Testing for nonlinear panel unit roots under cross-sectional dependency — With an application to the PPP hypothesis

In this paper we propose a number of nonlinear panel unit root tests that are robust to cross-sectional dependency. These tests may be used to test the null hypothesis of non-stationarity against the alternative that some or all of the time series in the system of equations follow a stationary exponential smooth transition autoregressive (ESTAR) process. In contrast to previous research we relax the assumption that the cross-correlation structure is driven by a common-factor and consider an endogenous correlation structure. Based on the size and power results from the Monte Carlo simulations we recommend using the Wald version of our cross-sectional dependent robust nonlinear panel unit root (CDR-NPU) method.Finally, in an empirical application we demonstrate that our more powerful nonlinear method, in contrast to previous methods, can provide support for PPP even in smaller samples. In consistency with the univariate tests in Bahmani-Oskooee et al. (2008) our CDR-NPU tests support the theory that less industrialized economies exhibit stronger and more distinct nonlinear adjustment patterns towards PPP.     

Are PPP tests erratically behaved? Some panel evidence

This paper examines whether, in addition to standard unit root and cointegration tests, panel approaches also produce test statistics behaving erratically when applied to tests for Purchasing Power Parity (PPP). We show that if appropriate tests (which are robust to cross‐sectional dependence) are used, any evidence of erratic behaviour disappears, and empirical support is found for PPP.     

Willingness to pay for publicly-financed health care: how should we use the numbers?

This paper addresses the question of how willingness to pay (WTP) values in health care evaluation can be used by policy makers. The way in which WTP values are used depends on from whom values are elicited and whether the good concerned is privately-financed or publicly-financed through taxation. Thus, four possible uses of WTP values are identified. The focus is on the two uses which arise in the publiclyfinanced situation. ‘Conventional’ use of WTP values, where the decision as to whether or not to provide a service depends upon whether or not WTP values are greater than total cost, applies only in the privately-financed, and not publiclyfinanced situations. The situations with publicly-financed goods are more complex. The use of WTP values for publicly-financed goods is justified and illustrated.     

Should we reallocate patent fees to the universities?

In knowledge economies, patent agencies are often viewed as a relevant instrument of an efficient innovation policy. This paper brings a new support to that idea. We claim that these agencies should play an increasing role in the regulation of the relation between private R&D labs and public fundamental research units especially concerning the question of the appropriation of free usable research results. Since these two institutions work with opposite institutional arrangements (see P.S. Dasgupta and P.A. David. 1987. Information disclosure and the economics of science and technology. In Arrow and the accent of modern economic theory, ed. G.R. Feiwel, 519–42. New York: State University of New York Press), we essentially argue that there is, on the one hand, an over-appropriation of these results while, on the other hand, there is also an under-provision of free usable results issued from more fundamental research. We show how a public patent office can restore efficiency.     

Nonlinearity and Persistence in PPP: Does Controlling for Nonlinearity Solve the PPP Puzzle?

We suggest half-life measures conditional on various regimes to examine persistence in the purchasing power parity (PPP) relations within nonlinear exponential smooth transition autoregressive (ESTAR) models. We use normal sampling and simulated confidence intervals for the regime-dependent half-lives. Statistical testing and simulations suggest that the regime-dependent half-lives work well in characterizing the persistence of departures from PPP in ESTAR models. The analysis reveals considerable persistence in PPP deviations and variation in persistence across currency groups and over time. Findings in the paper suggest that incorporating nonlinearities into PPP may not necessarily solve the PPP puzzle as claimed in some recent studies.     

Should we transfer resources from college to basic education?

We analyze public intervention in two educational levels: basic education and college education. The government decides per capita expenditure at each level and the subsidy for college education. We explore the effect of transferring money from one level to the other on equity and efficiency. We prove the existence of an Equity-Efficiency Frontier (EEF), and analyze which policy reforms are optimal when the society is not at the EEF. For developed countries, this policy consists of transferring resources from college education to basic education.     

Is aid for trade effective? A panel quantile regression approach

This paper investigates whether Aid for Trade (AfT) leads to greater exports in recipient countries. Using panel quantile regression and two strategies to address endogeneity (AfT lagged by two periods and dynamic OLS), our results suggest that total AfT disbursements promote the export of goods and services mainly for the lower quantiles (0.1, 0.25, 0.50) of the conditional distribution of exports. Hence, countries that export less in volume are those benefitting most from AfT. This effect is mainly driven by the impact on exports of goods rather than on that of services. We also investigate which types of AfT are effective when endogeneity is controlled for. The main results show that whereas aid to improve trade policy and regulation is associated with higher exports for all quantiles, aid used to build infrastructure is found to affect exports at only the lowest tails of the distribution (0.10–0.35) and aid to build productive capacity is generally more effective for the lower quantiles of the export distribution (0.10–0.50). In contrast, aid disbursed for general budget support (an untargeted type of aid) is not associated with greater export levels. This finding holds irrespective of the quantile.     

