Applied Economics Letters Research Articles

Fifty shades of QE: Robust evidence

Fabo et al. (2021) show that papers written by central bank researchers find quantitative easing (QE) to be more effective than papers written by academics. Weale and Wieladek (2022) show that a subset of these results lose statistical significance when OLS regressions are replaced by regressions that downweight outliers. We examine those outliers and find no reason to downweight them. Most of them represent estimates from influential central bank papers published in respectable academic journals. For example, among the five papers finding the largest peak effect of QE on output, all five are published in high-quality journals (Journal of Monetary Economics, Journal of Money, Credit and Banking, and Applied Economics Letters), and their average number of citations is well over 200. Moreover, we show that these papers have supported policy communication by the world's leading central banks and shaped the public perception of the effectiveness of QE. New evidence based on quantile regressions further supports the results in Fabo et al. (2021).

Input price discrimination under passive partial cross ownership

ABSTRACT Hu, Mizuno, and Song (Applied Economics Letters, 2021) compare the welfare effects of input price discrimination (IPD) and uniform input pricing (UIP) under passive partial ownership (PPO) where one downstream firm holds equity shares of its rival. This paper extends their setup to accommodate passive partial cross ownership (PCO) where each downstream firm holds equity shares of its rival. A common conclusion is that IPD improves welfare if the cost asymmetry is sufficiently low. Interestingly, this finding holds regardless of whether the more efficient firm is also the dominant partial shareholder. Indeed, it is found that the likelihood that IPD is welfare enhancing increases as firms become more asymmetric in terms of equity shares. However, the critical level of cost asymmetry differs under PPO and PCO, meaning that there are cases where IPD performs better in terms of social welfare under PCO but not under PPO, and vice versa. The main conclusion of this paper is that, compared to the PPO structure, PCO reduces the likelihood that IPD results in better welfare outcomes than UIP.

Labor Market Monopsony

There has been a renewed interest in monopsony in labor markets in recent years that includes both the traditional static approach to monopsony, ably reviewed by Boal and Ransom (1997), and the “new” approach to monopsony with more attention paid to dynamic issues, developed in detail by Manning (2003). The articles presented in this supplement highlight both approaches and illustrate the range of labor market settings in which the exercise of monopsony power may be important. The first use of the term “monopsony” in economics is widely attributed to Robinson (1969). Robinson conceived of monopsony as analogous to monopoly. Whereas monopoly refers to the case of a single seller confronted in a market by many buyers, monopsony refers to the case of a single buyer confronted in a market by many sellers. Just as the monopolist faces a downward-sloping demand curve for his product and

Applied Economics—Without Apology

To apply or not to apply economics?that is the question? Hardly. Applied economics, or at least what is operatively accepted as applied economics by journal reviewers and editors and practiced by economists in the profession, is pervasive in the top economics journals, outright dominant in journals de voted to the various variants of agricultural economics, and ubiquitous in the professional output of industry, government, and non government organization (NGO) economists, Extension faculty, and an ever-increasing ma jority of research/teaching faculty at public and private universities. A number of de partments, formerly known as Agricultural Economics Departments (or some closely re lated derivative), have adopted Applied Eco nomics as part or all of their department's name (e.g., U. of Minnesota, U. of Georgia, Cornell, Clemson, U. of Wisconsin, Virginia Tech, Texas Tech, North Dakota State U, U. of Wyoming, Utah State U, U. of Ver mont, and North Carolina A&T University). Journals abound that embed the term Ap plied Economics in their titles (e.g., Journal of Applied Economics, Journal of Agricultural and Applied Economics, Applied Economics (AEA), Applied Economics (Routledge), Ap plied Economics Letters, Applied Economic Perspectives and Policy, and Review of Applied Economics). Bachelor's and Master's Degrees in Applied Economics abound (as a Google search for such programs will attest), and there are even PhD degrees being granted in Ap plied (as distinct from General) Economics. There are also now explicit rankings of Ap plied Economics departments that are distinct from rankings of General Economics depart ments and which include a number of the for

A note on Taylor rules and the term structure

This article augments the well-known dynamic macro-economic model of Svensson (1997) to include the term structure of interest rates, in order to support the empirical findings of Fendel and Frenkel (2005) on the information content of the term structure of interest rates for monetary policy published in Applied Economics Letters. The derived Taylor-type rule is an implicit rule that cannot be used mechanically, because it contains an additional forward-looking argument. Only under special conditions of a stable and flat yield curve and/or an aggregate demand specification that only depends on the short-term interest rate this augmented rule collapses to the class of well-known Taylor-type rules.

Does Benford’s Law hold in economic research and forecasting?

First and higher order digits in data sets of natural and socio-economic processes often follow a distribution called Benford’s law. This phenomenon has been used in business and scientific applications, especially in fraud detection for financial data. In this paper, we analyse whether Benford’s law holds in economic research and forecasting. First, we examine the distribution of regression coefficients and standard errors in research papers, published in Empirica and Applied Economics Letters. Second, we analyse forecasts of GDP growth and CPI inflation in Germany, published in Consensus Forecasts. There are two main findings: The relative frequencies of the first and second digits in economic research are broadly consistent with Benford’s law. In sharp contrast, the second digits of Consensus Forecasts exhibit a massive excess of zeros and fives, raising doubts on their information content.

