Purchasing Power Parity Between the UK and Germany: The Euro Era

We use the Johansen cointegration approach to assess the empirical validity of the purchasing power parity (PPP) between the UK and Germany since the introduction of the euro. We conduct the empirical analysis in the context of the global financial crisis that began in 2007 and find that it directly affects the cointegration space. We fail to validate the Johansen and Juselius (1992) original hypothesis that nonstationarity of PPP associates with the nonstationarity of interest rate differentials to produce a stationary relation. On the other hand, we do not reject PPP. We find that PPP cointegrates with inflation differentials. We also find, contrary to conventional wisdom, that (i) equilibrium adjustment occurs between the German and UK inflation rates, while weak exogeneity exists for the German and UK interest rates and the PPP condition, and (ii) three common trends associated with the German interest rate the UK interest rate, and the PPP condition “push” the system with the German interest rate and the PPP condition playing dominant roles in affecting inflation in both Germany and the UK. These results cast serious doubt on the presumed independence of the UK monetary policy.     

The Whiter the Better? Racial Composition and Access to School Resources for Black Students

Rigorous courses are an important resource, distributed within schools, that merit attention as a central determinant of student achievement and future outcomes (Cook and Evans, J Labor Econ. 18(4):729–754, 2000; Rose and Betts, Rev Econ Stat. 86(2):497–513, 2004). Yet, black students are less likely to be enrolled in advanced courses in general (ex. Darity et al. 2001; Klopfenstein, Contemp Econ Pol. 23(3):416–28, 2005) and specifically Algebra 1 in middle school (Riley 1997). Debate exists around the potential benefits or drawbacks for black students attending highly integrated schools relative to highly segregated schools. This study examines which school characteristics are associated with large disparities in black student enrollment in Algebra 1 relative to white student enrollment in Algebra 1 in the same middle schools in North Carolina. Of particular interest is the relationship between access and the percentage of white students in a school. The study finds that: (1) black students are underrepresented in Algebra 1 in essentially all schools in North Carolina; (2) the largest disparities occur in schools that are highly integrated while the disparities are reduced in schools that are either large majority white or large majority non-white; (3) schools with a larger share of white teachers are related to larger disparities between black and white students; (4) the marginal effects of racial composition on the relative disparity in enrollment are significantly larger for black females than black males.     

For Colored Girls? Factors that Influence Teacher Recommendations into Advanced Courses for Black Girls

Given the lack of attention to Black girls’ participation in STEM related courses, it remains unclear why this group participates at lower rates in STEM courses later in their academic careers (Hyde et al. 2008; Tocci and Engelhard 1991; Catsambis 1994). The purpose of this paper is to examine the extent to which teachers influence Black girls’ opportunities along the math pipeline. The aim is to determine the role of Black girls’ cognitive and non-cognitive behaviors on teachers’ decisions to place them in advanced courses. Using nationally representative survey data, the findings indicate that Black girls’ confidence in their ability to master skills taught math reduced the odds teacher recommendations to advanced courses. Additionally, teachers’ expectations of the educational attainment of Black girls were related to the recommendation process. Overall, the findings suggest that subjective beliefs held by students and teachers critically influence Black girls’ persistence along the math pipeline.     

On the Relative Optimality of Environmental Policy Instruments: An Application of the Work of Alberto Alesina

