Term structure and the estimated monetary policy rule in the Eurozone

In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The Sect. 3 implemented is a classical structural method based on the indirect inference principle. We are grateful to Eduardo Ley, two anonymous referees and seminar participants at the XXXI Simposio de Análisis Económico (Oviedo, Spain) and Bank of Spain for their useful comments. Financial support from Ministerio de Ciencia y Tecnología and Universidad del País Vasco (Spain) and Fundación Séneca through projects SEJ2004-04811/ECON, 9/UPV00035.321-13511/2001 and I02937/PHCS/05, respectively, is gratefully acknowledged. The first author also thanks Fundación Ramón Areces for financial support.     

An empirical investigation of the effect of borrowing constraints on Spanish consumption

Abstract. This work analyses the relevance of borrowing constraints on the intertemporal behaviour of Spanish non-durable consumption. We estimate Euler equations with cohort data extracted from the “Encuesta Continua de Presupuestos Familiares” (ECPF) for the period 1985–1993. The results are robust to the use of different estimators to eliminate fixed individual effects, to different specifications of the model, to the effect of uncertainty and to the presence of habits in consumption. Our results allow us to conclude that non-durable consumption of a considerable fraction of the Spanish population is affected by borrowing constraints. At the same time, and in accordance with similar results for other countries, we confirm that borrowing constraints are especially important for the young. The author acknowledges the grant received from the Conselleria de Cultura, Educación y Ciencia de la Generalitat Valènciana, as part of its grant's programme for stays in foreign universities and the financial support by DGICYT grants SEC99-0820 and SEC 2002-00667. The author also acknowledges the hospitality of the Department of Economics at University College London (UCL) and of the Departamento de Análisis Económico de la Universidad Nacional de Educación a Distancia. This work has been presented in the XXV Simposio de Análisis Económico, held in Bellaterra (Spain) in December 2000. Finally, the author acknowledges comments by J. E. Boscá and two anonymous referees that have contributed to improving the final version of the paper.     

Environmental regulation: choice of instruments under imperfect compliance

Compliance is an important issue in environmental regulation. We discuss some of the key elements of the problem and analyze a situation where emissions are not random and firms are risk-neutral. We study the firm’s decision on emissions and compliance when the environmental regulation is based on standards and the enforcement agency audits the firm with a certain probability. We compare total emissions when environmental regulation is based on different instruments: standards, taxes, and tradable permits. We show that when compliance is an issue, environmental taxes are superior to the other instruments, and we analyze the (static) efficiency of the solution. This paper originated from the AEE/REE presidential address for the XXX Simposio de Análisis Económico (Murcia 2005). It builds on the research project on optimal enforcement in environmental problems done in collaboration with David Pérez-Castrillo. I would like to thank David Pérez-Castrillo and Pau Olivella for their useful comments. I gratefully acknowledge the financial support from the Ministerio de Ciencia y Tecnología (BEC2003-01132) and the Generalitat de Catalunya (Barcelona Economics - CREA and 2005SGR-00836).     

Games of strategic complementarities: an application to Bayesian games

This paper provides an introduction to the theory of games of strategic complementarities, considers Bayesian games, and provides an application to global games. This paper is based on the Spanish Economic Review lecture given at the Simposio de Análisis Económico, Alicante, December 2001. Support from the Spanish Ministry of Education and Science (project SEJ2005-08263) is gratefully acknowledged.     

The optimality of the Common Fisheries Policy: the Northern Stock of Hake

We evaluate the management of the Northern Stock of Hake during 1986-2001. A stochastic bioeconomic model is calibrated to match the main features of this fishing ground. We show how catches, biomass stock and profits would have been if the optimal Common Fisheries Policy (CFP) consistent with the target biomass implied by the Fischler's Recovery Plan had been implemented. The main findings are: i) an optimal CFP would have generated profits of more than 667 millions euros, ii) if side-payments are allowed (implemented by ITQ's, for example) these profits increase 26%. JEL Classification: Q22, Q28 We thank two anonymous referees whose comments and suggestions have substantially improved the paper, and to Javier Pereiro from Instituto Oceanográfico de Vigo for making available part of data available to us. Financial support from the Instituto de Estudios Económicos de Galicia, Pedro Barrie de la Maza, FEDER, Ministerio de Ciencia y Tecnología, SEC2002-4318-C02-01 (José María Da-Rocha), CICYT 1393-12254/2000 and SEC2003-02510/ECO (María José Gutiérrez), Fundación BBVA 1/BBVA 00044.321-15466/2002 (María José Gutiérrez) and from Universidad del País Vasco, 9/UPV00035.321-13511/2001 (María José Gutiérrez) is gratefully acknowledged.     