Revisiting the tourism-led-growth hypothesis for Turkey using the bounds test and Johansen approach for cointegration

This paper empirically revisits and investigates the tourism-led-growth (TLG) hypothesis in the case of Turkey by employing the bounds test and Johansen approach for cointegration using annual data from 1960–2006. Although Gunduz and Hatemi-J (2005; Is the tourism-led growth hypothesis valid for Turkey? Applied Economics Letters. 12, 499–504) support the TLG hypothesis for Turkey (suggesting unidirectional causation from tourism to economic growth) by making use of the leveraged bootstrap causality tests, and Ongan and Demiroz (2005; The contribution of tourism to the long-run Turkish economic growth. Ekonomický časopis [ Journal of Economics]. 53(9), 880–894.) suggest bidirectional causality between international tourism and economic growth in Turkey, this study does not find any cointegration between international tourism and economic growth in Turkey. Therefore, unlike the findings of Gunduz and Hatemi-J (2005) and Ongan and Demiroz (2005), this study rejects the TLG hypothesis for the Turkish economy since no cointegration was found and error correction mechanisms plus causality tests cannot be run for further steps in the long term.

Investigating attitudes to hydrogen refuelling facilities and the social cost to local residents

Vehicles fuelled by hydrogen (H2) have attracted increasing attention because of their potentially enhanced environmental profiles. Their penetration into the vehicle stock will be influenced by the spread of refuelling facilities. This study investigates local attitudes towards the proposed installation of H2 storage facilities at existing refuelling stations throughout London. Using multinomial logit analysis, we identify the determinants of attitudes. Results suggest that residents living very close to a proposed H2 facility are less likely to be opposed than residents living 200–500 m away. Opposition appears to be determined by a lack of trust in safety regulations, non-environmental attitudes, and concerns about the existing local refuelling station. The social cost to local residents of a local H2 storage facility was estimated using a method developed by Atkinson et al. [2004. ‘Amenity’ or ‘eyesore’? Negative willingness to pay for options to replace electricity transmission towers. Applied Economics Letters 11(4), 203–208], which elicits the amount of time respondents are willing to commit to oppose a new facility development. Using the leisure rate of time, the social cost is estimated at just under £14 per local opposed resident. Add to this the WTP to support opposition efforts by a local group, and the value comes to just under £25 per opposed resident.

On the dangers of a simplistic American option simulation valuation method

Chen and Shen [Chen, A.-S., and P.-F. Shen. 2003. Computational complexity analysis of least-squares Monte Carlo (LSM) for pricing US derivatives. Applied Economics Letters 10: 223–9] argue that we can improve the least squares Monte Carlo method (LSMC) to value American options by removing the least squares regression module. This would make it not only faster but also more accurate. We demonstrate, using a large sample of 2500 put options, that the proposed algorithm – the perfect foresight method (PFM) – is, as argued by the authors, faster than the LSMC algorithm but, contrary to what they state, it is not more accurate than the LSMC. In fact, the PFM algorithm incorrectly prices American options. We therefore, do not recommend the use of the PFM.

Measuring the Returns to Education Nonparametrically

This article uses a nonparametric model of earnings to measure the returns to education. Under very general smoothness conditions, a nonparametric estimator reveals the true shape of the earnings profiles up to random sampling error. Thus, the nonparametric model should provide better predictions than its parametric counterpart. We find that the nonparametric model predicts very different estimated returns than standard Mincer formulations. Depending on the experience and education level, returns measured in log earnings estimated from nonparametric model can be nearly twice those obtained from the Mincer model. Finally, this paper examines what structural features parametric models should include. This is a preprint of an article whose final and definitive form has been published in Applied Economics Letters © 2006 [copyright Taylor & Francis]; Applied Economics Letters is available online at: http://www.tandf.co.uk/journals/titles/13504851.asp

Random walk and breaking trend in financial series: An econometric critique of unit root tests

The present note sheds light on several pitfalls associated with unit root tests that are overlooked by a growing volume of literature in financial economics. Specifically, several studies have confused unit root tests with the Random Walk hypothesis. Unit root tests are not designed for such a task since they aim at investigating whether a time series is difference-stationary or trend-stationary and are not, therefore, predictability tests. Secondly, we emphasize some serious shortcomings associated with the widely used unit root test developed by Zivot and Andrews [Zivot, E. & Andrews, D.W.K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business and Economic Statistics, 10, 251–270.]. In particular, we stress that results from the Zivot–Andrews test are sensitive to the methods employed to calculate the critical values and to select the maxim lag k. Furthermore, Zivot–Andrews test imposes a one time structural break in a time series; however recent studies showed that not counting for other true structural breaks may bias the results and may cause a spurious rejection of the unit root null hypothesis. Finally, we support our arguments by an empirical example based on the findings of Narayan and Smyth [Narayan, K.P. & Smyth, R. (2004). Is South Korea’s stock market efficient? Applied Economics Letters, 11, 707–710.] with regards to the efficiency of South Korean stock market. We show that contrary to what the authors claim, the KSE (KOSPI) price index is predictable, and hence the South Korean stock market is not informationally efficient.

