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Abstract: We consider issues related to the order of an autoregression selected using information criteria. We study the sensitivity of the estimated order to i) whether the effective number of observations is held fixed when estimating models of different order, ii) whether the estimate of the variance is adjusted for degrees of freedom, and iii) how the penalty for overfitting is defined in relation to the total sample size. Simulations show that the lag length selected by both the Akaike and the Schwarz information criteria are sensitive to these parameters in finite samples. The methods that give the most precise estimates are those that hold the effective sample size fixed across models to be compared. Theoretical considerations reveal that this is indeed necessary for valid model comparisons. Guides to robust model selection are provided.
Abstract: What explains the correlations between nominal and real variables in the postwar US data? Are these correlations indicative of significant nominal price rigidity? Or do they simply reflect the particular way that monetary policymakers react to developments in the real economy? To answer these questions, this paper uses maximum likelihood to estimate a model of endogenous money. This model allows, but does not require, nominal prices to be sticky. The results show that nominal price rigidity, over and above endogenous money, plays an important role in accounting for key features of the data.
Abstract: This paper asks whether wage subsidies encourages participants to move into jobs with greater wage growth. We provide an analytical framework that identifies the key causal links between earnings subsidies and both within-and between-job wage growth. This framework highlights the importance of the form of the subsidy on the decision about the type of job to accept. We find that the subsidy will lead participants to place a higher value on jobs with wage growth if the relationship between pre-and post-subsidy earnings is convex, but the subsidy is predicted to have no effect on within-job wage growth if the transformation is linear. The subsidy is also predicted to affect between-job wage growth by increasing on-the- job search and altering the reservation wage. We use this framework to analyze the effects of the Canadian Self-Sufficiency Project experiment. We find that this subsidy did not affect within-job wage growth but did increase wage gains between jobs.
Abstract: This note shows that if commodities are tradable across jurisdictions, then it may be efficient to have heterogeneously sized jurisdictions, even if (i) consumers are identical, (ii) there is one private good and one public good, (iii) utility and production functions are not affected by population (within the relevant range of sizes of jurisdictions).
Abstract: A risk-averse consumer purchases an insurance policy; if she suffers a loss, she may receive services from a provider to recover some of the loss. Only the consumer and the provider know if the loss has actually occurred. The provider's behavior is uncertain. With some positive probability, the provider is honest, reporting the loss information truthfully to the insurer; with the complementary probability, the provider reports the information strategically, by writing a side-contract with the consumer to maximize the joint surplus of the provider-consumer coalition. We show that there is a loss of generality in considering only collusion-proof contracts, and characterize equilibria implemented by collusion-proof and noncollusion-proof contracts. When the probability of a provider acting collusively is small, the equilibrium contract is not collusion-proof but approximately first-best. When the probability of a provider acting collusively is large, the equilibrium contract is independent of this probability and identical to the equilibrium collusion-proof contract when the provider is collusive with probability 1.
Abstract: For numerous services, only an expert can diagnose which intervention a consumer needs to fix a loss. Since diagnosis is costly, efficiency requires that the loss be fixed by the first expert the consumer visits. In a simple competitive framework, we characterize equilibria and relate price distorsions to informational asymmetries. We then introduce the possibility of costly fraud, by requiring experts to announce a diagnosis. We show the existence of equilibria with fraud, because experts prefer that the customer remains uninformed. We also find that welfare is non-monotonic in the fraud cost.
Abstract: This paper discusses uniqueness and efficiency of user equilibrium in transportation networks with heterogeneous commuters. Daganzo (1983, Transportation Science) proved the uniqueness of (stochastic) user equilibrium when commuters have heterogeneous tastes over possible paths but identical disutility functions from time costs. We first show, by example, that his result may not apply in general networks if disutility functions are allowed to differ. However, for ÒsimpleÓ transportation networks, we can show that user equilibrium is always unique and weakly Pareto efficient (cf. the Braess example) for a general class of utility functions. We investigate if this result applies to more general networks. We also show that user equilibrium is unique in a dynamic bottleneck model with a simple network. We discuss an interesting relationship between the following two problems: the existence of user equilibrium in a finite model and the uniqueness of user equilibrium in a continuum model. In the appendix, we also provide a proof of a slightly generalized version of DaganzoÕs theorem.
Abstract: In this paper empirical evidence is presented on the elasticity of private R&D spending on its price. A censored panel-data regression model with random effects is applied to a balanced panel of 726 Italian firms over the 1992-97 period. Implied estimates point out that Italian firms' response to policy measures (including tax credits), aimed at reducing the user cost of R&D capital, is likely to be substantial (1.50-1.77). Furthermore, we also find that the elasticity of R&D spending is higher in recession (2.01) than in expansion (0.87).
