Non‐Homothetic Multisector Growth Models

Multisector growth (MSG) models are dynamic versions of computable general equilibrium (CGE) models. Non‐homothetic preference (utility) functions are required for the evolution of factor allocations and industrial structures in accordance with consumption expenditure patterns implied by the non‐unitary income elasticities observed in all budget data since Engel in the 1850s. But comparative static general equilibrium solutions and particularly solving the dynamics of MSG models require explicit specifications of all demand and cost (price) functions. On the demand side, the constant differences of elasticity of substitution (CDES) non‐homothetic indirect utility functions and Roy's identity provide the explicit Marshallian demand functions and budget shares. Sectorial constant elasticity of substitution (CES) cost functions and Shephard's lemma provide the explicit relative commodity price functions and the sectorial cost shares and capital–labor ratios. Walrasian equilibria are given by one equation and the multisector dynamics by three differential equations. Benchmark solutions are given for three cost regimes of a 10‐sector MSG model. History patterns of industrial/allocational evolutions are recognized.     

The CES‐‐Translog Production Function, Returns to Scale and AES

The translog functional form imposes no a priori restrictions on the substitution possibilities between the factor inputs, by relaxing the assumption of strong separability, and the CES–translog cost function specification allows for testing homothetic technology with Hicks‐neutral technical change. In this paper an n ‐factor CES–translog production function is presented which develops the parameters to directly assess scale effects from those due to technology in the production structure. In addition, by applying Shephard's lemma it was possible to derive the input demand functions, as well as the partial elasticities of substitution and the cross‐partial price elasticities of demand for a generalized CES–translog production structure.     

Seasonality, Cointegration, and Forecasting UK Residential Energy Demand

Much of the short‐run movement in energy demand in the UK is seasonal, and the contribution of long‐run factors to short‐run forecasts is slight. Nevertheless, using a variety of techniques, including a recently developed estimation procedure that is applicable irrespective of the orders of integration of the data, we obtain a long‐run income elasticity of demand of about one third, and we are unable to reject a zero price elasticity. An econometric model is shown to provide superior short‐run forecasts to well‐known seasonal time series models ex post , but is inferior to Box‐Jenkins SARMA models when the determinants themselves have to be forecast. However, the relatively short data sample and small number of forecasts suggest caution in generalising these results.     

Housing Prices in Urban China as Determined by Demand and Supply

This paper studies the demand for and supply of residential housing in urban China since the late 1980s when the urban housing market became commercialized. Using aggregated annual data from 1987 to 2012 in a simultaneous equations framework we show that the rapid increase in the urban residential housing price can be well explained by the forces of demand and supply, with income determining demand and cost of construction affecting supply. We find the income elasticity of demand for urban housing to be approximately 1, the price elasticity of demand to be approximately ?1.1 and the price elasticity of supply of the total housing stock to be approximately 0.5. The resulting long‐run effect of income on urban housing prices in elasticity terms is approximately 0.7, because the increase in income has shifted the demand curve outward more rapidly than the supply curve.     

Residential water demand responds asymmetrically to rising and falling prices

This paper econometrically estimates residential water consumption in Germany between 2007 and 2013 based on a panel of almost 3000 supply areas. In particular, the analysis distinguishes periods of rising and falling water and sewage water prices. The short-run (long-run) price elasticity is estimated at around 4.2% (13%), but water demand appears to respond asymmetrically to rising and falling prices. When prices are rising, the short-run (long-run) price elasticity is around 6.5% (17%). When prices are falling, the short-run price elasticity is not statistically different from zero, and the long-run price elasticity is estimated at around 12%. Additional results illustrate that employing average prices instead of marginal prices results in substantially overestimating the price elasticity. These findings are particularly relevant for utilities and regulators planning to alter the tariff structure towards a higher fixed fee and a lower volumetric fee.     

Welfare and Distribution Effects of Water Pricing Policies

In this paper, distribution and welfare effects of changes in block price systems are evaluated. A method is discussed to determine, for a Marshallian demand function, equivalent variation in case of a block price system. The method is applied to compare, for the Metropolitan Region of São Paulo, alternative pricing policies on the basis of their demand, welfare and distribution effects of changing water prices. Results show that there is a trade off between average welfare and income distribution. A pro-poor price system may result in lower average welfare than a flat price system, but in higher individual welfare for the poor. Moreover, there is a trade off between revenues for the water company and income distribution. Even though pro-poor price systems may not be as good for average welfare as flat price systems, their direct effects on poverty are important. Introducing pro-poor price systems, however, may have financial consequences for the water companies.     

