Fiscal Constitutions

We study the impact of fiscal constitutions on intergenerational transfers in an overlapping generation model with linear technology. Transfers represent outcomes of a voting game among selfish agents. Policies are decided one period at a time. Majoritarian systems, which accord voters maximum fiscal discretion, sustain all individually rational allocations, including dynamically inefficient ones. Constitutional rules, which give minorities veto power over fiscal policy changes proposed by the majority, are equivalent to precommitment. These rules eliminate fluctuating and dynamically inefficient transfers and sustain weakly increasing transfer sequences that converge to the golden rule. The golden rule allocation is the unique outcome of Markov constitutional rules. Journal of Economic Literature Classification Numbers: D72, H55.     

¿Predice la producción el desempleo? Una estimación de la ley de Okun para Grecia

Estimando una especificación dinámica de la ley de Okun, se examina la relación entre desempleo y producción en Grecia de 2000 a 2012. Estimada la prueba de Granger, el producto real resulta importante para comprender el comportamiento del desempleo y la razón de Okun es de tres a uno (un aumento de un 1 por ciento del desempleo está asociado a una caída de un 3 por ciento del producto real durante el periodo estudiado). El análisis de asimetría muestra que la respuesta del desempleo al producto real es más fuerte durante las contracciones que durante las expansiones de la actividad económica.     

Regionalism and Multilateral Trade Liberalization with Asymmetric Countries

The paper examines the impact of regionalism on the process of multilateral trade liberalization when countries are asymmetric. The author uses a three‐country, three‐good, competing exporters model, with countries being symmetric in everything but their discount factors. The equilibrium regional agreement is found to be a customs union between a patient and an impatient country and that the impact of regionalism depends on the discount factors. The impact of regionalism on multilateral trade liberalization depends critically on which countries engage in regionalism.     

Is dynamic general equilibrium a theory of everything?

Should we interpret the contributions of Edward C. Prescott and his collaborators, especially Finn Kydland and Rajnish Mehra, to dynamic general equilibrium as just a mathematical restatement of pre-Keynesian business cycle theory in the language of Arrow and Debreu? This essay advances the contrary view that Prescott has been laying the foundations for a theory of everything in macroeconomics that will stretch well beyond the frictionless environments treated in its early version. A theory of everything is an attempt to explain key empirical observations in nearly every subfield of macroeconomics from a simple, logically coherent conceptual platform with a minimum of institutional detail. After reviewing the current state of Prescott’s agenda, we examine several examples of dynamic equilibrium in economies with constant returns to scale, complete markets, idiosyncratic productivity shocks, and limited capital mobility. These examples suggest that the Solow residual controls the entire path of aggregate output if redefined more broadly to include financial, distributional and institutional variables; that the discount factor used in pricing streams of income will shift autonomously over time in response to endogenous changes in the set of unconstrained asset traders; and that a dynamic general equilibrium model with substantive frictions in financial markets goes some distance towards a joint account of well-known empirical anomalies in growth, business cycles, and asset returns.     

US shipping initial public offerings: Do prospectus and market information matter?

This paper examines the extent that public information, available prior to the initial public offering of shipping companies, is only partially incorporated in the final offer price. The sample includes shipping US initial public offerings that took place in the period 1987-2008, and the analysis employs a set of IPO, market, and firm specific characteristics. Our findings have both theoretical and empirical implications for shipping IPOs, and indicate that there is no asymmetry of information between participants in shipping IPOs. On the theoretical part, the partial adjustment theory of Benveniste and Spindt (1989) is supported, whereas the winner’s curse theory of Rock (1986) is rejected. On the empirical side, the probability of underpricing can be predicted by employing variables available to all IPO participants prior to the issue.     

Nonlinear dynamics in economics and finance and unit root testing

The recent financial crisis exposed the inability of traditional theoretical and empirical models to parsimoniously capture the rich dynamics of the economic environment. This has stimulated the interest of both academics and practitioners in the development and application of more sophisticated models. By allowing for the presence of nonlinearities, complex dynamics, multiple equilibria, structural breaks and spurious trends, these latter models resemble more closely the properties of economic and financial time series. In this article, we illustrate the flexibility of a family of econometric models, namely the exponential smooth transition autoregressive (ESTAR), to encompass several of the above characteristics. We then re-assess the power of the ESTAR unit root test developed by Kapetanios, Shin and Snell ((2003) Kapetanios, G., Shin, Y. and Snell, A. 2003. Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics, 112(2): 359–79. (doi:10.1016/S0304-4076(02)00202-6)[Crossref], [Web of Science ®] , [Google Scholar]) in the presence of nuisance parameters typically encountered in the literature and compare its performance with that of the augmented Dickey-Fuller and the Enders and Granger ((1998) Enders, W. and Granger, C. W.J. 1998. Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business & Economic Statistics, 16(3): 304–11. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) tests. Our results show the lack of dominance of any particular test and that the power is not independent to priors about the nuisance parameters. Finally, we examine several asset price deviations from fundamentals and one hyper-inflation series and find contradictory results between the nonlinear fitted models and unit root tests. The findings highlight that new testing procedures with higher power are desirable in order to shed light on the behavior of financial and economic series.     

Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model

March 2007 saw an increase of 3.1% in UK inflation and triggeredthe first explanatory letter from the Governor of the Bank ofEngland to the Chancellor of the Exchequer since the Bank ofEngland was granted operational independence in May 1997. Theletter gave rise to a lively debate on whether policymakersshould pay attention to the link between inflation and M4 moneygrowth. Using UK data since the introduction of inflation targetingin October 1992, we show that: (i) the relationship betweeninflation and M4 growth is not stable over time, and (ii) thetendency of M4 to exert inflationary pressures is conditionalon annual M4 growth exceeding 9.8%. Above this threshold, themoney effect on inflation is very small. The implication isthat the Monetary Policy Committee should not be particularlyworried for not paying close attention to M4 money movementswhen setting interest rates.