Investment and Uncertainty: A Theory‐based Empirical Approach*

This paper provides empirical evidence on the dynamic effects of uncertainty on firm‐level capital accumulation. A novelty in this paper is that the firm‐level uncertainty indicator is motivated and derived from a theoretical model, the neoclassical investment model with time to build. This model also serves as the base for the empirical work, where an error‐correction approach is employed. I find a negative effect of uncertainty on capital accumulation, both in the short run and the long run. This outcome cannot be explained by the model alone. Instead, the results suggest that the predominant mechanism at work stems from irreversibility constraints.     

Exchange Rate Pass‐through to Trade Prices: The Role of Nonlinearities and Asymmetries*

A standard assumption in the empirical literature is that exchange rate pass‐through is both linear and symmetric. This study tests these assumptions for export and import prices in the G7 economies. It focuses on non‐linearities in the reaction of profit margins to exchange rate movements, which may arise from the presence of price rigidities and switching costs. Nonlinearities are characterized by augmenting a standard linear model with polynomial functions of the exchange rate and with interactive dummy variables. The results suggest that nonlinearities and especially asymmetries cannot be ignored, although their magnitude varies noticeably across countries.     

汇率波动对外商直接投资的影响 ——基于知识资本模型从产业角度的实证检验

本文运用知识资本模型分别从国别和产业的角度对汇率波动与国际直接投资(FDI)进行实证检验。该模型考虑到资源禀赋对FDI的影响,并将FDI细分为垂直型和水平型;同时,为了使计量更加精确,本文还将模型中汇率的波动分解为一价定律失效导致的波动和不可解释的原因导致的波动;最后,本文还检验了美元盯住制对FDI的影响。结果发现,东道国货币贬值是否有利于吸引FDI取决于该国FDI是以水平型还是垂直型为主,同时,美元盯住制对FDI没有促进作用。     

Absorptive Capacity and Productivity Spillovers from FDI: A Threshold Regression Analysis*

This paper explores whether the effect of foreign direct investment (FDI) on productivity growth is dependent on absorptive capacity using recently developed threshold regression techniques. In manufacturing sectors where technology‐exploiting multinationals are prevalent, the results point to the presence of nonlinear threshold effects: the productivity benefit from FDI increases with absorptive capacity until some threshold level beyond which it becomes less pronounced. But there is also a minimum absorptive capacity threshold level below which productivity spillovers from FDI are negligible or even negative. On the contrary, no evidence of productivity spillovers is found in sectors where FDI appears to be motivated by technology‐sourcing considerations.     

The Impact of Short‐ and Long‐run Exchange Rate Uncertainty on Investment: A Panel Study of Industrial Countries*

We examine the relationship between aggregate investment and exchange rate uncertainty in the G7, using panel estimation and decomposition of volatility derived from the components generalized autoregressive conditionally heteroscedastic (GARCH) model. Our dynamic panel approach takes account of potential cross‐sectional heterogeneity, which can lead to bias in estimation. We find that for a poolable subsample of European countries, it is the transitory and not the permanent component of volatility which adversely affects investment. To the extent that short‐run uncertainty in the CGARCH model characterizes higher frequency shocks generated by volatile short‐term capital flows, these are most deleterious for investment.     

The Yen Real Exchange Rate may be Stationary after all: Evidence from Non‐linear Unit‐root Tests*

The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non‐linear version of the augmented Dickey–Fuller test, based on an exponentially smooth‐transition autoregressive model (ESTAR) that enhances the power of the tests against mean‐reverting non‐linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post‐Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so because of the use of a restrictive alternative hypothesis in previous tests.     

Explaining US–UK Interest Rate Differentials: A Reassessment of the Uncovered Interest Rate Parity in a Bayesian Framework*

In this paper, we test the uncovered interest rate parity (UIRP), allowing for transitory deviations from it. These deviations may arise from variations in risk premia, errors in expectations and linearization errors, and are modelled as a zero‐mean noise around the restrictions implied by the UIRP on a vector autoregression (VAR) in the interest rate differential and the spot exchange rate. Importantly, this approach includes the traditional one as a special case, which is derived by simply setting the noise to zero. When the noise is set to zero the UIRP is rejected, but if we allow for some degree of noise the UIRP is strongly supported by the data. Thus the UIRP relation does not hold exactly, but on average, with a stationary risk premium as opposed to a constant one. This result implies that analysing the effects of policy experiments under the null of the UIRP may be both safe and useful.     

