MULTIVARIATE VOLATILITY MODELING OF ELECTRICITY FUTURES

We model the dynamic volatility and correlation structure of electricity futures of the European Energy Exchange index. We use a new multiplicative dynamic conditional correlation (mDCC) model to separate long‐run from short‐run components. We allow for smooth changes in the unconditional volatilities and correlations through a multiplicative component that we estimate nonparametrically. For the short‐run dynamics, we use a GJR‐GARCH model for the conditional variances and augmented DCC models for the conditional correlations. We also introduce exogenous variables to account for congestion and delivery date effects in short‐term conditional variances. We find different correlation dynamics for long‐ and short‐term contracts and the new model achieves higher forecasting performance compared \to a standard DCC model. Copyright © 2012 John Wiley & Sons, Ltd.     

The demand for M3 in the euro area

In this paper, an empirically stable money demand model for M3 in the euro area is constructed. Starting with a multivariate system, three cointegrating relationships with economic content are found: (i) the spread between the long‐term and the short‐term nominal interest rates, (ii) the long‐term real interest rate, and (iii) a long‐run demand for broad money M3. There is evidence that the determinants of M3 money demand are weakly exogenous with respect to the long‐run parameters. Hence, following a general‐to‐specific modelling approach, a parsimonious conditional error‐correction model for M3 money demand is derived which can be interpreted economically. For the conditional model, long‐run and short‐run parameter stability is extensively tested and not rejected. Copyright © 2001 John Wiley & Sons, Ltd.     

Long‐run neutrality of demand shocks: Revisiting Blanchard and Quah (1989) with independent structural shocks

With reference to a stylized theoretical macromodel, Blanchard and Quah (American Economic Review, 1989, 79, 655–673) identify empirical aggregate supply (e.g., productivity) and demand shocks by assuming that the latter are neutral for economic activity in the long run. Taking advantage of recent contributions to the structural VAR literature and data‐based identification, we find that effects of unique independent non‐Gaussian structural shocks support this assumption. Moreover, unlike the results in Blanchard and Quah, statistically identified supply shocks exhibit (insignificantly) opposite impacts on gross domestic product and unemployment in the short run. In comparison with benchmark results obtained under assumed long‐run neutrality, statistical identification points to a stronger role of aggregate supply shocks for shaping temporary profiles of US unemployment during the recessionary period 1973:Q3–1975:Q1.     

AN EMPIRICAL GROWTH MODEL FOR MAJOR OIL EXPORTERS

This paper develops a long‐run output relation for a major oil‐exporting economy where the oil income‐to‐output ratio remains sufficiently high over a prolonged period. It extends the stochastic growth model developed in Binder and Pesaran (1999) by including oil exports as an additional factor in the capital accumulation process. The paper distinguishes between the two cases where the growth of oil income, g^o, is less than the natural growth rate (the sum of the population growth, n, and the growth of technical progress, g), and when g^o ≥ g + n. Under the former, the effects of oil income on the economy's steady growth rate will vanish eventually, while under the latter oil income enters the long‐run output equation with a coefficient which is equal to the share of capital if it is further assumed that the underlying production technology can be represented by a Cobb–Douglas production function. The long‐run theory is tested using quarterly data on nine major oil economies. Overall, the test results support the long‐run theory, with the existence of long‐run relations between real output, foreign output and real oil income established for six of the nine economies considered. Copyright © 2012 John Wiley & Sons, Ltd.     

Conditional Markov chain and its application in economic time series analysis

Motivated by the great moderation in major US macroeconomic time series, we formulate the regime switching problem through a conditional Markov chain. We model the long‐run volatility change as a recurrent structure change, while short‐run changes in the mean growth rate as regime switches. Both structure and regime are unobserved. The structure is assumed to be Markovian. Conditioning on the structure, the regime is also Markovian, whose transition matrix is structure‐dependent. This formulation imposes interpretable restrictions on the Hamilton Markov switching model. Empirical studies show that this restricted model well identifies both short‐run regime switches and long‐run structure changes in the US macroeconomic data. Copyright © 2010 John Wiley & Sons, Ltd.     

