Third contribution to the ergodic/nonergodic critique: Reply to Davidson,part 2

This second part of my reply to Davidson (2015 Davidson, P. “A Rejoinder to O'Donnell's Critique of the Ergodic/Nonergodic Explanation of Keynes's Concept of Uncertainty.” Journal of Post Keynesian Economics, 2015, 38 (1), 1–18.[Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) discusses mathematical and statistical matters using a simple model of ergodicity whose properties do not match many of those asserted by ENE. It responds to Davidson's counterarguments against pre-infinity indeterminacy, examines the works of Billingsley, Uffink, and Malinvaud as cited by Davidson, and then turns to important methodological issues. As in Part 1 of my reply, Davidson's rejoinder helps make the critique stronger, deeper, and more relevant.     

Value and exploitation: a comment

Abstract

This paper comments on a recent paper by Ernesto Screpanti (2003) Screpanti, E. 2003. Value and exploitation: a counterfactual approach. Review of Political Economy, 15: 155–171. [Taylor & Francis Online] , [Google Scholar], in this journal, on Marxian theories of value and exploitation. The paper argues, in opposition to Screpanti, that the labour theory of value is the most suitable foundation for a realistic and historically determined vision of society; that labour values provide a unique coherent conceptual framework for understanding the nature of profit; that the inconsistency of labour values is only apparent, as it disappears with a judicious choice of numéraire; and that prices of production explain much less than labour values and are therefore an inadequate substitute for the latter.     

Long-run purchasing power parity and asymmetric adjustment in BRICs

The primary aim of this study is an attempt to determine whether the Purchasing Power Parity (PPP) hypothesis holds for those countries that have collectively come to be known as ‘BRICs’, namely, Brazil, Russia, India and China. We use the momentum threshold cointegration tests (advanced by Enders and Siklos, 2001 Enders, W. and Siklos, P. L. 2001. Cointegration and threshold adjustment. Journal of Business Economics and Statistics, 19: 166–76. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) to investigate whether any asymmetric adjustment is discernible for BRICs, and show that whilst the Engle–Granger test (which assumes only symmetric adjustment) fails to reveal any cointegrational relationship for BRICs, the threshold cointegration test (with asymmetric adjustment) provides clear evidence of long-run PPP for BRICs, with the notable exception of China. We conclude that asymmetric adjustment of nominal exchange rates plays an important role in eliminating deviations from long-run PPP.     

Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian countries

This study finds that Purchasing Power Parity (PPP) holds in the long-run for Azerbaijan, Kazakhstan and Kyrgyzstan, based on Breitung's (2001 Breitung, J. 2001. Rank tests for nonlinear cointegration. Journal of Business and Economic Statistics, 19: 331–40. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) rank tests for cointegration. Results from further analysis indicates that nominal exchange rates and relative prices are nonlinearly interrelated. Trade barriers, transportation costs and government intervention in the pricing system in these countries may have resulted in the establishment of the above-mentioned nonlinear relationship.     

Monetary policy and country risk

This article develops an econometric model in order to study country risk behaviour for six emerging economies (Argentina, Mexico, Russia, Thailand, Korea and Indonesia), by expanding the country beta risk model of Harvey and Zhou (1993 Harvey, CR and Zhou, G. 1993. International asset pricing with alternative distributional specifications. Journal of Empirical Finance, 1: 107–31. [Crossref] , [Google Scholar]), Erb et al . (1996a, b) and Gangemi et al . (2000). Towards this end, we have analysed the impact of macroeconomic variables, especially monetary policy, upon country risk, by way of a time-varying parameter approach. The results indicate an unstable effect of monetary policy upon country risk in periods of crisis. However, this effect is stable in other periods, and the Favero–Giavazzi effect is not verified for all economies, with an opposite effect being observed in many cases.     

