A semiflexible normalized quadratic inverse demand system: an application to the price formation of fish

We propose a new inverse demand system, the normalized quadratic distance function, which is similar to the normalized quadratic expenditure function of Diewert and Wales (1988a). Aside from being able to maintain concavity in quantities globally, the resulting specification is also `flexible.' In addition, to obtain more parsimonious specifications, we apply the rank reduction procedures of Diewert and Wales (1988b) to the model's Antonelli matrix. We illustrate the techniques by estimating a system of inverse demands for bi-monthly fish landings, 1971–1991, for U.S. Great Lakes ports. To illustrate the model's usefulness, exact welfare measures associated with catch restrictions are derived. First version received: May 1999/Final version received: November 2000     

Model selection for nonlinear time series

We investigate the finite-sample performance of model selection criteria for local linear regression by simulation. Similarly to linear regression, the penalization term depends on the number of parameters of the model. In the context of nonparametric regression, we use a suitable quantity to account for the Equivalent Number of Parameters as previously suggested in the literature. We consider the following criteria: Rice T, FPE, AIC, Corrected AIC and GCV. To make results comparable with other data-driven selection criteria we consider also Leave-Out CV. We show that the properties of the penalization schemes are very different for some linear and nonlinear models. Finally, we set up a goodness-of-fit test for linearity based on bootstrap methods. The test has correct size and very high power against the alternatives investigated. Application of the methods proposed to macroeconomic and financial time series shows that there is evidence of nonlinearity.First version received: September 2002/Final version received : October 2003I would like to thank Cees Diks, Cars Hommes and an anonymous referee for useful comments that significantly improved the paper.     

Money demand, the Cagan model, testing rational expectations vs adaptive expectations: The case of Turkey

This paper estimates the Cagan type demand for money function for Turkish economy during the period 1986:1–1995:3 and tests whether Cagan's specification fits the Turkish data using an econometric technique assuming that forecasting errors are stationary. This paper also tests the hypothesis that monetary policy was implemented in aiming to maximize the inflation tax revenue. Finally, the Cagan model is estimated with the additional assumption of rational expectations for Turkey for the considered period. First version received: March 1998/final version received: October 1998     

A generalized additive Tobit model

This paper proposes a semi-parametric approach to estimation in Tobit models. A generalized additive Tobit model of residential local long distance (intra-LATA) telephone demand is estimated on a cross-section of residential telephone consumers across twenty-eight states. While past studies of telecommunications demand have used fully parametric models, the model presented here is non-parametric in two dimensions: first no distributional assumption is made for the error distribution, and second, the demand equation is non-parametric with respect to price. We find that the elasticity of demand is substantially lower (in absolute value) that found in previous studies for a 40% cut in tariffs. First version received: July 2000/Final version received: March 2001 RID="*" ID="*"  I thank the referee and Associate Editor for suggestions which improved the paper. The views expressed here are of the author and not Analysis Group | Economics.     

Encompassing and rational expectations: How sequential corroboration can imply refutation

Even though pieces of empirical evidence individually may corroborate an economic theory, their joint existence may refute that same theory. Testing of rational expectations models provides a concrete illustration of this principle. Surprisingly, empirical refutation of a rational expectations model may occur without having to estimate that model, and the refutation may be for a large class of expectations-based models and not just for a particular model specification. Narrow money demand in the United Kingdom illustrates such refutation. The general proposition concerning corroboration and refutation strongly favors the building of empirical models that are consistent with all available evidence. First version received: July 1994/final version received: July 1997     

The effects of learning and signaling on money demand: With an application to heterodox inflation stabilization programs

This paper develops a nonlinear vector autoregression of inflation and money growth subject to changes in regime. The regimes are fully characterized by the mean and variance of inflation and are conjectured to be the result of alternative government policies. Agents are unable to observe directly whether government actions are indeed consistent with the inflation rate targeted as part of a stabilization program. However, as part of their money demand decision, agents construct probability inferences regarding the regime. Government announcements are assumed to provide agents with additional, possibly truthful information regarding the regime.  This specification is estimated using data from the Israeli and Argentine high-inflation periods. Results indicate that the successful stabilization program implemented in Israel in July 1985 was more credible than either the earlier Israeli attempt in November 1984 or the Argentine programs. Government's signaling might simplify the agents' inference problem and increase the speed of their learning but, under certain conditions, it might also increase inflation volatility. Welfare gains from a temporary increase in real balances might be high enough to induce agents to raise their money demand in the short-term even if they are uncertain about the nature of government policy and the eventual outcome of the stabilization attempt. Statistically, the model restrictions cannot be rejected at the 1% significance level. First version received: August 1998/Final version received: January 1999     

A difficulty with the address models of product differentiation

Summary. In models of product differentiation and location models it is implicitly assumed that consumers can afford to buy the differentiated goods in the market. I show that with income heterogeneity there are severe existence problems of a price equilibrium in models of horizontal product differentiation with unit demand because some consumers are income-constrained. The result generalizes to other models of product differentiation, search, and switching costs. I present an alternative specification of variable individual demand in which this kind of existence problem cannot arise. Received: October 17, 1997; revised version: February 20, 1998     

