Econometric Specifications Research Articles

Long-Run Effects of Trade Openness on Foreign Direct Investment: Evidence from Developed and Developing Countries

The purpose of this paper is to examine the long-run effects of trade openness on FDI for 124 developed and developing countries over the period 1996-2021. The econometric specification adopted is the ARDL model in Panel. The main results estimate that, for developed and developing countries, trade openness has a positive and significant long-run effect on FDI inflows; the long-run effect is more important for developing countries (8-13 times that of developed countries). For developing countries, the long-run effect of trade openness on FDI is greater than that of infrastructure quality (from 6.6 to 10 times). For all samples (whole, developed and developing countries), the short-run effects are insignificant. The results estimate, also, a bidirectional causality between trade openness and FDI for whole sample and for developed countries. In the light of these results, it is recommended for the government to make several strategies to attract trade: Reduce barriers for products and services, more transparency, reduce bureaucracy, create a good politic and economic environment, develop institutions, improve infrastructure and specially communication and technology.

Does Google Analytics Improve the Prediction of Tourism Demand Recovery?

Research shows that Google Trend indices can improve tourism-demand forecasts. Given the impact of the recent pandemic, this may prove to be an important predictor of tourism recovery in countries that are still struggling to recover, including South Africa. The purpose of this paper is firstly, to build on previous research that indicates that Google Trends improves tourism-demand forecasting by testing this within the context of tourism recovery. Secondly, this paper extends previous research by not only including Google Trends in time-series forecasting models but also typical tourism-demand covariates in an econometric specification. Finally, we test the performance of Google Trends in forecasting over a longer time period, because the destination country is a long-haul destination where more lead time may be required in decision-making. Additionally, this research contributes to the body of knowledge by including lower frequency data (quarterly) instead of the higher frequency data commonly used in current research, while also focusing on an important destination country in Africa. Due to the differing data frequencies, the MIDAS modelling approach is used. The MIDAS models are compared to typical time-series and naïve benchmarks. The findings show that monthly Google Trends improve forecasts on lower frequency data. Furthermore, forecasts that include Google Trends are more effective in forecasting one to two quarters ahead, pre-COVID. This trend changed after COVID, when Google Trends led to improved recovery forecasts even over a longer term.

Setting up a sovereign wealth fund to reduce currency crises

This paper assesses whether and how setting up a sovereign wealth fund has a buffer effect against currency crises. Using an innovative dynamic logit panel model framework and a unique dataset covering 34 emerging countries over the period 1989–2019, we empirically show that sovereign wealth funds reduce the occurrence of currency crises. This result is robust to different econometric specifications, alternative definitions of sovereign wealth funds, controlling for currency crisis risk factors, and income level sampling. Our findings have important implications for financial stability and for policymakers, who could further exploit the potential of sovereign wealth funds to better manage foreign exchange risks.

The impact of cultural distance on fund transfers in the internal capital market

This paper examines how cultural distance affects fund transfers in the internal capital market of multinational firms. The results show that a larger cultural distance significantly reduces internal fund transfers to foreign subsidiaries. These results are robust to alternative measures of cultural distance and different econometric specifications. External shocks do not affect the results. Further analysis shows that the negative cultural impact is driven mainly by the dimensions of power distance, individualism, and uncertainty avoidance. Furthermore, the effect of cultural distance on internal fund transfers is independent of subsidiary productivity, and a larger cultural distance exacerbates the negative impact of corporate diversification on firm value. Overall, our findings highlight the important role that culture plays in multinationals’ global operations.

Crude oil price volatility and environmental performance

We study the relationship between crude oil price volatility and corporate environmental performance. Using an extensive dataset from 32 countries consisting of 18,464 firm-year observations, we provide strong evidence that oil price volatility significantly increases firms' environmental performance. Our main inference is robust when using alternative measures of oil price volatility and environmental performance, alternative econometric specifications and samples, and several approaches to control for endogeneity. In a set of additional analyses, we first conduct a difference-in-differences analysis that exploits the Arab Spring as an exogenous oil price volatility increase and document a stronger relationship between oil price volatility and environmental performance in the aftermath of the Arab Spring. We second identify (i) capital expenditures and (ii) alternative energy importation as two mechanisms through which oil price volatility influences environmental performance. We finally show that national culture plays a significant role in moderating the relationship between oil price volatility and environmental performance. Taken together, our empirical findings highlight the role of economic uncertainty in affecting firms’ environmental performance and provide significant contributions to management and policymakers.

