Moving average stochastic volatility models with application to inflation forecast

We introduce a new class of models that has both stochastic volatility and moving average errors, where the conditional mean has a state space representation. Having a moving average component, however, means that the errors in the measurement equation are no longer serially independent, and estimation becomes more difficult. We develop a posterior simulator that builds upon recent advances in precision-based algorithms for estimating these new models. In an empirical application involving US inflation we find that these moving average stochastic volatility models provide better in-sample fitness and out-of-sample forecast performance than the standard variants with only stochastic volatility.     

Racial Fractionalization and School Performance

The literature on racial “peer effects” suggests that diversity improves at least some students' school performance. However, a literature in economic development posits that diversity may negatively affect school performance by undermining the efficient provision of education. This article empirically tests this claim, which we call the “public goods channel,” by examining the relationship between racial diversity and student performance in Ohio's school districts. We find that moving from a completely homogenous school district to one in which two racial groups have equal population shares is associated with a 7–17.5 percentage point decline in the passage rate on the state math exam, holding per pupil spending across districts constant. These results suggest that racial diversity is negatively associated with school performance but that the public goods channel is not responsible for this relationship.     

Exit Deterrence

This paper is the first to provide a general context whereby potential entry can lead incumbent firms to permanently reduce the intensity of competition in a market. All previous results found that potential entry would lead to lower prices and greater competition. Examining markets where entry occurs by the acquisition of access rights from an existing incumbent, we demonstrate that, where competitive choices are strategic complements, a more efficient entrant may be unable to acquire those rights from a less efficient incumbent due to the unilateral accommodating behavior of the efficient incumbent. Similarly, such accommodating behavior may deter efficient investment by an incumbent. These results have implications as to how economists view potential entry and its benefits.     

From Experience: The Corporate Black Hole

There is a lot of creative potential lying dormant in corporations because too many managers fail to see innovation as a process to be deliberately managed. C. Joshua Abend sees innovation connected to virtually everything that happens—or doesn't happen—in an organization. He offers in this article ideas that managers can use to remove the impediments to increased innovation and productivity.     

Bush v. Gore and the Effect of New Source Review on Power Plant Emissions

New Source Review (NSR) is a Clean Air Act regulation that requires electric utilities to meet emission standards when making modifications to existing power plants. The regulation increases the cost of replacing worn out parts, and limits the firm’s scope of potential capital investments. Such restrictions may lead to greater retirements and lower utilization, adversely affecting profits. Prior to the 2000 presidential election, investors expected Bush to have a narrower interpretation of NSR than Gore. Therefore, we use changes in stock prices to estimate the effect on profits of differences in NSR policy. Our results indicate that investors expected the average boiler to be $38 million more valuable under the Bush administration. Over the boilers’ lifetimes, the additional utilization will have increased emissions by 19 million tons of sulfur dioxide, 5.9 million tons of nitrogen oxides and 980 million tons of carbon dioxide, relative to natural gas generation.      

FUTURE POLICY UNCERTAINTY, EFFORT, AND THE RESPONSIVENESS OF OUTPUT TO MARKET SIGNALS

This paper analyses the consequences of future policy uncertainty on the allocation of effort in an economy undergoing reforms. We demonstrate that uncertainty regarding future tax policies may reduce present effort, and will also reduce the responsiveness of output to productivity shocks and other market signals. The discussion has relevance for cases in which privatization will make present managers of firms the future owners and residual claimants to future output. An expectation that the purchasing price of the firm will have a positive relationship to present output will induce the manager to reduce contemporaneous effort, and uncertainty regarding the relationship will also depress present managerial effort.     

Competitive Neutrality in Access Pricing

This article examines the notion of competitive neutrality when setting access prices for vertically integrated bottleneck networks. In contrast to the claims of regulated firms (for example, Telstra), it is not possible to argue that access charges that involve unit prices in excess of short‐run marginal cost reflect competitive neutrality. That is, we demonstrate that in general models of downstream oligopoly, upstream prices that differ from marginal cost are not competitively neutral in the sense of placing integrated and non‐integrated firms on an equal basis.     

Interim audit scope,client size and client familiarity: An empirical analysis

This study investigates the scope of an audit conducted during the first part of the annual auditing cycle. It measures empirically the probability of auditing various balance sheet and income statement accounts. The results indicate that current assets and liabilities have a higher probability for an interim audit than fixed assets, long-term debt and equity accounts. Furthermore, the likelihood of including each account in an interim audit increases with client size, so the larger an auditee, the wider the audit scope during the beginning of the audit cycle. Also, the empirical results indicate that the lower the familiarity of the auditor with the auditee, the wider the scope of an interim audit. These results seem to be consistent with auditing theory and intuition.     

Financial Liberalisations in Latin America in the 1990s: A Reassessment

This paper studies the experience of Latin America (LATAM) with financial liberalisation in the 1990s. The rush towards financial liberalisations in the early 1990s was associated with expectations that external financing would alleviate the scarcity of saving in LATAM, thereby increasing investment and growth. Yet, the data and several case studies suggest that the gains from external financing are overrated. The bottleneck inhibiting economic growth is less the scarcity of saving, and more the scarcity of good governance. A possible interpretation for these findings is that in countries where private savings and investments were taxed in an arbitrary and unpredictable way, the credibility of a new regime could not be assumed or imposed. Instead, credibility must be acquired as an outcome of a learning process. Consequently, increasing the saving and investment rates tends to be a time‐consuming process. This also suggests that greater political instability and polarisation would induce consumers to be more cautious in increasing their saving and investment rates following a reform. Hence, reaching a sustained take‐off in Latin America is a harder task to accomplish than in Asia.