Joseph Yagil (The Graduate School of Business, Haifa University and Columbia University) This paper estimates the degree of the exponential-function misvaluation, its variation with given product price level, and its expected growth rate. The paper examines whether other mathematical functions, such as linear, quadratic and cubic functions, conform to the discounting and compounding processes of individual decision makers. Using subjects familiar with the exponential function discounting formula, this study finds that individuals undervalue the compound interest discounting formula given by the exponential function and overvalue the simple interest discounting formula given by the linear function. These findings can be attributed to the overreaction, overconfidence, mental accounting and narrow-framing behaviors discussed in psychology. Keywords: Exponential Discount Function; Experimental Subjective Discount Rates; Linear, Quadratic and Cubic Functions; overreaction, overconfidence, mental accounting and narrow-framing behavior; Economic Psychology. JEL: D90 G00 Date: 2003-06-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-015&r=all 478. Imperfect Monitoring and Impermanent Reputations Martin W. Cripps (Olin School of Business, Washington University in St. Louis) George J. Mailath (Department of Economics, University of Pennsylvania) Larry Samuelson (Department of Economics, University of Wisconsin-Madison) We study the long-run sustainability of reputations in games with imperfect public monitoring. It is impossible to maintain a permanent reputation for playing a strategy that does not play an equilibrium of the game without uncertainty about types. Thus, a player cannot indefinitely sustain a reputation for non-credible behavior in the presence of imperfect monitoring. Keywords: Reputation, Imperfect Monitoring, Repeated Games JEL: C70 C78 Date: 2002-07-30 Date: 2003-05-30 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-016&r=all 479. Financial Markets of the Middle East and North Africa: The Past and Present Yochanan Shachmurove (Department of Economics, University of Pennsylvania, and City College of the City University of New York) The recent political developments in the Middle East have prompted increased scrutiny of the economies of the nations lying in this region. Over the past few months, the financial markets of Middle East and North Africa (MENA) have been affected by the speculations that existed before the war in Iraq as well as its subsequent repercussions. Factors such as lagging domestic, political reforms, government interference, and inflexible monetary and fiscal policies remain obstacles to privatization, globalization, and foreign investment in MENA economies. As the economies enter the post-war recovery phase, reform of financial markets seems necessary to accelerate economic growth. Keywords: Middle East and North African (MENA) Emerging Financial Markets; Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Tunisia, Turkey; Foreign Direct Investment; Globalization and Growth; Iraq War; Gulf War; Macroeconomic and Financial Indicators JEL: E0 E1 F3 F4 G1 N2 O4 O5 Date: 2003-06-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-017&r=all 480. Business Strategy, Human Capital, and Managerial Incentives George J. Mailath (Department of Economics, University of Pennsylvania) Volker Nocke (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) We posit that the value of a manager’s human capital depends on the firm’s business strategy. The resulting interaction between business strategy and managerial incentives affects the organization of business activities, both the internal organization of the firm and the determination of firm boundaries. We illustrate the impact of this interaction on firm boundaries in a dynamic agency model. There may be disadvantages in merging two firms even when such a merger allows the internalization of externalities between the two firms. Merging, by making unprofitable certain decisions, increases the cost of inducing managerial effort. This incentive cost is a natural consequence of the manager’s business-strategy -specific human capital. Keywords: Human capital, managerial incentives, firm boundaries, firm organization JEL: D23 L14 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-018&r=all 481. A Gap for Me: Entrepreneurs and Entry Volker Nocke (Department of Economics, University of Pennsylvania) We present a theory of entrepreneurial entry and exit decisions. Knowing their own managerial talent, entrepreneurs decide which market to enter, where markets differ in size. We obtain a striking sorting result: each entrant in a large market is more efficient than any entrepreneur in a smaller market. The result obtains since competition is endogenously more intense in larger markets. The sorting and price competition effects imply that the number of entrants (and hence product variety) may actually be smaller in larger markets. In the stochastic dynamic extension of the model, we show that the churning rate of entrepreneurs is higher in larger markets. Keywords: entrepreneurship, entry, exit, firm turnover, industry dynamics JEL: L11 L13 M13 Date: 2003-06-30 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-019&r=all 482. South Africa’s International Competitiveness: A Product Level Analysis Mitchell Kellman (Department of Economics, The City College of City University of New York) Trevor Roxo (Department of Business Management, University of Transkei, South Africa) Yochanan Shachmurove (Department of Economics, University of Pennsylvania) As South Africa emerges from its Apartheid period, the evolution of its international trade is vital to the growth of the economy. This paper evaluates South Africa’s trade performance in three essential markets, namely United States, Europe