Survey-based forecast distributions for Euro Area growth and inflation: ensembles versus histograms

Ensemble methods can be used to construct a forecast distribution from a collection of point forecasts. They are used extensively in meteorology, but have received little direct attention in economics. In a real-time analysis of the ECB’s Survey of Professional Forecasters, we compare ensemble methods to histogram-based forecast distributions of GDP growth and inflation in the Euro Area. We find that ensembles perform very similarly to histograms, while being simpler to handle in practice. Given the wide availability of surveys that collect point forecasts but not histograms, these results suggest that ensembles deserve further investigation in economics.     

The role of direct flights in trade costs

Effects of direct flights on trade costs are investigated using micro price data at the city level. After controlling for local retail/distribution costs, traded input prices are obtained to be further used in the measurement of trade costs across cities through arbitrage conditions. The existence of a direct flight enters trade costs regressions negatively and significantly. The results are shown to be robust to the consideration of many control variables, nonlinearities in the effects of distance on trade costs, possible endogeneity of having direct flights between cities and alternative definitions of the data. The direct flights that are shown to be determined by bilateral air services agreements are further shown to reduce trade costs through an endogeneity analysis; the main policy implications are twofold: (i) international trade policies through aviation services, such as Open Skies Agreements of the US, are alternative trade policy tools to reduce international trade barriers; (ii) direct flights facilitate the integration of internal markets as in the case of European Union.     

Joint-Liability in Microcredit: Evidence from Bangladesh

The joint-liability lending model in microcredit predicts social ties between groups of borrowers to incentivise repayment. However, it also promotes free riding behaviour. Repeated experimental games conducted in Bangladesh are used to empirically analyse key theoretical hypotheses predicted under joint-liability (repeated experimental games are conducted by the author on the field in Manikganj, Dhaka, Bangladesh in December 2014); treated groups of microcredit borrowers are compared to control groups of non-microcredit borrowers alongside questionnaire findings. Treated individuals forego short-run gains from non-repayment and benefit from higher long-run gains from progressing on to further rounds. The paper also finds that treated individuals are significantly less likely to free ride and more likely to shoulder for their partner compared to control individuals. Optimal individual and group characteristics to maximise repayment under joint-liability are then identified.     

Do Institutions Matter for Foreign Direct Investment?

Using a panel of 69 countries during 1981 and 2005, we investigate the role of institutions in determining foreign direct investment (FDI). We find that institutions are a robust predictor of FDI and that the most significant institutional aspects are linked to propriety rights. Using a novel data set, we also study the impact of institutions on FDI at the sectoral level. We find that institutions do not have a significant impact on FDI in the primary sector but that institutional quality matters for FDI in manufacturing, and particularly in services.     

House price dynamics: Evidence from Beijing

To study the house price dynamics in China, this paper extends the traditional life-cycle model by incorporating land supply, regime shifts and government regulation factors. The models are estimated with an error correction framework using quarterly data from 2000 to 2007 in Beijing. The conclusions are as follows. (1) There exits a stable co-integration relationship between house price and fundamentals; land supply and financial regimes are also important determinants of long-run equilibrium house prices. (2) Short-run dynamics depend on changes of fundamentals and the adjustment process of housing market. Land supply has a significant impact on house price fluctuations while demand factors such as user costs, income and residential mortgage loan have greater influences. The adjustment speed of real house prices to the long-run equilibrium has been reduced significantly since 2005 which means exogenous shocks can cause prolonged deviation of real house prices from the equilibrium level.     

Microeconomic analysis on the growth of trade volume in China: 1978–2007

The gravity equation is usually employed by researchers in the field of international trade to explain the growth of a country’s imports and exports volume, especially the manufactured goods. But in China, variables in the model, such as exchange rate, tariff, transportation cost, and spatial distance etc., are not sufficient to explain the riddle of China’s growth in trade volume. In fact, this growth in China’s trade volume is owing to the disintegration of production in the process of economic globalization, to the multinational corporations’ (MNC) vertical outsourcing of their manufacturing processes and procedures, and to the timely readjustment of Chinese enterprises on their strategies of participating in the international intra-product specialization. In this paper we establish an equilibrium model of intra-product specialization dominated by MNCs, and do some empirical tests on the growth in trade volume in China by using the variables including technological conditions of trade, similarity of economies, policy conditions of trade, disintegration of production and level of per capita capital equipment. The empirical results support our basic judgments.     

What Plato Knew About Enron

This paper applies Plato’s cave allegory to Enron’s success and downfall. Plato’s famous tale of cave dwellers illustrates the different levels of truth and understanding. These levels include images, the sources of images, and the ultimate reality behind both. The paper first describes these levels of perception as they apply to Plato’s cave dwellers and then provides a brief history of the rise of Enron. Then we apply Plato’s levels of understanding to Enron, showing how the company created its image and presented information to support that image, and how the public eventually emerged from the cave to realize the truth about Enron’s actual accounting practices and financial state, which led to the corporation’s downfall. We find Plato’s allegory both useful in analyzing the relationship between Enron and the public and instructive about the power and moral responsibility of Enron’s executives.