The J-Curve phenomenon in European transition economies: A nonlinear ARDL approach

This article examines the J-curve phenomenon for 16 European transition economies. While previous studies assume a linear relationship between the exchange rate and the trade balance, this paper allows for nonlinearity. Following Bahmani-Oskooee and Fariditavana (2015 Bahmani-Oskooee, M., and H. Fariditavana. 2015. “Nonlinear ARDL Approach, Asymmetric Effects and the J-curve.” Journal of Economic Studies 42 (3): 519–530. doi:10.1108/JES-03-2015-0042.[Crossref], [Web of Science ®] , [Google Scholar], 2016 Bahmani-Oskooee, M., and H. Fariditavana. 2016. “Nonlinear ARDL Approach and the J-curve Phenomenon.” Open Economies Review 27 (1): 51–70. doi:10.1007/s11079-015-9369-5.[Crossref], [Web of Science ®] , [Google Scholar]), the empirical method used is the nonlinear cointegrating autoregressive distributed lag (NARDL) model of Shin et al. (2013 Shin, Y., B. Yu, and M. J. Greenwood-Nimmo. 2013. “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework.” In Festschrift in Honor of Peter Schmidt, edited by William C. Horrace and Robin C. Sickles. New York, NY: Springer Science and Business Media. [Google Scholar]) in which short-run and long-run nonlinearities are introduced via positive (appreciation) and negative (depreciation) partial sum decompositions of the real exchange rate. We argue that the lack of support for the J-curve phenomenon could be due to the linearity assumption. This issue is examined by utilizing the linear and the NARDL models. Using the linear autoregressive distributed lag (ARDL) model, we are unable to find support for the J-curve phenomenon in any case. However, when the NARDL model is used, we are able to find evidence for the J-curve in 12 out of the 16 countries. This suggests that allowing for nonlinearity in the adjustment process is important when studying the J-curve phenomenon.     

A test of the Wagner's hypothesis for the Fiji islands

In this article we examine Wagner's law for Fiji for the period 1970 to 2002. Using the Johansen (1988 Johansen, S. 1988. Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control, 12: 231–54. [Crossref], [Web of Science ®] , [Google Scholar]) test for cointegration, we find one cointegration relationship between national output and government expenditure. Using five different long run estimators, we find robust results on the impact of national income on government expenditure. The elasticity ranges from 1.36 to 1.44, implying that a 1% increase in income leads to a 1.36–1.44% increase in government expenditure. Moreover, we find that in the long run national income Granger causes government expenditure. While these results are consistent with Wagner's law, we warn policy makers that because Fiji's total debt stands at around 69% of GDP, in future the bulk of expenditure will go towards debt financing at the expense of productive sectors.     

A Note on Forecasting the Euro: Do Forecasters Have an Asymmetric Loss Function?

Based on the approach advanced by Elliott, Komunjer, and Timmermann (2005 Elliott, G., Komunjer, I., & Timmermann, A. (2005). Estimation and testing of forecast rationality under flexible loss. Review of Economics Studies, 72, 1107–1125. doi: 10.1111/0034-6527.00363[Crossref], [Web of Science ®] , [Google Scholar]), we analyzed whether the loss function of a sample of exchange-rate forecasters is asymmetric in the forecast error. Using forecasts of the dollar/euro exchange rate, we found that the shape of the loss function varies across forecasters. Some forecasters appear to make forecasts under an asymmetric loss function, while a symmetric loss function seems to describe well the loss function of other forecasters. Accounting for an asymmetric loss function does not necessarily make forecasts ‘look’ rational.     

The Interest Rate Brake on Maturity Transformation

Must banks match asset and liability maturities, as William Barnett and Walter E. Block (2009 Barnett, William and Walter E. Block. “Time Deposits, Dimensions and Fraud.” Journal of Business Ethics 88, 4 (2009): 711–716.[Crossref], [Web of Science ®] , [Google Scholar], 2011 Barnett, William and Walter E. Block. “Rejoinder to Bagus and Howden on Borrowing Short and Lending Long.” Journal of Business Ethics 100, 2 (2011): 229–238.[Crossref], [Web of Science ®] , [Google Scholar]), as well as Ivan Jankovic (2011) Jankovic, Ivan. “Economic Calculation, Maturity Mismatching and the Credit Cycle.” New Perspectives on Political Economy 7, 1 (2011): 105–124. [Google Scholar], surmise? While we agree with these authors that issuances of fiduciary media breed financial instability, we disagree that maturity transformation represents such a case. Maturity transformation — otherwise known as borrowing short-term and lending long-term — guided by several base legal principles, does not result in the issuance of fiduciary media. Most notable among these principles is that any credit issued must be funded by borrowing of a positive duration, i.e., not via a demand deposit. We demonstrate that two factors instigate larger degrees of maturity transformation than would otherwise be the case, breeding potential instability: a continual increase in the credit supply and the provision of a lender of last resort. We also show that the interest rate is a natural stabilizing brake on the over-issuance of longer-dated credit against short-term financing.     