Distinguishing external from internal scale effects: The case of public infrastructure

The recent applied production theory literature focusing on the economic performance of firms has increasingly recognized the importance of scale effects on costs and therefore efficiency. These scale effects may include short run returns due to fixity of privately demanded inputs (i.e., capital, long run internal returns to scale, and external factors affecting costs. Since these different types of scale effects can be thought of as shifts in and movements along cost curves, the different cost effects of such factors can be identified in a framework which explicitly takes them into account in the definition ofscale.In this article we formalize such a framework, and then use it to measure short run, long run (internal) and external scale effects from fixity of private capital, nonconstant returns to scale and public infrastructure. We then use these measures to identify the impacts of these different scale factors on productivity growth. The focus on public infrastructure as an important external scale factor is motivated by the current theoretical and policy interest in this issue; we show how a structural production theory model provides a rich basis for the analysis of the cost effects of infrastructure investment.     

Introducing the supply side into the LBS Model

This Briefing Paper describes a new version of the London Business School model, which incorporates our most recent research on the supply side. The changes reflect the desire to improve the specification of the supply-side of the model, and to capture the effects of taxes on the incentives to save, invest and to work, while still retaining the basic features of the income-expenditure framework. The main features of the new model are: - Gross domestic product is determined as the sum of the outputs of five sectors. Previously GDP was determined by the demand side as the sum of the expenditure components. - Domestic demand for the output of the private sector depends on domestic absorption and on the price of this output relative to import prices. Overseas demand for exports depends on world economic activity and on the price of exports relative to the world price of exports. - Supply depends on the capital stock, real unit labour costs and real raw material prices. In the short run, input prices are allowed to affect the mix between goods which are exported and those which are supplied to the domestic market. In the long run, however, the mix depends only on the price of exports relative to the price of domestically supplied goods (i.e., relative profitability). - In the short run, disequilibrium in the goods market is reflected in adjustments to prices, inventories and the external balance. - Since gross domestic product is determined by summing the output of each sector, output decisions are reconciled with expenditure decisions by making imports the difference between final expenditure and aggregate supply. - In the long run, increases in government expenditure crowd out private expenditure, but the effect takes several years to come through. - A cut in corporation taxes which is not financed by higher taxes elsewhere boosts the supply side by raising investment and the capital stock, but not by enough to raise revenues sufficiently to pay for the tax cut. Private sector saving increases but not by enough to fund higher public sector borrowing, so the current account goes into deficit. - In the short run, both supply and demand factors influence economic activity; in the long run, the path of the economy depends only on population growth, capital accumulation and technical progress.     

Understanding the Fisher equation

It is argued that univariate long memory estimates based on ex post data tend to underestimate the persistence of ex ante variables (and, hence, that of the ex post variables themselves) because of the presence of unanticipated shocks whose short‐run volatility masks the degree of long‐range dependence in the data. Empirical estimates of long‐range dependence in the Fisher equation are shown to manifest this problem and lead to an apparent imbalance in the memory characteristics of the variables in the Fisher equation. Evidence in support of this typical underestimation is provided by results obtained with inflation forecast survey data and by direct calculation of the finite sample biases. To address the problem of bias, the paper introduces a bivariate exact Whittle (BEW) estimator that explicitly allows for the presence of short memory noise in the data. The new procedure enhances the empirical capacity to separate low‐frequency behaviour from high‐frequency fluctuations, and it produces estimates of long‐range dependence that are much less biased when there is noise contaminated data. Empirical estimates from the BEW method suggest that the three Fisher variables are integrated of the same order, with memory parameter in the range (0.75, 1). Since the integration orders are balanced, the ex ante real rate has the same degree of persistence as expected inflation, thereby furnishing evidence against the existence of a (fractional) cointegrating relation among the Fisher variables and, correspondingly, showing little support for a long‐run form of Fisher hypothesis. Copyright © 2004 John Wiley & Sons, Ltd.     

Multiple Testing for No Cointegration under Nonstationary Volatility

With cointegration tests often being oversized under time‐varying error variance, it is possible, if not likely, to confuse error variance non‐stationarity with cointegration. This paper takes an instrumental variable (IV) approach to establish individual‐unit test statistics for no cointegration that are robust to variance non‐stationarity. The sign of a fitted departure from long‐run equilibrium is used as an instrument when estimating an error‐correction model. The resulting IV‐based test is shown to follow a chi‐square limiting null distribution irrespective of the variance pattern of the data‐generating process. In spite of this, the test proposed here has, unlike previous work relying on instrumental variables, competitive local power against sequences of local alternatives in 1/T‐neighbourhoods of the null. The standard limiting null distribution motivates, using the single‐unit tests in a multiple testing approach for cointegration in multi‐country data sets by combining P‐values from individual units. Simulations suggest good performance of the single‐unit and multiple testing procedures under various plausible designs of cross‐sectional correlation and cross‐unit cointegration in the data. An application to the equilibrium relationship between short‐ and long‐term interest rates illustrates the dramatic differences between results of robust and non‐robust tests.     

