Immiserizing Growth and the Metzler Paradox in the Ricardian Model

Conditions for the occurrence of immiserizing growth and the Metzler paradox are analysed in the Ricardian model when consumers in the foreign country have Leontief preferences while consumers in the home country have Cobb-Douglas preferences. By using specific functional forms, the conditions for the occurrence of the two paradoxes are defined in terms of the exogenous parameters of the model rather than endogenous variables such as the foreign import demand elasticity in the conditions of Bhagwati (1958) Bhagwati, J. N. 1958. Immiserizing growth: a geometrical note. Review of Economic Studies, 25: 201–205. [Crossref], [Web of Science ®] , [Google Scholar] and Metzler (1949a Metzler, L. A. 1949a. Tariffs, the terms of trade and the distribution of national income. Journal of Political Economy, 57: 1–29. [Crossref], [Web of Science ®] , [Google Scholar], b Metzler, L. A. 1949b. Tariffs, international demand, and domestic prices. Journal of Political Economy, 57: 345–351. [Crossref], [Web of Science ®] , [Google Scholar]). It is shown that the simultaneous occurrence of both paradoxical results is possible for some parameter values.     

Relationships between oil price shocks and stock market: an empirical analysis from Greater China

Although a lot of empirical research has studied the relationship between changes in oil price and economic activity, it is surprising that little research has been conducted on the relationship between oil price shocks and the Greater China region (China, Hong Kong and Taiwan). Therefore, the main goal of this article is to apply detailed monthly data from 1997/7 to 2008/9 to fill this gap. Compared to the effect of US stock market returns described by Kilian (2009 Kilian, L. 2009. Not All oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99: 1053–69. [Crossref], [Web of Science ®] , [Google Scholar]) and Kilian and Park (2009 Kilian, L. and Park, C. 2009. The impact of oil price shocks on the US stock market. International Economic Review, 50: 1267–87. [Crossref], [Web of Science ®] , [Google Scholar]), we found that the impact of oil price shocks on stock prices in Greater China has been mixed. First, the impact of oil price shocks on Taiwan's stock market is very similar to that on the US stock market. Additionally, all three shocks have had significantly positive impacts on Hong Kong's stocks, partially in contrast to the effects on the US stock market. However, in contrast to the effect in the US stock market, we found that only global oil supply shock has a significantly positive impact on China's stock returns, but global oil demand shock and the oil specific demand shock have no significant impacts. The reason for the lack of significant impacts is that the positive expectation effect of China's fast economic growth may be just offset by the negative effect of a precautionary demand-driven effect. This result is also consistent with the previous empirical findings that the segmented and integrated China stock market is mixed, and it implies that the China stock market is ‘partially integrated’ with the other stock markets and oil price shocks.     

Estimation of SEs for heteroscedastic and cross-sectionally correlated data

This study develops SE estimators for heteroscedastic and cross-sectionally correlated data. The new estimators are a cross-sectional version of the White and Domowitz (1984 White, H and Domowitz, I. 1984. Nonlinear regression with dependent observations. Econometrica, 52: 143–61. [Crossref], [Web of Science ®] , [Google Scholar]) and Newey and West (1987 Newey, W and West, K. 1987. A simple positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix. Econometrica, 55: 703–8. [Crossref], [Web of Science ®] , [Google Scholar]) estimators, and therefore, consistent in the presence of heteroscedasticity and cross correlation of unknown form. Unlike the estimators in the literature, these estimators can control for cross correlation even for single-period cross-sectional data.     

Unit roots and purchasing power parity: another kick at the can

Lopez et al. (2005 Lopez, C, Murray, C and Papell, D. 2005. State of the art unit root tests and purchasing power parity. Journal of Money, Credit and Banking, 37: 361–9. [Crossref], [Web of Science ®] , [Google Scholar]) demonstrated that single-equation unit-root tests cannot provide conclusive evidence of whether real exchange rates are stationary because inference depends critically on the lag-lengths used to construct the test statistics, a result reinforced by a recent work by Sweeney (2006 Sweeney, D. 2006. Mean reversion in nominal G-10 exchange rates. Journal of Financial and Quantitative Analysis, 41: 685–708. [Crossref], [Web of Science ®] , [Google Scholar]). The purpose of this article is to revisit the issue, first demonstrating the necessary conditions under which this approach of testing for Purchasing Power Parity (PPP) is appropriate.     

