Testing a discrete switching disequilibrium model of the UK labour market

This paper develops a test procedure for serial correlation for discrete switching disequilibrium models which include both an endogenous price adjustment equation and lagged dependent variables. The tests are applied to a model of the UK labour market and the model is respecified in the light of the test results.     

Wage and price adjustment in a multimarket disequilibrium model

The estimation of wage and price adjustment equations rests heavily on the use of tension variables that aim at capturing the disequilibria in the labour and goods markets. Disequilibrium models therefore provide a natural way of endogenizing these tension variables. This paper estimates jointly a two-market disequilibrium model and a wage and price adjustment block where price and wage growth react to excess effective demands. The estimation is carried out using the simulated pseudo-maximum-likelihood methods developed by Laroque and Salaniè (1989); the results look promising as regards the estimation of even more sophisticated models.     

Unemployment,disequilibrium and the short run phillips curve: An econometric approach

The paper specifies a disequilibrium model for the aggregate labour market consisting of demand and supply functions for labour, an adjustment equation for wages as well as for prices, a transactions equation and, finally, an equation that relates measured unemployment to vacancies and to excess demand. The model has a more sophisticated treatment of dynamics than earlier disequilibrium models. The parameter estimates and the goodness-of-fit are satisfactory and the model's implications for the behaviour of several important variables are sensible. In particular, excess demand estimates computed in various ways are reasonable.     

Hedonic analysis of a housing market in disequilibrium

This paper tests the hypothesis that information about housing market activity and about specific dwellings becomes capitalized into single family dwelling prices through a disequilibrium adjustment process. A dynamic price adjustment model, which is an extension of the standard hedonic model widely used in the literature, is derived, specified, and tested with both micro and aggregated data from the city of Chicago and for the period 1972–1976. The results show that from 32 to 75% of the variance in dwelling prices, unexplained by the standard hedonic attributes under assumptions of equilibrium, is explained by market activity signals such as mortgage interest rates and neighborhood transaction rates of the preceding period. Dwellings about which there is less information, making comparison pricing difficult, are shown to command a price premium. The standard equilibrium hypothesis appears readily rejectable and better predictions are obtained from the disequilibrium specifications. Several directions for extending this line of research are discussed.     

Cointegration of price measures: Evidence from the G-7

This study addresses index-dependency of empirical results associated with the purchasing power parity (PPP) relationship. Using four key price indices involving the G-7 nations, empirical tests for long-run co-movement are conducted. A test for linear restrictions is imposed. The speeds of adjustment are calculated for statistically significant linear combinations. The speed of the short-run response to disequilibrium differs both within and across countries. The seven-country average reveals that the CPI has the quickest recovery response to a one-time disturbance. The findings suggest that PPP results are not dependent upon the choice of index when an explicit set of indices is cointegrated.(JEL F3)     

Price adjustment and market structure: A single-industry study

The administered price hypothesis of Gardnier Means has continued to attract a great deal of empirical attention. Unfortunately, the results of all this research have not been consistent. The present paper tries to circumvent the usual empirical difficulties by using a lagged adjustment model for a single industry with geographically separate markets. It examines the rate of price adjustment and the frequency of price changes for newspaper advertising rates for a sample of local papers in Ireland. Adjustment equations are run for each newspaper using labour and materials cost indices as explanatory variables. The partial adjustment coefficient estimates are then related to market structure and firm specific characteristics.     

The lag structure of option price

The price of common stock warrants do not adjust immediately to changes in common stock prices. This lag is inconsistent with the ‘efficient market’ hypothesis. Based on daily closing prices this lag was measured and found to be a combination of the adjustment to stock price and to the adjustment of ‘other’ variables, i.e., positive serially correlated disturbance terms. A single equation model simultaneously estimating the parameters of the serial correlation and the coefficients of the lagged stock price indicate a substantial deviation from efficiency. Various simple strategies designed to exploit this lag are then tested.     

Long and Short Run Determinants of Small and Medium Size Enterprise Share: The Case of Venezuelan Manufacturing

Two recent studies of SME share determination have employed a partial adjustment model which specifies disequilibrium as the sole means of explanation. Contemporaneous information is found to be crucial in both analyses and suggests forward looking behaviour in the equilibrium specification. Time series data available for Venezuela allows the testing of such an equilibrium using the Engle and Granger (1987) error correction methodology. We find that current dated variables are important in the short rather than long run determination of SME shares and that only information known at the time the equilibrium is formed enters the long run component. The primary factors explaining equilibrium share are barriers to entry, factor mix, enterprise modernisation and a new exogenous proxy variable, GDP. The main determinants of short run movements are factor mix and enterprise modernisation. This revised version was published online in July 2006 with corrections to the Cover Date.     