Legal form and risk exposure in Spanish firms

Abstract. It is well-known that the legal form adopted by a firm determines the type of legal responsibility borne by its owners in case of bankruptcy. In this paper we argue that a firm under a limited liability status should be characterized by a higher than average bankruptcy probability, which ultimately captures their risk exposure when output is affected by exogenous shocks. To test this prediction we extend Lee's (1976) switching regressions model to a panel dataset of 1313 Spanish firms from 1990–1994, separating them into corporate and entrepreneurial forms (with/without limited liability, respectively). We consider both random effects and fixed effects panel data models, taking into account the potential endogeneity between risk exposure and the legal form choice. Our results confirm the hypothesis that firms under limited liability have significant higher risk exposure than firms under unlimited liability. The authors gratefully acknowledge valuable suggestions from Maite Martínez-Granado, A. Jorge Padilla, Javier Suárez and two anonymous referees. Data and financial support provided by the Fundación Empresa Pública (Madrid) and comments from participants at seminars held at CEMFI, Simposio de Análisis Económico and Universidad de Vigo are also sincerely appreciated. Mr. Campos particularly acknowledges research funding by the University of Las Palmas.     

Mathematical utility theory and the representability of demand by continuous homogeneous functions

The resort to utility-theoretical issues will permit us to propose a constructive procedure for deriving a homogeneous of degree one continuous function that gives raise to a primitive demand function under suitably mild conditions. This constitutes the first self-contained and elementary proof of a necessary and sufficient condition for an integrability problem to have a solution by continuous (subjective utility) functions.The work of José C. R. Alcantud has been supported by FEDER and Ministerio de Educación y Ciencia under the Research Project SEJ2005-0304/ECON, and by Consejería de Educación (Junta de Castilla y León) under the Research Project SA098A05. Carlos R. Palmero acknowledges financial support by FEDER and Ministerio de Educación y Ciencia under the Research Project SEJ2005-08709/ECON, and by Consejería de Educación (Junta de Castilla y León) under the Research Project VA017B05.     

Globalization, intellectual property, and economic prosperity

Innovation and the adoption of new ideas is fundamental to economic progress, and so is free trade of goods and services. Here we examine the underlying economics of the market for ideas and its implications for trade. From a positive perspective, we examine how such markets function and how international trade interact with them. From a normative perspective, we examine the pitfalls of current intellectual property regulations, and how might they be improved. We highlight recent research by ourselves and others challenging the notion that government awards of monopoly through patents and copyright are "the way" to provide appropriate incentives for innovation. JEL Classification: X15, X16 This article is based on the text of the SER Invited Lecture delivered by Michele Boldrin at the 2003 Simposio de Análisis Económico (Seville). We thank National Science Foundation Grants SES 01-14147 and 03-14713 for financial support. Corresponding author: Michele Boldrin     

Labor market assimilation of immigrants in Spain: employment at the expense of bad job-matches?

During the last decade, Spain has experienced an unprecedented increase of immigration from three localized areas: Eastern Europe, Latin America, and Africa. Using data from the Labour Force Survey for the period 1996–2006, we study the labour characteristics of recent immigrants, identifying the major differences with the native population at arrival and tracking whether these differences fade away as their years of residence in Spain increase. We allow the returns to human capital and the sensitivity to the business cycle to differ between immigrants and natives. Overall, our results show that, compared to natives, immigrants face initially higher participation and unemployment rates, as well as higher incidence of overeducation and temporary contracts. However, 5 years after arrival immigrants’ participation rates start to converge to natives’ rates, unemployment rates decrease to levels even lower than those of natives, and the incidence of overeducation and temporary contracts remains roughly constant: no reduction of the gap with Spanish workers is observed. We are grateful to Christian Dustmann, Juan F. Jimeno, Claudio Michelacci, an anonymous referee, and seminar participants at the 2006 EALE Conference, 2006 Simposio de Análisis Económico, BBVA Economic Research Department, FEDEA, CReAM, INSIDE and LECG for helpful comments and suggestions.     

