A Monte Carlo comparison of estimating the number of dynamic factors

Based on a Monte Carlo simulation, this study compares the finite sample performance of five of the most widely used methods for estimating the number of dynamic factors. The simulation results show that although the performance is affected by the data generating process, the methods proposed by Hallin and Li?ka (J Am Stat Assoc 102(478):603–617, 2007) and Bai and Ng (Bus Econ Stat 25(1):52–60, 2007) generally outperform the others. Specifically, Amengual and Watson’s (J Bus Econ Stat 25(1):91–96, 2007) method is sensitive to cross-sectional correlation, and Breitung and Pigorsch’s (Oxf Bull Econ Stat 75(1):23–36, 2013) estimator is sensitive to the overestimation of the number of static factors. The results of this study are further supported by an empirical application to a Chinese macroeconomic dataset.     

Markups and bargaining power in tradable and non-tradable sectors

This article jointly estimates product and labour market imperfections for narrowly defined sectors in the Portuguese economy for the period 2006–2009, following Roeger (J Polit Econ 103(2):316–330, 1995), Crépon et al. (Ann Econ Stat (79/80):583–610, 2005), Dobbelaere (Int J Ind Organ 22(10):1381–1398, 2004) and Abraham et al. (Rev World Econ 145(1):13–36, 2009). In addition, we propose a criterion for the identification of tradable and non-tradable sectors based on the export-to-sales ratio and compare markups and workers’ bargaining power along this dimension. Our findings suggest that markups are higher in the non-tradable than in the tradable sector but workers’ bargaining power is similar. In addition, there is a significant level of heterogeneity across markets, particularly in the non-tradable sector. Moreover, the article confirms that, if labour market imperfections are disregarded, markups are significantly understated.     

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.     

Malaysia-EU trade at the industry level: Is there an asymmetric response to exchange rate volatility?

Aftab et al. (Empirica 43:461–485, 2016) in this journal assessed the impact of exchange rate volatility on Malaysia-EU trade at commodity level using the linear ARDL approach of Pesaran et al. (J Appl Econom 16:289–326, 2001) and did not find significant effects in most of the 81 Malaysian exporting and 66 importing industries. In this paper, we argue for asymmetric effects of exchange rate volatility on the same industries’ trades which implies using Shin et al.’s (Festschrift in Honor of Peter Schmidt, Springer, New York, 2014) nonlinear ARDL approach. While we find short-run asymmetric effects of volatility in almost all industries, we find evidence of adjustment asymmetry in 17 exporting and nine importing industries. We also find significant impact or short-run cumulative asymmetry in 12 exporting and six importing industries. The most important finding is significant long-run asymmetric effects in 36 Malaysian exporting industries and 25 Malaysian importing industries. Clearly, trade flows react to an increased exchange rate volatility differently than to a decreased volatility.     

Surplus measures and luenberger Hicks–Moorsteen productivity indicator

This paper extends to production theory some notions of compensated and equivalent variation analyzed in Luenberger (Econ Theory 7:445–462, 1996) in a consumer context. Along this line the Luenberger–Hicks–Moorsteen productivity indicator introduced in Briec and Kerstens (Econ Theory 23:925–939, 2004) is derived from these concepts for multi-output production technologies. The dual properties of this productivity indicator are analyzed and an aggregate indicator is introduced inspired from the resource function proposed in Luenberger (1996). A connection to a suitable Slutsky matrix is established.     

Evolution and correlated equilibrium

Given a normal form game and a signal generating process, we construct an expanded game in the spirit of Aumann (Econometrica 55(1):1–18, 1987) in which agents condition their strategic choices on perceived signals. We collect results on evolutionary selection dynamics of Ritzberger and Weibull (Econometrica 63(6):1371–1399, 1995), Swinkels (J Econ Theory 57(2):306–332, 1992b) and Samuelson and Zhang (J Econ Theory 57:363–391, 1992) to apply them to normal form games with payoff irrelevant signals. We suggest a selection dynamic for the evolution of signals and characterize the set of signal distributions and induced payoffs for sets that are asymptotically stable with respect to this evolutionary selection on signals.     

Determining the number of factors after stationary univariate transformations

A very common practice when extracting factors from non-stationary multivariate time series is to differentiate each variable in the system. As a consequence, the ratio between variances and the dynamic dependence of the common and idiosyncratic differentiated components may change with respect to the original components. In this paper, we analyze the effects of these changes on the finite sample properties of several procedures to determine the number of factors. In particular, we consider the information criteria of Bai and Ng (Econometrica 70(1):191–221, 2002), the edge distribution of Onatski (Rev Econ Stat 92(4):1004–1016, 2010) and the ratios of eigenvalues proposed by Ahn and Horenstein (Econometrica 81(3):1203–1227, 2013). The performance of these procedures when implemented to differentiated variables depends on both the ratios between variances and dependencies of the differentiated factor and idiosyncratic noises. Furthermore, we also analyze the role of the number of factors in the original non-stationary system as well as of its temporal and cross-sectional dimensions. Finally, we implement the different procedures to determine the number of common factors in a system of inflation rates in 15 euro area countries.     

