Ex post tests for short-and long-run optimization

The purpose of this paper is to develop tests of long-run equilibrium models where the long-run is defined as the state where the observed levels of output and capital are consistent with optimizing behavior. We use the implied relationship between a restricted translog cost function and derived demand equations to provide a series of nested tests which can be interpreted as ex post tests for short- and long-run optimization behavior. A set of parameter restrictions on the translog system are specified for testing whether observable levels of capital and/or output of a firm correspond to the long-run optimal level. Our tests of the validity of long-run equilibrium specifications are based on data for 28 German industries for the period 1960-1981. For most of the industries the set of restrictions implied by long-run equilibrium had to be rejected.     

Cointegration of U.S. budget and current account deficits: Twins or strangers?

In this paper the authors employ the cointegration approach to explore empirically the existence of a possible long-run equilibrium relationship between the U.S. budget deficits and the current account deficits. This study uses annual nominal data in levels for the postwar period 1946–1988. Both the DW and the ADF tests confirm that the two deficits are not cointegrated. It implies that the two deficits have no possibility of reverting to a long-run equilibrium relation.     

A component model for dynamic correlations

We propose a model of dynamic correlations with a short- and long-run component specification, by extending the idea of component models for volatility. We call this class of models DCC-MIDAS. The key ingredients are the Engle (2002) DCC model, the Engle and Lee (1999) component GARCH model replacing the original DCC dynamics with a component specification and the Engle et al. (2006) GARCH-MIDAS specification that allows us to extract a long-run correlation component via mixed data sampling. We provide a comprehensive econometric analysis of the new class of models, and provide extensive empirical evidence that supports the model’s specification.     

Estimating total factor productivity using parametric,nonstochastic cost frontiers

The standard approach to measuring total factor productivity can produce biased results if the data are drawn from a market that is not in long-run competititve equilibrium. This article presents a methodology for adjusting data on output and variable inputs to the values they would have if the market were in long-run competitive equilibrium, given the fixed inputs and input prices. The method uses nonstochastic, parametric translog cost frontiers and calculates equilibrium values for output and varible inputs using an iterative linear programming procedure. Data from seven industries for 1970–1979 are used to illustrate the methodology.The editor for this paper was William H. Greene.     

To what extent are public savings offset by private savings in the OECD?

The substitutability of private and public savings has implications for the effectiveness of fiscal policy. Using annual data for the period 1970–2004, this study re-examines long-run relationships between OECD private and public savings rates. However, unlike previous work, panel data unit root and cointegration tests are employed. The results confirm substitutability where strong Ricardian Equivalence is rejected for the entire OECD panel. There is support for weak Ricardian Equivalence with less than perfect substitutability. Indeed, it is argued that existing studies most likely overstate the extent of long-run substitutability particularly with regard to EU countries. I am very grateful for the helpful comments provided by the Editor and an anonymous referee. Any remaining errors are my own.     

Mexico’s balance of payments and exchange rates: a cointegration analysis

Mexico’s recurrent economic crises have cast serious doubts on the existence of a long-run relationship between the country’s balance-of-payments and exchange rates. In this paper, cointegration and vector autoregression techniques are applied to Mexico’s data covering the period 1971 through 1988. Despite the presence of nonstationarity, the statistical analysis supports a long-run relationship between changes in international reserves and the exchange rate and changes in domestic credit. Further multivariate Granger causality tests, together with innovation accounting, indicate that Mexico’s monetary authorities adjust domestic assets to sterilize balance-of-payments deficits in a futile attempt to control its monetary policy.     

Household borrowing and metropolitan housing price dynamics – Empirical evidence from Helsinki

This article argues that, especially in the absence of sufficient direct data on credit constraints, it is reasonable to add a household debt variable in an empirical model studying housing price dynamics. This is because household borrowing is likely to reveal information regarding the credit constraints faced by households. Moreover, debt may also give information on expected income growth and interest rate movements. The aim of this study is to examine empirically if household borrowing data, indeed, is of importance in a dynamic housing price model. In line with the prior expectations, it is found that housing appreciation in the Helsinki Metropolitan area is Granger caused by the household debt-to-GDP ratio both in the short and in the long run. Causality from the housing market to credit, in turn, seems to run only through a cointegrating long-run relation. While the estimated long-run relation between housing prices, income and debt-to-GDP ratio appears to have remained stable through the sample period (1975Q1-2006Q2), the short-run dynamics changed somewhat due to the financial liberalization in the late 1980s. The stability of the long-run relation implies that the loan data are able to cater, at least to a notable extent, for the effect of the changes in Finnish households’ liquidity constraints on housing demand. In line with previous literature, it is also found that housing price adjustment is sluggish and includes notable backward-looking features.     

