What drives the short-run costs of fiscal consolidation? Evidence from OECD countries

We investigate how the short-term effects of fiscal consolidation on output and employment vary with the state of the business cycle, monetary policy, public debt, the current account, and private credit. By examining the response of a large number of variables, we are also able to shed light on the transmission channels of fiscal policy. Our main finding is that short-term output multipliers are below unity, even in states in which multipliers are expected to be larger (eg when the output gap is negative or monetary policy tight). Key offsetting factors that reduce the size of multipliers and explain differences across states are the extent to which the external sector improves and monetary policy eases.     

What drives entrepreneurs underground? The role of tax morale

Using novel cross-country data, we examine whether and to what extent tax morale impacts informal entrepreneurship. Employing instrumental variables strategy, we find that countries with higher tax morale enjoy lower informal entrepreneurship.     

What drives the high moments of hedge fund returns?

We study the high-moment distribution of hedge fund returns and identify factors that drive high-moment risk. Using hedge fund monthly returns, we find a strong correlation between the first four moments of returns (i.e. mean, standard deviation (SD), skewness, and kurtosis) and different characteristics of the funds such as leverage, liquidity, incentives, and strategy-related factors. We find that after controlling for other factors, incentives-related factors and a hedge fund’s specific strategy have the greatest impact on the distribution of fund returns. Our evidence also suggests investors allocate across hedge fund characteristics while placing greater emphasis on fund strategies and incentive factors.     

What drives idiosyncratic volatility over time?

We document the patterns of market-wide and firm-specific volatility in the Portuguese stock market over the 1991–2005 period and test several explanations for the behavior of firm-level idiosyncratic volatility. Unlike previous studies we find no evidence of a statistically significant rise in firm-specific volatility. On the contrary, the ratio of firm-specific risk to total risk slightly decreases. We show that this result stems from new listings of large privatized companies that display lower firm-specific risk. Our findings are consistent with the idea that changes in idiosyncratic volatility are related to changes in the composition of the market.

What drives cross-country differences in export variety? A bilateral panel approach

A worldwide event like the 2020 Coronavirus outbreak can only reinforce the interest in modelling trade diversification as a key factor in countries’ vulnerability to external shocks. This paper adopts a detailed relative framework to study the determinants of product-level export variety in a large bilateral panel of developing and developed economies (16,770 country pairs in the period 1988–2014). We find that country pairs characterized by large differentials in productivity and in the makeup of the labour force differ in export variety patterns. This result holds after controlling for other endowments and for trade costs. Further, productivity plays a significant role in the reduction of export variety dissimilarities between countries belonging to different income groups. Hence, without successful technological convergence the low-income economies will not be able to reduce their exposure to export risk.     

What drives housing dynamics in China? A sign restrictions VAR approach

We study housing dynamics in China using vector autoregressions identified with theory-consistent sign restrictions. We study seven potential drivers: (1) population increases; (2) a relaxation of credit standards, for example, due to the shadow banking system; (3) increasing preferences towards housing, for example, due to a housing bubble, or to housing being a status asset in the marriage market; (4) an increase in the savings rate; (5) expected productivity progress; (6) changes in land supply; and (7) tax policy, a proxy for policy stimulus. Our results show that, even if all shocks play relevant roles, productivity, savings glut, and policy stimulus have been the dominant drivers. When the sample is closer to 2014, housing preferences and credit shocks increase their importance to explain house prices and volume, while population shocks explain a larger share of the dynamics of residential investment. The results show some differences if we use house price indices constructed by the government or by private sources. The official indices show smaller increases in house prices and assign a smaller role to credit and preference shocks.     

What drives inflation in New Keynesian models?

This paper estimates variants of a small-scale New Keynesian model using observations on inflation, inflation expectations and nominal interest rates. We ask whether those variables alone can tell us something about the time series properties of real marginal costs.     