Infinitely repeated games in the laboratory: four perspectives on discounting and random termination

This paper compares behavior under four different implementations of infinitely repeated games in the laboratory: the standard random termination method [proposed by Roth and Murnighan (J Math Psychol 17:189–198, 1978)] and three other methods that de-couple the expected number of rounds and the discount factor. Two of these methods involve a fixed number of repetitions with payoff discounting, followed by random termination [proposed by Sabater-Grande and Georgantzis (J Econ Behav Organ 48:37–50, 2002)] or followed by a coordination game [proposed in (Andersson and Wengström in J Econ Behav Organ 81:207–219, 2012; Cooper and Kuhn in Am Econ J Microecon 6:247–278, 2014a)]. We also propose a new method—block random termination—in which subjects receive feedback about termination in blocks of rounds. We find that behavior is consistent with the presence of dynamic incentives only with methods using random termination, with the standard method generating the highest level of cooperation. Subject behavior in the other two methods display two features: a higher level of stability in cooperation rates and less dependence on past experience. Estimates of the strategies used by subjects reveal that across implementations, even when the discount rate is the same, if interactions are expected to be longer defection increases and the use of the Grim strategy decreases.     

External and internal consistency of choices made in convex time budgets

We evaluate data on choices made from convex time budgets (CTB) in Andreoni and Sprenger (Am Econ Rev 102(7):3333–3356, 2012a) and Augenblick et al. (Q J Econ 130(3):1067–1115, 2015), two influential studies that proposed and applied this experimental technique. We use the weak axiom of revealed preference (WARP) to test for external consistency relative to pairwise choice, and demand, wealth and impatience monotonicity to test for internal consistency. We find that choices made by subjects in the original Andreoni and Sprenger (Am Econ Rev 102(7):3333–3356, 2012a) paper violate WARP frequently; violations of all three internal measures of monotonicity are concentrated in subjects who take advantage of the novel feature of CTB by making interior choices. Wealth monotonicity violations are more prevalent and pronounced than either demand or impatience monotonicity violations. We substantiate the importance of our desiderata of choice consistency in examining effort allocation choices made in Augenblick et al. (Q J Econ 130(3):1067–1115, 2015), where we find considerably more demand monotonicity violations, as well as many classical monotonicity violations which are associated with time inconsistent behavior. We believe that the frequency and magnitude of WARP and monotonicity violations found in the two studies pose important confounds for interpreting and structurally estimating choice patterns elicited through CTB. We encourage researchers employing CTB in present and future experiments to include consistency tests in their design and pre-estimation analysis.     

Measuring market power when firms price discriminate

We propose conduct parameter-based market power measures within a model of price discrimination, extending work by Hazledine (Econ Lett 93:413–420, 2006) and Kutlu (Econ Lett 117:540–543, 2012) to certain forms of second-degree price discrimination. We use our model to estimate the market power of US airlines in a price discrimination environment. We find that a slightly modified version of our original theoretical measure is positively related to market concentration. Moreover, on average, market power for high-end segment is greater than that of low-end segment.     

Using simulation experiments to test historical explanations: the development of the German dye industry 1857-1913

In a simulation experiment, building on the abductive simulation approach of Brenner and Werker (2007), we test historical explanations for why German firms came to surpass British and France firms and to dominate the global synthetic dye industry for three decades before World War 1 while the U.S. never achieved large market share despite large home demand. Murmann and Homburg (J Evol Econ 11(2):177–205, 2001) and Murmann (2003) argued that German firms came to dominate the global industry because of (1) the high initial number of chemists in Germany at the start of the industry in 1857, (2) the high responsiveness of the German university system and (3) the late (1877) introduction of a patent regime in Germany as well as the more narrow construction of this regime compared to Britain, France and the U.S. We test the validity of these three potential explanations with the help of simulation experiments. The experiments show that the 2nd explanation—the high responsiveness of the German university system— is the most compelling one because unlike the other two it is true for virtually all plausible historical settings.     

Coordination and transfer

We study the ability of subjects to transfer principles between related coordination games. Subjects play a class of order statistic coordination games closely related to the well-known minimum (or weak-link) and median games (Van Huyck et al. in Am Econ Rev 80:234–248, 1990, Q J Econ 106(3):885–910, 1991). When subjects play a random sequence of games with differing order statistics, play is less sensitive to the order statistic than when a fixed order statistic is used throughout. This is consistent with the prediction of a simple learning model with transfer. If subjects play a series of similar stag hunt games, play converges to the payoff dominant equilibrium when a convention emerges, replicating the main result of Rankin et al. (Games Econ Behav 32:315–337, 2000). When these subjects subsequently play a random sequence of order statistic games, play is shifted towards the payoff dominant equilibrium relative to subjects without previous experience. The data is consistent with subjects absorbing a general principle, play of the payoff dominant equilibrium, and applying it in a new related setting.     