Linear and nonlinear Granger-causality between short-term and long-term interest rates during business cycles

This paper is about the causal relationship between short-term and long-term interest rates in the US and Canada. To that end, we apply a linear Granger causality test introduced by Toda and Yamamoto (1995 Toda, H. Y., and T. Yamamoto. 1995. “Statistical Inference in Vector Autoregressions with Possibly Integrated Processes.” Journal of Econometrics 66 (1–2): 225–250. doi:10.1016/0304-4076(94)01616-8.[Crossref], [Web of Science ®] , [Google Scholar]) and the nonlinear Granger causality test of Diks and Panchenko (2006 Diks, C., and V. Panchenko. 2006. “A New Statistic and Practical Guidelines for Nonparametric Granger Causality Testing.” Journal of Economic Dynamics and Control 30 (9–10): 1647–1669. doi:10.1016/j.jedc.2005.08.008.[Crossref], [Web of Science ®] , [Google Scholar]). By combining linear causality effects with the nonlinear ones, it is seen that the most common Granger causality direction between short-term and long-term interest rates is a bidirectional one. We also find that nonlinear Granger causality can be found where no linear causality had been uncovered. Moreover, our findings show that during recent business cycles, the federal funds rate (in the US) and the overnight rate (in Canada) still Granger-cause long-term interest rates significantly.     

Immiserizing Growth and the Metzler Paradox in the Ricardian Model

Conditions for the occurrence of immiserizing growth and the Metzler paradox are analysed in the Ricardian model when consumers in the foreign country have Leontief preferences while consumers in the home country have Cobb-Douglas preferences. By using specific functional forms, the conditions for the occurrence of the two paradoxes are defined in terms of the exogenous parameters of the model rather than endogenous variables such as the foreign import demand elasticity in the conditions of Bhagwati (1958) Bhagwati, J. N. 1958. Immiserizing growth: a geometrical note. Review of Economic Studies, 25: 201–205. [Crossref], [Web of Science ®] , [Google Scholar] and Metzler (1949a Metzler, L. A. 1949a. Tariffs, the terms of trade and the distribution of national income. Journal of Political Economy, 57: 1–29. [Crossref], [Web of Science ®] , [Google Scholar], b Metzler, L. A. 1949b. Tariffs, international demand, and domestic prices. Journal of Political Economy, 57: 345–351. [Crossref], [Web of Science ®] , [Google Scholar]). It is shown that the simultaneous occurrence of both paradoxical results is possible for some parameter values.     

Rudderless in a Sea of Yellow: The European Political Economy Impasse for Renewable Transport Energy

Faced with the twin challenges of anthropogenic climate change and ‘peak oil’, the need for an urgent and radical transformation of transport energy has been widely recognised. Adopting a neo-Polanyian economic sociology approach, this article asks what conditions European governance capacity to respond to these challenges, at either national or regional levels, using biofuels as a case study. It asks if the complexity of its political institutions, and the heterogeneity of interests and economic organisations, present ‘the biggest obstacle of all’ (Cohen 2007 Cohen, B. J. 2007. Enlargement and the International Role of the Euro. Review of International Political Economy, 14: 746–73. (doi:10.1080/09692290701642630)[Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) to reduce fossil fuel dependency. By examining the European Commission level and comparing five countries, evidence is produced for a political failure in terms of continued fossil fuel dependency. Incumbent interests in the agricultural sector and a distinctively European legacy of a transport fleet dependent on fossil diesel, have led to a marriage of convenience between rapeseed farmers and vehicle manufacturers. As a consequence, rather than escaping from the path dependency on fossil fuels (Unruh 2000 Unruh, G. C. 2000. Understanding Carbon Lock-in. Energy Policy, 28(12): 817–30. (doi:10.1016/S0301-4215(00)00070-7)[Crossref], [Web of Science ®] , [Google Scholar]), Europe has gone down a cul-de-sac of rapeseed biodiesel inherently limited in scope, and with the low levels of greenhouse gas emissions savings. Ironically this outcome is in part an unintended consequence of opposition to biofuels from environmentalist groups and politics.     