We study the issue of optimality of policies devoted to environmental goals, building upon the recent and interesting work by Alesina and Passarelli (2010) and extending their analysis to the more general framework set up by Weitzman (The Review of Economic Studies 41: 477-491, 1974). We illustrate instruments that governments have at their disposal to reduce polluting emissions, and we point out the economic implications that may arise from the overlapping regulation through both instruments in the European context. We review the literature on political determination of environmental regulation. On the basis of existing literature, we show that political factors are more important than economic ones in explaining why particular instruments are implemented for certain problems (Hepburn et al. Climate Policy 6: 137–160, 2006). We recognize Alesina’s contribution which states that environmental policy, and the decision to adopt one tool instead of another, is subject to a complex political process. Governments are subject to pressure from politicians, households, and firms because their decisions imply winners and losers. Then, we focus in detail on the work by Alesina and Passarelli (2010) who consider which policy tool and at what level would be chosen by majority voting to reduce polluting emissions; they find out that even if a tax is in general superior to quantity based mechanisms (quotas and tradable permits), the majority may strategically choose a quantity mode in order to charge the minority a larger share of the cost for polluting emissions reduction. We extend Alesina’s analysis, focusing on the optimality of price-based mechanisms, since it is not always the case that price instruments are more efficient than quantity instruments. To this aim, we explicitly make use of Weitzman results (The Review of Economic Studies 41: 477–491, 1974), which suggest that if costs are highly nonlinear compared to benefits, then price-type regulation is more efficient, while if costs are close to linear, then quantity-type regulation is more efficient. We cast Alesina’s analysis in the European context, analyzing potential voting outcomes, assuming that EU countries can be arranged according to different criteria. We find that depending on the empirical distribution of voting countries, Alesina’s voting procedure leads to interesting different outcomes.     

Export behavior of German SMEs in the Eurozone

The paper investigates the export behavior of German small and medium-sized enterprises (SMEs) in response to the introduction of Euro and the subsequent fall in trade costs. Based on a testable prediction derived from Helpman et al. (American Economic Review 94:300–316, 2004) and Helpman (Journal of Economic Literature 44:589–630, 2006), the paper argues that the likelihood of SMEs to become an exporter increases after the monetary union. By using an empirical probit estimation technique, it is found that SMEs, and especially medium-sized enterprises, indeed benefit from cost reductions in entering into export markets. What is more, firms operating in furniture, electrical equipment, plastics, medical instruments, machinery and textiles are more likely to benefit from monetary union. These results are robust to using exchange rate volatility as a proxy for the cost reductions due to monetary union.     

Real Exchange Rate Dynamics in the Asian Economies: Can Regime Shifts Explain Purchasing Power Parity Puzzles?

Abstract

We show that the strong version of the purchasing power parity (PPP) hypothesis holds in most of the US dollar real exchange rates using cointegration method that accounts for breaks in the models. The break dates in seven of the Asian currencies coincide with the two rounds of currency depreciation recorded during the 1997–1998 financial crises. We obtain a mean half-life estimate of about 10 months for PPP to converge to its long-run equilibrium level. Our confidence intervals based on persistence profile approach for the half-lives is much narrower than previous evidence might indicate. Taken together, these results show that mean reversion is stronger than commonly thought.     

Third-Degree Price Discrimination: Apology not Necessary _ Comment

In this comment, we note that the analysis in Lopez and Molina (2010) is subject to a number of mistakes and various unjustifiable assumptions.     

The gains from variety in the European Union

Over the last decade, European Union members have experienced a steady increase in imports. This increase was accompanied by a strong growth in the number of imported goods and trading partners, suggesting positive welfare gains for consumers via an extended set of consumption possibilities, as pointed out in the ??New Trade Theory??. In this paper, we apply the methodology developed by Feenstra (Am Econ Rev 84(1):157?C177, 1994) and Broda and Weinstein (Q J Econ 121(2):541?C585, 2006) to structurally estimate the gains from imported variety for the 27 countries of the European Union using highly disaggregated trade data at the CN-8 level from Eurostat for the period from 1999 to 2008. Our results show that, within the European Union, especially ??newer?? and smaller member states exhibit high gains from newly imported varieties. Furthermore, we find that the majority of the gains from variety for consumers stems from intra-European Union trade.     

