Nonlinearity in the financial development–income inequality nexus

The majority of theoretical studies on the relationship between income inequality and financial development argue that financial deepening might be a feasible instrument for improving income distribution. This paper finds that the prediction crucially depends on the stages of financial development that the country is undergoing. The benefits of financial depth only occur if the country has reached a threshold level of financial development. Below this critical value, financial development counteracts income inequality. Our policy implication is that a minimum level of financial development is a necessary precondition for achieving reduction in income inequality through financial development.     

Modelling structural change in the UK housing market: A comparison of alternative house price models

This paper develops a new approach to the modelling of house prices in the UK, with housing demand being conditioned directly on consumers' expenditure rather than the determinants of expenditure. Conditioning on consumption ensures that the permanent income measure used in determining the level of consumption is consistently reflected in housing demand. The effects of financial liberalisation on the relative consumption of housing and non-housing goods and services are captured using the average loan-value ratio for first-time buyers. We also allow for financial effects via the real user cost of home ownership. House prices are assumed to adjust so as to clear the housing market. The proposed model is found to have structurally stable parameters across the housing market downturn since 1990. Statistical comparisons with the more conventional models in use at HM Treasury and the Bank of England during the early 1990s provide additional evidence in favour of our proposed approach.     

On the median regression for SURE models with applications to 3-generation immigrants data in Sweden

In this paper we generalize the median regression method to be applicable to system of regression equations, in particular SURE models. Giving the existence of proper system wise medians of the residuals from different equations, we apply the weighted median regression with the weights obtained from the covariance matrix of the equations obtained from ordinary SURE method. The benefit of this model in our case is that the SURE estimators utilise the information present in the cross regression (or equations) error correlation and hence more efficient than other estimation methods like the OLS method. The Seemingly Unrelated Median Regression Equations (SUMRE) models produce results that are more robust than the usual SURE or single equations OLS estimation when the distributions of the dependent variables are not normally distributed or the data are associated with outliers. Moreover, the results are also more efficient than is the cases of single equations median regressions when the residuals from the different equations are correlated. A theorem is derived and indicates that even if there is no statistically significant correlation between the equations, using SUMRE model instead of SURE models will not damage the estimation of parameters.     

R&D, risks and overreaction in a market with the absence of the book-to-market effect

Prior studies document that the book-to-market (BM) effect is absent in the Taiwan stock market. Using Taiwanese data covering from 1991 to 2006, we show that, after controlling for the size effect and the Fama and French's (1993) risk factors, the BM effect only exists for those firms with low R&D intensity essentially because these stocks suffer less from investors’ underreaction to R&D investment. The BM effect arises primarily from fundamental reversals acting as a proxy for investors’ overreaction.     

Sovereign default: Which shocks matter?

This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt.     

Finance and growth in Africa: The broken link

While bank liabilities in Sub-Saharan Africa are found to follow (but not lead) economic growth, the link between bank credit and growth is altogether absent.     

Political regimes and income inequality

We construct a theoretically-motivated model of income inequality. Through a pooled regression on an international panel, we demonstrate that political regime (whether extractive, redistributive, or reinvestment-oriented) correlates with within-country income inequality.     

On the credibility of harassment in the insider—outsider model

In a well-known version of the insider-outsider model, the decision by outsiders not to underbid follows from the threats made by insiders to harass new entrants, thereby raising the entrants' disutility of work. It has been argued, however, that the harassment threat is not credible, at least in the one-period case. In the current paper we explore this claim, concluding that the existence of a social convention, together with associated social pressure effects, provides a possible explanation of the credibility of the harassment threat. Moreover, we suggest that such a convention is likely to play a role even in a multi-period analysis.     

An improved generalized moments estimator for a spatial moving average error model

Following Arnold and Wied (2010), we suggest an improved generalized moments estimator for the spatial moving average error model which takes explicitly into account that the moment conditions are based on OLS residuals rather than the true disturbances.     

Inflation and real sectoral output shares: Dynamic panel model evidence from seven OECD countries

Models of the cost of inflation often conclude that inflation misallocates resources. For example, inflation may lead to an increase in the variability of relative prices and it is often claimed that this increase in variability leads to a misallocation of resources. This claim raises the following empirical question, does inflation alter the composition of real output; that is, does it change real output shares? We examine this question using dynamic panel data methods for nine sector panels each with seven OECD countries from 1970 to 2005. We find evidence that inflation changes the real shares of some sectors even when inflation is treated as endogenous.     

Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach

We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK’s attempts at exchange rate pegs in the form of shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also had a palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005–2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.     

Switching error-correction models of house prices in the United Kingdom

This paper develops error-correction models of real house prices in the UK in which the adjustment coefficient switches stochastically between a stable regime where disequilibrium correction takes place and an unstable regime where such a correction does not occur. The generating mechanism of the shifts is modelled as a Markov process with transition probabilities which are either time-invariant or depend on the extent to which the system is out of disequilibrium. Estimation of error-correction models for the UK reveals that the observed booms in real house prices are associated with an unstable regime. We also find that the probability that the system remains in an unstable regime decreases as deviations from equilibrium increase.     

