Working Papers

Authors: Eric B. Schneider

May 2012

This paper uses demographic data drawn from Wrigley et al.s (1997) family reconstitutions of 26 English parishes to adjust Allen’s (2001) real wages to the changing demography of early moden England.  Using parity progression ratios (a fertility measure) and age specific mortality for children and parents, model families are predicted in two reference periods 1650-1700 and 1750-1800.  These models yield two levels of interesting results.  At the individual family level, we can measure how different families’ real wages changed over the family life cycle as additional children were born.  At the aggregate level, we can predict thousands of families using Monte Carlo simulation, creating a realistic distribution of median family real wages in the economy.  There are two main findings.  First, pregnancy and lactation do not create cyclical effects in the family’s income.  Instead, most families’ welfare ratios decline steadily across the family life cycle until children begin to leave the household, increasing the welfare ratios.  Second, Allen’s real wages understate or match the median of the predicted demography-adjusted distributions.

Reference: 099

Individual View

Authors: Harold Carter

May 2012

Housing was the major domestic priority of all postwar UK governments.  By 1970 the physical conditions of British housing had been transformed; by the 1990s seventy per cent of households in England owned their own homes.  Yet in 2012 there were still parts of many cities that deserved labeling as slums.  Why had massive public expenditure not managed to achieve the goal of successive governments?  Vested interests, created by each wave of intervention, limited subsequent policy choices.  From about 1950 to about 1995, governments expanded owner occupation via a wide range of subsidies, but increasingly restricted the supply of land by restrictive planning laws.  There was a massive (and unremarked) tenurial revolution, as privately rented houses were sold off to owner occupiers.  At the same time, slum clearance created large single-tenure areas.  This changed the nature of the demand for council housing (once occupied by the upper skilled working-class).  In some parts of the country, gentrification removed a once-affordable source of owner-occupied housing.  But rent control meant there were few homes for would-be renters.  Access to good quality social housing thus became a very high-stakes game, for those on modest incomes - and a major source of ethnic tension in some inner cities.

Reference: 098

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Authors: Anthony Venables, Michele Ruta

Apr 2012

Natural resources account for 20% of world trade, and dominate the exports of many countries. Policy is used to manipulate both international and domestic prices of resources, yet this policy is largely outside the disciplines of the WTO. The instruments used include export taxes, price controls, production quotas, and domestic producer and consumer taxes (equivalent to trade taxes if no domestic production is possible). We review the literature, and argue that the policy equilibrium is inefficient. This inefficiency is exacerbated by market failure in long run contracts for exploration and development of natural resources. Properly coordinated policy reforms offer an avenue to resource exporting and importing countries to overcome these inefficiencies and obtain mutual gains.

JEL Codes: F1, F13, Q3

Keywords: natural resources, trade, export tax, tariff escalation, OPEC, WTO, terms of trade

Reference: 84

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Authors: Thomas Norman

Apr 2012

If players learn to play an infinitely repeated game using Bayesian learning, it is known that their strategies eventually approximate Nash equilibria of the repeated game under an absolute-continuity assumption on their prior beliefs.  We suppose here that Bayesian learners do not start with such a "grain of truth", but with arbitrarily low probability they revise beliefs that are performing badly.  We show that this process converges in probability to a Nash equilibrium of the repeated game.

JEL Codes: C73, D83

Keywords: Repeated games, Nash equilibrium, Rational learning, Bayesian learning, Absolute continuity

Reference: 602

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Authors: Alan Beggs

Apr 2012

This paper studies uniqueness of equilibrium in symmetric 2 x 2 bayesian games.  It shows that if signals are highly but not perfectly dependent then players play their risk-dominant actions for all but a vanishing set of signal realizations.  In contrast to the global games literature, noise is not assumed to be additive.  Dependence is modeled using the theory of copulas.