Rank based cointegration testing for dynamic panels with fixed <Emphasis Type="Italic">T</Emphasis>

In this paper, we show that the cointegration testing procedure of Binder et al. (Econom Theory 21:795–837, 2005) for Panel Vector Autoregressive model of order 1, PVAR(1) is not valid due to the singularity of the hessian matrix. As an alternative we propose a method of moments based procedure using the rank test of Kleibergen and Paap (J Econom 133:97–126, 2006) for a fixed number of time series observations. The test is shown to be applicable in situations with time-series heteroscedasticity and unbalanced data. The novelty of our approach is that in the construction of the test we exploit the “weakness” of the Anderson and Hsiao (J Econom 18:47–82, 1982) moment conditions. The finite-sample performance of the proposed test statistic is investigated using simulated data. The results indicate that for most scenarios the method has good statistical properties. The proposed test provides little statistical evidence of cointegration in the employment data of Alonso-Borrego and Arellano (J Bus Econ Stat 17:36–49, 1999).     

Do internal references lead to wage rigidity?

This paper analyzes three prominent models of internal references and their impact on wage rigidity (Danthine and Kurmann in Scand J Econ 109(4):857–881, 2007; J Monet Econ 57(7):837–850, 2010; Koskela and Schöb in J Econ 96:79–86, 2009). With one exception, these studies find that internal references, nested in reciprocal worker preferences, unambiguously increase wage rigidity. In contrast to that literature, the present study provides analytical proofs, calibration results as well as impulse response functions which show that the effect of internal references on wage rigidity is in fact ambiguous. Several model extensions are discussed and robustness checks conducted. The intuition for this result is similar in all models: as internal and external references are modeled as weighted average, an increase in the weight on the internal reference implies a simultaneous decrease in the weight on the outside option. Therefore, the effect of the internal reference relative to the external reference determines whether wage rigidity increases or decreases.     

Finance–growth nexus: does causality withstand financial liberalization? Evidence from cointegrated VAR

The main finding of the paper is that, contrary to Rousseau and Wachtel (Economic growth and financial depth. Is the relationship extinct already? UNU-Wider discussion paper no. 2005/10, 2005), a long-run equilibrium relationship between financial and economic development is identified with data up to 2006—well over the financial openness boom of the nineties—in countries whose history is characterized by numerous years of high inflation and/or episodes of crisis or other structural change. Also, financial openness, or lack thereof, proves to be an important feature both in explaining differences in sensitivity of financial development to capital accumulation and in determining the direction of causality between financial and economic development. The paper finds that bidirectional causality between economic and financial development is not as frequent an outcome as in Luintel and Khan (J Dev Econ 60:381–405, 1999), and in several cases, Joan Robinson’s (The generalization of the general theory in the rate of interest, and other essays, Macmillan, London, pp 67–142, 1952) statement on the primacy of economic development over finance is supported by the estimations.     

The role of the German Historical School in the development of Mises’s thought

Hülsmann (2007) and Hayek ([1922] 1981) have argued that Mises’s first book The Development of the Relationship between Lords of Manor and Peasants in Galicia, 1772–1848 (1902) is written in the tradition of the German Historical School. Historicist contemporaries of Mises also considered his first academic work a continuation of the Knapp-Grünberg tradition (Kaser Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reich, 28(1), 374–79, 1904; Wimbersky, 1906). We argue that von Mises (1902) does not represent the younger German Historical School. First, Mises provides a rationalization of the history rather than ethical and cultural explanation of historical events. Second, he does not support the Knapp-Grünberg argument about the historical development of serfdom under a Slavic rule. Finally, von Mises (1902) does not adhere to the ideology of the Historical School regarding the virtues of the Prussian bureaucracy.     

Slack-based directional distance function in the presence of bad outputs: theory and application to Vietnamese banking

In this paper we extend the slack-based directional distance function introduced by Färe and Grosskopf (Eur J Oper Res 200(1):320–322, 2010) to measure efficiency in the presence of bad outputs and illustrate it through an application on data of Vietnamese commercial banks. We also compare results from the slack-based directional distance function relative to the directional distance function, the enhanced hyperbolic efficiency measure (Färe et al. in Rev Econ Stat 71(1):90–98, 1989) and the Farrell-type technical efficiency and confirm that it has greater discriminative power.     

