Interest linkages between the US,UK and German interest rates: should the UK join the European Monetary Union?

In light of continuing mixed results in the literature, this paper re‐examines the German Dominance Hypothesis (GDH) and considers whether the UK should join the Eurozone. For this purpose, short‐term interest rate relationships between the UK, Germany, the Eurozone and the USA, for the period January 1982 to June 2007, are studied. The policy implication of a loss of monetary autonomy for the UK in favour of Germany or the European Central Bank (ECB) would give support to the UK joining the EMU as an economic response. From the early 1980s the Bundesbank’s responsibility was to use money growth targets to keep average inflation rate down in the long run. This long run objective suggests that an appropriate methodology for testing the GDH is to test whether the German stochastic trend is a driving stochastic trend. In other words we determine whether a permanent shock to the German interest rate has a permanent effect on the UK interest rate. To this end the structural shocks in a VECM are identified by imposing long‐run restrictions of the type developed in King et al. (1991). We apply the same techniques to testing whether the UK has suffered a loss of monetary autonomy in favour of the ECB.     

Pursuing the wrong options? Adjustment costs and the relationship between uncertainty and capital accumulation

Abel and Eberly (1999) prove that uncertainty has an ambiguous effect on long run capital accumulation in a real options model. We show that, with adjustment costs quadratic in investment, more uncertainty reduces capital and this effect may be large.     

A two-country dynamic Heckscher–Ohlin model with physical and human capital accumulation

We study a two-country endogenous growth model in which the long-run growth is propelled by the accumulation of physical and human capital. We show that in the integrated world economy, there exists a unique and locally saddlepoint stable balanced growth equilibrium. We also show that the incorporation of adjustment costs in the process of human capital accumulation leads to a lower long-run growth rate. We then show that, in the 2-country world economy with international trade, balanced growth is possible. Finally, we present a dynamic Heckscher–Ohlin theorem concerning the pattern of international trade. We appreciate the constructive comments from an anonymous referee which have improved this paper significantly. We acknowledge also with gratitude the valuable comments of Hideyuki Adachi, Kosuke Aoki, Daniel Bernhofen, Eric Bond, Koichi Futagami, Ronald Jones, Tamotsu Nakamura and Raymond Riezman on earlier versions. We appreciate also the beneficial comments from the participants of the GEP conference on New Directions in International Trade Theory held in the University of Nottingham and of the Adachi OB Workshop in Kobe University.     

Financialization and the rentier income share – evidence from the USA and Germany

During the past two decades, there has been a shift of significance from the real to the financial sector. In the course of (financial) globalization, measures of liberalization and deregulation have contributed to a strengthening of financial capital. The concept of shareholder value orientation has become more powerful, capital income has increased tremendously, while real wages have stagnated. Most industrial countries have experienced a decline in the share of labor income. Based on a review of empirics and literature, this paper seeks to determine who gained from the fall in the labor share of income in the USA and Germany, respectively. If financialization is indeed responsible for the decline, rentiers should be the beneficiaries. In order to identify the relevant effects, the profit share of the two countries under observation is split between the share of retained earnings and the share of net property income (= rentiers’ income) using a modification of the approach chosen by Epstein and Jayadev (2005 Epstein, G. and Jayadev, A. 2005. “The rise of rentier incomes in OECD countries: Financialization, central bank policy and labor solidarity”. In Financialization and the world economy, Edited by: Epstein, G. Cheltenham: Edward Elgar.  [Google Scholar]). The evidence presented shows that the development of the rentier income share indeed corresponds quite well with the stages of development of financialization in the two different countries: in the US, where the important shift towards financialization occurred in the early 1980s, the rentiers’ share of income shows a corresponding leap upwards exactly at that time and remains on a higher level until the end of the observation period. In Germany, the process of financialization started much later – in the beginning of the 1990s – and followed a much more gradual transition, which is perfectly mirrored by the development of income shares: from the 1990s onwards, the rentiers’ income share gradually increased over time.     

Cyclical and political influences on the size distribution of income in the US (1959–1989)

This study addresses the question of whether exchange rate pass-through into the import price is symmetric between appreciation and depreciation of the home currency. The dramatic increase of the dollar in the early 1980s and the subsequent decline provided a necessary setting for testing whether there was a structural change in the exchange rate pass-through. Examining import price data for 98 disaggregated SIC industries in the US manufacturing sector and the US import price for all commodities, mixed evidence is found regarding the stability of exchange rate pass-through.     

Bilateral capital flows and the exchange rate: The case of the U.S.A. vis-à-vis Canada,France, West Germany and the U.K.

