Small sample properties of Canonical Cointegrating Regressions

Monte Carlo simulations are performed to examine small sample properties of Canonical Cointegrating Regressions (CCR). The first data generation process is designed to generate both cointegrated and non-cointegrated systems with normal disturbances. If the near-observational equivalence of the stationary and the integrated processes is not significant, both powers and empirical sizes of CCR tests are acceptable. The second data generation process is based on the error correction model. Cointegrated systems with various fat-tailed disturbances are generated and analyzed. The empirical sizes of CCR tests with studentt disturbances and GARCH disturbances are found to be reasonable under certain restrictions. The last data generation process is a generalized least squares (GLS) process that incorporates heteroskedasticity into the error correction model. Again, the empirical sizes of CCR tests are reasonable.     

Small sample properties of the two-step and three-step estimators in a heteroscedastic linear regression model and the Bayesian alternative

In this paper, we consider the heteroscedastic linear regression model in which the variance of the disturbance term is assumed to be proportional to one of the regressors raised to an unknown power. We first derive the Bayesian estimator, and compare the mean squared errors of the two-step, three-step and Bayesian estimates by Monte Carlo experiments.     

Technological choices and unemployment benefits in a matching model with heterogenous workers

This article aims at understanding the interactions between public policies, such as unemployment benefit systems, and firms’ technological choices. For this purpose, we use a matching model in which workers are vertically differentiated and where the nature of jobs is endogenous. We show that an improvement in unemployment benefits leads to an increase in productivity by making agents more selective and jobs more complex. However, the impact on labour market participation is negative.     

The Weibull distribution as a general model for forecasting technological change

This paper presents a simple and widely applicable model for technological forecasting using the Weibull distribution function. It shows the generality of the Weibull function, which can accommodate different patterns of technological change. A method for estimating parameters and some applications are presented to illustrate the usefulness of the model.     

Endogeneity and sample selection in a model for remittances

We estimate a remittance model in which we address endogeneity and reverse causality relationships between immigrants' remittances, pre-transfer income and consumption. In order to take into account the fact that a large share of individuals do not remit, instrumental variable variants of the double-hurdle and Heckit selection models are proposed and estimated by Limited Information ML; semiparametric extensions are considered as robustness checks. Our results for a sample of recent immigrants to Australia show that endogeneity is substantial and that estimates obtained by the methods previously employed in the literature may be misleading if given a behavioral interpretation.     

Small sample performance of the Stein-Rule in non-orthogonal designs

The effects of multicollinearity upon the risk improvement provided by Stein-like estimators over the maximum likelihood estimator in the normal regression model are investigated via Monte Carlo methods. Risk gains are found to degenerate rapidly given moderate degrees of multicollinearity.     

Small noise asymptotics for a stochastic growth model

We develop analytic asymptotic methods to characterize time-series properties of nonlinear dynamic stochastic models. We focus on a stochastic growth model which is representative of the models underlying much of modern macroeconomics. Taking limits as the stochastic shocks become small, we derive a functional central limit theorem, a large deviation principle, and a moderate deviation principle. These allow us to calculate analytically the asymptotic distribution of the capital stock, and to obtain bounds on the probability that the log of the capital stock will differ from its deterministic steady-state level by a given amount. This latter result can be applied to characterize the probability and frequency of large business cycles. We then illustrate our theoretical results through some simulations. We find that our results do a good job of characterizing the model economy, both in terms of its average behavior and its occasional large cyclical fluctuations.     

Small sample bias in conditional sum-of-squares estimators of fractionally integrated ARMA models

This paper considers estimation of the parameters for the fractionally integrated class of processes known as ARFIMA. We consider the small sample properties of a conditional sum-of-squares estimator that is asymptotically equivalent to MLE. This estimator has the advantage of being relatively simple and can estimate all the parameters, including the mean, simultaneously. The simulation evidence we present indicates that estimation of the mean can make a considerable difference to the small sample bias and MSE of the other parameter estimates.     

A monte carlo study of the small sample properties of various estimators of Solow's distributed lag model

The results of some Monte Carlo experiments investigating the small sample properties of estimators ofSolow's distributed lag model are presented. In general, the relative efficiency of an estimation technique depends on the true values of the parameters being estimated. But if the assumptions of the model are not violated, then the maximum and mean likelihood and the Bayesian estimators are best.     

A sample selection model for prepared food expenditures

The factors affecting household expenditures on four types of prepared food products from a sample selection model estimated using a two-step method are explored. Results suggest that several variables affect household expenditures on various prepared food products. Factors examined are presence of children, number of earners, region, household size, seasonality, age, race, education, and income.     