Measuring the effectiveness of non-price export promotion using a supply-side approach

In this paper we assess the effectiveness of the Market Promotion Program (MPP) in increasing U.S. exports and benefitting U.S. agricultural producers and food processors. Export shipments are linked to producer welfare using Kohli's (1978) profit maximization (GNP function) approach to modeling international trade. Using estimated profit functions in conjunction with a synthetic export demand function for processed agricultural products, we compute changes in farm and food processing sector profits that result from alternative own-price and advertising elasticities of export demand with and without the MPP subsidy. This approach allows us to investigate aggregate welfare effects of nonprice promotion without requiring the difficult task of estimating the export demand effects of market promotion activities for numerous commodities and importing countries. First version received: April 1999/Final version received: June 2000     

An econometric analysis of veterans’ health care utilization using two-part models

Based on the 1992 US National Survey of Veterans, we analyzed veterans inpatient and outpatient health care utilization patterns by estimating count data two-part hurdle models. We also identified factors that affect veterans choice of health care between VA and non-VA facilities using count data selection models. Not surprisingly, we found that health condition measures are the most important factors in determining veterans health care utilization. Gender, disability, and employment status are also significant. Veterans with lower socio-economic status, without other health insurance coverages, or living near VA health care facilities are more likely to use VA health care system for outpatient visits and inpatient admissions. Our study underscores the role of alternative sources of health care and insurance in discerning the true effects of the explanatory variables on an individuals total demand for health care and its allocation between alternative providers.Jel classification: C35, I12, H51This research was done under a contract with the VA Health Care Network, Upstate New York (VISN 2). We are grateful to A. Colin Cameron, Diane Dewer, Joe Engelhardt, Terrance Kinal, Hamp Lankford, Frank Windmeijer, and two anonymous referees for helpful suggestions and comments. We alone are responsible for the views expressed, and deficiencies remaining, in the paper.First version received: September 2001/Final version received: February 2003     

Testing for negativity in a demand system: A Bayesian approach

The paper introduces Bayesian inference into a demand model. This allows us to test for the negativity condition of the substitution matrix which is difficult to handle directly in the traditional approach. To illustrate the Bayesian inference procedures, we estimate the Rotterdam model and test the demand properties using Japanese data. The empirical results show the importance of specifically considering negativity in demand analysis. First version received: September 1997/final version received: February 1998     

The demand for money in Austria

In this paper, the demand for real money M1, M2, and M3 is estimated for Austria over the time period 1965–96. The modelling takes place within the framework of a small vector autoregression. To estimate the demand for money, two-equation error-correction models are constructed, which contain the short-run dynamics and the long-run economic equilibrium. It is found that a stable money demand exists for all monetary aggregates. The long-run equilibrium of M1, after accounting for a structural break in 1979, can be characterised as a classical type of money demand, with no interest rate effects and an elasticity of one for real GDP. In the case of M2 and M3, we find a unit coefficient on income and a significantly negative influence of a long-term interest rate. The statistical properties of the estimated short-run money demand equations – considering in-sample and out-of-sample tests – are generally very good. First version received: October 1996/Final version received: April 2000     

Constrained nonparametric regression analysis of load curves

In this paper, we analyze household load curves through the use of Constrained Smoothing Splines. These estimators are natural smoothing splines that allow to incorporate periodic shape constraints. Since the time pattern of electricity demand combines strong periodical regularities with abrupt changes along time, a nonparametric regression estimator that is able to incorporate regularity constrains appears to be very well suited to approach load curves. In the paper we also propose a method to compute the penalty parameters that appear in the constrained smoothing spline estimator, we show some statistical properties and finally we construct confidence intervals. First version received: February 1998/final version accepted: July 1999     

Estimation of hedonic price functions via additive nonparametric regression

We model a hedonic price function for housing as an additive nonparametric regression. Estimation is done via a backfitting procedure in combination with a local polynomial estimator. It avoids the pitfalls of an unrestricted nonparametric estimator, such as slow convergence rates and the curse of dimensionality. Bandwidths are chosen using a novel plug in method that minimizes the asymptotic mean average squared error (AMASE) of the regression. We compare our results to alternative parametric models and find evidence of the superiority of our nonparametric model. From an empirical perspective our study is interesting in that the effects on housing prices of a series of environmental characteristics are modeled in the regression. We find these characteristics to be important in the determination of housing prices.First version received: October 2002/Final version received: October 2003We thank B. Baltagi and two anonymous referees for their comments. The authors retain responsibility for any remaining errors.     