The exporter productivity premium along the productivity distribution: evidence from quantile regression with nonadditive firm fixed effects

A vast literature on the international activities of heterogeneous firms finds the existence of a positive exporter productivity premium. On average, exporting firms are more productive than firms that sell on the national market only. The Melitz (Econometrica 71:1695–1725, 2003) model, however, has implications for not only mean differences but also differences in the distribution of productivity. Furthermore, exporting firms may be different from non-exporting firms for reasons that are not included in the Melitz model. We believe that conditioning on firm fixed effects and studying the distribution of productivity are both necessary for empirical tests of the Melitz model. This paper is the first to employ a new quantile estimation technique for panel data introduced in Powell (Did the economic stimulus payments of 2008 reduce labor supply? Evidence from quantile panel data estimation. RAND Corporation Publications Department, Santa Monica, 2014). We find that the premium is positive at all productivity levels, but highest at the lowest quantiles. These results support theoretical models which suggest that there is a division in productivity between exporters and non-exporters.     

Modeling the Behavior of the KRW/USD Exchange Rate and Policy Implications

Abstract

This paper examines the behavior of the KRW/USD exchange rate based on four major models. Using the mean absolute percent error (MAPE) as the criterion, the purchasing power parity (PPP) model using the relative producer price index (PPI) performs the best, followed by the extended investment saving-liquidity preference money supply (IS-LM) model, the Frankel model, the purchasing power parity model based on the relative consumer price index (CPI), the Dornbusch model, the Frenkel model, and the uncovered interest parity model. The generalized Box–Cox model indicates that the log-log form for the PPP model can be rejected.     

The Entrepreneur: Real and Imagined

Ludwig von Mises, Friedrich Hayek, and Murray Rothbard were the main architects of the distinctly Austrian theory of production as it exists today. All three conceived the entrepreneurial function in the actual market economy as presupposing the ownership of property, specifically capital. Yet, many, if not most, contemporary Austrian economists conceive the entrepreneur as a pure decision-maker possessing superior “alertness” but owning no resources. This pure entrepreneur earns profits by “discovering” and seizing objectively existing but previously unperceived opportunities to arbitrage price discrepancies between a bundle of complementary inputs and the output it yields. That this is the essence of “the” Austrian theory of the entrepreneur and profit is accepted as a matter of course by those among the broader economics profession who are sympathetic to the Austrian approach. It is the goal of this paper to demonstrate that there is in the Austrian tradition traceable back to Carl Menger, a very definite and prominent strand of thought that conceives property ownership as central to the tasks that the entrepreneur characteristically performs in the real-world market economy. The managerial function . . . can never evolve into a substitute for entrepreneurship. The fallacy to the contrary is due to the error confusing the category of entrepreneurship as it is defined in the imaginary construction of functional distribution with conditions in a living and operating market economy. The function of the entrepreneur cannot be separated from the direction of the employment of factors of production for the accomplishment of definite tasks. The entrepreneur controls the factors of production; it is this control that brings him either entrepreneurial profit or loss. (Mises 1998, p. 302) Mr. Keynes obviously arrives at this view by an artificial separation of the function of the entrepreneurs as owners of capital and their function as entrepreneurs in the narrow sense. But these two functions cannot be absolutely separated even in theory, because the essential function of the entrepreneurs, that of assuming risks, necessarily implies the ownership of capital. Moreover, any new chance to make entrepreneurs’ profits is identical with a change in the opportunities to invest capital, and will always be reflected in the earnings (and value) of capital invested. (Hayek 1931, p. 277; emphasis in original) It is clear, therefore, that the process of equalization of rate of return throughout the economy, one that results in a uniform rate of interest, is the very same process that brings about the abolition of profits and losses in the ERE. . . . [I]f the . . . entrepreneur owns no assets, then how in the world does he earn profits? Profits, after all, are simply the other side of the coin of an increase in the value of one’s capital; losses are the reflection of a loss in capital assets. (Rothbard 2004, pp. 513–14; 1997, 2:247; emphasis in original)      