JEL Codes: C72, D82

Keywords: Bayesian games, Global games, Uniqueness, Copulas, Risk dominance

Reference: 603

Individual View

Authors: Neil Shephard, Dacheng Xiu

Apr 2012

Estimating the covariance and correlation between assets using high frequency data is challenging due to market microstructure effects and Epps effects.  In this paper we extend Xiu's univariate QML approach to the multivariate case, carrying out inference as if the observations arise from an asynchronously observed vector scaled Brownian model observed with error.  Under stochastic volatility the resulting QML estimator is positive semi-definite, uses all available data, is consistent and asymptotically mixed normal.  The quasi-likelihood is computed using a Kalman filter and optimised using a relatively simple EM algorithm which scales well with the number of assets.  We derive the theoretical properties of the estimator and prove that it achieves the efficient rate of convergence.  We show how to make it achieve the non-parametric efficiency bound for this problem.  The estimator is also analysed using Monte Carlo methods and applied on equity data that are distinct in their levels of liquidity.

JEL Codes: CO1, C14, C58, D53, D81

Keywords: EM algorithm, Kalman filter, Market microstructure noise, Non-synchronous data, Portfolio optimisation, Quadratic variation, Quasi-likelihood, Semimartingale, Volatility

Reference: 604

Individual View

Authors: Johanna Vogel

Apr 2012

This paper investigates two channels through which research and development (R&D) and human capital may affect regional total factor productivity growth in the manufacturing sector, using panel data on 159 EU-15 regions from 1992 to 2005.  Based on the endogenous growth model of Griffith, Redding and Van Reenen (2003), we allow R&D and human capital to influence productivity growth both directly, reflecting own innovation, and indirectly, reflecting imitation of frontier technology.  Further, the model allows for conditional convergence to a long-run level of TFP relative to the frontier.  We also develop an extension that captures geographically localised technology spillovers.  Our preferred system-GMM estimates provide evidence of a positive and significant direct effect of human capital, and a positive and significant indirect effect of R&D on productivity growth.  This may be interpreted as lending support to the recent focus of EU regional policy on raising educational attainment and R&D expenditures, although their channels of influence appear to differ.  Our results also suggest that TFP convergence has taken place over our sample period and that geographic distance to the technology frontier matters.

JEL Codes: O30, O47, I25, R11/12, C23

Keywords: Total factor productivity, Convergence, Human capital, Research and development, European regions

Reference: 599

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Authors: Jennifer Castle,David Hendry

Apr 2012

We consider forecasting with factors, variables and both, modeling in-sample using Autometrics so all principal components and variables can be included jointly, while tackling multiple breaks by impulse-indicator saturation.  A forecast-error taxonomy for factor models highlights the impacts of location shifts on forecast-error biases.  Forecasting US GDP over 1-, 4- and 8-step horizons using the dataset from Stock and Watson (2009) updated to 2011:2 shows factor models are more useful for nowcasting or short-term forecasting, but their relative performance declines as the forecast horizon increases.  Forecasts for GDP levels highlight the need for robust strategies such as intercept corrections or differencing when location shifts occur, as in the recent financial crisis.

JEL Codes: C51, C22

Keywords: Model selection, Factor models, Forecasting, Impulse-indicator saturation, Autometrics

Reference: 600

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Authors: John Quah

Apr 2012

Consider a finite data set of price vectors and consumption bundles; under what conditions will there be a weakly separable utlity function that rationalizes the data?  This paper shows that rationalization in this sense is possible if and only if there exists a preference order on some finite set of consumption bundles that is consistent with the observations and that is weakly separable.  Since there can only be a finite number of preference orders on this set, the problem of rationalization with a weakly separable utility function is solvable.

JEL Codes: C14, C60, C61, D11, D12

Keywords: Afriat's theorem, Concave utility function, Budget set, Generalized axiom of revealed preference, Preorder

Reference: 601

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Authors: Tapan Mitra, Gier B Asheim, Wolfgang Buchholz, Cees Withagen

Mar 2012

The Dasgupta-Heal-Solow-Stiglitz model of capital accumulation and resource depletion poses the following sustainability problem: is it feasible to sustain inde nitely a level of consumption that is bounded away from zero? We provide a complete technological characterization of the sustainability problem in this model without reference to the time path. As a byproduct we show general existence of a maximin optimal path under weaker conditions that those employed in previous work. Our proofs yield new insights into the meaning and signi cance of Hartwick's reinvestment rule.

