Long-run Model Research Articles

Good governance and crime rates in Malaysia

Purpose– The purpose of this paper is to relate the quality of governance with crime in Malaysia. The study also identifies the best good governance tool to fight against crime in Malaysia.Design/methodology/approach– The study uses time-series data on crime rates and six measures of governance: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. In this study the authors employed the popular autoregressive distributed lagged modeling approach to estimate the long-run model of crime and governance.Findings– The authors test the hypothesis that good governance lowers crime rates (total crime, violent and property crimes). The results suggest a negative relationship between crime rates and good governance in Malaysia. This suggests that good governance reduces crime rates in Malaysia.Research limitations/implications– The limitations of this study is the short time-series used in the analysis which is from 1996 to 2009.Practical implications– This study provides evidence that the practice of good governance, for example, lower corruption, good policing and judicial system can mitigate crime in Malaysia.Social implications– The implementation of good governance will protect property right of individuals, business sector and the society as a whole, and this will enhance prosperity of a nation.Originality/value– This study provide the first empirical evidence that linking between crime and good governance in Malaysia.

Evaluation of House Price Models Using an ECM Approach: The Case of the Netherlands

The research question of this paper is whether the Dutch housing market is overvalued or not. This is investigated by using different types of error correction models and by examining the impact of different variables that can explain house price changes in the Netherlands. The current financial crisis confirms the notion that developments in the residential property sector are important for the economy as a whole. For that reason it is important to fully understand the factors that affect the housing market. Therefore we need a long-run model approach that relates house prices to fundamentals. However the model should also be able to detect bubbles in the short run. As a first step, we look at the affordability of house prices and mortgage payments in order to check how well the housing market performs in the short run. In the medium to long-run, we estimate an error correction model relating prices to fundamentals, using variables like interest rate, labour income, financial assets of households, and household stock. The error correction model tests whether prices tend to revert to some equilibrium price level. We evaluate existing house price models for the Netherlands, which we use as a benchmark for comparison to our improved model. Finally, we try to forecast housing prices based on a few simple economic scenarios.

International Mobility of Capital in the United States: Robust Evidence from Time-Series Tests

AbstractThis study examines the relationship between domestic saving and investment and measures the international mobility of capital in the United States. The long-run model, “with” and “without” structural breaks, is estimated using several single-equation and system estimators to assess the robustness of results and take an exhaustive account of the methodological and measurement issues. The results provide dominant support for the long-run relationship between domestic saving and investment. The estimates of the slope parameter on saving above zero and the dominant support for cointegration between saving and investment across estimators vindicate the validity of intertemporal budget constraint and suggest the sustainability of current account deficits. The numerical magnitude of the slope parameter on saving is consistently low across estimators. The results showing the low slope parameter on saving resonate with the observed high mobility of capital. The estimates of the model with structural breaks reinforce the dominant support for the long-run relationship between domestic saving and investment. The inclusion of these structural breaks in the model generally reduces the numerical magnitude of the slope parameter on saving and suggests the high mobility of capital.

The effects of the Internet and mobile services on urban household expenditures: The case of South Korea

This paper investigates the changes in the structure of the household expenditure on telecommunications services and its relationships with other existing expenditures in South Korea employing the average household monthly expenditure from 1998.Q1 to 2014.4Q. The linear approximate Almost Ideal Demand System (LA/AIDS) is implemented in both short-run and long-run models. The short-run relationship is estimated using a seemingly unrelated regression (SUR) with first differenced series of data, and the long-run relationship is examined through a Vector Error Correction Model (VECM). Both sets of empirical results suggest that the household demand for telecommunications services is income inelastic over the whole analysis period, and the absolute value of the own price elasticity noticeably increased in the period of 2007.Q1–2014.Q4. Additionally, the estimations from the VECM LA/AIDS model suggest that the relationship between telecommunications services and other existing goods/services such as public transportations, cultural services, books and private education had a complementary relationship in the early period of the Internet and mobile services. However, a substitution relationship has tended to be reinforced after the Internet and mobile services came into widespread use.