Optimal accident compensation schemes

This paper considers the way in which accident compensation is offered as insurance against personal injury due to accidents. We begin by setting up a simple microeconomic model in which accident compensation schemes can be studied. Using this model, the accident compensation scheme that maximizes the expected utility of the insured for a given expected outlay of the scheme (that is, for a budget constraint for the insurer) is characterized. We show that, in order for the optimal schedule of indemnities to be increasing (more severe accidents lead to greater compensation) then, contrary to what has been assumed in the literature, the marginal utility of wealth must be decreasing in health. In particular, if the marginal utility of wealth is non-decreasing in health, then an optimal indemnity schedule cannot provide full compensation, in the sense that utility in each state is a constant. Financial support from Secretaría de Estado de Universidades e Investigación del Ministerio de Educación y Ciencia is gratefully acknowledged by F. J. Vázquez.     

A market game approach to differential information economies

In this paper we recast a differential information economy as a strategic game in which players propose net trades and prices. Pure strategy Nash equilibria are strong and determine both consumption plans and commodity prices that coincide with the Walrasian Expectations equilibria of the underlying economy. The authors acknowledge support by research grants BEC2003-09067-C04-01 (Ministerio de Educación y Ciencia and FEDER), PGIDT04XIC30001PN (Xunta de Galicia) and SA070A05 (Junta de Castilla y León). JP Torres-Martínez is also grateful to CNPq-Brazil and University of Vigo for financial support. We are indebted to N.C. Yannelis for helpful comments and insights.     

Labour segregation and immigrant and native-born wage distributions in Spain: an analysis using matched employer–employee data

This article carries out an empirical examination of the origin of the differences between immigrant and native-born wage structures in the Spanish labour market. Special attention is given in the analysis to the role played by occupational and workplace segregation of immigrants. Legal immigrants from developing countries exhibit lower mean wages and a more compressed wage structure than native-born workers. By contrast, immigrants from developed countries display higher mean wages and a more dispersed wage structure. The main empirical finding is that the disparities in the wage distributions for the native-born and both groups of immigrants are largely explained by their different observed characteristics, with a particularly important influence in this context of workplace and, specially, occupational segregation. Hipólito Simón, Esteban Sanromá and Raúl Ramos wish to thank the support received from the Ministerio de Fomento and the Ministerio de Educación y Ciencia through the projects T 75/2006 (Plan Nacional de Investigación, Desarrollo e Innovación Científica), SEJ2004-05860/ECON and SEJ2005-04348/ECON, respectively. A previous version of this paper was published as an IVIE Working Paper (WP-EC 2007-03).     

The Consumption/Wealth and Book/Market Ratios in a Dynamic Asset Pricing Contex

This paper addresses new insights into the predictability of financial returns. In particular, we analyze two aspects of the controversial forecasting literature. On the one hand, we demonstrate a positive and contemporaneous link between aggregate book/market and consumption/wealth ratios. On the other hand, we show that real estate and human capital, as the present value of all future salaries, are key components of the consumption/wealth ratio in Spain. Specifically, we find that the cointegrating residuals of consumption, asset holdings, real estate holdings, and our measure of human capital provide a better forecast of future returns than does the standard proxy of the consumption/wealth ratio. This result is important because it clarifies the importance of country-specific components of wealth for cases in which the consumption/wealth ratio is employed as an instrument in conditional asset pricing models.Belén Nieto: Financial support from the Ministerio de Ciencia y Tecnología grant SEJ2005-09372 is gratefully acknowledged.Rosa Rodríguez: Financial support from the Ministerio de Ciencia y Tecnología grant SEC2003-06457 is gratefully acknowledged.     

