Aggregate Economic Conditions Research Articles

Time-varying expected momentum profits

This paper examines the time variations of expected momentum profits using a two-state Markov switching model with time-varying transition probabilities to evaluate the empirical relevance of recent rational theories of momentum profits. We find that in the expansion state the expected returns of winner stocks are more affected by aggregate economic conditions than those of loser stocks, while in the recession state the expected returns of loser stocks are more affected than those of winner stocks. Consequently, expected momentum profits display strong procyclical variations. We argue that the observed momentum profits are the realization of such expected returns and can be interpreted as the procyclicality premium. We provide a plausible explanation for time-varying momentum profits through the differential effect of leverage and growth options across business cycles.

Health-income inequality: the effects of the Icelandic economic collapse.

IntroductionHealth-income inequality has been the focus of many studies. The relationship between economic conditions and health has also been widely studied. However, not much is known about how changes in aggregate economic conditions relate to health-income inequality. Nevertheless, such knowledge would have both scientific and practical value as substantial public expenditures are used to decrease such inequalities and opportunities to do so may differ over the business cycle. For this reason we examine the effect of the Icelandic economic collapse in 2008 on health-income inequality.MethodsThe data used come from a health and lifestyle survey carried out by the Public Health Institute of Iceland in 2007 and 2009. A stratified random sample of 9,807 individuals 18–79 years old received questionnaires and a total of 42.1% answered in both years. As measures of health-income inequality, health-income concentration indices are calculated and decomposed into individual-level determinants. Self-assessed health is used as the health measure in the analyses, but three different measures of income are used: individual income, household income, and equivalized household income.ResultsIn both years there is evidence of health-income inequality favoring the better off. However, changes are apparent between years. For males health-income inequality increases after the crisis while it remains fairly stable for females or slightly decreases. The decomposition analyses show that income itself and disability constitute the most substantial determinants of inequality. The largest increases in contributions between years for males come from being a student, having low education and being obese, as well as age and income but those changes are sensitive to the income measure used.ConclusionsChanges in health and income over the business cycle can differ across socioeconomic strata, resulting in cyclicality of income-related health distributions. As substantial fiscal expenditures go to limiting the relationship between income and health, the business-cycle effect on equality, which has up until now not received much attention, needs to be considered.

Discussion

Discussion

Making Sense of Isolationism: Foreign Policy Mood as a Multilevel Phenomenon

Political scientists have long been interested in the American public’s foreign policy mood, but they have typically separated the microlevel question (who’s more likely to support isolationism?) from the macrolevel one (when does isolationism’s popularity increase?), even though public opinion is inherently a multilevel phenomenon, as the answers to these two questions interact. Showing how multilevel models can deal with the effects of time rather than just space, I find that both guns and butter drive foreign policy mood, but in different ways. When economic assessments sour, the public’s appetite for isolationism increases, but the impact of these individual-level perceptions is constrained by aggregate economic conditions, which are sufficiently salient that they are accessible irrespective of knowledge. The nature of the international security environment, however, predominantly affects foreign policy mood amongst high-knowledge individuals, thereby suggesting that low- and high-knowledge individuals’ foreign policy views are shaped by different situational cues.

Disentangling Beta and Value Premium Using Macroeconomic Risk Factors

In this paper, we study the time-varying total risk of value and growth stocks. The objective is to investigate the contention that the market factor's ability to explain the value premium is limited. Inspired by Ferson and Harvey [1999], we revisit the role of the market beta in the presence of aggregate economic factors. We discuss the incorporation of aggregate economic conditions in the context of multifactor risk models and provide cross-sectional evidence on the relationship between average returns and postranking betas for book-to-market (BE/ME) sorted portfolios. We show that the ineffective role of the market beta can be altered by incorporating aggregate economic risk factors in the cross-sectional asset pricing tests of size and BE/ME sorted portfolios. No previous study provides such a decomposition of the cross-sectional role of the market beta in the presence of macroeconomic risk factors.