Sectoral Differences in Depression Risk Among the Employed European Population

This paper analyses the relationship between gender, occupation, and depression in the population over 15 years of age, employed and residing in Europe. Using data from the European Health Survey, ordered econometric specifications are estimated for different sub-samples of individuals, according to the sector in which they are employed. The results show that gender is the most determining factor in the risk of depression, followed by the type of work schedule and other occupational characteristics of the individual. Thus, this article highlights the importance of considering the interaction between gender and occupation in the analysis of mental health. Finally, the implementation of mental health care policies for workers through occupational risk prevention plans is proposed as an effective way to address this issue.

Central Bank Independence, Inflation and Money Growth: Evidence from South Africa

Purpose: This article evaluates the impact of the de jure independence of the South African Reserve Bank (SARB) on the credibility and discipline of domestic monetary policy. Credibility captures the extent to which economic agents trust the SARB to pursue its price stability mandate and is measured by the relationship between the SARB’s independence and domestic inflation. Discipline relates to the effect of independence on money growth rates, while independence is associated with a more disciplined central bank and moderate money growth rates. Methodology: A simple autoregressive distributed lag (ARDL) econometric specification and Granger causality tests are employed. Following the extant empirical literature, existing indexes of central bank independence (CBI) are regressed on annual rates of inflation and M2 money growth. Findings: A statistically significant negative relationship is established between both i) CBI and inflation and ii) CBI and money growth for the South African economy. This suggests that the SARB’s legal independence plays an important role in containing inflation (credibility) and limiting excessive money growth (discipline). Contribution: This article fills a gap in the extant literature by being the first attempt at formalising the empirical link between de jure CBI, inflation, and the rate of money growth in the South African economy.

A new approach for measuring poverty or social exclusion reduction in European NUTS 2 regions

This paper examines the problem of poverty or social exclusion reduction for NUTS 2 regions in the European Union over the years 2005–2015. To do so, we extend the concept of absolute poverty convergence to conditional poverty β-convergence and use a quantile regression approach to provide a broader assessment of the heterogeneous relationships between poverty and some economic factors. We consider spatial dependence between neighbouring regions using appropriate spatial econometric specification. We focus on regional performance in tackling poverty or social exclusion using a novel indicator based on the efficiency theory and examine potential heterogeneity in regions’ ability to fight poverty. These differences are analysed in detail considering instabilities in the relationship between regional performances and a relevant asset for policy effectiveness as the quality of institutions. Our findings can help policy makers to better understand factors behind poverty reductions and develop more responsive policies at different institutional levels.

Envisaging the Intrinsic Departure from Zipf’s Law as an Indicator of Economic Concentration along Urban–Rural Gradients

A rank-size rule following Zipf’s law was tested along a complete urban–rural hierarchy in Greece using 2021 census data released at different administrative levels. Testing five econometric specifications (linear, quadratic, and cubic forms, together with refined logistic and Gompertz forms) on log-transformed population numbers, deviations from the rank-size rule were assumed as an indicator of economic concentration (considering settlements, population, and activities jointly) along the density gradient in Greece. This hypothesis was verified using progressively disaggregated population numbers at (i) regional units (n = 75), (ii) ‘Kallikratis’ municipalities (n = 333), (iii) ‘Kapodistrian’ municipalities (n = 1037), and (iv) local communities (n = 6126). Econometric results were stable across geographical levels and indicate a relatively poor fit of linear specifications, the classical formulation of Zipf’s law. Quadratic specifications displayed a good fit for all territorial levels outperforming cubic specifications. Gompertz specifications outperformed logistic specifications under aggregate partitions (e.g., regional units and ‘Kallikratis’ municipalities). Quadratic specifications outperformed both logistic and Gompertz specifications under disaggregated levels of investigation (‘Kapodistrian’ municipalities and local communities). Altogether, these findings indicate the persistence of non-linear rank-size relationships estimated over a cross-section of population data at progressively detailed observational units. Such evidence enriches the recent literature on Zipf’s law, demonstrating the inherent complexity of rank-size rules tested on real data along the whole density gradient in a given country.

Do unpriced natural and ecosystem capital affect economic output? Growth regression analyses

AbstractServices provided by nature and ecosystem capital are unpriced and their contributions cannot be observed through factor payments. Estimates of nature's gross domestic product contribution are thus based on bottom‐up extrapolations of local ecological valuations or various sectoral dependency assumptions. These estimates are hence partial and wide‐ranging. On the other hand, omission of nature and ecosystem capital in standard growth regressions potentially biases estimated returns to other factors of production. This paper incorporates various categories of natural capital and biodiversity into growth regressions, with annual data covering more than 100 economies over more than two decades. A range of econometric specifications are used, including fixed effect panel regressions, Arellano and Bond, and Pseudo Poisson Maximum Likelihood. The estimates point to natural capital, especially the narrower and specific ecosystem capital, having a sizeable positive elasticity of around one‐third of total gross fixed capital. Ecosystem capital is thus estimated to contribute around USD6–12 trillion (or 10–20 trillion in purchasing power parity terms) annually for the global economy. This estimated contribution is significantly higher than what is implied by existing stock valuations, underscoring the importance of ecosystem capital to sustainable growth.

