Working Papers

Authors: Robert Allen

Dec 2013

This paper compares historical poverty baskets to modern food security and poverty lines.  Changes in the historical baskets and indexing methods are proposed to bring historical studies into better alignment with modern measures as well as with historically based estimates of energy requirements.  In addition, it is argued that modern poverty measures could be improved by emulating the historical methods.

JEL Codes: I32, N30, O15

Keywords: poverty measurement, poverty line, subsistence ratio, nutritional standards, food security

Reference: 685

Individual View

Authors: Ferdinand Rauch, Guy Michaels

Nov 2013

Do locational fundamentals such as coastlines and rivers determine town locations, or can historical events trap towns in unfavorable locations for centuries?  We examine the effects on town locations of the collapse of the Western Roman Empire, which temporarily ended urbanization in Britain, but not in France.  As urbanization recovered, medieval towns were more often found in Roman-era town locations in France than in Britain, and this difference still persists today.  The resetting of Britain's urban network gave it better access to naturally navigable waterways when this was important, while many French towns remained without such access.

JEL Codes: R11, N93, O18

Keywords: Economic Geography, Economic History, Path Dependence, Transportation

Reference: 684

Individual View

Authors: Francesco Zanetti, Federico S. Mandelman

Nov 2013

Recent empirical evidence establishes that a positive technology shock leads to a

decline in labor inputs. Can a flexible price model enriched with labor market frictions

replicate this stylized fact? We develop and estimate a standard flexible price model using

Bayesian methods that allows, but does not require, labor market frictions to generate

a negative response of employment to a technology shock. We find that labor market

frictions account for the fall in labor inputs.

JEL Codes: E32

Keywords: Technology shocks, employment, labor market frictions

Reference: 683

Individual View

Authors: David Gill, John Thanassoulis

Oct 2013

We study price competition between firms over public list or posted prices when a fraction of consumers (termed 'bargainers') can subsequently receive discounts with some probability.  Such stochastic discounts are a feature of markets in which some consumers bargain explicitly; of markets in which sellers use the marketing practice of couponing; and of markets in which sellers offer both simple-to-understand tariffs (the posted prices) alongside complex or opaque tariffs that might offer a discount.  Even though bargainers receive reductions off the posted prices, the potential to discount dampens competitive pressure in the market by reducing the incentive to undercut a rival's posted price, thus raising all prices and increasing profits.  Welfare falls because of the stochastic nature of the discounts, which generates some misallocation of products to consumers.  We also find that stochastic discounts facilitate collusion by reducing the market share that can be gained from a deviation.

JEL Codes: C78, D43, L13

Keywords: Posted prices, list prices, collusion, bargaining, negotiation, haggling, discounting, coupons, obfuscation, flat rate bias, price takers

Reference: 682

Individual View

Authors: John Muellbauer

Oct 2013

This paper proposes that all new euro area sovereign borrowing be in the form of jointly guaranteed Eurobonds.  To avoid classic moral hazard problems and to insure the guarantors against default, each country would pay a risk premium conditional on economic fundamentals to a joint debt management agency.  This suggests that these bonds be called 'Euro-insurance-bonds'.  While the sovereign debt markets have taken increasing account of the economic fundamentals, the signal to noise ratio has been weakened by huge market volatility, so undercutting incentives for appropriate reforms and obscuring economic realities for voters.  This paper uses an econometric model to show that competitiveness, public and private debt to GDP, and the fall-out from housing market crises are the most relevant economic fundamentals.  Formula-based risk spreads based on these fundamentals would provide clear incentives for governments to be more oriented towards economic reforms to promote long-run growth than mere fiscal contraction.  Putting more weight on incentives that come from risk spreads, than on fiscal centralisation and the associated heavy bureaucratic procedures, would promote the principle of subsidiarity to which member states subscribe.  The paper compares Euro-insurance-bonds incorporating these risk spreads with other policy proprosals.