An Empirical Analysis of the Austrian Business Cycle Theory

The Austrian economists Ludwig von Mises and Friedrich A. Hayek developed a unique theory of the business cycle. In their view, an unsustainable boom ensues when the rate of interest prevailing in the market falls below the natural rate. The boom is characterized not only by an increase in aggregate production but also by a distortion of the structure of production. Similarly, the recession that follows is characterized by a decline in aggregate production as the structure of production is repaired. Hence, the Austrian account of macroeconomic fluctuation stresses the misallocation and reallocation of resources in addition to the overproduction and underproduction of more conventional business cycle theories. In a recent article, Lester and Wolff (Review of Austrian Economics 26(4):433–461, 2013) attempt to consider the empirical relevance of the Austrian view. We argue that the authors’ use of the federal funds rate as an indicator of monetary policy is inappropriate in that it fails to distinguish a low market interest rate from a market interest rate that is low relative to the natural rate. Using an estimate of the natural rate provided by Selgin et al. (2011), we attempt to improve upon their analysis.     

The Dollar-Pound Exchange Rate During the First Nine Months of World War II

Between August 25, 1939 and June 7, 1940, there was a free market for British pounds in New York. German success at the outset of World War II caused the value of free sterling to fall relative to the official exchange rate. This imposed an externality that made it more difficult for Britain to finance the war. Eventually, the externality became large enough that Britain chose to take extreme measures to abolish it, even at the expense of tarnishing the reputation of London’s financial markets. We collected daily data to investigate how the market reacted to war news and to policy changes. Using methods developed by Bai and Perron (Econometrica 66:47–78, 1998; Journal of Applied Econometrics 18:1–22, 2003), we find 17 breaks in the exchange rate. Fourteen are associated with military events and three are associated with policy changes. The episode illustrates how markets can fail to serve the public interest during times of war.     

How does taste and quality impact on import prices?

Understanding the dynamics of import prices is an important but challenging issue that affects our assessment of welfare. We propose an exact import price index by extending the analysis of Broda and Weinstein (Q J Econ 121(2):541–585, 2006), who include growth in product variety in their calculations of import prices. While still relying on Armington’s (Int Monet Fund Staff Pap 16(1):159–178, 1969) definition of variety, we relax two assumptions, allowing the set of products and unobserved taste and quality parameter to vary. Our modified import price index shows that gains from variety in European G7 countries, although positive, are small compared with gains from taste and quality. Using food and tobacco products as a benchmark with unchanged taste and quality, we find significant gains from shifts in consumer preferences and improving quality for Germany, France, Italy and the UK between 1995 and 2012. By comparing results based on different benchmark groups we further flag the importance of consumer taste in international trade.     

Does foreign direct investment cause long run economic growth? Evidence from the Latin American and the Caribbean countries

The empirical evidence about the temporal precedence between foreign direct investment (FDI) and economic growth in open developing economies is mixed. In this research effort, we explored the FDI-growth nexus for 16 developing countries of Latin American and the Caribbean countries during the last three decades, a period in which many of these countries introduced various economic and financial reforms. As a departure from many previous studies, the current analysis uses the Granger noncausality test procedure recently developed by Toda and Yamamoto (J Econ 66:225–250, 1995), and Dolado and Lutkepohl (Econ Rev 15:369–386, 1996)–TYDL. Our results suggest that the null hypothesis that ‘FDI does not Granger cause economic growth’ is rejected for all countries except Dominican Republic, Trinidad and Tobago, and Jamaica. There is also evidence of unidirectional causality from growth to FDI for all countries except Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, and Jamaica. We found bidirectional causality for Argentina, Brazil, Mexico, Peru and Venezuela.     

FX intervention in the Yen-US dollar market: a coordination channel perspective

The coordination channel has recently been established as an additional means by which foreign exchange market intervention may be effective. It is conjectured that strong and persistent misalignments of the exchange rate are caused by a coordination failure among fundamentals-based traders. In such situations official intervention may act as a coordinating signal, encouraging traders to engage in stabilizing speculation. We apply the framework developed in Reitz and Taylor (Eur Econ Rev 52(1), 55?C76 2008) to daily data on the yen-US dollar exchange rate and on Federal Reserve and Japanese Ministry of Finance intervention operations. The results provide further support for the coordination channel of intervention effectiveness.     

