Inflation and Economic Growth: Evidence from the Southern African Development Community

In this paper, we investigate the role of inflation rates in determining economic growth in 15 sub‐Saharan African countries, which are all members of the Southern African Development Community, between 1980 and 2009. The results, based on panel time‐series data and analysis (we use the fixed effects and fixed effects with instrumental variables estimators to account for heterogeneity and endogeneity in thin panels), suggest that inflation has had a detrimental effect to growth in the community. We highlight that inflation has offset the Mundell–Tobin effect and consequently reduced the much needed economic activity in the community, and also the importance of an institutional framework conducive to a stable macroeconomic environment as a precondition for development and prosperity in the community.     

Converging on the learning curve: Theory and application to German regional data

Converging on the Learning Curve: Theory and Application to German Regional Data. — Studies finding convergence between regions are usually based on the assumptions of decreasing returns to overall capital and ubiquitous exogenous technical progress. In contrast, we derive convergence from a model with endogenous knowledge creation and knowledge spillovers which interact with the regional formation of human capital. The model allows for conditional convergence due to interregional knowledge dissemination which is an important determinant of the regional learning curve. In empirical estimates for 327 German regions, it is found that the characteristics of the knowledge and the human capital sectors have largely the impacts on convergence which are predicted by the model.     

Democracy and Durability: Empirical Analysis and a Causality Test

The current literature has failed to differentiate between the collapse of democratic and authoritarian rules or whether democratic regimes collapse for the same reasons as do authoritarian regimes. Therefore, the current literature is silent on whether democracies are more fragile or less susceptible to economic and political breakdowns. Using a multitude of political instability variables, this paper explores empirically, whether political freedom and civil liberty (a proxy for democracy) has any effect on the stability of the political order. The empirical results of the paper confirm the hypothesis that democracy is conducive to political stability; the higher the level of political freedom and civil liberty, the more stable countries are. The paper also presented a Granger-causality test of political instability and the level of political freedom and civil liberty. The test results indicate that the level of political freedom and civil liberty Granger-cause the level of political instability, while the level of political instability does not Granger-cause the level of political freedom and civil liberty. The test results indicate that Granger-causality runs one-way from political freedom and civil liberty to political instability and not the other way. A further comprehensive research is needed on the multi-layered and the complex relationship among democracy and the resilience of the political order.I would like to thank an anonymous referee for helpful comments that improved the quality of the paper. I would also like to thank the Research Council of Niagara University for their financial support.     

Monetary policy rules for a developing country: Evidence from Pakistan

This paper estimates forward-looking monetary policy rules to examine the interest rate setting behavior of the State Bank of Pakistan. Considering the external constraints on monetary policy, core inflation and a country-specific measure of the output gap, we demonstrate that the State Bank of Pakistan reacts to changes in inflation, the output gap and the federal funds rate.     

Bayesian analysis of time-varying parameter vector autoregressive model for the Japanese economy and monetary policy

This paper analyzes the time-varying parameter vector autoregressive (TVP–VAR) model for the Japanese economy and monetary policy. The parameters are allowed to follow a random walk process and estimated using the Markov chain Monte Carlo method. The empirical result reveals the time-varying structure of the Japanese economy and monetary policy during the period from 1981 to 2008. The marginal likelihoods of the TVP–VAR model and other fixed parameter VAR models are estimated for model comparison. The estimated marginal likelihoods indicate that the TVP–VAR model best fits the Japanese economic data.     

Aggregate price shocks and financial stability: the United Kingdom 1796-1999

This paper investigates aggregate price shocks on financial stability in the United Kingdom. We construct an annual index of UK financial conditions for 1790-1999 and use a dynamic probit model to estimate the effect of shocks on the index. We find evidence that price level shocks contributed significantly to financial instability during 1820-1931 and that inflation rate shocks contributed to instability during 1931-1999. While affecting the stability of the financial system, both the nature of aggregate price shocks and their impact depend on the existing monetary and financial regime.     

Deterioration of Firm Balance Sheet and Investment Behavior: Evidence from Panel Data on Thai Firms*

Using firm‐level data, the present paper investigates whether, and to what extent, firm balance sheet problems mattered for investment over the period 1992–2002. Various categories of firms are compared, with firms grouped according to their a priori degree of liquidity constraint. Firms are also divided into pre‐crisis and post‐crisis periods to examine the impact of the financial crisis on firms’ investments. The results support the existence of the balance sheet channel and suggest that Thai firms faced greater liquidity constraints following the financial crisis. Small firms and non‐bond‐issuing firms are found to have been more adversely affected by the crisis than large firms and bond‐issuing firms.     