JEL Codes: O10, Q32

Keywords: Sustainability, Maximin

Reference: 83

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Authors: Martin Ellison, Charles Brendon, Martin Ellison

Mar 2012

A well-known time-inconsistency problem hinders optimal decision-making when policymakers are constrained in their pesent choices by expectations of future outcomes.  The time-inconsistency problem is caused by differences in the preferences of policymakers who exist at different points in time.  Adapting the arguments of Rawls (1971), we propose that these differences can be eliminated if policy is set from behind a 'veil of ignorance', without knowledge of when the policy will be implemented.  We set up a well-defined choice problem that captures this normative perspective.  The policies that it generates have a number of appealing properties.

JEL Codes: E52, E61

Keywords: Macroeconomic policy, Rawls, Time inconsistency, Veil of ignorance

Reference: 595

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Authors: K. Rebecca Scott

Mar 2012

When consumers are forward-looking with respect to their demand for a habit-forming good, traditional measures of price elasticity are misleading.  In particular, such measures will underestimate sensitivity to long-run shifts - and therefore underestimate the potential effect of policy instruments that act through price.  Correcting elasticities for the behavior of the price process requires a model with forward-looking consumers, a habit-forming good, and uncertain relative prices.  With appropriate restrictions on the type of price uncertainty, this paper shows that it is possible to solve for the optimal consumption path under any price process.  Simulations then sketch out how habits and the price process shape demand.  Gasoline demand motivates the model and illustrates its implications.

JEL Codes: H30, Q40, Q41, Q50, R40

Keywords: Gasoline demand, Rational habits, Price elasticity

Reference: 596

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Authors: David Hendry, Grayham E. Mizon

Mar 2012

Understanding the workings of whole economies is essential for sound policy advice - but not necessarily for accurate forecasts.  Structural models play a major role at most central banks and many other governmental agencies, yet almost none forecast the financial crisis and ensuing recession.  We focus on the problem of forecast failure that has become prominent during and after that crisis, and illustrate its sources and many surprising implications using a simple model.  An application to 'forecasting' UK GDP over 2008(1)-2011(2) is consistent with our interpretation.

JEL Codes: C52, C22

Keywords: Structural models, Location shifts, Economic forecasting, Autometrics

Reference: 597

Individual View

Authors: David Hendry, Soren Johansen

Mar 2012

Trygve Haavelmo's Probability Approach aimed to implement economic theories, but he later recognized their incompleteness. Although he did not explicitly consider model selection, we apply it when theory-relevant variables, {xt}, are retained without selection while selecting other candidate variables, {wt}. Under the null that the {wt} are irrelevant, by orthogonalizing with respect to the {xt}, the estimator distributions of the xt's parameters are unaffected by selection even for more variables than observations and for endogenous variables. Under the alternative, when the joint model nests the generating process, an improved outcome results from selection. This implements Haavelmo's program relatively costlessly.

JEL Codes: C51, C22

Keywords: Trygve Haavelmo, Model discovery, Theory retention, Impulse-indicator saturation, Autometrics

Reference: 598

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Authors: Diaa Noureldin,Neil Shephard,Kevin Sheppard

Feb 2012

This paper introduces a new class of multivariate volatility models which is easy to estimate using covariance targeting, even with rich dynamics. We call them rotated ARCH (RARCH) models. The basic structure is to rotate the returns and then to fit them using a BEKK-type parameterization of the time-varying covariance whose long-run covariance is the identity matrix. The extension to DCC-type parameterizations is given, introducing the rotated conditional correlation (RCC) model. Inference for these mdoels is computationally attractive, and the asymptotics are standard. The techniques are illustrated using data on some SJIA stocks. 

JEL Codes: C32, C52, C58

Keywords: RARCH, RCC, Multivariate volatility, Covariance targeting, Common persistence, Empirical Bayes, Predictive likelihood

Reference: 594

Individual View

Authors: George Mavrotas, Syed Mansoob Murshed, Sebastian Torres

Feb 2012

We look at the type of natural resource dependence and growth in developing countries. Certain natural resources called point-source, such as oil and minerals, exhibit concentrated and capturable revenue patterns, while revenue flows from resources such as agriculture are more diffused. Developing countries that export the former type of products are regarded prone to growth failure due to institutional failure.We present an explicit model of growth collapse with micro-foundations in rent-seeking contests with increasing returns.  Our econometric analysis is among the few in this literature with a panel data dimension. Point-source-type natural resource dependence does retard institutional development in both governance and democracy, which hampers growth. The resource curse, however, is more general and not simply confined to mineral exporters.