What drives rural out-migration? Insights from Kosovo

Drawing on household, network and relative deprivation models of migration, this paper empirically tests the probability to migrate utilising data for agricultural households in Kosovo (circa 13,500 observations). We identify the determinants of the propensity to migrate and length of migration in the previous year, considering gender-related differences. The results reveal the significance of household/personal characteristics, farm characteristics and network effects on the propensity to migrate and length of migration in the previous year. However, we find no significant effect of relative deprivation on the propensity to migrate and length of migration. While education has a strong, positive effect on migration by women, this is not the case for men. Unprofitability and a lack of inputs, manpower and equipment, causing farmland to be left uncultivated, also stimulate out-migration.     

What drives the Bitcoin price? A factor augmented error correction mechanism investigation

This article aims to determine what drives the price of Bitcoin. To achieve this aim, a large set of data is analysed using VEC models augmented by factors representing unobservable economic forces. They have been obtained by means of principal component analysis. This method enables us to contribute to the existing literature on Bitcoin in two ways. First, we employ the dimension reduction technique to combine variables from several papers. Second, we estimate several unobservable economic concepts instead of utilizing proxy variables as is usually done. We find that the main factor driving the Bitcoin price is its popularity. Hence, our result not only confirms some previous findings but reinforces them by providing a better definition of popularity. Finally, we conclude that the Bitcoin price is not affected by supply and demand factors in the way that is natural for conventional currencies.     

What drives the reversal of the gender education gap? Evidence from Germany

We study the mechanisms that are associated with the gender education gap and its reversal in Germany. We focus on three outcomes, graduation from upper secondary school, any tertiary education and tertiary degree. Neither individual and family background nor labour market characteristics appear to be strongly associated with the gender education gap. There is some evidence that the gender gap in upper secondary education reflects the rising share of single parent households which impacts boys’ attainment more than girls’. The gender education gap in tertiary education is correlated with the development of class sizes and social norms.     

What drives technology transitions? An integration of different approaches within transition studies

This paper aims to provide a deeper understanding of transition drivers by reviewing four major strands of inquiry in transition studies: Multi Level Perspective (MLP); Strategic Niche Management (SNM); Transition Management (TM); Technological Innovation Systems (TIS). To the best of our knowledge, none of these contributions have so far provided a clear-cut classification of main drivers of transitions, as evidenced by the difficulty of practitioners in reaching goals as entrepreneurs, or policy makers in supporting economic growth. We believe that these theoretical streams share views relating the origin and drivers of transitions and that the analysis of the multi-level developments and systemic sub-processes by using the Integrative Propositional Analysis (IPA) allows for a more comprehensive identification of transition drivers. By mapping causal relationships within each perspective and by developing an integrative framework that takes in due account of overlaps between theories, we derived a new conceptual structure for the identification of transitions’ drivers.     

What drives the localization of Spanish multinationals in developing and transition countries?

In this paper, we investigate the location determinants of Spanish multinational firms in developing and transition economies. We pay particular attention to the role played by market potential and agglomeration economies as decisive factors in location. We also analyze whether, beyond the observed attributes, there are any significant differences across regions in terms of attracting foreign affiliates. With this aim, we estimate a mixed logit model, which allows us to endogenously consider the existence of complex substitution patterns among different destinations. Our results confirm that Spanish investment in developing and transition countries depends on market potential and agglomeration externalities. The intensity of these externalities, however, depends on the nationality of competitors, greater rivalry being observed among Spanish‐owned affiliates. Furthermore, our findings show that the location of multinational firms responds both to factors related to the local business environment, including the cost and quality of labor and infrastructures, and to the existence of specific regional effects.     

Why do regulators regulate? The case of the southern California gas market

Cross-subsidies often accompany entry regulation. Because cross-subsidies may be efficient or inefficient, they make it harder to find out whether regulation is motivated by public interest or public choice considerations. This paper uses case study methods to illuminate the motives and intentions of California state regulators in a battle over bypass of state-regulated gas utilities during the 1980s. Detailed study reveals that wealth redistribution, rather than economic efficiency, dominated regulators' motives.The author would like to thank John Baden, Robert Bradley, Charles Rowley, several anonymous referees, and participants in the Center for Market Processes colloquium for helpful comments; Mike McDonald, Lisa Johnson, Gary Shiu, Bob Baldini, and Don Dempsey for research assistance; and the Center for Market Processes for financial support.     