After a preliminary test (with generally negative results) of the interest parity assumption, an eclectic portfolio adjustment approach, which determines an exchange pressures variable (under a régime of a managed float) is constructed, for bilateral comparisons between the United States and its major trading partners taken individually. This approach to bilateral capital flows and managed exchange rate determination appears to function reasonably well, as judged by the empirical results. Interestingly, factors specific to individual exchange markets appear to play important roles in explaining bilateral capital flows and cross exchange rates, which would not occur in a Walrasian world, with global market clearing.     

Research on China’s export structure to the US: Analysis based on the US economic growth and exchange rate

Due to the rapid appreciation of RMB, the consistent declining of the US economy and other uncertain factors, China’s export volume to the United States has declined. The paper first chooses six industries to divide them into three groups based on per capita possession of capital, then employs the monthly data from 2001 to 2008 to carry out EG two-step cointegration test, and finally analyzes the impacts of the US economic growth and the exchange rate variability on different export industries. Empirical results show that the labor-intensive industries are most susceptible to fluctuations brought by economic growth and real exchange rate, while those industries with higher per capita possession of capital are less susceptible to external factors. In the short run, the export of labor-intensive products gives an advantage to China’s foreign trade development, but in the long-run, these industries will be affected greatly by various uncertain factors and the advantages of China’s labor-intensive export industries will disappear with the shift of the international division. Therefore, the only way to guarantee the dominant position of China’s foreign trade is to develop capital and technology intensive export industries and upgrade export structure.     

Health and Income Variation – A Panel Data Study on the Developed and Less Developed Economies

In this paper, human capital in the form of ‘health status’ is introduced into a neoclassical economic growth model as one of the main factors differentiating rich and poor countries. Various panel data models are used to examine how health and other growth factors affect average income in different countries. Our main empirical finding indicates that a one-year increase in life expectancy (the health status measure) raises GDP per capita by 0.5–0.9%. Based on this result, a baseline health status can be established to help poor countries achieve a targeted economic growth rate.     

Sector-specific capital, “Bang-bang” investment,and the Filippov solution

Bang-bang investment in a two-sector growth model with immobile capital is rational and leads to a unique and globally stable long-run equilibrium along a sliding trajectory. This steady state coincides with the stationary equilibrium in the traditional model with non-sector-specific capital.This article was written while the authors were visiting scholars at Cornell University. We gratefully acknowledge financial assistance from the Erasmus University Trust Fund and the Netherlands Scientific Organization. We would like to thank, without implicating, two anonymous referees, Martijn Herrmann, Jean-Marie Viaene, Claus Weddepohl, and the participants of seminars at the University of Maryland, the University of Montreal, and Erasmus University Rotterdam for perceptive remarks and useful comments. Jeroen Hinloopen and Rien Wagenvoort provided able graphical assistance. The views expressed in this article are those of the authors and not necessarily those of the World Bank.     

Stochastic accumulation of human capital and welfare in the Uzawa–Lucas model: an analytical characterization

Stochastic growth models are often solved numerically, because they are not tractable in general. However, recent several studies find the closed-form solution to the stochastic Uzawa–Lucas model in which technological progress or population dynamics follow a Brownian motion process with one or two parameter restriction(s). However, they assume that the return on the accumulation of human capital is deterministic, which is inconsistent with empirical evidence. Therefore, I develop the Uzawa–Lucas model in which the accumulation of human capital follows a mixture of a Brownian motion process and many Poisson jump processes, and obtain the closed-form solution. Moreover, I use it to examine the nexus between human capital uncertainty, technological progress, expected growth rate of human capital, and welfare.     

A national or local phenomenon? A comparison of the US and the Chinese housing markets

This article investigates the common movements of house prices across cities as well as the macroeconomic underpinnings of the comovements in the US and China. Our empirical results indicate more differences than similarities between the US and the Chinese housing markets. The results from a Bayesian dynamic latent factor model indicate that the fluctuations of house prices across cities in the US are more a national phenomenon, while the dynamics of house prices across cities in China are mainly driven by the city-specific component. We further use VAR models to compare the roles of the underlying determinants in these two housing markets. The results show that the roles of monetary policy shocks and aggregate fluctuations in driving the common movements of house prices across cities differ substantially between the US and China at both short and long horizons.     