The Political Power of Big Business: A Response to Bell and Hindmoor

There has been a recent resurgence of interest in debates about the power of business (Culpepper 2011 Culpepper, P. (2011). Quiet Politics and Business Power: Corporate Control in Europe and Japan, Cambridge: Cambridge University Press. [Google Scholar]; Bell 2012 Bell, S. (2012). The Power of Ideas: The Ideational Mediation of the Structural Power of Business. International Studies Quarterly, 56(4), 661–73. doi: 10.1111/j.1468-2478.2012.00743.x[Crossref], [Web of Science ®] , [Google Scholar]) and Bell and Hindmoor (2013 Bell, S., Hindmoor, A. (2013). The Structural Power of Business and the Power of Ideas: The Strange Case of the Australian Mining Tax. New Political Economy, ,forthcoming. Available from: http://dx.doi.org/10.1080/13563467.2013.796452 [19 (3), pp. 470–486, cross-references updated] [Google Scholar]) make an important, theoretically informed, but empirically rooted, contribution to that debate. In this response, we address both aspects of their contribution, arguing that their treatment of Lindblom is partial and, consequently, so is their explanation of the case. As such, we largely rely on their narrative of the evolution of the Australian mining tax, focusing first on critically examining Bell and Hindmoor's theoretical position, before turning to their analysis of the case.     

Accounting Price of an Exhaustible Resource: Response and Extensions

Wei (Environ Resour Econ 60:579–581, 2015) presents a novel derivation of the accounting price for an exhaustible resource in a non-optimal economy subject to an allocation mechanism. We show that Wei (2015) and Hamilton and Ruta (Environ Resour Econ 42:53–64, 2009) are in fact employing different and mutually exclusive allocation mechanisms for the economy, and this explains the differences between the respective accounting prices. Because accounting prices must be defined subject to the allocation mechanism for the economy, the prices derived in the two papers are equally valid within their respective allocation domains. Further analysis shows that if there is declining marginal product of factors, a ‘Hartwick investment rule’ for the model economy (set investment just equal to depletion, valued at the accounting price) will lead to declining consumption for the Wei (2015) accounting price, and increasing consumption for the Hamilton and Ruta (2009) accounting price. This result is extended to consider the accounting standards recommended in the UN SEEA (System of environmental-economic accounting 2012: central framework. United Nations, European Commission, Food and Agriculture Organization of the United Nations, International Monetary Fund, Organisation for Economic Co-operation and Development, World Bank, 2012), as well as accounting for environmental externalities from resource use.     

Within-groups wage inequality and schooling: further evidence for Portugal

This article provides further evidence on the positive impact of schooling on within-groups wage dispersion in Portugal, using data on male workers from the 2001 wave of the European Community Household Panel. The issue of schooling endogeneity is taken into account by using the latest available instrumental-variable technique for quantile regression, i.e. the control-function estimator due to Lee (2007 Lee, S. 2007. Endogeneity in quantile regresssion models: a control function approach. Journal of Econometrics, 141: 1131–58. [Crossref], [Web of Science ®] , [Google Scholar]). The findings are compared with earlier results based on different techniques, i.e. the instrumental-variable estimator due to Arias et al. (2001 Arias, O, Hallock, KF and Sosa-Escudero, W. 2001. Individual heterogeneity in the returns to schooling: instrumental variables quantile regression using twins data. Empirical Economics, 26: 7–40. [Crossref] , [Google Scholar]) and the standard exogeneity-based estimator due to Koenker and Bassett (1978 Koenker, R and Bassett, G. 1978. Regression quantiles. Econometrica, 46: 33–50. [Crossref], [Web of Science ®] , [Google Scholar]).     

Explaining the Delayed Effect of Monetary Policy: The Role of Inventories and Factor-hoarding

This paper proposes a new model accounting for the delayed effect of monetary policy shocks on output. The key feature of the model is to distinguish a variety of margins (i.e., inventory adjustments, hours per worker, efforts and employments) on which firms adjust output in response to macroeconomic shock. When these multiple margins are properly introduced to an otherwise standard modern monetary business cycles model, the interplay between inventory adjustments and the one-period lag in adjusting employment can produce the hump-shaped response of output to monetary shock. Given the weak evidence on habit formation at household level found in Dynan (2000) Dynan, K. (2000). Habit formation in consumer preferences: evidence from panel data. American Economic Review, 90 (3), 391–406. doi: 10.1257/aer.90.3.391[Crossref], [Web of Science ®] , [Google Scholar] and Flavin and Nakagawa (2008) Flavin, M., &; Nakagawa, S. (2008). A model of housing in the presence of adjustment costs: a structural interpretation of habit persistence. American Economic Review, 98, 474–495. doi: 10.1257/aer.98.1.474[Crossref], [Web of Science ®] , [Google Scholar], therefore, this paper provides an alternative explanation for the delayed effect of monetary policy without relying on the habit formation.     