Convergence of Bayesian learning to general equilibrium in mis-specified models

A central unanswered question in economic theory is that of price formation in disequilibrium. This paper lays the groundwork for a model that has been suggested as an answer to this question in, particularly, Arrow [Toward a theory of price adjustment, in: M. Abramovitz, et al. (Ed.), The Allocation of Economic Resources, Stanford University Press, Stanford, 1959], Fisher [Disequilibrium Foundations of Equilibrium Economics, Cambridge University Press, Cambridge, 1983] and Hahn [Information dynamics and equilibrium, in: F. Hahn (Ed.), The Economics of Missing Markets, Information, and Games, Clarendon Press, Oxford, 1989]. We consider sellers that monopolistically compete in prices but have incomplete information about the structure of the market they face. They each entertain a simple demand conjecture in which sales are perceived to depend on the own price only, and set prices to maximize expected profits. Prior beliefs on the parameters of conjectured demand are updated into posterior beliefs upon each observation of sales at proposed prices, using Bayes’ rule. The rational learning process, thus, constructed drives the price dynamics of the model. Its properties are analysed. Moreover, a sufficient condition is provided, relating objectively possible events and subjective beliefs, under which the price process is globally stable on a conjectural equilibrium for almost all objectively possible developments of history.     

Multiple capital inputs, Q, and investment spending

Despite their explicit treatment of dynamics and solid theoretical basis, investment models based on the Brainard-Tobin Q have recorded a generally disappointing empirical performance. When the Q model is expanded to recognize the possibility that the value of the firm depends on two or more capital inputs with differing adjustment cost technologies, the econometric equation following from optimizing behavior includes Q as well as a set of additional explanatory variables. The importance of these omitted variables is assessed, and the capital homogeneity assumption for equipment and structures implicit in Conventional Q models is rejected. The Multi-Capital Q model is then extended in two ways: (i) adding inventory, research and development, and labor as quasi-fixed factors and (ii) exploring the sensitivity of the instrumental variables estimates to normalization. We conclude that the Multi-Capital Q model is a useful extension that overcomes an important omitted variables problem in the Conventional Q framework.     

Testing the exogeneity specification in the complete dynamic simultaneous equation model

It is shown that in the complete dynamic simultaneous equation model exogenous variables cause endogenous variables in the sense of Granger (1969) and satisfy the criterion of econometric exogeneity discussed by Sims (1977a), but that the stationarity assumptions invoked by Granger and Sims are not necessary for this implication. Inference procedures for testing each implication are presented and a new joint test of both implications isderived. Detailed attention is given to estimation and testing when the error vector of the final form of the complete dynamic simultaneous equation model is both singular and serially correlated. The theoretical points of the paper are illustrated by testing the exogeneity specification in a small macroeconometric model.     

Half‐panel jackknife fixed‐effects estimation of linear panels with weakly exogenous regressors

This paper considers estimation and inference in linear panel regression models with lagged dependent variables and/or other weakly exogenous regressors when N (the cross‐section dimension) is large relative to T (the time series dimension). It allows for fixed and time effects (FE‐TE) and derives a general formula for the bias of the FE‐TE estimator which generalizes the well‐known Nickell bias formula derived for the pure autoregressive dynamic panel data models. It shows that in the presence of weakly exogenous regressors inference based on the FE‐TE estimator will result in size distortions unless N/T is sufficiently small. To deal with the bias and size distortion of the FE‐TE estimator the use of a half‐panel jackknife FE‐TE estimator is considered and its asymptotic distribution is derived. It is shown that the bias of the half‐panel jackknife FE‐TE estimator is of order T^?2, and for valid inference it is only required that N/T³→0, as N,T→∞ jointly. Extension to unbalanced panel data models is also provided. The theoretical results are illustrated with Monte Carlo evidence. It is shown that the FE‐TE estimator can suffer from large size distortions when N>T, with the half‐panel jackknife FE‐TE estimator showing little size distortions. The use of half‐panel jackknife FE‐TE estimator is illustrated with two empirical applications from the literature.     