Effects of trade openness on the steady-state growth rates of selected Asian countries with an extended exogenous growth model

The Solow (1956 Solow, R. 1956. A contribution to the theory of economic growth. Quarterly Journal of Economics, 70: 65–94. [Crossref], [Web of Science ®] , [Google Scholar]) growth model is extended with an endogenous growth framework to estimate the effects of trade openness on the Steady State Growth Rate (SSGR). Estimates of the augmented production functions are used to compute the SSGRs for Singapore, Malaysia, Hong Kong, India and Thailand. Good policies that increase the growth effects of openness is also tested with an interactive term. Our results show that Singapore has the highest SSGR of 2.75%, followed by Hong Kong and Thailand with 2.5%. India and Malaysia have lower SSGRs of 1.7% and 0.5%, respectively.     

Globalization and the effects of changes in functional income distribution on aggregate demand in Germany

Germany has experienced a period of extreme nominal and real wage moderation since the mid‐1990s. Contrary to the expectations of liberal economists, this has failed to improve Germany’s mediocre economic performance. However, Germany is now running substantial current account surpluses. One possible explanation for Germany’s disappointing performance is found in Kaleckian theory, which highlights that the domestic demand effect of a decline in the wage share will typically be contractionary, whereas net exports will increase (Blecker 1989 Blecker, R. 1989. International competition, income distribution and economic growth. Cambridge Journal of Economics, 13: 395–412. [Web of Science ®] [Google Scholar]). The size of the foreign demand effect will critically depend on the degree of openness of the economy. This paper aims at estimating empirically the demand side of a Bhaduri and Marglin (1990 Bhaduri, A. and Marglin, S. 1990. Unemployment and the real wage: The economic basis for contesting political ideologies. Cambridge Journal of Economics, 14: 375–93. [Crossref], [Web of Science ®] [Google Scholar]) type model for Germany. The paper builds on the estimation strategy of Stockhammer, Onaran, and Ederer (2009 Stockhammer, E., Onaran, Ö. and Ederer, S. 2009. Functional income distribution and aggregate demand in the Euro area. Cambridge Journal of Economics, 33(1): 139–59. [Crossref], [Web of Science ®] [Google Scholar]) and Hein and Vogel (2008 Hein, E. and Vogel, L. 2008. Distribution and growth reconsidered – empirical results for six OECD countries. Cambridge Journal of Economics, 32: 479–511. [Crossref], [Web of Science ®] [Google Scholar], 2009 Hein, E. and Vogel, L. 2009. Distribution and growth in France and Germany – single equation estimations and model simulations based on the Bhaduri/Marglin‐model. Review of Political Economy, 21(2): 245–72. [Taylor & Francis Online] [Google Scholar]). The main contribution lies in a careful analysis of the effects of globalization. Since Germany is a large open economy by now it is a particularly interesting case study.     

Financial development and economic growth nexus: a time-series evidence from India

This study examines the relationship between financial development and economic growth in India for the period 1951–52 to 1995–96. The long-run equilibrium and short-run dynamic models are estimated using financial interrelations ratio and new issue ratio as the measures of financial development, a la Goldsmith (1969 Goldsmith, RW. 1969. Financial Structure and Development, New Haven: Yale University Press.  [Google Scholar]). The Johansen (1991 Johansen, S. 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models’. Econometrica, 59: 1551–80. [Crossref], [Web of Science ®] , [Google Scholar]) estimator rejects the null of zero cointegrating vector and shows the presence of long-run equilibrium relationship between financial development and economic growth. The error correction model, impulse response and variance decomposition analyses (Sims, 1980 Sims, CA. 1980. Macroeconomics and reality. Econometrica, 48: 1–48. [Crossref], [Web of Science ®] , [Google Scholar]), and the Toda and Yamamoto (1995 Toda, HY and Yamamoto, T. 1995. Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66: 225–50. [Crossref], [Web of Science ®] , [Google Scholar]) estimator show the presence of bidirectional Granger-causality between financial development and economic growth. The presence of bidirectional Granger-causality suggested by these estimators points towards the possible problem of endogeneity and simultaneity bias in the growth models that examine the contemporaneous effect of financial development on economic growth. The economic reforms that started since July 1991 emphasized on the liberalization and development of financial sector to supplement the efforts aimed at achieving high economic growth in India.     