and Japan. It examines the nation’s flexibility in the face of fluctuations in relative exchange rates in its markets. Using the Constant Market Share (CMS) model of international trade and the “Rising Stars” model, the particular areas of industrial structure in which South Africa is positioned to succeed are identified on the market as well as the product levels. Keywords: Apartheid; South Africa; Southern African Development Community (SADC); United States, Japan, European Union; International Competitiveness; Entrepreneurship; Exchange Rate Responsiveness; Constant Market Share ( CMS) model JEL: F1 F4 Date: 2003-07-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-020&r=all 483. Contemporaneous Perfect Epsilon-Equilibria George Mailath (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) Larry Samuelson (Department of Economics, University of Wisconsin-Madison) We examine contemporaneous perfect epsilon-equilibria, in which a player’s actions after every history, evaluated at the point of deviation from the equilibrium, must be within epsilon of a best response. This concept implies, but is stronger than, Radner’s ex ante perfect epsilon-equilibrium. A strategy profile is a contemporaneous perfect epsilon-equilibrium of a game if it is a subgame perfect equilibrium in a perturbed game with nearly the same payoffs, with the converse holding for pure equilibria. Keywords: Epsilon equilibrium, ex ante payoff, multistage game, subgame perfect equilibrium JEL: C70 C72 C73 Date: 2003-08-15 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-021&r=all 484. Using a Social Experiment to Validate a Dynamic Behavioral Model of Child Schooling and Fertility: Assessing the Impact of a School Subsidy Program in Mexico Petra Todd (Department of Economics, University of Pennsylvania) Kenneth I. Wolpin (Department of Economics, University of Pennsylvania) This paper studies the performance of a methodology that can be used to evaluate the impact of new policies that radically depart from existing ones. It uses data gathered from a randomized schooling subsidy experiment in Mexico (i) to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling, (ii) to forecast long-term program impacts that extend beyond the life of the experiment, and (iii) to assess the impact of a variety of counterfactual policies. The behavioral model is estimated using data on families in the randomized-out control group and in the treatment group prior to the experiment, both of which did not receive any subsidy. Child wages provide a valuable source of variation in the data for identifying subsidy effects. Using the estimated model, we predict the effects of school subsidies according to the schedule that was implemented under the Mexican PROGRESA program Keywords: schooling, child labor, fertility, structural estimation, social experiments JEL: J1 J2 Date: 2002-04-01 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-022&r=all 485. The Macroeconomy and the Yield Curve: A Nonstructural Analysis Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER) Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco) S. Boragan Aruoba (Department of Economics, University of Maryland) We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and much weaker evidence for a reverse influence. We also relate our results to a traditional macroeconomic approach based on the expectations hypothesis. Keywords: Yield curve, term structure, interest rates, macroeconomic fundamentals, factor model, statespace model JEL: G1 E4 C5 Date: 2003-10-21 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-024&r=all 486. Some Like it Smooth, and Some Like it Rough: Untangling Continuous and Jump Components in Measuring, Modeling, and Forecasting Asset Return Volatility Torben G. Andersen (Kellogg School of Management, Northwestern University and NBER) Tim Bollerslev (Department of Economics, Duke University and NBER) Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER) A rapidly growing literature has documented important improvements in volatility measurement and forecasting performance through the use of realized volatilities constructed from high frequency returns coupled with relatively simple reduced-form time series modeling procedures. Building on recent theoretical results from Barndorff-Nielsen and Shephard (2003c,d) for related bi-power variation measures involving the sum of high- frequency absolute returns, the present paper provides a practical framework for non-parametrically measuring the jump component in realized volatility measurements. Exploiting these ideas for a decade of high-frequency five-minute returns for the DM/$ exchange rate, the S&P500 market index, and the 30-year U.S. Treasury bond yield, we find the jump component of the price process to be distinctly less persistent than the continuous sample path component. Explicitly including the jump measure as an additional explanatory variable in an easy-to implement reduced form model for realized volatility results in highly significant jump coefficient estimates at the daily, weekly and quarterly forecast horizons. Keywords: Continuous-time methods; jumps; quadratic variation; realized volatility; bi-power variation; high-frequency data; volatility forecasting; HAR-RV model JEL: C1 G1 Date: 2003-02-01 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-025&r=all 487. Should Courts Always Enforce What Contracting Parties Write? Luca Anderlini (Department of Economics, Georgetown University) Leonardo Felli (London School of Economics, Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Centre for Economic Policy Research (CEPR)) Andrew Postlewaite (Department of Economics, University of Pennsylvania) We find an economic rationale for the common sense answer to the question in our title — courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. We study a buyer-seller model with asymmetric information and ex- ante investments, in which some contingencies cannot be contracted on. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex- ante and interim-efficient contracts. In particular, some types pool in equilibrium. By voiding some contracts that the pooling types would like the court to enforce, the court is able to induce them to separate, and hence to improve ex-ante welfare. Keywords: Optimal Courts, Informational Externalities, Ex-ante Welfare JEL: C79 D74 D89 K40 L14 Date: 2003-11-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-026&r=all 488. Core Convergence with Asymmetric Information Richard McLean (Department of Economics, Rutgers University) Andrew Postlewaite (Department of Economics, University of Pennsylvania) We analyze the ex ante incentive compatible core for replicated private information economies. We show that any allocation in the core when the economy is replicated sufficiently often is approximately Walrasian for the associated Arrow-Debreu economy. Keywords: Core, Asymmetric Information, Incentive Compatibility, Exchange Economy JEL: C71 D82 D51 Date: 2003-11-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-027&r=all 489. Crime, Inequality, and Unemployment, Second Version Kenneth Burdett (Department of Economics, University of Pennsylvania) Ricardo Lagos (New York University) Randall Wright (Department of Economics, University of Pennsylvania) There is much discussion of the relationships between crime, inequality, and unemployment. We construct a model where all three are endogenous. We find that introducing crime into otherwise standard models of labor markets has several interesting implications. For example, it can lead to wage inequality among homogeneous workers. Also, it can generate multiple equilibria in natural but previously unexplored ways; hence two identical neighborhoods can end up with different levels of crime, inequality, and unemployment. We discuss the effects of anti-crime policies like changing jail sentences, as well as more traditional labor market policies like changing unemployment insurance. Keywords: Crime, Inequality, Unemployment, Search JEL: D83 J64 Date: 2002-05-03 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-029&r=all 490. An On-the-Job Search Model of Crime, Inequality, and Unemployment Kenneth Burdett (Department of Economics, University of Pennsylvania) Ricardo Lagos (Department of Economics, New York University) Randall Wright (Department of Economics, University of Pennsylvania) We extend simple search-theoretic models of crime, unemployment and inequality to incorporate on-the-job search. This is valuable because, although the simple models can be used to illustrate some important points concerning the economics of crime, on-the- job search models are more relevant empirically as well as more interesting in terms of the types of equilibria they generate. We characterize crime decisions, unemployment, and the equilibrium wage distribution. We use quantitative methods to illustrate key results, including a multiplicity of equilibria with different unemployment and crime rates, and to discuss the effects of changes in labor market and anti-crime policies. Keywords: Crime, Inequality, Unemployment, Search, Turnov JEL: D83 J31 Date: 2003-09-04 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-030&r=all 491. Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland) Randall Wright (Department of Economics, University of Pennsylvania) We compare three pricing mechanisms for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We do this in a framework that, in addition to considering different mechanisms, extends existing work on the microfoundations of money by allowing a general matching technology and endogenous entry. We study how the nature of equilibrium and effects of policy depend on the mechanism. Under bargaining, trades and entry are both inefficient, and inflation implies a first-order welfare loss. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation can actually improve welfare. Under posting, the Friedman rule implies first best, and inflation reduces welfare but the effect is second order. Keywords: Money, Search JEL: D83 E31 Date: 2003-09-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-031&r=all 492. Inflation and Welfare in Models with Trading Frictions Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland) Randall Wright (Department of Economics, University of Pennsylvania) We study the effects of inflation in models with various trading frictions. The framework is related to recent search-based monetary theory, in that trade takes place periodically in centralized and decentralized markets, but we consider three alternative mechanisms for price formation: bargaining, price taking, and posting. Both the value of money per transaction and market composition are endogenous, allowing us to characterize intensive and extensive margin effects. In the calibrated model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to be between the bargaining and posting models. In some cases, moderate inflation may increase output or welfare. Keywords: Money, Search, Frictions, Inflation JEL: D83 E31 Date: 2003-11-12 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-032&r=all 493. Do Vertical Mergers Facilitate Upstream Collusion? Volker Nocke (Department of Economics, University of Pennsylvania) Lucy White (Finance, Harvard Business School) In this paper we investigate the impact of vertical mergers on upstream firms’ ability to sustain collusion. We show in a number of models that the net effect of vertical integration is to facilitate collusion. Several effects arise. When upstream offers are secret, vertical mergers facilitate collusion through the operation