The aggregate elasticity of factor substitution with middle products

The elasticity of substitution between factors in production relates the change in the ratio of factors used in a production process to a given change in the factor price ratio. An aggregate concept of such an elasticity relates a change in overall factor endowments to the resulting change in factor prices. For a closed economy the behavior of consumers is an important part of such an aggregate elasticity, since endowment changes can bring about changes in commodity prices and resulting adjustments to factor prices. For a small open economy, commodity prices in typical models are exogenous. In the model with middle products, all final consumer goods are non-traded, so that local consumer behavior can affect factor prices. The aggregate elasticity of substitution is shown to be an average of production elasticities and demand elasticity even for a small open economy.     

Goods market responses to trade shocks and trade and wages decompositions

Abstract.  Trade and wages literature asks whether trade or technology has been the major factor behind increases in wage inequality in OECD countries since the 1980s. In this literature, little attention has been paid to how goods market responses to trade shocks affect conclusions. Using an Armington heterogeneous goods trade model we capture demand side effects, and show how trade shocks affecting the price of unskilled‐intensive importable goods can be absorbed on the demand side of goods markets, with little or no impact on relative wage rates. No wage impact occurs if the elasticity of substitution in preferences between imports and import substitutes is one. As this elasticity increases, trade plays an ever larger role in explaining wage inequality changes, and as the elasticity goes below one the sign of the effect changes. We present some results of general equilibrium decompositions of total wage change into trade and technology components using UK data. We suggest that since many import demand elasticity estimates are in the neighbourhood of one, there is a prima facie case that goods market considerations further lower the significance of trade as an explanation of recent trends in OECD wage inequality beyond that claimed in the literature.     

Trading Behavior and Asset Returns: Evidence from the Interday Serial Correlations of Intraday‐to‐Intraday Daily Returns of Taiwan

This paper sheds light on the importance of trading behavior in the determination of asset prices by examining the interday serial correlations of intraday‐to‐intraday daily returns of the Taiwan Stock Exchange (TSEC). The TSEC exhibits positive serial correlation in the beginning and the end of the week and negative serial correlation in the middle of the week. The interday serial correlation is not a result of non‐synchronous trading, bid‐ask bounce in transaction price, or price limits. The serial correlation is positively related to trading volume and similar to the pattern in the US. We suggest that trading behavior seems to be an important determinant of asset prices.     

The effects of price on household demand for food and calories in poor countries: are our databases giving reliable estimates?

Food price policy relies heavily on estimated price elasticities of food demand to help balance the nutritional and economic objectives in poor countries. Economists use either unit values (ratios of household expenditure to quantity purchased) or community prices (enumerated from vendors in local markets) as proxies for market prices when estimating price elasticities with household survey data. Biases are believed to result from using unit values, due to measurement error and quality effects, but evidence on this issue is lacking and even less is known about community prices. This article provides an empirical evidence from Vietnam, which suggests that economists should exercise caution when estimating price elasticities from household surveys. A 14-food demand system is estimated alternatively with unit values or community prices, and the elasticity of calories with respect to rice prices is calculated. This elasticity is more than twice as large (?0.54 versus ?0.22) when community prices are used rather than unit values. Hence, conclusions about the nutritional effects of rice price increases appear sensitive to data choices made by economists. More generally, this discrepancy suggests that the household survey databases commonly used by economists may not provide reliable estimates.     

Income Elasticities at different price vectors

Cross-country data are used to evaluate the income elasticities of the demand for ten broad groups of goods at two different price vectors: the observed prices of separate countries and the geometric means of these prices across all countries. The major effect is on the income elasticity of the demand for food; using observed rather than geometric mean prices results in lower elasticity values for the more affluent countries.     

Viewpoint: Option prices, preferences, and state variables

Abstract.  This paper surveys recent developments in the theory of option pricing. The emphasis is on the interplay between option prices and investors' impatience and their aversion to risk. The traditional view, steeped in the risk‐neutral approach to derivative pricing, has been that these preferences play no role in the determination of option prices. However, the usual lognormality assumption required to obtain preference‐free option pricing formulas is at odds with the empirical properties of financial assets. The lognormality assumption is easily reconcilable with those properties by the introduction of a latent state variable whose values can be interpreted as the states of the economy. The presence of a covariance risk with the state variable makes option prices depend explicitly on preferences. Generalized option pricing formulas, in which preferences matter, can explain several well‐known empirical biases associated with preference‐free models such as that of Black and Scholes (1973) and the stochastic volatility extensions of Hull and White (1987) and Heston (1993) .     