Reference: 81

Individual View

Authors: Eric Schneider

Feb 2012

This paper challenges the growing consensus in the literature (Stone, 2005; Dodds, 2007) that medieval English peasants and manorial managers were price responsive in their production decisions.  Using prices of and acreages planted with wheat, barley, and oats of 49 manors held by the bishop of Winchester from 1349-70, we estimate price elasticities of supply for each grain in aggregate and on each particular manor.  Aggregate price elasticities of supply for wheat and oats were not significantly different than zero, and barley aggregate elasticities of supply were significant but very low.  These elasticities are low compared with price elasticities of supply estimated for developing and developed countries in the nineteenth and twentieth centuries.  Attempting to explain the variation in the estimated price elasticities for individual manors, market concentration had a significant, positive effect on price elasticities of wheat and oat supply.  In the end, the low levels of price responsiveness in the post-Black Death period suggest that commercialisation was not as dominant in the medieval English economy as has been argued.  Thus, the institutional and structural changes highlighted by Marxist and Neo-Malthusian historians may need to take a more prominent role in explanations of medieval economic change.

Reference: 097

Individual View

Authors: Gregg Huff

Feb 2012

Between the 1870s and World War II, falls in world shipping costs and Western industrialisation gave rise to export-led Southeast Asian growth and specialization in a narrow range of primary commodity exports.  A linked development was the emergence of a few dominant Southeast Asian urban centres, typically primate and always ports.  Drawing on historical census data, this paper uses rank-size distributions and transition matrices to investigate the influence of commodity specialisation and exports on urban systems development in the region.  It is argued that different commodities produced different spread effects, resulting in variation in degrees of urban concentration in the region.  However, geography, path dependence and infrastructrue also shaped urban systems development.  The main cities that emerged during this period became the 'gateways' that connected frontier Southeast Asia to the Global economy.

JEL Codes: N15, N95, R11

Keywords: Urbanisation, Gateway cities, Agglomeration effects, Export-led growth, Staple exports, Urban systems, Rank-size distributions, Transition matrices

Reference: 096

Authors: Kevin Hjortshøj O'Rourke, Alan de Bromhead, Barry Eichengreen

Feb 2012

We examine the impact of the Great Depression on the share of votes for right-wing anti-system parties in elections in the 1920s and 1930s.  We confirm the existence of a link between political extremism and economic hard times as captured by growth or contraction of the economy.  What mattered was not simply growth at the time of the election but cumulative growth performance.  But the effect of the Depression on support for right-wing anti-system parties was not equally powerful under all economic, political and social circumstances.  It was greatest in countries with relatively short histories of democracy, with existing extremist parties, and with electoral systems that created low hurdles to parliamentary representation.  Above all, it was greatest where depressed economic conditions were allowed to persist.

JEL Codes: N10, D72

Keywords: Great Depression, Political extremism, Voting

Reference: 095

Individual View

Authors: Neil Shephard,Kevin Sheppard

Feb 2012

High frequency financial data allows us to learn more about volatility, volatility of volatility and jumps.  One of the key techniques developed in the literature in recent years has been bipower variation and its multipower extension, which estimates time-varying volatility robustly to jumps.  We improve the scope and efficiency of multipower variation by the use of a more sophisticated exploitation of high frequency data.  This suggests very significant improvements in the power of jump tests.  It also yields efficiency estimates of the integrated variance of the continuous part of a semimartingale.  The paper also shows how to extend the theory to the case where there is microstructure in the observations and derive the first nonparametric high frequency estimator of the volatility of volatility.  A fundamental device in the paper is a new type of result showing path-by-path (strong) approximation between multipower and the (unobserved) RV based on the continuous part of the process.

