Empirical evidence on the long-run neutrality hypothesis using low-frequency international data

We use the Backus and Kehoe (American Economic Review, 1992, 82, 864–888) long, low-frequency data on real GNP/GDP, prices, and money for Australia, Canada, Denmark, Germany, Italy, Japan, Norway, Sweden, the United Kingdom and the United States to examine the long-run neutrality proposition. In doing so, we apply the Fisher and Seater (American Economic Review, 1993, 83, 402–415) non-structural methodology, paying explicit attention to the univariate time-series properties of the variables. We conclude that the data are generally supportive of the quantity-theoretic proposition that money is long-run neutral.     

Game-theoretic definitions of fairness and the contractualistic foundations of justice

We discuss game-theoretic interpretations of Rawls's theory of justice with special reference to the choice of the most appropriate solution concept. We show that Core-like solution concepts, as the one proposed by Laden (1991,Philosophy and Public Affairs,20, 189–222), have undesirable implications in this context. The “Bargaining Set” has more satisfactory properties for any contractualistic approach.     

Reviews

Book reviewed in this article: Sustainable Development in Agriculture, edited by J.K. Parikh Agriculture and the GATT: Rewriting the Rules, by Dale E. Hathaway Keynes's Vision, by A. Fitzgibbons The Canada-United States Free Trade Agreement: The Global Impact, edited by J.J. Schott and M.G. Smith From School to Unemployment?, edited by P.N. Junankar Empirical Modeling of Exchange Rate Dynamics, by F.X. Diebold K.A. Chrystal and R. Sedgwick (Wheatsheaf Books, Sussex, 1987) Floating Exchange Rates: Theories and Evidence, by R. MacDonald Essays in Honour of Kenneth Arrow: Volume I, Social Choice and Public Decision Making; Volume II, Equilibrium Analysis; Volume III, Uncertainty, Information and Communication, edited by Walter P. Heller, Ross M. Starr and David A. Starrett Keynes and Public Policy After Fifty Years: Volume 1—Economics and Policy, edited by O.F. Hamouda and J.M. Smithin Keynes and Public Policy After Fifty Years: Volume 2—Theories and Method, edited by OF. Hamouda and J.M. Smithin Handbook of Econometrics Volume III, edited by Z. Griliches and M.D. Intriligator Applied Welfare Economics and Public Policy, by R.E. Just, D.L. Hueth and A. Schmitz The Economic Theory and Measurement of Environmental Benefits, by P. Johansson Applications of Modern Production Theory: Efficiency and Productivity, edited by A. Dogramaci and R. Fare Australian Protectionism: Extent, Causes and Effects, by Kym Anderson and Ross Garnaut Policy Options for the Singapore Economy, by C.Y. Lim and associates German Political Economy: The History of an Alternative Economics, by T. Riha World Agricultural Trade: Building A Consensus, edited by W.M. Miner and D.E. Hathaway Industry Assistance Reform and the Labour Market: The New Zealand Experience, by R. Blandy and M. Baker     

Reviews

Book reviewed in this article: External Economic Policy Since the War. Vol. 1. Thc Post-War Financial settlement, by L.S. Pressnell Egalitarianism and the Generation of Inequality, by Henry Phelps Brown Lectures on Advanced Econometric Theory, by D. Sargan States and Markets: An Introduction to International Political Economy, by S. Strange How Much Government? by Michael James Allocation Models: Specification, Estimation & Applications, by R. Bewley Industrial Relations Reform: A Policy for Australia, by William A. Growth, Accumulation, and Unproductive Activity: An Analysis of the Postwar U.S Economy by E.N. Wolff Risk, Decision and Rodonality, edited by B.R. Munier Specification Analysis in the Linear Model—in Honour of Donald Cochrane, edited by M.L. King and D.E.A. Giles Structural Change in Macroeconomic Models, by MJ. Vilares Classical Political Economy: A Survey of Recent Literature edited by W.O. Economic History and the History of Economics, by M. Blang Economic Adjustment: Polices and Problems, edited by F. Holmes Direct Protection of Innovation, edited by W. Kingston     