JEL Codes: E43, E44, G01, G10, G12

Keywords: Sovereign spreads, eurobonds, eurozone sovereign debt crisis, subsidiarity

Reference: 681

Individual View

Authors: Dominik Karos

Oct 2013

We generalize the class of apex game by combining a winning coalition of symmetric minor players with a collection of apex sets which can form winning coalitions only together with a fixed quota of minor players.  By applying power indices to these games and their subgames we generate players' preferences over coalitions which we use to define a coalition formation game.  We focus on strongly monotonic power indices and investigate under which conditions on the initial general apex game there are core stable coalitions in the resulting coalition formation game.  Besides several general results, we develop condition for the Shapley-Shubik index, the Banzhaf index, and the normalized Banzhaf index in particular.  It turns out that many statements can be easily verified for arbitrary collections of apex sets.  Nevertheless, we give some relations between the collection of apex sets and the set of core stable coalitions.

JEL Codes: C71, G34

Keywords: Apex Games, Core Stability, Hedonic Games, Strong monotony

Reference: 680

Individual View

Authors: Nicholas Dimsdale

Oct 2013

The paper examines the behavior of the British economy 1890-1913 by using a newly assembled quarterly data set.  This provides a basis for estimating a small macroeconomic model, which can be used to explore the relationship between the policy responses of the Bank of England and the course of the economy.  It is one of the few papers to make use of UK quarterly data and seeks to extend the earlier work of Goodhart (1972).  The paper goes on to look into the determinants of external and internal gold flows and relates these to an extensive historical literature.  The outcome is compared with the traditional representation of the working of the gold standard, as set out in the well-known Interim Report of the Cunliffe Committee (1918).  It is found that operation of the model accords in general with the views of the Committee.  The views of the Committee were applicable to the pre 1914 gold standard, but less so to the restored interwar gold standard.

The next question to be considered is how far the Bank observed 'The Rules of the Game' in the sense of relating the reserves of the commercial banks to the gold reserves held at the Bank.  It is shown that the relationship between the Bank's reserves and the reserves of the commercial banks was severely distorted by the massive gold movements of 1895-6.  These flows were associated with US political conflicts over the monetization of silver.  With the exception of this episode, the Bank is shown to have had a limited measure of discretion in operating the gold standard.  The final question to be considered is whether a similar model can be estimated from US data and related to the views of Friedman and Schwartz.

Reference: Number 123

Individual View

Authors: Nicholas Dimsdale

Oct 2013

In the late 19th century Britain accumulated substantial overseas assets.  It has been generally accepted that overseas investment displaced domestic investment.  This paper questions this assumption by pointing to the rise in the savings ratio, which enabled high capital exports to be combined without reducing the rate of domestic investment.  The determinants of consumption and savings are examined and it is argued that the rise in savings can be attributed to the fall in the dependency ratio.  This phenomenon is familiar from modern studies of economic development and also from US experience in the 19th century.  The determinants of business investment are analysed and the results indicate the importance of both real profits and accelerator effects for investment, but there is no evidence of crowding out of home investment by overseas issues.  House building then is examined and demographic factors are found to be important.  Crowding out effects may have been present, but this is not the only hypothesis, which is consistent with the data.  The collapse in house building could also be attributed to the massive boom and bust in the property market in the period 1890-1914.

Reference: Number 122

Individual View

Authors: Martin Ellison, Andreas Tischbirek

Oct 2013

In response to the Great Financial Crisis, the Federal Reserve, the Bank of England and many other central banks have adopted unconventional monetary policy instruments.  We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound.  To do so, we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model.  Asset quantities matter for interest rates through a preferred habitat channel.  If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.

