Banking sector development and interest rate volatility in emerging economies

Over the last decades, macroeconomic stability is said to be one of the major concerns of emerging economies. Financial sector as a core of macroeconomic stability has been under close consideration of policy makers. The relationship between interest rate uncertainty and banking sector development as one of the most important indicators of financial sector development, especially for emerging economies, has not received enough attention in the literature. Perhaps this article is the most comprehensive study that investigates the relationship between interest rate uncertainty and banking sector development for a large group of emerging economies. To do this, the short-run and long-run models using a bounds testing approach to cointegration for 12 emerging economies over the period 1980–2011 have been developed. Estimated results from all models indicate that interest rate uncertainty has significant effect on banking sector development in both short-run and long-run phenomena in the majority of countries. The findings indicate that the link between interest rate uncertainty and banking sector development in each country depends on each country’s specific structure.     

Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads

We study the dynamic impact of idiosyncratic volatility and bond liquidity on corporate bond spreads over time and empirically disentangle both effects. Using an extensive data set, we find that both idiosyncratic volatility and liquidity are critical mainly for the distress portfolios, i.e., low-rated and short-term bonds; for others only volatility matters. The effects of volatility and liquidity shocks on bond spreads were both exacerbated during the recent financial crisis. Liquidity shocks are quickly absorbed into bonds prices; however, volatility shocks are more persistent and have a long-term effect. Our results overall suggest significant differences between how volatility and liquidity dynamically impact bond spreads.     

A Cost Function for the Natural Gas Transmission Industry

This article estimates the parameters of a cost function for the process of gas transmission based on the two basic capital inputs to the process: pipe and compressors. This in turn allows us to assess the combination of capital, operating, and maintenance costs that minimize the total cost of a natural gas transportation system. We further show that the industry's production technology exhibits increasing returns to scale. That is, we find that the long-run marginal cost is lower than the long-run average cost per unit. The natural gas transmission cost function derived is consistent with the engineering aspects of the industry and may be used to find the minimal cost of a system to transport natural gas.     

Properties of the Sample Autocorrelations of Nonlinear Transformations in Long-Memory Stochastic Volatility Models

The autocorrelations of log-squared, squared, and absolute financialreturns are often used to infer the dynamic properties of theunderlying volatility. This article shows that, in the contextof long-memory stochastic volatility models, these autocorrelationsare smaller than the autocorrelations of the log volatilityand so is the rate of decay for squared and absolute returns.Furthermore, the corresponding sample autocorrelations couldhave severe negative biases, making the identification of conditionalheteroscedasticity and long memory a difficult task. Finally,we show that the power of some popular tests for homoscedasticityis larger when they are applied to absolute returns.     

The International Business Cycle in a Changing World: Volatility and the Propagation of Shocks in the G-7

The changing relationships between the G-7 countries are examined through VAR models for quarterly growth, estimated over sub-periods and using a rolling data window. Trivariate models are employed, each including the US and a European (E15) aggregate. The results show that conditional volatility of growth has declined relatively more since 1980 for E15 than for the US, aggregate European shocks have increased impact on “core” European countries from around 1980, the effects of the US on Europe are largest during the 1970s and the late 1990s, and E15 has a steadily increasing impact on the US economy over time. JEL Classification Numbers: E32, F02, F43     

Truth and Robustness in Cross‐country Growth Regressions*

We re‐examine studies of cross‐country growth regressions by Levine and Renelt (American Economic Review, Vol. 82, 1992, pp. 942–963) and Sala‐i‐Martin (American Economic Review, Vol. 87, 1997a, pp. 178–183; Economics Department, Columbia, University, 1997b). In a realistic Monte Carlo experiment, their variants of Edward Leamer's extreme‐bounds analysis are compared with a cross‐sectional version of the general‐to‐specific search methodology associated with the LSE approach to econometrics. Levine and Renelt's method has low size and low power, while Sala‐i‐Martin's method has high size and high power. The general‐to‐specific methodology is shown to have a near nominal size and high power. Sala‐i‐Martin's method and the general‐to‐specific method are then applied to the actual data from Sala‐i‐Martin's original study.     

Brand-Supermarket Demand for Breakfast Cereals and Retail Competition

The Berry, Levinsohn, and Pakes (1995) market equilibrium model is extended to the supermarket chain level to examine consumer choices and retail competition for thirty-seven brands of breakfast cereals in Boston. Estimated taste parameters for product characteristics vary significantly across consumers. Although consumers are price-sensitive with respect to their chosen cereals, they exhibit strong brand and supermarket loyalty. Retail markups increase and marginal costs decrease with grocery market shares, attesting to oligopoly power with efficiencies. Markups decrease with the own-price elasticity of demand, with Corn Flakes having the highest markups. A detailed picture of consumer response and supermarket competition is provided.     

Credit lines as monitored liquidity insurance: Theory and evidence

We propose a theory of credit lines provided by banks to firms as a form of monitored liquidity insurance. Bank monitoring and resulting revocations help control illiquidity-seeking behavior of firms insured by credit lines. The cost of credit lines is thus greater for firms with high liquidity risk, which in turn are likely to use cash instead of credit lines. We test this implication for corporate liquidity management by identifying exogenous shocks to liquidity risk of firms in corporate bond and equity markets. Firms experiencing increases in liquidity risk move out of credit lines and into cash holdings.     

Network externalities in consumer spending on lottery games: evidence from Spain

We use data from two nationally representative Spanish surveys in 2005 and 2006 to investigate spending on lottery games. Estimates from Tobit and double hurdle models of participation in lottery markets and spending on lottery tickets find that frequent participation in one game is not associated with an increased or decreased probability of participating in other games, but is associated with increased spending on other games. Consumer spending on different lottery games exhibits inter-related consumption decisions. Also, the assumptions underlying the double hurdle model, but not the Tobit model, better describe consumer spending on lottery tickets in Spain.     

Preference erosion and market access liberalization: the African dilemma in multilateral negotiations on agriculture

African countries, especially sub-Saharan ones, have conflicting interests in multilateral negotiations on agriculture. On the one hand, their economies may be boosted by the price effect induced by agricultural liberalization. On the other hand, multilateral tariff cuts will result in the erosion of preferential margins. Based on an original methodology, using CGE modeling, detailed tariff calculations and predictive analysis, this paper investigates the potential impact of current multilateral negotiations on the value of preferences for African agriculture. It estimates the preferential value to USD 0.7 billion of welfare and USD 1 billion of exports to the Triad markets. Furthermore, it highlights the “cruel dilemma” African countries face in current negotiations, as they gain from ambitious trade liberalization, despite the large preferential erosion, while they suffer from noticeable trade and welfare losses under conservative scenarios.