Tax Avoidance and Corporate Social Responsibility: A Meta-Analysis

ABSTRACT We analyze 117 estimates from 23 studies that examine the relationship between corporate social responsibility (CSR) and corporate tax aggressiveness. The meta-regression results indicate that both CSR and tax avoidance proxies play a role in explaining the differences in estimates of primary studies. Data samples and econometric specifications also explain some of the heterogeneity. We use meta-regression results to predict the association between CSR and tax avoidance for several hypothetical and plausible study designs and find either no or a small to moderate association between the constructs, indicating that firms decouple CSR from tax avoidance. Interestingly, evidence suggests that such a relationship exists in settings of extreme CSR and tax avoidance behaviors. Academic research has not yet explored the determinants of the heterogeneity of the empirical evidence on the relationship between CSR and tax avoidance. This meta-analysis fills this gap and provides useful insights for future research, practice, and regulation. JEL Classifications: C19; H26; M14.

Does corruption sand the wheels of sustainable development? Evidence through green innovation

AbstractThis study investigates the impact of corruption on green innovation, as corruption may impede or foster green innovation in developing economies due to their weak governance systems. We develop a dataset of Chinese non‐financial firms listed between 2007 and 2020 and apply static and dynamic regression techniques. The results indicate a highly significant negative association between corruption and green innovation. This supports the notion that corruption culture reduces corporate legitimacy concerns (institutional theory), increases managerial rent‐seeking (agency theory), and hinders green innovation, thus impeding sustainable development and supporting the “sand the wheels” hypothesis. Our analysis also reveals that corruption's negative impact on green innovation is particularly significant for firms with lower media and analyst coverage, non‐state‐owned firms, and firms in heavy‐polluting industries. These results are robust to alternate proxies of green innovation and corruption as well as econometric specifications that account for endogeneity issues and industry, region, and time‐fixed effects.

The Student Evaluation of Teaching Premium for Clinical Faculty in Economics

This article uses student evaluation of teaching (SET) data for 947 faculty members affiliated with 90 U.S. colleges and universities to study the presence of a teaching quality rating premium for clinical economics faculty relative to traditional tenure-track economics faculty. Based on OLS estimation, we find this difference ranges between 3.9% and 4.8% and is robust to different econometric model specifications. Moreover, the average treatment effect from a propensity score weighting approach suggests that the difference ranges between 5.8% and 6.1%. Lastly, our analysis produces an institutional ranking of economics departments based on department-level SETs. Overall, our findings are encouraging signs for the hiring and retention of clinical faculty in economics departments.

The marginal cost of mortality risk reduction: Evidence from housing markets

We provide the first evidence on the rate at which spatial variation in all-cause mortality risk is capitalized into US housing prices. Using a hedonic framework, we recover the annual implicit cost of a 0.1 percentage-point reduction in mortality risk among older Americans and find that this cost is less than $3453 for a 67 year old and decreasing with age to less than $629 for an 87 year old. These estimates, while similar to estimates from the market for health care, are far below comparable estimates from markets for labor and automobiles, suggesting that the housing market provides an alternative, substantially cheaper channel for reducing mortality risk. We find this conclusion to be robust to a wide range of econometric model specifications, including accounting for associated expenditures on property taxes and the physical and financial costs of moving.

Does Gender Equality in Managerial Positions Improve the Gender Wage Gap? Comparative Evidence from Europe

In this paper, we analyse the impact of gender equality in managerial positions on wages and the gender wage gap in 22 European countries. We draw on the employer–employee microdata from the European Structure of Earnings Survey (E-SES) for the year 2018, which allows us to include firm fixed effects in our econometric specifications, thus controlling for both observed and unobserved heterogeneity at the firm level. The analysis is carried out not only at the mean but also across the wage distribution through unconditional quantile regressions. The results on the impact of gender equality in management on wages are mixed. However, we find that gender equality has a predominantly positive effect in the upper part of the wage distribution, and a negative effect in the middle and lower parts. The results on the impact on the gender wage gap show that in many cases, a more gender-equal management reduces the gender wage gap. Furthermore, gender equality in management reduces the gender wage gap mainly in the middle and lower part of the wage distribution.