The payoff and implied pricing kernel in REITs

This article explores the hybrid character (i.e. the resemblance of both stock and bond) of Real Estate Investment Trust (REIT) through the implied pricing kernel behind REITs prices. We use the Empirical Pricing kernel method (Rosenberg and Engle, 2002 Rosenberg, J and Engle, RF. 2002. Empirical pricing kernels. Journal of Financial Economics, 64: 341–72. [Crossref], [Web of Science ®] , [Google Scholar]) to explore their Payoff probability density and extract the implied pricing kernel. To estimate payoff probability density, we use asymmetric GARCH model. Results indicate that implied pricing kernels flatten in all ranges of low rate of returns and decrease exponentially in ranges of high rate of returns. This means the REIT pricing kernel resembles a bond when rate of return is low, and a stock when it is high. The pattern is consistent between 1970 and 2000.     

A nonparametric revealed preference test of optimal intra-firm resource allocation

The collective rationality hypothesis initiated by Chiappori (1988a Chiappori, PA. 1988a. Rational household labor supply. Econometrica, 56: 63–89. [Crossref], [Web of Science ®] , [Google Scholar]) and applied by Seaton (1997 Seaton, JS. 1997. Neoclassical and collective rationality in household labour supply. Applied Economics Letters, 4: 529–33. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar], 2001) for a two-person household is used to distinguish the organizational behaviour of firms. Firms produce satisfaction to groups as traditional managerial and early behavioural theories of the firm of Williamson, Baumol and Marris suggest, as well as more modern principle agent models. Under certain conditions, intra-firm bargaining leads to a Pareto optimal outcome. What makes this work an important contribution is that it identifies a set of nonvacuous testable restrictions to empirically detect if firm-level data satisfy Pareto optimal behaviour for the main decision makers in the organization.     

Price transmission,foreign exchange rate risks and global diversification of ADRs

The purposes of this article are to reinvestigate how returns of major American depository receipts (ADRs) from different countries are related to the underlying stock returns and to identify the determinants of ADR risk premiums. We use different types of error-correcting terms in vector error correction models to examine information flows between ADRs and the underlying foreign stocks. General method of moments estimation of conditional international asset pricing model of Dumas and Solnik (1995 Dumas, B and Solnik, B. 1995. The world price of foreign exchange risk. Journal of Finance, 50: 445–79. [Crossref], [Web of Science ®] , [Google Scholar]) is applied to investigate ADR return premiums. We find that stock returns are more affected by disequilibrium between ADR and stock prices in an inefficient way. For US investors, foreign exchange rate risk premiums and world market risk premium (beyond US index) are priced in ADRs returns ex ante. Surprisingly, it is shown that the exchange rate of New Taiwan dollar and the interest rates of Brazil and Taiwan play important roles in determining ADR risk premiums across countries.     

Labour values and energy values: some developments on the common substance of value since 1867

Abstract

Marx’s Das Kapital (1867) singled out labour as the common substance of value in all commodities. Costanza (1980 Costanza, Robert. 1980. “Embodied Energy and Economic Valuation.” Science 210 (4475): 1219–1224. doi:10.1126/science.210.4475.1219[Crossref], [PubMed], [Web of Science ®] , [Google Scholar]) in Science chose energy and propagated energy values (a century after Engels criticised Podolinsky on energy). Mainstream economists quickly questioned Marx’s logic. Pareto advocated simultaneous equations, unaware of their use by Mühlpfordt and Dmitriev. Contributions by Charasoff and Potron were also overlooked. Already in 1927, Leontief and Sraffa knew how to replace labour values by other commodity values. Generalising Sraffa’s subsystems and using “percentage formulas” for price-value deviations, I discuss some empirical results for labour or energy theories of value.     

Modelling the dynamics of EU economic sentiment indicators: an interaction-based approach

