Mean absolute percentage error and bias in economic forecasting

This article develops a simple theoretical framework to show how forecasters may bias downward point predictions under the assumption that the asymmetric loss function is directly related to the (Mean) Absolute Percentage Error (M)APE.     

Calibrating spatial models of trade

Empirical spatial models of trade that are based on a mathematical programming specification often exhibit a large discrepancy between the equilibrium solution and the observed demand, supply and levels of trade flows among countries. This discrepancy may be due to several causes. Assuming, however, that a trade model is not misspecified – in the sense that behavior of the economic agents involved in the specific commodity markets has been included in the study and that the relevant policy instruments have been properly taken into account – the cause of discrepancy may be traced either to imprecision of unit transaction costs or to imprecision in the measurement of the demand and supply functions' parameters, or both. Policy assessments based on this type of imprecise models are distorted. This paper presents a methodology for calibrating mathematical programming spatial trade models of increasing complexity, from the one-commodity case to a multi-commodity model with asymmetric slope matrices of demand and supply functions. The proposed calibration procedure identifies corrections of imperfectly measured parameters. The calibrated models generate solutions that exactly reproduce quantities produced and consumed in all countries, as well as trade flows among all pairs of countries, observed in a given base year. Such models may then serve as a springboard for assessing the impact of various policy changes on economic agents in the countries under study.     

Sensitive products in the Doha negotiations: The case of European and Japanese market access

Given the highly concentrated distribution of agricultural protection, allowing in the negotiations too many exceptions through sensitive products puts at risk the objectives of World Trade Organization. This issue is difficult to analyze with the commonly used applied trade models, because they represent trade flows at an aggregate level, while sensitive products are picked at the product level and their protection, under the form of tariff-rate quotas, is contingent on the level of imports. This paper assesses the effect of these exceptions, based on the case of agricultural trade protection in Europe and Japan, two countries where tariff dismantling in the agricultural sector is a particularly sensitive issue. Since agricultural border protection is heterogeneous, we avoid aggregation bias by extending a multi-country computable general equilibrium model to the product level. This allows us to represent trade policies explicitly and to account for their interdependencies. The results suggest that consideration of sensitive products strongly limits the potential gains from a possible agriculture agreement at Doha. Moreover, there is no aggregate trade-off between decreasing tariffs and increasing/opening quotas. To achieve “substantial” market access improvements in the agricultural sector, the objective should be most favored nation tariff reduction.     

The economic impact of EU-enlargement: assessing the migration potential

This paper analyzes the determinants of immigration flows to Germany in a time series-cross section framework. The reduced form of a well established theoretical model is estimated for a sample of 17 sending countries and a period covering 1960 to 1994. The estimates are then used to perform out-of-sample forecasts to assess the immigration potential from the Eastern European accession candidates to Germany. These scenarios predict a moderate increase in immigration to Germany, especially for the first round accession candidates. First version received: July 1999/Final version received: July 2000     

Forecasting the volatility of S&P depositary receipts using GARCH-type models under intraday range-based and return-based proxy measures

We employ four various GARCH-type models, incorporating the skewed generalized t (SGT) errors into those returns innovations exhibiting fat-tails, leptokurtosis and skewness to forecast both volatility and value-at-risk (VaR) for Standard & Poor's Depositary Receipts (SPDRs) from 2002 to 2008. Empirical results indicate that the asymmetric EGARCH model is the most preferable according to purely statistical loss functions. However, the mean mixed error criterion suggests that the EGARCH model facilitates option buyers for improving their trading position performance, while option sellers tend to favor the IGARCH/EGARCH model at shorter/longer trading horizon. For VaR calculations, although these GARCH-type models are likely to over-predict SPDRs' volatility, they are, nevertheless, capable of providing adequate VaR forecasts. Thus, a GARCH genre of model with SGT errors remains a useful technique for measuring and managing potential losses on SPDRs under a turbulent market scenario.     

Evolutionary selection of ‘chivalrous’ conventions in coordination games without common expectations

We study an evolutionary game-theoretic model where players have to choose within a predetermined set of mixed strategies in a coordination game. Players are of two different kinds, male and female. No common expectations assumption is made; players tend therefore to adopt the strategy that yields larger than average expected payoffs for their kind. In this framework, every stable stationary point of the population dynamics can be interpreted as the emergence of a particular convention. A classification of the possible conventions is provided; conditions for their emergence are determined.     

Long-term recurrence patterns in the late 2000 economic crisis: Evidences from entropy analysis of the Dow Jones index

The depth (4.5% US GDP decline and 9.5% stable unemployment) and duration (more than two years) of the present global economic recession have suggested to many researchers and practitioners to think that it is singular relative to previous recession that occurred in the aftermath of the World War II. It has been argued that the singularity of the late 2000 crises arises from non-precedent components, such as globalization and a dominant financial system equipped with exotic instruments (e.g., derivatives) designed from highly specialized mathematical theories. This paper uses the historic (1928–2010) Dow Jones index analyzed with informational entropy methods to show the presence of recurrent cycles with dominant periods of 4.5 and 22 years. For time series, entropy is a measure of the diversity of patterns for given time scales. In this form, the higher the entropy, the more complex the underlying system dynamics. It is shown that the present economic downturn coincides with the occurrence of a 22-year cycle in the entropy dynamics of the Dow Jones index. It suggests that the crisis is not singular, but its origin can be also explained from recurrent long-term patterns. Implications of the empirical results for the evolution of the late 2000 crisis and the potential aftermath courses of the global economy are discussed.     

