On using relative prices to measure capital-specific technological progress

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.     

Dynamics of fine wine and asset prices: evidence from short- and long-run co-movements

This article examines short- and long-term price linkages among the majority of fine wine and equity markets over the period of 2003 to 2012. We do not consider the price index (LIV-EX 100 or 500), as is typically undertaken in previous studies, but rather examine the auction price series of the world’s most traded wine-vintage pairs (5 Bordeaux first growth, 8 Bordeaux second growth, 5 Burgundy, 3 Rhone, 4 Italian, 5 Californian, 1 Australian and 1 Portuguese). A global equity index is also included using the Morgan Stanley Capital International World. Cointegration procedures, the Granger non-causality test, and ECM are used to analyse short- and long-run relationships among these markets. The results indicate a strong effect of financial markets on wine prices and short-term causality for certain wines. Moreover, the findings indicate short-run causality between the wines themselves, revealing a leader (exogenous) or follower (endogenous) status of certain fine wines in price dynamics, and also long-run causality for endogenous wines. This approach is relevant to portfolio diversification strategies and allows price movements to be anticipated more accurately than using an index approach.     

Money demand in China in the reform period: an error correction model

Based on integration and cointegration test findings, this paper constructs an error correction (ECM) model to evaluate the dynamic adjustment process of money demand in China in the reform period (1979 to 1990). The cointegration tests suggest that some long-run relationship exists among money demand, real income, price, and the real interest rate. The ECM model shows that the dynamic adjustment process of money demand maintains stable and significant relationships to most of its determinants.     

Monetary transmission in Spain: a structural cointegrated VAR approach

This paper analyses the monetary policy channels in Spain using a cointegrated structural VAR approach which explicitly accounts for endogenous policy reactions in a small open economy. Evidence is found of one cointegrating relation which is identified as a long-run money demand function. In addition, stability tests are applied to this relationship to assess whether there has been a change of monetary regime. The impulse-responses for the non-monetary shocks as well as the absence of the puzzles traditionally found in the empirical literature, suggest that the model specification identifies the monetary policy shocks correctly. Thus, according to our results, a monetary contraction causes a weak downward response in the price level, as well as an increase in both short and long-run nominal interest rates, a decrease in aggregate output and an exchange rate appreciation.     

Purchasing Power Parity: A Time Series Analysis of the U.S. and Mexico, 1995–2007

This paper presents indirect evidence that absolute purchasing power parity (PPP) may hold in the long-run between Mexico and the U.S., but due to data limitations, the relationship could not be tested directly. Thus it is not clear if absolute PPP holds in the long run between the U.S. and Mexico. Given that relative PPP is a necessary, but not sufficient, condition for absolute PPP to hold, this study tests the relationship between the change in the log of the exchange rate, and the changes in the log of the U.S. producer price index (PPI) and the Mexican PPI. Here, the absence of relative PPP would indicate that absolute PPP could not hold. Given that all the relevant variables in first difference log are stationary, PPP in its relative form holds and OLS can be applied directly in a VAR model setting, viz., treating all variables initially as potentially endogenous. The estimates indicate one-way Granger causality from the percentage change in the exchange rate to the percentage change in the Mexican price level, which is not an implausible result for an emerging nation such as Mexico which imports a significant fraction of (dollar denominated) intermediate products and capital inputs.     

Testing a theoretical model of mortgage demand on UK data

This study explores whether the long-run purchasing power parity (PPP) hypothesis holds for selected real exchange rates from Turkish economy during the period 1982M1–2003M12. In addition to conventional unit root tests, five different unit root test procedures have been applied including efficient point-optimal tests, extended M tests and GLS-detrended variants of DF tests, to four monthly real exchange rate series defined in terms of both producer and consumer price indices. The countries analysed are the USA, the UK, Germany and Italy which are major trade partners of Turkey. Mixed evidence is found for the long-run PPP hypothesis when real exchange rate is defined in terms of German DM and Italian Lira. However, the empirical analysis reveals that the PPP hypothesis holds strongly in the long-run for the UK£ and US$ based real exchange rates series using either PPI or CPI. In corroboration with other studies in the literature, the bias correlated half-life estimates suggest relatively faster speeds of adjustment supporting the view that the deviations from the PPP rate dissipate rather quickly for relatively high inflation countries.     

Cross market predictions for commodity prices

This paper shows that commodity prices can be predicted from cross-market information by establishing long-run cross-market commodity price equilibrium models, which are characterized by a linear relation between prices across different markets. Using data from five representative commodity markets (oil, copper, gold, corn, and cattle) during the period 2005–2018, we demonstrate that oil and industrial metal markets have formed a long-run price equilibrium with other markets across different commodity families. However, agriculture and gold markets do not tend to have long-run price equilibrium relations with other commodity markets. Furthermore, we show that the absence of a price equilibrium is due to the cross-market liquidity interference effect. After we control for the liquidity effect, long-run cross-market commodity price equilibrium relations are reestablished for agriculture and gold markets. These results can aid in demonstrating that liquidity can capture most of the missing information that is not reflected in price dynamics in less liquid markets, such as agriculture and gold markets. Therefore, less liquid commodity price predictions require both prices and liquidity levels from cross-markets, while liquid commodity prices (oil and metal) can be predicted based solely on cross-market prices.     

