Structural sign patterns and reduced form restrictions

This paper reconsiders the degree to which the sign patterns of hypothesized structural arrays limit the possible outcomes for the sign pattern of the corresponding estimated reduced form. The conditions under which any structural restrictions would apply were believed to be very narrow, rarely found to apply, and virtually never investigated. As a result, current practice does not test the structural hypothesis in terms of the comparison of the estimated reduced form and the permissible reduced form sign patterns. This paper shows that such tests are always possible. Namely, that the sign patterns of the hypothesized structural arrays always limit the sign patterns that can be taken on by the estimated reduced form. Given this, it is always possible to falsify a structural hypothesis based only upon the sign pattern proposed. Necessary conditions, algorithmic principles, and examples are provided to illustrate the analytic principle and the means of its application.     

The strategic value of recall

This work studies the value of two-person zero-sum repeated games in which at least one of the players is restricted to (mixtures of) bounded recall strategies. A (pure) k-recall strategy is a strategy that relies only on the last k periods of history. This work improves previous results ( [Lehrer, 1988] and [Neyman and Okada, 2009]) on repeated games with bounded recall. We provide an explicit formula for the asymptotic value of the repeated game as a function of the one-stage game, the duration of the repeated game, and the recall of the agents.     

Now, whose schools are really better (or weaker) than Germany's? A multiple testing approach

Using PIRLS (Progress in International Reading Literacy Study) data, we investigate which countries' schools can be classified as significantly better or weaker than Germany's as regards the reading literacy of primary school children. The ‘standard’ approach is to conduct separate tests for each country relative to the reference country (Germany) and to reject the null of equally good schools for all those countries whose p-value satisfies p_i ? 0.05. We demonstrate that this approach ignores the multiple testing nature of the problem and thus overstates differences between schooling systems by producing unwarranted rejections of the null. We employ various multiple testing techniques to remedy this problem. The results suggest that the ‘standard’ approach may overstate the number of significantly different countries by up to 30%.     

Alternative unit root testing strategies using the Fourier approximation

Two alternatives to  and  Fourier unit root testing strategy, which incorporates pretesting for nonlinearity, are considered. One is based on the union of rejection (UR) approach, and the other is a hybrid strategy that combines the UR approach with the use of extra information from nonlinearity pretesting. Simulation results show that the two proposed strategies, especially the hybrid, frequently outperform the original pretesting strategy.     

The economic impacts of river rehabilitation: A regional Input-Output analysis

We developed a model to predict the impacts of river rehabilitation activities on the local economy. The model is based on the Input-Output analysis technique and was applied to the planned rehabilitation project for the River Thur in northern Switzerland, along the 4 km stretch between the communities of Bürglen and Weinfelden. We estimated changes in local employment and local economic output resulting from government spending on rehabilitation, associated changes in adjacent land use, and increased recreational activity. Accounting for land use changes required a modification of the conventional Input-Output analysis technique which should be of general interest. We accounted for uncertainty in the data and in some of the model assumptions by using a probabilistic formulation and propagating uncertainty through the model equations. As time-consuming local surveys were beyond the scope of this study, we used the Location Quotient non-survey technique to construct the local technical coefficients from national data and local employment data. This implies that the model can be applied quite easily to a different study area in Switzerland as long as local employment data are available. For each CHF 1 million expenditure per year on rehabilitation activities in our study region, we estimate an extra 8 fulltime employment equivalents (standard deviation, σ = 0.4 fte) and an increased output of CHF 1.4 million (σ = CHF 0.05 million). The low uncertainty of these estimates can be partly attributed to the structure of Input-Output analysis and partly to the fact that we estimated changes in the economic output, rather than output itself. In addition to the above impacts, we estimate that increased recreational use of the area will increase output by as much as CHF 0.17 million (σ = CHF 0.12 million) and employment by as much as 1.7 fulltime employment equivalents (σ = 1.3 fte), depending on the specific rehabilitation option selected.     