Behavioral Timing,Valuation and Postissue Performance of UK Initial Public Offerings

Using a sample of 1,926 UK initial public offerings (IPOs) launched from 1987 to 2007, this study introduces a new angle on testing the behavioral timing hypothesis in the context of UK IPOs via investigating relationships between the magnitude of IPOs misvaluation and postissue stock price and operating performance. IPO misvaluation is measured using (i) an intrinsic value of the firm estimated using residual income valuation model and (ii) intensity of IPO issuance activity. The findings show that stock price and operating underperformance in the postissue are directly linked to the degree of IPOs' misvaluation. Specifically, the stock price and operating performance are found to be significantly and robustly different between hot markets IPOs and cold market IPOs 3 years postissue. We also show that overvalued IPOs have lower long-run stock returns, but outperforming operating performance, than undervalued IPOs do. Our findings are broadly consistent with the behavioral explanations of the poor stock price and operating performance, supporting the U.S. results of Purnanandam and Swaminathan [2004 Purnanandam, A. and B. Swaminathan. “Are IPOs Really Underpriced?” Review of Financial Studies, 17, (2004), pp. 811–848.[Crossref], [Web of Science ®] , [Google Scholar]] and Loughran and Ritter [2000 Loughran, T. and J. Ritter. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55, (2000), pp. 361–389.[Crossref], [Web of Science ®] , [Google Scholar]].     

Modelling the dynamics of EU economic sentiment indicators: an interaction-based approach

This article estimates a simple univariate model of expectation or opinion formation in continuous time adapting a ‘canonical’ stochastic model of collective opinion dynamics (Weidlich and Haag, 1983 Weidlich, W, and Haag, G, 1983. Concepts and Models of a Quantitative Sociology. Berlin: Springer; 1983.[Crossref] , [Google Scholar]; Lux, 1995 Lux, T, 1995. Herd behavior, bubbles and crashes, The Economic Journal 105 (1995), pp. 881–96.[Crossref], [Web of Science ®] , [Google Scholar], 2009a Lux, T, 2009a. Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey, Journal of Economic Behavior and Organization 72 (2009a), pp. 638–55.[Crossref], [Web of Science ®] , [Google Scholar]). This framework is applied to a selected data set on survey-based expectations from the rich EU business and consumer survey database for 12 European countries. The model parameters are estimated through Maximum Likelihood (ML) and numerical solution of the transient probability density functions for the resulting stochastic process. The model's success is assessed with respect to its out-of-sample forecasting performance relative to univariate Time Series (TS) models of the Autoregressive Moving Average model, ARMA(p,?q) and Autoregressive Fractionally Integrated Moving Average, ARFIMA(p,?d,?q) varieties. These tests speak for a slight superiority of the canonical opinion dynamics model over the alternatives in the majority of cases.     

Will the skill-premium in the Netherlands rise in the next decades?

While the skill-premium has been rising sharply in the US and the UK for 20 years, the Dutch skill-premium decreased for much of that period and only started to rise in the early 90s. In this article, we investigate whether the Dutch skill-premium will rise in the next decades. To answer this question, we forecast the skill-premium using the Katz and Murphy (1992 Katz, L and Murphy, K. 1992. Changes in relative wages, 1963–1987: supply and demand factors. Quarterly Journal of Economics, 107: 35–78. [Crossref], [Web of Science ®] , [Google Scholar]) and the Krusell et al. (2000 Krusell, P, Ohanian, L, Ríos-Rull, J-V and Violante, G. 2000. Capital-skill complementarity and inequality: a macroeconomic analysis. Econometrica, 68: 1029–53. [Crossref], [Web of Science ®] , [Google Scholar]) models. The Katz and Murphy model (KM) explains demand shifts by skill-biased technological change in unobservable variables captured by a time trend. In contrast, the Krusell et al. model (KORV) explains demand shifts by (observable) changes in the capital stock under a capital-skill complementarity technology. The results show that while the KM model predicts that the skill-premium will have increased by 30% in 2020, based on realistic predictions of the stock of capital, the KORV model predicts that the skill-premium will remain between ?5 and +5% of its 1996 level.     

Nonlinearity as an explanation of the forward exchange rate anomaly

This article shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984 Fama, E. 1984. Forward and spot exchange rates. Journal of Monetary Economics, 14: 319–38. [Crossref], [Web of Science ®] , [Google Scholar]). Using sterling-Canadian dollar data and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision.     