Reviews

Book reviewed in this article: Australia in the International Economy in the Twentieth Century, by B. Dyster and D. Meredith Australia's Foreign Debt Myths and Realities, by John Pitchford Convict Workers: Reinterpreting Australia's past, edited by Stephen Nicholas Trade Policy in a Changing World Economy, by Robert E Baldwin Japan: Facing Economic Maturity, by E. J. Lincoln Social and Psychological Foundations of Economic Analysis, by J. L. Baxter Handbook of Economic Psychology, edited by W. F. Van Raaij, G. M. Veldhoven and K-E. Wameryd Share Markets and Portfolio Theory, edited by Ray Ball, Phillip Brown, Frank J. Finn and R. R. Officer Macroeconomic Theory and Stabilization Policy, by Willem H. Buiter The Theory of Industrial Organization, by J. Tirole The Economics of Missing Markets. Information, and Games, edited by F. Hahn Privatization: An Economic Analysis, by J. Vickers and G. Yarrow Regulating for Competition? Trade Practices Policy in a Changing Economy, edited by M. James     

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.     

An Economic Definition of the Middle Class

The concept of a middle class is prevalent in both common parlance and the social sciences; concern is frequently expressed that the middle class is shrinking, and politicians often position themselves as champions of the middle class. Yet the phrase “middle class” is extremely ambiguous; no consensus exists on either the upper bound or the lower bound separating the middle class from other classes. The present paper employs the government’s official poverty line as the demarcation between the poor and the middle class, and develops an equivalent distinction to separate the middle class from the wealthy. Based on the new definition, the paper provides some rough empirical estimates of the size of the American middle class over the 1989–2004 period.

Extending Nash's Axioms to Nonconvex Problems

Nash's axioms are extended to a domain of nonconvex problems to characterise in a simple way the Extended Nash Bargaining Solution proposed by Conley and Wilkie (1996,Games Econ. Behav.13, 26–38). Independence of irrelevant alternatives is weakened on the new domain to take into account the possibility that the solution of the convexified problem constitutes a “relevant” alternative.Journal of Economic LiteratureClassification Number: C71, C78.     

What is the systems perspective to Innovation and Technology Policy(ITP) and how can we apply it to developing and newly industrialized economies?

Despite recent advances in the Evolutionary and Systems Perspectives to Economic Change (SI), confusion still exists about how to apply it to the design and implementation of Innovation & Technology Policy (ITP) in concrete settings. Since the ‘Normative’ aspects of SI are framed in terms so general to make them insufficient or inadequate as guides and tools for actual policymaking, a presumption exists that additional theoretical and conceptual knowledge is required. Thus a major objective of this paper is to contribute to the development of a realistic and ‘grounded’ theoretical framework for Technology and Innovation Policy which is particularly relevant both for the promotion of Business Sector R&D and of hi tech (especially IT) industries in Top Tier and other Industrializing Economies. A second objective is to contribute directly to the capability of successfully applying this conceptual framework in concrete policy settings. Rather than justifying ITP the paper focuses on characterising and applying “Salient Normative Principles or Themes” of the SI perspective to ITP. Several concrete examples are given and the notions of Policy Process, (Country) Program Portfolio Profile and Policy Environment are introduced.     

Ownership herding and informational herding

This article takes as its point of departure the herding model of Bikhchandani et al. (1992 Bikhchandani, S., Hirshleifer, D. and Welch, I. 1992. A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of Political Economy, 100: 992–1026. [Crossref], [Web of Science ®] , [Google Scholar]). We extend earlier experimental evidence to distinguish between informational herding, as in the model, and ownership herding, an alternative explanation for observed behaviour.     

Non-Walrasian Labor Markets and Real Business Cycles

The standard real business cycle literature mainly focuses on Walrasian models designed to fit the U.S. institutional framework. Differences between the United States and Europe, mostly evident in the labor market, suggest that a purely Walrasian model may be inappropriate for the study of European business cycles. I present a stochastic version of the dynamic general equilibrium model of Daveri and Maffezzoli (2000, “A Numerical Approach to Fiscal Policy, Unemployment and Growth in Europe,” Econometrics and Applied Economics Working Paper 2000-4, IEP, Università Bocconi), where unemployment is generated by monopolistic unions, and calibrate it to reproduce several long-run features of the Italian and U.S. economies. This framework is then compared with an indivisible labor model built on Hansen (1985, Journal of Monetary Economics16, 309–328) and Rogerson and Wright (1988, Journal of Monetary Economics22, 501–515). I focus on the impulse response functions, the standard business cycle statistics, and the ability to reproduce the cyclical components of the main macroeconomic variables. The main results are as follows: (i) the impulse response functions of the monopoly union (MU) model show a higher degree of overall persistence; (ii) the business cycle statistics are similar; (iii) the MU model enjoys a statistically significant advantage in reproducing the Italian business cycle, but not that of the United States. Journal of Economics Literature Classification Numbers: E32, E24, J23, J51.     

