317. John Barkoulas, Christopher F. Baum, "Persistence in the Eurocurrency Market" (4/96: 198 Kb, Adobe Acrobat format; RATS procedure for GPH available)
Abstract: We investigate the low frequency properties of three- and six-month rates for Eurocurrency deposits denominated in eight major currencies with specific emphasis on fractional dynamics. Using the fractional integration testing procedure suggested by Geweke and Porter-Hudak (1983), we find that several of the Eurocurrency deposit rates are fractionally integrated processes with long memory. These findings have important implications for econometric modeling, forecasting, and cointegration testing of Eurocurrency rates.
316. James E. Anderson, Will Martin (World Bank), "The Welfare Analysis of Fiscal Policy: A Simple Unified Account" (4/96: 99 Kb, Adobe Acrobat format)
Abstract : A simple general equilibrium model of an economy with distortionary taxes and public goods is used to extend, unify and clean up the welfare analysis of changes in taxation, redistribution and the provision of public goods. We clarify the distinction between compensation and money metric measures of the welfare impact of fiscal changes and show that the equivalent variation measure dominates other measures. We provide an integrated approach to marginal tax and public good changes when public goods have real resource costs and must be financed by distortionary taxation using the concepts of the marginal cost of funds, the fiscal price of public goods and the virtual price of public goods. Here too, the compensation version of these concepts dominates the money metric version.
Abstract: DeGennaro, Kunkel, and Lee (1994) studied the long run dynamics of a system of long term interest rates of five industrialized countries by means of sophisticated cointegration methods. They found little evidence in support of the cointegration hypothesis, thus concluding that a separate set of fundamentals drives the dynamics of each of the individual long term interest rate series. In this study, we extend their analysis by exploring the possibility of very slow mean reverting dynamics (fractional cointegration) in the system of the five long term interest rates. We use the GPH test as our testing methodology for fractional integration and cointegration. Through rigorous investigation of the full system of the five long term interest rate series and its various subsystems, we provide evidence that the error correction term follows a fractionally integrated process with long memory, that is, it is mean reverting, though not covariance stationary. Despite significant persistence in the short run, a shock to the system of long term interest rates eventually dissipates so that an equilibrium relationship prevails in the long run.
(Previously titled "Testing for Fractal Structure in Stock Returns")
Abstract: This paper investigates the presence of fractal dynamics in stock returns. We improve upon existing literature in two ways: i) instead of rescaled-range analysis, we use the more efficient semi-nonparametric procedure suggested by Geweke and Porter-Hudak (GPH, 1983), and ii) to ensure robustness, we apply the GPH test to a variety of aggregate and sectoral stock indices and individual companies' stock returns series at both daily and monthly frequencies. Our results indicate that fractal structure is not exhibited by stock indices, but it may characterize the behavior of some individual stock returns series.
Abstract: We employ a nonlinear, nonparametric method to model the stochastic behavior of changes in several short and long term U.S. interest rates. We apply a nonlinear autoregression to the series using the locally weighted regression (LWR) estimation method, a nearest-neighbor method, and evaluate the forecasting performance with a measure of root mean square error. We compare the forecasting performance of the nonparametric fit to the performance of two benchmark linear models: an autoregressive model and a random-walk-with-drift model. The nonparametric model exhibits greater out-of-sample forecast accuracy than that of the linear predictors for most U.S. interest rate series. The improvements in forecasting accuracy are statistically significant and robust. This evidence establishes the presence of significant nonlinear mean predictability in U.S. interest rates, as well as the usefulness of the LWR method as a modeling strategy for these benchmark series.
Abstract: It is often argued that monetary instability reduces the informational content of market signals and thereby hinders the efficient allocation of investment. In this paper we use a signal extraction framework to give empirical content to this idea. In particular, we show why this framework predicts that, as monetary uncertainty decreases, the cross-sectional distribution of investment widens. We then explore this hypothesis using panel data information for UK companies over twenty years. Our data generally support the view that monetary instability may affect investment allocation through its effect on the predictability of prices.