Investment and Uncertainty: A Theory‐based Empirical Approach*

This paper provides empirical evidence on the dynamic effects of uncertainty on firm‐level capital accumulation. A novelty in this paper is that the firm‐level uncertainty indicator is motivated and derived from a theoretical model, the neoclassical investment model with time to build. This model also serves as the base for the empirical work, where an error‐correction approach is employed. I find a negative effect of uncertainty on capital accumulation, both in the short run and the long run. This outcome cannot be explained by the model alone. Instead, the results suggest that the predominant mechanism at work stems from irreversibility constraints.     

Is infrastructure capital productive? A dynamic heterogeneous approach

This paper offers an evaluation of the output contribution of infrastructure. Using a panel time series approach and a large cross‐country dataset, the paper estimates a long‐run aggregate production function relating gross domestic product to human capital, physical capital, and a synthetic measure of infrastructure comprising transport, power and telecommunications. Tests of the cointegration rank allowing it to vary across countries reveal a common rank with a single cointegrating vector, which we interpret as the long‐run production function. Estimation of its parameters is performed using the pooled mean group (PMG) estimator, which allows for unrestricted short‐run parameter heterogeneity across countries while imposing the (testable) restriction of long‐run parameter homogeneity. The long‐run elasticity of output with respect to the synthetic infrastructure index ranges between 0.07 and 0.10. The estimates are highly significant, both statistically and economically, and robust to alternative dynamic specifications and infrastructure measures. Tests of parameter homogeneity fail to yield evidence that the long‐run parameters differ across countries. Copyright © 2014 John Wiley & Sons, Ltd.     

The Difference Between Short and Long Run Effects of Police Outlays on Crime: Policing Deters Criminals Initially, But Later They May 'Learn by Doing'

Abstract . In the long run a positive relationship of police expenditurescrime is derived in models which explain criminal behavior In the short run, however, the statistical results point to the possible deterring effect of police expenditures. A theoretical model is constructed to explain the statistical difference of the short and long run effect of police outlays on crime. As police expenditures increase, crime level diminishes. As time elapses, criminals may adjust to the new level of police effort, improve their performance and at the same level of outlays, increase their criminal activities. This phenomenon could be termed “Criminals’Learning by Doing”. It could explain why, over the long run, the level of crime is positively associated with police expenditures. The empirical analysis examines pooled cross sectional time series of 47 states over the period 1970 to 1980—a total of 517 cases.     

CO‐INTEGRATING VAR MODELS AND ECONOMIC POLICY

This paper surveys some relevant contributions to the economic literature on co‐integrating vector autoregressive (VAR) models [vector error correction mechanisms (VECMs)], emphasizing their usefulness for economic policy. It further discusses some theoretical aspects that are necessary for a complete understanding of their potential. The theoretical introduction of the co‐integrating VAR model is followed by an illustration of its applications to monetary policy, fiscal policy and exchanges rates as well as in establishing the effects of structural bilateral shocks between countries (the so‐called global VAR, or GVAR, models). Special attention is paid to the VECM capacities of being used in conjunction with dynamic stochastic general equilibrium models and of jointly specifying the short‐ and long‐run dynamics, thus representing the steady‐state of economic systems (by means of the co‐integration relations) and the short‐run dynamics around it.     

Constructing Multi‐Country Rational Expectations Models

This article considers some of the technical issues involved in using the global vector autoregression (GVAR) approach to construct a multi‐country rational expectations (RE) model and illustrates them with a new Keynesian model for 33 countries estimated with quarterly data over the period 1980–2011. The issues considered are: the measurement of steady states; the determination of exchange rates and the specification of the short‐run country‐specific models; the identification and estimation of the model subject to the theoretical constraints required for a determinate rational expectations solution; the solution of a large RE model; the structure and estimation of the covariance matrix and the simulation of shocks. The model used as an illustration shows that global demand and supply shocks are the most important drivers of output, inflation and interest rates in the long run. By contrast, monetary or exchange rate shocks have only a short‐run impact in the evolution of the world economy. The article also shows the importance of international connections, directly as well as indirectly through spillover effects. Overall, ignoring global inter‐connections as country‐specific models do, could give rise to misleading conclusions.     

