On Models with an Uncongestible Public Good and a Continuum of Consumers

This short note shows that models with an uncongestible or mildly congestible public good and a (non-atomic) continuum of consumers have an interesting but unfortunate property. Only an infinite level of public good provision in the continuum economy can be approximated by feasible public good levels in a sequence of economies with finite populations. We discuss the theoretical and practical problems this creates for familiar models that employ a continuum of consumers and a finite level of an uncongestible public good.     

Planning horizons for master production scheduling

Production and operations planning in organizations quite often is a multi-level sequential process, involving aggregate planning, master production scheduling, and detailed operations planning and scheduling. To obtain good planning results, it is desirable to have a proper planning horizon for each level of planning. There have been a considerable number of studies dealing with planning horizons for aggregate planning or production smoothing problems. There are also many planning horizon studies for single-item lot sizing problems. No study has addressed the issues associated with the planning horizons for master production schedules (which is a multi-item lot sizing problem in nature), particularly with respect to the relationship to the aggregate plan.This study addresses the issue of planning horizons for companies employing a make-to-stock competitive strategy facing a seasonal demand for their products. We formulate the aggregate planning problem and the master scheduling problem as two separate mathematical programs to approximate the two-stage process that typically takes place in practice. Rolling planning horizons are used to approximate the periodic updates of the plans commonly done in practice. The models also incorporate resource requirements planning concepts to estimate loads on the critical work centers.The planning process is simulated as a single pass procedure where the results of aggregate planning are passed to the master production scheduling model once per month and the results of the master scheduling model (i.e., the portion of the master schedule actually implemented) are passed back to the aggregate planning model for the next planning session.The experimental results show that when the planner faces extreme cost structures such as high smoothing costs/high setup costs or low smoothing costs/low setup costs, the planning horizon effects are reduced to a minimum. Master schedule planning horizons need not be as long as aggregate planning horizons. Alternatively, non-extreme cost structures such as high smoothing costs/low setup costs and low smoothing costs/high setup costs should be handled with equal planning horizons for both aggregate planning and master scheduling.It is also found that the firm's cost structure has an impact on the appropriate planning horizon for both aggregate planning and master scheduling. Some cost conditions allow for smaller master schedule horizons. The best horizon choice seems to be equal planning horizons for both aggregate planning and master scheduling, even though the cost savings is slight in some cases.Finally, the proper length of the planning horizon for master scheduling is affected by the planning horizon of the aggregate plans.     

Threshold estimation of Markov models with jumps and interest rate modeling

We reconstruct the level-dependent diffusion coefficient of a univariate semimartingale with jumps which is observed discretely. The consistency and asymptotic normality of our estimator are provided in the presence of both finite and infinite activity (finite variation) jumps. Our results rely on kernel estimation, using the properties of the local time of the data generating process, and the fact that it is possible to disentangle the discontinuous part of the state variable through those squared increments between observations not exceeding a suitable threshold function. We also reconstruct the drift and the jump intensity coefficients when they are level-dependent and jumps have finite activity, through consistent and asymptotically normal estimators. Simulated experiments show that the newly proposed estimators perform better in finite samples than alternative estimators, and this allows us to reexamine the estimation of a univariate model for the short term interest rate, for which we find fewer jumps and more variance due to the diffusion part than previous studies.     

Can we identify Walrasian allocations?

Abstract. We consider a discrete time, pure exchange infinite horizon economy with consumers and consumption goods per period. Within the framework of decentralized mechanisms, we show that for any given consumption trade at any period of time, say at time one, the consumers will need in general an infinite dimensional (informational) space to identify such a trade as an intertemporal Walrasian one. However, we show a set of environments where the Walrasian trades at each period of time can be achieved as the equilibrium trades of a sequence of decentralized competitive mechanisms, using only both current prices and quantities to coordinate decisions. Received: 1 December 1999 / Accepted: 31 October 2000     

Time horizons matter: the hazard rate of coalition governments and the size of government

This study examines how coalition governments affect the size of government, measured by total central government expenditure as a share of GDP. Existing studies suggest that the presence of multiple political parties within ruling coalitions generate common pool resource problems or bargaining inefficiencies which, in turn, leads to more government spending when coalition governments are in office. We demonstrate that coalition governments have shorter time horizons than single party governments and use that finding to motivate a simple formal model. The model shows that coalition governments have greater incentives to increase government spending because of a lower discount factor in office. Results from empirical models estimated on a global sample of 111 democracies between 1975 and 2007 provide strong statistical support for the aforementioned theoretical prediction. The empirical results remain robust when we control for alternative explanations, employ different estimation techniques, and use different measures of government spending.     

Measuring immigration's effects on labor demand: A reexamination of the Mariel Boatlift

Why do immigration shocks tend to have benign effects on native wages? One reason is that immigrants as consumers contribute to the demand for their services. We model an economy where workers spend their wages on a locally produced good, then test it via a reexamination of the 1980 “Mariel Boatlift” using Wacziarg's Channel Transmission methodology. Current Population Survey data on workers in 9 different retail labor markets and Survey of Buying Power data on retail spending by consumers in Miami and four comparison cities are used. We find strong evidence that the Mariel Boatlift augmented labor demand.     

