Do trade flows respond to nudges? Evidence from the WTO’s Trade Policy Review Mechanism

Relatively little is known about the economic effects of WTO members’ communications outside of official negotiations and dispute proceedings. This paper considers whether interactions between members through the Trade Policy Review Mechanism, the WTO’s prime transparency institution, lead to subsequent changes in bilateral trade flows. Trade policy concern submissions are more likely to lead to positive trade responses when (i) the receiving country is less concerned about terms‐of‐trade losses, (ii) the submitter is more willing to engage in WTO disputes with the reviewed member to challenge controversial trade policies, and (iii) the submitting country challenges trade policies in the nonchemical manufacturing sector. Nudges through the TPR process are not successful in raising agricultural trade.     

Do oil price changes really matter to the trade balance? Evidence from Korea-ASEAN commodity trade data

The contribution of this article is to assess the effect of oil prices have on the trade balance in the framework of bilateral commodity trade data between Korea and each of the four ASEAN member countries—Indonesia, Malaysia, Singapore, and Thailand. To examine this subject thoroughly, we first assume the effects of oil price changes to be symmetric and apply the linear autoregressive distributed lag (ARDL) method to the subject. We find that the price of crude oil indeed has an important role in affecting Korea's trade balance with those four ASEAN economies in both the long- and short-run. We then separate oil price hikes from oil price plunges and implement the nonlinear ARDL method to reveal that there is evidence that changes in oil prices appear to have asymmetric effects on the trade balance for certain products in the long- and short-run.     

Do the ECB's introductory statements help predict monetary policy? Evidence from a tone analysis

In this paper, we examine whether a tone shock derived from European Central Bank communication helps predict ECB monetary policy decisions. To this purpose, we first use a bag-of-words approach and several dictionaries on the ECB's Introductory Statements to derive a measure of tone. Next, we orthogonalise the tone measure on the latest data available to market participants to compute the tone shock. Finally, we relate the tone shock to future ECB monetary policy decisions. We find that the tone shock is significantly and positively related to future ECB monetary policy decisions, even when controlling for market expectations of monetary policy and the Governing Council's inter-meeting communication. Further extensions show that the predictive ability of the tone shock is robust to (i) the normalization of the tone measure, (ii) alternative market expectations of monetary policy, and (iii) the horizon of macroeconomic variables used in the Taylor-type monetary policy rule. These findings highlight an additional channel through which ECB communication improves monetary policy predictability, suggesting that the ECB may have private information that it communicates through its Introductory Statements.     

Are monetary policy shocks causal to bank health? Evidence from the euro area

Despite considerable efforts of the European Central Bank (ECB) to support bank intermediation after the 2008 financial crisis, the recovery of euro area banks remained incomplete. Although many studies indicate that central banks can influence the stock prices of firms through their policy actions and communication, a knowledge gap exists as to whether the ECB's monetary policy can influence bank health. Through a high-frequency identification approach, this study reveals that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. This study provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB's monetary policy measures on euro area banks.     

Should public policy respond to positional externalities?

A nice suit is one that compares favorably with those worn by others in the same local environment. More generally, a positional good is one whose utility depends strongly on how it compares with others in the same category.¹A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated.² For example, if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient, since when all spend more, each candidate's probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful.In such cases, however, it is often impractical to negotiate private solutions. Do positional externalities then become legitimate objects of public policy concern? In attempting to answer this question, I employ the classical libertarian criterion put forth by John Stuart Mill³, who wrote the state may not legitimately constrain any citizen's freedom of action except to prevent harm to others. I argue that many positional externalities appear to meet Mill's test, causing not just negative feelings but also large and tangible economic costs to others who are ill-equipped to avoid them. I also discuss an unintrusive policy remedy for positional externalities, one modeled after the use of effluent charges to curb environmental pollution.The paper is organized as follows. Section 1 notes the deep similarity between the conditions that give rise to positional arms races and those that give rise to conventional military arms races. Section 2 follows with a review of evidence concerning the strength of concerns about relative position. Section 3 describes some of the tangible economic costs that people experience as a result of positional externalities arising from such concerns. Section 4 takes up the question of whether collective action directed against positional externalities is consistent with respect for individual rights. Section 5 describes how a progressive consumption tax could neutralize many of the most costly effects of positional externalities.     

