The Feldstein-Horioka puzzle in the presence of structural shifts: The case of Japan versus the USA

This paper tests the Feldstein-Horioka “puzzle” for the two richest countries of the world: Japan and the USA. For this purpose it employs three different cointegration tests that are applied to the Feldstein-Horioka long-run investment-saving equation in conjunction with the Lumsdaine and Papell (1997) unit root test considering two structural shifts. A novel aspect of the paper is that it determines the number of breaks solely from a scrutiny of the data and that in constructing the dummy variables for the breaks it uses the endogenously determined break dates. It shows that allowing for structural shifts eliminates the “puzzle” both for Japan and the USA.     

Geographical segmentation of US capital markets

Demographic variation in savings behavior can be exploited to provide evidence on segmentation in US bank loan markets. Cities with a large fraction of seniors have higher volumes of bank deposits. Since many banks rely heavily on deposit financing, this affects local loan supply and economic activity. I show a positive effect of local deposit supply on local outcomes, including the number of firms, the number of manufacturing firms, and the number of new firms started. The effect is stronger in industries that are heavily dependent on external finance. The deregulation of intrastate branching reduced the effect of local deposit supply by approximately a third.     

A functional coefficient model view of the Feldstein–Horioka puzzle

What does the saving–investment (SI) relation really measure and how should the SI relation be measured? These are two of the most discussed issues triggered by the so-called Feldstein–Horioka puzzle. Based on panel data we introduce a new variant of functional coefficient models that allows to separate long and short to medium run parameter dependence. The new modeling framework is applied to uncover the determinants of the SI relation. Macroeconomic state variables such as openness, the age dependency ratio, government current and consumption expenditures are found to affect the SI relation significantly in the long run.     

Measuring Inflation Expectations Uncertainty Using High‐Frequency Data

Inflation expectations play a key role in determining future economic outcomes. The associated uncertainty provides a direct gauge of how well‐anchored the inflation expectations are. We construct a model‐based measure of inflation expectations uncertainty by augmenting a standard unobserved components model of inflation with information from noisy and possibly biased measures of inflation expectations obtained from financial markets. This new model‐based measure of inflation expectations uncertainty is more accurately estimated and can provide valuable information for policymakers. Using U.S. data, we find significant changes in inflation expectations uncertainty during the Great Recession.     

Competitive risk sharing contracts with one-sided commitment

This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment effectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogoff [1989. Sovereign debt: is to forgive to forget? American Economic Review 79, 43-50]. From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.     

Stockholding: Participation, location, and spillovers

This paper provides the first joint analysis of household stockholding participation, location among stockholding modes, and participation spillovers. Our model matches observed participation, conditional and unconditional, and asset location patterns. We find that financial sophistication correlates strongly only with direct stockholding and mutual fund participation, while social interactions mainly influence stockholding through retirement accounts. Whether retirement account owners include stocks in their accounts strongly depends on owner characteristics, which is not the case with mutual fund owners and investment in stock funds. Stockholding is more common among retirement account owners, but mainly because of owner characteristics rather than of any participation spillovers from retirement account ownership.     

Reforms in Thai bank governance: The aftermath of the Asian financial crisis

This paper provides an empirical analysis of Thailand's bank governance reforms after the 1997 Asian financial crisis and then examines the stock market's response. Unlike the pre-crisis period, we find that the bank sector returns (or return volatilities) have become more Granger causal to the overall stock market in the post-crisis period. Announcements of bank governance reforms are also generally associated with significant change in bank sector returns. This adds to the proposition that improved bank governance is related to improved bank performance as measured by their bank stock returns.     

Do newspaper articles on card fraud affect debit card usage?

This paper investigates the impact of newspaper articles about skimming fraud on debit card usage in the Netherlands using daily transaction data and daily newspaper announcements from January 1st 2005 to December 31st 2008. Key finding is that articles about skimming fraud significantly affect same day debit card usage. The direction and strength of the media effects strongly depend on the specific characteristics of the publications, such as type of fraud addressed and their position in the newspaper, but above all on the frequency with which they come out. The effects, however, are economically small compared to other factors, such as calendar and holiday effects, and do not sustain or accumulate in the long run. Yet, some first cost calculations demonstrate that the impact of media attention on total retail payments efficiency is not to be underestimated.     

The Dynamics of Household Wealth Accumulation in Italy

We examine the dynamics of wealth accumulation distribution in Italy using data drawn from the Survey of Household Income and Wealth, a representative survey of the Italian population conducted by the Bank of Italy. We compare survey data with National Accounts data and discuss sample representativeness, attrition and measurement issues. We then look at wealth inequality (the cross‐sectional dispersion of wealth) and wealth mobility (individual transitions across the wealth distribution) and examine the age profile of wealth using repeated cross‐sectional data. Finally, we consider various explanations for the pattern of wealth accumulation in Italy, focusing on retirement, bequests, income risk, health shocks and credit market imperfections.     

Structural changes in foreign investors’ trading behavior and the corresponding impact on Taiwan's stock market

This study investigates the impact of the expected and unexpected trading behavior of foreign investors on return volatilities during structural change periods. And the jump intensity model pinpoints crucial events that have influenced the stock market. The empirical results find that there has been a stabilizing effect of foreign investment on Taiwan's stock market as restrictions on foreign trading have been gradually relaxed, as opposed to there being a complete relaxation of the restrictions imposed on Qualified Foreign Institutional Investors (QFIIs).     