This article estimates a simple univariate model of expectation or opinion formation in continuous time adapting a ‘canonical’ stochastic model of collective opinion dynamics (Weidlich and Haag, 1983 Weidlich, W, and Haag, G, 1983. Concepts and Models of a Quantitative Sociology. Berlin: Springer; 1983.[Crossref] , [Google Scholar]; Lux, 1995 Lux, T, 1995. Herd behavior, bubbles and crashes, The Economic Journal 105 (1995), pp. 881–96.[Crossref], [Web of Science ®] , [Google Scholar], 2009a Lux, T, 2009a. Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey, Journal of Economic Behavior and Organization 72 (2009a), pp. 638–55.[Crossref], [Web of Science ®] , [Google Scholar]). This framework is applied to a selected data set on survey-based expectations from the rich EU business and consumer survey database for 12 European countries. The model parameters are estimated through Maximum Likelihood (ML) and numerical solution of the transient probability density functions for the resulting stochastic process. The model's success is assessed with respect to its out-of-sample forecasting performance relative to univariate Time Series (TS) models of the Autoregressive Moving Average model, ARMA(p,?q) and Autoregressive Fractionally Integrated Moving Average, ARFIMA(p,?d,?q) varieties. These tests speak for a slight superiority of the canonical opinion dynamics model over the alternatives in the majority of cases.     

Service innovation and the proximity-concentration trade-off model of trade and FDI

This paper introduces service innovation in the proximity-concentration trade-off model of trade and foreign direct investments (FDI) [Helpman, E., M. Melitz, and S. R. Yeaple 2004 Helpman, E., M. Melitz, and S. R. Yeaple. 2004. “Export Versus FDI with Heterogeneous Firms.” American Economic Review 94 (1): 300–316. doi: 10.1257/000282804322970814[Crossref], [Web of Science ®] , [Google Scholar]. “Export Versus FDI with Heterogeneous Firms.” American Economic Review 94 (1): 300–316]. The idea is that innovation will have two main effects on service firms’ choice between exports and FDI. First, innovative firms will on average have higher productivity levels than non-innovative enterprises. Secondly, innovators will have to pay a higher relational distance cost for undertaking export activities, and they will, therefore, prefer to avoid (or reduce) these costs by choosing an FDI strategy instead. We test the empirical relevance of this idea on a new survey data set for a representative sample of firms in all business service sectors in Norway. The results show that firms are more likely to choose FDI rather than export the greater their productivity level and the higher the relational distance costs they face.     

What (if any) are the returns to computer use?

Using North American data, we revisit the question first broached by Krueger (1993 Krueger, AB. 1993. How computers have changed the wage structure: evidence from microdata. Quarterly Journal of Economics, 108: 33–60. [Crossref], [Web of Science ®] , [Google Scholar]) and re-examined by DiNardo and Pischke (1997 DiNardo, JE and Pischke, J-S. 1997. The returns to computer use revisited: have pencils changed the wage structure too?. Quarterly Journal of Economics, 112: 291–303. [Crossref], [Web of Science ®] , [Google Scholar]) of whether there exists a real wage differential associated with computer use. Employing a mixed effects model with matched employer–employee data to correct for the fact that workers and workplaces that use computers are self-selected, we find that computer users enjoy an almost 4% wage premium over nonusers. Failure to correct for worker and workplace selection effect leads to a more than twofold overestimate of this premium.     

Nonlinearity as an explanation of the forward exchange rate anomaly

This article shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984 Fama, E. 1984. Forward and spot exchange rates. Journal of Monetary Economics, 14: 319–38. [Crossref], [Web of Science ®] , [Google Scholar]). Using sterling-Canadian dollar data and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision.     

Ownership herding and informational herding

This article takes as its point of departure the herding model of Bikhchandani et al. (1992 Bikhchandani, S., Hirshleifer, D. and Welch, I. 1992. A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of Political Economy, 100: 992–1026. [Crossref], [Web of Science ®] , [Google Scholar]). We extend earlier experimental evidence to distinguish between informational herding, as in the model, and ownership herding, an alternative explanation for observed behaviour.     

Exchange Rate Regimes and Inflation: Evidence from India

Abstract

Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a ‘policy discipline effect’ – restricting money supply growth, and a ‘credibility effect’ – inducing higher money demand and reduced velocity of money. Alternatively, the ‘impossibility trillema’ of Mundell (1961a Mundell, R. A. (1961a). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29, 475–485. doi: 10.2307/139336[Crossref], [Web of Science ®] , [Google Scholar], 1961b Mundell, R. A. (1961b). Flexible exchange rates and employment policy. Canadian Journal of Economics and Political Science, 27, 509–517. doi: 10.2307/139437[Crossref], [Web of Science ®] , [Google Scholar]) predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the ‘empirically-claimed’ de facto stable exchange rate regime on inflation in India during different sub-periods of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in the Indian case, which could be because of the offsetting sterilization policy undertaken by the Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large-scale intervention to even out exchange rate volatility.     