The ACR Model: A Multivariate Dynamic Mixture Autoregression*

This paper proposes and analyses the autoregressive conditional root (ACR) time‐series model. This multivariate dynamic mixture autoregression allows for non‐stationary epochs. It proves to be an appealing alternative to existing nonlinear models, e.g. the threshold autoregressive or Markov switching class of models, which are commonly used to describe nonlinear dynamics as implied by arbitrage in presence of transaction costs. Simple conditions on the parameters of the ACR process and its innovations are shown to imply geometric ergodicity, stationarity and existence of moments. Furthermore, consistency and asymptotic normality of the maximum likelihood estimators are established. An application to real exchange rate data illustrates the analysis.     

Estimation of technical and allocative inefficiency: A primal system approach

The estimation of technical and allocative inefficiencies using a flexible (translog) cost system is found to be quite difficult, especially when both the inefficiencies are random. In this paper we use the alternative primal system consisting of the production function (translog) and the first-order conditions of cost minimization. The estimation of the primal system is more straightforward and it enables us to estimate observation-specific technical and allocative inefficiencies, and their impact on input demand and cost. We use data on steam-electric generating plants from the U.S. to estimate the model using both Cobb–Douglas and translog production functions.     

Estimation Bias and Inference in Overlapping Autoregressions: Implications for the Target‐Zone Literature*

Samples with overlapping observations are used for the study of uncovered interest rate parity, the predictability of long‐run stock returns and the credibility of exchange rate target zones. This paper quantifies the biases in parameter estimation and size distortions of hypothesis tests of overlapping linear and polynomial autoregressions, which have been used in target‐zone applications. We show that both estimation bias and size distortions of hypothesis tests are generally larger, if the amount of overlap is larger, the sample size is smaller, and autoregressive root of the data‐generating process is closer to unity. In particular, the estimates are biased in a way that makes it more likely that the predictions of the Bertola–Svensson model will be supported. Size distortions of various tests also turn out to be substantial even when using a heteroskedasticity and autocorrelation‐consistent covariance matrix.     

The Long‐Run Impact of Foreign Aid in 36 African Countries: Insights from Multivariate Time Series Analysis*

We comprehensively analyse the long‐run effect of foreign aid (ODA) on key macroeconomic variables in 36 sub‐Saharan African countries from the mid‐1960s to 2007, using a well‐specified cointegrated VAR model as statistical benchmark. Results provide broad support for a positive long‐run impact of ODA flows on the macroeconomy. In contrast, we find little evidence supporting the thesis that aid has been harmful. From a methodological point of view we highlight the importance of transparency in reporting results, especially when the hypothesis being tested differs from theoretical expectations, and we identify reasons for econometrically inadequate results in the literature.     

General‐to‐Specific Model Selection Procedures for Structural Vector Autoregressions*

Structural vector autoregressive (SVAR) models have emerged as a dominant research strategy in empirical macroeconomics, but suffer from the large number of parameters employed and the resulting estimation uncertainty associated with their impulse responses. In this paper, we propose general‐to‐specific (Gets) model selection procedures to overcome these limitations. It is shown that single‐equation procedures are generally efficient for the reduction of recursive SVAR models. The small‐sample properties of the proposed reduction procedure (as implemented using PcGets) are evaluated in a realistic Monte Carlo experiment. The impulse responses generated by the selected SVAR are found to be more precise and accurate than those of the unrestricted VAR. The proposed reduction strategy is then applied to the US monetary system considered by Christiano, Eichenbaum and Evans (Review of Economics and Statistics, Vol. 78, pp. 16–34, 1996) . The results are consistent with the Monte Carlo and question the validity of the impulse responses generated by the full system.     

The Relative Price of Non‐traded Goods under Imperfect Competition*

We consider the role of imperfect competition in explaining the relative price of non‐traded to traded goods within the Balassa–Samuelson framework. Under imperfect competition in these two sectors, relative prices depend on both productivity and mark‐up differentials. We test this hypothesis using a panel of sectors for 12 OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark‐up differentials.     

