Formation of inflation expectations in the U.K.: Pitfalls in the use of the error-learning model

This paper examines the formation of explicitly-reported price expectations in the UK. Expectations are formed over a long period, and a general distributed lag provides a superior explanation to that provided by a second-order error-learning form. The error-learning mechanism is shown to be biased when lagged expectations incorporate a random shock, and when expectations are reported more frequently than the length of the forecast horizon.     

On the quantitative significance of imperfect information

Economic models of markets with imperfect information have increasingly involved high degrees of theoretical sophistication. So far there has been no movement beyond qualitative prediction. This paper attempts to make quantitative assessments of the new features arising from imperfect information following on recent work by Braverman (1980) and Braverman and Dixit (1981). The information structure of these models is based on non-sequential search, where consumers enter the market only once. It is of interest to question under what circumstances single price equilibria will exist under different assumptions about the distribution of search costs. Therefore for particular families of demand, cost and information conditions, the possibilities of competitive, monopolistic and two price equilibria are examined and their relative likelihoods assessed.     

Unpredictable times: the extent,characteristics and correlates of insecure hours of work in Britain

This article presents new British evidence that suggests that cutting working hours at short notice is twice as prevalent as zero-hours contracts and triple the number of employees are very anxious about unexpected changes to their hours of work. The pay of these employees tends to be lower, work intensity higher, line management support weaker and the threat of dismissal and job loss greater. In addition, the well-being of these employees is lower and they are less committed to the organisations that employ them. However, the prevalence of insecure working hours is reduced by workplace level employee involvement exercised individually or through collective representation.     

Asymmetries between Rich and Poor Countries in Financial Crisis Responses: The Need for a Flow-of-Funds Approach

This paper focuses on the manner in which interest rates have been raised to, and sustained at, extremely high levels in developing and emerging market economies as a consequence of recent financial crises. By contrast rich market economies have typically lowered interest rates and injected liquidity in response to incipient financial crises. The paper first sketches the logic that lies behind extremely high interest rates (nominal and real) as an element of crisis resolution. It suggests that this reflects a money-phobic view of financial markets and also conflicts with some well-established economics. It then reviews the conventional wisdom about why richer economies have enjoyed sustained price stability in recent years and why this in turn has allowed their monetary authorities to be relaxed about injecting additional liquidity in response to LTCM (1998) and September 11 (2001)-type crises. It is pointed out that this conventional wisdom is also money-phobic in that it neglects the build up of corporate and government debt in bond and financial derivative form that has been associated with recent financial developments. This analysis helps to contest the common view that emerging market economies pay a higher price merely because their polices are "bad'. Finally, the paper reviews the manner in which the financial systems of developing and emerging market economies respond to the destabilization created by corrosively high real rates of interest. Even when bankruptcy arrangements are well established, certain new forms of financial flows and instruments are implicit in this response, but are invariably ignored in formal modelling.     

The statistical significance of a change in concentration

This note examines statistical tests for the significance of a change in the logvariance measure of concentration between two points in time. The note points out flaws in two existing tests, proposes a correct test, and provides an empirical example.     

Entry costs and stock market participation over the life cycle

Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies point to a significant structural (state) dependence in the stock market entry decision, which is consistent with costs of this type. However, the magnitude of these costs is not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately two percent of the permanent component of the annual labor income. My estimated model matches the zero median holding as well as the hump-shaped age–participation profile observed in the data.     

The Effect of Risk Characteristics on the Willingness to Pay for Mortality Risk Reductions from Electric Power Generation

The objective of this study is to estimate willingness to pay (WTP) for the reduction of mortality risks caused by fossil fuel (natural gas, coal and oil) versus nuclear electric power generation systems and to examine the influence of risk characteristics involved with electric power generation on WTP. A choice experiment was conducted to achieve these objectives. The attributes for nuclear risks in the experiment included the probability of disasters and the expected losses if a disaster occurs. We find evidence of (i) a baseline effect (where WTP is sensitive to hypothetical versus actual baseline expected mortality); (ii) a ‘labeling effect,’ where, surprisingly, the term ‘nuclear’ has no effect on WTP, but the term ‘fossil-fueled power generation’ results in lower WTP; and (iii) disaster aversion, meaning that people focus on the conditional loss from a nuclear disaster, not the probability. We also find that the WTP for reducing deaths from a nuclear disaster is about 60 times the WTP for routine reducing fossil-fuel generation-related deaths.     

A reexamination on the effect of bank competition on bank non-performing loans

This article examines whether competition in the deposit and loan markets results in a more stable or fragile banking industry. Following the assumption that deposit and loan competitions are not separable, a simple equilibrium model is developed. Then, using the aggregate time-series data of Federal Deposit Insurance Corporation (FDIC)-insured financial institutions, we estimate the generalized VAR model of deposit rate (DR), interest margin between the loan and DRs, and non-performing loan ratio. Our results support the competition–fragility hypothesis.     

Product differentiation, cost‐reducing mergers, and consumer welfare

Abstract.  Cost synergies are an explicitly recognized justification for a two‐firm merger, and empirical techniques are now widely used to assess the impact of cost‐reducing mergers on prices and welfare in the post‐merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre‐merger empirical estimates. Indeed, we further show that in such markets, two‐firm mergers will typically lead to higher prices regardless of the merger's cost savings. JEL classification: L10, L41