Sluggish quantity adjustment in a non-clearing market—a disequilibrium econometric application to the loan market

The paper argues that the estimated speed of price adjustment in a disequilibrium econometric model is likely to be biased if allowance is not made for quantity adjustment inertia on both sides of the market. Furthermore, if the model estimated is static rather than dynamic then, in certain circumstances, an excess demand regime may be mistaken for one of excess supply and vice-versa. In an empirical application to the loan market for the clearing banks in Ireland we can claim to have obtained some support for this belief.     

Moment-based estimation of smooth transition regression models with endogenous variables

Nonlinear regression models have been widely used in practice for a variety of time series and cross-section datasets. For purposes of analyzing univariate and multivariate time series data, in particular, smooth transition regression (STR) models have been shown to be very useful for representing and capturing asymmetric behavior. Most STR models have been applied to univariate processes, and have made a variety of assumptions, including stationary or cointegrated processes, uncorrelated, homoskedastic or conditionally heteroskedastic errors, and weakly exogenous regressors. Under the assumption of exogeneity, the standard method of estimation is nonlinear least squares. The primary purpose of this paper is to relax the assumption of weakly exogenous regressors and to discuss moment-based methods for estimating STR models. The paper analyzes the properties of the STR model with endogenous variables by providing a diagnostic test of linearity of the underlying process under endogeneity, developing an estimation procedure and a misspecification test for the STR model, presenting the results of Monte Carlo simulations to show the usefulness of the model and estimation method, and providing an empirical application for inflation rate targeting in Brazil. We show that STR models with endogenous variables can be specified and estimated by a straightforward application of existing results in the literature.     

Spatial Vector Autoregressions

Abstract

A spatial vector autoregressive model (SpVAR) is defined as a VAR which includes spatial as well as temporal lags among a vector of stationary state variables. SpVARs may contain disturbances that are spatially as well as temporally correlated. Although the structural parameters are not fully identified in SpVARs, contemporaneous spatial lag coefficients may be identified by weakly exogenous state variables. Dynamic spatial panel data econometrics is used to estimate SpVARs. The incidental parameter problem is handled by bias correction rather than more popular alternatives such as generalised methods of moments (GMM). The interaction between temporal and spatial stationarity is discussed. The impulse responses for SpVARs are derived, which naturally depend upon the temporal and spatial dynamics of the model. We provide an empirical illustration using annual spatial panel data for Israel. The estimated SpVAR is used to calculate impulse responses between variables, over time, and across space. Finally, weakly exogenous instrumental variables are used to identify contemporaneous spatial lag coefficients.     

A continuity property for local price adjustment mechanisms

This paper makes a case that a (local) continuity property is a reasonable one for any local price adjustment mechanism. This property means that if the starting points (i.e., initial prices) of the adjustment process are ‘close' to one another, and if the characteristics of the economies are ‘close' to one another, then, given any price adjustment mechanism, agents should compute equilibria that are ‘close' to one another. Under preferences which satisfy a ‘surjectivity hypothesis', it is shown that the tâtonnement process satisfies this continuity property on a nice subset of the space of all economies. A characterization of these economies for which the tâtonnement process is locally stable is given. Chart logic is a useful way to think about the path dependent property of implied volatility and about the relationship between implied volatility and historical volatility.     

住房价格与交易量的关系:基于动态存量-流量模型的解释

以住房动态存量-流量模型为基础,通过研究外生冲击下住房价格、建设量以及存量的变化过程,提出了住房价格与交易量关系的一种解释方法.研究发现,传统的流动性约束、信息不对称等理论不适合中国的住房市场,而新建住房的滞后效应导致存量调整的时间过长,是住房价格和交易量正向剧烈波动的主要原因.     

Why a simple herding model may generate the stylized facts of daily returns: explanation and estimation

The paper proposes an elementary agent-based asset pricing model that, invoking the two trader types of fundamentalists and chartists, comprises four features: (i) price determination by excess demand; (ii) a herding mechanism that gives rise to a macroscopic adjustment equation for the market fractions of the two groups; (iii) a rush towards fundamentalism when the price misalignment becomes too large; and (iv) a stronger noise component in the demand per chartist trader than in the demand per fundamentalist trader, which implies a structural stochastic volatility in the returns. Combining analytical and numerical methods, the interaction between these elements is studied in the phase plane of the price and a majority index. In addition, the model is estimated by the method of simulated moments, where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index. A (parametric) bootstrap procedure serves to set up an econometric test to evaluate the model’s goodness-of-fit, which proves to be highly satisfactory. The bootstrap also makes sure that the estimated structural parameters are well identified.