A time series analysis of real wages,consumption and asset returns

This paper re-examines whether the time series properties of aggregate consumption, real wages, and asset returns can be explained by a neoclassical model. Previous empirical rejections of the model have suggested that the optimal labour contract model might be appropriate for understanding the time series properties of the real wage rate and consumption. We show that an optimal contract model restricts the long-run relation of the real wage rate and consumption. We exploit this long-run restriction (cointegration restriction) for estimating and testing the model, using Ogaki and Park's (1989) cointegration approach. This long-run restriction involves a parameter that we call the long-run intertemporal elasticity of substitution (IES) for non-durable consumption but does not involve the IES for leisure. This allows us to estimate the long-run IES for non-durable consumption from a cointegrating regression. Tests for the null of cointegration do not reject our model. As a further analysis, our estimates of the long-run IES for non-durable consumption are used to estimate the discount factor and a coefficient of time-nonseparability using Hansen's (1982) Generalized Method of Moments. We form a specification test for our model à la Hausman (1978) from these two steps. This specification test does not reject our model. © 1996 John Wiley & Sons, Ltd.     

Soviet Household Saving Function

In this paper, the Soviet household saving function is estimated using reconstructed data from the unpublished archival material: the Soviet family budget survey data. In addition, a shortage indicator is developed to capture both household purchasing power in comparison with the availability of consumer goods in the official market and the spillover of the household demand for consumer goods from the official retail market to the secondary one. A long-run solution of the Soviet household saving function, which includes a shortage indicator as one of the independent variables, is estimated using these data. The reliability of the long-run solution is confirmed by the short-run dynamics of the Soviet household saving function, which satisfy super-exogeneity, parameter constancy, and several diagnostic tests. The highly significant coefficient of the shortage indicator suggests that Soviet household saving behaviour was affected by shortages of consumer goods during 1965–1989. This revised version was published online in July 2006 with corrections to the Cover Date.     

Asymptotic consequences of neglected dynamics in individual effects models*

We assess the asymptotic consequences of estimating static models based on cross-section or panel data, when in reality the data are generated by a dynamic relationship, involving lagged dependent and current and lagged exogenous variables as well as individual effects. If the exogenous variable follows a stationary process, then the static estimators usually underestimate its long-run effect. This inconsistency is less severe, the higher the autocorrelation of the exogenous variable. If the exogenous variable follows a random walk with or without individual-specific drift, then the estimators are found to be consistent for the long-run effect.     

Oil exports and the Iranian economy

This paper presents an error-correcting macroeconometric model for the Iranian economy estimated using a new quarterly data set over the period 1979Q1–2006Q4. It builds on a recent paper by the authors, Esfahani, Mohaddes, and Pesaran (in press), which develops a theoretical long-run growth model for major oil exporting economies. The core variables included in this paper are real output, real money balances, inflation, exchange rate, oil exports, and foreign real output, although the role of investment and consumption are also analysed in a sub-model. The paper finds clear evidence for the existence of two long-run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. The results show that real output in the long run is influenced by oil exports and foreign output. However, it is also found that inflation has a significant negative long-run effect on real GDP, which is suggestive of economic inefficiencies and is matched by a negative association between inflation and the investment–output ratio. Finally, the results of impulse responses show that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.     

Long-run consequences of debt

Empirical evidence suggests that both public and private debt may have long-run detrimental effects on the economy. However, theoretical works have not provided a unique explanation to the issue. In this paper, therefore, we propose a framework that is able to describe the long-run effects of different kinds of debt. We introduce a stock-flow consistent dynamic model where the economy is represented as a network of trading relationships among agents. Debt contracts are one of such relationships. The model is characterized by a unique and stable steady-state and predicts that: (i) aggregate income is always limited from the above by the money supply; (ii) debts cause in the long-run a redistribution of borrowers’ wealth and income in favor of lenders; (iii) the redistribution is magnified by the level of the interest rate and (iv) by the degree of debt persistence. In the aggregate this may also lower the average marginal propensity to spend and nominal income, providing therefore a clear-cut explanation to the empirical evidence.     

Nonlinear minimization estimators in the presence of cointegrating relations

In this paper, we consider estimation of a long-run and a short-run parameter jointly in the presence of nonlinearities. The theory developed establishes limit behavior of minimization estimators of the long- and short-run parameters jointly. Typically, if the long-run parameter that is present in a cointegrating relationship is estimated, its estimator will be superconsistent. Therefore, we may conjecture that the joint minimization estimation of both parameters jointly will result in the same limit distribution for the short-run parameter as if the long-run parameter was known. However, we show that unless a regularity condition holds, this intuition is false in general. This regularity condition, that clearly holds in the standard linear case, is identical to the condition for validity of a two-step Granger–Engle type procedure. Also, it is shown that if the cointegrated variables are measured in deviation from their averages, the standard asymptotic normality result (that one would obtain if the long-run parameter was known) holds.     

