Money, capital, and real liquidity effects with habit formation

Abstract.  The money in utility model is reconsidered in the presence of endogenous labour and habits. With standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money, the model exhibits superneutrality in the steady state. Nevertheless, habits give rise to real liquidity effects in the short run. After an increase in the nominal interest rate, employment falls, resulting in a fall in capital accumulation and in the short‐ and long‐term real interest rates. The adjustment of the capital stock is non‐monotonic. Employment and the short‐ and long‐term real interest rates may also adjust non‐monotonically. JEL classification: E22, E52, E58     

Stock Market Fluctuations and Money Demand in Italy, 1913–2003

This paper examines the impact of stock market fluctuations on money demand in Italy from a long‐run perspective. The money demand function estimated by Muscatelli and Spinelli (2000) for a long time span is utilized as a benchmark, adding to the specification information on share prices from the Milan Stock Exchange Reform of 1913 to recent years. For a shorter time period (1938–2003), annual observations on stock market capitalization and turnover velocity are also considered. The empirical findings suggest that stock market fluctuations help to explain temporary movements in liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long‐run relationship is unstable. In a dynamic, short‐term specification of money demand, the estimated coefficient of deflated stock prices is positive, and therefore compatible with a wealth effect, in the years 1913–1980, while in the last two decades a substitution effect has prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalization. Moreover, in the recent period, stock market turnover and money growth are positively correlated .     

Price stickiness, trend inflation, and output dynamics: a cross‐country analysis

Abstract.  Sticky price models based on menu costs predict that countries with high trend inflation should have (i) smaller impact effects of demand shocks on output and (ii) less persistent output fluctuations, relative to low‐trend inflation countries. These predictions are tested, controlling for changes in trend inflation, using a country‐specific approach. The results do not support the second prediction. That prediction is also not robust to a modified measure of trend inflation that excludes episodes of hyperinflation. These findings suggest that while price stickiness is important for understanding short‐run impact effects, real propagation mechanisms may drive persistence in output fluctuations.     

Are migrants more skilled than non‐migrants? Repeat,return, and same‐employer migrants

Abstract.  I examine the determinants of inter‐state migration of adults within western Germany, using the German Socio‐Economic Panel from 1984–2000. Migrants who do not change employers represent one‐fifth of all migrants and have higher education and pre‐move wages than non‐migrants. Skilled workers thus have a low‐cost migration avenue that has not been considered in the previous literature. Other migrants are heterogeneous and not unambiguously more skilled than non‐migrants. I confirm that long‐distance migrants are more skilled than short‐distance migrants, as predicted by theory, and I show that return migrants are a mix of successes and failures. Most repeat migration is return migration. JEL classification: J6     

Interest Rates, Stock Returns and Credit Spreads: Evidence from German Eurobonds

We investigate daily variations in credit spreads on investment‐grade Deutschemark‐denominated Eurobonds during the challenging 1994–1998 period. Empirical results from a Longstaff and Schwartz (1995) two‐factor regression, extended for correlated spread changes and heteroskedasticity, indicate strong persistence in spread changes. Consistent with theory and previous findings, changes in spreads are significantly negatively related to the term‐structure level while, contrary to theory, the proxy for asset value does not yield a significant negative contribution. We even find a significant positive relation for Eurobonds with long maturity. Tentative interpretations are portfolio‐rebalancing activities or differing risk factor sensitivities on short‐ vs. long‐maturity bonds.     

UK Utility Regulation: Licences, Commitment and Judicial Review

Abstract ** :  This paper analyses critically the claim made by Levy and Spiller that, in the context of UK utility regulation, licences operate as a 'technology of commitment'. The functional logic of delegation which underpins much principal–agent analyses is discussed, together with the credibility problem emerging from a divergence between a principal's long‐term and short‐term policies. Levy and Spiller contend that the UK has a successful model of utility regulation in part because of the use of licences which restrict the regulator from deviating from the broad substantive principles settled at the time of vesting. This contention is examined through the detailed consideration of five judicial review cases which have cast light on how, and to what extent, the licences restrict regulatory discretion .     

What drives the cross‐country growth and inequality correlation?