Exchange Rate Regimes and Inflation: Evidence from India

Abstract

Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a ‘policy discipline effect’ – restricting money supply growth, and a ‘credibility effect’ – inducing higher money demand and reduced velocity of money. Alternatively, the ‘impossibility trillema’ of Mundell (1961a Mundell, R. A. (1961a). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29, 475–485. doi: 10.2307/139336[Crossref], [Web of Science ®] , [Google Scholar], 1961b Mundell, R. A. (1961b). Flexible exchange rates and employment policy. Canadian Journal of Economics and Political Science, 27, 509–517. doi: 10.2307/139437[Crossref], [Web of Science ®] , [Google Scholar]) predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the ‘empirically-claimed’ de facto stable exchange rate regime on inflation in India during different sub-periods of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in the Indian case, which could be because of the offsetting sterilization policy undertaken by the Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large-scale intervention to even out exchange rate volatility.     

Interrelationships among banks,stock markets and economic growth: an empirical investigation

This article utilizes a simultaneous equations model to study the relationships among economic growth, banking and stock market development. In contrast to conventional instrumental variable approach, we implement the analysis via the methodology of identification through heteroscedasticity. Using Beck and Levine (2004 Beck, T. and Levine, R. (2004) Stock markets, banks and growth:panel evidence, Journal of Banking and Finance, 28, 423–42.[Crossref], [Web of Science ®] , [Google Scholar]) dataset, we find that each of the three variables interacts in important ways. While both are conducive to economic growth, banking development matters more for growth in low-income countries and stock market development is more favourable to growth in high-income or low-inflation ones. The data also reveal coexistence of a positive effect of banking development on stock market development and a negative effect of stock market development on banking development. Besides, the feedback effects of growth on both banking and stock market development are found.     

Economic class and the distribution of income: a time-series analysis of the UK economy, 1955–2010

This paper contributes to our understanding of the determinants and dynamics of surplus-value using quarterly UK data, 1955–2010, and the Johansen (1988 Johansen, S. 1988. Statistical analysis of cointegrated vectors. Journal of Economic Dynamic and Control, 12: 231–54. [Crossref], [Web of Science ®] , [Google Scholar], 1991 Johansen, S. 1991. Estimation and hypothesis of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59: 1551–80. [Crossref], [Web of Science ®] , [Google Scholar]) cointegration and vector error correction model (VECM). A model is introduced to define this Marxian concept, before we explain distribution, paying attention to three forces that are traditionally seen as drivers of power in this struggle: (i) working class militancy; (ii) the size of the ‘reserve army’ of the unemployed; and (iii) political party. Our results demonstrate the ongoing relevance of Marxian economics in providing an alternative, robust and significant explanation of distribution in the post-war UK economy.     

Dynamic capabilities and radical innovation performance in established firms: a structural model

The paper extends Teece’s model of dynamic capabilities (2007 Teece, D. 2007. “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance.” Strategic Management Journal 28 (13): 1319–1350. doi: 10.1002/smj.640[Crossref], [Web of Science ®] , [Google Scholar]) into four types of capabilities: sensing, coordination, autonomy and reconfiguration capabilities. We further develop a structural model between four types of dynamic capabilities and radical innovation performance (RIP) in established firms. Based on a dataset of top 500 manufacturing established firms in Taiwan, the proposed hypotheses are tested using the structural equation models. The results reveal that four types of dynamic capabilities and RIP are positively correlated in a sequential and structural manner. This paper concludes the systemic development of dynamic capabilities can improve RIP in established firms. Finally, we point out some managerial implications for improving RIP in established firms.     

Anchoring-Adjusted Capital Asset Pricing Model

What happens when the capital asset pricing model is adjusted for the anchoring and adjustment heuristic of Tversky and Kahneman [1974 Tversky, A., and D. Kahneman. “Judgment Under Uncertainty: Heuristics and Biases.” Science, 185, (1974), pp. 1124–1131.[Crossref], [PubMed], [Web of Science ®] , [Google Scholar]]? The surprising finding is that adjusting the capital asset pricing model for anchoring provides a plausible unified framework for understanding almost all of the key asset pricing anomalies. The anomalies captured in the theoretical framework include the well-known size and value effects, high alpha of low beta stocks, accruals, low volatility anomaly, momentum effect, stock splits, and reverse stock splits. The market equity premium is also larger with anchoring. This suggests that the anchoring-adjusted capital asset pricing model may provide the needed unifying structure to behavioral finance.