JEL Codes: E40, E43, E52, E58

Keywords: Quantitative Easing, Large-Scale Asset Purchases, Preferred Habitat, Optimal Monetary Policy

Reference: 679

Individual View

Authors: Kevin Roberts

Oct 2013

This paper investigates the behaviour of bodies or organizations, operating in a stochastic environment, where there is a delegated decision maker.  A crucial decision is when to delegate to another decision maker.  The problem may be intrapersonal, as occurs when there are endogenously changing tastes, or interpersonal where delegation is intuitionally necessay or where decison making is 'as if' there is delegation.  This is possible if decision making is through voting - an existence theorem is given.  Decisions lead to shifts in control involving option losses; forward-looking recognition of this leads to the endogenous creation of hysteresis.  The fact that the behaviour of other agents leads to hysteresis makes it optimal for any single agent to introduce more hysteresis.  Organisations or bodies with many possible decision makers operate, in subsets of the state space, in one of two regimes, one where hysteresis is small and the other where hysteresis is large.

JEL Codes: D1, D2, D7

Keywords: Dynamic Voting, collective decisions, delegation, endogenous preferences, hysteresis

Reference: 678

Individual View

Authors: Liang Chen, Juan Dolado, Jesus Gonzalo

Oct 2013

Time invariance of factor loadings is a standard assumption in the analysis of large factor models.  Yet, this assumption may be restrictive unless parameter shifts are mild (i.e., local to zero).  In this paper we develop a new testing procedure to detect big breaks in these loadings at either known or unknown dates.  It relies upon testing for parameter breaks in a regression of one of the factors estimated by Principal Components analysis on the remaining estimated factors, where the number of factors is chosen according to Bai and Ng's (2002) information criteria.  The test fares well in terms of power relative to other recently proposed tests on this issue, and can be easily implemented to avoid forecasting failures in standard factor-augmented (FAR, FAVAR) models where the number of factors is a priori imposed on the basis of theoretical considerations.

JEL Codes: C12, C33

Keywords: Structural break, large factor model, factor loadings, principal components

Reference: 677

Individual View

Authors: Climent Quintana-Domeque, Francesco Turino

Oct 2013

Do relative concerns on visible consumption give rise to economic distortions?  We re-examine the question posited by Arrow and Dasgupta (2009) building upon their theoretical framework but recognizing that relative concerns can only apply to visible goods (e.g., cars, clothing, jewelry) and that households consume both visible and non-visible goods.  Contrary to Arrow and Dasgupta (2009), the answer to this question turns to be always affirmative: the competitive equilibrium marginal rate of substitution between the visible and non-visible goods will always be different than the socially optimal one, since individuals do not take into account the negative externality they exert on others through the consumption of the visible good, while the social planner does.  If one is willing to invoke separability assumptions, then the steady state competitive equilibrium consumption of non-visible goods will be strictly lower than the socially optimal one, consistent with expenditure patterns both in developed and developing countries.

JEL Codes: D6, E2

Keywords: visible goods, non-visible goods, conspicuous consumption, inconspicuous consumption, conspicuous leisure, inconspicuous leisure, labor supply, market distortions

Reference: 676

Individual View

Authors: Kevin Hjortshøj O'Rourke, Richard S. Grossman, Madalina A. Ursu, Ronan Lyons

Oct 2013

Information on the performance of equities during the latter part of the globalized long nineteenth century is scarce, particularly for smaller European economies such as Ireland.  Using a dataset of over 35,000 price-year observations from the Investor's Monthly Manual, this paper constructs new monthly Irish stock market price indices for the period 1864-1930, encompassing periods of significant economic and political turmoil in Irish history.  In addition to a total market index covering all 118 equity securities issued by 94 companies, sector-specific indices are presented for railways, financial services companies, and miscellaneous industrial and retail companies.  Weighted by market capitalization, nominal equity prices were largely static in the 1860s, before increasing by almost 60% in nominal terms between 1870 and 1878.  Between 1878 and 1879, equity prices fell by one sixth in the space of a year, after which there was a secular rise in equity prices for two decades, with equity prices in 1899 twice what they had been in 1864.  Between the turn of the century and the outbreak of the Great War, though, prices fell by 25%, a pattern that stands in stark contrast to returns on the London exchange, which were greater during 1894-1913 than during the preceding two decades.  The period from 1914 until 1929 saw a number of boom-bust cycles, concurrent with war and other political events affecting Ireland, including its independence movement.  Railway equities, which had trebled between the mid-1860s and the turn of the century, fell sharply during the 1910s and 1920s.  In contrast, financial equity prices - which were just 20% higher in 1920 than in 1864 - rose strongly during the 1920s.  Overall, the average annual gain in equity prices over the period was just 0.9%, well below levels associated with an equity premium puzzle.