Do the Rich Save More? Evidence from Canada

This paper provides new evidence on the long‐standing question of whether more affluent households save a larger fraction of their income. The major difficulty in empirically assessing the relationship between incomes and saving rates is to construct a credible proxy for long‐run income—purged of transitory fluctuations and measurement error. The Canadian Family Expenditure Survey provides us with both unusually good data on savings rates and potential predictors with which we can construct reliable long‐run income proxies. Our empirical analysis suggests that the estimated relationship between saving rates and long‐run incomes is sensitive to the predictor used to proxy long‐run income. Nevertheless, our preferred estimates indicate that, except for poorest households (who simply do not save), saving rates do not differ substantially across predicted long‐run income groups.     

Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession.First version received: November 2002/Final version received: April 2003This paper benefited greatly from discussions with Kalvinder Shields, Mark Harris, Pete Summers, and Vance Martin. Two anonymous referees provided useful comments on an earlier version of the paper for which we are grateful. The usual disclaimer applies to any errors and omissions. Funding from The University of Melbourne greatly assisted in the completion of this paper.     

How does economic policy uncertainty drive gold–stock correlations? Evidence from the UK

In this article, we investigate the effects of economic policy uncertainty (EPU) on correlations between the UK stock market and gold market. We find that less certain economic policies result in lower correlations, while more certain economic policies result in higher correlations. The correlations are symmetric and show no structural breaks caused by the recent financial crisis. The recent financial crisis has not changed EPU effects on the correlations. The effects of one positive one-standard-deviation shock of the logarithmic change rate of the EPU on the correlations last approximately 19 months.     

How do voters perceive changes to the rules of the game? Evidence from the 2014 Hungarian elections

Voters often rely on partisan attachments as they evaluate new policy proposals, but does partisanship also color their interpretation of incumbent efforts to entrench themselves in power by changing the “basic rules of the political game”? We explore this question by taking advantage of a rare instance where a single party held a supermajority sufficient to unilaterally amend the constitution and overhaul the electoral system. We embedded a randomized experiment in a panel survey around the 2014 Hungarian elections, providing respondents with different information about recent changes to the Hungarian electoral rules. While respondents were largely pessimistic about the reforms, providing information yielded no significant effects on their views on the elections' legitimacy. But when information was presented alongside partisan cues, respondents became more negative in their views. Subgroup analysis shows that this effect is concentrated entirely among those not supporting the incumbent. Partisan differences in opinion dwarf any treatment effects we were able to induce. We provide evidence that these findings are unlikely the result of a well-informed populace. Rather, we provide the first experimental evidence that partisan-motivated reasoning applies not only to public policy under fixed institutions but also to changes to the institutional rules of a political system. Incumbents can exploit strong partisan attachments to reduce political competition.     

Who wants political integration?: Evidence from the Swedish EU-membership referendum

The regional voting pattern of the Swedish European Union (EU)-membership referendum is analyzed to determine voters’ preferences over two fiscal regimes: an autonomous Sweden, or Sweden as part of the EU. A major difference between these regimes is that autonomy gives greater national discretion to handle risk-sharing and redistribution between regions. I find that inhabitants of rich and stable regions, with high levels of schooling, small receipts of central government transfers, and trade relations displaying comparative advantages towards the EU were relatively positive to membership. A plausible interpretation is thus that voters in safe and rich regions voted in favor of dismantling the Swedish transfer system.     

Do ethnic networks influence circular migration? Evidence from the UK

This article identifies ethnic network effects among temporary migrants in the UK. Using microdata from Understanding Society and the UK Census, the empirical results show that ethnic networks change the individual probability for circular migration. These effects are strong and significant only for some ethnicities, when controlling for a set of socio-economic characteristics and when adding spatial variability     

Do policy burdens induce excessive managerial perks? Evidence from China’s stated-owned enterprises

This paper explores the effect of policy burdens of China’s state-owned enterprises (SOEs) on senior executives’ excessive perks. The empirical analysis demonstrates that SOE policy burdens are significantly and positively correlated with senior executives’ excessive perks, indicating that SOE policy burdens increase agency cost. The results hold after controlling for potential endogeneity. Moreover, we find the following evidences. Strategic policy burdens of SOEs have a significantly greater impact on their senior executives’ excessive perks, compared with social policy burdens. The positive impact of SOE policy burdens on excessive perks is significantly weaker in east China due to the higher degree of marketization. The central government’s stricter supervision can also alleviate the positive correlation between policy burdens of centrally administered SOEs and senior executives’ excessive perks.     

