Dynamic factor demand in a rationing model

In this paper, a dynamic decision model of the firm with a delayed adjustment of employment and investment is developed. Special attention is devoted to dynamic inefficiencies, i.e. underutilizations of the capital stock and labour hoarding. Market disequilibrium is introduced by allowing for a sluggish adjustment of wages and prices. The model of the firm is complemented by explicit aggregation, and the aggregate model is estimated for the FRG for the period 1960 to 1989. The empirical results reveal that dynamic adjustment constraints for employment and capital contributed to the persistence of unemployment in Germany in the 1980s.     

R&D subsidies in a model of growth with dynamic market structure

This paper presents the effects of an R&D subsidy in a Schumpeterian general equilibrium model with rich industry dynamics. R&D subsidies raise the long-run growth rate, but they also raise the level of industry concentration. In the model firms compete for market share through process R&D endogenously determining the market structure within and across industries. Endogeneity of the market structure allows for analysis of changes in the moments of the firm size distribution in response to policy. R&D subsidies primarily benefit large incumbent firms who increase their innovation rates creating a greater technological barrier to entry. Concentration increases with fewer firms and a higher variance in the market shares. In general equilibrium, the greater distortions in the product market cause the wage rate to fall which leads to increased turnover rates. In addition, the analysis demonstrates that the model captures a large number of empirical regularities described in the industrial organization literature, but absent from most endogenous growth models. These features, such as entering firms are small relative to incumbents, the hazard rate of exit is negatively related to firm size, and large firms spend more on R&D than small firms play important roles in understanding the impact of R&D subsidies on the economy.     

A dynamic model of demand for Mediterranean tourism

A dynamic econometric model was specified in order to estimate tourism consumption changes by Northern European countries and the USA for major Mediterranean destinations. The model employed a flexible framework for modelling short-term dynamics as well as the long run effects of a range of variables of specific interest to the countries considered. The estimated model provided useful information for tourism demand. The income elasticities demonstrated considerable differences in tourism demand preferences between origin countries and between traditional and newly developing destinations. The own and substitute price elasticities indicated the importance of effective prices in determining tourism receipts of the destinations.     

A dynamic heterogeneous labour demand model for German manufacturing

There is currently general agreement amongst economists that the discount rate to compute the present value of benefits and costs in the economic evaluation of public policies is defined according to the social time preference approach. However, whether this rate has to be used for the discount of non-monetary health consequences is a question for which there is no satisfactory reply. In this paper, it is argued that such a reply rests on the estimation of the relationship between the individual time preference for health and money in the contexts of private and social choice. In support of this argument an empirical analysis has been carried out in which the individuals making-up a representative sample of the population of Zaragoza (Spain) have been faced with a series of hypothetical inter-temporal choices. Their replies have implicitly revealed their temporal preference rates and have led to the conclusion that health consequences are discounted at a higher rate than monetary consequences. This would appear to be contrary to the standard practice applied in the economic valuation of health programmes.     

A dynamic econometric model of Thailand manufacturing energy demand

The purpose of this article is to employ the dynamic translog framework to model inter-factor and inter-fuel energy demand for the Thai manufacturing sector. The Denny et al. (1981) and Lynk (1989) framework, which proposes a dynamic adjustment for capital stock is employed to motivate the estimated of factor demand and fuel share equations. Three factors: energy, labour and capital; and five fuel types: fuel oil, diesel oil, liquified petroleum gas (LPG), electricity, and coal and lignite; are examined. Regression diagnostics support the empirical specification. Numerous factor and fuel substitution possibilities are identified, with some policy implications described.     

An application of dynamic specifications of factor demand equations to interfuel substitution in US industrial energy demand

In a recent paper, Jones (1995) [A dynamic analysis of the interfuel substitution in US industrial energy demand. J. Bus. Econ. Stat. 13 (4), 459–465] presents a dynamic analysis of interfuel substitution in US industry energy demand. The author concludes that a dynamic linear logit model is ‘superior' to a comparable dynamic translog model. The latter in fact violates concavity conditions whilst the logit formulation does not. This paper shows first of all that the dynamic formulation of the translog used in Jones (1995) is mis-specified. In fact, a parsimonious error-correction model (ECM) ‘dominates' alternative dynamic formulations, amongst which the partial adjustment mechanism used by the author. The ECM is able to generate optimal estimates of long-run and short-run elasticities, and it satisfies the concavity conditions of the cost function. Further, the theoretical framework used in this paper is the one recently proposed by Urga (1996) [On the identification problem in testing dynamic specification of factor demand equations. Econ. Lett. 52, 205–210] and Allen and Urga (1998) [Derivation and estimation of interrelated factor demands from dynamic cost function. Forthcoming in Economica]. It allows one to identify all coefficients (long-run and short-run) of the dynamic formulation via the joint estimation of the ‘effective' (short-run) cost function and the set of factor demand equations. This strategy solves, amongst other things, the parameter identification problem within the set of demand equations themselves, an issue which was originally noted by Anderson and Blundell (1982) [Estimation and hypothesis testing in dynamic singular equation systems. Econometrica, 1559–1571], re-addressed by Friesen (1992) [Testing dynamic specification of factor demand equations for US manufacturing. Rev. Econ. Stat. LXXIV (2), 240–250] and, more recently, by Urga (1996) and Allen and Urga (1998).     

Conditional and unconditional food demand elasticities in a dynamic multistage demand system

This paper estimates conditional and unconditional demand elasticities in a three stage analysis of consumer demand for food and non-food items in Greece. A dynamic version of the AIDS model is specified and estimated, and full system misspecification tests applied. Correction formulas for price and expenditure elasticities are used to calculate unconditional elasticities from conditional demand sub-systems. All food items rank as price inelastic. Deviations between the calculated conditional and unconditional price and expenditure elasticities are found to be significant, demonstrating the importance of correcting conditional elasticities before they can be used for policy purposes or welfare analyses.     