Growth, welfare and optimal trade taxes: a fallacy of composition

Optimal export taxation rules out the possibility of immiserizing growth in a two-country world. Thus, productivity increases in the exporting sector must be welfare improving. This paper shows that in a multicountry world such reasoning commits a fallacy of composition. Simultaneous growth of exporting nations can lead to welfare losses in the presence of unilaterally optimal export taxes. Also, optimal export taxes can decline in response to such growth. This result further strengthens the possibility of perverse welfare movements. Thus, standard policy recommendations of increasing productivity in the exporting sector may lead to unintended and self-defeating outcomes.     

A new test for linear inequality constraints when the variance–covariance matrix depends on the unknown parameters

We extend Hansen’s (2005) test to testing hypotheses involving general inequality constraints where the variance–covariance matrix of the functions in the constraints depends on the unknown parameters. The test can be applied to a wider class of problems than Wolak’s (1991).     

Military expenditure and economic growth across different groups: A dynamic panel Granger-causality approach

Applying GMM (Arellano and Bond, 1991) to panel data of 90 countries spanning over 1992–2006, this paper explores possible relationships between military expenditure and economic growth. Based on the definitions of income levels by the World Bank – high, middle and low – our results indicate military spending leads negatively economic growth for the panels of low income countries with a marginally significance level of 10%. Of four different regional panels (Africa, Europe, the Middle East–South Asia and Pacific Rim), a negative but stronger (5% significance level) causal relationship from military expenditure to economic growth is found for the Europe and Middle East–South Asia regions.     

Tariff liberalization and trade specialization: Lessons from India

This paper analyzes the effects of policy reform on the structure of India’s trade in manufactures, from 1990 to 2006. It computes comparative advantage indicators on the basis of disaggregated trade flow data and assesses the effects of trade liberalization on the evolution of India’s pattern of trade specialization. Industries where import tariffs have been reduced the most have experienced the highest increase in specialization. Moreover, trade liberalization has helped India improve its comparative advantage in industries with medium- to high-technology content, as well as in some of the industries enjoying the most robust growth in global demand. Liberalization policies have been instrumental in enhancing the international competitiveness of industries.     

Adult nutrition and growth

We provide microeconomic foundations for the commonly assumed subsistence constraint on consumption and demonstrate that the theory is consistent with several important features of development. In principle, subsistence is consistent with different combinations of food consumption, energy expenditure, body weight, and health. In practice, caloric intake has remained remarkably constant over the course of development, giving the appearance of a minimal subsistence constraint in consumption alone. We argue that the trendless nature of caloric intake results from a positive income effect on food consumption being offset by a reduction in the need for food as the energy requirements of work decrease with development. The theory helps explain the observed patterns in body mass, fertility, and economic growth rates for more than two centuries.     

Biogeographical conditions, the transition to agriculture and long-run growth

We use new data on the timing of the transition to agriculture, developed by Putterman and Trainor (2006), to test the theory of Diamond (1997) and Olsson and Hibbs (2005) that an earlier transition is reflected in higher incomes today. Our results confirm the theory, even after controlling for institutional quality and other geographical factors. The date of transition is correlated with prehistoric biogeography (the availability of wild grasses and large domesticable animal species). The factors conducive to high per capita incomes today are good institutions, an early transition to agriculture, access to the sea and a low incidence of fatal malaria. Geographical influences have been at work in all of these proximate determinants of per capita income.     

Cross-country causes and consequences of the crisis: An update

We update [13] and [Rose and Spiegel, 2010] and search for simple quantitative models of macroeconomic and financial indicators of the “Great Recession” of 2008–09. We use a cross-country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars. We check a number of different indicators of crisis intensity, and a variety of different country samples. While countries with higher income and looser credit market regulation seemed to suffer worse crises, we find few clear reliable indicators in the pre-crisis data of the incidence of the Great Recession. Countries with current account surpluses seemed better insulated from slowdowns.     

The impact of bilateral investment treaties on foreign direct investment

This paper uses a large panel of OECD data on stocks of outward foreign direct investment (FDI) to evaluate the impact of bilateral investment treaties. For several variants of the knowledge capital model of multinationals, we demonstrate that investment treaties exert a significant positive effect on outward FDI, if they actually are implemented. Moreover, even signing a treaty has a positive, although lower and in most specifications insignificant, effect on FDI. Journal of Comparative Economics 32 (4) (2004) 788–804.     

Sex and environmental policy in the U.S. House of Representatives

Using LCV score data, we find that female legislators favor stricter environmental policies than do their male counterparts. Moreover, gender-corrected estimates suggest that voters do not push environmental policy towards the middle, but rather select the ideologically closest candidate.     

The effects of environmental taxes and quotas on the optimal timing of emission reductions under Choquet–Brownian uncertainty

The effects of two environmental policy options for the reduction of pollution emissions, i.e. taxes and non-tradable quotas, are analyzed. In contrast to the prior literature this work endogenously takes into account the level of emissions before and after the adoption of the new environmental policy. The level of emissions is determined by solving the firm's profit maximization problem under taxes and fixed quotas. We find that the optimal adoption threshold under taxes is always larger than the adoption threshold under fixed quota, even in a setting characterized by ecological uncertainty and ambiguity – in the form of Choquet–Brownian motions – on future costs and benefits over adopting environmental policies.     

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.     

On the mark(s): Optimum currency areas in Germany

In the wake of unification, the former GDR became a member of the DM monetary zone. We evaluate whether unified Germany satisfies the criteria defining an optimal monetary area. We conclude that the primary criterion, similarity of shocks, is not satisfied even by the western states, a reflection of the importance of sector-specific relative to geographic shocks coupled with different sectoral structures. Extending this argument, we conclude that the correlation of shocks to the eastern states with western states is also likely to be small. A case for monetary unification must, in consequence, be based on political rather than narrowly economic calculations.