Playing the synthesizer with Canadian data: Adding polls to a structural forecasting model

Election forecasting has become a fixture of election campaigns in a number of democracies. Structural modeling, the major approach to forecasting election results, relies on ‘fundamental’ economic and political variables to predict the incumbent’s vote share usually a few months in advance. Some political scientists contend that adding vote intention polls to these models—i.e., synthesizing ‘fundamental’ variables and polling information—can lead to important accuracy gains. In this paper, we look at the efficiency of different model specifications in predicting the Canadian federal elections from 1953 to 2015. We find that vote intention polls only allow modest accuracy gains late in the campaign. With this backdrop in mind, we then use different model specifications to make ex ante forecasts of the 2019 federal election. Our findings have a number of important implications for the forecasting discipline in Canada as they address the benefits of combining polls and ‘fundamental’ variables to predict election results; the efficiency of varying lag structures; and the issue of translating votes into seats.     

Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession.First version received: November 2002/Final version received: April 2003This paper benefited greatly from discussions with Kalvinder Shields, Mark Harris, Pete Summers, and Vance Martin. Two anonymous referees provided useful comments on an earlier version of the paper for which we are grateful. The usual disclaimer applies to any errors and omissions. Funding from The University of Melbourne greatly assisted in the completion of this paper.     

Inflation, investment and economic performance: The role of internal financing

This paper studies a link between inflation and economic activity that is built on two hypotheses. First, firms mitigate informational frictions in financial markets by accumulating retained earnings over a period of time. Second, firms allocate earnings among three competing uses - dividends, current investment, and the accumulation of internal funds - and inflation directly distorts this allocation decision as well as the real value of accumulated internal funds. The model predicts that the level of inflation - both unanticipated and expected inflation - as well as the variability of inflation distort firms’ internal financing decisions, increases frictions in financial markets, reduces the level and efficiency of investment, and reduces aggregate output. The marginal effects of inflation are increasing in the inflation rate.     

Regulating an Externality-Generating Utility Environmental Taxes Under Limited Information

Global warming is currently an important item on most nationalenvironmental agendas. In many countries, coal-fired electricity generatingstations represent an important source of greenhouse gases. We examinehow regulations to curb emissions affect public utility pricing regulationwhen regulators act non-cooperatively. We show that, when there is limitedinformation on fixed abatement costs, an environmental regulator prefersan emission tax over an output tax or a lump sum environmental tax. Thepublic utility regulator prefers the lump sum tax regime.     

Growth effects of government expenditure and taxation in rich countries: A comment

Fölster and Henrekson (European Economic Review 45 (2001), 1501-1520) argue that “...the more the econometric problems that are addressed, the more robust the relationship between government size and economic growth appears”. But in failing to control for simultaneity and in ignoring issues of sample-selection bias, the regressions reported by Fölster/Henrekson are flawed. Using theoretically valid instruments, we find that the estimated partial correlation between size of the public sector and economic growth is statistically insignificant and highly unstable across specifications. Moreover, since instruments are weak, all hypothesis tests are unreliable. We conclude that cross-country growth regressions are unlikely to come up with a reliable answer to the question of the growth effects of government spending and taxation.     

Adaptability, productivity, and educational incentives in a matching model

We study the connections between the labour market and the education sector in a matching framework with ex-post wage bargaining. Workers have multidimensional skills and the search market is segmented by technology. Education is a time-consuming activity and determines jointly the scope - or adaptability - and intensity - or productivity - of individual skills. We establish three main results. First, unemployment provides incentives to schooling by raising the need for adaptability. Second, private returns to productivity are below social returns, but no hold-up phenomenon is involved. Third, due to wage and congestion externalities, private returns to adaptability exceed social returns. As a consequence, both over- and under-education may take place in equilibrium.     

International capital and nontraded goods in the long run

The present paper develops the comparative static properties of a small open economy which produces both traded goods and nontraded goods, and is a price taker in the international market for productive capital. Assumptions of full employment, competitive markets, and international mobility of productive cap ital input capture a long run horizon. Comparative static results associated with the wage, labor, and the price of the nontraded good are independent of factor intensity, factor substitution, and demand for the nontraded good. A tax on the traded good and a capital subsidy together raise national income and the real wage.     

The hidden value of air transportation infrastructure

Air transportation is a key strategic asset in that it provides access to markets and thereby enables the economic development of nations. Thus, in order to maintain their competitiveness in a global economy, countries must invest in air transportation infrastructure to ensure their ability to meet current and future demand for aviation services. The objective of this paper is to develop and illustrate a methodology for evaluating the strategic value of air transportation infrastructure, in particular the benefits associated with the ability to react quickly to changes in the market. The hypothesis is that by recognizing and taking advantage of this strategic value, it may be possible to design better policies for aviation infrastructure delivery.The methodology developed here uses system dynamics to model different strategies for infrastructure delivery. These strategies are defined by three variables: the amount of capacity increase, the time to deliver the capacity and the congestion threshold that triggers the need for capacity delivery. Monte Carlo simulation is used to take into account multiple sources of uncertainty. The model shows that a strategy of capacity delivery based on small increments and short response times can yield more benefits than strategies that consider large capacity increases and long response times. Furthermore, in the specific airport example considered here, it was found that a congestion threshold of 75% should be the trigger for capacity enlargements if strategies based on small capacity increments and 1 or 5 years to increase capacity are considered. The lesson for decision-makers is that congestion delays must be addressed with foresight.     

Regulating an externality-generating public utility: A multi-dimensional screening approach

In this paper, I present a monopoly screening model in which a firm holds private information on fixed abatement costs. Because of the nature of the optimal contracts, bunching is never optimal even with ‘n’ distinct types. A characterization of full and limited information solutions is offered and it is shown that the design standards alone determine the value of an information rent. The variable charge is completely free of any marginal information costs. This allows the variable charge to track marginal damages and thereby ensures that marginal social costs are covered. A fixed charge implements the optimal solution.