A medium-N approach to macroeconomic forecasting

This paper considers methods for forecasting macroeconomic time series in a framework where the number of predictors, N, is too large to apply traditional regression models but not sufficiently large to resort to statistical inference based on double asymptotics. Our interest is motivated by a body of empirical research suggesting that popular data-rich prediction methods perform best when N ranges from 20 to 40. In order to accomplish our goal, we resort to partial least squares and principal component regression to consistently estimate a stable dynamic regression model with many predictors as only the number of observations, T, diverges. We show both by simulations and empirical applications that the considered methods, especially partial least squares, compare well to models that are widely used in macroeconomic forecasting.     

Are property rights enough?Re‐evaluating a big‐bang claim1

We investigate the claim made by proponents of the big‐bang strategy that the establishment of property rights in an economy in transition creates its own demand for the enforcement of laws to protect those rights. Our model contains a government engaging in activities to accomplish objectives that depend on public support for the enforcement of the rule of law and agents who interpret the level of activities of the government as indications of the government's intent to enforce the rule of law. Agents, using the level of government activities as an input to their decisions, choose whether to support the government's objectives. We establish conditions under which the level of activities chosen by the government maximizes its benefits, and simultaneously induces the constituency to support enforcement of the rule of law. These conditions provide a basis for the argument for the implementation of the big‐bang policy. When these conditions do not hold, however, we show that the level of activities that maximizes the government's benefits may have only a minor impact on support for the enforcement of the rule of law. Two characteristics play an important role in these conditions: the initial level of crime and the types of activities the government chooses to undertake. We present examples showing that the initial level of crime has the more dramatic effect on subsequent support for the rule of law.     

Market makers as information providers: The natural experiment of STAR

Market makers are financial intermediaries who are supposed to provide additional liquidity, but do not have any information-related obligation. This paper studies the unique case of the Italian Stock Exchange, where market makers are also obliged to facilitate information disclosure about the firms they cover. We focus on a group of small/medium capitalization stocks (STAR) that are assigned a designated market maker (DMM) starting from 2001. We show that their liquidity requirements are not binding during the sample periods and that the main impact of DMMs' introduction is due to their obligations on information provision. We find that DMMs' activity as information providers reduces spread and price volatility, the probability of informed trading (PIN), and the adverse selection component of the spread. An event study provides evidence that the information released through DMMs is perceived as useful by market participants.     

Does private-label production by national-brand manufacturers create discounter goodwill?

Discount stores have a private-label dominated assortment where national brands have only limited shelf access. These limited spots are in high demand by national-brand manufacturers. We examine whether private-label production by leading national-brand manufacturers for two important discounters (one hard and one soft) creates discounter goodwill. We estimate a selection model that is based on a sample of 450 manufacturer-category combinations from two leading discounters (Aldi in Germany and Mercadona in Spain), and we show that private-label production is indeed rewarded: national-brand manufacturers that are involved in such practices have a higher likelihood of procuring shelf presence for their brands. Moreover, while powerful manufacturers are intrinsically more likely to obtain shelf presence with soft discounters, manufacturers with less power can compensate for this by producing private labels. No such dependence on power exists for hard discounters.However, not all national-brand manufacturers are equally likely to produce private labels for discounters. We find that national-brand manufacturers are less likely to do so when: (a) they experience more sales growth, (b) it is more difficult to produce high-quality products in a specific category, (c) they invest more advertising support into their brands, and (d) they introduce more innovations. Moreover, a higher price differential relative to the discounter's private labels makes national-brand manufacturers less likely to engage in private-label production for hard discounters.     

The continuing need for affirmative action

Affirmative action is defined as the steps taken to end the absence in jobs, schools, and honored positions of members of groups that have been subordinated. Its purpose is to reduce discrimination, to reduce income disparities between groups, and to promote diversity by gender and race in every role and activity. The persistence of occupational segregation by sex and race to a degree that cannot be explained by differences in qualifications or voluntary behavior testifies to the need for further action. Alternatives to affirmative action, such as helping people regardless of race or sex from disadvantaged backgrounds, “just enforcing the law against discrimination”, or waiting for educational improvements to bring groups better qualifications would not do the job affirmative action is designed to do.     

The long-term effects of job search requirements: Evidence from the UK JSA reform

This paper investigates long-term returns from unemployment compensation, exploiting variation from the UK JSA reform of 1996, which implied a major increase in job search requirements for eligibility and in the related administrative hurdle. Search theory predicts that such changes should raise the proportion of nonclaimant nonemployed, with consequences on search effort and labor market attachment, and lower the reservation wage of the unemployed, with negative effects on post-unemployment wages. I test these ideas on longitudinal data from social security records (LLMDB). Using a difference in differences approach, I find that individuals who start an unemployment spell soon after JSA introduction, as opposed to 6 months earlier, are 2.5–3% more likely to move from unemployment into Incapacity Benefits spells, and 4–5% less likely to have positive earnings in the following year. This latter employment effect only vanishes 4 years after the initial unemployment shock. Also, annual earnings for the treated individuals are lower than for the non-treated. These results suggest that while tighter search requirements were successful in moving individuals off unemployment benefits, they were not successful in moving them onto stable or better jobs, with fairly long-lasting unintended consequences on a number of labor market outcomes.     

Data Envelopment Analysis of different climate policy scenarios

Recent developments in the political, scientific and economic debate on climate change suggest that it is of critical importance to develop new approaches able to compare policy scenarios for their environmental effectiveness, their distributive effects, their enforceability, their costs and many other dimensions. This paper discusses a quantitative methodology to assess the relative performance of different climate policy scenarios when accounting for their long-term economic, social and environmental impacts. The proposed procedure is based on Data Envelopment Analysis, here employed in evaluating the relative efficiency of eleven global climate policy scenarios. The methodology provides a promising comparison framework; it can be seen as a way of setting some basic guidelines to frame further debates and negotiations and can be flexibly adopted and modified by decision makers to obtain relevant information for policy design. Three major findings emerge from this analysis: (i) stringent climate policies can outperform less ambitious proposals if all sustainability dimensions are taken into account; (ii) a carefully chosen burden-sharing rule is able to bring together climate stabilisation and equity considerations; and (iii) the most inefficient strategy results from the failure to negotiate a post-2012 global climate agreement.