Cash Flow and Risk Premium Dynamics in an Equilibrium Asset Pricing Model with Recursive Preferences

Under linear approximations for asset prices and the assumption of independence between expected consumption growth and time-varying volatility, long-run risks models imply constant market prices of risks and often generate counterfactual results about asset return and cash ow predictability. We develop and estimate a nonlinear equilibrium asset pricing model with recursive preferences and a exible econometric specication

Trade Openness and Economic Growth in Canada: An Evidence from Time-Series Tests

This study examines the effects of international trade and investment on output and tests the null hypothesis of Granger non-causality among trade, investment and economic growth in Canada. The long-run model is estimated using several single-equation and system estimators to assess the robustness of results across methodologies. The single-equation, OLSEG, GMM, DOLS, NLLS and FMOLS, estimates of the model provide consistent support for the positive and significant long-run effects of exports and investment on output. The ML system estimates cross-validate the cointegrating relationship and reinforce the positive effects of exports and investment and the negative effects of imports on output. The over-parameterized level-VAR estimates suggest unidirectional Granger-causality from exports, imports and investment each to output. The estimates of the model with structural breaks support the long-run relationship, though the evidence is not unambiguous ubiquitously across all the tests. The evidence supporting the positive and significant long-run effects overwhelms the evidence providing weak or no support for the effects of trade on output. The results underline the need for the acceleration of exports (and investment) to offset the demand-reducing effects of imports and escalate the altitudes of output and economic growth.

Estimating the housing price with a search-and-matching model

Purpose– This paper aims to pose an important starting point for the application of the search-and-matching models to real estate appraisals, thus reducing the “gap” between practitioners and academicians. Due to relevant trading frictions, the search-and-matching framework has become the benchmark theoretical model of the housing market. Starting from the large related literature, this paper develops a simplified approach to modelling the frictions that focuses on the direct relationship between house price and market tightness (a common feature only for the labour market matching models). The characterization of the equilibrium through two main variables simplifies the analysis and allows using the theoretical model for empirical purposes, namely, the real estate appraisals.Design/methodology/approach– This work is both theoretical and empirical. Theoretically, a long-run equilibrium model with a positive share of vacant houses and home seekers is determined along with price and market tightness. Also, the conditions of existence and uniqueness of the steady-state equilibrium are determined. Unlike most of the search-and-matching models in the housing literature, the out-of-the steady-state dynamics are also analyzed to show the stability of the equilibrium. Empirically, to show the usefulness of the theoretical model, a numerical simulation is performed. By using two readily available housing market data – the expected time on the market and the average number of trades – it is possible to determine the key variables of the model: price, market tightness and matching opportunities for both buyers and sellers. Although the numerical simulation concerns the Italian housing market, the proposed model is generally valid, being empirically applicable to all real estate markets characterized by non-negligible trading frictions. Indeed, the proposed model can be used to compare housing markets with different features (concerning the search and matching process), as well as analyse the same housing market in different time periods (because the efficiency of the search and matching process can change).Findings– Several important results are obtained. First, the price adjustment – i.e. the difference between the actual selling price and the price obtained in an ideal situation of frictionless housing market – is remarkable. This means that the sign and the size of the price adjustment depend on the extent of trading frictions in the housing market. Precisely, the higher the trading frictions on the demand side (more buyers and less sellers), the higher the actual selling price (the price adjustment is positive), whereas the higher the trading frictions on the supply side (less buyers and more sellers), the lower the actual selling price (the price adjustment is negative). Accordingly, the real estate appraisers should assess the trading frictions in the housing market before determining the price adjustment. Second, an increase in the number of trades affects the house price only if the time on the market varies. Also, the higher the variation in the time on the market, the larger the house price adjustment. Indeed, the expected time on the market reflects the opportunities to matching for both parties and thus the trading frictions. If the time on the market increases (decreases), the seller will receive less (more) opportunities to match; thus, the actual selling price will be driven downwards (upwards).Originality/value– As far as the authors are aware, none of the existing works in the search and matching literature has considered how to take advantage of this theoretical approach to estimate the house price in the presence of trading frictions in the housing market. Indeed, the proposed theoretical model may be a useful tool for real estate appraisers, as it is able to derive the trading frictions from the time on the market and the number of trades, thus estimating properly the house price.

