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.     

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.     

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.     

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.     

Economic class and the distribution of income: a time-series analysis of the UK economy, 1955–2010

This paper contributes to our understanding of the determinants and dynamics of surplus-value using quarterly UK data, 1955–2010, and the Johansen (1988 Johansen, S. 1988. Statistical analysis of cointegrated vectors. Journal of Economic Dynamic and Control, 12: 231–54. [Crossref], [Web of Science ®] , [Google Scholar], 1991 Johansen, S. 1991. Estimation and hypothesis of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59: 1551–80. [Crossref], [Web of Science ®] , [Google Scholar]) cointegration and vector error correction model (VECM). A model is introduced to define this Marxian concept, before we explain distribution, paying attention to three forces that are traditionally seen as drivers of power in this struggle: (i) working class militancy; (ii) the size of the ‘reserve army’ of the unemployed; and (iii) political party. Our results demonstrate the ongoing relevance of Marxian economics in providing an alternative, robust and significant explanation of distribution in the post-war UK economy.     

Another look at the spending response to the 2001 income tax rebates

This article revisits the spending response to the 2001 US tax rebates by focussing on two key aspects of how tax policy researchers use the Consumer Expenditure Survey (CEX). These two attributes, which are often overlooked, are as follows: the measures used for consumption and the ‘outlier’ criteria applied to the data. First, I reproduce the results in Johnson et al. (2006 Johnson, DS, Parker, JA and Souleles, NS. 2006. Household expenditure and the income tax rebates of 2001. American Economic Review, 96: 1589–610. [Crossref], [Web of Science ®] , [Google Scholar]), which (using the CEX) concluded that households immediately spent 20–40% of their rebates on nondurable consumption goods. Then, I show how making two changes – both of which are relied upon in the literature – affects their results. These adjustments reduce the estimated magnitude of the rebate's impact by as much as 100%.     

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.     

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.     

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.     

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.     

From the ‘econometrics of capital punishment’ to the ‘capital punishment’ of econometrics: on the use and abuse of sensitivity analysis

The academic debate over the deterrent effect of capital punishment has intensified again with a major policy outcome at stake. About two dozen empirical studies have recently emerged that explore the issue. Donohue and Wolfers (2005 Donohue, J and Wolfers, J. 2005. Uses and abuses of empirical evidence in the death penalty debate. Stanford Law Review, 58: 791–845. [Web of Science ®] , [Google Scholar]) claim to have examined the recent studies and shown the evidence not to be robust to specification changes. We argue that the narrow scope of their study does not warrant this claim. Moreover, focusing on our two studies that they have examined, we show the deterrence findings to be robust, while their work has serious flaws and their reporting appears to be selective. The selectivity is biased towards showing ‘no deterrence’.     

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.     

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.     

Does Higher Education Affect Economic Growth? The Case of Greece

Abstract

The purpose of the study is twofold: first, it presents an extensive review of empirical studies that have examined the relationship between higher education and economic growth. Second, it estimates the effect of higher education on economic growth in Greece over the period 1960–2009. It applies the model introduced by Mankiw, Romer, and Weil (1992 Mankiw, G., Romer, D., & Weil, D. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407–437. doi: 10.2307/2118477[Crossref], [Web of Science ®] , [Google Scholar]) by using the higher enrolment rates as a proxy of human capital. The paper employs cointegration and an error-correction model to test the causal relationship between higher education, physical capital investments and economic growth. The empirical analysis reveals that there is a long-run cointegrating relationship between higher education, physical capital investments and economic growth. The elasticity of economic growth with respect to higher education is 0.52%. The results also suggest that there is evidence of unidirectional long-run and short-run Granger causality running from higher education and physical capital investments to economic growth.     

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.     

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.     

Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model

This study is focussed on estimating the real interest and inflation sensitivity in Spanish market, proposing an extension of the Stone (1974 Stone, BK. 1974. Systematic interest-rate risk in a two-index model of returns. Journal of Financial and Quantitative Analysis, 9: 709–21. [Crossref], [Web of Science ®] , [Google Scholar]) two-factor model and controlling for size and growth of the companies [Fama and French (1993) three-factor model], because of its importance in the stock sensitivity shown by previous literature. I also study the classical explanatory factors of the stock sensitivity: leverage and liquidity level of the firms. The Spanish stock response is similar to the response in other markets, and the ‘size’ is higher than ‘growth’ effect.     

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.     

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.