Should mobile capital pay for public infrastructure investment?

The paper contributes to the discussion of fiscal competition with infrastructure goods. We explicitly focus on the costs of providing public infrastructure capital that appear in the public budget as investment. Thus we analyse the problem in a dynamic framework. Public infrastructure is considered as a marginal product complement to private capital. A central result of the model is that the fact that public capital is a complement to private capital, so that an increase in the supply of public capital ceteris paribus improves the marginal productivity of private capital, cannot be used as an argument to support a source tax. The so-called indirect productivity effect on private capital induced by public inputs does not justify the taxation of mobile capital. Rather, the efficiency of a source tax on mobile capital income depends on the question of whether or not the public input generates a factor rent to private capital.

Should we care about the uncertainty around measures of political-economic development?

Several proxies of political–economic development, such as the Worldwide Governance Indicators, come in the form of an estimate along with a standard error reflecting the uncertainty of this estimate. Existing empirical work discards the information provided by the standard errors. We argue that the appropriate practice should be to take into account this additional information through the use of multiple imputation. We investigate the importance of our proposed approach in several applications. We find that accounting for the uncertainty around the values of various measures of political–economic development tends to have a large influence on the magnitude and statistical significance of the estimated effects of these variables.     

Fiscal sustainability and demographics – Should we save or work more?

Approaching demographic shifts are raising concerns about fiscal sustainability in most OECD countries. A widespread view based on the tax-smoothing idea is that a prior consolidation of public finances is required to cope with the predicted trend deterioration in the primary budget balance. However, the smoothing argument cannot unconditionally be applied to the demographic problem. It is important to distinguish between increases in the dependency ratio driven by changes in fertility and longevity. For the former the smoothing argument may be appropriate, but not for the latter. In the case of longevity, a trade-off between consolidation and increasing retirement ages becomes relevant, and there are strong arguments why the latter should be pursued by e.g. linking statutory retirement ages to longevity. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed.     

Testing theories of reciprocity: Do motivations matter?

One of the key issues for understanding reciprocity is how agents evaluate the kindness of an action. In this paper we investigate experimentally the hypothesis that the motivation driving an action is relevant for its perceived kindness and, as a consequence, for reciprocal behavior. In particular, we examine the hypothesis that, for a given distributional outcome, positive reciprocity is less strong in response to strategically motivated actions than to non-strategically motivated actions. Our results indicate that, both at the aggregate and the individual level, reciprocity is significantly stronger when strategic motivations can be ruled out. These findings suggest that intentions matter and, in particular, that models of intention-based reciprocity should take into account the nature of the motivations behind choices.     

Is there a profit premium for market-oriented firms? A panel data investigation

ABSTRACT

This paper provides an empirical investigation of the impact of market orientation on firms' economic performance during the period 1998–2012 using a panel of Italian manufacturing firms. We introduce a dynamic concept of market orientation, in that we define a market-oriented firm as one that persistently undertakes product and marketing innovation, while at the same time introducing organizational changes and training efforts to manage and improve its knowledge assets over the long term. This notion of market orientation is therefore crucially related to the so-called dynamic capability approach. The related empirical model shows that being a market-oriented firm significantly affects profitability, in a framework in which this latter is simultaneously estimated with productivity, thus allowing for more precise estimates of the profit premium which is earned accordingly.     

Exchange rates forecasting: local or global methods?

Exchange rates forecasters usually assume that local methods (nearest neighbour) dominate the global ones (neural networks or genetic programming, for example). In this article, first, we use different generalizations of the standard nearest neighbours to predict the dynamic evolution of the Yen/US$ and Pound Sterling/US$ exchange rates one-period ahead. Second, we compare our results with those employing global methods such as neural networks, genetic programming, data fusion and evolutionary neural networks. Finally, we find out the existence of predictable structures τ?periods ahead. Our results reveal a slightly but significant forecasting ability for one-period ahead which is lost when more periods ahead are considered, and no important predictive differences between local and global methods have been found.     

Testing for unit roots: a simple alternative to Dickey—Fuller

This ariticle proposes a very simple test for a unit root in a time series which is based on the residual autocorrelation function from a regression of the observed series on a linear trend. The test statistic is proportional to the maximum lag length for which the residual autocorrelations at all lower lag lengths are stickly positive. Critical values for the test are calculated using Monte Carlo simultation assuming a random walk DGP. Its robustness properties to different I(1) DGPs are examined along with its power characteristics. These are found to compare very favourably to those of Dickey–Fuller-type tests.