Endogenous technological change,income distribution,and unemployment with inter-class conflict

This paper presents a Kaleckian growth model that incorporates endogenous technological change. The model endogenously determines the rate of capacity utilization, the rate of economic growth, income distribution, and the employment rate in addition to technological change. The paper shows that whether or not an increase in the relative bargaining power of workers raises the long-run equilibrium unemployment rate depends on which regime is realized in the long-run equilibrium. If, for example, the long-run equilibrium corresponds to the wage-led growth regime, a rise in the relative bargaining power of workers leads to a decline in the unemployment rate. This result is never obtained from the mainstream NAIRU model.     

Residential water demand responds asymmetrically to rising and falling prices

This paper econometrically estimates residential water consumption in Germany between 2007 and 2013 based on a panel of almost 3000 supply areas. In particular, the analysis distinguishes periods of rising and falling water and sewage water prices. The short-run (long-run) price elasticity is estimated at around 4.2% (13%), but water demand appears to respond asymmetrically to rising and falling prices. When prices are rising, the short-run (long-run) price elasticity is around 6.5% (17%). When prices are falling, the short-run price elasticity is not statistically different from zero, and the long-run price elasticity is estimated at around 12%. Additional results illustrate that employing average prices instead of marginal prices results in substantially overestimating the price elasticity. These findings are particularly relevant for utilities and regulators planning to alter the tariff structure towards a higher fixed fee and a lower volumetric fee.     

The multi-market analysis of a housing price transmission model

In this article, we examine dynamic relationships among housing prices from four first-tier cities in China from December 2000 to May 2010 and present an equilibrium model of housing price in multi-markets. By explicitly incorporating and modelling endogenous price series in competing housing markets, our empirical model is able to capture the existence of long-run equilibrium relationships and important short-run dynamics and price structures such as price leadership, price transmission lag and asymmetric price responses. Such multi-market analysis has generalized implications and can easily be applied to analyse the pricing dynamics among other real estate markets in the world. Our major contribution lies in two aspects. First, we employ an Error-Correction Model (ECM) with Directed Acyclic Graphs (DAG) to study the price dynamics in the four largest and key housing markets in China. Second, we uncover a price transmission among these housing markets in China and provide an insightful understanding of price adjustment across markets. The revealed effective price transmission and high correlation among these different markets actually is not a good thing for a stable financial system and for the defence against price bubbles in the housing market.     

The labour income share and the relative price of investment in the US: an empirical investigation

Several studies argue that the recent decline in the secular trend of the labour income share is mostly driven by capital-embodied technological progress which is typically identified with trend reductions in the relative price of investment. In this paper, I use data from the United States to assess the nature of the relationship between trends in the labour share and the relative price of investment. Results from co-integration tests reveal that the share and the relative price of investment are most likely not co-integrated. However, co-variation tests indicate that both time series share a common stochastic component, and additional tests of structural breaks point at the presence of a common change in the mean or trend of both series. These results suggest that capital-embodied or investment-specific technological progress may have played an important role in the decline of the secular trend of the labour share.     

Analysis of long-run benefits from international equity diversification between Taiwan and its major European trading partners: an empirical note

This paper employs four cointegration test approaches, PO, HI, JJ and KSS, to test for pairwise long-run equilibrium relationships between Taiwan's stock price index and each of the stock price indexes of four European markets – French, German, Dutch, and British stock markets. The results from these four tests are robust and clearly consistent in suggesting that the Taiwan stock market is not pairwise cointegrated with the four European stock markets. This provides strong evidence that there exist long-run benefits for Taiwan investors diversifying in the equity markets of Taiwan's major European trading partners, France, Germany, Holland, and the UK, over the sample period considered from 6 January 1998 to 30 May 2002. These findings could be valuable to Taiwan individual investors and financial institutions holding long-run investment portfolios in the equity markets of France, Germany, Holland, and the UK.     

Is inequality an inevitable by-product of skill-biased technical change?

This article examines trends in relative wages between high- and medium-skilled workers and between medium- and low-skilled workers in Finland, Germany, Italy, South Korea and the US over the period 1970–2005. It is found that there are large differences in the evolution wage inequality across the countries in our sample, with some countries showing a long-run upward trend in relative wages (such as the US, Germany and Italy) and others showing a long-run downward trend (such as Finland and Korea). The main conclusion from our results is that inequality is not an inevitable by-product of technological change.     