What drives bilateral foreign direct investment among Asian economies?

This study analyses the role of knowledge transfers via bilateral foreign direct investment (FDI) among 31 Asian economies. We make three distinct contributions to the literature on the drivers of FDI by: (1) applying the knowledge-capital model to FDI among Asian economies for the first time, using a comprehensive data set, and comparing it to an empirical gravity-type model of FDI; (2) conducting model selection tests to choose between alternative empirical specifications and estimation methods; and (3) modelling both the FDI participation decision and the decision on the amount of FDI. The main findings are: (1) while vertical FDI, driven by seeking low-cost unskilled labour, appears to be the dominant type of intra-Asian FDI, overall the knowledge-capital model is not supported by the data; and (2) conventional gravity variables (e.g., size, distance, common language) provide a better explanation of intra-Asian FDI and, therefore, a more suitable vehicle for future research.     

What drives trade in services? Lessons from the Nordics

This article makes an empirical assessment of the relative importance of non-actionable institutional and cultural factors and actionable policy measures for services market integration, using the Nordic countries as a case study. The Nordics are an ideal case as they are perceived to be a cluster of similar countries, but they have chosen different relations to the European Union (EU) and the rest of the world. First, comparing actionable and non-actionable determinants of services trade, I find that policy-determined free trade agreements (FTAs) boost services trade by 75% and a single market by an additional 45%, while the accumulated effect of all standard non-actionable shared geographical, institutional and cultural features (sharing a land border, language, colonial past and legal origin) almost triples services trade. Having controlled for all these determinants, intra-Nordic trade in services is more than three times the predicted value. An unexplained Nordic bias of this magnitude indicates that full integration of services markets may rely on deeper institutional and cultural factors.     

What matters when? The impact of ECB communication on financial market expectations

This article analyses financial markets’ reaction to European Central Bank's (ECB) communication. We apply a novel indicator that quantifies the contents of the ECB's introductory statements and allows disentangling ECB statements on prices, the real and the monetary sector. We provide evidence that it matters what issue the ECB is speaking about: especially, the ECB's statements on price developments represent important news to financial markets. It also matters when the ECB affects markets: communication drives maturities above 4 months.     

What drives the global official/policy interest rate?

We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of global official/policy interest rate. We find that 66% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (23%), oil prices (19%), global output (16%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output, inflation and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.     

What happened to the transatlantic capital market relations?

This paper investigates the capital market relations between Euroland and the USA from 1990 until 2006. The UIP-implied long-run relation between European and US government bond yields is shown breaking down in the mid-1990s. However, contrasting with conventional theory, a stationary equilibrium exists additionally including the exchange rate. The reason proves to be a stochastic trend common to the European interest and the euro/dollar rate, which is explained by central bank reactions and unfinished learning processes on the role of the euro. Furthermore, the paper demonstrates a striking reduction in the US capital market dominance, leading to transatlantic interdependence at eye level.     

Trade,finance or policies: What drives the cross-border spill-over of business cycles?

In this paper we investigate how income growth rates in one country are affected by growth rates in partner countries, testing for the importance of pairwise country links as well as characteristics of the receiving country (trade and financial openness, exchange rate regime, fiscal variables). We find that trade integration fosters the spill-over of business cycles, both bilaterally and as a country characteristic (trade openness). Results for financial integration are mixed; financial links as pairwise country characteristic are either insignificant or negatively signed (indicating a dampening of cross country spill-overs), but financial openness as characteristic of the receiving country amplifies spill-overs. We find no evidence for a role of the exchange rate regime. Finally, we find that higher government spending and debt reduces countries’ vulnerability to foreign business cycles, presumably through the effect of automatic stabilizers.