of an outlets effect: Cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical integration also facilitates collusion through a reaction effect: the vertically integrated firm’s ‘contract’ with its downstream affiliate can be more flexible and thus allows a swifter reaction in punishing defectors. Offsetting these two effects is a possible punishment effect which arises if the integrated structure is able to make more profits in the punishment phase than a disintegrated structure. Keywords: vertical mergers, collusion JEL: L13 L42 Date: 2003-11-17 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-033&r=all 494. TRIPS, externalities, trade agreements, hostages Wilfred J. Ethier (Department of Economics, University of Pennsylvania) This paper makes several basic points relating to the economics of Intellectual Property Rights, the TRIPS Agreement, and the World Trade Organization dispute settlement process. Keywords: TRIPS, externalities, trade agreements, hostages JEL: F10 F13 Date: 2003-11-21 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-034&r=all 495. Trade Agreements Based on Political Externalities, Second Version Wilfred J. Ethier (Department of Economics, University of Pennsylvania) During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of- trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements. This paper introduces inter-governmental political externalities into a model with terms-of-trade externalities. It delivers results consistent with what we actually observe, and thus resolves the puzzles, if and only if political externalities dominate terms-of-trade externalities. Keywords: Political externalities, trade agreements, reciprocity, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle JEL: F02 F13 Date: 2002-11-23 Date: 2003-11-30 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-035&r=all 496. The Effect of Adolescent Experience on Labor Market Outcomes: The Case of Height Nicola Persico (Department of Economics, University of Pennsylvania) Andrew Postlewaite (Department of Economics, University of Pennsylvania) Dan Silverman (Department of Economics, University of Michigan, Ann Arbor) Taller workers receive a wage premium, and the disparity in wages is similar in magnitude to the race and gender gaps. We exploit the variation in an individual’s height over time to explore the ways in which height affects wages. Specifically, we show that for white males the effect of adult height is essentially eliminated when adolescent height is taken into account. We find that participation in high school sports and clubs, and to a lesser extent schooling, are channels through which teen height affects adult wages. The benefits of being a taller teen seem to accrue equally across income classes and also across broad occupation categories, suggesting that the benefits of teen height do not result from occupational sorting. Because height is heritable and because tall adults tend to have children with each other, the benefits of teen height tend to be perpetuated across generations. Finally, we use our estimates of the teen height premium to perform a simple calculation of the monetary benefits of a newly approved treatment for children that increases height. Keywords: Confidence, Optimism, Behavioral Economics JEL: D81 D83 Date: 2003-12-03 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-036&r=all 497. The Effects of Constitutions on Coalition Governments in Parliamentary Democracies Daniel Diermeier (Kellogg School of Management,Northwestern University) Hulya Eraslan (Finance, Wharton School, University of Pennsylvania) Antonio Merlo (Department of Economics, University of Pennsylvania) In this article we present an overview of our recent research on the effects of constitutions on coalition governments in parliamentary democracies. Our approach is based on the solution and estimation of a multilateral bargaining model which we use to investigate the consequences of constitutional features of parliamentary democracy for the formation and stability of coalition governments. Keywords: Political Stability, Coalition Governments, Constitutional Design JEL: D72 H19 C73 Date: 2003-12-01 URL: http://d.repec.org/n?u=RePEc:pen:papers:03-037&r=all 498. The political economy of job protection and income redistribution. Bruno Amable Donatella Gatti This paper presents a model allowing to analyze voting, welfare institutions and economic performance. We consider a political economy framework with three classes of agents: entrepreneurs, employed workers and unemployed workers. Agents vote on alternative institutional options: the degree of labour market flexibility and the intensity of redistribution. We show that the welfare state configuration depends on the nature of the political system - majoritarian, coalition, twoparty. Because internationalization reduces the possibility for national government to e.ectively tax profits, the existing political coalition is fragilized by the process of globalization. The model generates results concerning the macroeconomic equilibrium employment level. Hence we can assess the effects of internationalization on macroeconomic performance. The impact of internalization depends on the nature of the political system ( majoritarian versus coalition government) and on the institutional configuration (positive flexibility versus positive redistribution). Date: 2005 URL: http://d.repec.org/n?u=RePEc:pse:psecon:2005-12&r=all 499. Relative Economic Decline and Unrealized Demographic Opportunity in the Philippines Christopher Edmonds (Economics Study Area, East-West Center) Manabu Fujimura (Economics Department, Aoyama Gakuin University, Tokyo) The paper examines the long-run relationship between demographic and macroeconomic development trends in the Philippines, and compares trends observed in