Abstract: We re-examine Sephton and Larsen's (1991) conclusion that cointegration-based tests for market efficiency suffer from temporal instability. We improve upon their research by i) including a drift term in the vector error correction model (VECM) in the Johansen procedure, ii) correcting the likelihood ratio test statistic for finite-sample bias, and iii) fitting the model over longer data sets. We show that instability of the Johansen cointegration tests mostly disappears after accounting for these two factors. The evidence is even more stable in favor of no cointegration when we apply our analysis to longer data sets.
"Effective Protection Redux" (9/95: 83Kb, Adobe Acrobat format: Updated version of Boston College Working Paper #273.)Abstract: This paper rehabilitates effective protection. In general equilibrium, the usual definition (the percentage change in value added per unit induced by the tariff structure) corresponds to no economically interesting magnitude. The effective rate of protection for sector j is defined here as the uniform tariff which is equivalent to the actual differentiated tariff structure in its effect on the rents to residual claimants in sector j. This definition applies to general as well as partial equilibrium economic structures, has obvious relevance for political economy models and seems to correspond to the motivation for the early effective protection literature. Like the earlier effective rate formula, the concept is operational using the widely available set of Computable General Equilibrium (CGE) models. An example is provided for the US economy. The numerical results for the old and new concepts are not significantly correlated.
"A General Equilibrium Spatial Model of Housing Quality and Quantity" (8/95: 264Kb, Adobe Acrobat format)
Abstract: This paper examines the properties of stationary-state general equilibrium in a monocentric city with durable housing. On the demand side, identical households choose location, housing quality and quantity (floor area), and other goods. On the supply side, developers choose the structural density and time path of quality (which depends on construction quality and maintenance) of buildings. Under a certain set of assumptions, existence and uniqueness of equilibrium are proved, and its comparative static/dynamic properties are determined.
"Is Earnings Inequality Also Rising in Other Industrialized Countries ?--the Role of Institutional Constraints" (8/95: 66Kb, Adobe Acrobat format)"Recent Developments in the Bottleneck Model" (8/95)"Self-Financing of Congestible Facilities in a Growing Economy" (6/95: 99Kb, Adobe Acrobat format)"Does Employee Ownership Improve Incentives for Efforts?" (8/95: 462Kb, Adobe Acrobat format)
Abstract: This paper provides a theoretical framework to analyze workers' incentives under different ownership. It shows that the workers' effort and expected income are higher and the monitoring intensity is lower in the employee-owned firm than in the capitalist firm. Unlike in previous models, the advantage of employee ownership here does not depend on the size of the firm. It also shows that the advantage of employee ownership increases as workers' reservation wage decreases, the monitoring cost and productivity uncertainty increases. Finally, it discusses the relevance of the theory to employee stock-ownership program (ESOP) and profit sharing.
"Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis" (4/95: 248Kb, Adobe Acrobat format)Abstract: Many people believe that prevailing commission rates for residential real estate brokers are "too high" but do not offer a formal model. This paper presents a general equilibrium model of the housing market in which real estate brokers serve as matching intermediaries. We use this model to construct an illustrative example which is "calibrated" using data representative of a typical housing market.
"A Filtering Model with Steady-State Housing" (2/95: 231Kb, Adobe Acrobat format)Abstract: This paper presents a filtering model of the housing market which is similar to Sweeney's (1974b), except that the maintenance technology is such that housing can be maintained at a constant quality level as well as downgraded, and population at each income level grows continuously over time. In equilibrium, at each moment of time, some housing is allowed to deteriorate in quality, and other housing is maintained in a steady-state interval of qualities.
"Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power" (5/95: now published in Econometric Theory, 1995, 11:1148-1172)Abstract: In the context of testing for a unit root in a univariate time series, the convention is to ignore information in related time series. This paper shows that this convention is quite costly, as large power gains can be achieved by including correlated stationary covariates in the regression equation. The paper derives the asymptotic distribution of ordinary least squares (OLS) estimates of the largest autoregressive root and its t statistic. The asymptotic distribution is not the conventional ''Dickey-Fuller'' distribution, but a convex combination of the Dickey-Fuller distribution and the standard normal, the mixture depending on the correlation between the equation error and the regression covariates. The local asymptotic power functions associated with these test statistics suggest enormous gains over the conventional unit root tests. A simulation study and empirical application illustrate the potential of the new approach.
"Review Article Methodology: Alchemy or Science?" (5/95: 413Kb, Adobe Acrobat format)Abstract: This article reviews David Hendry's Econometrics: Alchemy or Science?
"A Theory of the Soft-budget Constraint" (8/95: 116Kb, Adobe Acrobat format)Abstract: This paper studies the soft budget constraint problem in a principal-agent model. The agent screens projects of and makes initial investment in the projects that have passed the screening. He then finds the types of the funded projects and decides to close some of the ex post inefficient ones among them. Closing projects sends an unfavorable signal about the agent's screening effort. Under the ex ante efficient contract, the agent has incentive to refinance some of the ex post inefficient projects.
"Approximate Asymptotic P-Values for Structural Change Tests" (4/95: 281Kb, Adobe Acrobat format)Abstract: Numerical approximations to the asymptotic distributions of recently proposed tests for structural change are presented. This enables easy yet accurate calculation of asymptotic p-values.
"Erratum: The Likelihood Ratio Test Under Nonstandard Conditions: Testing the Markov Switching Model of GNP" (3/95: 116Kb, Adobe Acrobat format) Note: This erratum corrects an error in Hansen, Journal of Applied Econometrics (1992)).
"Stochastic Equicontinuity for Unbounded Dependent Heterogenous Arrays" (11/94: 660Kb, Adobe Acrobat format)Abstract: This paper establishes stochastic equicontinuity for classes of mixingales. Attention is restricted to Lipschitz-continuous parametric functions. Unlike some other empirical process theory for dependent data, our results do not require bounded functions, stationary processes, or restrictive dependence conditions. Applications are given to martingale difference arrays, strong mixing arrays, and near epoch dependent arrays.
"Formal Measures of the Informal Sector Wage Gap in Mexico, El Salvador, and Peru" (3/95: 231Kb, Adobe Acrobat format)Abstract: Using comparable micro-level data from three countries, we ask what type of person works in the informal sector and whether informal workers earn lower wages than observationally equivalent workers in the formal sector. The characteristics of informal workers are similar across countries. Surprisingly, when we control for these personal characteristics, we find a significant wage premium associated with formal employment in El Salvador and Peru but a premium associated with work in the informal sector in Mexico. A model of endogenous selection offers little help in explaining the differences in wage patterns. The research casts doubt on the received wisdom that the informal sector, always and everywhere, is a poorly-paid but easily- entered refuge for those who have no other employment opportunities.
"Financial Constraints and Investment: A Critical Review of Methodological Issues and International Evidence" (8/95)Revised version (with discussion by Steven Fazzari and Donald Hester) published in Is Bank Lending Important for the Transmission of Monetary Policy?, J. Peek and E. Rosengren, eds., Federal Reserve Bank of Boston Conference Series No. 39, June 1995.
