A farewell to critical junctures: Sorting out long-run causality of income and democracy

We consider the empirical relevance of two opposing hypotheses on the causality between income and democracy: The Democratic Transition hypothesis claims that rising incomes cause a transition to democracy, whereas the Critical Junctures hypothesis denies this causal relation. Our empirical strategy is motivated by Unified Growth Theory, which hypothesizes that the present international income differences have roots in the prehistoric past. Thus, we use prehistoric measures of biogeography as instruments for modern income levels, and find a large long-run causal effect of income on the degree of democracy. This result rejects the Critical Junctures hypothesis, which is an important part of the Primacy of Institutions view.     

Path dependence and transitions from tyranny to democracy: evidence from ancient Greece

For empirical research on the effects of institutions, an important question is whether a given institutional type will generate different outcomes depending on the circumstances that give rise to that institution. In this paper, we examine a unique historical episode in which a specific type of institution—rule by a tyrant—arose in similar states yet differed in terms of whether the impetus came from local support or external influences. Over the course of the sixth century BCE, a substantial subset of Greek poleis (city–states) experienced a period of tyranny. In some cases, the tyrant came to power with the support of local elites, yet in other cases, the tyrant was imposed by a conquering power, Persia. Although it is likely that the tyrants’ proponents—whether local elites or Persian rulers—sought to increase stability and maintain policies necessary for wealth creation, the long run effects of tyranny differed: In poleis where the rise of a tyrant would have depended on local support, a record of tyranny predicts a greater propensity for subsequent development of democracy. By contrast, in poleis where the rise of a tyrant would have depended on Persian support, a record of tyranny has a weak (and perhaps negative) association with subsequent development of democracy. These findings illustrate both the long-run importance of institutional paths and the difficulty in transplanting institutions.     

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

Re-examination of the long-run purchasing power parity: further evidence from Turkey

In this article, we re-examine the empirical validity of the Purchasing Power Parity (PPP) theory for the Turkish economy. For this purpose, an empirical model is constructed using some contemporaneous estimation techniques such as multivariate co-integration and vector error correction methodology. Our estimation results reveal that the PPP can strongly be supported as a long-run stationary steady-state relationship for the Turkish economy.     

Life expectancy and human capital: long-run evidence from a panel of countries

This article examines the long-run impact of life expectancy on human capital investment for a panel of 14 countries over the period 1870–2010. Using recently developed panel time series techniques, we find (i) that life expectancy at birth has a statistically significant long-run effect on schooling and (ii) that long-run causality is unidirectional from life expectancy to schooling.     

Corruption clubs: empirical evidence from kernel density estimates

A common finding of many analytical models is the existence of multiple equilibria of corruption. Countries characterized by the same economic, social and cultural background do not necessarily experience the same levels of corruption. In this article, we use Kernel Density Estimation techniques to analyse the cross-country distribution of corruption. Particular emphasis will be given to the question whether the distribution of corruption shows more than one peak. We find that most of the estimated densities exhibit twin peaks. We also provide some evidence on the intra-distribution dynamics and the persistence of corruption. We find the group of countries classified within the two ‘clubs’ to be very stable. Corruption is a highly persistent phenomenon. Substantial changes in the economic, political and cultural environment of countries within the ‘corruption club’ are required before a significant decline of corruption is to be expected.     

The long-run effect of aid on health: evidence from panel cointegration analysis

Although a major objective of aid donors is to improve health outcomes in recipient countries, there is relatively little research on whether aid to the health sector leads to improved health outcomes, and even less on the impact of total aid. This paper examines the relationship between total aid and population health using panel cointegration and causality techniques designed to deal with problems afflicting previous aid-health studies: spurious regressions, omitted variables, endogeneity, cross-sectional dependence, and parameter heterogeneity. The main results are: (i) aid has, on average, a small but negative long-run effect on health, (ii) while the long-run (or trend) effect of aid on health is negative, the short-run (temporary) effect of aid on health is positive, (iii) causality runs in only one direction, from aid to health, and (iv) aid worsens health mainly in sub-Saharan countries, but has a positive, albeit statistically insignificant, long-run impact on health in Latin American and Caribbean countries and in countries with negative values of net ODA.     

Dynamics of fine wine and asset prices: evidence from short- and long-run co-movements

This article examines short- and long-term price linkages among the majority of fine wine and equity markets over the period of 2003 to 2012. We do not consider the price index (LIV-EX 100 or 500), as is typically undertaken in previous studies, but rather examine the auction price series of the world’s most traded wine-vintage pairs (5 Bordeaux first growth, 8 Bordeaux second growth, 5 Burgundy, 3 Rhone, 4 Italian, 5 Californian, 1 Australian and 1 Portuguese). A global equity index is also included using the Morgan Stanley Capital International World. Cointegration procedures, the Granger non-causality test, and ECM are used to analyse short- and long-run relationships among these markets. The results indicate a strong effect of financial markets on wine prices and short-term causality for certain wines. Moreover, the findings indicate short-run causality between the wines themselves, revealing a leader (exogenous) or follower (endogenous) status of certain fine wines in price dynamics, and also long-run causality for endogenous wines. This approach is relevant to portfolio diversification strategies and allows price movements to be anticipated more accurately than using an index approach.     