Aggressive bidding and the renegotiation of concession contracts: Empirical evidence from Peru*

This paper confirms a positive relationship between the aggressiveness of bids and the probability of renegotiating concession contracts. We use a database of 113 concessions awarded in Peru, finding that a 1% increase in bidding aggressiveness increases the probability of contract renegotiation by 2.4%–3%. This impact is higher for the transportation sector. Our results are robust to several econometric specifications. These results confirm the hypothesis that bidders will submit aggressive bids to renegotiate contract terms once the government and concessionaire are tied, and competition is no longer possible.

Exchange rate pass-through to export prices in China: does product quality matter?

ABSTRACT Using a unique data set of Chinese firm-product-destination level export on the period 2000–2013, this paper investigates the effect of real exchange rate changes on multi-product firms’ price setting decisions on export product with heterogeneous levels of quality. We find less exchange rate pass-through (ERPT) for higher-quality products. Meanwhile, the ERPT is higher when the Renminbi (RMB) appreciates than when it depreciates, and product quality has a greater effect on the ERPT during RMB depreciation. Furthermore, higher distribution costs lead to more pricing-to-market (PTM) and less pass-through. This heterogeneity in ERPT is also robust in different samples and econometric specifications. Combined with the existing studies on the effects of firm heterogeneity on the ERPT, our study helps piece together a more complete picture of the heterogeneity across firms in their reaction to export prices when the exchange rate changes.

Carbon price and firm greenhouse gas emissions

Drawing on the recent enthusiasm in the carbon markets, I examine the impact of carbon prices on firm greenhouse gas (GHG) emissions. Using a sample of 1591 firms from 23 European countries, I demonstrate that an increase in carbon price decreases corporate GHG. At hypothesized higher carbon pricing levels, I document that the effect of pricing on corporate GHG emissions is negative. The negative impact of high carbon prices manifests in other harmful gases such as sulphur and volatile organic compounds (VOCs). In evaluating how the various phases of the EU emission trading scheme have affected firm greenhouse gas emissions, I show that the negative effect of pricing became pronounced in Phase 3 of the EU ETS. The findings from this study are robust to alternative econometric specifications and further sample selection criteria.

The crowding out of conventional electricity generation by renewable energy sources: implications from Greek, Hungarian, and Romanian electricity markets

To achieve ambitious energy-climate targets, all EU member states have introduced policies to support the market introduction of renewable energy sources (RES) generation. Motivated to close the gap of the merit order effect (MOE) in less mature Central and South East European electricity markets, we empirically confirm economic theory predictions that in the short run, an increase in RES generation reduces electricity prices. The merit order effect is initially econometrically confirmed and quantified. Different econometric model specifications are estimated to differentiate the MOE caused by wind and solar generation and to differentiate the MOE on high-load and low-load days. In addition, we simulate the adjustment of the realised day-ahead electricity prices to the no-RES generation scenario. Modern statistical methods are applied to bridge the gap in the limited public data availability to solve simulation models used in the power system or agent-based simulations. A family of data mining algorithms is applied for the merit order estimation used in the dynamic adaptation of the generation mix to the omitted RES generation. The estimated energy imbalance caused by the excluded RES generation is therefore compensated by the additional conventional generation dispatch according to the estimated power plant merit order. The estimated supply curves for each generation technology assist the reasoning behind the established MOE in econometric models. Based on our findings, policymakers should prioritise policies that facilitate the integration of RES into their electricity markets, which would in turn accelerate energy transition. With increasingly growing shares of renewables in the system, the governments need to rethink the support scheme, where the emphasis should be placed on efficiently integrating renewables in the power system by taking into account temporal and spatial dimensions.

For narrower income inequality: traditional finance or microfinance?

ABSTRACT This paper uses the theory of information imperfections to examine the relationship between income inequality and financial development in a dual financial system comprising traditional finance and microfinance. It uses panel data for 97 developing countries over a period characterized by declining income inequality from 2000 to 2017. Traditional finance is measured through domestic credit relative to GDP and the IMF Financial Development Index. Microfinance is measured through the size of microfinance gross loan portfolio relative to GDP and the number of active microfinance borrowers to the total population. Controlling for various measures of macroeconomic and socioeconomic variables and using different econometric specifications including a random-effects linear regression model with endogenous sample selection, the results show that microfinance consistently predicts a lower income inequality measured by the Gini coefficient, while traditional finance shows no impact. The findings of this paper draw clear policy implications regarding the role of microfinance as a tool for income equality in developing countries.