"The Roles of Part-time Work and Self-employment in the Retirement Transition: A Preliminary View from the HRS" (5/95: 66Kb, Adobe Acrobat format)"Can Ignorance Make Central Banks Behave?" (7/95: 215Kb, Adobe Acrobat format)Abstract: This paper presents a model in which "instrument uncertainty"‹that is, an uncertain mapping from monetary policy to macroeconomic outcomes‹may mitigate the inflationary bias problem that arises when efficient monetary policy rules are time- inconsistent. If the relation between monetary policy and macroeconomic outcomes is uncertain, the private sector has an incentive to scrutinize the past for clues about this relationship. This learning creates a link between past government behavior and present inflation expectations that the government can exploit to enhance its credibility. The model implies that the two conventional arguments for simple rules in monetary policy‹one stressing the central bank's poor forecasting abilities and the other stressing the perils of discretion‹may work at cross-purposes. Moreover, it provides an explanation of the cyclical behavior of inflation due to political cycles and of the correlation between the level and variance of inflation.
"Trade Restrictiveness Benchmarks" (6/95: 99Kb, Adobe Acrobat format)Abstract: This paper provides benchmarks of trade restrictiveness and year-on-year changes in trade restrictiveness using the Trade Restrictiveness Index. These benchmark measures stand in sharp contrast to standard measures. For a 28 country sample the TRI is used to compare trade policy in a recent year with free trade. Trade weighted average tariffs substantially underestimate restrictiveness measured by the 'uniform tariff equivalent' (the inverse of the TRI minus one), with the degree of underestimate positively correlated with the dispersion of the tariff structure. The rank correlation of the 'uniform tariff equivalent' and the average tariff in the sample is high, but the error implied by using the average tariff instead of the uniform tariff equivalent is substantial and variable. For a 7 case sample, year-on-year recent changes in trade policy are evaluated with the TRI and with standard measures. Here, the correlation of the TRI and changes in the standard measures is close to zero, essentially because tariff means and variances often do not move together. These conclusions appear to be robust with respect to missing data problems. The magnitude of the TRI is not very sensitive to elasticity of substitution variation, but is sensitive to the assumptions used to treat NTBs.
"The Loss in Efficiency from Using Grouped Data" (6/95: 52Kb, Adobe Acrobat format)Abstract: In this paper, we test the multivariate model of securitiesÕ excess returns formulated by Engle et al. (1990) on an expanded set of maturities. By applying their methodology to the entire Treasury term structure, we consider the applicability of a parsimonious common factor approach to the dynamics of short-, medium-, and long-term interest rates. We extend their methodology to incorporate asymmetric GARCH representations, in which the slope of the yield curve (and its sign) affects the evolution of the conditional variance of excess returns in fixed-income and equity markets. We find this approach quite successful in explaining the comovements of excess returns on the spectrum of Treasury issues for the 1962-1992 period.
"The Battle Against Major Air Pollutants: Some Wartime Statistics" (4/95)"Form of Ownership and Financial Constraints: Panel Data Evidence from Leverage and Investment Equations" (4/95)Abstract: This paper analyzes the effects of the form of ownership on the substitutability between internal and external sources of finance. In particular, we test whether financial constraints are more severe for independent firms and whether there are differences between members of large national business groups and subsidiaries of foreign multinational corporations. The results obtained from leverage and investment equations estimated for a panel of Italian companies imply that independent firms face more severe financial constraints. Moreover, such constraints are greater when cash flow decreases. Members of national groups and subsidiaries of multinational corporations are less sensitive to cash flow in their investment decisions. Leverage equations suggest, however, that there are interesting differences between the two latter categories of firms. In particular, agency costs arising from the conflict between managers and shareholders are more important for subsidiaries of multinational corporations.
"The Pin Factory Revisited: Diversification and Productivity Growth" (11/94)"Investment and Financing Constraints: A Switching Regression Approach Using U.S. Firm Panel Data" (4/95)
Abstract: In this paper we develop a switching regression model of investment, in which the probability of a firm being financially constrained is endogenously determined. This approach allows one to address the potential problem of static and dynamic misclassification encountered where firms are sorted using a criteria chosen a priori.
The empirical results obtained for US panel data suggest that the probability of being constrained depends upon variables that capture each firm's credit worthiness, and it is also related to general macroeconomic conditions and to the tightness of monetary policy.
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