JEL Codes: C01, C02, C13, C14, C22, D53, D81

Keywords: Bipower variation, Jumps, Market microstructure noise, Multipower variation, Non-parametric analysis, Quadratic variation, Semimartingale, Volatility, Volatility of volatility

Reference: 593

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Authors: Era Dabla-Norris. Raphael Espinoza, Sarwat Jahan

Feb 2012

This paper documents the expanding economic linkages between low-income countries (LICs) and a narrow group of “Emerging Market leaders” that have become major players in international trade and financial flows. VAR models show that these linkages have increased the share of growth volatility that can be attributed to foreign shocks in LICs. Dynamic panel models further analyze the impact of LIC trade orientation and production structure on the sensitivity to foreign shocks. The empirical results demonstrate that the elasticity of growth to trading partners’ growth is high for LICs in Asia, Latin America and the Caribbean, and Europe and Central Asia. However, for commodity-exporting LICs in Sub-Saharan Africa and the Middle East, terms of trade shocks and demand from the emerging market leaders are the main channels of transmission of foreign shocks.

JEL Codes: C22, E32, F15, F43

Keywords: Growth Spillovers; Low-income Countries; Economic Integration; Decoupling; Vector Autoregression

Reference: 82

Individual View

Authors: Kevin Hjortshøj O'Rourke, Harold James

Feb 2012

The paper presents trade policy as in line with that of other continental European powers, with a move to moderate levels of tariff protection for politically sensitive sectors such as steel and textiles and clothing, but also in agriculture, with levels of protection falling slightly before the First World War.  Monetary policy was similarly driven by the constraints of capital scarcity, and the political priority attached to reducing the cost of funding government debt.  The most innovative area was probably in industrial policy, where after the 1880s and again in the 1930s in response to severe shocks, quite creative institutional policies were adopted.  In particular financial restructuring was used as an opportunity to reshape the structure of industry.

JEL Codes: N23, N24, N73, N74

Keywords: Comparative economic history, Industrial policy, Monetary, Policy, Monetary regime, Trade policy

Reference: 094

Individual View

Authors: Thomas Norman

Jan 2012

In von Neumann and Morgenstern's sample model of poker, equilibrium has the first player bet with high and low hands, and check with intermediate hands.  The second player then calls if his hand is sufficiently high.  Betting by the low hands is interpreted as bluffing, and is a pure strategy.  Here we show that this equilibrium is nongeneric, in the sense that it ceases to exist if the first player is allowed to choose among many possible bets, rather than just one.  Moreover, Newman's solution for this case - which also has pure-strategy bluffing - is shown not to be a sequential equilibrium.  However, a modified solution  - where low hands bluff using mixed strategies - is a sequential equilbrium.

JEL Codes: C73

Keywords: Poker, Game theory, Mixed strategies, Perfect Bayesian equilibrium, Sequential equilibrium

Reference: 590

Individual View

Authors: Thomas Norman

Jan 2012

Models of macroeconomic learning are populated by agents who possess a great deal of knowledge of the "true" structure of the economy, and yet ignore the impact of their own learning on that structure; they may learn about an equilibrium, but they do not learn within it.  An alternative learning model is presented where agents' decisions are informed by hypotheses they hold regarding the economy.  They periodically test these hypotheses against observed data, and replace them if they fail.  It is shown that agents who learn in this way spend almost all of the time approximating rational-expectations equilibria.

JEL Codes: E00, D83, D84

Keywords: Rational-expectations equilibrium, Learning, Hypothesis testing

Reference: 591

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Authors: Florian Ploeckl, Simon C. Holmes

Jan 2012

This study investigates the impact of joint-stock banks on the rationalisation of the British interwar steel industry.  A new panel data set of steel firm characteristics covering 1920 to 1938 is used to document rationalization and bank involvement, including interlocking directorships, with both found to be more extensive than previously thought.  A set of all potential amalgamation pairs is created and used in a logit analysis of the determinants of mergers.  Bank involvement with firms increased the probability that a particular merger occurred.  Furthermore mergers with bank involvement did not increase the involved firm's profitability, while those without did.

JEL Codes: L61, N24, N64

Keywords: Banking, Steel industry, Rationalization, Mergers, Interwar Britain

Reference: 093

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