Estimating the Impact of Temperature Change on Electricity Consumption in Seoul

Climate change, in particular temperature change, has an impact on the demand for heating and cooling. This paper explores the effect of gradually warming climate on the demand for heating and cooling in Seoul during 1995-2014 using an autoregressive distributed-lag model, a family of time- series econometric multivariate regression model. The estimated results reveal that there are two peaks in Seoul's electricity consumption because cooling degree days (CDD) and heating degree days (HDD) are statistically highly significant. CDD's regression coefficient for a short and long-run model is approximately twice bigger than HDD's and the summer peak is more important in terms of electricity consumption in Seoul. Furthermore, there exists a long-run relationship between electricity consumption and the explanatory variables such as economic growth, CDD, HDD, seasonal dummies, and black out dummy.

Sustainability of current account deficits in India: an intertemporal perspective

This study examines the sustainability of current account deficits (CADs) and the validity of intertemporal budget constraint (IBC) in India. The long-run model is estimated on annual data for the period 1950–1951 to 2009–2010. The optimal single-equation and maximum-likelihood (ML) system estimates of the model provide a consistent support for the long-run relationship between imports and exports. The OLSGH estimates provide no support and that ML system estimates a consistent support for cointegration in both the models estimated with one and two structural breaks in level. The new cointegration breakdown tests generally suggest that the cointegration prevails from 1951 to 2010. The evidence supporting the cointegration between imports and exports overwhelms the evidence providing a mixed or no support for cointegration. The estimates of slope parameter above zero and the dominant support for cointegration between imports and exports vindicate the validity of IBC and the sustainability of CADs. The short-term management strategies need to be accompanied by long-term improvements in productivity to reduce inflation, lever up the competitiveness of exports and ensure the sustainability of the external value of domestic currency.

Model Uncertainty and Bond Pricing

We construct an equilibrium term structure model that is robust to economic agent's uncertainty about the true data generating process. The low-dimensional two-factor long-run risk model captures the intuition that an ambiguity averse agent behaves pessimistically by attaching more weight to the data generating process implying a lower lifetime utility. Our calibrated model can largely match the mean interest rates and the volatility of interest rates. Importantly, the model can help resolve several challenges to standard representative-agent models such as the excess volatility puzzle, the empirical failure of the expectations hypothesis, the positive yield spread, and the predictability of bond risk premia.

Essential Elements of an Effective Prison Hospice Program.

As the number of prison inmates facing end-stage chronic illness grows, more prisons across the U.S. must address the need for end-of-life care. Many will likely need to develop a plan with potentially limited resources and external support. This case study presents one long-running model of care, the Louisiana State Penitentiary Prison Hospice Program. Based on field observations and in-depth interviews with hospice staff, inmate volunteers and corrections officers, we identify five essential elements that have contributed to the long-term operation of this program: patient-centered care, an inmate volunteer model, safety and security, shared values, and teamwork. We describe key characteristics of each of these elements, discuss how they align with earlier recommendations and research, and show how their integration supports a sustained model of prison end-of-life care.

Banking sector development and interest rate volatility in emerging economies

Over the last decades, macroeconomic stability is said to be one of the major concerns of emerging economies. Financial sector as a core of macroeconomic stability has been under close consideration of policy makers. The relationship between interest rate uncertainty and banking sector development as one of the most important indicators of financial sector development, especially for emerging economies, has not received enough attention in the literature. Perhaps this article is the most comprehensive study that investigates the relationship between interest rate uncertainty and banking sector development for a large group of emerging economies. To do this, the short-run and long-run models using a bounds testing approach to cointegration for 12 emerging economies over the period 1980–2011 have been developed. Estimated results from all models indicate that interest rate uncertainty has significant effect on banking sector development in both short-run and long-run phenomena in the majority of countries. The findings indicate that the link between interest rate uncertainty and banking sector development in each country depends on each country’s specific structure.

