Macro-financial linkages and business cycles: A factor-augmented probit approach

In this paper, we analyze macro-financial linkages in the euro area by implementing an innovative factor-augmented probit model estimated using a large database. In particular, our model specification enables the identification of the leading influence of financial variables on euro area business cycles, in addition to the coincident information conveyed by standard macroeconomic variables. We also point out that dynamic factor models lead to more accurate replication of business cycles than static ones.     

Farmland returns and economic conditions: a FAVAR approach

This study examines the linkages between farmland returns and other market forces including the returns to alternative investments, agricultural sector activity, non-farm real estate, and macroeconomic conditions over the period 1973–2008. The study applies factor-augmented vector autoregression to extract information from a large panel of economic time series. Results suggest that farmland returns are influenced by common trends in the returns to alternative investments and general macroeconomic conditions.     

Global and regional linkages across market cycles: evidence from partial correlations in a network framework

Using a novel approach, partial correlations within a complex network framework, we examine the degree of globalization and regionalization of stock market linkages and how these linkages vary across different economic or market cycles. Our results show that geography influences network linkages differently across economic cycles. During normal times, regional factors shape market linkages; however, during periods of turbulence, global rather than regional factors drive the linkages. The network traffic also increases during times of turmoil, but contrary to previous results, we do not find a consistent or overwhelming increase in positive linkages between markets. Also, contrary to expectations, financial centres such as the US, China, Japan, and the UK command a greater regional rather than global influence. Our findings have implications for asset pricing and policy decision making.     

Global banking and international business cycles

This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.     

Randomization of commodity taxes: An expenditure minimization approach

Using an expenditure minimization approach, necessary and sufficient conditions for local random taxation are obtained in terms of the curvature of the compensated demand function, so that intuition from excess burden analysis can be applied. Major findings include: (1) random taxation is locally optimal if the compensated demand function is sufficiently convex; (2) horizontally equitable taxation is locally optimal if the compensated demand function is concave, and (3) local randomization is not optimal if the tax revenue requirement is sufficiently close to zero or to any local maximum. We also derive an inverse elasticity characterization of the optimal random tax structure.     

Four harmonic cycles explain and predict commodity currencies' wide long term fluctuations

In theory and practice, it is difficult to accept a particular model of explanation and forecasting of exchange currencies as the literature review reveals. However, the currencies that are called commodity currencies, such as the Australian dollar are heavily influenced by commodity prices cycles, and hence they might be easier to analyze and predict. We investigate the possibility that the Australian dollar is primarily determined by a handful of harmonic cycles which in turn are based not only on commodity prices cycles but also on commodity production cycles and in general on economic cycles. In this way we can get a very good fit of the relevant data and good out-of-sample forecasts. We cross check these results by referring to the main issues involved, such as fundamentals, short and long cycles, and so on. In addition, our analysis, forecasting ability, and conclusions still hold for three more commodity currencies examined here: New Zealand's dollar, Canada's dollar, and Norway's krone.     

Trade,structure and linkages in Costa Rica: An input-output approach

Input-output tables for Costa Rica are used first to assess the country's trade performance; it is argued that trade with the rest of Central America has produced a Costa Rican comparative advantage in consumer durables. The paper then uses the input–output tables to examine the economy's structure, which is shown to be block triangular. Finally, measures of linkages are derived from the tables and a critique of the growth-inducing linkage mechanism is presented.     

Modelling non-competitive behavior in commodity markets: A game theoretic approach

In this paper, we provide a coalitional alternative to the perfectly competitive and purely non-cooperative assumptions commonly employed in the modelling of commodity markets. These assumptions of perfect competition or pure non-cooperation are usually imposed exogenously without providing an economic basis for assuming why firms that could stand to gain by cooperating would not in fact do so. Three behavioral rules embodied in three different cooperative games are discussed in this paper and a methodology for predicting the coalition structures that would result from each of these is offered. By applying these games to the US copper industry of the 1970's, we show that the theory of games can be profitably employed in conjunction with the traditional institutional approach of industrial organization to yield useful economic predictions.The author is grateful to two anonymous referees whose comments led to a considerably improved version of the paper.     

