Capital flows and the boom–bust cycle: The case of Estonia

During 2000–2007, Estonia was among the fastest growing emerging market economies, but in late-2008 entered a deep recession. This paper examines shocks, institutions, and policies that have made Estonia's boom–bust cycle so severe. It finds that an open capital account, the prospect for EU entry, and the currency board facilitated massive capital inflows, which led to credit and real estate booms. In late-2008 a domestic slowdown was greatly amplified by the global financial and economic crisis. To resume sustainable growth, the country will need to regain competitiveness and rebalance resources to exports. Estonia's experience underscores the importance for other emerging market economies to retain some flexibility in their macroeconomic frameworks and approach capital account liberalization cautiously.     

Avoiding arbitrary exclusion restrictions using ratios of reduced-form estimates

We show how to obtain coherent structural-form (SF) exclusion restrictions using the reduced-form (RF) parameter ratios. It will be shown that an over-identified SF corresponds to a group of regressors sharing the same RF ratio value; those regressors should be excluded jointly from the SF. If there is no group structure, then the SF is just-identified; in this case, however, it is no longer clear which regressor should be excluded. Hence, just-identified SF’s are more arbitrary than over-identified SF’s in terms of exclusion restrictions. This is in stark contrast to the notion that the former is less arbitrary than the latter, because the former excludes fewer regressors. We formalize these points, and then suggest to find the number of modes in the estimated RF ratios as a way to find groups in the ratios. For this purpose, an informal graphical method using a kernel nonparametric method and a formal modality test are employed. An empirical example with selling price in a residential real estate market and duration on the market as two endogenous variables is provided. The authors are grateful to the editor and two anonymous referees for their comments     

Regret in auctions: theory and evidence

The sealed-bid first-price auction of a single object in the case of independent privately-known values is the simplest auction setting and understanding it is important for understanding more complex mechanisms. But bidders bid above the risk-neutral Nash equilibrium theory prediction. The reasons for this “over bidding” remain an unsolved puzzle. Several explanations have been offered, including risk aversion, social comparisons, and learning. We present a new explanation based on regret and a model that explains not only the observed over bidding in sealed-bid first-price auctions, but also behavior in several other settings that is inconsistent with risk aversion. The authors gratefully acknowledge support from the National Science Foundation.     

Spatial welfare economics versus ecological footprint: modeling agglomeration,externalities and trade

A welfare framework for the analysis of the spatial dimensions of sustainability is developed. It covers agglomeration effects, interregional trade, negative environmental externalities, and various land use categories. The model is used to compare rankings of spatial configurations according to evaluations based on social welfare and ecological footprint indicators. Five spatial configurations are considered for this purpose. The exercise is operationalized with the help of a two-region model of the economy, that is, in line with the ‘new economic geography.’ By generating a number of numerical ‘counter-examples,’ it is shown that the footprint method is inconsistent with an approach aimed at maximum social welfare. Unless environmental externalities are such a large problem that they overwhelm all other components of economic well-being, a ‘spatial welfare economic’ approach delivers totally different rankings of alternative land use configurations than the ecological footprint.      

On a clear day you might see an environmental Kuznets curve

We shed some new light on the Environmental Kuznets curve (EKC) and show how it can be viewed as a particular form of equilibrium relationship, where technology and preference parameters determine the shape of the curve. In contrast to most of the literature on the EKC, we estimate a theoretically consistent model on long-run data (Swedish sulfur emission, covering the period 1900–2002). Furthermore, we test and date structural change. The model suggests four regimes, 1900–1918, 1919–1933, 1934–1967 and 1968–2002, generating four rather different patterns for pollution over time. The policy-conclusions are consonant with Pearce’s general view about the EKC: there is no theoretical presumption that it has an inverted U shape, nor should any country try to “grow out of the environmental problems” without analyzing the benefits and costs of so doing.     

Subjective recursive expected utility

We axiomatize a subjective version of the recursive expected utility model. This development extends the seminal results of Kreps and Porteus (Econometrica 46:185–200 (1978)) to a subjective framework and provides foundations that are easy to relate to axioms familiar from timeless models of decision making under uncertainty. Our analysis also clarifies what is needed in going from a represention that applies within a single filtration to an across filtration representation.Part of this research was conducted when Ozdenoren visited MEDS in Fall 2003. We thank Tapas Kundu, Costis Skiadas, Jean-Marc Tallon and Tan Wang for helpful discussions and also thank audiences at Koc University, Northwestern University, the CERMSEM conference “ Mathematical Models in Decision Theory” at Universite Paris I, and the FUR XI conference on foundations and applications of utility, risk and decision theory     

Paid Parental Leave: An Employee Right or Still An Ideal? An Analysis of the Situation in Québec in Comparison with North America

Over recent years, parental leave policy in Canada has evolved quite considerably. Since 2001, Canadian employees have a right to a 1 year paid parental leave; those in the province of Québec have a better paid, more flexible regime. This paper first shows that Québec is somewhat of an exception in the North American context, with its inclusive mode of governance which contributes to positive policies in terms of family and childcare. This is due to a few elements: the recognition of a declining birthrate, but more importantly the significant involvement and actions of women’s advocacy organizations, in the context of an inclusive governance of family policy. We will defend the hypothesis that Québec has adopted a cumulative (or work–family balance) model in the field of work–family relation, while the US and English Canada tend to still resort mainly to a laissez-faire attitude, which to this day has limited employee rights in terms of parental leave, but also in terms of child care.