‘Stochastically more risk averse:’ A contextual theory of stochastic discrete choice under risk

Microeconometric treatments of discrete choice under risk are typically homoscedastic latent variable models. Specifically, choice probabilities are given by preference functional differences (given by expected utility, rank-dependent utility, etc.) embedded in cumulative distribution functions. This approach has a problem: Estimated utility function parameters meant to represent agents’ degree of risk aversion in the sense of Pratt (1964) do not imply a suggested “stochastically more risk averse” relation within such models. A new heteroscedastic model called “contextual utility” remedies this, and estimates in one data set suggest it explains (and especially predicts) as well as or better than other stochastic models.     

Dealing with Benchmark Revisions in Real‐Time Data: The Case of German Production and Orders Statistics*

Benchmark revisions in non‐stationary real‐time data may adversely affect the results of regular revision analysis and the estimates of long‐run economic relationships. Cointegration analysis can reveal the nature of vintage heterogeneity and guide the adjustment of real‐time data for benchmark revisions. Affine vintage transformation functions estimated by cointegration regressions are a flexible tool, whereas differencing and rebasing work well only under certain circumstances. Inappropriate vintage transformation may cause observed revision statistics to be affected by nuisance parameters. Using real‐time data of German industrial production and orders, the econometric techniques are exemplified and the theoretical claims are examined empirically.     

A Micro‐Decomposition Analysis of Aggregate Human Development Outcomes*

We show how differences in aggregate human development outcomes over time and space can be additively decomposed into a pure mean income (growth) component, a component attributed to differences in the distribution of income, and components attributed to ‘non‐income’ factors and differences in the model linking outcomes to income and non‐income characteristics. The income effect at the micro level is modelled non‐parametrically, so as to flexibly reflect potentially complex distributional changes. Our proposed method is illustrated using data for Morocco and Vietnam, and the results offer some surprising insights into the observed aggregate gains in schooling attainments.     

A No‐Arbitrage Structural Vector Autoregressive Model of the UK Yield Curve*

This article combines a Structural Vector Autoregression with a no‐arbitrage approach to build a multifactor Affine Term Structure Model (ATSM). The resulting No‐Arbitrage Structural Vector Autoregressive (NASVAR) model implies that expected excess returns are driven by structural macroeconomic shocks. This is in contrast with a standard ATSM, in which agents are concerned with non‐structural risks. As a simple application, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all structural shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields.     

Partial Horizontal Inequity Orderings: A Non‐parametric Approach*

We provide a partial ordering view of horizontal inequity (HI), based on the Lorenz criterion, associated with different post‐tax income distributions and a (bistochastic) non‐parametric estimated benchmark distribution. As a consequence, several measures consistent with the Lorenz criterion can be rationalized. In addition, we establish the so‐called HI transfer principle, which imposes a normative minimum requirement that any HI measure must satisfy. Our proposed HI ordering is consistent with this principle. Moreover, we adopt a cardinal view to decompose the total effect of a tax system into a welfare gain caused by HI‐free income redistribution and a welfare loss caused by HI, without any additive decomposable restriction on the indices. Hence, more robust tests can be applied. Other decompositions in the literature are seen as particular cases.     

Cross‐sectional Dependency and Size Distortion in a Small‐sample Homogeneous Panel Data Unit Root Test*

In this paper, we investigate the effects of cross‐sectional disturbance correlation in a homogeneous panel data unit root test. As reported by other authors, the unit root test has incorrect size in the presence of cross‐sectional correlation. We suggest that a previously known estimator can be used to reduce the size distortions. We supply response surface estimates for critical values and study the size characteristics of the proposed test. We find that the suggested estimator performs well in small‐sample homogeneous panel data unit root tests. The reduction in size distortion comes at a small cost of lower power against a stationary alternative.     

A Non‐parametric Examination of Capital–Skill Complementarity*

This paper uses non‐parametric kernel methods to construct observation‐specific elasticities of substitution for a balanced panel of 73 developed and developing countries to examine the capital–skill complementarity hypothesis. The exercise shows some support for capital–skill complementarity, but the strength of the evidence depends upon the definition of skilled labour and the elasticity of substitution measure being used. The added flexibility of the non‐parametric procedure is also capable of uncover ing that the elasticities of substitution vary across countries, groups of countries and time periods.