Spatial price dependence by time scale: Empirical evidence from the international butter markets

The objective of the present work is to investigate price dependence (co-movement) in the international butter markets. This is pursued using monthly wholesale prices from Oceania and the European Union and two non-parametric tools, namely, the copulas and the wavelets. The empirical results suggest that: (a) The price linkages in the two butter-producing regions are weak in the short-run but they become much stronger in the long-run. (b) The time horizon (time scale) is relevant not only for the intensity but for the structure of price co-movement as well; in the long-run, there is an asymmetry in price dependence in the sense that strong positive shocks are transmitted with a higher intensity compared to strong negative ones.     

Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics

This paper develops a method for analysing the dynamics of large cross-sections based on a factor analytic model. We use "law of large numbers" arguments to show that the number of common factors can be determined by a principal components method, the economy-wide shocks can be identified by means of simple structural VAR techniques and that the parameters of the unobserved factor model can be estimated consistently by applying OLS equation by equation. We distinguish between a technological and a non-technological shock. Identification is obtained by minimizing the negative realizations of the technology shock. Empirical results on 4-digit industrial output and productivity for the U.S. economy from 1958 to 1986 show that: (1) at least two economy-wide shocks, both having a long-run effect on sectoral output, are needed to explain the common dynamics; (2) although the technological shock accounts for at least 50 per cent of the aggregate dynamics of output, it cannot by itself explain dynamics at business cycle frequencies; (3) sector-specific shocks explain the main bulk of total variance but generate mainly high frequency dynamics; (4) both the technological and the non-technological component of output show a peak for positive sectoral comovements of output at business cycle frequencies; (5) technological shocks are strongly correlated with the growth rates of the investment in machinery and equipment sectors and their inputs.     

On the deviations from purchasing power parity: the case of the Ringgit effective exchange rate

The paper investigates the extent to which the Ringgit exchange rate converges on its purchasing power parity level in the long run, using the cointegration and variance ratio tests. The results indicate that shifts in the real exchange rate are dominated by permanent stochastic shocks which prevent it from reverting to its PPP base level. Further analysis indicates that low frequency movements in the relative price of tradable goods and the external terms of trade cannot explain the long-run swing in the real exchange rate.     

A Sequential Rationality Test of USDA Preliminary Price Estimates for Selected Program Crops: Rice, Soybeans, and Wheat

Despite recurrent evaluations on USDA price forecasts, the performance of USDA price estimates has not previously been examined in publication. To fill the void in research to this important public information, a sequential forecast evaluation procedure is applied to selected USDA price estimates: Rice, soybeans, and wheat. The evaluation procedure reveals that the USDA price estimates are short-run unbiased; however, they are not long-run rational. In addition, short-run optimality and efficiency tests suggest that USDA price estimates need to be properly scaled and fully reflect information embodied in past prices and their estimates — a possible venue to improve the predictability of USDA price estimates for the crops.     

The demand for residential electricity: new evidence on time-varying elasticities

This study employs a generalized functional form to examine demand for residential electiricity. The appropriatenes of the conventional double-log and linear forms are tested. Time-varying elasicities are estimated. Major findings are summarized as follows:(1) the double-log and linear forms can be rejected at the 0.05 and 0.01 levels, respectively; (2) long-run own-price elasticities declined in absolute value consistently from 2.13 to 1.19 during the period 1950–87; (3) long-run income elasticities also decreased from 1.29 to 0.97 during the same period; and (4) long-run corss-Price elasticities with respect to the price of natural gas dropped form 0.40 to 0.29. These results may be heplful to decision makers in determining the change in total revenues owning to the change in prices, pricing strategies, the effectiveness of energy conservation programmes, the effect of rising real income on the demand for residential electricity and future demand.     

Does history matter?: Empirical analysis of evolutionary versus stationary equilibrium views of the economy

The evolutionary vision in which history matters is of an evolving economy driven by bursts of technological change initiated by agents facing uncertainty and producing long term, path-dependent growth and shorter-term, non-random investment cycles. The alternative vision in which history does not matter is of a stationary, ergodic process driven by rational agents facing risk and producing stable trend growth and shorter term cycles caused by random disturbances. We use Carlaw and Lipsey’s simulation model of non-stationary, sustained growth driven by endogenous, path-dependent technological change under uncertainty to generate artificial macro data. We match these data to the New Classical stylized growth facts. The raw simulation data pass standard tests for trend and difference stationarity, exhibiting unit roots and cointegrating processes of order one. Thus, contrary to current belief, these tests do not establish that the real data are generated by a stationary process. Real data are then used to estimate time-varying NAIRU’s for six OECD countries. The estimates are shown to be highly sensitive to the time period over which they are made. They also fail to show any relation between the unemployment gap, actual unemployment minus estimated NAIRU and the acceleration of inflation. Thus there is no tendency for inflation to behave as required by the New Keynesian and earlier New Classical theory. We conclude by rejecting the existence of a well-defined a short-run, negatively sloped Philips curve, a NAIRU, a unique general equilibrium, short and long-run, a vertical long-run Phillips curve, and the long-run neutrality of money.