Services sector and economic growth in India

This study examines the long-run equilibrium and short-run dynamic relationship between services sector and Gross Domestic Product (GDP) and between services and nonservices sectors in India. The model is estimated using the optimal single-equation and the maximum-likelihood system estimators. All the estimators consistently suggest the cointegrating relationship between services sector and GDP as well as between services and nonservices sectors. The estimates of long-run elasticity parameters are statistically significant and dimensionally consistent across the estimators. The conventional Cumulative Sum (CUSUM) and the new CUSUM and Moving Sum (MOSUM) tests suggest the stability of the equilibrium residuals and reinforce the cointegrating relationship between the model series. The error correction model provides some support for unidirectional Granger-causality from services sector to GDP. The impulse response and variance decomposition analyses instead suggest the bidirectional causality between services sector and GDP and between services and nonservices sectors. The stable growth of services sector is essentially crucial to absorb the adverse effects of exogenous weather shocks in agriculture and industry and provide resilience to the economy.     

House price dynamics: Evidence from Beijing

To study the house price dynamics in China, this paper extends the traditional life-cycle model by incorporating land supply, regime shifts and government regulation factors. The models are estimated with an error correction framework using quarterly data from 2000 to 2007 in Beijing. The conclusions are as follows. (1) There exits a stable co-integration relationship between house price and fundamentals; land supply and financial regimes are also important determinants of long-run equilibrium house prices. (2) Short-run dynamics depend on changes of fundamentals and the adjustment process of housing market. Land supply has a significant impact on house price fluctuations while demand factors such as user costs, income and residential mortgage loan have greater influences. The adjustment speed of real house prices to the long-run equilibrium has been reduced significantly since 2005 which means exogenous shocks can cause prolonged deviation of real house prices from the equilibrium level.     

Price transmission in the international skim milk powder markets

This article investigates the strength and the pattern of spatial price linkages in skimmed milk powder markets using monthly wholesale price data from three major producers and exporters (the U.S.A., the E.U., and Oceania) and the nonlinear autoregressive distributed lag model. The results suggest that prices in the three regions considered are linked with stable long-run relationships. The law of one price, however, does not hold. The dominant pattern of transmission in the long run is asymmetric involving positive price stocks to be transmitted with higher intensity compared to negative prices shocks; asymmetries in price transmission exist in the short run as well.     

Residential water demand responds asymmetrically to rising and falling prices

This paper econometrically estimates residential water consumption in Germany between 2007 and 2013 based on a panel of almost 3000 supply areas. In particular, the analysis distinguishes periods of rising and falling water and sewage water prices. The short-run (long-run) price elasticity is estimated at around 4.2% (13%), but water demand appears to respond asymmetrically to rising and falling prices. When prices are rising, the short-run (long-run) price elasticity is around 6.5% (17%). When prices are falling, the short-run price elasticity is not statistically different from zero, and the long-run price elasticity is estimated at around 12%. Additional results illustrate that employing average prices instead of marginal prices results in substantially overestimating the price elasticity. These findings are particularly relevant for utilities and regulators planning to alter the tariff structure towards a higher fixed fee and a lower volumetric fee.     

Price Shocks in General Equilibrium: Alternative Specifications

Smets and Wouters (2003) find that at short- and medium-termhorizons stochastic variations in the goods market mark-up arethe most important source of inflation variability in the euroarea. This article shows that an empirically plausible alternativeinterpretation is that the estimated price mark-up shocks representrelative price (e.g. productivity) shocks in a flexible-pricesector. Such an interpretation is consistent with recent microfindings that prices are very flexible in some sectors suchas the food and energy sector, while they are very sticky inother sectors such as services. (JEL codes: E1, E2, E3)     

The dynamic effects of shocks to wages and prices in the United States and the Euro Area

This article investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent technology shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the article.     

