FACTOR ANALYSIS OF A LARGE DSGE MODEL

We study the workings of the factor analysis of high‐dimensional data using artificial series generated from a large, multi‐sector dynamic stochastic general equilibrium (DSGE) model. The objective is to use the DSGE model as a laboratory that allows us to shed some light on the practical benefits and limitations of using factor analysis techniques on economic data. We explain in what sense the artificial data can be thought of having a factor structure, study the theoretical properties of the principal components estimates of the factor space, investigate the substantive reason(s) for the good performance of diffusion index forecasts, and assess the quality of the factor analysis of highly disaggregated data. In all our exercises, we explain the precise relationship between the factors and the basic macroeconomic shocks postulated by the model. Copyright © 2012 John Wiley & Sons, Ltd.     

Entrepreneurship policy and targets: the case of a low absorptive capacity region

Despite the existence of a positive relationship between new firm creation and economic growth, a certain controversy still exists regarding the need for the public promotion of entrepreneurship. The recent surge of entrepreneurship policies encompasses a wide variety of instruments and goals that are mainly designed and implemented at a regional or local level, which allows for a more efficient use of public resources. Case studies are therefore a useful approach to assessing “good practices” in entrepreneurship policies. We adopt this approach to empirically analyse whether policies are targeting specific entrepreneurial projects or not in the region of Valencia. We identify the features (in relation to the entrepreneur, the sector and the characteristics of the project itself) that may influence greater access to public funding and are principally related to standard requirements for this means of financing. These variables do not address specific entrepreneurial profiles, sectors or applicant projects, thereby revealing a substantial degree of horizontal policy design. Other features, such as almost all entrepreneurial characteristics (previous experience, age, etc.), do not seem relevant in terms of receiving public funds.     

The Business Ethics of Short Selling and Naked Short Selling

The controversy over short selling has continued unabated from the introduction of modern equity trading in Amsterdam in 1610 to the present day. Nevertheless, the business ethics literature has not really addressed short selling. Short sellers not only profit from the misery of others, they also create it through their selling activities. However, they also provide a socially useful service by making prices better reflect true values, protecting other investors from purchasing overpriced securities. Short sellers can also help to provide liquidity in the markets. Recently, there has been a hue and cry against so called “naked” short selling, which involves not delivering the shares that have been sold. This gives manipulators a tool for depressing stock prices and deprives purchasers of voting rights and potential stock lending revenue. Naked short selling creates ethical issues for short sellers, buyers, brokers, market makers, and regulators. Is it ethical to exploit a legal loophole that permits sellers to sell stock and delay delivering shares indefinitely?     

Scale and the origins of structural change

We consider broad patterns of structural change: (i) sectoral reallocations, (ii) rich movements of productive activities between home and market, and (iii) an increase in establishment size, especially in manufacturing. We extend these facts and develop a unified model explaining them. The crucial distinction across manufacturing, services and home production is the scale of the productive unit. In manufacturing, scale technologies lead to industrialization and marketization. In services, they lead to marketization and later demarketization of services. A later increase in the scale of services could yield a decline in industry and a rise in services, consistent with the data.     

Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment*

We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly‐available quarterly data set of fiscal variables for the period 1981–2007. To allow for comparability with previous results on euro‐area countries and the US, we use a standard structural vector autoregressive (VAR) framework, and study the impact of aggregated and disaggregated government spending and net‐tax shocks. In addition, to frame euro‐area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the results to the inclusion of variables aiming to control for underlying financial and fiscal conditions. The main new findings are that: expansionary fiscal shocks have a short‐term positive impact on GDP and private consumption, with government spending shocks entailing, in general, higher effects on economic activity than (net) tax reductions; output multipliers to government expenditure shocks are of similar size in the euro area and in the US; the persistence of a fiscal spending shock is higher in the US than in the euro area, which appears to be related to military spending in the US; and fiscal multipliers have increased over the recent past in both geographical areas.     

Does a Common Currency Promote Countries’ Growth via Trade and Tourism?

The main aim of this study is to contribute to the debate on the effects of a common currency. In particular, the impact of a common currency on growth via trade and tourism is explored for a panel dataset which includes 179 countries as destination and 30 OECD countries as origin over the period 1995–2006. This research contributes to previous work in three ways: (i) tourism is included as an additional channel for a common currency to promote growth; (ii) the heterogeneity of countries is addressed by dividing the sample into three groups of countries by income; and (iii) up‐to‐date data including the case of the euro are considered. The results obtained suggest that a common currency strengthens economic growth by promoting not only international trade but also tourism.     

Learning from exporting: The moderating effect of technological capabilities

There is evidence that exporters are more productive than non-exporters. Scholars argue that exporters may have access to knowledge spillovers in foreign markets and use this knowledge to become more efficient. However, we know little about whether learning from exporting is affected by firms’ heterogeneous resource endowments and, particularly, about the specific firm characteristics that matter the most in this respect. Utilizing a sample of 1534 Spanish manufacturing firms from 1990 to 2002, we empirically analyze whether a firm's technological capabilities (proxied by its relative R&D expenditures) affect its ability to learn from the interaction with foreign agents. We find that firm productivity increases after exporting for all firms. However, ex post productivity improvements are larger for the more technologically advanced firms than they are for their less technologically advanced counterparts. Our results show that some firms stand to benefit more from exporting than others and hint at the importance of absorptive capacity for knowledge acquisition overseas.     

Education for the masses? The interaction between wealth,educational and political inequalities

This paper presents a simple model of distribution dynamics, in which the distributions of wealth, education and political power are circularly endogenous. Different levels of education translate into different income and wealth levels. Political power may (or may not) vary with wealth, and in turn affects decisions on the level of public expenditure on education. Since the market for education credit is imperfect, some people might need to rely on public schooling, the quality of which depends on those expenditure levels. As a result, educational opportunities differ along the wealth distribution. The dynamic system displays multiple equilibria, some of which are characterized by a vicious circle of interaction between educational, wealth and political inequalities. These particular equilibria, which are more unequal, are also shown to be inefficient in terms of aggregate output levels. Switching equilibria may be achieved through redistribution of political power.
JEL classification: D31, D63.     

International Financial Liberalization, Capital Flows, and Exchange Rate Regimes: An Introduction

This introduction to a special edition of Review of International Economics summarizes a collection of articles that originated in a conference on “Is Globalization of Capital Markets a Boost or a Hindrance to Development?” that was sponsored by the Program in Economic Policy Management (PEPM) at Columbia University during 16–17 April 1999.