It is merely a matter of time: A meta‐analysis of the causality between environmental performance and financial performance

Research on the relationship between corporate environmental performance (CEP) and financial performance (CFP) continuously receives high attention in both general media and academic publications. One central issue concerns the causal effects between the two constructs. Because existing primary literature is characterized by its heterogeneous study designs and mixed empirical evidence, the aim of this paper is to explicitly shed light on the causality effects between CEP and CFP by means of a meta‐analysis of 893 empirical estimates from 142 CEP–CFP studies. Our findings suggest that in the short run (1 year), financial resources can increase a firm's environmental performance as proposed by the slack resources hypothesis; however, the effects disappear in the long run (after more than 1 year). Conversely, increasing environmental performance has no short‐term effect on a corporate financial performance, whereas a firm significantly benefits in the long term, which is in accordance with the Porter hypothesis. Overall, our results show that the causality between environmental performance and financial performance depends on the time horizon.     

Trends, lead times and forecasting

The innovations representation for a local linear trend can adapt to long run secular and short term transitory effects in the data. This is illustrated by the theoretical power spectrum for the model which may possess considerable power at frequencies that might be associated with cycles of several years' duration. Whilst advantageous for short term forecasting, the model may be of less use when interest is in the underlying long run trend in the data. In this paper we propose a generalisation of the innovations representation for a local linear trend that is appropriate for representing short, medium and long run trends in the data.     

A Semiparametric Analysis of the Term Structure of the US Interest Rates*

The short end of the US$ term structure of interest rates is analysed allowing for the possibility of fractional integration and cointegration. This approach permits mean‐reverting dynamics for the data and the existence of a common long run stochastic trend to be maintained simultaneously. We estimate the model for the period 1963–2006 and find it compatible with this structure. The restriction that the data are I(1) and the errors are I(0) is rejected, mainly because the latter still display long memory. This result is consistent with a model of monetary policy in which the Central Bank operates affecting contracts with short term maturity, and the impulses are transmitted to contracts with longer maturities and then to the final goals. However, the transmission of the impulses along the term structure cannot be modelled using the Expectations Hypothesis.     

Earning or Learning? How Extending Closing Time in the Retail Sector Affects Youth Employment and Education

This paper estimates the causal impact of increased demand for low‐skilled workers on youth employment, and short and long run education. We exploit quasi‐experimental demand shifts for retail workers due to changes in allowed opening hours for retail stores across Norwegian municipalities. We find that relaxed restrictions on opening hours increased employment in the sector and permanently reduced educational attainment for affected high school students. The results suggest that policies or shocks that increase demand for low‐skilled workers in the short term might have negative long‐run effects in terms of reduced educational attainment.     

Do Smaller Classes Always Improve Students’ Long‐run Outcomes?

We exploit the strict class size rule in Norway and matched individual and school register information for 1982–2011 to estimate long‐run causal effects on income and educational attainment. Contrary to recent evidence from the US and Sweden, we do not find any significant average effect on long‐run outcomes of reduced class size. We further use the large register data set and quasi‐experimental strategy to estimate whether the class size effect depends on external conditions facing students and schools, such as teacher quality, extent of upper secondary school choice, school district size, local fiscal constraints and labour market conditions. Overall, we find that the class size effect does not depend on these factors measured at the school district level. The absence of class size effects on long‐run outcomes in Norway is consistent with earlier findings for short‐run outcomes, using comparable data and empirical strategies.     

A Multi-state model of state dependence in labor supply: Intertemporal labor supply effects of a shift from joint to individual taxation

In this paper I develop an intertemporal discrete choice model of female labor supply to analyze the effects of true state dependence and its effect on labor supply behavior over time. The estimation results show that state dependence is significantly positive at the extensive margin and lower but in general still significant at the intensive margin. I apply this model to study the short and long run labor supply effects of a fundamental reform of the German income tax system, i.e. the shift from joint to individual taxation of married couples and show that labor supply responses are significantly higher in the long run than in the short run.