The forecasting ability of a cointegrated VAR system of the UK tourism demand for France, Spain and Portugal

This paper uses the vector autoregressive (VAR) methodology as an alternative to Deaton and Muellbauer’s Almost Ideal Demand System (AIDS), to establish the long-run relationships between I(1) variables: tourism shares, tourism prices and UK tourism budget. With appropriate testing, the deterministic components and sets of exogenous and endogenous variables of the VAR are established, and Johansen’s rank test is used to determine the number of cointegrated vectors in the system. The cointegrated VAR structural form is identified and the long-run structural parameters are estimated. Theoretical restrictions such as homogeneity and symmetry are tested and not rejected by the VAR structure. The fully restricted cointegrated VAR model reveals itself a theoretically consistent and statistically robust means to analyse the long-run demand behaviour of UK tourists, and an accurate multi-step forecaster of the destinations’ shares when compared with unrestricted reduced form and first differenced VARs, or even with the structural AIDS model.     

More Evidence in Favor of the Balassa–Samuelson Hypothesis

This study provides additional evidence of a significant long-run relationship between the relative price of nontradables and real output, consistent with the productivity-bias hypothesis of Balassa and Samuelson. The results, however, also indicate that additional permanent supply shocks, specifically real oil prices, need to be considered. In every case, relative prices are significantly affected by permanent innovations in real output and real oil prices. The general lack of evidence of cointegration, however, points to the possibility that additional long-run determinants of relative prices have been omitted.     

Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.     

International demand and liquidity shocks in a SVAR model of the Australian economy

A structural vector autoregressive model of the Australian economy that allows for international shocks from the USA, Japan as well as world commodity prices is specified and estimated for the period 1979–1999. A block exogenous structure linking the three countries is imposed. The international linkages are modelled using a factor structure to circumvent problems from estimating large scale dynamic models. The factors are estimated recursively using a Kalman filter and are found to represent aggregate demand and liquidity shocks for the USA and Japan respectively. The key empirical result is the USA shocks are the dominant source of international shocks on the Australian economy with the Japanese economy having a dampening effect on the USA shocks. The empirical results also show that Australian monetary policy responds to domestic conditions rather than international monetary policy.     

Dynamic aspects in a temporary equilibrium of international trade with quantity rationing

The dynamics of a small open economy are analyzed in a context where economic agents have uncertain expectations about future market dates such as prices and wages or quantity constraints. The dynamic adjustment process is shown to be a stable one, and conditions are discussed under which exogeneous shocks will alter the asymptotic equilibrium of the economy. The economic system in general does not approach the long-run equilibrium monotonically, i.e. the adjustment process has a cyclical pattern.     

The contemporaneous correlation between price shocks and output shocks

Until the 1990s, prices were believed to be procyclical. Several researchers have since presented evidence of counter-cyclical prices. This evidence proved robust, but its interpretation has varied. Some have argued that the contemporaneous correlation between output and prices reflects both the source of the current shock and the adjustment process from short-run to long-run equilibrium; the adjustment to the long run imparts a bias towards a negative price-output correlation. The issue of dynamics is addressed by estimating price shocks and output shocks. The sign of the correlation between these shocks does not reveal anything about the relative importance or frequency of demand versus supply shocks; however, some understanding is gained from the time-series of the product of the shocks. In periods when the product is negative, supply shocks must have been either relatively large or relatively important. In periods when the product is positive, demand shocks must have been either relatively large or relatively important. The data suggest that the economies of the USA, Canada and the UK were buffeted by both demand and supply shocks in about equal portions.     