The Intratemporal Substitution between Government Spending and Private Consumption: Empirical Evidence from Taiwan

In this paper, we investigate the idea that a general model of consumption should allow for the direct effect of government consumption. We show, given an assumed preference specification, that there is a cointegration restriction implied by an intraperiod first-order condition of the model. This restriction leads to a linear deterministic cointegrated system of government consumption, private consumption and their relative price that is consistent with the data for Taiwan. The intratemporal elasticity of substitution between government and private consumption is estimated to be about 1.1. Overall, we find consistent empirical evidence in support of our model.     

Determinants of Female Fertility in Taiwan, 1966–2001: Empirical Evidence from Cointegration and Variance Decomposition Analysis*

This study investigates the determinants of the fertility rate in Taiwan over the period 1966–2001. Consistent with theory, the key explanatory variables in Taiwan's fertility model are real income, infant mortality rate, female education and female labor force participation rate. The test for cointegration is based on the recently developed bounds testing procedure while the long‐run and short‐run elasticities are based on the autoregressive distributed lag model. Among our key results, female education and female labor force participation rate are found to be the key determinants of fertility in Taiwan in the long run. The variance decom‐position analysis indicates that in the long run approximately 45percent of the variation in fertility is explained by the combined impact of female labor force participation, mortality and income, implying that socioeconomic development played an important role in the fertility transition in Taiwan. This result is consistent with the traditional structural hypothesis.     

Efficiency,Cointegration and Contagion in Equity Markets: Evidence from China,Japan and South Korea*

This paper empirically examines whether three East Asian stock markets, namely, those of China, Japan and South Korea, are individually and/or jointly efficient, and whether contagion exists between the cointegrated markets. While individual market efficiency is examined through testing for the random walk hypothesis, joint market efficiency is examined through testing for cointegration and contagion. The present study finds that the hypothesis of individual market efficiency is strongly rejected for the Chinese stock market, but not for the Japanese and the South Korean stock markets. However, when testing for cointegration, market efficiency is strongly rejected for all these markets. We take a simple case of contagion and find that although there is a long‐term relationship among the three markets, the contagion hypothesis cannot be rejected only between Japanese and South Korean stock markets, indicating short‐run portfolio diversification benefits from these two markets.     

A fractional cointegration approach to empirical tests of PPP: New evidence and methodological implications from an application to the Taiwan/US dollar relationship

A Fractional Cointegration Approach to Empirical Tests of PPP: New Evidence and Methodological Implications from an Application to the Taiwan/ US Dollar Relationship. —This paper applies a relatively new concept of fractional cointegration to shed some light on the validity of purchasing power parity as a long-run equilibrium condition, using the Taiwan/US dollar exchange rate. Findings suggest that, while standard tests of cointegration fail to support cointegration between nominal exchange rates, domestic and foreign prices, the fractional cointegration analysis permits deviations from equilibrium to follow a fractionally integrated process and hence captures a much wider class of parity or mean-reversion behaviour. The paper concludes by indicating areas in which fractional cointegration will be a particularly appropriate technique to unearth previously unfounded temporal characteristics.     

Demand, comparative advantage and economic geography in international trade: Evidence from the OECD

Demand, Comparative Advantage and Economic Geography in International Trade: Evidence from the OECD. — This paper examines the influence of demand on the pattern of net trade for 17 OECD countries. It is found that demand differences are important as a cause of international trade. In fact, for the majority of countries, demand factors explain more of the net trade pattern than do factor proportions. The evidence offers some support for the modern geography and trade theories: high domestic demand in an industry leads to a net export for the majority of cases. The evidence is, however, not clear-cut. Moreover, a demand bias in favour of domestic varieties leads to a net export. Here, the evidence is clear-cut.     

Capital controls and covered interest parity in the EU: Evidence from a panel-data unit root test

Capital Controls and Covered Interest Parity in the EU: Evidence from a Panel-Data Unit Root Test. - This paper examines whether the abolition of the remaining capital controls in the EU during 1990 has facilitated the achievement of onshore covered interest parity with respect to Germany. We test for unit roots in covered interest differentials. However, we employ the new methodology of pooling our data and performing a unit root test based on a panel data set. Our results suggest that the period characterized by the absence of capital controls has not facilitated the achievement of covered interest parity. Indeed, evidence in favour of covered interest parity is strongest for the period preceding 1990.     

