Kalman filtering estimation of unobserved rational expectations with an application to the German hyperinflation

The assumption that rational expectations always lie on a convergent path is subject to an empirical test using the German hyperinflation data. The estimation technique employs a Kalman filtering algorithm. After presenting a brief background for the convergent expectations problem and a derivation of the various model specifications, a generalized expectations model and its attendant Kalman filtering estimation technique are discussed. Additional estimation details and empirical results are then presented. Based on an assumption of normally distributed errors, the null hypothesis of convergent paths is rejected in all situations involving a deterministic specification of the evolution of the unobserved parameter which characterizes the convergent path. The same null hypothesis is rejected in four of the six cases corresponding to a stochastic specification of the evolution of the unobserved parameter which characterizes the convergent path. A discussion of these findings, their economic significance, and suggestions for further research concludes the paper.     

Climate policy and the optimal extraction of high‐ and low‐carbon fossil fuels

Abstract. We study how restricting CO₂ emissions affects resource prices and depletion over time. We use a Hotelling‐style model with two non‐renewable fossil fuels that differ in their carbon content (e.g., coal and natural gas) and in addition are imperfect substitutes in final good production. We show that an economy facing a CO₂ flow‐constraint may substitute towards the relatively dirty input. As the economy tries to maximize output per unit of emissions it is not only carbon content that matters: productivity matters as well. With an announced constraint the economy first substitutes towards the less productive input such that more of the productive input is available when constrained. Preliminary empirical results suggest that it is cost‐effective to substitute away from dirty coal to cleaner oil or gas, but to substitute from natural gas towards the dirtier input oil.     

Carbon leakage revisited: unilateral climate policy with directed technical change

Using a stylized theoretical model, we argue that current economic analyses of climate policy tend to over-estimate the degree of carbon leakage, as they abstract from the effects of induced technological change. We analyse carbon leakage in a two-country model with directed technical change, where only one of the countries enforces an exogenous cap on emissions. Climate policy induces changes in relative prices, that cause carbon leakage through a terms-of-trade effect. However, these changes in relative prices also affect the incentives to innovate in different sectors. This leads to a counterbalancing induced-technology effect, which always reduces carbon leakage. We therefore conclude that the leakage rates reported in the literature may be too high, as these estimates neglect the effect of price changes on the incentives to innovate.      

Forecasting the electric transformation in transportation: the role of battery technology performance

In an effort to encourage consumers to purchase electric vehicles (EVs), the government has been funding battery research to solve some of these problems. This paper presents a study using technology forecasting using data envelopment analysis (TFDEA) to forecast future battery performance characteristics. The results were compared against the performance goals established by the US Department of Energy (DOE). We find that the foreseen progress of EV battery performance will be insufficient to meet the DOE projected goals for the range that EVs can travel before running out of power. Therefore, a new battery technology must be developed because the incremental improvements in current battery technologies leave EVs considerably short of the DOE performance specification for longer trip ranges.     

The role of income tax in student loan repayments

West keeps score of the continuing and growing inadequacies of the British student loan scheme to 1998 and shows how an income-contingent loan could better satisfy its aims. He explores a common objection to any form of student loan scheme, that students pay for their university education through progressive income taxes. West shows how this argument falls short, and hence that some form of income contingent loan is required if equity and efficiency are to be satisfied.     

Trade liberalization,labor reforms and formal–informal employment dynamics

This paper studies gross worker flows to explain the rise in informality in Brazilian metropolitan labor markets from 1983 to 2002. In particular, we examine the impact of trade and constitutional reforms (that include increased firing costs, tighter restrictions on overtime work, and fewer restrictions on union activity) occurring during the period. We find aggregate sectoral movements to be driven largely by changes in the hiring rates which, in turn are driven largely by the constitutional reforms. Trade liberalization accounts for roughly 1–2.5% of the increase in informality, while the constitutional reforms account for 30–40%.