Income inequality and the business cycle: A threshold cointegration approach

This paper investigates the impact of various socio-economic variables on various cohorts of the income distribution. We use asymmetric cointegration tests to show that unemployment and immigration shocks have real impacts on income inequality. In addition, using threshold test results we are able to show that positive and negative shocks to the economy do not have symmetric effects nor do the impacts of these shocks impact income quintiles uniformly.     

Relationships among U.S. oil prices and oil industry equity indices

The cointegration analysis suggests that the pure oil industry equity system and the mixed oil price/equity index system offers more opportunities for long-run portfolio diversification and less market integration than the pure oil price systems. On a daily basis, in the oil price systems all oil prices with the exception of the 3-month futures can explain the future movements of each other. In the mixed system, none of the daily oil industry stock indices can explain the daily future movements of the New York Mercantile Exchange (NYMEX) futures prices, whereas these prices can explain the movements of independent companies engaged in exploration, refining, and marketing. The spillover analysis of oil volatility transmission suggests that the oil futures market has a matching or echoing volatility effect on the stocks of some oil sectors and a volatility-dampening effect on the stocks of others. The policy implication is that, during times of high oil volatility, traders should choose the S&P oil sector stocks that match their tolerance for volatility and use the right financial derivative to hedge against or profit from this volatility. The day effect for volatility transmission suggests that Friday has a calming effect on the volatility of oil stocks in general. The effect for Monday is not significant.     

Sources of real exchange rate movements in Saudi Arabia

The paper investigates the sources of real exchange rate movements in Saudi Arabia by decomposing real exchange rate movements into those attributable to real and nominal shocks. Using a popular structural VAR model and assuming long-run neutrality of nominal shocks, we find that real shocks play a significant role in explaining real exchange rate movements in Saudi Arabia. Using a more disaggregated model, we also find that oil production shocks rather than real oil price shocks are responsible for real exchange rate movements. In order to stabilize the real exchange rate, Saudi Arabia should focus on stabilizing oil production.(JEL F3, C5)     

The spirit of capitalism, asset pricing and growth in a small open economy

Conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics. This may be due to preference specifications in conventional models. In this paper, we consider preferences with the “spirit of capitalism” (the desire to accumulate wealth as a way of acquiring status). We analyze a number of potential effects of international catching-up and the spirit of capitalism on savings, growth, portfolio allocation and asset pricing. Moreover, we obtain a multi-factor Capital Asset Pricing Model (CAPM). Our results show that status concerns have non-trivial effects on savings, growth, portfolio allocation, asset prices and the foreign exchange risk premium.     

Do retail gasoline prices rise more readily than they fall?: A threshold cointegration approach

This paper revisits the controversy over whether retail gasoline prices respond to increases in upstream prices more rapidly than decreases. Using threshold and momentum models of cointegration and daily data at different stages in the distribution chain, we find that transmission between upstream and downstream prices is mostly asymmetric in the momentum model: increases in upstream prices are passed on to downstream prices more quickly than decreases. We distinguish between small and large shocks and show that the asymmetry is more pronounced for small shocks, which may be due to consumer search costs.     

The 2007–2009 financial crisis,global imbalances and capital flows: Implications for reform

The paper discusses the currents that led to the 2007–2009 financial crisis. We discuss the crisis in a historical context and present evidence regarding the incidence and unit price of risk. Our results show that the unit price of risk prior to the subprime crisis is comparable to the price of risk prior to the great depression and similar to the price of risk at onset of the technology bubble. We then discuss global imbalances, the associated risks with regard to international optimal allocation of capital, and arrangements to minimize problems of global imbalances.     

Welfare cost of inflation in a stochastic balanced growth model

There is a large and growing literature on the welfare cost of inflation. However, work in this area tend to find moderate estimates of welfare gains. In this paper we reexamine welfare costs of inflation within a stochastic general equilibrium balanced growth model paying a particular attention to recursive utility, portfolio balance effects, and monetary volatility and monetary policy uncertainty. Our numerical analysis shows that a monetary policy that brings down inflation to the optimum level can have substantial welfare effects. Portfolio adjustment effects seem to be the dominant factor behind the welfare gains.     

Depositors’ Assessment of Bank Riskiness in the Russian Federation

In the period after the crises in the late 1990s, the banking industries in most emerging markets have undergone significant restructuring consistent with the Basel II Accord. The Central Bank of Russia’s efforts since 2000 have contributed to the consolidation and improvement of the banking industry. To measure the extent of market discipline in the Russian banking industry, we study the reaction of Russian depositors to excessive risk taking by large banks between 2000:1 and 2005:1. We find that during our analysis period, well-capitalized, more liquid banks significantly increase their deposits.     

Monetary and fiscal policy interactions: Evidence from emerging European economies

This paper examines the interactions between fiscal and monetary policy for some former transition, emerging European economies over the 1995Q1–2010Q4 period by using a Markov regime-switching model. We consider the monetary policy rule proposed by Taylor (1993) and the fiscal policy rule suggested by Davig and Leeper (2007) in accounting for monetary and fiscal policy interactions. Empirical results suggest that monetary and fiscal policy rules exhibit switching properties between active and passive regimes and all countries followed both active and passive monetary policies. As for fiscal policy, the Czech Republic, Estonia, Hungary, and Slovenia seem to have alternated between active and passive fiscal regimes while fiscal policies of Poland and the Slovak Republic can be characterized by a single fiscal regime. Although the policy mix and the interactions between monetary and fiscal policy point a diverse picture in our sample countries, the monetary policy seems to be passive in all countries after 2000. This finding is consistent with the constraints imposed by European Union enlargement on monetary policy.