Global imbalances,cross-market linkages,and the financial crisis: A multivariate Markov-switching analysis

Based on multivariate Markov-switching models, this paper presents new results on the interactions between global imbalances, credit spreads, housing markets, macroeconomic variables, commodities and equities during Q1-1987/Q1-2011. We show that rising global imbalances and the uncontrolled development of the US mortgage and housing markets have been deeply destabilizing the economy, with various shocks impacting subsequently equity markets and macroeconomic variables. But we also uncover, surprisingly, that the cross-market linkages with the commodity markets are strong. Finally, we identify that the US housing market lies at the epicenter of the crisis through its multiple and highly significant interactions with the other variables in the system (including the global imbalances). Sub-samples and alternative time series estimates are provided to check the statistical congruency of the various models.     

University/industry research linkages and knowledge transfers: A general equilibrium approach

This article models the dynamic behavior of the firm (or industry) and the university, intricately linked together in their respective research efforts by research personnel and faculty exchanges to each other's organization. One of the novel features of the model is the development of what is called the Fletcher rule (or hypothesis); namely, a top-rate university (or firm by implication) will always have 10% of its research faculty (personnel) away (at various sites) on leave from the campus (firm). It is then shown how the rule relates to knowledge transfer and personnel and faculty exchanges and turnovers. The model also differentiates between produced knowledge and transferred knowledge and shows that both types of knowledge (like capital) have implicit prices (values) which decline over time. The decline puts downward pressure over time on the employment and exchanges of research personnel and faculty. Both types of knowledge, however, can continue to increase at steady rates, due to an increase in the efficiency of knowledge production and transfer. The results of the analysis have policy implications for management, state legislators, and higher education and for technological change. The article also includes the empirical results of a small pilot study on the Fletcher rule.     

The dynamic causality between commodity prices,inflation and output in China: a bootstrap rolling window approach

In this article, we empirically study the time-varying bilateral causality between commodity prices, inflation and output in China. We first perform a series of parameter stability tests and find strong evidence of instability in the parameters estimated for Granger causality tests. We then use the bootstrap rolling window approach to test the causality and find that the causality from commodity prices to both inflation and output is time-varying in the entire sample period and asymmetric in different phases of the business cycle. We also find evidence of the causality from both inflation and output to commodity prices in certain sub-periods. Further discussion on the cost-price mechanism through which the economy fluctuates cyclically suggests that the dynamic causality between commodity prices and inflation contributes to understanding the nature of economic fluctuations and to forecasting economic crises. Overall, our results provide a new perspective to disentangle economic fluctuations.     

Causal linkages between work and life satisfaction and their determinants in a structural VAR approach

Work and life satisfaction depend on a number of pecuniary and non-pecuniary factors at the workplace and determine these in turn. We analyze these causal linkages using a structural vector autoregression approach for a German sample of the working populace from 1984 to 2008, finding that workplace autonomy plays an important causal role in determining well-being.     

Modelling energy and labour linkages: A CGE approach with an application to Iran

We develop a unique dynamic CGE model suitable for analysing the policy interrelationships between fuels, crude oil and the labour market. Special emphasis is placed on the modelling of energies, crude oil, and the factors of production in the economy. To fully outline the model's features, we build simulations that hypothesize removing fuel and crude oil subsidies in an oil exporting economy to assess their effects on the labour market. The model allows for extensive treatment of transition dynamics, featuring gradual as well as immediate removal of the subsidies. We focus on constructing two alternative simulations applied to a purpose built Social Accounting Matrix (SAM) of the Iranian economy, with the revenue from subsidy elimination redistributed to households as extra income or into increased investment. The study pays particular attention to SAM data construction of energy goods and factors of production. In the specific case of Iran, the model shows that rebating the revenue from subsidy removals to households affects the labour market adversely, while channelling revenue into investment improves labour fortunes in the long run. The model is sufficiently detailed and encompassing to allow for further applications to other countries and energy–labour policy issues.     