Systems GMM estimates of the Feldstein–Horioka puzzle for the OECD countries and tests for structural breaks

A systems GMM estimation method is used to estimate the Feldstein–Horioka equation from 1960 to 2007 with a panel of 13 OECD countries. It is found that the Feldstein–Horioka puzzle exists in a weaker form with a much reduced saving retention coefficient. The Bretton Woods agreement in particular seems to have weakened the Feldstein–Horioka puzzle by significantly improving international capital mobility. In comparison the Maastricht agreement seems to have improved capital mobility only by a small magnitude. The Blundell and Bond systems GMM method and structural break tests of Mancini-Griffoli and Pauwels are used in this paper.     

Estimating VARs with long stationary heterogeneous panels: A comparison of the fixed effect and the mean group estimators

The most promising candidates for estimating vector autoregressive models with long, stationary, possibly heterogeneous panel data sets (panel-VARs) are the fixed effect (FE) and the mean group (MG) estimators. With a view to providing guidance to applied researchers on how to pool in a panel-VAR, this paper compares the performance of the FE and the MG estimators both asymptotically and in Monte Carlo simulations. The main results of the analysis suggest the use of both estimators in applied work. If FE and MG estimates give similar estimates, the FE estimator should be used because it is more efficient. If they differ, the MG estimator should be used only if the panel is sufficiently long — say, twice as long as usually recommended in the dynamic panel data literature. If FE and MG estimates differ and the panel is not long enough, neither is generally a desirable alternative and other estimation techniques are needed.     

Measuring the output gap in Switzerland with linear opinion pools

We use the recently proposed linear opinion pool methodology of Garratt et al. (2014) to construct real-time output gap estimates for Switzerland over the out-of-sample period from 2003:Q1 to 2015:Q4. The model space consists of a large number of bivariate VAR specifications for the output gap and inflation, with each VAR specification using a different estimate of the output gap, lag order, and structural break information. We find that the linear opinion pool performs rather poorly. Real-time estimates of the output gap are no more accurate than those from some simple benchmark models, no more robust to ex post revisions than the real-time estimates of the individual univariate output gaps, and do not produce more accurate forecasts of inflation. The key driver of ‘good’ forecast performance is structural break information. Once the same structural break information is conditioned upon in all prediction models, the gain from averaging over many different pools of models that utilize various output gap estimates or lag structures in the VAR specification is of negligible magnitude.     

Estimation of consistent multi-country FEERs

Most studies on equilibrium exchange rates focus on a limited number of G7 countries. But in a situation of world imbalances, emerging countries can no longer be excluded. The study of all equilibrium exchange rates is delicate. First, the trade model has to be balanced at the aggregate level. This paper suggests a method to achieve world balance both in volume and in value. Second, the N − 1 bilateral exchange rates cannot ensure that the N areas will reach their macroeconomic equilibrium simultaneously. This paper examines the existing solutions to solve the N − 1 problem and proposes an alternative which minimizes the distance to the current-account targets. Finally, in order to compare the relevance of the different methodologies, FEERs are calculated for 19 industrialized and developing countries. The results, which are taking into account the modification on output gap assessment induced by the 2008–2009 crisis, lead for the year 2010 to a USD closed to its equilibrium, a RMB undervalued by around 35% in real effective terms and to a EUR/USD parity equals to 1.47.     

The sufficiency strategy: Would rich-world frugality lower environmental impact?

One alleged weapon against unsustainable environmental impact is for the wealthy to consume less. This sufficiency strategy is to complement the efficiency strategy of lowering ratios of resource inputs to economic outputs; the former would reduce the affluence factor in I = PAT, the latter the technology factor. That the latter strategy suffers from a consumption rebound is widely recognized. This paper identifies a similar rebound when the affluence factor is autonomously lowered: The lower initial demand lowers prices, which in turn stimulates new demand by others. The strategy moreover addresses only the rich, raising questions of its theoretical maximum efficacy. Its proponents usually conflate frugality with the North-South dichotomy and intragenerational with intergenerational equity. Moreover, there are difficulties with the supporting arguments that frugality is good for one’s own sake as well as for the environment, and that the rich should ‘lead the way’ to living more lightly. Personal behaviour change is furthermore not a substitute for international political efforts. Finally, since all changes in right-side factors of the I = PAT equation change other right-side factors, such indirect attacks on impact should be abandoned in favor of supply and emissions quotas.     