Abstract.  We present a neo‐classical model that explores the determinants of growth‐inequality correlation and attempts to reconcile the seemingly conflicting evidence on the nature of the growth‐inequality relationship. The initial distribution of human capital determines the long‐run income distribution and the growth rate by influencing the occupational choice of the agents. The steady‐state proportion of adults that innovates and updates human capital is path dependent. The output elasticity of skilled‐labour, barriers to knowledge spillovers, and the degree of redistribution determine the range of steady‐state equilibria. From a calibration experiment we report that a skill‐intensive technology, low barriers to knowledge spillovers, and high degrees of redistribution characterize the industrial countries with a positive growth‐inequality correlation. A negative correlation between growth and inequality arises for the group of non‐industrial countries with the opposite characteristics. JEL classification: E1, O4     

Integration or Independence? An Alternative Assessment of Real Interest Rate Linkages in the European Union

The relationship between national real interest rates provides a valuable insight into the extent of economic and financial integration between countries. This paper tests for long‐run parity in ex post real interest rates among the major European Union (EU) countries over the period 1979–2003. The empirical investigation, however, is based on an alternative approach. Strong parity is determined by whether or not the first largest principal component (LPC), based on real interest rate differentials with respect to a chosen base country, is stationary. The qualitative outcome of the test is invariant to the choice of base country, and compared with alternative multivariate tests for long‐run parity, this methodology places less demands on limited data sets. Strong evidence of onshore parity occurs during 1979–1990 and 1993–2003 with the half‐life of a deviation to parity that varies towards 6 months. There is no evidence of long‐run parity among EU members during 1990–1993 despite the easing of remaining capital controls in 1990. Parity is rejected for a sample of non‐EU countries throughout the study period.     

Decentralized Policymaking in a Long‐run Growth Model with Seigniorage and Taxes

The paper introduces decentralized policymaking into a game‐theoretic model with output growth through capital accumulation, and in which the determination of taxes, seigniorage and the long‐run growth rate of the economy reflects the strategic interactions between the government, the central bank and the private sector. The paper investigates, among other things, the impact on the long‐run growth rate of a higher degree of inflation aversion of the central bank and a higher degree of inefficiency in the tax system.     

Asymmetry in Okun's law

Abstract.  In this paper we support the proposition that the output‐unemployment relationship as represented by Okun's law is asymmetric. Okun's coefficients are defined based on a dynamic model that allows for asymmetry in the relationship between cyclical output and unemployment. Using data from the United States for the post‐war period, our results show that the short‐run effects of positive cyclical output on cyclical unemployment are quantitatively different from those of negative ones, and the data are consistent with the proposition that cyclical unemployment is more sensitive to negative than to positive cyclical output. Several theoretical explanations of asymmetry rationalize the findings. JEL Classification: C13, C22, E32     

Implications of Singapore's CPF Scheme on Consumption Choices and Retirement Incomes

Singapore has a unique policy of allowing the use of mandatory social security contributions to finance homeownership. An intertemporal model of housing demand is employed to demonstrate analytically that the CPF scheme can distort an individual's intertemporal and intratemporal consumption choices, and induce Singaporeans to demand more housing than they would otherwise. The withdrawals for housing have also affected the adequacy of CPF balances for financing retirement. Pegging the rate of return on CPF balances to a long‐term rate is the long‐term solution to curbing excessive withdrawals for housing, and ensuring the adequacy of CPF savings for financing retirement.     

Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?

Abstract.  This paper provides a selective overview of puzzles in exchange rate economics. We begin with the forward bias puzzle: high interest rate currencies appreciate when one might guess that investors would demand higher interest rates on currencies expected to fall in value. We then analyse the purchasing power parity puzzle: the real exchange rate displays no (strong) reversion to a stable long‐run equilibrium level. Finally, we cover the exchange rate disconnect puzzle: the lack of a link between the nominal exchange rate and economic fundamentals. For each puzzle, we critically review the literature and speculate on potential solutions. JEL classification: F31     

Stunting and academic achievement among Vietnamese children: new evidence from the young lives survey

Most of the empirical literature on the relationship between the health condition and skill development of school children are based on a static relationship between health and skill development. This article contributes to the literature by examining the dynamic relationship between stunting and school achievement using data from the first three waves of the Young Lives Survey in Vietnam. Using both structural equation and hybrid estimators, empirical results show that past school performance is the most significant predictor of the academic performance. Stunting has a significant negative effect on school performance, and its effect in the long run is as twice as much its effect in the short run. The empirical evidence also shows that the age of the child, mothers’ literacy, access to electricity and household consumption significantly affect school performance.     