Supporting others and the evolution of influence

In this paper we study environments in which agents can transfer influence to others by supporting them. When planning whom to support, they should take into account the future effect of this, since the receiving agent might use this influence to support others in the future. We show that in the presence of a finite horizon there is an essentially unique optimal support behavior which can be characterized in terms of associated marginal value functions. The analysis of these marginal value functions allows us to derive qualitative properties of optimal support strategies under different specific environments and to explicitly compute the optimal support behavior in some numerical examples. We also investigate the case of an infinite horizon. Examples show that multiple equilibria may appear in this setting, some of which sustaining a degree of cooperation that would not be possible under a finite horizon.     

Nonparametric estimation of conditional VaR and expected shortfall

This paper considers a new nonparametric estimation of conditional value-at-risk and expected shortfall functions. Conditional value-at-risk is estimated by inverting the weighted double kernel local linear estimate of the conditional distribution function. The nonparametric estimator of conditional expected shortfall is constructed by a plugging-in method. Both the asymptotic normality and consistency of the proposed nonparametric estimators are established at both boundary and interior points for time series data. We show that the weighted double kernel local linear conditional distribution estimator has the advantages of always being a distribution, continuous, and differentiable, besides the good properties from both the double kernel local linear and weighted Nadaraya–Watson estimators. Moreover, an ad hoc data-driven fashion bandwidth selection method is proposed, based on the nonparametric version of the Akaike information criterion. Finally, an empirical study is carried out to illustrate the finite sample performance of the proposed estimators.     

Fiscal consolidation and its cross-country effects

We build a new Keynesian DSGE model consisting of two heterogeneous countries in a monetary union. We study how public debt consolidation in a country with high debt (like Italy) affects welfare in a country with solid public finances (like Germany). Our results show that debt consolidation in the high-debt country benefits the country with solid public finances over all time horizons, while, in Italy, debt consolidation is productive in the medium and long term. All this is with optimized feedback policy rules. On the other hand, fiscal consolidation hurts both countries and all the time, if it is implemented in an ad hoc way, like an increase in taxes. The least distorting fiscal mix from the point of view of both countries is the one which, during the early phase of pain, Italy cuts public consumption spending to address its debt problem and, at the same time, reduces income tax rates, while, once its debt has been reduced in the later phase, it uses the fiscal space to further cut income taxes.     

Policy uncertainty and aggregate fluctuations

This paper estimates the impact on the US economy of four types of uncertainty about (i) government spending, (ii) tax changes, (iii) public debt, and (iv) monetary policy. Uncertainty about government debt has a large and persistent effect on output, consumption, investment, consumer confidence, and business confidence. Uncertainty about tax changes also has detrimental consequences for real activity but the effect of spending and monetary policy uncertainty appears to be small. About 25% of output fluctuations are accounted for by policy uncertainty, with government debt making the largest contribution at longer horizons.     

The London Business School with Gower Publishing

The Autumn Statement updated the government's spending plans and its forecast from those announced in the Budget in March. On both counts there is very little difference between the Treasury view and our own forecast released in October. The Treasury supports our projection that output and demand will decelerate in 1989, that inflation will peak in the first half of the year at about 7 per cent and fall back to 5 per cent by the end of the year and that the deficit on the current account of the balance of payments will narrow only marginally over the next 12 months. On public spending in 1989–90, our October forecast was close to the unchanged official figures. It was clear to us - though not to most City commentators - that savings on unemployment benefit, debt interest and elsewhere would enable greater spending on programmes within an unchanged planning total. In later years the government has upped its expenditure plans from those announced a year ago, as we had assumed it would. As a result, the Autumn Statement projects significant increases in real public spending from now on. We show that, under a more appropriate inflation forecast, public spending rises nearly 2 per cent next year but falls back in 1990–92. Finally we argue that, unless the Chancellor decides to run an even larger PSDR (public sector debt repayment) than the £12bn built into our forecast - and the Autumn Statement forecast assumes a PSDR in 1989–90 similar to the expected outturn in 1988–9 of £10bn - the scope for tax cuts remains intact.     

Macroeconomic Forecasting using Low‐frequency Filters

We consider univariate low‐frequency filters applicable in real‐time as a macroeconomic forecasting method. This amounts to targeting only low frequency fluctuations of the time series of interest. We show through simulations that such approach is warranted and, using US data, we confirm empirically that consistent gains in forecast accuracy can be obtained in comparison with a variety of other methods. There is an inherent arbitrariness in the choice of the cut‐off defining low and high frequencies, which calls for a careful characterization of the implied optimal (for forecasting) degree of smoothing of the key macroeconomic indicators we analyse. We document interesting patterns that emerge: for most variables the optimal choice amounts to disregarding fluctuations well below the standard business cycle cut‐off of 32 quarters while generally increasing with the forecast horizon; for inflation and variables related to housing this cut‐off lies around 32 quarters for all horizons, which is below the optimal level for federal government spending.     