JEL Codes: E3, G12, N23, N24

Keywords: Irish stock exchange, Investor's Monthly Manual, long-run stock returns, 19th Century, 20th Century, Ireland

Reference: 120

Individual View

Authors: Renaud Foucart, Jana Friedrichsen

Oct 2013

We study two platforms competing for members by investing in network quality.  Quality is complementary to the network size: the marginal utility generated by an additional member increases with the network's quality.  Platforms are imperfect substitutes: a share of the potential members are biased toward each of the platforms and some are indifferent ex ante.  We assume that, in case of multiple equilibria, consumers use the investment in quality as a coordination device.  We find that, in equilibrium, platforms randomize over two disconnected intervals of investment levels, corresponding to competing for either the entire population or the mass of ex-ante different members.  While the "prize" of winning the competition for members is identical for both platforms, the value of the outside option "not investing" depends on a platform's share of ex-ante biased members.  The platform with the smallest share of ex-ante biased members bids more aggressively to compensate for its lower outside option and achieves a monopoly network with higher probability than its competitor.

JEL Codes: D43, D44, M13

Keywords: Internet, Platforms, Investment, Network Effects

Reference: 675

Individual View

Authors: Jennifer Castle,David Hendry, Oleg Kitov

Sep 2013

We consider the reasons for nowcasting, how nowcasts can be achieved, and the use and timing of information.  The existence of contemporaneous data such as surveys is a major difference from forecasting, but many of the recent lessons about forecasting remain relevant.  Given the extensive disaggregation over variables underlying flash estimates of aggregates, we show that automatic model selection can play a valuable role, especially when location shifts would otherwise induce nowcast failure.  Thus, we address nowcasting when location shifts occur, probably with measurement error.  We describe impulse-indicator saturation as a potential solution to such shifts, noting its relation to intercept corrections and to robust methods to avoid systematic nowcast failure.  We propose a nowcasting strategy, building models of all disaggregate series by automatic methods, forecasting all variables before the end of each period, testing for shifts as available measures arrive, and adjusting forecasts of cognate missing series if substantive discrepancies are found.  An alternative is switching to robust forecasts when breaks are detected.  We apply a variant of this strategy to nowcast UK GDP growth, seeking pseudo real-time data availability.

JEL Codes: C52, C51

Keywords: Nowcasting, Location shifts, Forecasting, Contemporaneous information, Autometrics, Impulse-indicator saturation

Reference: 674

Individual View

Authors: Daniel Gutknecht

Sep 2013

This paper develops a test for monotonicity of nonparametric regression models under endogeneity, which in its generality is novel in the literature.  The test statistic, which is built upon a second order U-process, introduces 'correction terms' based on control functions that purge the endogeneity.  The test has a non-standard asymptotic distribution from which asymptotic critical values can directly be derived.  Furthermore, the test statistic is extended to accommodate multivariate (exogenous) regressors.  Consistency against general alternatives is proved and the test's finite sample properties are examined in a Monte Carlo experiment.  The test is used to formally assess the monotonicity of the reservation wage as a declining function of elapsed unemployment duration.  This relationship is difficult to measure due to the simultaneity of both variables.  Preliminary results indicate that reservation wage functions do in fact not decline monotonically.

JEL Codes: C14, C36, C54, J64

Keywords: control function, endogeneity, reservation wages, test for monotonicity

Reference: 673

Individual View

Authors: Collin Raymond, Daniel J. Benjamin, Matthew Rabin

Sep 2013

People believe that, even in very large samples, proportions of binary signals might depart significantly from the population mean.  We model this "non-belief in the Law of Large Numbers" by assuming that a person believes that proportions in any given sample might be determined by a rate different than the true rate.  In prediction, a non-believer expects the distribution of signals will have fat tails, more so for larger samples.  In inference, a non-believer remains uncertain and influenced by priors even after observing an arbitrarily large sample.  We explore implications for beliefs and behavior in a variety of economic settings.

