Regional Integration and Lobbying for Tariffs Against Nonmembers

We study the impact of regional trading arrangements (RIAs) on tariff policy toward nonmembers in a three-good, three-country political economy model. Comparing free-trade areas (FTAs) with and without rules of origin and customs unions (CUs) with varying degrees of economic and political integration, we show how increasingly deep integration can lead to rising protection against nonmember imports. Other differences between FTAs and CUs, like the extent of free-riding in a CU and any component of a CU's tariff designed to improve the members' terms of trade, are not explicitly accounted for. Nevertheless, the results suggest that FTAs are likely to welfare dominate CUs.     

SERVICE QUALITY IN ELECTRICITY DISTRIBUTION IN BRAZIL: A MALMQUIST APPROACH

The paper undertakes a dynamic analysis for service quality in the electricity distribution in Brazil between 2010 and 2014 based on Malmquist indexes constructed upon Data Envelopment Analysis (DEA) distance functions. The motivation for the less usual consideration of efficiency frontiers for service quality, that does not rely on traditional inputs and outputs but rather on quality indicators, builds on previous static applications in the context of telecommunications. The analysis considers undesirable technical indicators for quality as inputs and desirable consumer satisfaction indicators for quality as outputs in the efficiency frontier analysis. The bootstrap‐corrected Malmquist indexes indicated service quality deterioration in 38.1 per cent, quality stagnation in 40.5 per cent and quality improvement only in 21.4 per cent of the cases. When one decomposes the Malmquist index, the evidence does not suggest relevant frontier shifts and indicates a dominant role for the catch‐up effect. Finally, Malmquist indexes are regressed against variables that may portray heterogeneities, such as firm size, service area, density, ownership and regional dummies in terms of a well‐known two‐stage procedure. The mostly weak significance results reinforce the plausibility of the initial analysis.     

Price discovery in dual‐class shares across multiple markets

This paper proposes a new measure of price discovery that uses the spectral decomposition. The methodology is especially important in the context of large price systems, such as interest rate parities with spot and futures contracts or dual‐class shares in multiple markets. We employ high frequency data to study price discovery in dual‐class Brazilian stocks and their ADRs. We find that the foreign market is at least as informative as the home market and that shocks in the dual‐class premium entail a permanent effect in normal times, but transitory in periods of financial distress     

Tests with correct size when instruments can be arbitrarily weak

This paper applies classical exponential-family statistical theory to develop a unifying framework for testing structural parameters in the simultaneous equations model under the assumption of normal errors with known reduced-form variance matrix. The results can be divided into the limited-information and full-information categories. In the limited-information model, it is possible to characterize the entire class of similar tests in a model with only one endogenous explanatory variable. In the full-information framework, this paper proposes a family of similar tests for subsets of endogenous variables’ coefficients. For both limited- and full-information models, there exist power upper bounds for unbiased tests. When the model is just-identified, the Anderson–Rubin, score, and (pseudo) conditional likelihood ratio tests are optimal. When the model is over-identified, the (pseudo) conditional likelihood ratio test has power close to the power envelope when identification is strong.     

Bootstrap validity for the score test when instruments may be weak

It is well-known that size adjustments based on bootstrapping the t$t$-statistic perform poorly when instruments are weakly correlated with the endogenous explanatory variable. In this paper, we provide a theoretical proof that guarantees the validity of the bootstrap for the score statistic. This theory does not follow from standard results, since the score statistic is not a smooth function of sample means and some parameters are not consistently estimable when the instruments are uncorrelated with the explanatory variable.     

Modeling and Forecasting Large Realized Covariance Matrices and Portfolio Choice

We consider modeling and forecasting large realized covariance matrices by penalized vector autoregressive models. We consider Lasso‐type estimators to reduce the dimensionality and provide strong theoretical guarantees on the forecast capability of our procedure. We show that we can forecast realized covariance matrices almost as precisely as if we had known the true driving dynamics of these in advance. We next investigate the sources of these driving dynamics as well as the performance of the proposed models for forecasting the realized covariance matrices of the 30 Dow Jones stocks. We find that the dynamics are not stable as the data are aggregated from the daily to lower frequencies. Furthermore, we are able beat our benchmark by a wide margin. Finally, we investigate the economic value of our forecasts in a portfolio selection exercise and find that in certain cases an investor is willing to pay a considerable amount in order get access to our forecasts. Copyright © 2016 John Wiley & Sons, Ltd.     

Oil shocks and endogenous markups: results from an estimated euro area DSGE model

This paper estimates a linearised DSGE model for the euro area. The model is New Keynesian and allows for a role for oil usage and endogenous price markups. The importance of shocks to monetary policy and oil prices is estimated to have declined in the post-1990 period, in line with the higher predictability of policy and the fall in the persistence and—to a lesser extent—variability of oil disturbances. Counterfactual exercises show that oil efficiency gains would alleviate the inflationary and contractionary consequences of oil shocks, while higher wage flexibility would help ease the impact on real output at the expense of larger inflationary pressures. While we report evidence of “countercyclical” price markups, the rise in markups induced by an oil disturbance is not found to considerably amplify the inflationary and contractionary effects of the shock. The paper discusses the policy implications of our empirical results for the euro area economy.     

Profit margins and business cycles in the Brazilian industry: a panel data study

The paper investigates the relationship between profit margins and business cycle in the Brazilian industry during the 1992–1998 period, taking as reference a dynamic panel data model founded around a conjectural variation framework. The empirical results indicate procyclical behaviour of profit margins for the aggregate business cycle but is less clear in the case of sector-specific business cycle variables. Among the most robust results, one can highlight the roles of lagged profitability and import intensity and the negligible role of union density. Schmalensee in (American Economic Review 75, pp. 341–51) outlined three theoretical interpretations associated with the empirical model (classical, revisionist and managerial). Econometric tests on the related restrictions do not allow one to exclusively legitimate any of the three interpretations.     

Employment Flows,Capital Mobility,and Policy Analysis

This article extends Hopenhayn and Rogerson's analysis of firing taxes by introducing a flexible form of capital and considering transitionary dynamics. The article finds that capital is not important for understanding the long run and welfare effects of firing taxes. However, capital is crucial for determining the short run consequences of eliminating this type of policy.