Allocation rules for land division

This paper studies the classical land division problem formalized by Steinhaus (Econometrica 16 (1948) 101-104) in a multi-profile context. We propose a notion of an allocation rule for this setting.  We discuss several examples of rules and properties they may satisfy. Central among these properties is division independence: a parcel may be partitioned into smaller parcels, these smaller parcels allocated according to the rule, leaving a recommended allocation for the original parcel. In conjunction with two other normative properties, division independence is shown to imply the principle of utilitarianism.     

Ecological footprint accounting in the life cycle assessment of products

We present and discuss ecological footprint (EF) calculations for a large number of products and services consumed in the western economy. Product-specific EFs were calculated from consistent and quality-controlled life cycle information of 2630 products and services, including energy, materials, transport, waste treatment and infrastructural processes. We formed 19 homogeneous product/process subgroups for further analysis, containing in total 1549 processes. Per group, the average contribution of two types of land occupation (direct and energy related) to the total EF was derived. It was found that the ecological footprint of the majority of products is dominated by the consumption of non-renewable energy. Notable exceptions are the EFs of biomass energy, hydro energy, paper and cardboard, and agricultural products with a relatively high contribution of direct land occupation. We also compared the ecological footprint results with the results of a commonly used life cycle impact assessment method, the Ecoindicator 99 (EI). It was found that the majority of the products have an EF/EI ratio of around 30 m²-eq. yr/ecopoint ± a factor of 5. The typical ratio reduces to 25 m² yr/ecopoints by excluding the arbitrary EF for nuclear energy demand. The relatively small variation of this ratio implies that the use of land and use of fossil fuels are important drivers of overall environmental impact. Ecological footprints may therefore serve as a screening indicator for environmental performance. However, our results also show that the usefulness of EF as a stand-alone indicator for environmental impact is limited for product life cycles with relative high mineral consumption and process-specific metal and dust emissions. For these products the EF/EI ratio can substantially deviate from the average value. Finally, we suggest that the ecological footprint product data provided in this paper can be used to improve the footprint estimates of production, import and export of products on a national scale and footprint estimates of various lifestyles.     

Flooding risk and housing values: An economic assessment of environmental hazard

Climate change, the ‘boom and bust’ cycles of rivers, and altered water resource management practice have caused significant changes in the spatial distribution of the risk of flooding. Hedonic pricing studies, predominantly for the US, have assessed the spatial incidence of risk and the associated implicit price of flood risk. Using these implicit price estimates and their associated standard errors, we perform a meta-analysis and find that an increase in the probability of flood risk of 0.01 in a year is associated to a difference in transaction price of an otherwise similar house of - 0.6%. The actual occurrence of a flooding event or increased stringency in disclosure rules causes ex-ante prices to differ from ex-post prices, but these effects are small. The marginal willingness to pay for reduced risk exposure has increased over time, and it is slightly lower for areas with a higher per capita income. We show that obfuscating amenity effects and risk exposure associated with proximity to water causes systematic bias in the implicit price of flood risk.     

Structural estimation of congestion costs

We estimate a structural model of congestion costs using a Bayesian Nash equilibrium approach: The individual's preference for traveling depends on the anticipated level of congestion, which in turn is determined by travelers’ decisions of mobility. The model is estimated using a French transportation household survey. Results confirm the presence of incomplete information and show that aversion to congestion is 6.6% lower during peak times than during off-peak times. A traveler's willingness-to-pay to save 1 min in traffic is estimated at 0.73 euros during peak times and 0.25 euros during off-peak times.     