Does tax policy affect credit spreads? Evidence from the US and UK

This paper studies how exogenous tax changes affect credit market conditions in the US and UK. Using both structural VAR and structural factor-augmented VAR (FAVAR) model, we find that tax-policy shocks have significant effects on the credit spread. Specifically, the credit spread responds first positively and then negatively to an exogenous tax increase in the two countries. Moreover, the impulse responses of the credit spread to tax-policy shocks do not always accord well with the impulse responses of the output. This indicates that there are channels of tax policy transmission to the credit spread other than through its impact on the business cycle.     

Do community-driven development projects enhance social capital? Evidence from the Philippines

We explore the social capital impacts of a community-driven development project in the Philippines in which communities competed for block grants for infrastructure investment. The analysis uses a unique panel data set of about 2100 households, aggregated at the village-level, collected in 66 treatment and 69 comparison communities. We provide both difference-in-differences and propensity score matching estimates. We find that the project increased participation in village assemblies and the frequency with which local officials meet with residents and had a negative impact on collective action. There is also more limited evidence of a positive impact of the project on bridging (i.e., generalized) trust and of a negative impact on group membership.     

Do central banks respond to exchange rate movements? Some new evidence from structural estimation

This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand, and the United Kingdom. We develop and estimate a structural general equilibrium model, in which monetary policy is represented as a simple rule and exchange rate pass‐through is incomplete due to the presence of local currency pricing and distribution services. We find that the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have not adjusted interest rates in response to exchange rate movements since the adoption of inflation targeting, while our model selection results for Australia are less clear.     

Do political determinants affect revenue collection? Evidence from the Indian states

In a recent study, Dash and Raja (2013) have shown that the size and composition of public expenditure of Indian states are systematically linked with political determinants such as the extent of government fragmentation, strength of opposition, electoral years, and ideology. This study extends the questions to whether there are similar links to revenue collections by the governments that rule the different states in India. Using the same time period of the previous study, four revenue measures related to tax collection and internal debt are considered and four different sets of hypotheses are developed by linking the political determinants with each of the revenue measures. The overall findings of the study suggest that the government-specific political determinants are significant and robust determinants of revenue collections of the Indian states.     

How responsive is body weight to transitory income changes? Evidence from rural Tanzania

We use time-series of rainfall to estimate the response of body weight to transitory changes in household income in rural Tanzania. We find that the response of body weight to income changes is positive on average, but that the impact is highest for female children, and lower for adults. For female children, a ten-percent increase in household income implies an increase in body weight by about 0.4 kg. In contrast, the body weight of adolescents and young adults is virtually invariant to income changes.     

How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks

How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions. However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.     

Why Do the Rich Save More? A Theory and Australian Evidence*

We provide a theory to explain the existence of inequality in an economy where agents have identical preferences and have access to the same production technology. Agents consume a ‘health’ good which determines their subjective discount factor. Depending on initial distribution of capital the economy gets separated into different permanent‐income groups. This leads to a testable hypothesis: ‘The rich save a larger proportion of their permanent‐income’. We test this implication for savings behaviour in Australia. We find that even after controlling for lifecycle and health characteristics, higher permanent income is positively related with higher savings rates and better saving habits.     

Why do firms choose zero-leverage policy? Evidence from China

In recent years, firms choosing zero-leverage policy have largely increased around the world. However, few studies have focused on why Chinese firms choose zero-leverage policy. In this article, we investigate the motivations for firms choosing zero-leverage policy from the perspective of financing needs. Using a sample of public firms listed in Shanghai and Shenzhen Stock market in China from 2007 to 2014, we find that firms without external financing needs are more likely to become zero-leverage firms, and that financial constraints and financial flexibility also may be the motivations for firms choosing zero-leverage policy.