中国长期煤炭需求:影响与政策选择

本文采用协整技术研究中国煤炭需求的长期均衡关系,估计出中国煤炭需求的长期收入弹性、价格弹性、结构弹性以及运输成本弹性;预测未来长期煤炭需求并分析其对环境、煤炭供给和煤炭价格的影响;模拟解释变量不同增长率下煤炭需求的演变并给出政策选择。中国高速经济增长是煤炭需求增长的主要原因。GDP是引导煤炭需求的原因,但煤炭需求不是引导GDP增长的原因,这也说明了将GDP作为解释变量的合理性。变量模拟得出的政策选择是工业结构的调整,即便是微调,也会对煤炭需求有很大的抑制作用;煤炭出厂价格的变动对煤炭需求变动的影响不太大,但煤炭需求对运输成本相当敏感,因而煤炭的最终价格对煤炭需求影响很大。     

Minorities and majorities: a dynamic model of assimilation

Abstract.  The paper analyses the population dynamics of a country that has two ethnic groups, a minority and a majority, and minority members can choose to assimilate into the majority. Depending on the minority's size, the long‐run outcome can be full or no assimilation. Under certain parameter values multiple equilibria exist, including the two extreme cases. The paper demonstrates that both the long‐run outcome and the equilibrium path may be inefficient. Two extensions to the basic model are considered. The first one allows for a comparison between a multicultural and a 'melting pot' society. The second one introduces population growth and studies the interplay between exogenous and endogenous changes in the minority's size. JEL classification: J110, J150, J180     

Sex, equality, and growth

Abstract.  We set up a model of economic and demographic long‐run development, where inequality in income and reproductive success (polygynous mating) plays a central role. The model generates a slow and gradual compression of the income gap between landholders and landless, together with rising levels of human capital. This process spurts at some stage, as society endogenously transits into sustained growth. Simultaneously, inequality in income and reproductive success drops; society becomes monogamous.     

The Co‐initial Swap Market Model

In this paper, we introduce a novel approach to the pricing and the risk management of generic European style interest‐rate derivatives. This new model has great flexibility and has the advantage of avoiding complex model calibration techniques typical of standard short‐rate models. Dynamics is assigned on a set of co‐initial forward swap rates, and arbitrage‐free restrictions are determined in a normal and lognormal setup. Model implementation and calibration are discussed, and details of two example applications are also presented.
(J.E.L.: G12, G13).     

Long‐term Performance of New Equity Issuers, Venture Capital and Reputation of Investment Bankers

This study investigates the potential effects of investment‐banking reputation and venture capital on the long‐term performance of initial public offerings (IPOs) simultaneously. Our findings do not support the view that IPOs perform differently compared with other firms, with the only exception of venture‐backed IPOs. We show that venture‐backed IPOs are associated with long‐term gains when we account for investment bankers' reputation, size and book‐to‐market effects. Zero investment portfolios, based on combinations of underwriter's reputation and venture capital involvement's in IPOs, provide additional evidence in support of the view that venture‐backed IPOs, regardless of the reputation of underwriters, are associated with significant post‐issue gains. Our results also indicate that the reputation of investment bankers matters only in the absence of venture capital .     

Predicting UK Business Cycle Regimes

This paper uses logistic regression to construct a one‐quarter ahead prediction model for classical business cycle regimes in the UK. The binary dependent variable is obtained by applying simple mechanical rules to date turning points in quarterly real GDP data from 1963 to 1999. Using a range of real and financial leading indicators, several parsimonious one‐quarter‐ahead models are developed for the GDP regimes, with model selection based on the SIC criterion. A real M4 variable is consistently found to have predictive content. One model that performs well combines this with nominal UK and German short‐term interest rates. The role of the latter emphasises the open nature of the UK economy.