Higher order game dynamics

Continuous-time game dynamics are typically first order systems where payoffs determine the growth rate of the players? strategy shares. In this paper, we investigate what happens beyond first order by viewing payoffs as higher order forces of change, specifying e.g. the acceleration of the players? evolution instead of its velocity (a viewpoint which emerges naturally when it comes to aggregating empirical data of past instances of play). To that end, we derive a wide class of higher order game dynamics, generalizing first order imitative dynamics, and, in particular, the replicator dynamics. We show that strictly dominated strategies become extinct in n-th order payoff-monotonic dynamics n   orders as fast as in the corresponding first order dynamics; furthermore, in stark contrast to first order, weakly dominated strategies also become extinct for n?2$n?2$. All in all, higher order payoff-monotonic dynamics lead to the elimination of weakly dominated strategies, followed by the iterated deletion of strictly dominated strategies, thus providing a dynamic justification of the well-known epistemic rationalizability process of Dekel and Fudenberg [7]. Finally, we also establish a higher order analogue of the folk theorem of evolutionary game theory, and we show that convergence to strict equilibria in n-th order dynamics is n orders as fast as in first order.     

Time varying CAPM betas and banking sector risk

This paper employs the [Bai and Perron, 1998] and [Bai and Perron, 2003] structural break methodology to investigate whether the CAPM betas for banking sector stocks are time invariant. I find evidence for three large structural shifts in my monthly (1941.02-2008.01) sample. The third break corresponds with a decline in the perceived riskiness of banking stocks in the period starting in 2000.04. The banking sector was thus priced to be less risky during the period associated with rising leverage and financial sector risk.     

Modeling Nonlinear Autoregressive Distributed Lag Models: A New Approach

It is a common practice in econometrics that estimation is carried out in terms of the reduced form parameters and the structural form parameters are retrieved using the functional relationship between structural form parameters and the reduced form parameters. The reduced form of many useful economic models is a nonlinear distributed lag model (NLADL) with error structure which may have autocorrelation. In addition, the relationship between the reduced form and the structural parameters is often nonlinear and in a ratio form. In such situations existing sampling theory estimation procedures result in estimators for the structural parameters which do not have finite moments and do not possess optimal sampling properties. As an alternative, we propose a two step Bayesian estimation method. The Bayesian method has great potential and allows us to obtain the posterior probability density functions of all parameters of interest. In particular, its application for the analysis of adaptive expectation partial adjustment models for which the reduced form is a NLADL model, has been found extremely useful. An application to Nerlove’s supply response function supports the proposed methodology.

     

A semiflexible normalized quadratic inverse demand system: an application to the price formation of fish

We propose a new inverse demand system, the normalized quadratic distance function, which is similar to the normalized quadratic expenditure function of Diewert and Wales (1988a). Aside from being able to maintain concavity in quantities globally, the resulting specification is also `flexible.' In addition, to obtain more parsimonious specifications, we apply the rank reduction procedures of Diewert and Wales (1988b) to the model's Antonelli matrix. We illustrate the techniques by estimating a system of inverse demands for bi-monthly fish landings, 1971–1991, for U.S. Great Lakes ports. To illustrate the model's usefulness, exact welfare measures associated with catch restrictions are derived. First version received: May 1999/Final version received: November 2000     

Proper belief revision and equilibrium in dynamic games

We present a theory of rationality in dynamic games in which players, during the course of the game, may revise their beliefs about the opponents’ utility functions. The theory is based upon the following three principles: (1) the players’ initial beliefs about the opponents’ utilities should agree on some profile u of utility functions, (2) every player should believe, at each of his information sets, that his opponents are carrying out optimal strategies and (3) a player at information set h should not change his belief about an opponent's ranking of strategies a and b if both a and b could have led to h. Scenarios with these properties are called preference conjecture equilibria for the profile u of utility functions. We show that every normal form proper equilibrium for u induces a preference conjecture equilibrium for u, thus implying existence of preference conjecture equilibrium.     

The combination of time series and cross-section data in interindustry flow analysis

The following problem is analyzed: for all years, there are available outputs and final demands; for some years, we have additional information about interindustry flows. Those flows will thus be estimated for all years on the assumption that all the observed relations are valid only up to a stochastic term. The M.L. estimates for a single equation are then derived as the solution of a system of simultaneous equations.