贫富差距、供求弹性与房价*

近些年，中国的贫富差距和房价居高不下，但现有文献忽视供求弹性与贫富差距交互作用对房价的影响。据此，本文构建结合贫富差距和供求弹性的住房存量调整模型，使用中国2002—2012年7省份33个城市的UHS数据发现，收入和财富的基尼系数对房价有正影响；供求弹性对房价分别有负影响和正影响；收入和财富基尼系数与供求弹性交互项对房价分别有正影响和负影响。据此，为防止房价泡沫，各级政府一方面应缩小贫富差距，另一方面应增加土地和住房供给。     

A Simple Characterization of the Second‐best Two‐part and Block‐rate Tariffs Theory and Applications

The general necessary optimality conditions for second‐best discrete multipart tariffs are rather complex. In this paper, we derive a simplified characterization of these conditions for two‐part tariffs and for block‐rate tariffs for given thresholds of these tariffs. The simplified necessary optimality conditions are equivalent to the necessary conditions for a Ramsey‐optimum for goods with continuously variable individually demanded quantities. We demonstrate that this characterization of second‐best multipart tariffs can be helpful, when applying the usual regulatory mechanisms to these tariffs. In particular, we consider Vogelsang–Finsinger (1979) regulation as well as a particular form of price‐cap regulation which is related to the Laspeyres index of prices.     

Joint Adjustment of House Prices, Stock Prices and Output Towards Short‐run Equilibrium

A dynamic IS‐LM model including houses and stocks as additional assets will be analysed in this paper. Providing also housing services, a major consumption item for most households, houses create an additional link between the monetary and the real sector, distinct from the traditional wealth effect channel. We analyse the adjustment path of output, house prices and stock prices after policy shocks within a rational expectation setup. Depending crucially on the elasticity of housing services demand, different reaction patterns of asset prices will emerge. The results are contrasted with relevant empirical findings, particularly Lastrapes (Journal of Housing Economics, 11 (2002), pp. 40–74), leading to the identification of plausible elasticity ranges. The analysis sheds new light on the ongoing discussion about demand effects from changing real estate wealth and about determinants of house price fluctuations.     

Estimating Quality‐adjusted Price Changes: Method and Application to VCRs

This paper uses scanner data to generate estimates of quality‐adjusted price changes for video‐recorders. We use hedonic regressions to derive estimates of the changing worth of each quality component. These are then applied to weighted changes in the mix of quality attributes of products to derive estimates of quality‐adjusted price (QAP) changes. The data source used is electronic‐point‐of‐sale (EPOS) scanner data that are available for a wide range of goods. This study provides an example of how such methods can be more widely applied. The estimates of QAP changes correspond to constant‐utility, (hedonic) cost‐of‐living indexes defined in economic theory as the ratio of expenditure functions at constant utility allowing for changing prices and characteristics of goods. This method is proposed as an improvement on the existing direct method , which takes its estimates directly from the coefficients associated with 'time dummies' in a hedonic regression. We finally undertake a matching process, akin to that used by statistical offices, and compare the results. Direct comparisons with RPI estimates and these hedonic approaches are not easy since the approaches use quite different data sets. Our replication of a procedure akin to that used for the RPI on the scanner data set provides insights into sources of potential bias.     

Stock Market Fluctuations and Money Demand in Italy, 1913–2003

This paper examines the impact of stock market fluctuations on money demand in Italy from a long‐run perspective. The money demand function estimated by Muscatelli and Spinelli (2000) for a long time span is utilized as a benchmark, adding to the specification information on share prices from the Milan Stock Exchange Reform of 1913 to recent years. For a shorter time period (1938–2003), annual observations on stock market capitalization and turnover velocity are also considered. The empirical findings suggest that stock market fluctuations help to explain temporary movements in liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long‐run relationship is unstable. In a dynamic, short‐term specification of money demand, the estimated coefficient of deflated stock prices is positive, and therefore compatible with a wealth effect, in the years 1913–1980, while in the last two decades a substitution effect has prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalization. Moreover, in the recent period, stock market turnover and money growth are positively correlated .     

A dynamic model of demand for Mediterranean tourism

A dynamic econometric model was specified in order to estimate tourism consumption changes by Northern European countries and the USA for major Mediterranean destinations. The model employed a flexible framework for modelling short-term dynamics as well as the long run effects of a range of variables of specific interest to the countries considered. The estimated model provided useful information for tourism demand. The income elasticities demonstrated considerable differences in tourism demand preferences between origin countries and between traditional and newly developing destinations. The own and substitute price elasticities indicated the importance of effective prices in determining tourism receipts of the destinations.     

Testing for rational bubbles in the US housing market

The presence of a bubble in the US housing market prior to the 2007 subprime mortgage financial crisis is investigated. This is done by looking into the relationship between house prices and rental prices, known as the price–rent ratio, which is an important measure of a potential deviation between house prices and its fundamental value. Additionally, the interest rate is taken into account since it is an important factor in determining demand for housing mortgages and thereby influencing house prices, and explosive behavior of house prices is considered. These relationships are investigated through a theoretical and econometrical framework. The empirical evidence suggests that there was a bubble in the housing market prior to the financial crisis, even when controlling for the decreasing interest rate and the fundamental information given by the rental price in the period. Explosiveness was the main source of the price increase, such that a bubble was present in the housing market after correcting for other fundamental factors. The econometric procedures used in the analysis may therefore be relevant for monitoring the housing market.