Kalman filter approach to estimate the demand for international reserves

A few studies have provided empirical support for the fact that the demand for international reserves experienced structural instability in 1973 and 1979 due to a change in exchange rate system and oil price shocks. Thus, under the current managed float due to exchange rate and oil price fluctuations, coefficient estimates could be time dependent. After showing that indeed, estimated coefficients are time dependent, the Kalman filter estimation method is employed and the reserve demand function for 19 industrial countries estimated. The Kalman filter approach incorporates the time-varying properties of coefficients estimates.     

Estimating anticipated and nonanticipated demand elasticities for cigarettes in Spain

This paper will test whether tobacco consumption generates addiction in Spanish people. If this is the case, can such addiction be explained in the context of rational addiction theory? Elasticities are also obtained in the cases where price variations can be anticipated or, by contrast, where they cannot. The results first reveal the addictive and rational character of Spanish tobacco consumption. With respect to estimated demand elasticities, we find the expected results, namely that the anticipated values are higher than the nonanticipated values and that the long-run effects are also higher than the short-run effects.     

Attribution of hedge fund returns using a Kalman filter

Hedge funds offer attractive investment possibilities because they engage in investment styles and opportunity sets which – because they are different from traditional asset class funds – generate different risk exposures. Conventional wisdom holds that hedge funds add value and provide unique investment opportunities because of their ability to invest in disparate risk exposures, and via the manager’s skill in selecting stocks and timing the market. In this article, a Kalman filter is used to decompose the time series of hedge fund returns into market timing and stock selection factors to establish whether fund managers really do generate statistically significant abnormal profits. Compelling evidence supports an alternative interpretation for the market timing return constituent. This work represents the first time the Kalman filter has been used to extract a time series of the capital asset pricing model’s dynamic variables for determining return component magnitudes.     

Inflation and real short-term interest rates - A Kalman filter analysis of the term structure

This paper applies the Kalman filter technique to look at the relationship among real interest rates, inflation, and the term structure of interest rate under the expectations hypothesis. Using quarterly data from 1960:1 to 1991:1 for inflation, three month nominal short term interest rates and long term yields with maturities from one to five years, this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time-varying premium and a random-walk real interest rate. In other words, a reconciliation of the expectations hypothesis with the data is attained by assuming time-varying term premium and non-stationary real interest rate.     

On the motivations for the dual-use of electronic and traditional cigarettes

We apply a classical economic categorization of preferences to identify the motivations of dual-users of electronic and traditional cigarettes. The responses of 2406 US adults (including 413 dual-users) in 2015 were collected using a novel online survey along with a follow-up in 2016 of 143 of these adults (68 dual-users). A sizeable minority of 37% of dual-users reported viewing electronic and conventional cigarettes primarily as complements. Of those who had never smoked or used electronic cigarettes, only 27% thought the complementarity motive would be primary. Dual-user motivations were associated with quit-attempt, cessation methods, gender and age. 1 year on, there was a positive relationship between the level of complementarity in the dual-user’s motives and their change in self-reported traditional cigarette consumption. It is concluded that the application of a canonical economic classification of preferences may reveal important heterogeneities among the dual-user population.     

On adaptation and the demand for health

The purpose of this paper is to analyse the impacts of adaptation to failing health. This is done by integrating adaptation processes in a Grossman type of pure consumption model. Model simulations show that adaptation affects the health variables by lowering the incentives to invest in health, as well as smoothing the optimal health stock path over the life cycle. Whether or not the risk of mortality is an object of choice has important effects when studying adaptation, as well as for the joint development of the health variables.     

International outsourcing and the demand for skills

This paper explores the impact of international outsourcing on the demand for skills in three small and open EU economies. A model of variable costs and factor demand functions for different skill levels and imported as well as domestic materials are constructed. International outsourcing is treated directly as a substitution process between labour of different skills and imported inputs. The direct consequence of international outsourcing for labour is measured by the cross price elasticities. These cross price elasticities indicate a negative outsourcing impact on low- and medium-skilled labour in the three countries and on high-skilled labour in two out of the three countries. This outsourcing effect on labour is compared with the direct effect of embodied technical change and of the technical change bias. International outsourcing has a more unambigous and significant negative impact on labour than technical change. Technical change is either labour using (embodied technical change) or only slightly biased in favour of high-skilled labour. When the cost savings effect of international outsourcing is taken into account, an indirect positive stimulus for all skill categories arises from a greater demand for goods. It can be shown, that this indirect positive effect can compensate for a large part of the negative substitution impact of international outsourcing on labour.     

On the demand for information

Most previous research on the economics of information has been based on the expected utility hypothesis and Bayesian learning. Yet there is experimental evidence that decision makers do not always maximize expected utility and that human learning is not always consistent with Bayes' rule. Using a two-period model, this paper examines the valuation of information as well as the demanf for information in the broader context of a state preference approach under an ordinal representation of preferences. In particular, it is not assumed that the decision maker is Bayesian, nor that he behaves in a way consistent with the expected utility hypothesis. In this general framework, the value of information is defined and analysed. Also, under active learning, the optimal allocation of information gathering activities is discussed. Behavioural properties of the demand for information are derived making use of a compensation function. Implications of the results for measuring the value of information and for the economic analysis of learning activities are discussed.     

