Testing Part of a DSGE Model by Indirect Inference

We propose a way of testing a subset of equations of a DSGE model. The test draws on statistical inference for limited information models and the use of indirect inference to test DSGE models. Using the numerical small sample distribution of our test for two subsets of equations of the Smets–Wouters model we show that the test has accurate size and good power in small samples, and better power than using asymptotic distribution theory. In a test of the Smets–Wouters model on US Great Moderation data, we reject the specification of the wage‐price but not the expenditure sector. This points to the wage‐price sector as the source of overall model rejection.     

Strictness of leniency programs and asymmetric punishment effect

We analyze the impact of leniency programs on the behavior of firms participating in illegal cartel agreements in a two-stage repeated game model. Our approach takes into account asymmetric punishment effect and allows to discuss the design of leniency programs in the setting with asymmetries. The main contribution of the paper is that we consider heterogeneous firms. This heterogeneity results in additional costs in case of disclosure of the cartel, which are caused by asymmetric punishments. Next, following current antitrust rules, we analyze effects of the strictness of leniency programs, which reflects the likelihood of getting a complete exemption from fine even in case many firms self-report simultaneously. Our main conclusion is that leniency programs work better for small companies, since a lower rate of law enforcement is needed in order to induce self-reporting by smaller firms, while big firms are less likely to start a cartel in the first place given the possibility of self-reporting in future. Finally, we analyze optimal enforcement strategies of the antitrust authority and conclude that the authority with limited resources should implement more generous leniency rules the more cartelized the economy is.     

Optimal monetary policy using an unrestricted VAR

This paper proposes a simple benchmark for monetary policy. Assuming the true model of the economy is unknown, it is based on an unrestricted vector autoregression (VAR). The key result is that instead of deriving optimal policy using the original VAR equations as the constraint, when no restriction is placed on the correlation structure of the VAR disturbances, the constraint should be formed from a transformation of the VAR. This method is applied to the USA, 1964–2009. Significant welfare gains are found compared with actual policy and using a Taylor rule. Incorporating a zero interest rate lower bound lowers output and inflation. Copyright © 2010 John Wiley & Sons, Ltd.     

Testing a DSGE Model of the EU Using Indirect Inference

We use the method of indirect inference, using the bootstrap, to test the Smets and Wouters model of the EU against a VAR auxiliary equation describing their data. We find that their model generates excessive variance compared with the data. But their model fits the dynamic facts quite well if the errors have the properties assumed by SW but scaled down. We compare a New Classical version of the model which also performs reasonably if error properties are chosen using New Classical priors (notably excluding shocks to preferences). Both versions have (different) difficulties fitting the data if the actual error properties are used. A model combining rigid and flexible-wage/price sectors, with a weight of around 5% on the rigid sector, does best in fitting the data.     

Lean Production and Beyond: the System,Its Critics and the Future

Peter Wickens, who is Director of Personnel and Information Systems of the Nissan Motor Manufacturing (UK) Ltd, puts ‘lean production’ in its historical context, examines some of the criticisms of the system and considers some of the changes taking place in Japan. He goes on to suggest possible ways forward and makes the case for a system of ‘lean production’ managed by people who care about people.     

An Investigation into Restaurant Attributes: A Basis for a Typology

This article has the aim of presenting the basis for a new, clearer classification of restaurant attributes. The research followed an interpretive approach with a systematic review of the literature, compared and contrasted with the findings of six focus group interviews. A new model was devised with seven categories of restaurant attributes. This article presents a model that needs to be tested. Also, follow-up articles with more detail about the attributes under each category will be presented. This article organizes the disparate literature on restaurant attributes and looks into the relationship between attributes, particularly its influence on perceived consumer value.     

The Great Recession and the Rise of Populism

Intereconomics - The success of populist rhetoric in Europe is worrisome as it presents a threat to national and European institutions, the rule of law, and other fundamental free-market democratic...     

The effect of mergers and acquisitions on environmental,social and governance performance and market value: Evidence from EU acquirers

This study explores the effect of environmental, social, and governance (ESG) performance on market value and performance in the context of mergers and acquisitions. We examine whether acquisition of targets with better ESG performance can help acquirers to increase their own ESG performance and whether the market values the increased ESG performance positively. Moreover, we explore whether the acquisition of targets with better ESG performance affects the market value of acquirers. For this study, we utilize a sample of 100 European mergers and acquisitions between 2003 and 2017, for which matching data on the ESG performance of both the target and acquiring firms are available. Our results show that the postmerger ESG performance of the acquirer increases following the acquisition of a target that has higher ESG performance than that of the acquirer in the premerger stage, whereas the postmerger market value of the acquirer increases following an increase in the acquirer's postmerger ESG performance in relation to its premerger ESG performance. Finally, we provide partial evidence of a positive relationship between the postmerger market value of the acquirer and the acquisition of a target with higher ESG performance than itself in the premerger stage.     

Testing Macro Models by Indirect Inference: A Survey for Users

With Monte Carlo experiments on models in widespread use we examine the performance of indirect inference (II) tests of DSGE models in small samples. We compare these tests with ones based on direct inference (using the Likelihood Ratio, LR). We find that both tests have power so that a substantially false model will tend to be rejected by both; but that the power of the II test is substantially greater, both because the LR is applied after re-estimation of the model error processes and because the II test uses the false model’s own restricted distribution for the auxiliary model’s coefficients. This greater power allows users to focus this test more narrowly on features of interest, trading off power against tractability.     

Can stochastic discount factor models explain the cross-section of equity returns?

We propose a multivariate test of the capital asset pricing model (C-CAPM) of the cross-sectional variation in equity returns in which we compare cross-sectional variation in equity returns to the cross-sectional variation in their conditional covariance with stochastic discount factors. We use a multivariate generalized heteroskedasticity in mean model to estimate 25 portfolios that are formed on size and the book-to-market ratio. Each portfolio is allowed to have its own no-arbitrage condition. We find that although the conditional covariances of returns with consumption exhibit negative variation across size, they do not vary across the book-to-market ratio. Thus, C-CAPM can capture the size effect, but not the value effect. The fit is, however, improved by allowing the coefficients on the consumption covariances to be different. The value effect appears to be associated with the book-to-market ratio as well as size. On its own the book-to-market ratio does not generate additional information about average returns to C-CAPM. A possible explanation for these findings is that both small and low book-to-market ratio firms are expected to have higher rates of growth.