The money-age distribution: Empirical facts and the limits of three monetary models

The money-age distribution is hump-shaped for the US post-war economy. There is no clear-cut relation between the variation of money holdings within generations and age. Furthermore, money is found to be only weakly correlated with both income and wealth. We analyze three motives for money demand in an overlapping generations setup in order to explain these observations: (1) money-in-the-utility, (2) an economy with costly credit service, and (3) limited-participation. All three models are consistent with the hump-shaped relation between average money holdings and age, yet they predict a much closer association between money holdings, income, wealth, and age than we find in the data. Only the limited-participation model partly replicates the low bivariate correlation between money and income as well as between money and interest-bearing assets. None of the three models satisfactorily explains these stylized facts.     

Exploiting old customers and attracting new ones: The case of bank deposit pricing

Recent theoretical contributions suggest that deposit interest rates should be higher in geographic areas characterized by greater in-migration and lower for depositors at banks with greater shares of existing (or so-called “locked-in”) depositors. These hypotheses are tested using a rich data set obtained for the Spanish banking industry. Results confirm that, all else equal, banks offer higher deposit rates in territories characterized by greater in-migration, and also that they tend to offer lower rates, the larger the number of their locked-in depositors. These findings confirm the existence of the trade-off between exploiting old customers and attracting new ones.     

Redistribution and the marginal cost of public funds

Discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one-consumer economy, while the main justification of distortionary taxes is that they are needed for redistribution. This paper analyzes the issue in a model with heterogeneous consumers and a linear income tax, focusing on the tradeoff between labour market distortions and the redistribution from high-wage to low-wage workers. In an optimal tax system the MCF will be the same for all sources of funds and under certain assumptions less than one. Without optimality the MCF will in general differ between different sources of finance.     

The empirical validity of the New Keynesian Phillips curve using survey forecasts of inflation

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.     

Explaining foreign bank entrance in emerging markets

This paper provides a theoretical framework that can explain the empirical observation that foreign banks from industrialized countries tend to increase their involvement in emerging markets in periods of market instability. In this model, domestic banks have (through past lending operations) more soft information on their borrowers available compared to foreign banks. Foreign banks, however, have a superior screening technology that allows them to obtain more hard information about their borrowers’ investment projects. The model has an important implication: Foreign banks increase their market share when credit market conditions deteriorate. The rationale for this finding is that the comparative advantage of the domestic bank loses value in unstable credit market conditions. Thus, the advantage of having a screening technology becomes more important and allows the foreign bank to increase market share. In times of crisis hard information on projects is relatively more important than soft information on the borrower’s history.     

Internal and external exchange rate equilibrium in a cointegration framework. An application to the Spanish peseta

A simple cointegration methodology is used to compute the equilibrium real exchange rate for the peseta. The stock of foreign assets and the evolution of sectoral prices are considered to be the fundamentals for the real exchange rate. After testing for cointegration, we proceed to decompose the series into a permanent and a transitory component, following the method devised by Gonzalo and Granger. The permanent component of the real exchange rate corresponds to its (time-varying) equilibrium value, and the deviation of the actual real exchange rate from this equilibrium value gives an estimation of the degree of misalignment of the real exchange rate. By the end of the sample (1998:1), the peseta is estimated to be undervalued around 6%.     

A revealed preference test of rationing

This paper derives a revealed preference test for utility maximization under rationing and can detect, for which goods rationing is binding without specifying a functional form or imposing rationing constraints prior to estimation. For UK data from 1920–55, we find evidence of utility maximization under rationing with rationing binding for food and other services. Estimated virtual prices exceed observed food prices by 16.5% in 1947 and observed prices of other services by 10.9% in 1952.     

The dynamic impact of immigration on natives' labor market outcomes: Evidence from Israel

This paper studies the short and medium run impact of highly skilled immigrants from the Former Soviet Union to Israel on natives' wages and employment. If immigrants are relatively good substitutes for native workers, the impact of immigration will be largest immediately upon the immigrants' arrival, and may become smaller as the labor market adjusts to the supply shock. Conversely, if immigrants upon arrival are poor substitutes for natives, the initial effect of immigration is small, and increases over time as immigrants acquire local labor market skills and compete with native workers. We empirically examine these alternative hypotheses using data from Israel between 1989 and 1999.We find that wages of both men and women are negatively correlated with the fraction of immigrants with little local experience in a labor market segment. A 10 percent increase in the share of immigrants lowers natives' wages in the short run by 1–3 percent, but this effect dissolves after 4–7 years. This result is robust to a variety of different segmentations of the labor market, to the inclusion of cohort effects, and to different dynamic structures in the residual term of the wage equation. On the other hand, we do not find any effect of immigration on employment, neither in the short nor in the medium run.