Predictive performance of the World Bank's commodity price projections

The World Bank's commodity price projections are widely used for various planning purposes. Two aspects of the Bank's projections of relative prices are studied in this paper. The first is whether the forecasts make efficient use of the information available at the time the forecast is made. The second is whether the forecasts predict future prices with greater accuracy than alternative forecasting methods. These matters are studied by comparing the World Bank's past price projections with the actual prices that were subsequently observed. The results show that, overall, the World Bank forecasts do not pass either test. First, the World Bank forecasts are informationally inefficient. Prediction error (projection minus actual price) tends to be positively correlated with the projections themselves. Although the direction of future price movements tends to be correctly predicted, the magnitude of these movements tends to be overpredicted. Second, the World Bank forecasts do not perform well even compared with the simplest of alternative forecasting methods - the prediction of no change.     

Single Stock Futures as a Substitute for Short Sales: Evidence from Microstructure Data

Abstract:  We examine how the introduction of single-stock futures impacts short sale costs and short interest levels in the underlying spot market. We find that short selling in the underling securities declines, after futures are introduced, the cost of borrowing stock for short sales declines and the available unborrowed supply of lendable shares increases. These results are consistent with futures exchanges providing a low-cost substitute market for establishing short positions. Microstructure evidence also suggests that the lower cost and greater ease of short selling via futures markets draws informed traders from the spot market.     

Auditor Fees, Market Microstructure, and Firm Transparency

Abstract:  Auditors, as corporate insiders, have access to private information regarding the firm's financial and business opacity that is unavailable to outside investors. We test whether auditors price their knowledge of firm opacity in their audit fees by examining two competing hypotheses. The first states that higher audit fees may reflect the greater risk that the auditor faces in auditing an opaque firm. Under this hypothesis, market based measures of opacity will be positively correlated with higher fees. The second hypothesis states that firms buy reputational capital from their auditor by paying high fees in an attempt to improve the market's perception of the firm's transparency. In this case, higher audit fees are negatively correlated with market based measures of opacity. Our results are consistent with the first hypothesis, that auditors price opacity risk into their fees.     

Sub-optimal saving and the shadow price of labor The public good argument

One argument for the incorporation of a ‘premium on saving’ into calculations of the shadow price of labor has been the claim that aggregate inter-generational savings are a public good and the individual savings decisions lead to sub-optimal provision of savings. This paper shows that even if this claim was true, the incorporation of a ‘premium on savings’ into benefit-cost analysis calculations would be inappropriate. The shadow price of labor relative to project output shoud still be set at the relative effects on aggregate income of hiring a worker on the one hand and producing output on the other.     

Explaining the Relative Decline of Agriculture: A Supply-Side Analysis for Indonesia

The relative decline of agriculture in growing economies isa central feature of economic development and a major influenceon agricultural policies. The literature on the causes of thisdecline has focused on the relative price effects arising fromdemand factors, especially Engel's law, rather than on supply-sideinfluences, such as changes in relative factor endowments anddifferential rates of technical change. This article developsa simple structural model of the transformation of the Indonesianeconomy, applying an error correction mechanism to capture thedynamics resulting from disequilibria and the costs of adjustment.The decline in agriculture's share of gross domestic productis found to be caused much less by the relative price effectstypically emphasized in the literature than by capital accumulationand rapid technical change in agriculture.     

How road improvement reduces poverty: the case of Laos

A general equilibrium modeling approach is used to study the effect that rural road improvement has on poverty incidence in Laos. Household survey data are used to distinguish three categories of rural villages according to their road access: (i) no vehicular access; (ii) dry season only access; and (iii) all weather access. A general equilibrium model of the Lao economy is then used to simulate, first, the effect of upgrading category (i) to category (ii) roads, and second, category (ii) to category (iii) roads. The former has a larger poverty‐reducing effect but is also more costly.     

Vulnerability to a Currency Crisis: Lessons from the Asian Experience

Are currency crises caused by manias and panics in financial markets, or by unsustainable deteriorations in domestic macroeconomic conditions? This question is explored in the context of the recent Asian currency crisis. The theoretical concept of vulnerability is used to identify three early‐warning indicators of susceptibility to a currency crisis: rapid accumulation of mobile capital; domestic lending booms; and overvalued exchange rates. It is shown that the crisis and noncrisis countries of Asia may be distinguished empirically, using these indicators, over the decade preceding the crisis. This exercise provides convincing evidence that the crisis emanated largely from domestic macroeconomic conditions.