A polarization-cohesion perspective on cross-country convergence

Understanding whether the gap between rich and poor country wellbeing is narrowing is really about whether rich and poor groups can be identified in the overall size distribution of the characteristic of interest, and how those respective subgroup size distributions are changing. Here two simple statistics for analyzing the issue are introduced which are capable of discerning, in many dimensions, changes in the underlying distributions which reflect combinations of increasing (decreasing) subgroup location differences and decreasing (increasing) subgroup spreads, which are the characteristics of polarization (de-polarization). When applied in an examination of the distribution of lifetime GDP per capita over time, the population weighted version exhibits de-polarization and the unweighted version exhibits polarization. As a collection of countries, Africa is diverging from the rest of the world regardless of the weighting scheme.     

Social Capital and the Municipal Bond Market

We examine the influence of social capital in the municipal bond market. Defined as the norms and networks that encourage cooperation, social capital is a social construct which captures a region’s level of altruism, trustworthiness, and propensity to honor obligations. We expect that municipalities with high social capital are more trustworthy and likely to honor their debt obligations, which will result in lower bond yields. Our findings confirm that the bonds issued by municipalities located in high social capital counties exhibit lower yields compared to the municipalities located in low social capital counties. Our findings are also supported by bond prices in the secondary market, which shows that bonds from the municipalities located in high social capital regions have higher prices. Additional tests reveal that the influence of social capital is stronger for general obligation bonds, suggesting that social capital matters more for bonds where the willingness of municipalities to pay taxes is an important factor. Lastly, we document that the bonds of municipalities in high social capital areas are less likely to have insurance, suggesting that social capital may act as a substitute for bond insurance.     

The Commission's Recommendations on Housing Finance

The Commission proposes radical changes in the structure of institutions supplying residential mortgage funds. By massive broadening of their asset and liability powers, the thrifts are to become quasi-banks. The resulting housing credit gap is to be filled by multipurpose lenders, notably pension funds, and by greater use of mortgage securities backed by conventional as well as FHA and VA loans. For these changes, the Commission relies on the magic of deregulation, initiated partly in the Depository Institutions Act of 1982. A mortgage investment tax credit is proposed to cushion adverse effects on housing, but its adoption is highly unlikely. The Commission's expectations of structural reform through deregulation are overdrawn. Hence, its approach would probably reduce resource allocation to housing. The assertion that the new system would be more efficient is not supported by the meager analysis offered in the Report . Likewise, the claim of greater cyclical stability of mortgage lending remains unsubstantiated. The Commission also recommends curtailment of federal programs supporting the private housing sector: restricting FHA to high-risk loans and phasing down the GNMA guaranty of mortgage securities. But the proposals for FNMA and FHLMC stop short of cutting their umbilical cords of government.     

Productivity growth and the depletion of technological opportunities

Griliches recently observed that the rise in energy and materials prices and the possible exhaustion of the sources of technological progress are the main candidate explanations of the productivity slowdown. The present paper examines these possibilities by studying information on the rate of return to R and D, where the hypothesis of technological exhaustion is most likely to appear. Annual data are used to decipher differences in timing. The evidence does not support technological exhaustion, but instead indicates that even the R and D facet of productivity growth was thrown off by macroeconomic events associated with the oil shocks. These findings support the energy price-macroeconomic disturbance diagnosis of the productivity slowdown.The refereeing process of this paper was handled through E. Appelbaum.     

Exchange Rate Movements and Employment Growth: An OCA Assessment of the CEE Economies

According to the traditional optimum currency area approach, not much will be lost from a very hard peg to a currency union if there has been little reason for variations in the exchange rate in the past. This paper takes a different approach and highlights the fact that high exchange rate volatility may also signal high costs for labor markets. The impact of exchange rate volatility on labor markets in the CEECs is analyzed, revealing that volatility vis-à-vis the euro significantly lowers employment growth. Hence, eliminating exchange rate volatility could be considered a substitute for removing employment protection legislation.     

Unemployment, Factor Substitution and Capital Formation

Abstract. We incorporate a wage-bargaining structure in a dynamic general equilibrium model and show how this feature changes short- and long-run properties of equilibria compared with a perfectly competitive setting. We discuss how employment, capital and income shares respond to wage-setting shocks and show that adjustment dynamics depend decisively on the magnitude of the elasticity of substitution between labour and capital. Values of the elasticity below unity add persistence, tend to preserve stability and lead to empirically plausible adjustment patterns. By contrast, values above unity introduce additional volatility, thereby making steady states potentially unstable.     

Measuring the value of mobile telecommunications networks

Fuentelsaz, Garrido and Maicas (2015) propose an “improved” measure of network value for the mobile telecommunications industry. Unfortunately, their measure has multiple issues. For one, it is biased against networks that are small and/or active in small markets. Also, it cannot adequately take into account intertemporal changes in mobile operators’ price discrimination behaviour. Finally, where the functional form of the network effects is concerned, Fuentelsaz et al. invoke Zipf’s law without providing any empirical justification. This paper suggests an alternative for Fuentelsaz et al.’s measure and exploits as yet unused data on on-net discounts to apply it to the cases of Germany and Belgium. It is shown that the alternative measure does not suffer from the same weaknesses as Fuentelsaz et al.’s measure – bar the final one. The paper therefore screens the literature on other network industries in search of an empirical foundation for the network externality assumption. However, the paper finds that the broader literature is also still struggling with this issue.     

Measuring the contribution of durable goods to the welfare cost of inflation

In this paper, we measure the contribution of durable goods to the welfare cost of inflation, in the context of an endogenous growth model with durable and nondurable goods, where purchases of the latter require only a partial cash payment compared with the former. Unlike existing measures, our proposed welfare measure is computationally efficient and relatively easy to implement.We find that durability adds a significant component to the welfare costs of inflation.     

Interurban differences in the innovative nature of production

Several authors have suggested that large cities concentrate on innovative commodities and allow the production of more standardized goods to filter down to lower wage smaller cities. This paper provides an empirical test of this hypothesis. The innovativeness of production within a given SMSA is measured by the proportion of professional, technical and kindred workers. Evidence for specific two-digit manufacturing industries indicates that such innovation workers are generally more prevalent in larger cities. Substantial improvements in transportation and communications in recent years have not greatly altered the tendency for professionals to be concentrated in large urban areas.