The long-run and short-run demand for money: Additional evidence

This paper presents estimates of Chow's money-demand equations using Chow's data. The equations are adjusted for autocorrelation using two autocorrelation transformations, the standard Cochrane-Orcutt transformation that deletes “initial” observations, and one that does not delete these observations. The estimates focus on the question of the asset versus the transactions specifications. The results reaffirm Chow's original conclusion which supported the asset motive and, thereby, reversed nearly all of the findings recently reported by Lieberman (1980). The paper concludes that one should be wary about using the Cochrane-Orcutt transformation, especially when the ratio of the number of deleted observations to total observations is large.     

On the optimality of public capital for long-run economic growth: evidence from panel data

The role of public capital in economic growth is examined using data from the Penn World Tables and other sources on a large number of countries. Drawing on intertemporal optimization, the theoretical framework nests the exogenous (Solow) and endogenous types of growth and is data-consistent. It is found that public capital makes a significant contribution to growth. The actual level of investment on public capital is suboptimal. Growth in recent decades can be characterized as ‘endogenous’ with little sign of convergence. There is evidence of a growth slow-down between the 1970s and 1980s. Human capital also significantly enhances growth.     

Dynamic adjustment and long-run equilibria: Panel data estimates for the East German states

The economic development in East Germany after unification shows both, success and failure. In the early nineties wages and productivity increased fast; later on catching up faded out. A central question from a policy viewpoint is whether this fading out indicates a reduction of the adjustment speed or an equilibrium gap. This points towards a stationarity analysis of differences between East and West Germany. Our paper presents panel data estimates for the East German states for wages, productivity, competitiveness and unemployment. The results reveal that the adjustment was fast, but the equilibrium gaps are large.     

New estimates of time-varying currency betas: A trivariate BEKK approach

This paper examines the conditional time-varying currency betas from five developed markets and four emerging markets. We employ a modified trivariate BEKK-GARCH-in-mean model of Engle and Kroner (1995) to estimate the time-varying conditional variance and covariance of returns of stock index, the world market portfolio and changes in bilateral exchange rate between the US dollar and the local currency. It is found that currency betas are more volatile than those of the world market betas. Currency betas in emerging markets are more volatile than those in the developed markets. Moreover, we find evidence of long-memory in currency betas. The usefulness of time-varying currency betas are illustrated by two applications.     

The returns to education and wage penalty from overeducation: New evidence from Vietnam

This study intends to estimate the rate of returns to education in Vietnam, the distributive effects of education on wages, and the wage penalty from the incidence of overeducation in the Vietnamese labor market during 2004–2016. This study employs a pseudo-panel approach to address omitted variables bias and the unconditional quantile regression to identify the heterogeneity of returns to education across the income distribution. Our main finding indicates that the estimated rate of returns to education in Vietnam is approximately 6.5%, showing a downward bias from previous estimates. The returns vary across wage distributions, where a lower rate of return is observed in lower quantiles and a higher rate among those individuals at the higher quantiles. The returns to education have declined since 2008, confirming the oversupply of highly educated workers in the Vietnamese labor market with an estimated wage penalty of 17%. Government assistance measures are needed to reduce the overeducation and the wage penalty issues in the Vietnamese labor market.     

On the time-varying nature of the debt-growth nexus: evidence from the euro area

This article uses the DCC-generalized autoregressive conditional heteroskedasticity model to investigate the existence of time-varying correlations between public debt and economic growth. To that end, we use annual data from both central and peripheral countries of the euro area for the period 1961–2015. The results suggest that the relationships between these variables are time-varying and that in some countries and for some periods, there is a positive association between them.     

Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions

We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.     

Agenda control in an unstable multiparty parliamentary democracy: evidence from the Israeli public sector

As elected politicians’ knowledge, information and expertise about the policy process decrease, so will their ability to control it and to independently shape its agenda. When elected politicians spend less time in their positions due to cabinet instability, they will have less knowledge about policy issues in comparison to career bureaucrats. Multiparty parliamentary systems are characterized by cabinet instability, hence increasing the likelihood of this phenomenon. Indeed it has been shown that in these systems the bureaucracy is the main player in the policy process. This paper illustrates this phenomenon in the Israeli context, a clear example of a multiparty democracy with an unstable cabinet and a dominant bureaucracy.     

Oil price and Gulf Corporation Council stock indices: New evidence from time-varying copula models

Using a time-varying GJR copula approach, we determine the conditional dependence of the GCC stock indices on oil price between 2007 and 2016. We show how to improve the forecasting accuracy of the co-movement of energy and stock prices in an equally weighted portfolio. Contrary to prior findings, we demonstrate that due to the different co-movements across the GCC stock indices, portfolios of oil assets and several GCC stocks are less likely to be affected by systemic risk. The different co-movements across several stock indices over time provide different entry and exit points for stock investors. This approach is in line with the ‘buy low/sell high’ adage.     

Life expectancy and education: evidence from the cardiovascular revolution

This paper exploits the unexpected decline in the death rate from cardiovascular diseases since the 1970s as a large positive health shock that affected predominantly old-age mortality; i.e. the fourth stage of the epidemiological transition. Using a difference-in-differences estimation strategy, we find that US states with higher mortality rates from cardiovascular disease prior to the 1970s experienced greater increases in adult life expectancy and higher education enrollment. Our estimates suggest that a one-standard deviation higher treatment intensity is associated with an increase in adult life expectancy of 0.37 years and 0.07–0.15 more years of higher education.