Primary Commodity Prices and the Terms of Trade*

This paper provides a survey of a range of issues involved in the analysis of primary commodity prices and the terms of trade. Particular emphasis is placed upon the long-run behaviour of the terms of trade between primary commodities and manufactures and the paper presents some new evidence regarding the long-run behaviour of Australia's terms of trade.     

Small Leading Firms*

We formally analyze the question of whether a price leader must control a large share of the market. Our main result is that if other producers have rising marginal costs and behave as price takers, even the smallest firm in a competitive industry with a rising supply curve can enhance its profits by cutting output and raising price, becoming a price leader. Therefore, we would expect pure competition to be destroyed under these technological conditions.     

Technology Shocks and Job Flows

We consider a version of the Solow growth model where technological progress can be investment specific or investment neutral. The labour market is subject to search frictions, and the existing productive units may fail to adopt the most recent technological advances. Technological progress can lead to the destruction of technologically obsolete jobs and cause unemployment. We calibrate the model to replicate the high persistence that characterizes the dynamics of firms' neutral technology and the frequency of firms' capital adjustment. We find that neutral technological advances increase job destruction and job reallocation and reduce aggregate employment. Investment-specific technological advances reduce job destruction, have mild effects on job creation, and are expansionary. Hence, neutral technological progress prompts Schumpeterian creative destruction, while investment-specific technological progress operates essentially as in the standard neoclassical growth model. Using structural VAR models, we provide support to the key dynamic implications of the model.     

PARTISAN POLITICS, INTEREST RATES AND THE STOCK MARKET: EVIDENCE FROM AMERICAN AND BRITISH RETURNS IN THE TWENTIETH CENTURY

We examine the relationship between government partisanship, interest rates and the mean and volatility of stock prices in the United States and United Kingdom. We suggest that traders in the stock market rationally expect higher (lower) post-electoral interest rates during the incumbency of the left-wing (right-wing) party – Democrats and Labor (Republican and Conservative) – and in election years when they expect the left-wing (right-wing) party to win elections. We hypothesize that expectations of higher (lower) interest rates decrease (increase) the mean and volatility of stock prices during the actual incumbency or even anticipation of a left-wing (right-wing) party holding the office of the chief executive. Results from empirical models estimated on data from U.S. and U.K. markets over most of the twentieth century statistically support our claims.     

ASSESSING THE COMPETITION FACED BY OIL PIPELINES

This paper assesses the competition faced by oil pipelines. It also uses a new procedure and new data to test whether oil pipeline markets are competitive or monopolistic, under standard definitions. The key innovation of the paper is a new approach to the definition of the relevant market(s) in which oil pipelines operate. While recognizing that pipeline monopsony also could be a problem under certain conditions, the paper argues that these conditions are unlikely to arise and that if they do, it is unclear whether pipeline owners would be in a position to exploit them. The study offers new evidence to fuel the 80-year-old debate over pipeline rates and regulation.     

Time variation in the cointegrating relationship between stock prices and economic activity

The present paper examines whether there exists a long‐run cointegrating relationship between a stock market index and output and interest rates. Moreover, estimation is conducted over the full sample and both a recursive and rolling sample to examine any time variation in the nature of the relationship. The results support evidence of a single cointegrating vector, where stock prices typically exhibit a positive relationship with industrial production and a negative relationship with interest rates. However, there is significant time variation and periods of time where contrary results are observed. As such any model of stock prices needs to account for such time variation     

Testing separability of public consumption in household decisions

In this paper we propose a sequential strategy, based on the microeconomic approach of the demand theory, in order to test for separability between private and public consumption. The aim of the present work is to verify, using a conditional almost ideal demand system, whether the different components of public consumption exert conditioning effects on the allocative structure of private spending. The empirical estimation of the model and the separability tests are developed for both a demand system in five functional categories of private spending, and for a demand system in six categories, where the private expenditures on those goods and services which can also be offered by the public sector are enclosed in a single functional category. The results of the separability tests, obtained using UK data for the 1974–2000 period, show that public individual consumption plays an important role in modifying consumer choices, while public collective consumption does not affect private consumption behaviours. The relationships between the different components of private spending and public individual consumption are both of substitutability and complementarity; in particular, we find that public individual consumption and the corresponding private expenditures on ‘Health, education, recreation and social protection’ are complements.     

Economic Risk Factors and Commercial Real Estate Returns

A great deal of research has focused on the links between stock and bond market returns and macroeconomic events such as fluctuations in interest rates, inflation rates, and industrial production. Although the comovements of real estate and other asset prices suggests that these same systematic risk factors are likely to be priced in real estate markets, no study has formally addressed this issue. This study identifies the growth rate in real per capita consumption, the real T-bill rate, the term structure of interest rates, and unexpected inflation as fundamental drivers or state variables that systematically affect real estate returns. The finding of a consistently significant risk premium on consumption has important ramifications for the vast literature that has examined the (risk-adjusted) performance of real estate, for it suggests that prior findings of significant abnormal returns (either positive or negative) that have ignored consumption are potentially biased by an omitted variables problem. The results also have important implications for dynamic asset allocation strategies that involve the predictability of real estate returns using economic data.     

The Impact of Bank Consolidation on Commercial Borrower Welfare

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.     

Managerial Entrenchment and Capital Structure Decisions

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross-sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.