Smiling under stochastic volatility

This paper studies the behavior of the implied volatility function (smile) when the true distribution of the underlying asset is consistent with the stochastic volatility model proposed by Heston (1993). The main result of the paper is to extend previous results applicable to the smile as a whole to alternative degrees of moneyness. The conditions under which the implied volatility function changes whenever there is a change in the parameters associated with Hestons stochastic volatility model for a given degree of moneyness are given.JEL Classification: G12, G13Mathematical assistance provided by José Alcalde (Universidad de Alicante) is much appreciated, and we have also benefited from discussions with Eva Ferreira (Universidad del País Vasco) and Javier Fernández Navas (Instituto de Empresa). We also thank José M. Campa (IESE) and two anonymous referees, whose suggestions have helped us improve this paper substantially. Gonzalo Rubio and Ángel León acknowledge the financial support provided by Ministerio de Ciencia y Tecnología grants BEC2001-0636 and BEC2002-03797 respectively. Ángel León also acknowledges Generalitat Valenciana grant CTIDIA/2002/103. The contents of this paper are the sole responsibility of the authors.     

Discounting long run average growth in stochastic dynamic programs

Summary. Finding solutions to the Bellman equation often relies on restrictive boundedness assumptions. In this paper we develop a method of proof that allows to dispense with the assumption that returns are bounded from above. In applications our assumptions only imply that long run average (expected) growth is sufficiently discounted, in sharp contrast with classical assumptions either absolutely bounding growth or bounding each period (instead of long run) maximum (instead of average) growth. We discuss our work in relation to the literature and provide several examples. Received: July 26, 2000; revised version: July 10, 2002 RID="*" ID="*" I am specially grateful to Cuong Le Van and to anonymous referee for detecting an error in a previous version of this paper and for suggestions that sensibly improved the paper. Comments and suggestions are also acknowledged to Michele Boldrin, Raouf Boucekkine, Fabrice Collard, Tim Kehoe, Omar Licandro, and Luis Puch. I am also indebted to participants to the III Summer School on Economic Theory held at the Universidade de Vigo, the Macroeconomics Workshop at the Universitat Autò}noma de Barcelona, and the Econometrics Seminar at Tilburg University. Financial support from the Belgian government, under project PAI P4/01, at the IRES-UCL, from a European Marie Curie fellowship, Grant HPMF-CT-1999-00410, at the CEPREMAP, and from IVIE and Spanish Ministerio de Ciencia y Tecnología and FEDER, under project BEC2001-0535, at the Universidad de Alicante, is gratefully acknowledged.     

Forward contracts and competition

This paper examines the strategic use of forward contracts in an industry where downstream firms must buy an essential input from imperfectly competitive upstream suppliers. When a single large firm and a fringe of firms exist downstream, the large firm buys forward contracts from the fringe, i.e. there is horizontal subcontracting from the large firm to the firms on the fringe, in order to make the spot market less competitive. Hence our paper argues that horizontal subcontracting becomes an anti-competitive device. We also compare the strategies of buying forward contracts and purchasing productive capacity and we find that both are equivalent tools. When the downstream industry has instead several large firms, they have a “horizontal” incentive to sell forward contracts in order to gain market share, but the former “vertical” incentive to buy them persists. In this case, forward contracting may then lead to less competition in the spot market. We are indebted to Ramon Faulí-Oller, José Manuel Ordó?ez and Juan Carlos Reboredo for their helpful comments and suggestions on an earlier draft. We also gratefully acknowledge the valuable observations made by two anonymous referees and a Co-Editor that led to substantial improvements. Of course, the usual disclaimer applies. Antelo acknowledges financial support from the Xunta de Galicia (Grant PGIDIT02PXIA20101PR) and Bru that from the Spanish Ministerio de Ciencia y Tecnología (Grant PB98-1402).     