China’s catch-up to the US economy: decomposing TFP through investment-specific technology and human capital

We implement a neoclassical growth model that incorporates investment-specific technology (IST) modifying capital investment in the law of motion of capital and bifurcates productivity into human capital and total factor productivity (TFP) in the production function. We focus on the role of changes in the quality-adjusted price of investment goods on China’s growth by comparing the effects of IST and human capital on the decomposition of US and Chinese productivity. The results show that both human capital and IST play an important role in the decomposition of US TFP. For China, human capital accounts for an increasingly higher portion of Chinese TFP for the period 1952–2009; however, IST contributes to the explanation of TFP only after the 1979 reforms. The analysis is extended by considering the impact of IST in the consumer’s investment decision and by projecting both countries’ GDP while modelling unbalanced Chinese growth using catch-up. Our model predicts that the Chinese economy will surpass the US economy in 2024.     

The linkages,persistence, asymmetry in the volatility,the price discovery and efficiency,and the effect of the US subprime mortgage financial crisis on the spot and the futures market’s returns: the case of India

This article examines the effects of persistence, asymmetry and the US subprime mortgage crisis on the volatility of the returns and also the price discovery, efficiency and the linkages and causality between the spot and futures volatility by using various classes of the ARCH and GARCH models, and through the Granger’s causality. We have used two indices: one for spot and the other for futures, for the daily data from 12 June 2000 to 30 September 2013 from Nifty stock indices. We have then tested for ARCH effects, and subsequently employed various models of the ARCH and GARCH conditional volatility. The GARCH(1,1) model is found to be significant, and it implies that the returns are not autocorrelated and have ‘short memory’. It supports the hypothesis of the efficiency of the markets. The negative ‘news’ has more significant effect on volatility, corroborating the ‘leverage impact’ in finance on market volatility. We have also tested the volatility spillover effects. The two methods we employed support the spillover effects and the causality is bidirectional. We also have used the dummy variable for the US subprime mortgage financial crisis and found that they are statistically significant. Indian stock market is thus integrated to the world stock markets.     

Divorce and the Birth Control Pill in the US, 1950–85

This paper explores the relationship between the advent of the birth control pill and divorce rates. Women using the pill can decide when and whether to have children and whether to maintain their attachment to the labor force. This ability may increase women's autonomy, making divorce more feasible. The pill's effects are identified through a quasi-experiment exploiting differences in the language of the Comstock anti-obscenity statutes approved in the late 1800s and early 1900s in the United States. Empirical evidence from state-level data on US divorce rates 1950 to 1985 shows that sales bans of oral contraceptives have a negative impact on divorce. These findings are robust to alternative specifications and controls for observed (such as women's labor force participation) and unobserved state-specific factors, and time-varying factors at the state level. Results suggest that the impact of women's control of hormonal contraception on their autonomy is important in divorce decisions.     

From the ‘econometrics of capital punishment’ to the ‘capital punishment’ of econometrics: on the use and abuse of sensitivity analysis

The academic debate over the deterrent effect of capital punishment has intensified again with a major policy outcome at stake. About two dozen empirical studies have recently emerged that explore the issue. Donohue and Wolfers (2005 Donohue, J and Wolfers, J. 2005. Uses and abuses of empirical evidence in the death penalty debate. Stanford Law Review, 58: 791–845. [Web of Science ®] , [Google Scholar]) claim to have examined the recent studies and shown the evidence not to be robust to specification changes. We argue that the narrow scope of their study does not warrant this claim. Moreover, focusing on our two studies that they have examined, we show the deterrence findings to be robust, while their work has serious flaws and their reporting appears to be selective. The selectivity is biased towards showing ‘no deterrence’.     

A tale of two Ginis in the US, 1921–2012

Following a methodology by Jantzen and Volpert (2012), we use IRS Adjusted Gross Income data for the US (1921–2012) to estimate two Gini indices representing inequality at the bottom and the top of the income distribution, and to calculate the overall Gini as a function of the parameters underlying the two indices. A steady increase in the overall Gini since the Second World War actually hides two different periods of distributional changes. First, the increase in inequality from the mid 1940s to the late 1970s is driven by rising inequality at the bottom of the income distribution that more than offsets a decrease in inequality at the top. The implication is that middle-income earners gained relative to high-incomes, and especially relative to low-income earners. Second, the rise in the Gini after 1981 is driven by rising inequality at the top. Third, top-driven inequality follows a U-shaped trajectory consistent with Piketty and Saez (2003, 2006). Fourth, the welfare effects of the different distributional changes behind increasing inequality can be evaluated in light of the Lorenz-dominance criterion by Atkinson (1970): we argue that the rise in inequality since 1981 is much more likely to be associated with a social welfare loss net of compensating growth.