Dynamics of money, output and price interaction — some Indian evidence

The present study is an attempt to model the dynamic interactions between money, output and prices in a structural vector autoregression framework. The primary concern of the paper is to examine the sources of variations and response of one variable to changes in others in a system of economic variables in the Indian context. Using quarterly data from 1970Q1 to 1990Q4, we find that structural factors, in addition to monetary factors, play an important role in generating and sustaining the process of inflation and fluctuations in economic activity. An increase in money/credit supply is found to increase output and prices in the short-run and prices in the long-run, while a non-accommodating monetary policy is ineffective in controlling inflation even at the cost of substantial output losses, thereby indicating relative rigidities in price movements. Another interesting finding is that the monetary authority responds differently to different price shocks, exercising its leverage in altering the quantity as well as the composition of aggregate money supply. Our findings also indicate that the economy is characterized by relatively large and infrequent shocks to ‘price/cost’-related factors. Finally, our analysis suggests that a simple monetary targeting without adequate ‘supply side’ measures may not be able to serve the objective of maintaining growth with price stability.     

Effects of vertical integration on price and volume: An empirical inquiry

A simple model with two stages of production is used for deriving some empirically testable hypotheses. Firms (two upstream and two downstream) in the industry are either vertically integrated or not, hence the industry has three alternative patterns: Complete unintegrated, partially integrated, or fully integrated.Final good prices, outputs and profits of firms are different in each integration pattern but what is optimal can not be stated (i.e., pay-offs are much too complicated in order to solve the sub-game equilibrium).The essential feature of the model is that there are external markets for the intermediate inputs. Hence input trade between the four firms/divisions need not balance since excess supply or demand is traded at the external market. With this feature purely downstream exogenous shocks have no effect on upstream pricing nor production decisions if all four firms are unintegrated. Such exogenous shocks have non-zero effects if at least one firm is vertically integrated. There are also other dissimilarities in comparative statics of each industry integration pattern.An indirect method to test the effects of vertical integration on price and volume is presented and empirically tested. Depending on the vertical integration pattern of an industry exogenous shocks have dissimilar effects on prices and outputs of the final and intermediate good. A four equations system is estimated by using Finnish forest industry firm data. Final good demand rise has a reducing effect on both paper and pulp prices. Stumpage prices (upstream marginal costs) have a negative impact on paper and pulp production and a positive impact on prices. These effects from upstream (downstream) stage into downstream (upstream) market should not occur when all firms are unintegrated.This is a revised version of a paper which was presented at seminars at Brussels, Turku, Vienna, and Stuttgart. I would like to thank seminar participants (specially Frank Schmid) and anonymous referees for helpful comments. Financial support from the Marcus Wallenberg Foundation is gratefully acknowledged.     

An econometric analysis of the world zinc market

A fairly detailed market form of econometric model is built, based on the technological, behavioral and institutional features of the world zinc industry. An estimated version of the model indicates different systems of lag responses in the structures of demand and supply to the price of zinc, a very poor substitutability on the demand side, free market price as a long-run equilibrator for the U.S. producers' price, and an important influence of the U.S. interventions on the world market. The model meets reasonably well the predictability criterion based on the technique of dynamic simulation. The performance properties of the world zinc industry, analysed through dynamic multiplier simulation technique, show that the industry exhibits a reasonably, stable market environment to the exogenous disturbances such as an increase in the activity levels of consumers and variations in the prices of substitutes. It is, however, quite sensitive to technological changes in the consumer industries. The stockpile policy of the U.S. Government does not seem to be properly geared to its objectives and, in general, it seems to have restricted the development of the industry as a whole.     

Sources of fluctuations in hours worked for Canada,Germany, Japan and the U.S.: a sign restriction VAR approach

This study empirically examines the sources of fluctuations in hours worked in Canada, Germany, Japan and the U.S. It is particularly motivated by Galí’s (1999) VAR study, which demonstrates that a positive technology shock reduces hours worked, at least in the short run. However, in the present study, a technology shock is identified without recourse to Galí’s long-run restriction, which has been subject to active controversy. Furthermore, this study uncovers other important sources of fluctuations in hours worked to reflect the concern, raised by numerous studies, that technology shocks leave most variations in hours worked unexplained. Specifically, there are six shocks underlying our model, and they are identified using a set of sign restrictions. The empirical results confirm that in all four countries, a positive technology shock significantly reduces hours worked. This technology shock, along with labor supply and demand shocks, accounts for most of the short-term variations in hours worked. As the forecasting horizon increases, technology and demand shocks become less important, whereas labor supply shocks contribute to explaining the bulk of long-run variations in hours worked. Finally, the empirical relevance of Galí’s long-run identification restriction is tested and the results are related to those obtained using the sign restriction model.     