Structural changes and regional disparity in China's inflation: a revisit

The study re-examined the time series properties and regional disparities in Chinese inflation by extending the work of Chong, Zhang, and Feng (2011 Chong, Tai-Leeung, Terence, Ning Zhang and Feng, Qu. 2011. Structural Changes and Regional Disparity in China's Inflation. Economics Bulletien, 31(1): 572–583.  [Google Scholar]). For this purpose we employed the Lagrange Multiplier (LM) unit root test with one structural break and two structural breaks suggested by Lee and Strazicich (2003 Lee, Junsoo, Mark, C. and Strazicich. 2003. Minimum LM Unit Root Test with Two Structural Breaks. Review of Economics and Statistics, 85(4): 1082–1089. [Crossref], [Web of Science ®] , [Google Scholar], 2004 Lee, J. and Strazicich, M. 2004. Minimum LM unit root test with one structural break. Working Paper 04–17, Boone, North Carolina: Department of Economics, Appalachian State University.  [Google Scholar]) and a recently developed ADF type unit root test with two structural breaks of Narayan and Popp (2010 Narayan, Paresh Kumar and Stephan Popp. 2010. A New Unit root test with Two Structural Breaks in Level and Slope at Unknown Time. Journal of Applied Statistics, 37(9): 1425–1438. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]). We found that national, urban and rural series of the overall inflation series, clothing, and food, national series of education and residence and the rural series of residence and education are stationary. We also found regional disparity in Chinese inflation, but the disparities existed only in education inflation series.     

Irving Fisher's debt deflation analysis: From the Purchasing Power of Money (1911) to the Debt-deflation Theory of the Great Depression (1933)

Abstract

In 1933, Irving Fisher proposed an explanation for the Great Depression based on the distinction between the price level and price change effect of deflation in a context of over-indebtedness. This paper compares the debt-deflation theory of Fisher (1933 Fisher, I., 1933. The debt-deflation theory of great depressions, Econometrica 1 (1933), pp. 337–57. DOI: 10.2307/1907327[Crossref], [Web of Science ®] , [Google Scholar]) with the dynamic depression process he had expounded almost 20 years earlier in the Purchasing Power of Money (1911). The role played by both price level and price change effects in the analyses of Fisher (1933, 1911) are clarified in the context of the disequilibrium model of Tobin (1975 Tobin, J., 1975. Keynesian models of recession and depression, American Economic Review 65 (1975), pp. 195–202.[Web of Science ®] , [Google Scholar]). More precisely, we show that the stationary equilibrium is assumed to be locally unstable according to Fisher's 1911 insights and globally unstable according to his 1933 analysis.     

Book reviews

Book reviewed in this article: Tracy, Michael, East-West European Agricultural Trade: The Impact of Association Agreements, APS-Agricultural Policy Studies Frydman, Roman, Rapacynski, Andrzej, Privatization in Eastern Europe: Is the State Withering Away?     

The Politics of Co-optation

Our model consists of two groups. Group 1 holds political power and Group 2 threatens this power. Group 1 decreases the probability of its upheaval by co-opting some agents from Group 2 into a more benign third group. Improvements in the upheaval technology lead to fewer but better co-optation offers. Increasing the size and/or the degree of fragmentation of Group 2 has the opposite effect. If the co-opted group also threatens Group 1, co-optation transfers are reduced. Our model provides a new explanation of why growth is a politically stabilizing force. The theory suggests that, in post-Communist privatizations, unstable governments will give large benefits to a small number of beneficiaries while stable governments will give small benefits to a large group. J. Comp. Econ., December 2001, 29(4), pp. 591–607. Universita' di Modena e Reggio Emilia, I-41100 Modena, Italy; and Centre for Economic Policy Research; and Royal Holloway, University of London, Egham, Surrey TW20 OEX, United Kingdom; and Centre for Economic Policy Research. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: D74, P26, D3.     