Trade-induced Industrialization and Economic Growth

Based on a modified Heckscher-Ohlin model of Deardorff and Park (2010 Deardorff, A. and Park, J.-H. 2010. A story of trade-induced industrialization. International Economic Journal, 24: 283–296. [Taylor & Francis Online] , [Google Scholar]), this paper develops a dynamic model of trade-induced industrialization and economic growth. It shows that a developing country may grow out of its autarky steady state with no industrialization into a new steady state with full industrialization by opening to trade with a large industrialized country, exporting the labor-intensive intermediate input in exchange for the capital-intensive intermediate input for the modern good. Even when the developing country is on its path toward complete industrialization under autarky, free trade may induce it to grow faster with its return to capital being raised and sustained at a level that is higher than its autarky level during its industrialization process. Once it completes its industrialization process by having all of its resources in the modern sector, then diminishing returns to capital come back to accompany further capital accumulation, slowing down the growth of the economy. This trade-induced industrialization and economic growth, having an expansion of international trade both in its absolute value and in its ratio to the size of the developing country, correspond well with the dynamic profiles of East Asian Miracle countries’ economic growth based on their export-oriented industrialization strategy.     

Interest rate pass-through and illiquidity shocks in the US

This study examines the US interest rate pass-through mechanism and considers the illiquidity shocks upon retail interest rate correlations caused by financial crises between 1986 and 2011. We estimate a bi-variable EGARCH model using a dynamic conditional correlation model developed by Engle (2002 Engle, R. F. 2002. Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business and Economic Statistics, 20: 339–350. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) in order to analyze how asymmetric monetary policy influences interest rate pass-through. We test the risks to the dynamic condition and changes in the correlation coefficient. The main empirical results are as follows. First, the long-run interest rate pass-through mechanism is unstable in the US. Second, expected monetary policy impulses are greater than the unexpected ones in the short-run. Finally, according to the one-step and N-step forecast tests, the illiquidity shocks caused by financial crises demonstrate a significant change in retail interest rate risks, but not in correlations between retail interest rates. We conclude that when the interest rate pass-through mechanism is unstable, banks may stop helping each other and will not provide loans to firms and consumers, thereby exhausting the capital of all economic systems. The characteristics of illiquidity enter into the interest rate pass-through mechanism; therefore, the relationship between illiquidity and the interest rate pass-through needs to be investigated.     

Does Higher Education Affect Economic Growth? The Case of Greece

Abstract

The purpose of the study is twofold: first, it presents an extensive review of empirical studies that have examined the relationship between higher education and economic growth. Second, it estimates the effect of higher education on economic growth in Greece over the period 1960–2009. It applies the model introduced by Mankiw, Romer, and Weil (1992 Mankiw, G., Romer, D., & Weil, D. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407–437. doi: 10.2307/2118477[Crossref], [Web of Science ®] , [Google Scholar]) by using the higher enrolment rates as a proxy of human capital. The paper employs cointegration and an error-correction model to test the causal relationship between higher education, physical capital investments and economic growth. The empirical analysis reveals that there is a long-run cointegrating relationship between higher education, physical capital investments and economic growth. The elasticity of economic growth with respect to higher education is 0.52%. The results also suggest that there is evidence of unidirectional long-run and short-run Granger causality running from higher education and physical capital investments to economic growth.     

Second contribution to the ENE critique: Reply to Davidson,part 1

On first encounter, the ergodic/nonergodic (ENE) approach has apparent plausibility. Although concerned by some of its problems for many years, it was only after more concentrated reflection on both its parts and their combinations that I became aware of its manifold deficiencies, some of which I outlined in my previous critique (O’Donnell, 2014 ———. “A Critique of the Ergodic/Nonergodic Approach to Uncertainty.” Journal of Post Keynesian Economics, 2014, 37 (2), 187–209.[Web of Science ®] , [Google Scholar]). In this paper, facilitated by Davidson’s (2015b ———. “A Rejoinder to O’Donnell’s Critique of the Ergodic/Nonergodic Explanation of Keynes’s Concept of Uncertainty.” Journal of Post Keynesian Economics, 2015b, 38, 1–18.[Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) rejoinder, these criticisms are deepened, broadened, and strengthened. Because the debate deals with fundamental matters in several disciplines, a considerable amount of investigation, unpacking, and logical dissection is required to clarify the argumentation beneath the compressed and seemingly smooth surface of the ENE position. For this reason, my reply is divided into two parts. This contribution primarily examines the central role of framing in ENE arguments, and clarifies the various misunderstandings and misrepresentations to which it leads. The subsequent contribution provides more detailed discussion of mathematical, stochastic, and methodological issues.     