Impacts Of The Aggregate Economic And Financial Conditions On Output In An Emerging Economy

This study formulates the theoretical model based on the money market equilibrium, the goods market equilibrium, and an augmented aggregate supply function. The sample ranges from 1996.Q1 to 2009.Q3 and has 55 observations. Applying the generalized autoregressive conditional heteroskedasticity (GARCH) model, this paper finds that Brazils real GDP is positively impacted by real M2 money supply, the real stock price, world output and the expected inflation rate and is negatively influenced by the government deficit as a percent of GDP, the real BRL/USD exchange rate and the U.S. Treasury bill rate. The first and third quarters exhibit seasonal effects. Therefore, expansionary monetary policy is more effective than deficit-financed expansionary fiscal policy, and pursuing real appreciation, promoting a robust stock market, and maintaining a strong world economy will benefit the Brazilian economy.

Schooling Investments and Macroeconomic Conditions: A Micro-Macro Investigation for Latin America and the Caribbean

Schooling is a major factor in economic development. There is extensive empirical literature on what determines schooling attainment. But most of this literature uses micro data to explore connections between schooling attainment and family background and experiences, local markets, local schools and other community characteristics. These studies generally have not linked schooling attainment closely to changes in aggregate economic conditions. This paper uses a new high quality data set for 18 Latin American and Caribbean countries to assess the effects of macro conditions on schooling attainment. Household survey data are used to construct a quasi panel with information on attainment for birth cohorts born between 1930 and 1970, which is merged with country-specific aggregate data. We use the data to document schooling progress in Latin America and estimate multivariate relations for schooling attainment by birth cohorts as related to sets of variables for macroeconomic stability, factor endowments, demographic developments, institutions and culture and religion. These estimates are used to decompose the change in schooling progress by decade, and to explore the causes of the slowdown in schooling accumulation in the region since the 1980s debt crisis.

Altman Model as Insolvency Indicator

Business failure is a sobering economic reality and is no longer the exclusive province of the small, undercapitalised business units but occurs increasingly among the large industrial and financial corporations as well. Irrespective of age and size of the firm, the primary organisation process is to relieve the burden of liabilities and realign the capital structure so that financial problems are kept aside to a greater extent. Literatures available indicate that a firm’s propensity to fail is heightened due to cumulative effects of reduced real economic growth, stock market performance, money supply and business formation. On the micro side, if a firm finds its very existence in a tenuous state and the aggregate economic conditions indicate increased failure pressures, then drastic preventive measures should be implemented, if possible and if deemed desirable. Of course, if the value of the firm is less than its liquidation value, then early liquidation in the face of expected continued micro and macro pressures would be expedient. Needless to say, in almost all cases, the fundamental business failure problems lie within the firm itself. Although earlier works in this context have established certain important generalisations regarding the performance and trends of particular measurements, the adaption of the results for assessing bankruptcy potential of firms, both theoretically and practically, is questionable. In almost every case, the methodologies so adopted were essentially univariate in nature and emphasises were placed on individual signals of impending problems. The potential ambiguity as to the relative performance is clearly evident. The crux of shortcomings inherent in any univariate analysis lies therein. An appropriate extension of the previous studies, therefore, is to build their findings and to combine several measures into meaningful predictive model. Z-score model, as a technique of Multiple Discriminate Analysis (MDA), is used on a fairly widespread basis now-a-days amongst practitioners, instructors and students with utmost trust on it to be more useful for pedagogic reasons also. We also aim to examine the model’s predictive ability by reviewing the previous financial facts and figures that have helped to form the present system.

Strategic and Financial Bidders in Takeover Auctions

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature poorly-performing companies. We also find that (i) valuations of different strategic bidders are more dispersed, (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.

Could Education Promote the Israeli-Palestinian Peace Process?

