Jobs and the Future of the US Economy: Possibilities and Limits

This paper reviews the presentations and discussions had at the conference on ??Jobs And The Future of the US Economy: Possibilities and Limits?? held at Howard University shortly after the late 2000??s financial crisis. The paper begins with the historical context in which the conference was placed and reviews the various points made by topic. The paper concludes with an outline of potential alternative eventualities facing the economy were the US not to adopt the policies presented.     

Is infrastructure capital productive? A dynamic heterogeneous approach

This paper offers an evaluation of the output contribution of infrastructure. Using a panel time series approach and a large cross‐country dataset, the paper estimates a long‐run aggregate production function relating gross domestic product to human capital, physical capital, and a synthetic measure of infrastructure comprising transport, power and telecommunications. Tests of the cointegration rank allowing it to vary across countries reveal a common rank with a single cointegrating vector, which we interpret as the long‐run production function. Estimation of its parameters is performed using the pooled mean group (PMG) estimator, which allows for unrestricted short‐run parameter heterogeneity across countries while imposing the (testable) restriction of long‐run parameter homogeneity. The long‐run elasticity of output with respect to the synthetic infrastructure index ranges between 0.07 and 0.10. The estimates are highly significant, both statistically and economically, and robust to alternative dynamic specifications and infrastructure measures. Tests of parameter homogeneity fail to yield evidence that the long‐run parameters differ across countries. Copyright © 2014 John Wiley & Sons, Ltd.     

Valuation of VIX derivatives

We conduct an extensive empirical analysis of VIX derivative valuation models before, during, and after the 2008–2009 financial crisis. Since the restrictive mean-reversion and heteroskedasticity features of existing models yield large distortions during the crisis, we propose generalisations with a time-varying central tendency, jumps, and stochastic volatility, analyse their pricing performance, and implications for term structures of VIX futures and volatility “skews.” We find that a process for the log of the observed VIX combining central tendency and stochastic volatility reliably prices VIX derivatives. We also uncover a significant risk premium that shifts the long-run volatility level.     

Run length analysis of Shewhart charts applied to drifting processes under an integrative SPC/EPC model

Engineering Process Controllers (EPC) are frequently based on parametrized models. If process conditions change, the parameter estimates used by the controllers may become biased, and the quality characteristics will be affected. To detect such changes it is adequate to use Statistical Process Control (SPC) methods. The run length statistic is commonly used to describe the performance of an SPC chart. This paper develops approximations for the first two moments of the run length distribution of a one-sided Shewhart chart used to detect two types of process changes in a system that is regulated by a given EPC scheme: i) changes in the level parameter; ii) changes in the drift parameter. If the drift parameter shifts, it is further assumed that the form of the drift process changes from a linear trend under white noise (the in-control drift model) into a random walk with drift model. Two different approximations for the run length moments are presented and their accuracy is numerically analyzed. Received: August 1998     

Indirect estimation of large conditionally heteroskedastic factor models,with an application to the Dow 30 stocks

We derive indirect estimators of conditionally heteroskedastic factor models in which the volatilities of common and idiosyncratic factors depend on their past unobserved values by calibrating the score of a Kalman-filter approximation with inequality constraints on the auxiliary model parameters. We also propose alternative indirect estimators for large-scale models, and explain how to apply our procedures to many other dynamic latent variable models. We analyse the small sample behaviour of our indirect estimators and several likelihood-based procedures through an extensive Monte Carlo experiment with empirically realistic designs. Finally, we apply our procedures to weekly returns on the Dow 30 stocks.     

Polychoric versus Pearson correlations in exploratory and confirmatory factor analysis of ordinal variables

Given that the use of Likert scales is increasingly common in the field of social research it is necessary to determine which methodology is the most suitable for analysing the data obtained; although, given the categorization of these scales, the results should be treated as ordinal data it is often the case that they are analysed using techniques designed for cardinal measures. One of the most widely used techniques for studying the construct validity of data is factor analysis, whether exploratory or confirmatory, and this method uses correlation matrices (generally Pearson) to obtain factor solutions. In this context, and by means of simulation studies, we aim to illustrate the advantages of using polychoric rather than Pearson correlations, taking into account that the latter require quantitative variables measured in intervals, and that the relationship between these variables has to be monotonic. The results show that the solutions obtained using polychoric correlations provide a more accurate reproduction of the measurement model used to generate the data.     

Capital mobility and international sharing of cyclical risk

This paper investigates whether the international globalization of financial markets allows for significant cross-country risk-sharing at the business cycle frequency. We find that cross-country risk-sharing is still limited and this is unlikely to be the result of financial frictions that limit state-contingent contracts. Part of the limited international risk sharing could be the consequence of frictions that de-facto reduce the short-term mobility of financial capital. But even with these frictions we find significant divergence between model predictions and the data.     

Fiscal Consolidations and Economic Growth

The aim of this paper is to deepen the understanding of the macroeconomic consequences of fiscal consolidations. In particular, there is evidence in the literature of fiscal consolidation episodes producing (non‐Keynesian) expansionary effects in the short run. We replicate this result for a panel of OECD countries under exogeneity of the fiscal consolidation. However, we provide some evidence that output growth might affect the fiscal tightening process so that fiscal consolidations are not exogenous to economic growth. Once we allow for feedback effects from economic growth to fiscal adjustments, we find that expansionary effects disappear and recover the typical Keynesian effect of fiscal adjustments. This finding points to the need to take these short‐term negative implications into account in the design of fiscal consolidations.     

An improved genetic algorithm for robust design in multivariate systems

In a previous article, we presented a genetic algorithm (GA), which finds solutions to problems of robust design in multivariate systems. Based on that GA, we developed a new GA that uses a new desirability function, based on the aggregation of the observed variance of the responses and the squared deviation between the mean of each response and its corresponding target value. Additionally, we also changed the crossover operator from a one-point to a uniform one. We used three different case studies to evaluate the performance of the new GA and also to compare it with the original one. The first case study involved using data from a univariate real system, and the other two employed data obtained from multivariate process simulators. In each of the case studies, the new GA delivered good solutions, which simultaneously adjusted the mean of each response to its corresponding target value. This performance was similar to the one of the original GA. Regarding variability reduction, the new GA worked much better than the original one. In all the case studies, the new GA delivered solutions that simultaneously decreased the standard deviation of each response to almost the minimum possible value. Thus, we conclude that the new GA performs better than the original one, especially regarding variance reduction, which was the main problem exhibited by the original GA.     

A Reconsideration of Tax Shield Valuation

A quarter‐century ago, Miles and Ezzell (1980) solved the valuation problem of a firm that follows a constant leverage ratio L = D/S. However, to this day, the proper discounting of free cash flows and the computation of WACC are often misunderstood by scholars and practitioners alike. For example, it is common for textbooks and fairness opinions to discount free cash flows at WACC with beta input β _S = [1 + (1 ? τ)L]β_u, although the latter is not consistent with the assumption of constant leverage. This confusion extends to the valuation of tax shields and the proper implementation of adjusted present value procedures. In this paper, we derive a general result on the value of tax shields, obtain the correct value of tax shields for perpetuities, and state the correct valuation formulas for arbitrary cash flows under a constant leverage financial policy.