Recursive utility with unbounded aggregators

A new framework is presented for the study of the existence and uniqueness of solutions to the Koopmans’ equation in the unbounded case, that is based on the contraction mapping approach. In the bounded below case with bounded consumption streams, uniqueness of the solution in the whole class of weak-star continuous utility functions is obtained. When the aggregator is unbounded below and/or consumption streams are unbounded, existence of a weak-star continuous solution is shown, and a simple criterium to check the sufficient conditions for existence is provided. Juan Pablo Rincón-Zapatero and Carlos Rodríguez-Palmero gratefully acknowledge financial support by the Ministerio de Educación y Ciencia and FEDER funds under Research Projects MTM2005-06534 and SEJ2005-08709/ECON, respectively, and by Consejería de Educación de la Junta de Castilla y León under Research Projects VA99/04 and VA017B05, respectively. This paper has substantially benefited from the comments of an anonymous referee. Particular and special thanks are due to Robert Becker for his very helpful comments and valuable suggestions.     

Identifying optimal contingent fiscal policies in a business cycle model

Optimal fiscal policy is indeterminate in a dynamic and stochastic environment. The complete characterization of the fiscal policy requires the use of identification constraints. In the literature either capital taxes or debt have been restricted to be not contingent on the state of nature. We propose a different type of identification constraints to have both policy variables state-contingent. Three alternative identification conditions are considered: (i) restrictions on the dynamic and stochastic behavior of the debt path; (ii) an exogenous debt path, and (iii) an exogenous belief function. The main result indicates that the optimal capital tax is zero and constant over the business cycle for any of the identification conditions used, suggesting that is optimal for the government to use debt return as a shock absorber, keeping capital taxes constant. The result is quite different from the previous literature, which obtains very volatile capital taxes. JEL Classification: E62, H21. We are grateful to Alfonso Novales, Víctor Ríos-Rull, Javier Vallés and two anonymous referees for helpful comments and suggestions. We acknowledge financial support from Spanish Ministerio de Ciencia y Tecnología (Ruiz and Pérez: BEC 2003-039; Manzano: BEC 2002-01995). Baltasar Manzano also acknowledges support from Xunta de Galicia (PGIDIT03PXIC30001PN, PGIDIT03CSO30001PR).     

Corrigendum to “On randomized matching mechanisms” [Economic Theory 8(1996)377–381]

Ma (in Econ. Theory 8, 377–381, 1996) studied the random order mechanism, a matching mechanism suggested by Roth and Vande Vate (Econometrica 58, 1475–1480, 1990) for marriage markets. By means of an example he showed that the random order mechanism does not always reach all stable matchings. Although Ma's (1996) result is true, we show that the probability distribution he presented – and therefore the proof of his Claim 2 – is not correct. The mistake in the calculations by Ma (1996) is due to the fact that even though the example looks very symmetric, some of the calculations are not as “symmetric.” We thank two anonymous referees for their helpful comments. B. Klaus’s and F. Klijn’s research was supported by Ramón y Cajal contracts of the Spanish Ministerio de Ciencia y Tecnología. The work of the authors was also partially supported through the Spanish Plan Nacional I+D+I (BEC2002-02130 and SEJ2005-01690) and the Generalitat de Catalunya (SGR2005-00626 and the Barcelona Economics Program of CREA).     

Income measurement and comparisons

The purpose of this paper is to provide a way for better measuring a country's global income when official statistics fail to account for the existence of a thriving underground, or black economy. Another purpose of this research is to discuss adequate ways to perform international comparisons of income, and income per head, and to correct for depreciation. Besides the general interest of this problem, there are two more specific reasons behind this work. First, the allocation of development funds by international agencies (for example, the structural funds in the European monetary system) are conditioned on this measure. Second, the measurement of unemployment may be totally distorted by failing to account for the hidden economy. This paper has benefitted from comments by the participants at the Forty-Seventh International Atlantic Economic Conference, Vienna, Austria, March 16–23, 1999, and especially Michael Pickhardt. Financial support is acknowledged from the Dirección General de Ciencia y Tecnología, under project SEC 98-1112, and the Junta Castilla y León, under project SA 29/99. Comments by the participants at the 1997 Applied Econometrics Association conference on public deficits are also acknowledged. The authors are solely responsible for any remaining errors.