The Swedish industrial support program of the 1970s revisited

The economy-wide dynamic cost-benefit study of the Swedish industrial subsidy program 1976 through 1984 (Carlsson et al. Res Policy 10(43):336–354 1981; Carlsson J Ind Econ 32(1):9–14, 1983a, b) is revisited in light of later economic development. Since the Swedish Micro to Macro model (Eliasson Am Econ Rev 67(1):277–281 1977a, 2017a) was used for quantification, this article is both (1) a study on the calibration of high dimensional micro-based and nonlinear economic systems models, and (2) a post inquiry into the empirical credibility of the cost-benefit calculations performed. We find that the Micro-based Macro model represents the minimum of detailed resolution necessary for the dynamic cost benefit calculations of the micro interventions in the Swedish economy we study. Even though the increased model complexity meant significant parameter calibration difficulties, a thoroughly researched model specification with exactly defined policy interfaces (with the markets of the economy) should take priority over parameter estimation problems, and always be preferred to estimating the parameters of a wrongly specified model perfectly. The oil price shocks of the 1970s caused radical market disorder in the western economies, bankrupting some 35% of Swedish manufacturing and threatening the Swedish government with massive unemployment. We confirm the earlier results that the government choice of a radical employment rescue policy came at enormous social cost in the form of economic stagnation, and still did not prevent the unemployment of the rest of OECD Europe from hitting Sweden a decade later, and persisting well into the next millennium. According to an alternative simulated policy scenario on the model, had the subsidies been replaced with a general lowering of the payroll tax of the same magnitude and the consequent increase in unemployment taken immediately during 1976–1980, production structures would have been radically and rapidly reorganized, normal employment would have been rapidly restored, and neither the stagnation nor the radical increase in unemployment of the early 1990s would have occurred. In retrospect we see no reason to worry about the empirical credibility of this computed dynamic trade off between Keynesian demand and Schumpeterian supply effects (caused by resource reallocations and endogenous structural change due to the price change), as we did then. We conclude with certainty that this trade-off would not even have been discovered as a possibility had we used a traditional model that did not embody these micro-macro linkages.     

Interest rate assumptions and predictive accuracy of central bank forecasts

The interest rate assumptions for macroeconomic forecasts differ among central banks. Common approaches are given by the assumptions that interest rates remain constant over the forecast horizon, follow a path as expected by market participants or follow a path as expected by the central bank itself. Theoretical papers such as Svensson (The instrument-rate projection under inflation targeting: the Norwegian example. Centre for European Policy Studies Working Paper (127), 2006) and Galí (J Monet Econ 58:537–550, 2011) suggest an accuracy ranking for these forecasts, from employing central bank expectations yielding the highest forecast accuracy to conditioning on constant interest rates yielding the lowest. Yet, when investigating the predictive accuracy of the Bank of England’s and the Banco Central do Brasil’s forecasts for interest rates, inflation and output growth, we hardly find any significant differences between forecasts based on the different interest rate paths. Our results suggest that the choice of the interest rate assumption appears to be of minor relevance empirically.     

Applying a microfounded-forecasting approach to predict Brazilian inflation

We investigate whether combining forecasts from surveys of expectations is a helpful empirical strategy for forecasting inflation in Brazil. We employ the FGV–IBRE Economic Tendency Survey, which consists of monthly qualitative information from approximately 2000 consumers since 2006, and also the Focus Survey of the Central Bank of Brazil, with daily forecasts since 1999 from roughly 250 professional forecasters. Natural candidates to win a forecast competition in the literature of surveys of expectations are the (consensus) cross-sectional average forecasts (AF). We first show that these forecasts are a bias-ridden version of the conditional expectation of inflation using the no-bias tests proposed in Issler and Lima (J Econom 152(2):153–164, 2009) and Gaglianone and Issler (Microfounded forecasting, 2015). The results reveal interesting data features: Consumers systematically overestimate inflation (by 2.01 p.p., on average), whereas market agents underestimate it (by 0.68 p.p. over the same sample). Next, we employ a pseudo out-of-sample analysis to evaluate different forecasting methods: the AR(1) model, the Granger and Ramanathan (J Forecast 3:197–204, 1984) forecast combination (GR) technique, a Phillips-curve based method, the Capistrán and Timmermann (J Bus Econ Stat 27:428–440, 2009) combination method, the consensus forecast (AF), the bias-corrected average forecast (BCAF), and the extended BCAF. Results reveal that: (i) the MSE of the AR(1) model is higher compared to the GR (and usually lower compared to the AF); and (ii) the extended BCAF is more accurate than the BCAF, which, in turn, dominates the AF. This validates the view that the bias corrections are a useful device for forecasting using surveys. The Phillips-curve based method has a median performance in terms of MSE, and the Capistrán and Timmermann (2009) combination method fares slightly worse.