Gender and the demand for medical care

The consumption of a set of diverse medical services is analysed in an effort to determine the sources of high utilization by women.Unlike previous studies of gender and the demand for medical services,the range of services investigate allows us to draw conclusions about the influence of physicians as agents.We use a modified version of the almost-ideal demand model in the emperical analysis which,unlike the double-log quadratic, or linear demand models, is consistent with constraints imposed by economic theory.Through decomposition of the variance, it was found that if women reported the same series of health indicators as men. their use of most services would fall below that of men.     

Cash-on-hand and demand for credit

Subprime consumers often use small-dollar credit products, such as payday loans, to meet short-term financial needs over pay cycles. However, relatively little is known about the income sensitivity of demand for credit in this market. This paper provides a causal estimate of the effect of tax rebates on the demand for small-dollar credit, using a unique proprietary loan-level dataset. Identification relies on variation in state Earned Income Tax Credit (EITC) generosity for areas within the same commuting zones that span state borders. The results show that a $100 increase in EITC benefits leads to an 8.3% reduction in the number of loan applications and a 6.6% reduction in the number of borrowers. This could translate into sizable reductions in loan volume and savings in financial charges. More broadly, the results suggest that public programs with income benefits could help recipients with consumption smoothing in the presence of credit market frictions.     

Household lending, interest rates and housing price bubbles in Korea: Regime switching model and Kalman filter approach

This study investigates whether interest rates and household lending caused housing price bubbles in Korea over the period of 1986 to 2003. Using a regime-switching model, we found evidence of the existence of housing price bubbles throughout the sample period, with the exception of 1998 when Korea suffered from a financial crisis. Using a Kalman filter technique, we estimated the size of housing price bubbles for the sample period. Finally, using generalized impulse response function analysis and variance decompositions, we found that housing price bubbles increased with household lending and industrial production, whereas they decreased with interest rate; this latter effect is relatively small, however. Policy implications include the importance of preemptive intervention on household lending in order to contain housing price bubbles, but interest rates appear to be a less effective policy tool.     

Background risk and the demand for state-contingent claims

Summary. We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in background risk. We show that the conditions for standard risk aversion, that is positive, declining absolute risk aversion and prudence, are necessary and sufficient for generalized risk aversion.Received: 13 February 2002, Revised: 10 February 2003, JEL Classification Numbers: D52, D81, G11. Correspondence to: Guenter FrankeWe are grateful to Louis Eeckhoudt, Christian Gollier, Harris Schlesinger and an unknown referee for valuable comments.     

Overseas students' fees and the demand for education

This paper presents an empirical investigation of the effect of fees on the demand for British education by overseas students. Demand (as measured by student numbers) depends on UK fees(in US $) ralative to the US consumer price index and on OECD real income. The estimated equations, which include a distributed lag, have significant effects of fees and are reasonably stable. The estimated elasticities of demand with respect to fees are:

Universities: total–0.5

undergraduates–1.0

postgraduates–0.3

Further Education: advanced–1.2

nonadvanced–0.7     

Employment security and the demand for labour in Europe

This paper analyses the impact of employment security on labour demand. The approach taken is to estimate a dynamic labour demand function that allows for the effect of changes in a measure of employment security derived from surveys of employers. The estimation uses panel data on employment (both in terms of the total number of employees and total hours worked) for seven European countries for the period 1981–1994. The results suggest that employment security can have significant effects in slowing down the dynamic adjustment of labour demand. The paper also finds some (less robust) evidence that employment security can increase the long run level of labour demand in terms of total hours, but not the number of persons employed.     

Specific complements and the demand for money in Australia

Clements and Nguyen, using Australian data, found that money, durables, and other consumption are specific complements. This letter applies a Nasse-type model to the same data and describes the associated preference independence transformation in order to interpret the results.     

Cointegration analysis and the UK demand for nitrogen fertilizer

Nitrogen fertilizer taxes have been proposed as a means of controlling agricultural ‘over-production’ and nitrate pollution of water courses in the EC. This paper constructs time-series models of fertilizer demand which provide quantitative information relevant to this issue. Time-series data on the use of nitrogen fertilizer in UK agriculture is found to have a unit root with non-zero drift coupled with a one-time change in drift after testing against the alternative hypothesis that the process is trend-stationary with a break in trend. The stochastic component of the nitrogen use series is cointegrated with the ratio of the price of nitrogen fertilizer to the price of agricultural output. Appropriate error correction models are estimated. Both the short-run and long-run price elasticities of the response of nitrogen use are found to be rather low. Some brief policy conclusions are drawn.