that country to trends in eight regional neighbors in East and Southeast Asia. The Philippines stands out from these countries in that available data suggests the country has completed its demographic transition to a much lesser extent than comparison countries. Analysis of trends shows that the Philippine economy has lost ground to the country's neighbors over the past 50 years, and that its unfulfilled demographic transition has played a key role in explaining the country's relative economic decline. The paper reviews established economic theory and a few simple counter-factual simulations to explain and support this conclusion. The authors also consider the relationship between demographic trends and associated economic developments, and the political situation in the country. Despite discouraging findings regarding the Philippines' relative economic decline, the paper notes the country's more favorable performance in social development vis-a- vis its neighbors. The paper ends on an optimistic note, pointing to: recent economic reforms, the unrealized potential of a 'demographic dividend,' rising demand and use of modern family planning among Philippine households, and the favorable long run outlook for Philippine Overseas Contract Workers, as causes for optimism regarding future demographic change and the country's economic prospects. JEL: J13 J18 N35 O15 D13 E66 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:ewc:wpaper:wp77&r=all 500. SINGAPORE'S BEVERIDGE CURVE: A Comparative Study of the Unemployment and Vacancy Relationship for Selected East Asian Countries Edward Teo (Ministry of Manpower, Singapore) Shandre M. Thangavelu (Department of Economics, National University of Singapore) Elizabeth Quah (Ministry of Manpower, Singapore) This paper explores the relationship between unemployment (U) and job vacancies (V) in the Singapore labour market. Empirical analysis using the framework of the UV Curve (also known as the Beveridge Curve) indicates that Singapore’s labour market appears to have improved in its matching efficiency as compared to other East-Asian countries. However, detailed study of Beveridge Curve for the Singapore economy reveals that it has become more inelastic since the Asian crisis, thereby suggesting that the labour market is less responsive in recent years. This might suggest the possibility that employers are now more cautious and selective in their employment decisions. URL: http://d.repec.org/n?u=RePEc:sca:scaewp:0508&r=all 501. A Strong Invariance Principle for Associated Random Fields R.M. Balan (Department of Mathematics and Statistics, University of Ottawa,) (Department of Mathematics, Nanjing University) In this paper we generalize Yu’s strong invariance principle for associated sequences to the multi-parameter case, under the assumption that the covariance coefficient u(n) decays exponentially as n -> (infinity symbol). The main tools will be the Berkes-Morrow multi-parameter blocking technique, the Csorgo-Revesz quantile transform method and the Bulinski rate of convergence in the CLT for associated random fields. Keywords: strong invariance principle; associated random fields; blocking technique; quantile transform. JEL: C10 C40 Date: 2003-10-14 URL: http://d.repec.org/n?u=RePEc:pqs:wpaper:0172005&r=all 502. Path properties of (N;d)-Gaussian random fields Yong-Kab Choi (Department of Mathematics, Gyeongsang National University and School of Mathematics and Statistics, Carleton University) In this paper, we investigate several sample path properties on the increments of (N,d)-Gaussian random fields and also we obtain the law of iterated logarithm for the Gaussian random field, via estimating upper and lower bounds of large deviation probabilities on suprema of the (N,d)- Gaussian random fields. Keywords: Gaussian random field, quasi-increasing, regularly varying function, large deviation probability. JEL: C10 C40 Date: 2004-04-01 URL: http://d.repec.org/n?u=RePEc:pqs:wpaper:0192005&r=all 503. Has human capital accounted for regional economic growth in italy? a panel analysis on the 1980-2001 period. Eliana Baici (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont) Giorgia Casalone (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont) Since Solow’s (1957) contribution, human capital has a central role in the debate on economic growth as a leading long period development factor. If from a theoretical point of view the role of human capital on economic growth both directly and throughout its use in R&D activities is fully accepted, from an empirical perspective the results are much more controversial, strictly depending on the quality of data. A recent analysis by Aghion and Cohen (2004) put in evidence that high-level human capital has a positive effect on economic performance only if a country is close to the technological frontier: countries that are far from this frontier, specialised in traditional sectors, can growth, almost in the short run, even exploiting medium-level human capital. This analysis lead to consider the link between human capital and growth with a greater detail, trying to disclose the effect of different human capitals in a country, such as Italy, traditionally oriented toward a low/medium technology production. Using, beyond the usual proxies of human capital, some measures of its quality and of its interrelation with R&D sector, we would like to give a new contribution to the analysis of regional growth in Italy in the period 1980-2001. The panel approach, here adopted, allows us to take account of the temporal variability and to check for omitted variable specific for regions and persistent over time. Keywords: human capital, labour productivity, regional growth, panel estimations JEL: C23 J24 O40 R11 Date: 2005-05 URL: http://d.repec.org/n?u=RePEc:upo:upopwp:101&r=all