Nonlinearity in real exchange rates: an approach with disaggregated data and a new linearity test

Employing disaggregated real exchange rates from nine European counties in 16 goods categories, we assess in this study the nonlinearity in the real exchange rates. Surprisingly, we find evidence for nonlinearity in only four (10) out of 143 series with the linearity test proposed by Harvey et al. (2008 Harvey, D. I., Leybourne, S. J. and Xiao, B. 2008. A powerful test for linearity when the order of integration is unknown. Studies in Nonlinear Dynamics and Econometrics, 12 Art 8[Web of Science ®] , [Google Scholar]) at the 5% (10%) significance level. This result differs greatly from those of Juvenal and Taylor (2008 Juvenal, L. and Taylor, M. P. 2008. Threshold adjustment of deviations from the law of one price. Studies in Nonlinear Dynamics and Econometrics, 12 Art 8[Web of Science ®] , [Google Scholar]), Imbs et al. (2003 Imbs, J., Mumtaz, H., Raven, M. O. and Rey, H. 2003. Nonlinearities and real exchange rate dynamics. Journal of the European Economic Association, 1: 639–49. [Crossref] , [Google Scholar]), Sarno et al. (2004 Sarno, L., Taylor, M. P. and Chowdhury, I. 2004. Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study. Journal of International Money and Finance, 23: 1–25. [Crossref], [Web of Science ®] , [Google Scholar]) and Berka (2009 Berka, M. 2009. “Non-linear adjustment in law of one price deviations and physical characteristic of good”. In Review of International Economics Vol. 17, 51–73.  [Google Scholar]), who report ample evidence for nonlinearity for the same or similarly disaggregated real exchange rate datasets.     

Irving Fisher's debt deflation analysis: From the Purchasing Power of Money (1911) to the Debt-deflation Theory of the Great Depression (1933)

Abstract

In 1933, Irving Fisher proposed an explanation for the Great Depression based on the distinction between the price level and price change effect of deflation in a context of over-indebtedness. This paper compares the debt-deflation theory of Fisher (1933 Fisher, I., 1933. The debt-deflation theory of great depressions, Econometrica 1 (1933), pp. 337–57. DOI: 10.2307/1907327[Crossref], [Web of Science ®] , [Google Scholar]) with the dynamic depression process he had expounded almost 20 years earlier in the Purchasing Power of Money (1911). The role played by both price level and price change effects in the analyses of Fisher (1933, 1911) are clarified in the context of the disequilibrium model of Tobin (1975 Tobin, J., 1975. Keynesian models of recession and depression, American Economic Review 65 (1975), pp. 195–202.[Web of Science ®] , [Google Scholar]). More precisely, we show that the stationary equilibrium is assumed to be locally unstable according to Fisher's 1911 insights and globally unstable according to his 1933 analysis.     

Structural changes and regional disparity in China's inflation: a revisit

The study re-examined the time series properties and regional disparities in Chinese inflation by extending the work of Chong, Zhang, and Feng (2011 Chong, Tai-Leeung, Terence, Ning Zhang and Feng, Qu. 2011. Structural Changes and Regional Disparity in China's Inflation. Economics Bulletien, 31(1): 572–583.  [Google Scholar]). For this purpose we employed the Lagrange Multiplier (LM) unit root test with one structural break and two structural breaks suggested by Lee and Strazicich (2003 Lee, Junsoo, Mark, C. and Strazicich. 2003. Minimum LM Unit Root Test with Two Structural Breaks. Review of Economics and Statistics, 85(4): 1082–1089. [Crossref], [Web of Science ®] , [Google Scholar], 2004 Lee, J. and Strazicich, M. 2004. Minimum LM unit root test with one structural break. Working Paper 04–17, Boone, North Carolina: Department of Economics, Appalachian State University.  [Google Scholar]) and a recently developed ADF type unit root test with two structural breaks of Narayan and Popp (2010 Narayan, Paresh Kumar and Stephan Popp. 2010. A New Unit root test with Two Structural Breaks in Level and Slope at Unknown Time. Journal of Applied Statistics, 37(9): 1425–1438. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]). We found that national, urban and rural series of the overall inflation series, clothing, and food, national series of education and residence and the rural series of residence and education are stationary. We also found regional disparity in Chinese inflation, but the disparities existed only in education inflation series.