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Indexed versus nominal government debt under inflation and price-level targeting
Get PDFThis paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT
Okun’s law – A meta analysis
Get PDFThis paper seeks to identify whether there is a representative empirical Okun’s Law coefficient (OLC) and to measure its size. We carry out a meta regression analysis on a sample of 269 estimates of the OLC to uncover reasons for differences in empirical results and to estimate the ‘true’ OLC. On statistical (and other) grounds, we find it appropriate to investigate two separate subsamples, using respectively (some measure of) unemployment or
output as dependent variable. Our results can be summarized as follows. First, there is evidence of type II publication bias in both sub-samples, but a type I bias is present only among the papers using some measure of unemployment as the dependent variable. Second, after correction for publication bias, authentic and statistically significant OLC effects are present in both sub-samples. Third,
bias-corrected estimated true OLCs are significantly lower (in absolute value) with models using some measure of unemployment as the dependent variable. Using a bivariate MRA approach, the estimated true effects are -0.25 for the unemployment sub-sample and -0.61 for the output-sub sample; with a multivariate MRA methodology, the estimated true effects are -0.40 and -1.02 for the unemployment and the output-sub samples respectively
Contracting over Prices
Get PDFWe defi ne a solution concept, perfectly contracted equilibrium, for an intertemporal exchange economy where agents are simultaneously price takers in spot commodity
markets while engaging in non-Walrasian contracting over future prices. In a setting
with subjective uncertainty over future prices, we show that perfectly contracted equi-
librium outcomes are a subset of Pareto optimal allocations. It is a robust possibility
for perfectly contracted equilibrium outcomes to di er from Arrow-Debreu equilibrium
outcomes. We show that both centralized banking and retrading with bilateral contracting can lead to perfectly contracted equilibria
Complexity and Bounded Rationality in Individual Decision Problemsing.
Get PDFI develop a model of endogenous bounded rationality due to search costs, arising implicitly
from the problems complexity. The decision maker is not required to know the entire structure
of the problem when making choices but can think ahead, through costly search, to reveal more
of it. However, the costs of search are not assumed exogenously; they are inferred from revealed
preferences through her choices. Thus, bounded rationality and its extent emerge endogenously:
as problems become simpler or as the benefits of deeper search become larger relative to its
costs, the choices more closely resemble those of a rational agent. For a fixed decision problem,
the costs of search will vary across agents. For a given decision maker, they will vary across
problems. The model explains, therefore, why the disparity, between observed choices and
those prescribed under rationality, varies across agents and problems. It also suggests, under
reasonable assumptions, an identifying prediction: a relation between the benefits of deeper
search and the depth of the search. As long as calibration of the search costs is possible,
this can be tested on any agent-problem pair. My approach provides a common framework
for depicting the underlying limitations that force departures from rationality in different and
unrelated decision-making situations. Specifically, I show that it is consistent with violations of
timing independence in temporal framing problems, dynamic inconsistency and diversification
bias in sequential versus simultaneous choice problems, and with plausible but contrasting risk
attitudes across small- and large-stakes gambles
Comparative Statics of Asset Prices: the effect of other assets' risk
Get PDFCurrently, financial economics is unable to predict changes in asset prices with respect
to changes in the underlying risk factors, even when an asset's dividend is independent
of a given factor. This paper takes steps towards addressing this issue by highlighting
a crucial component of wealth effects on asset prices hitherto ignored by the literature.
Changes in wealth do not only alter an agents risk aversion, but also her perceived
'riskiness' of a security. The latter enhances significantly the extent to which market-
clearing leads to endogenously-generated correlation across asset prices, over and above
that induced by correlation between payoffs, giving the appearance of 'contagion.
Inequalities in Child Mortality in India: A District-Level Analysis
Get PDFThis paper measures the degree of inequality in child mortality rates across districts in India, using data from the 1981, 1991 and 2001 Indian population censuses. The results show that child mortality is more concentrated in less developed districts in all three census years. Further, between 1981 and 2001, the inequality in child mortality seems to have increased to the advantage of the more developed districts (i.e., there was an increasing concentration of child mortality in less developed districts). However, the inequality in female child mortality rates seems to have declined between 1991 and 2001, even as it increased – albeit at a slower rate than before – for male child mortality rates. In the decomposition analysis, it is found that while a more equitable distribution of medical facilities and safe drinking water across districts did contribute towards reducing inequality in child mortality between 1981 and 1991, different levels of structural change among districts were responsible for a very large part of the inequality in child mortality to the advantage of the more developed districts in all three census years. Other variables which played important roles in increasing inequality included a measure of infrastructure development, female literacy, and a social group status variable. The paper concludes with some brief comments on the policy implications of the findings
A Producer Theory with Business Risks
Get PDFIn this paper, we consider a producer who faces uninsurable business risks due to incomplete spanning of asset markets over stochastic goods market outcomes, and examine how the presence of the uninsurable business risks affects the producer's optimal pricing and production behaviours. Three key (inter-related) results we find are: (1) optimal prices in goods markets comprise ‘markup’ to the extent of market power and ‘premium’ by shadow price of the risks; (2) price inertia as we observe in data can be explained by a joint work of risk neutralization motive and marginal cost equalization condition; (3) the relative responsiveness of risk neutralization motive and marginal cost equalization at optimum is central to the cyclical variation of markups, providing a consistent explanation for procyclical and countercyclical movements. By these results, the proposed theory of producer leaves important implications both micro and macro, and both empirical and theoretical
A bayesian spatial individual effects probit model of the 2010 UK general election
Get PDFThe Conservative Party emerged from the 2010 United Kingdom General Election as
the largest single party, but their support was not geographically uniform. In this paper, we estimate a hierarchical Bayesian spatial probit model that tests for the presence of regional voting effects. This model allows for the estimation of individual region-specic effects on
the probability of Conservative Party success, incorporating information on the spatial relationships between the regions of the mainland United Kingdom. After controlling for a range of important covariates, we find that these spatial relationships are significant and
that our individual region-specic effects estimates provide additional evidence of North-South variations in Conservative Party support
Firm size and trade secret intensity: evidence from the Economic Espionage Act
Get PDFThis paper considers trade secrecy as an appropriation mechanism in the context ofb the US Economic Espionage Act (EEA) 1996. We examine the relation between trade secret intensity and firm size, using a cross section of 95 court cases. The paper builds on extant work in three respects. First, we create a unique body of evidence, using EEA prosecutions from 1996 to 2008. Second, we use an econometric approach to measurement, estimation and hypothesis testing. This allows us comprehensively to test the robustness of findings. Third, we focus on objectively measured valuations,
instead of the subjective, self-reported values used elsewhere. We find a stable, robust value for the elasticity of trade secret intensity with respect to firm size, which indicates that a 10% reduction in firm size leads to a 7% increase in trade secret intensity. We find that this result is not sensitive to industrial sector, sample trimming, or functional form
EMU, EU, Market Integration and Consumption Smoothing
Get PDFWe take a new approach to the study of the impact of EMU on consumption smoothing. Rather than relying on inferences based on the behavior of consumption levels or growth, we focus on consumption volatility and therefore on smoothing more directly. Consequently, we find that even though EMU tends to smooth consumption, it is not through cross-country property and claims. Rather it comes through the promotion of the tradability of goods, capital in particular: specifically, the encouragement of price competition, contestable home markets, ability to borrow and buy insurance at home, and the harmonization of regulations. Some of the consumption smoothing may also depend on EU membership rather than EMU as such but EMU adds to it. As a fundamental part of the analysis, the paper uses a new index of currency union which focuses on the ratio of trade with other countries sharing the same currency relative to total foreign trade