On the choice of functional form in stochastic frontier modeling

This paper examines the effect of functional form specification on the estimation of technical efficiency using a panel data set of 125 olive-growing farms in Greece for the period 1987–93. The generalized quadratic Box-Cox transformation is used to test the relative performance of alternative, widely used, functional forms and to examine the effect of prior choice on final efficiency estimates. Other than the functional specifications nested within the Box-Cox transformation, the comparative analysis includes the minflex Laurent translog and generalized Leontief that possess desirable approximation properties. The results indicate that technical efficiency measures are very sensitive to the choice of functional specification. Perhaps most importantly, the choice of functional form affects the identification of the factors affecting individual performance – the sources of technical inefficiency. The analysis also shows that while specification searches do narrow down the set of feasible alternatives, the identification of the most appropriate functional specification might not always be (statistically) feasible. First version received: November 1999/Final version received: July 2001 RID="*" ID="*"  The authors wish to thank Almas Heshmati, Robert Romain, and an anonymous referee for insightful comments and suggestions. Special thanks go to the associate editor who handled the paper, and whose careful reading and suggestions have improved the paper substantially. The second author wishes to acknowledge the financial support from “President SSHRC” from the University of Saskatchewan. The usual caveats with respect to opinions expressed in the paper apply. Senior authorship is shared. This is University of Nebraska-Lincoln Agricultural Research Division Article No. 13270.     

The proper panel econometric specification of the gravity equation: A three-way model with bilateral interaction effects

We argue that the proper specification of a panel gravity model should include main (exporter, importer, and time) as well as time invariant exporter-by-importer (bilateral) interaction effects. In a panel of 11 APEC countries, the latter are highly significant and account for the largest part of variation. First version received: February 2001/Final version received: June 2002 RID="*" ID="*"  We are grateful to two anonymous referees and Robert Kunst for their helpful comments.     

Contracting out refuse collection

In this paper we seek an explanation for the reservations of local authorities towards contracting out. Although empirical evidence suggests that contracting out results in a significant cost decrease, a majority of Dutch municipalities provides for waste collection services themselves. Based on theoretical insights we model the choice between private, public, in-house, and out-house refuse collection. The models are estimated using a database comprising nearly all Dutch municipalities. We find evidence that the number of inhabitants, the transfer by central government, and interest group arguments are important explanations. Interestingly, ideology seems to play a minor role.  Compared to earlier studies we estimate more general models. Although the same qualitative results are found for parametric and semiparametric models, we find strong statistical evidence that a parametric specification is far too inflexible. Differences between the parametric and the semiparametric marginal effects are substantial. Thus, more attention is needed for the implications of model specification. First version received: November 2000/Final version received: May 2002 We thank two anonymous referees for their comments on an earlier version.     

Short- and long-term unemployment: How do temporary layoffs affect this distinction?

In this paper, we provide new evidence on how to model unemployment durations in the presence of temporary layoffs. Two different types of econometric models are used: the multiple phase duration model and the competing risks model. Special attention is paid to the possibility of time-varying or non-proportional effects of the explanatory variables on the hazard function. The results show that instead of using the multiple phase duration model as an alternative to the competing risks model, it may be more fruitful to use it to extend the specification of the competing risks model. First version received: August 2000/Final version accepted: July 2001 RID="*" ID="*"  Financial support from the Danish National Research Foundation is gratefully acknowledged. We thank Gerard van den Berg, Per-Anders Edin, Niels Haldrup, Winfred Pohlmeier and anonymous referees for useful comments. We also thank Jens Chr. Thellesen for research assistance.     

Models for count data with endogenous participation

We present several extensions of the Poisson and negative binomial models for count data based on the lognormal model for latent heterogeneity in the conditional means. The lognormal model provides a versatile specification that is more flexible than the familiar log gamma form, and provides a platform for several “two part” extensions that have appeared in the literature, including zero inflation, hurdle and sample selection models. We then extend these received two- part models by allowing for endogeneity of the participation equation. We conclude with a detailed application using the data employed in a recent study of the German health care system.      

Specifying differential cyclical response in economic time series: Capacity utilization and demand for imports

This paper begins with a discussion of several techniques currently employed to specify non-reversible relationships and shows that many of the more popular techniques lead to biased slope and intercept estimates when the data have a natural order and the purpose is to estimate differential response over a series of cycles. Next a general specification of a non-reversible relationships is proposed. This variable partitioning procedure has two advantages over currently employed techniques: (1) It allows unbiased estimation of slope and intercept parameters; (2) It implies a set of joint hypotheses which can be tested to deduce the appropriate adjustment path. The suggested procedure is then applied to an investigation of the effect of capacity utilization on US import demand. Employing a model posited by Gregory [5] but correcting his inappropriate specification of capacity utilization's ratchet effect, we find a significant, non-reversible relationship between capacity utilization and import demand. This result is precisely the opposite of that originally inferred by Gregory. We conclude that inappropriate specification of non-reversible relationships can lead to incorrect forecasts and policy decisions and that these problems can be corrected if our specification procedure is employed.     

Buffer stocks,exchange rates and deviations from purchasing power parity

In this paper an extension of the Monetary Approach to the Exchange Rate reduced form is presented and estimated for four bilateral exchange rates with data from the recent floating experience. The extension incorporates two features: a more sophisticated modelling of money demand, using theCarr andDarby money demand specification, and allowing for deviations from purchasing power parity. The estimated results are supportive of our extended specification and we conclude by arguing that care should be taken in specifying the underlying structural relationships in asset reduced form exchange rate equations.