The role of autoregressive conditional skewness and kurtosis in the estimation of conditional VaR

This paper investigates the role of high-order moments in the estimation of conditional value at risk (VaR). We use the skewed generalized t distribution (SGT) with time-varying parameters to provide an accurate characterization of the tails of the standardized return distribution. We allow the high-order moments of the SGT density to depend on the past information set, and hence relax the conventional assumption in conditional VaR calculation that the distribution of standardized returns is iid. The maximum likelihood estimates show that the time-varying conditional volatility, skewness, tail-thickness, and peakedness parameters of the SGT density are statistically significant. The in-sample and out-of-sample performance results indicate that the conditional SGT-GARCH approach with autoregressive conditional skewness and kurtosis provides very accurate and robust estimates of the actual VaR thresholds.     

The Great Recession: US dynamics and spillovers to the world economy

This paper provides an empirical investigation of both the within-US and international channels of transmission of macroeconomic and financial shocks by means of a 50-country macroeconometric model (estimated over the 1980-2009 period), including measures of excess liquidity and financial fragility, specifically designed in order to evaluate the relevance of the boom-bust credit cycle view put forward as an interpretation of the recent “Great Recession” episode. We find that such a view is consistent with the empirical evidence. Moreover, concerning the real effects of financial shocks within the US, we detect stronger evidence of an asset prices channel, rather than a liquidity channel. Concerning the spillovers to the world economy, we find that while financial disturbances are transmitted to foreign countries through US house and stock price dynamics, as well as excess liquidity creation, the trade channel is the key trasmission mechanism of real shocks.     

Productivity and efficiency analysis of Shinkin banks: Evidence from bootstrap and Bayesian approaches

This paper analyzes the productivity and efficiency of Shinkin banks and the various prefectures in Japan, over the period from 2000 to 2006. We obtain estimates of efficiency growth and productivity growth, using the bootstrapped Malmquist index, and estimates of efficiency using the Bayesian distance frontier approach. We confirm that the efficiency growth and productivity growth of Shinkin banks did not improve significantly over the period of this study. In addition, we show that the efficiency of Shinkin banks is homogenous, with little variation across the banks analyzed. Methodologically, we also prove that a failure to impose theoretical regularity on the distance function could lead to false conclusions about the average efficiency or efficiency ranking of Shinkin banks. The study also includes an analysis of the correlates of productivity and efficiency growth, and provides efficiency and productivity estimates of the prefectures in which the banks are located.     

Regional capital mobility in China: 1978-2006

We examine cross-region capital mobility in China and track how the degree of mobility has changed over time. The effects of fiscal and redistributive activities of different levels of government in China on private capital mobility are taken into account. Our results indicate that there was a significant improvement in capital mobility over time in China, particularly for private capital in the more developed regions. The central and provincial governments, via their taxation, spending, and transfers, loosen the relationship between private saving and investment and appear to promote capital mobility, particularly for less developed regions. There are considerable differences between more and less developed regions in terms of the degree of capital market integration and the improvement in capital mobility over time. The results have important policy implications on global re-balancing as well as regional development gap and risk-sharing within China.     

Inflation targeting: An indirect approach to assess the direct impact

It is quite difficult to assess the benefits of inflation targeting (IT) since its immediate effect will be on inflation expectations, an unobserved variable. Due to lack of comprehensive data on inflation expectations, most studies so far concentrated on the impact of IT either on observable variables like output, unemployment, and inflation or compared post-IT surveys of IT countries with non-IT countries. In our study, we focus on a yet unanswered question, i.e., how the expectations change with the adoption of IT. We suggest that heterogeneous inflation expectations lead to long memory in actual inflation, and IT, if successful, should decrease this persistence by concentrating the public’s expectations toward the announced target. Empirical results confirm our hypothesis with a reduction in inflation memory after the adoption of IT in almost all eight developed countries in our sample.     

Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions

Several studies have analyzed discretionary accruals to address earnings-smoothing behaviors in the banking industry. We argue that the characteristic link between accruals and earnings may be nonlinear, since both the incentives to manipulate income and the practical way to do so depend partially on the relative size of earnings. Given a sample of 15,268 US banks over the period 1996–2011, the main results in this paper suggest that, depending on the size of earnings, bank managers tend to engage in earnings-decreasing strategies when earnings are negative (“big-bath”), use earnings-increasing strategies when earnings are positive, and use provisions as a smoothing device when earnings are positive and substantial (“cookie-jar” accounting). This evidence, which cannot be explained by the earnings-smoothing hypothesis, is consistent with the compensation theory. Neglecting nonlinear patterns in the econometric modeling of these accruals may lead to misleading conclusions regarding the characteristic strategies used in earnings management.     

The Slow Adjustment of Aggregate Consumption to Permanent Income

This paper investigates the relationship between aggregate consumption and permanent income using a new approach to the estimation of cointegrated systems that builds on Stock and Watson's common stochastic trends representation. The permanent and transitory movements in aggregate income and consumption are estimated directly using the Kalman filter and are allowed to be correlated. This approach avoids any implicit restriction that permanent income be as smooth as consumption. Instead, permanent income appears to be relatively volatile, with consumption adjusting toward it only slowly over time. These results provide a clear rejection of the standard version of the permanent income hypothesis and are suggestive of alternative theories of consumption behavior such as habit formation or precautionary savings.     

Comparing New Keynesian models of the business cycle: A Bayesian approach

The baseline New Keynesian model cannot replicate the observed persistence in inflation, output, and real wages for sensible parameter values. As a result, several extensions have been suggested to improve its fit to the data. We use a Bayesian approach to estimate and compare the baseline sticky price model of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398.] and three extensions. Our empirical results are as follows. First, we find that adding price indexation improves the fit of Calvo's [1983. Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383-398.] model. Second, models with both staggered price and wage setting dominate models with only price rigidities. Third, introducing wage indexation does not significantly improve the fit. Fourth, all model estimates suggest a high degree of price stickiness. Fifth, the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts. Finally, the estimated inflation parameters of the Taylor rule are stable across models.