Localized Technological Change and Unemployment in the Global Economy: a Schumpeterian approach

This paper develops a Schumpeterian approach to analyse the interaction between unemployment and localized technological change in a global competitive process. The model predicts that the present levels of unemployment are caused by a combination of three factors: (i) the localized character of the wave of information and communication technology generated in the more advanced countries which, because of this, it is characterized by a factor mix appropriate to economic systems where there is an abundance of capital and a relative scarcity of labour; (ii) the strong and rapid dynamic decline of competitive advantages and quasi-rents, based on the introduction of new information and communication technology; (iii) the strong international competitive pressure from countries with lower wage levels and a greater capability to host the affiliates of multinational companies and to imitate the new information and communication technologies developed in the innovative countries. The results of the empirical analysis, for the OECD countries in the years 1990–92, suggest that a country's competitiveness and therefore its share of total world demand and employment is mostly, if not exclusively, determined by its innovative capacity. Wage levels alone cannot, even when they fall, at least in relative terms, re-establish conditions of full employment: efficiency wages are an important complementary factor in building the innovation capacity of a country.     

A variable threshold band approach to measuring market linkages

Uncertain and changing economic conditions can have substantial effects on price relationships in spatially separated, linked markets. Although numerous studies have analysed price relationships to characterize market linkage structures, most assume that the relationships and associated linkages are time invariant. This study extends the literature by modelling and estimating time-dependent market linkages that are conditional on changes in exogenous factors. The methodology is used to investigate price relationships in North Carolina (NC) corn and soya bean markets. Empirical results indicate that generalized market-linkage models provide a better representation of price relationships over time, improving the understanding of price discovery dynamics and marketing strategies.     

Business cycles synchronization in East Asia: A Markov-switching approach

This paper attempts to analyze the relationships between the ASEAN-5's business cycles. We examine the nature of business cycle synchronization trying to disentangle between intraregional and interregional synchronization by considering the important role of China, Japan and the US in synchronizing the activity within the ASEAN-5. We employ a time-varying transition probability Markov switching framework in order to allow the degree of synchronization to fluctuate across the phases of the business cycles. We provide evidence that the signals contained in some regional and global leading business cycles can impact the ASEAN-5's business cycles.     

American business cycles 1889–1913: An accounting approach

This paper quantitatively investigates the Depression of the 1890s and the 1907 recession in the United States. Business Cycle Accounting decomposes economic fluctuations into their contributing factors. The results suggest that both the 1890s and the 1907 recessions were primarily caused by factors that affect the efficiency wedge, i.e. slumps in the economy’s factor productivity. Distortions to the labor wedge played a less important role. Models with financial market frictions that translate into the efficiency wedge are the most promising candidates for explaining the recessionary episodes.     

Global distribution and dynamics of economic freedom: Non-parametric approach

The paper exploits the distributional dynamics and structural changes in the endogenous distribution of economic freedom across countries over time by utilizing the Rosenblatt–Parzen Kernel density estimator compared to the original distribution based on the methodology proposed by the Heritage Foundation. We utilize the distribution of economic freedom as a tool to identify which policies enhanced the overall level of economic freedom. We develop the distribution of endogenous economic freedom by decomposing effects of economic freedom on the level of income per capita in IV–2SLS estimation framework for a panel of 134 countries to identify the effect of institutions of economic freedom on the level of per capita income. Structural estimates indicate that improvements in the monetary, fiscal, and labor freedom exert the strongest direct effect on the level of economic freedom and indirect effect on the level of real income per capita. Our study demonstrates considerable differences between the original and endogenous distributional dynamics of economic freedom over time. In exploiting the non-parametric setting of endogenous economic freedom, we identify a recent emergence of twin-peak distribution across countries where developing nations have improved the level of economic freedom considerably compared to the initial year.