Abstract: A number of previous studies have questioned the dominant role of Germany within the EMS. These conclusions are often based on empirical findings that interest rates of member countries of the EMS are not affected by German interest rates, even in the long run. In this study we establish evidence to the contrary by demonstrating that intra-EMS interest rate differentials (vis-a-vis Germany) exhibit mean-reverting behavior characterized by long-memory dynamics. Fractional error correction models' estimates suggest the presence of short-run intra-EMS monetary-policy interdependencies, but they validate the German Dominance Hypothesis in the long run.
Abstract: This paper extends a conventional cash-in-advance model to incorporate a real balance effect of the kind described by de Scitovszky, Haberler, Pigou, and Patinkin. When operative, this real balance effect eliminates the liquidity trap, allowing the central bank to control the price level even when the nominal interest rate hits its lower bound of zero. Curiously, the same mechanism that gives rise to the real balance effect also implies that monetary policies have distributional consequences that make some agents much worse off under a zero nominal interest rate than they are when the nominal interest rate is positive.
Abstract: We explore the potential for discriminating between honest and dishonest agents, when a principal faces an agent with private information about circumstances affecting the surplus; honest agents reveal circumstances truthfully. We investigate three specifications of honesty, depending on how the equity of the mechanism affects the agent's ethical conduct. First, a truth-teller unconditionally reveals circumstances and ethics; the optimal mechanism leaves a rent to the dishonest agent only, while the decision is suboptimal under bad circumstances even for an honest agent. Second, allowing for the honest agent to lie about ethics does not improve his situation: the allocations under truth-telling may be implemented by letting the dishonest agent lie in equilibrium. Finally, if honest behavior is conditional on the mechanism being fair, the optimal mechanism depends on the probability that the agent is dishonest. If it is large, the optimal mechanism is as if the agent was dishonest with certainty. Otherwise, it is approximately first best (it is first best if the principal's utility does not directly depend on circumstances); the dishonest agent lies in equilibrium.
Abstract: In this paper, we empirically investigate the impact of exchange rate volatility on real international trade flows utilizing a 13-country dataset of monthly bilateral real exports for 1980--1998. We compute one-month-ahead exchange rate volatility from the intra--monthly variations in the exchange rate to better quantify this latent variable. We find that the effect of exchange rate volatility on trade flows is nonlinear, depending on its interaction with the importing country's volatility of economic activity, and that it varies considerably over the set of country pairs considered.
Abstract: Empirical evidence for the United States shows that many antidumping petitions are withdrawn before the International Trade Commission and the International Trade Administration complete their investigations. Prusa (1992) argues that petitions are used by domestic industries to threaten and induce foreign industries into a collusive agreement exonerated from antitrust concerns because of US trade laws. In his model, all antidumping petitions should be withdrawn, which is not the case. This paper provides a model in which only some petitions are withdrawn and Prusa's result is just a special case. The decision to withdraw a petition depends on two key parameters: the coordination cost and the bargaining power of domestic and foreign industries. A new dataset is constructed to test the theoretical model on the US experience for the period 1980-1992. The econometric analysis supports the theoretical conclusions of the model. This finding is consistent with the hypothesis that the antidumping law is used as a collusive device.
Abstract: This paper presents evidence on the extent of wage mobility both while working for the same firm and when moving to a new firm. We find that mean wage growth between jobs is large in comparison to wage growth while working for the same employer,especially for less educated workers who experience low mean wage growth between jobs but even lower wage growth while working for the same employer.There is, however, substantial heterogeneity in wage growth both within and between firms. We, therefore, focus on both the means of the wage change distributions and on the probability that a worker does not experience real wage growth either while working for the same employer or moving to a new employer. We find that while real wages do grow with experience on the average job, a substantial proportion of workers experience real declines in wages while working for the same employer or moving to a new employer.
Abstract: The gravity model has been widely used to infer substantial trade flow effects of institutions such as customs unions and exchange rate mechanisms. McCallum [1995] found that the US-Canada border led to trade between provinces that was a factor 22 (2,200%) times trade between states and provinces, a spectacular puzzle in light of the low formal barriers on this border. We show that the gravity model usually estimated does not correspond to the theory behind it. We solve the "border puzzle" by applying the theory seriously. We find that national borders reduce trade between the US and Canada by about 40%, while reducing trade among other industrialized countries by about 30%. The spectacular McCallum headline number is the result of a combination of omitted variables bias and the small size of the Canadian economy.
Abstract: We study a generalization of Shapley-Scarf's (1974) economy in which multiple types of indivisible goods are traded. We show that many of the distinctive results from the Shapley-Scarf economy do not carry over to this model, even if agents' preferences are strict and can be represented by additively separable utility functions. The core may be empty. The strict core, if nonempty, may be multi-valued, and might not coincide with the set of competitive allocations. Furthermore, there is no Pareto efficient, individually rational, and strategy-proof social choice rule. We also show that the core may be empty in the class of economies with a single type of indivisible good and agents consuming multiple units, even if no complementarity exists among the goods.