A nonparametric revealed preference test of optimal intra-firm resource allocation

The collective rationality hypothesis initiated by Chiappori (1988a Chiappori, PA. 1988a. Rational household labor supply. Econometrica, 56: 63–89. [Crossref], [Web of Science ®] , [Google Scholar]) and applied by Seaton (1997 Seaton, JS. 1997. Neoclassical and collective rationality in household labour supply. Applied Economics Letters, 4: 529–33. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar], 2001) for a two-person household is used to distinguish the organizational behaviour of firms. Firms produce satisfaction to groups as traditional managerial and early behavioural theories of the firm of Williamson, Baumol and Marris suggest, as well as more modern principle agent models. Under certain conditions, intra-firm bargaining leads to a Pareto optimal outcome. What makes this work an important contribution is that it identifies a set of nonvacuous testable restrictions to empirically detect if firm-level data satisfy Pareto optimal behaviour for the main decision makers in the organization.     

Testing for threshold cointegration and error correction: evidence in the petroleum futures market

This article examines the existence of threshold cointegration between futures and spot prices for the Brent petroleum market. We then estimate the asymmetric error-correction specification utilizing the Momentum Threshold Autoregressive Consistent (M-TAR-C) approach particularly proposed by Enders and Siklos (2001 Enders, W and Siklos, PL. 2001. Cointegration and threshold adjustment. Journal of Business and Economic Statistics, 19: 166–76. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]). We find that, for the daily data over 2 January 2001 through 15 October 2006, the petroleum futures prices are cointegrated with the spot prices. This effectively confirms the expectations hypothesis and that asymmetric adjustments for the futures basis towards the long-run value display a negative basis from the long-run equilibrium level more persistently than a positive basis from that level. The empirical result suggests that short-run arbitrages manipulating buy-long (sell-short) futures contracts be profitable when a positive basis is weakening (a negative basis is strengthening).     

Confidence and alternative Keynesian methods of asset choice

Abstract

This article elaborates the analysis of asset choice proposed by Keynes and later adopted by Post Keynesians such as Paul Davidson and Hyman Minsky. The article incorporates the essential aspects of the theory of confidence presented in Dequech (1999) Dequech, D. 1999. Expectations and confidence under uncertainty. Journal of Post Keynesian Economics, 21: 415–430. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar], first into an investigation of the relation between confidence and the liquidity premium and then into the broader theory of asset choice. Keynes considered two methods of determining planned investment expenditures: one method is based on the comparison between the marginal efficiency of capital and the interest rate; the other is based on the comparison between the demand price and the supply price of a particular capital good. Both methods can be generalized for asset choice, with investment as a particular case. The article refines and develops these two methods so as to specify more precisely the influence of confidence and speculation on the determination of liquidity premia and hence on the several assets' profitability.     

Modelling the dynamics of EU economic sentiment indicators: an interaction-based approach

This article estimates a simple univariate model of expectation or opinion formation in continuous time adapting a ‘canonical’ stochastic model of collective opinion dynamics (Weidlich and Haag, 1983 Weidlich, W, and Haag, G, 1983. Concepts and Models of a Quantitative Sociology. Berlin: Springer; 1983.[Crossref] , [Google Scholar]; Lux, 1995 Lux, T, 1995. Herd behavior, bubbles and crashes, The Economic Journal 105 (1995), pp. 881–96.[Crossref], [Web of Science ®] , [Google Scholar], 2009a Lux, T, 2009a. Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey, Journal of Economic Behavior and Organization 72 (2009a), pp. 638–55.[Crossref], [Web of Science ®] , [Google Scholar]). This framework is applied to a selected data set on survey-based expectations from the rich EU business and consumer survey database for 12 European countries. The model parameters are estimated through Maximum Likelihood (ML) and numerical solution of the transient probability density functions for the resulting stochastic process. The model's success is assessed with respect to its out-of-sample forecasting performance relative to univariate Time Series (TS) models of the Autoregressive Moving Average model, ARMA(p,?q) and Autoregressive Fractionally Integrated Moving Average, ARFIMA(p,?d,?q) varieties. These tests speak for a slight superiority of the canonical opinion dynamics model over the alternatives in the majority of cases.     