Towards solving the PPP puzzle: evidence from 113 countries

Several different approaches have been followed by researchers to test the validity of Purchasing Power Parity (PPP). Since the introduction of the unit-root tests, researchers have applied a battery of these tests to determine whether the real exchange rates are stationary. If the answer is in the affirmative, PPP is validated. While application of the standard augmented Dickey–Fuller test has not provided much support for PPP, a test that incorporates nonlinearity in the rates has. Under both tests, however, the null of nonstationary is tested against the alternative of stationarity. In this article, when we switch the null with the alternative and apply Kwiatkowski et al. (1992 Kwiatkowski, D, Phillips, PCB, Schmidt, P and Shin, Y. 1992. Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54: 159–78. [Crossref], [Web of Science ®] , [Google Scholar]) test, we provide relatively more support for the theory, getting closer and closer towards solving the PPP puzzle.     

Unit roots and purchasing power parity: another kick at the can

Lopez et al. (2005 Lopez, C, Murray, C and Papell, D. 2005. State of the art unit root tests and purchasing power parity. Journal of Money, Credit and Banking, 37: 361–9. [Crossref], [Web of Science ®] , [Google Scholar]) demonstrated that single-equation unit-root tests cannot provide conclusive evidence of whether real exchange rates are stationary because inference depends critically on the lag-lengths used to construct the test statistics, a result reinforced by a recent work by Sweeney (2006 Sweeney, D. 2006. Mean reversion in nominal G-10 exchange rates. Journal of Financial and Quantitative Analysis, 41: 685–708. [Crossref], [Web of Science ®] , [Google Scholar]). The purpose of this article is to revisit the issue, first demonstrating the necessary conditions under which this approach of testing for Purchasing Power Parity (PPP) is appropriate.     

Nonlinearity in real exchange rates: an approach with disaggregated data and a new linearity test

Employing disaggregated real exchange rates from nine European counties in 16 goods categories, we assess in this study the nonlinearity in the real exchange rates. Surprisingly, we find evidence for nonlinearity in only four (10) out of 143 series with the linearity test proposed by Harvey et al. (2008 Harvey, D. I., Leybourne, S. J. and Xiao, B. 2008. A powerful test for linearity when the order of integration is unknown. Studies in Nonlinear Dynamics and Econometrics, 12 Art 8[Web of Science ®] , [Google Scholar]) at the 5% (10%) significance level. This result differs greatly from those of Juvenal and Taylor (2008 Juvenal, L. and Taylor, M. P. 2008. Threshold adjustment of deviations from the law of one price. Studies in Nonlinear Dynamics and Econometrics, 12 Art 8[Web of Science ®] , [Google Scholar]), Imbs et al. (2003 Imbs, J., Mumtaz, H., Raven, M. O. and Rey, H. 2003. Nonlinearities and real exchange rate dynamics. Journal of the European Economic Association, 1: 639–49. [Crossref] , [Google Scholar]), Sarno et al. (2004 Sarno, L., Taylor, M. P. and Chowdhury, I. 2004. Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study. Journal of International Money and Finance, 23: 1–25. [Crossref], [Web of Science ®] , [Google Scholar]) and Berka (2009 Berka, M. 2009. “Non-linear adjustment in law of one price deviations and physical characteristic of good”. In Review of International Economics Vol. 17, 51–73.  [Google Scholar]), who report ample evidence for nonlinearity for the same or similarly disaggregated real exchange rate datasets.     

Service innovation and the proximity-concentration trade-off model of trade and FDI

This paper introduces service innovation in the proximity-concentration trade-off model of trade and foreign direct investments (FDI) [Helpman, E., M. Melitz, and S. R. Yeaple 2004 Helpman, E., M. Melitz, and S. R. Yeaple. 2004. “Export Versus FDI with Heterogeneous Firms.” American Economic Review 94 (1): 300–316. doi: 10.1257/000282804322970814[Crossref], [Web of Science ®] , [Google Scholar]. “Export Versus FDI with Heterogeneous Firms.” American Economic Review 94 (1): 300–316]. The idea is that innovation will have two main effects on service firms’ choice between exports and FDI. First, innovative firms will on average have higher productivity levels than non-innovative enterprises. Secondly, innovators will have to pay a higher relational distance cost for undertaking export activities, and they will, therefore, prefer to avoid (or reduce) these costs by choosing an FDI strategy instead. We test the empirical relevance of this idea on a new survey data set for a representative sample of firms in all business service sectors in Norway. The results show that firms are more likely to choose FDI rather than export the greater their productivity level and the higher the relational distance costs they face.