Abstract: I study the macroeconomic costs (both in terms of stabilization and welfare) of the relinquishment of monetary policy independence associated with the membership of a currency area. The analysis is framed within a general equilibrium model of the world economy, composed by a large closed Union and a small (either independent or integrated) open economy. In terms of business cycle stabilization, I find that an economy relinquishing its monetary independence may face a potential trade-off between higher instability in real activity and lower instability in inflation. The tightness of this trade-off is found to be inversely related to the degree of cross-country symmetry of the shocks. In terms of welfare, maintaining the monetary stabilization tool proves to be always welfare improving. Finally, a higher degree of openness does not necessarily make a country a better candidate for participating in a currency area.
Abstract: Consumption is partly a social activity, yet most studies of consumer behavior treat households in isolation. We investigate familial relationships in consumption patterns using a sample of parents and their children from the Panel Study of Income Dynamics. We find a positive and statistically significant parent-specific effect on childrenÕs consumption even after controlling for the effect of parental income, and we find similar effects for sibling pairs. Child consumption responds negatively to large post-retirement shortfalls in consumption of the parents. This behavior holds up even after allowing for the possibility of smaller parent-to-child transfers made necessary by the parental consumption shortfalls. These results suggest that although income is an important source of the intergenerational correlation, parental choices and experiences also affect consumption behavior of the children.
Abstract: We speculate about how Europe's monetary union will evolve in the next five to ten years. We concentrate on what is likely to be the most important change in that period, namely, the increased number and heterogeneity of the participating states. New members will be sharply different from the incumbents in terms of their per capita incomes and economic structures. We concentrate on the implications of this development for the structure, organization and operation of the monetary union. We focus on the implications for the conduct of monetary policy of voting and representation rules on the ECB Board on the grounds that these will have to change with the accession of additional members. We focus on prudential supervision and lending in the last resort on the grounds that the inclusion of countries with recently-created and still-developing financial systems will be among the most prominent consequences of EMU enlargement. We focus on the coordination of fiscal policies on the grounds that the fiscal positions and problems of the accession economies will differ from those of the incumbents. And we focus on labor market flexibility on the grounds that labor-market effects will be among the leading consequences of the admission of new members.
Abstract: Historical evidence suggests that Mafias originally formed to provide enforcement of legitimate property rights when state enforcement was weak. We provide a general equilibrium model of Mafias as enforcement coalitions which protect property from predators. Both the level of predation and the type of enforcement -- self-enforcement, specialized competitive enforcement and Mafia enforcement -- are endogenous. We identify the conditions under which a coalition emerges and persists and show that Mafias are most likely to be found at intermediate stages of economic development. We also show that Mafias might provide better enforcement to the rich than would a welfare-maximizing state, suggesting a difficulty in the emergence and persistence of state provision of enforcement.
Abstract: This paper proposes a form of asymptotic trimming to obtain root n convergence of functions of kernel estimated objects. The trimming is designed to deal with the boundary effects that arise in applications where densities are bounded away from zero.
Abstract: We study coalition formation as an ongoing, dynamic process,with payoffs generated as coalitions form, disintegrate, or regroup. A process of coalition formation (PCF) is an equilibrium if a coalitional move to some other state can be "justified" by the expectation of higher future value, compared to inaction. This future value,in turn,is endogenous: it depends on coalitional movements at each node. We study existence of equilibrium PCFs. We connect deterministic equilibrium PCFs with unique absorbing state to the core, and equilibrium PCFs with multiple absorbing states to the largest consistent set.In addition, we study cyclical as well as stochastic equilibrium PCFs.
Abstract: Insecurity impedes trade. Using a variant of the gravity model Ð the workhorse of empirical international economics Ð Anderson and Marcouiller (1999) showed that transparent government policies and enforceable commercial contracts significantly reduce trade costs and increase trade volume. This paper asks two further questions. Does insecurity impede some types of trade more than others? Do different dimensions of insecurity affect different types of trade differently?
Abstract: We compare the performance of a currency board arrangement, inflation targeting, and dollarization in a small open, developing economy with liberalized capital account. We focus explicitly on the transmission of shocks to currency and country risk premia in international financial markets and on the role of fluctuations in premia in the propagation of other shocks. We calibrate our model on Argentina. The framework fits the data relatively well in that it matches the second moments of several key macro variables. Welfare analysis suggests that dollarization is preferable to the alternative regimes we consider because it removes the volatility that originates from the currency premium. However, a currency board can match dollarization if the central bank holds a sufficiently large stock of foreign reserves on average.