JEL Codes: B49, D03, D14, D83, G11

Keywords: learning, non-Bayesian updating, behavioral economics, information economics

Reference: 672

Individual View

Authors: Robin Winkler

Sep 2013

It is commonly thought that the rapid increase in household saving during the early years of National Socialism was partly driven by ideological factors.  On this view, the popularity of the regime allowed it to exert 'moral suasion' on households to save more than they might have done in the absence of such indoctrination.  This paper employs the previously unpublished raw data from a household budget survey conducted in 1937 to identify ideological heterogeneity at the household level.  Assuming that households' responsiveness to the regime's saving propaganda was a function of their exogenous ideological commitment to National Socialism, the paper tests the hypothesis that Nazi households saved more than others.  The new evidence presented here does not confirm this hypothesis.

JEL Codes: N14, D12

Keywords: German economic history, National Socialism, household saving

Reference: 119

Individual View

Authors: Tim Willems, Shaun Larcom, Mare Sarr

Sep 2013

Recently, the international community has increased its commitment to prosecute malicious dictators - for example by establishing the International Criminal Court.  This has raised the international community's loss associated with being time-inconsistent (i.e.: granting amnesties ex post), the idea being that a reduced prospect of amnesty deters dictators from committing atrocities ex ante.  Simultaneously, however, this elects dictators of a worse type.  Moreover, when the costs of being time-inconsistent are lower than those associated with keeping the dictator in place, the international community will still grant amnesty - thereby making the effective punishment function non-monotonic.  Consequently, increased commitment to ex post punishment may actually induce dictators to worsen their behaviour, purely to "unlock" the amnesty option by forcing the international community into time-inconsistency.

JEL Codes: F55, K14, O12

Keywords: dictatorship, time-inconsistency, International Criminal Court, amnesty, institutions

Reference: 671

Individual View

Authors: David Meredith, Deborah Oxley

Sep 2013

In 2009, Horrell, Meredith and Oxley used trends in body mass to argue that poor London women in the later 19th century suffered declining access to household resources over their lifetimes.  The authors evaluated competing models of household behaviour, rejected the unitary model of equal distribution throughout the household, saw some support for a safety-first model, but on the whole concluded that resources were allocated in accordance with bargaining power linked to the economic worth of family members.  As (particularly married) women's labour-force participation fell, so too did their share of the food diminish, and with this they lost weight.  This unequal distribution was supported by a moral economy of the family: a set of shared values about obligations and entitlements which protected earners and prioritized the needs of children secured by maternal sacrifice.  The current paper explores further the role of power in the family.  The contention of a bargaining household is supported through a very different but contemporaneous case study: the modern industrial town of Paisley.  The paper juxtaposes a service economy (Wandsworth near London) with a modern manufacturing sector (Paisley near Glasgow) in order to contrast how economic form and opportunities in the market sector shaped relations and outcomes in the household sector.  Again, our measure is lifetime nutrition and our data are drawn from prisons.  We find that families bargained over the allocation of resources; that bargaining position was heavily influenced by economic value, mediated by maternal sacrifice; that this was an earner bias rather than a gender bias; and that new industrial work for women and children supported a more egalitarian distribution that improved everyone's health status via superior heights and heavier weights.  It is a tale of two cities, of blood and bone, of flesh and families.

Reference: 118

Individual View

Authors: Kevin Hjortshøj O'Rourke, Nicholas Crafts

Sep 2013

This paper surveys the experience of economic growth in the 20th century with a focus on technological change at the frontier together with issues related to success and failure in catch-up growth.  A detailed account of growth performance based on historical national accounts data is given and is accompanied by a review of growth accounting evidence on the sources of economic growth.  The key features of our analysis of divergence in growth outcomes are an emphasis on the importance of 'directed' technical change, of institutional quality, and of geography.  We provide brief case studies of the experience of individual countries to illustrate these points.