This paper explores Palestinians' attitudes towards a peace process and their determinants, with a particular focus on the role of education. Understanding the factors that shape attitudes towards peace is important in order to be successful in negotiations or in implementing a peace agreement. In the literature, there is particular disagreement about the role of education. While some authors have linked violent and extreme positions to ignorance and to low market opportunities, others have found that education is positively correlated with being a member of a terrorist group. To better understand the role of education I decompose the attitudes towards peace into two dimensions; attitudes towards reconciliation and attitudes towards concessions. To measure these attitudes, I use a flexible item response model proposed by Spady (2007), which allows to take into account the multidimensionality of the concepts. The results show that education has a positive effect on attitudes towards concessions but a negative effect on attitudes towards reconciliation. This may occur because relative to a situation of peace, highly educated individuals are more strongly affected by current depressed economic conditions in Palestine. They therefore have more to gain from a peace agreement and may thus be more willing to make concessions. At the same time, they may be more frustrated and therefore less willing to reconcile. I also find that their attitudes to reconciliation move closely with aggregate economic conditions, while those of less educated individual are also influenced by local factors such as the construction of the separation barrier in their region of residence.

Gradients of the Intergenerational Transmission of Health in Developing Countries

This paper investigates the sensitivity of the intergenerational transmission of health to exogenous changes in income, education and public health, changes that are often delivered by economic growth. It uses individual survey data on 2.24 million children born to 600000 mothers during 1970-2000 in 38 developing countries. These data are merged with macroeconomic data by country and birth cohort to create an unprecedentedly large sample of comparable data that exhibit massive variation in maternal and child health as well as in aggregate economic conditions. The country-level panel is exploited to control for aggregate shocks and trends in unobservables within countries, while a panel of children within mother is exploited to control for family-specific endowments and neighbourhood characteristics. Child health is indicated by infant survival and maternal health by (relative) height. We find that improvements in maternal education, income and public health provision that occur in the year of birth and the year before birth limit the degree to which child health is tied to family circumstance. The interaction (gradient) effects are, in general, most marked for shorter women suggesting that children are more likely to bear the penalty exerted by poor maternal health if they are conceived or born in adverse socio-economic conditions.

The Occupational Assimilation of Hispanics in the U.S.: Evidence from Panel Data

This study investigates whether Hispanic immigrants assimilate in occupational status with natives and the factors that determine occupational status. A theoretical framework is proposed that models occupational status and convergence of Hispanics relative to U.S.-born non-Hispanics as a function of human capital and demographic exogenous variables, U.S. experience (assimilation effects) and periods of migration (cohort effects). In addition, the model also controls for aggregate economic conditions and location effects. The empirical testing is based on a random effects model estimation procedure to accommodate the longitudinal PSID panel data used in the analysis. The results suggest that length of time resided in the U.S. narrows the occupational gap between Hispanic immigrants and non-Hispanic Whites and U.S.-born Hispanic counterparts. The level of individuals' human capital affects the rate of occupational mobility and determines whether convergence occurs in occupational status. Mexican immigrants with low human capital start in occupations with relatively low status and they do not experience much occupational mobility. Their occupational status does not converge with that of non-Hispanic or U.S.-born Hispanic counterparts. However, Mexican immigrants with high human capital experience occupational mobility, and catch up with non-Hispanic Whites after 15 years and with U.S.-born Hispanics after 10 years of working in the U.S.

The Influence of Macro Trends on the Frequency of Industrial Disputes

New Zealand, like many other nations has seen a dramatic fall in both the frequency and length of industrial disputes since the highs of the 1970s and early 1980s. This paper investigates and assesses the influence of aggregate economic and labour market conditions, and the resultant effects of those conditions, on the scale and scope of industrial disputes in New Zealand between 1988 and 2001. To this end, the purpose of this paper is to determine the influence of the prevailing legislation; the decline in union density and the relative strength of unions in each industry; and the importance of economic growth, wages and inflation on the length and frequency of industrial disputes.