Convergence in household credit demand across euro area countries: evidence from panel data

This article contributes to the literature on the convergence of financial systems in the euro area by estimating household credit demand in individual countries. Using the ARDL framework advocated notably by Pesaran et al. (1999 Pesaran, MH, Shin, Y and Smith, RP. 1999. Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94: 621–34. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]), the article provides evidence on the convergence of long-run credit demand determinants (interest rates, investment and house prices) in the largest euro area countries, while short run-dynamics remain heterogenous across countries. The article also demonstrates that the equation uncovers demand rather than supply behaviour.     

Stationary measures for some Markov chain models in ecology and economics

Summary. Let continuous, exists in for x in . Let be an i.i.d. sequence from F and X₀ be a nonnegative random variable independent of . Let be the Markov chain generated by the iteration of random maps by . Such Markov chains arise in population ecology and growth models in economics. This paper studies the existence of nondegenerate stationary measures for {X_n}. A set of necessary conditions and two sets of sufficient conditions are provided. There are some convergence results also. The present paper is a generalization of the work on random logistics maps by Athreya and Dai (2000).Received: 20 March 2002, Revised: 4 December 2002, JEL Classification Numbers: C22, D9.The author wishes to thank Professor Mukul Majumdar and the referees for several useful suggestions.     

Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model

This study is focussed on estimating the real interest and inflation sensitivity in Spanish market, proposing an extension of the Stone (1974 Stone, BK. 1974. Systematic interest-rate risk in a two-index model of returns. Journal of Financial and Quantitative Analysis, 9: 709–21. [Crossref], [Web of Science ®] , [Google Scholar]) two-factor model and controlling for size and growth of the companies [Fama and French (1993) three-factor model], because of its importance in the stock sensitivity shown by previous literature. I also study the classical explanatory factors of the stock sensitivity: leverage and liquidity level of the firms. The Spanish stock response is similar to the response in other markets, and the ‘size’ is higher than ‘growth’ effect.     

The persistence of Taiwan's output fluctuations: an empirical study using innovation regime-switching model

In this article we examine the persistence nature of Taiwan's aggregate output fluctuations by using the ‘innovation regime-switching’ (IRS) model in which the effect of an innovation may be permanent or transitory, depending on an unobservable state variable that follows a first order Markov chain. By applying the IRS model to Taiwan's real GDP data, we find that during the 1961 to 2000 period 61% (39%) of the real output shocks are likely to have permanent (transitory) effects. Moreover, the innovations in the officially identified expansion (contraction) are more likely to have a permanent (transitory) effect. These results are similar to those found in many studies of US real output fluctuations, e.g. Beaudry and Koop (1993 Beaudry, P and Koop, G. 1993. Do recessions permanently change output?. Journal of Monetary Economics, 31: 149–63. [Crossref], [Web of Science ®] , [Google Scholar]), Kim and Nelson (1999 Kim, C-J and Nelson, CR. 1999. Friedman's plucking model of business fluctuations: tests and estimates of permanent and transitory components. Journal of Money, Credit and Banking, 31: 317–34.  [Google Scholar]) and Kuan et al. (2005 Kuan, C-M, Huang, Y-L and Tsay, RS. 2005. An unobserved component model with switching permanent and transitory innovations. Journal of Business and Economic Statistics, 23: 443–54. [Taylor &; Francis Online], [Web of Science ®] , [Google Scholar]). However, we also find that Taiwan's output dynamics have changed drastically ever since year 2000. In particular, the shocks to real GDP have become more likely to have only transitory effect, even during the period of post-2001:IV expansion.     

A Note on Forecasting the Euro: Do Forecasters Have an Asymmetric Loss Function?

Based on the approach advanced by Elliott, Komunjer, and Timmermann (2005 Elliott, G., Komunjer, I., & Timmermann, A. (2005). Estimation and testing of forecast rationality under flexible loss. Review of Economics Studies, 72, 1107–1125. doi: 10.1111/0034-6527.00363[Crossref], [Web of Science ®] , [Google Scholar]), we analyzed whether the loss function of a sample of exchange-rate forecasters is asymmetric in the forecast error. Using forecasts of the dollar/euro exchange rate, we found that the shape of the loss function varies across forecasters. Some forecasters appear to make forecasts under an asymmetric loss function, while a symmetric loss function seems to describe well the loss function of other forecasters. Accounting for an asymmetric loss function does not necessarily make forecasts ‘look’ rational.