JEL Codes: N10. O33, O43, O47

Keywords: catch-up, divergence, growth accounting, technical change

Reference: 117

Individual View

Authors: Renaud Foucart

Jul 2013

Consumption in the time of Internet is characterized by extremely low search costs, leading to increased product diversity (the long tail) and large mainstream products (superstars).  In this paper, I show how the mainstream taste can be catered by a niche product, while minority tastes can be mainstream.  A competitive market with arbitrarily small search costs supplies a product design corresponding to the mainstream taste at a price that only mainstream buyers are willing to pay.  Products corresponding to the taste of the minority are offered at lower price, and bought by several types of buyers.

JEL Codes: C7, D8, L11

Keywords: Search, matching, horizontal product diversity

Reference: 670

Individual View

Authors: Debopam Bhattacharya

Jul 2013

Abstract: We consider empirical measurement of exact equivalent/compensating variation resulting from price-change of a discrete good, using individual-level data. We show that for binary and multinomial choice, the marginal distributions of EV/CV are nonparametrically point-identified solely from the conditional choice-probabilities, under extremely general preference-distributions. These results hold even when the distribution/dimension of unobserved heterogeneity are neither specified, nor identified and utilities are neither quasi-linear nor parametrically specified. Welfare-distributions can be expressed as closed-form functionals of observable individual choice-probabilities, thus enabling easy computation in applications. Average EV for price-rise equals the change in average consumer-surplus and is smaller than average CV for a normal good. Point-identification fails for ordered choice if the unit-price is identical for all alternatives, thereby providing a connection to Hausman-Newey's (2013) partial identification results for the limiting case of continuous choice.

JEL Codes: D12, D11, C14, C25

Keywords: Multinimial choice, Compensating and equivalent variation, unobserved heterogeneity, unrestricted heterogeneity, deadweight loss

Reference: 669

Individual View

Authors: Javier Fernandez-Macho

Jul 2013

This paper introduces a class of cointegration tests based on estimated low-pass and high-pass regression coefficients from the same wavelet transform of the original time series data.  The procedure can be applied to test the null of cointegration in a n + k multivariate system with n cointegrating relationships without the need of either detrending nor differencing.  The proposed non residual-based wavelet statistics are asymptotically distributed as standard chi-square with nk degrees of freedom regardless of deterministic terms or dynamic regressors, thus offering a simple way of testing for cointegration under the null without the need of special tables.  Small sample quantiles for these wavelet statistics are obtained using Monte Carlo simulation in different situations including I(1) and higher order cointegration cases and it is shown that these wavelet tests exhibit appropriate size and good power when compared to other tests of the null of cointegration.

JEL Codes: C22, C12

Keywords: Brownian motion, cointegration, econometric methods, integrated process, multivariate analysis, spectral analysis, time series models, unit roots, wavelet analysis

Reference: 668

Individual View

Authors: James Wolter

Jul 2013

Global frailty is an unobserved macroeconomic variable.  In event data contexts, this unobserved variable is assumed to impact the hazard rate of event arrivals.  Attempts to identify and estimate the path of frailty are complicated when observed macroeconomic variables also impact hazard rates.  It is possible that the impact of the observed macro variables and global frailty can be confused and identification can fail.  In this paper I show that, under appropriate assumptions, the path of global frailty and the impact of observed macro variables can both be recovered.  This approach differs from previous work in that I do not assume frailty follows a specific stochastic process form.  Previous studies identify global frailty by assuming a stochastic form and using a filtering approach.  However, chosen stochastic forms are arbitrary and can potentially lead to poor results.  The method in this paper shows how to recover frailty without these assumptions.  This can serve as a model check to filtering approaches.  The methods are applied to simulations and an application to corporate default.

JEL Codes: C13, C14, C41, C58

Reference: 667

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