An Econometric Analysis of the Determinants of Fertility for China, 1952–2000

This study investigates the determinants of the fertility rate in China over the 1952–2000 period. Consistent with theory, the key explanatory variables in our fertility model are real per capita income, infant mortality rate, female illiteracy and female labour force participation rates. The long-run results and the test for cointegration are based on the Johansen (1988 Johansen, S. 1988. Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12: 231–254. [Crossref], [Web of Science ®] , [Google Scholar]) and Johansen & Juselius (1990 Johansen, S and Juselius, K. 1990. Maximum likelihood estimation and inference on cointegration – with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52: 169–210. [Crossref], [Web of Science ®] , [Google Scholar]) approach. Our long-run results conform to theory in that all variables appear with their expected signs, and the dummy variable used to capture the effects of the family planning policy indicates that in the years of the policy, fertility rates have been falling by around 10–12%. Our results suggest that socio-economic development – consistent with the traditional structural hypothesis – played a key role in China's fertility transition.     

The valuation of water for conservation projects in South Africa

A number of water development and conservation programmes are currently being undertaken in South Africa, one of the most notable being the Working for Water Programme. The economic rationale underlying the programme in selected mountain catchments in the Western Cape was presented by Van Wilgen et al. (South African Journal of Science, 93: 404–11, 1997 VAN WILGEN, BW, LITTLE, PR, CHAPMAN, RA, GÖRGENS, AHM, WILLEMS, T and MARAIS, C. 1997. The sustainable development of water resources: history, financial costs, and benefits of alien plant control programmes. South African Journal of Science, 93: 404–11. [Web of Science ®] [Google Scholar]) and Marais (Unpublished, PhD thesis, University of Stellenbosch, 1998 MARAIS C 1998 An economic evaluation of alien plant control programmes in the mountain catchment areas of the Western Cape province, South Africa Unpublished PhD thesis. Stellenbosch: University of Stellenbosch  [Google Scholar]). A cost–benefit analysis of the Working for Water Programme in the Mgeni catchment in KwaZulu‐Natal was conducted by Gillham & Haynes (Unpublished paper presented at Tenth South African National Hydrology Symposium, 2001 GILLHAM S HAYNES M 2001 Evaluating a riparian clearing programme as a water management strategy Unpublished paper presented at the Tenth South African National Hydrology Symposium, Pietermaritzburg, 26–28 September  [Google Scholar]). Cost–benefit analysis has also been conducted in the Eastern Cape by Hosking & Du Preez (South African Journal of Science, 95: 442–8, 1999 HOSKING, SG and DU PREEZ, M. 1999. A cost–benefit analysis of removing alien trees in the Tsitsikamma mountain catchment. South African Journal of Science, 95: 442–8. [Web of Science ®] [Google Scholar]). There are, however, aspects of these assessments which merit more attention than they have been given thus far. One of these aspects is the value of water benefits, and this article examines it from the perspectives of marginal cost and willingness to pay. It is shown that different approaches are appropriate for different project locations, and that significantly different results are being obtained using these approaches. It is concluded that great care is needed in relating the value of water benefits to the specifics of the various locations where the conservation project is being implemented.     

Elasticity of substitution and anti-dumping decisions

Motivated by a monopolistic competition model with market segmentation and international price discrimination, this paper analyzes whether there is an inverse relation between the elasticity of substitution and final ad valorem anti-dumping duties across products. We test this for 19 countries using data on anti-dumping from the Global Antidumping Database and US data at the 6-digit HS product level for the elasticity of substitution from Broda and Weinstein (Q J Econ 121(2):541–585, 2006). The results in our empirical investigation support a negative relation between the elasticity of substitution and the final ad valorem anti-dumping duties.