Trade,the Staple Theory of Growth,and Fluctuations in Colonial Singapore, 1900–39

Our paper enquires into the nexus between trade, growth, and fluctuations in the British colony of Singapore during the early twentieth century. Hitherto, little quantitative economic history has been written on this great entrepôt of Southeast Asia due to a lack of data. We overcome this limitation by utilising the gross domestic product series recently constructed for the pre‐war period by Sugimoto. This comprehensive data set enables us to explore the relevance and applicability of the staple theory of export‐led growth to colonial Singapore through cliometric analyses. The results suggest that foreign trade had acted both as an engine of growth and a source of economic instability.     

The trading behavior and price impact of foreign, institutional, individual investors and government: Evidence from Korean equity market

We examine the dynamic relation between stock returns and four types of investment flows using Korean daily data for the period 1998–2010, focusing on the investment/trading behavior of four types of investors – individual, institutional, government, and foreign – and the effect of cross-border investment flows on the Korean equity market. We find that, first, foreigners and institutional investors tend to drive the Korean equity market, and their trades seem to be information-driven, whereas individual investors do not drive the Korean equity market and their trades do not seem to be information-driven. Second, as a result, both foreigners and institutional investors performed well in the sample period, whereas individual investors performed poorly. Third, the four types of investors differ in their trading behavior. In response to U.S. market returns, foreigners and institutional investors tend to take a momentum strategy whereas individual investors and government tend to take a contrarian strategy.     

Health insurance reform and economic growth: Simulation analysis in Japan

This paper evaluates the drastic reforms of Japanese public health insurance initiated in 2006. We employ a computable general equilibrium framework to numerically examine the reforms for an aging Japan in the dynamic context of overlapping generations. Our simulation produced the following results: first, an increase in the co-payment rate, a prominent feature of the 2006 reform, would promote economic growth and welfare by encouraging private saving. Second, the ex-post moral hazard behavior following the increase in co-payment rates, however, reduces economic growth. Third, Japan's trend of increasing the future public health insurance benefits can mainly be explained by its aging population, and increasing the co-payment rate does little to reduce future payments of public health insurance benefits. Fourth, the effect on future economic burdens of reducing medical costs through efficiencies in public health insurance, emphasis on preventive medical care, or technological progress in the medical field is small. Finally, a policy of maintaining public health insurance at a fixed percentage of GDP will require reducing public health insurance benefits, perhaps up to 45% by 2050. Such a policy also reduces economic growth until approximately 2035. Our simulation indicates that the reform does not significantly reduce future public health insurance benefits, but it can enhance economic growth and welfare by encouraging private saving.     

The relationship between U.S. and eurodollar interest rates: Evidence from the futures market

The Relationship between U.S. and Eurodollar Interest Rates: Evidence from the Futures Market. — This paper analyzes the lead/lag relationship in the Granger-cause sense between U.S. and Eurodollar interest rates in futures contracts. It shows that yields on U.S. Treasury bill and Eurodollar futures are cointegrated with the TED spread as the cointegrating vector for the period January 1987–July 1993. The error correction model indicates that the U.S. market leads the Eurodollar market. However, the presence of this unidirectional causality does not improve the forecasting of Eurodollar yields. Other evidence given in the paper suggests that the hypothesis of contemporaneous relationships, at least on daily base, is not rejected.     

Poverty Effects of the Philippines’ Tariff Reduction Program: Insights from a Computable General Equilibrium Analysis*

A computable general equilibrium micro‐simulation model is used to assess the economic and poverty impacts of tariff reduction in the Philippines. Tariff reduction induces consumers to substitute cheaper imported agricultural products for domestic goods, thereby resulting in a contraction in agricultural output. In contrast, tariff reduction reduces the domestic cost of production, benefiting the outward‐oriented and import‐dependent industrial sector. The national poverty headcount decreases marginally as lower consumer prices outweigh the nominal income reduction experienced by the majority of households. However, both the poverty gap and severity of poverty worsens, implying that the poorest of the poor become even poorer.     

Accounting Conservatism and the Temporal Trends in Current Earnings’ Ability to Predict Future Cash Flows versus Future Earnings: Evidence on the Trade‐off between Relevance and Reliability*

This research reports that an increasing level of accounting conservatism over the 1973–2005 period is associated with: (1) an increase in the ability of current earnings to predict future cash flows and (2) a decrease in the ability of current earnings to predict future earnings. We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples in both in‐sample and out‐of‐sample analyses and are robust to the use of alternative measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations among conservatism, relevance, reliability, and usefulness suggest a trade‐off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards has a possible adverse impact on earnings usefulness through a negative effect on reliability.