Common dynamic factors in driving commodity prices: Implications of a generalized dynamic factor model

Identification of the price drivers of commodity prices is difficult because economic indicators reflect commodity prices with lead or lag, and some commodities have spillover effects to other commodities. A generalized dynamic factor model is capable of accounting for these characteristics and can be applied to panel data of monthly returns of a vast variety of commodities. The empirical results indicate that four common dynamic factors exist that account for much of the variation in the commodity returns. The identification of the common dynamic factors is conducted by interchangeably creeping an economic indicator into the commodity return panel data and examining the ratio of variance explained by the common factors. The four common factors correspond to the U.S. inflation rate, the world industrial production, the world stock index, and the price of crude oil.     

France in the global economy: a structural approximate dynamic factor model analysis

This study identifies the main shocks that cause fluctuations in French output and their channels of transmission. It uses a large-dimensional structural approximate dynamic factor model. There are three main findings. First, common shocks, especially demand shocks, which seem to originate from the U.S., play an important role in explaining French economic activity. While international trade, relative prices, and foreign direct investment (FDI) flows are the main channels of transmission, the stock market, consumer confidence, and interest rates also matter. Second, France’s integration with the rest of the world has increased over time. Third, there is some tentative evidence of regional components in explaining French output fluctuations; country-specific components also contribute. The predominance of exogenous factors affecting French output, the asymmetry in the transmission of shocks, and France’s participation in a currency area argue for making French goods, services, and labor markets as flexible as possible.     

KLEM substitutability: a dynamic flexible demand system

The theory of intertemporal budget constraint is applied to test Italian public debt sustainability, with the finding that current fiscal policy has not been following a sustainable path in the 1980s. In particular, we find that (i) while primary surplus is stationary, public debt is not, (ii) permanent shocks explain about 90% of forecast error variance of public debt, while playing a minor role in primary surplus and (iii) debt is not sustainable even if stochastic discount rates are accounted for.     

A dynamic factor model framework for forecast combination

A panel of ex-ante forecasts of a single time series is modeled as a dynamic factor model, where the conditional expectation is the single unobserved factor. When applied to out-of-sample forecasting, this leads to combination forecasts that are based on methods other than OLS. These methods perform well in a Monte Carlo experiment. These methods are evaluated empirically in a panel of simulated real-time computer-generated univariate forecasts of U.S. macroeconomic time series.     

Assessing the role of futures position substitutability in a monthly model of factor demand for softwood lumber

Empirical Economics - We combine cointegrated VAR modeling with basic neoclassical production theory in a new way that tests for, and illuminates the empirical nature of, the monthly US housing...     

Estimating dynamic demand for airlines

This paper uses an original panel dataset with posted prices and sales to estimate a dynamic demand. We find that consumers become more price sensitive as time to departure nears which is consistent with having lower valuations. This result provides empirical support to a key theoretical implication in Deneckere and Peck (2012)—high-valuation consumers purchase earlier. We also find that the number of active consumers increases closer to departure.     

Money-based underlying inflation measure for Russia: a structural dynamic factor model approach

We estimate a dynamic factor model for the cross section of monetary and price indicators. We extract the common part of the dataset’s fluctuations and decompose it into structural shocks. We argue that one of the shocks identified has empirical properties (in terms of impulse response functions) that are fully in line with the theoretically expected relationship between money growth and inflation, confirming that the process identified has the capacity for economic interpretation. Based on this finding, we decompose recent inflationary developments in Russia into those that are associated with changes in monetary stance and other shorter-lived shocks.     

A dynamic factor model for nowcasting Canadian GDP growth

This paper estimates a dynamic factor model (DFM) for nowcasting Canadian gross domestic product. The model is estimated with a mix of soft and hard indicators, and it features a high share of international data. The model is then used to generate nowcasts, predictions of the recent past and current state of the economy. In a pseudo-real-time setting, we show that the DFM outperforms univariate benchmarks, as well as other commonly used nowcasting models, such as MIDAS and bridge regressions.     

Indeterminacy in a dynamic two-country model

The purpose of this paper is to show that indeterminacy can arise in a simple competitive two-country dynamic model of international trade, free of externalities, imperfect competition, and government intervention. This seemingly surprising result is based on an assumption that there is no international credit market. As will be shown later, the assumption implies that dynamic equilibrium paths of our two-country, therefore heterogeneous consumer, model are not generally Pareto-optimal.The paper is dedicated to Professor Mukul Majumdar on the occasion of his 60th birthday with great respect. We thank Takashi Kamihigashi, Tapan Mitra and Makoto Yano for their useful comments on the earlier version of this paper.     

Donations in a recursive dynamic model

Abstract.  This paper studies how donations respond to unexpected permanent changes in income and tax rates in a recursive dynamic model. The dynamic approach yields several interesting insights. If marginal tax rates are progressive, a permanent jump in a household's income increases its consumption and donations in the short run, but has no effect in the long run. The permanent income elasticity of current donations is likely to exceed one. If the marginal tax rate is flat, the jump in income raises consumption and donations in both the short and the long run. A permanent marginal tax rate cut raises consumption and donations in the long run if marginal tax rates are progressive, while it reduces donations in the short run if it has little direct impact on tax payments. If the marginal tax rate is flat, a tax cut has a positive effect on consumption in both the short and the long run, but has an ambiguous effect on donations.     

Measuring business cycle comovements in Europe: Evidence from a dynamic factor model with time-varying parameters

Estimation results from a dynamic factor model confirm an increase in output synchronization across European countries during the run-up to the inception of EMU, but EMU by itself has not continued to foster the emergence of a common business cycle.