Changing Labour Markets and Early Career Outcomes: Labour Market Entry in Europe Over the Past Decade

The paper addresses the driving forces behind recent changes in labour market outcomes among market entrants in Europe. Based on data for 12 European countries from the 1988-97 European Community Labour Force Surveys, the empirical analyses estimate panel data models to assess the effects of cyclical changes in aggregate economic conditions, changing youth cohort sizes, increasing educational expansion and structural changes in labour demand on market entrants' unemployment risks and occupational allocation. In general, it is found that unemployment risks have closely followed the evolution of aggregate economic conditions with only slight impact from demographic factors. Changes in occupational allocation, in turn, are more dependent on the relative evolution of educational expansion and occupational upgrading trends. In addition, these trends have not affected all school leavers evenly: the lowest qualified are most heavily affected by cyclical changes in economic conditions, while leavers from tertiary level education have been more strongly affected by recent trends of changing occupational attainment. More troublesome, however, is that continuing occupational upgrading is established to contribute to increasing labour market difficulties in particular among the lowest qualified leavers.

The Impact of Macroeconomic Performance on Alternative Poverty Measures

This article studies how aggregate economic conditions affect alternative poverty indexes. The different indexes include the official headcount rate, and others based on improved methods for both identifying and aggregating individuals deemed poor. The empirical analysis uses March Current Population Survey state-level data for the 1990s to estimate cross-section/time-series models of the alternative poverty indexes. Resulting estimates indicate that the measured effects of aggregate activity on poverty turn critically on the procedures for gauging poverty. Based on some theoretically preferred alternatives, the powerful economy of the past decade has had much less of an impact than is suggested by the official headcount rate. The findings thus provide an important caveat for researchers trying to identify the links between economic conditions and poverty, and for policy-makers seeking to understand how best to reduce poverty.

A Comparison of National Effects on Individual U.S. Senate Elections

In this article a second look is taken at the effect that national conditions have on individual U.S. Senate elections. In doing so, the effects that presidential popularity, aggregate national economic conditions, and short‐term party evaluations have had on individual Senate contests from 1980 through 1996 are examined. In addition to assessing the comparative influence of these national factors, consideration is given to the question of whether open seat contests should be included in the same models as Senate races where the incumbent is seeking reelection. Analyses of results for national, state, and candidate data provide strong evidence that incumbent and open seat elections are sufficiently different in that each merit their own model rather than being included in the same one. In contests where incumbents are seeking reelection, national economic conditions are the dominant national influence on individual Senate races. By contrast, national factors play a very limited role in open seat contests.

Do Business Cycles Affect State Appropriations to Higher Education?

1. Introduction and Motivation Business cycles affect higher education in a number of important ways. Anecdotal evidence from college admissions officers and administrators, as well as empirical evidence on the behavior of students and institutions of higher education, suggest that enrollment in higher education is countercyclical. For example, Betts and McFarland (1995) recently showed that enrollments in community colleges are highly responsive to changes in local labor market conditions. These authors found a 1% increase in the unemployment rate among all adults associated with a 4% increase in enrollment at community colleges in a large panel of community colleges across the United States. Leslie and Ramey (1986) found a similar relationship between economic conditions and enrollment using data aggregated to the regional level. This paper examines the relationship between state appropriations to higher education and state-specific measures of business cycle conditions in order to better understand the effects of the business cycle on government funding of higher education.1 I further investigate the relationship between the business cycle and state government appropriations to higher education reported by Betts and McFarland (1995) and Leslie and Ramey (1986). Both of these studies aggregated state and local government appropriations to higher education to the regional and national level. While data aggregated to the regional and national levels are readily available, decisions about government funding to higher education are made at the state and local levels, and these decisions may be affected more by local economic conditions than by aggregate economic conditions. If the timing of turning points in the business cycle varies across states, then aggregating government appropriations data across states may obscure important statespecific phenomena. Most research has focused on the effects of economic conditions on demand for higher education. One notable exception is Leslie and Ramey (1986), who examined the relationship between enrollment, business cycles, and state appropriations to higher education using regional appropriations and enrollment data and a national measure of business cycle conditions. That study found a procyclical relationship between the NBER coincident index and regional-level government appropriations to higher education. For one region, the estimated elasticity of appropriations with respect to changes in the coincident index was three, suggesting that a 1% change in the NBER coincident index was associated with a 3% change in appropriations to higher education in that region. This study also highlighted the complex relationship between state funding for higher education, enrollment, and business cycle conditions by documenting a statistically significant relationship between enrollment and state appropriations at the regional level, although they found that the appropriations-enrollment relationship weakened after 1977. Betts and McFarland (1995) also describe, in an informal way using aggregate data, a procyclical relationship between the business cycle and funding for higher education. These authors report that aggregate state and local government appropriations to higher education fell in the years 1971, 1975, 1980-1982 as well as in several years in the early 1990s; all of these years are either coincident with, or immediately following, years when the NBER Dating Committee has identified a cyclical downturn in the economy. The transmission mechanism linking business cycles and government appropriations to higher education during recessionary periods seems clear: recessions reduce tax revenues; state and local governments, most of which operate under legally required balanced budget restrictions, reduce appropriations to institutions of higher education, as well as other types of expenditures, in order to balance their budgets. Betts and McFarland point out that these cyclical patterns of government support for higher education may place tremendous financial pressure on institutions of higher education during economic downturns, because the cuts in government funding happen at the same time enrollments are increasing. …