Do High‐Frequency Data Improve High‐Dimensional Portfolio Allocations?

This paper addresses the debate about the usefulness of high‐frequency (HF) data in large‐scale portfolio allocation. We construct global minimum variance portfolios based on the constituents of the S&P 500. HF‐based covariance matrix predictions are obtained by applying a blocked realized kernel estimator, different smoothing windows, various regularization methods and two forecasting models. We show that HF‐based predictions yield a significantly lower portfolio volatility than methods employing daily returns. Particularly during the 2008 financial crisis, these performance gains hold over longer horizons than previous studies have shown, translating into substantial utility gains for an investor with pronounced risk aversion. Copyright © 2013 John Wiley & Sons, Ltd.     

Spline Regression in the Presence of Categorical Predictors

We consider the problem of estimating a relationship nonparametrically using regression splines when there exist both continuous and categorical predictors. We combine the global properties of regression splines with the local properties of categorical kernel functions to handle the presence of categorical predictors rather than resorting to sample splitting as is typically done to accommodate their presence. The resulting estimator possesses substantially better finite‐sample performance than either its frequency‐based peer or cross‐validated local linear kernel regression or even additive regression splines (when additivity does not hold). Theoretical underpinnings are provided and Monte Carlo simulations are undertaken to assess finite‐sample behavior; and two illustrative applications are provided. An implementation in R is available; see the R package ‘crs’ for details. Copyright © 2014 John Wiley & Sons, Ltd.     

When is an aggregate of a time series efficiently forecast by its past?

The paper gives necessary and sufficient conditions for a linear combination of the elements of a vector time series to be efficiently forecast by its own past values, where by past we mean both the infinite and also the finite past. We observe that the problem is equivalent to testing a single element of a vector for exogeneity, this observation also suggesting a method for empirically testing the derived conditions.     

Allocating chances of success in finite and infinite societies: The utilitarian criterion

We study a particular collective choice problem, that of allocating chances of success. We argue that many problems of interest have this nature, from small scale problems like medical triage to large scale ones like the allocation of opportunities in society. We consider both finite and infinite societies. We characterise utilitarian-type criteria by means of new properties tailored to the probabilistic structure of the alternatives.     

Functional Coefficient Cointegration Models Subject to Time–Varying Volatility with an Application to the Purchasing Power Parity

This paper analyses functional coefficient cointegration models with both stationary and non‐stationary covariates, allowing time‐varying (unconditional) volatility of a general form. The conventional kernel weighted least squares (KLS) estimator is subject to potential efficiency loss, and can be improved by an adaptive kernel weighted least squares (AKLS) estimator that adapts to heteroscedasticity of unknown form. The AKLS estimator is shown to be as efficient as the oracle generalized kernel weighted least squares estimator asymptotically, and can achieve significant efficiency gain relative to the KLS estimator in finite samples. An illustrative example is provided by investigating the Purchasing Power Parity hypothesis.     

On games without side payments arising from a general class of markets

The class of games without side payments obtainable from finite trader markets having possibly infinite dimensional commodity spaces, individual compact, convex consumption and production sets, and concave upper-semicontinuous utility functions is considered. It is shown that these market games are precisely the totally balanced games. In fact, each totally balanced game is shown to have both a finite commodity representation and an infinite commodity ‘simple’ representation.     

Residential spatial growth with perfect foresight and multiple income groups

This paper presents explicit solutions for expanding monocentric cities with two or more income groups. Housing is durable but deteriorates over time, and redevelopment cannot take place. Landlords have perfect foresight. The utility function and housing technology are Cobb-Douglas. Population, per capita income, and transportation costs per mile change at constant percentage rates. The model is solved analytically, using an infinite time horizon. As development proceeds outward, a constant fraction of land is developed with high-income housing, and the remaining land is reserved for future low-income development. At any time, housing is constructed at one distance for high-income consumers, and at a lesser distance for low-income consumers. High-income housing is first occupied by high-income consumers, then filters to low-income consumers, and is ultimately abandoned. Low-income housing is first occupied by low-income households, and ultimately abandoned.     

Tax Discounting in a High‐debt Economy*

This paper estimates a consumption function for Belgium that allows for government debt discounting and for the overall discounting of the future (reflecting the consumers’ planning horizon or precautionary savings). It also allows for substitutability or complementarity effects from government expenditures. Results suggest that consumers do take into account (future) government activity. Ricardian Equivalence is rejected however, since we cannot reject a relatively short planning horizon or a precautionary savings motive for the consumers. We use bootstrapped distributions for inference since the instrumental variables estimators used may have non‐standard distributions. This procedure also helps to tackle potential endogeneity and sample size problems.