Cross-autocorrelation in the New Zealand stock market

We examine the New Zealand stock market for evidence of cross-autocorrelation. We find some evidence of both Lo and MacKinlay's (1990) size effect and Chordia and Swaminathan's (2000) volume effect. Moreover, in the size portfolios, the results of cross-autocorrelations are consistent with the findings of Li and Xu (2002) published in Applied Economics Letters. In the size-volume portfolios, this study reveals a special characteristic of the New Zealand stock market that lagged returns of a larger-volume portfolio may not always lead returns of a smaller-volume portfolio.

Does Benford's Law Hold in Economic Research and Forecasting?

First and higher order digits in data sets of natural and socio-economic processes often follow a distribution called Benford's law. This phenomenon has been used in many business and scientific applications, especially in fraud detection for financial data. In this paper, we analyse whether Benford's law holds in economic research and forecasting. First, we examine the distribution of leading digits of regression coefficients and standard errors in research papers, published in Empirica and Applied Economics Letters. Second, we analyse forecasts of GDP growth and CPI inflation in Germany, published in Consensus Forecasts. There are two main findings: The relative frequencies of the first and second digits in economic research are broadly consistent with Benford's law. In sharp contrast, the second digits of Consensus Forecasts exhibit a massive excess of zeros and fives, raising doubts on their information content.

Stochastic Unit Roots in the Capital Asset Pricing Model?

Evidence is provided in this article for the existence of a stochastic unit root (STUR) in a proxy for the US risk-free interest rate, in preference to a standard fixed unit root. The implications of the existence of the STUR, on estimating and testing the capital asset pricing model, are also examined through simulations. The effects of the STUR in the risk-free interest rate, on conducting unit root tests for excess market returns and estimating the betas of assets, are found to be qualitatively similar to those of the standard (fixed) unit root. Thus, this article confirms the conjecture of Markellos and Mills (2001, Applied Economics Letters, 8, pp. 499–502) on the risk-free interest rate following near-integrated processes, at least for a STUR.

Testing the quantity theory of money in Greece: reply to Özmen

Özmen (Applied Economics Letters, 10, 971–4, 2003) re-examines money exogeneity in Greece using data from Karfakis (Applied Economics, 34, 583–7, 2002) and claims, contrary to Karfakis, that money exogeneity is rejected. This reply demonstrates that money exogeneity is sensitive to lag length specification.

More on the estimation of the human capital depreciation rate

This study formulates an alternative empirical model to that of Groot (Applied Economics Letters, 5, 535–8, 1998) to estimate the rate of depreciation of human capital, in which the post-schooling investment and the difference between the potential and the observed earnings of the individuals are taken into account. As an illustration, the model has been estimated for a sample of Spanish men and women. The results show depreciation rates of human capital of around 1–1.5% per year.

How Effective Are Private Schools in Latin America?

Using multilevel modelling and data from 10 Latin American countries, this paper provides new evidence on the relative effectiveness of public and private schools. There are substantial differences in the achievement of private and public schools, usually around one-half a standard deviation. A small portion of these differences is accounted for by the higher socioeconomic status of students in private schools. A quite substantial portion is explained by the varying peer group characteristics in private and public schools. After accounting for peer characteristics, the average private school effect across all 10 countries is zero, though with some variance around this mean (the effects range between -0.2 and 0.2 standard deviations). Evidence on selection bias is inconclusive, but the paper argues that these effects may constitute an upper bound to the true effects.

Why is Ownership Endogenous?

A recently published paper by Gugler and Weigand (Applied Economics Letters, 10, 483-486, 2003) addresses the problem of the endogeneity of ownership, but an unresolved question remains. Where does this endogeneity come from? We show that the main source of endogeneity is the simultaneity between ownership and value.

Diversification benefits in trading?

This study argues that there may exist benefits in active portfolio management and trading other than the possibility of obtaining excess returns. The objective is not to attack the hypothesis that trading cannot produce (risk-adjusted) returns that are superior to passive investment strategies. What is suggested is that the combination of active and passive strategies can help considerably in diversifying investment positions. An empirical application using large samples of daily data on the Dow Jones Industrial Average (DJIA) and the Financial Times Institute of Actuaries 30 (FT30) indexes shows that simple market timing techniques, such as those used by Brock et al. (Journal of Finance, 47, 1731–64, 1992), Mills (International Journal of Finance and Economics, 2, 319–31, 1997) and Markellos (Applied Economics Letters, 6, 177–79, 1999), can be combined with buy-and-hold strategies to match the market return at a fraction of market risk. In accordance with the studies by Mills and Markellos, it is found ...

How Effective Are Private Schools in Latin America?

How Effective Are Private Schools in Latin America?