Schooling Investments and Aggregate Conditions: A Household-Survey-Based Approach for Latin America and the Caribbean

Schooling is a major factor in economic development. There is a large empirical literature on what determines schooling attainment. But most of this literature uses micro data to explore connections between schooling attainment and family background and experiences, local markets, local schools and other community characteristics. These studies generally have not linked schooling attainment closely to changes in aggregate economic conditions. This paper uses a new high quality data set for 18 Latin American and Caribbean countries to assess the effects of macro conditions on schooling attainment. Household survey data are used to construct a quasi panel with information on attainment for birth cohorts born between 1930 and 1970, which is merged with country-specific aggregate data. We use the data to document schooling progress in Latin America and estimate multivariate relations for schooling attainment by birth cohorts as related to sets of variables for macroeconomic stability, factor endowments, demographic developments, institutions and culture and religion. These estimates are used to decompose the change in schooling progress by decade, and to explore the causes of the slowdown in schooling accumulation in the region since the 1980s debt crisis.

The “credit crunch” and the availability of credit to small business

We present estimates of how much bank loans and real activity in small businesses responded to changes in banks' capital conditions and other bank and aggregate economic conditions. Using data for 1989–1992 by state, we estimated the effects of those factors on employment, payrolls, and the number of firms by firm size, as well as on gross state product. In response to declines in their own bank capital, small banks shrank their loan portfolios considerably more than large banks did. Large banks tended to increase loans more when small banks were under increased capital pressure than vice versa. Real economic activity was reduced more by capital declines and by loan declines at small banks than at large banks. Small banks were making “high-powered loans” in that dollar-for-dollar loan declines in their loans had larger impacts on economic activity than loan declines at large banks did. Capital declines at small banks produced larger changes in economic activity dollar-for-dollar than capital declines at large banks did. Aggregate economic conditions had smaller effects on small firms than on large firms and smaller effects on small banks than on large banks. The evidence hinted that the volume of loans made under Small Business Administration (SBA) loan guarantee programs shrank less in response to declines in bank capital than the volume of loans not made under the SBA loan guarantee programs.

Public Support for Economic Reforms in Poland

Using monthly surveys, the author examines the impact of aggregate economic conditions on the dynamic of support for the Polish program of economic reforms, the Balcerowicz Plan. To highlight the ambiguity of the standard retrospective model, the author analyzes the impact of subjective perceptions of economic conditions on postures toward the reform program, asking if people were extrapolating the past when forming predictions about the future. Then the effect of these predictions on the postures toward reform is studied. Finally, the author focuses on the distributional effects. Substantive conclusions concerning the impact of economic conditions on the support of economic reform programs under democracy close the article.