Cross market predictions for commodity prices

This paper shows that commodity prices can be predicted from cross-market information by establishing long-run cross-market commodity price equilibrium models, which are characterized by a linear relation between prices across different markets. Using data from five representative commodity markets (oil, copper, gold, corn, and cattle) during the period 2005–2018, we demonstrate that oil and industrial metal markets have formed a long-run price equilibrium with other markets across different commodity families. However, agriculture and gold markets do not tend to have long-run price equilibrium relations with other commodity markets. Furthermore, we show that the absence of a price equilibrium is due to the cross-market liquidity interference effect. After we control for the liquidity effect, long-run cross-market commodity price equilibrium relations are reestablished for agriculture and gold markets. These results can aid in demonstrating that liquidity can capture most of the missing information that is not reflected in price dynamics in less liquid markets, such as agriculture and gold markets. Therefore, less liquid commodity price predictions require both prices and liquidity levels from cross-markets, while liquid commodity prices (oil and metal) can be predicted based solely on cross-market prices.     

Effects of mineral-commodity price shocks on monetary policy in developed countries

This article investigates effects of changes in mineral commodity prices on monetary policy. Using macroeconomic data from three mineral-producing countries (Australia, Canada and New Zealand) and two non-mineral-resource countries (USA and UK), I estimate the impulse response functions of the policy interest rates and the core consumer price index (CPI) inflation rates to mineral-commodity price shocks. I find that the central banks in both groups of the examined countries significantly respond to mineral-commodity price shocks. In responses to an unexpected 10% increase in mineral commodity prices, the central banks are estimated to increase their policy interest rates by approximately 0.8 percentage points. Moreover, the central banks seem to take anticipatory policy reactions to control core CPI variations triggered by these shocks. Thus, mineral commodity prices would act as important determinants of the monetary policies in both groups of the examined countries. These findings would be useful for analysing Taylor rules in their countries. However, effects of the increase in their policy interest rates on core CPI inflation cannot be identified for the examined countries.     

Price Clustering and Investor Sentiment

Among the anomalous findings in the finance literature, perhaps the most persistent is the finding that security prices tend to cluster on round pricing increments. The author examines how investor sentiment influences the degree of price clustering. Both univariate and multivariate tests show a contemporaneous correlation between price clustering and investor sentiment. Recognizing the need to make stronger causal inferences, the author conducts 2 additional sets of tests. First, the author uses the technology bubble period as natural experiment and examine the price clustering of technology vis-à-vis nontechnology stocks. Results show that price clustering is markedly higher in tech stocks than in nontech stocks during this period of rising, sector-specific, investor sentiment. Second, the author estimates a vector autoregression process and examines the impulse responses of price clustering to exogenous shocks in investor sentiment. The results from these tests indicate that causation flows from sentiment to clustering instead of the other way around.     

Employment and output effects of financial shocks

This paper develops a New Keynesian model featured with financial frictions in the form of an exogenous credit constraint to explore the employment and output effects of financial shocks. I show that the equity payout adjustment costs are crucial for the transmission mechanism of financial shocks. The model is estimated using the Bayesian methods and simulated using the observed exogenous shocks for two periods, 1954:III–1983:IV and 1984:I–2015:I. Overall, it is found that financial shocks can account for the observed dynamics of employment and output, especially the sharp decreases during the Great Recession 2007–2008. Additionally, the financial shock is the third and second biggest contributor to output and employment variations, respectively, in the earlier period, but it turns out to be the main source of employment and output fluctuations in the later period. I find that firms are faced higher equity payout adjustment costs in the period 1984:I–2015:I, which accounts for greater variations in the equity payouts in the period.