The J-Curve at industry level: Evidence from Sweden–US trade

Previous research that investigated the impact of real depreciation of kronor on Swedish trade balance used trade data either between Sweden and the rest of the world or between Sweden and each of her trading partners. Not much support was provided for a significant effect, especially in the case of Swedish–US trade. In this paper we consider the trade flows between Sweden and the US one more time and try to disaggregate the data by industry. We consider the trade balance of each of the 87 industries that trade between the two countries and investigate the short-run and the long-run effects of real depreciation of kronor on each industry's trade balance. While we find short-run significant effects in the majority of the industries, the short-run effects last into the long-run favorable effects only in 23 of 87 industries.     

Testing the Stability of a Production Function with Urbanization as a Shift Factor

Urban economists have long sought to explain the relationship between urbanization levels and output. In this paper we revisit this question and test the long-run stability of a production function including urbanization using non-stationary panel data techniques. Our results show that a long-run relationship between urbanization, output per worker and capital per worker cannot be rejected for either our sample of 30 developing countries or our sample of 22 developed countries. We do find, however, that the sign and magnitude of the impact of urbanization varies considerably across the countries. In addition, we estimate the long-run average effects on GDPW of urbanization and capital. These results offer new insights and potential for dynamic urban models rather than the simple cross-section approach.     

Dividend growth, stock valuation, and long-run risk

In this paper, we integrate the long-run concept of risk into the stock valuation process. We use the intertemporal consumption capital asset pricing model to demonstrate that a stock’s long-run dividend growth is negatively related to its current dividend-price ratio and positively related to its long-run covariance between dividends and consumption. Then, we show that the equilibrium price of a stock is determined by its current dividend, long-run dividend growth, and long-run risk. In all, our work suggests that risk cumulated over many periods represents an important parameter in assessing the theoretical value of a firm.     

The term structure of cross-sectional dispersion of expectations in a Learning-to-Forecast Experiment

In this paper, we present the results of a Learning-to-Forecast Experiment (LtFE) where we eliciting short- as well as long-run expectations regarding the future price dynamics in markets with positive and negative expectations feedback. Comparing our results on short-run expectations with the LtFE literature, we prove that eliciting long-run expectations has no impact on the price dynamics nor on short-run expectations formation. In particular, we confirm that the Rational Expectation Equilibrium (REE) is a good benchmark only for the markets with negative feedback. Interestingly, our data show that while the term structure of the cross-sectional dispersion of expectations is convex in positive feedback markets, it is concave in negative feedback markets. Differences in the slope of the term structure stem from diverse degrees of uncertainty regarding the evolution of prices in the two feedback systems: (1) in the negative feedback system, the convergence of the price to the REE reflects a tendency for coordination of long-run expectations around the fundamental value; (2) conversely, oscillatory price dynamics observed in the positive feedback system is responsible for the diverging pattern of long-run expectations. Finally, we propose a new measure of heterogeneity of expectations based on the scaling of the dispersion of expectations over the forecasting horizon.

     

The long-run implications of the production smoothing model of inventories: An empirical test

This paper provides an empirical test of the long-run implications of the production smoothing model of inventories, the dominant framework for inventory investment research in the past. Intertemporal models of a firm holding inventories of finished goods predict a long-run relationship between inventories, shipments, factor input prices, and the real interest rate which is tested here using cointegration test procedures. These tests provide little support for the predictions of the production smoothing model. In most of the data sets used, test statistics indicate that inventories, shipments, factor input prices, the nominal interest rate, and the inflation rate maintain a long-run equilibrium relationship but parameter estimates of cointegrating vectors are often implausible, typically rejecting hypotheses implied by structural models of the production smoothing motive for holding inventories.     

Rent Control and The Supply of Housing Services: The Brookline Massachusetts Experience

A bstract . The hypothesis that the short-run and long-run supply of housing services is unaffected by rent control is examined. It has been asserted that total housing services may remain unchanged when tenant supplied services are included and that capital improvements may return to normal after the initial loss in property values. Using data on health code violations and building permits from a town in metropolitan Boston , the analysis concludes that rent control diminishes the total supply of housing services in the short-run and reduces capital expenditures to maintain and improve housing services in the long-run.     

Explanation for market response to seasoned equity offerings

In this paper, we use a multivariate framework to extend the recent univariate seasoned equity offering (SEO) research that investigated the valuation impact of inside ownership. Our multivariate findings re-enforce and add to the univariate findings as we show that the inside ownership level is a consistent factor in accounting for short-run and long-run returns around SEOs, while the decrease in inside ownership has no impact on short-run returns but influences long-run returns in a manner inconsistent with signaling theory. Compared to prior research, our regression tests do a much better job of accounting for returns associated with SEO announcements. For short-run regression tests, the four major factors associated with superior stock returns are: lower underpricing; greater profitability prior to SEO; lower inside ownership level; and, less stock price variability prior to SEO. For long-run regression tests, the four major conditions linked to superior returns are: greater profitability prior to SEO; smaller inside ownership level; relative size of the offering; and, greater decrease in inside ownership level.