On exact small sample properties of ordinary ridge estimators

In this paper, we examine the exact small sample properties of the ordinary ridge estimator and the bias-corrected ordinary ridge estimator.     

A new estimator for trade costs and its small sample properties

This paper discusses the estimation of parameters of a traditional transportation model, as it is typically present in so-called Takayama–Judge type spatial price equilibrium models. In contrast to previously used estimation methods, observations of regional prices as well as of trade costs are used in a direct estimation of the first order conditions. The proposed method uses bi-level programming techniques to minimize a weighted least squares criterion under the restriction that the estimated parameters satisfy the Kuhn–Tucker conditions for an optimal solution of the transport model. A penalty function and a smooth reformulation are used to iteratively approximate the complementary slackness conditions. Monte-Carlo simulations are used to trace out some properties of the estimator and compare it with a traditional calibration method. The analysis shows that the proposed technique estimates prices as well as trade costs more precisely than the traditional calibration method. It is suggested to apply the same method to a range of linear and quadratic models.     

Inflation Dynamics in a Small Open Economy

We evaluate the empirical performance of forward‐looking models for inflation dynamics in a small open economy. Using likelihood‐based testing procedures, we find that the exact formulation is at odds with Norwegian data. Moreover, some of the parameters in the model are not well identified. We also find that the inexact formulation is not rejected statistically using a test based on a minimum distance method. However, confidence regions also reveal an identification problem with this model. Instead, we find a well‐specified backward‐looking model with imperfect competition underlying the price setting, which is a model that outperforms an alternative forward‐looking model in‐sample. The backward‐looking model also forecasts somewhat better than the alternative forward‐looking model, during and after the recent financial crisis.     

Durability in a Monopoly With a Small Number of Buyers

This paper shows that the number of buyers is a crucial demand characteristic for a monopolist's choice of durability. When he sells to a few large buyers, he offers a more durable good than when selling to many small buyers. By increasing durability of the good sold to large buyers, the monopolist encourages current purchasing and can thus engage in greater intertemporal price discrimination and make more profit. Therefore Bulow's proposition of minimal durability does not survive in the case of few buyers. This has not been pointed out thus far.     

Aggregation of heterogenous beliefs,asset pricing,and risk sharing in complete financial markets

Given a competitive equilibrium in complete asset markets, we propose a method that aggregates heterogeneous individual beliefs into a single “market probability,” which, if commonly shared by investors, generates the same marginal valuation of assets by the market as well as by each individual investor. As a result of the aggregation process, the market portfolio may have to be scalarly adjusted, upward or downward, a reflection of an aggregation bias due to the diversity of beliefs. From a dual viewpoint, the standard construction of an expected utility-maximizing aggregate investor designed to represent the economy in equilibrium, is shown to be also valid in the case of heterogeneous beliefs, modulo the above scalar adjustment of the market portfolio, thereby generating an Adjusted version of the Consumption based Capital Asset Pricing Model (ACCAPM). We analyze how the allocation of aggregate and individual risks relates to deviations of individual beliefs from the aggregate market probability. Finally, we identify the channels through which the distribution of beliefs and other microeconomic characteristics (incomes, attitudes toward risk) across investors impact the pricing of risky assets an may contribute to explaining the equity premium puzzle.     

Small Firms and Unemployment in a Two-sector Model

This paper presents a two-sector model of an economy – one sector consisting of large firms with institutionally determined wage (the Formal sector) and the other sector consisting of small firms (the Informal sector). The paper examines the effects of changes in benefits, entrepreneurial zeal, and the institutionally determined wage in the Formal sector on unemployment. It concludes with brief comments on the role of aggregate demand and supply policies in reducing unemployment in this economy.     

Industrialization and Expectations in a Small Open Economy

The degree of industrialization in a country can be measured by the diversity of intermediate goods produced in the country. I construct a small-country model in which this diversity is determined endogenously in the process of industrialization. My model shows that the character istics of equilibria depend on the substitutability among intermediate goods; particularly when the substitutability is large, there may be multiple equilibria. When such equilibria exist, optimistic expectations lead to a high degree of industrialization but pessimistic expectations yield a low degree of industrialization.
JEL Classification Numbers: O14, F43, F12     

Correcting Trade Distortions in a Small Open Economy

This paper considers the second-best strategy of correcting a wide variety of trade distortions in a small open economy with perfect competition in all markets. Using the tools of duality, we obtain some general properties of the structure and the levels of the optimal taxlsubsidy rates. The paper also analyzes the welfare effects of unilateral piecemeal trade policy reforms when some of the quota distortions—imposed by the foreign countries—are unalterable. It is shown that the merits of unilateral trade policy reforms that are emphasized in the literature crucially depend on the absence of unalterable foreign imposed quotas.