Serious crime in Nigeria: an empirical analysis using time series data (between 2000-2010)

This paper empirically examined the effect of the clearance rate, the unemployment rate, the percentage of females in employment and the percentage of the labour force with tertiary education on Serious Crime in Nigeria for the period 2000-2011. Time-series data from (NBS) National Bureau of statistics and Nigeria police annual reports 2011are used and tests for the existence of a long runcointegration relationship among serious crime, clearance rate and various socio economic indicators is carried out. The cointegration analysis provides strong evidence of the existence of a long-run model. With the normalized coefficients showing a negative effect of the clearance rate, percentage of females in the labourforce and the percentage of the labour force with tertiary education on serious crime, with the exception being the unemployment rate which is found to exert a positive effect.KEYWORDS: Crime, Cointegration, Unit Root, Time-Series.

A cost model for radio access data networks

Purpose – The purpose of this paper is to use basic economic theory to examine the relation between the demanded data traffic and the network costs for several network deployment scenarios and find the most preferable deployment strategy subject to specific constraints in near future (2015-2020). Design/methodology/approach – The paper identifies the cost structure of radio access networks and explicitly models the network costs as a function of data traffic, both in the short-run (current network) and in the long-run (future capacity expansion scenarios). In the short-run model, the operating cost of the current network is calculated, highlighting the energy cost and its dynamics. In the long-run model, assuming unchanged site infrastructure, the cost analysis provides information for decision-making on network evolution. Findings – The results show that the operating cost does not differ significantly from short- to long-run, and the energy cost constitutes a small but remarkable share (around 7 per cent) of total network operating cost. In addition, the paper concludes that the best strategy is not the most cost-efficient strategy but the one which meet the coverage requirements imposed by the regulator when the spectrum is allocated to operators. Finally, the speed of investments in urban regions is driven by the traffic growth, whereas in suburban and rural regions, it is driven by the regulator’s intervention. Originality/value – The paper contributes to the improvement of cost modeling for techno-economics by using economic theory and analyzing the energy consumption. In addition, the paper investigates real cases for mobile operators, and provides useful information for decision-making in network evolution.

Ambiguous Long Run Risks

It does. Depending on the forecast horizon, a one standard deviation increase in our measure for ambiguity about consumption volatility predicts a significant increase in average excess equity returns varying between 200 and 600 basis points annualized. The ambiguity measure we propose is easily obtained from the cross-section of analysts' forecasts for aggregate output growth. We estimate a version of the long-run risk model, where the investor is concerned about a potential misspecification of the variance dynamics. The measures we construct from survey data can be interpreted as proxies of the usually latent state variables in the model, so that we can perform the estimation without the use of asset pricing information. The model produces unconditional moments and return predictability patterns via the variance premium in line with the data.

Piketty in the long run.

I examine the idea of 'the long run' in Piketty (2014) and related works. In contrast to simplistic interpretations of long-run models of income- and wealth-distribution Piketty (2014) draws on a rich economic analysis that models the intra- and inter-generational processes that underly the development of the wealth distribution. These processes inevitably involve both market and non-market mechanisms. To understand this approach, and to isolate the impact of different social and economic factors on inequality in the long run, we use the concept of an equilibrium distribution. However the long-run analysis of policy should not presume that there is an inherent tendency for the wealth distribution to approach equilibrium.

Aggregate Tail Risk, Economic Disasters, and the Cross-Section of Expected Returns

The aggregate tail risk measure constructed in Kelly and Jiang (2014) has no additional explanatory power when added to a standard model of the unconditional crosssection of expected returns. In conditional predictive regression systems and vectorautoregressions of the market portfolio and the long- and short-sides of the SMB and HML portfolios, the tail measure appears to forecast expected returns ‐ and not cash flows ‐ on both small and large stocks and on growth stocks. This is inconsistent with a rare disaster model of asset prices which should operate primarily through a cash flow channel. The tail measure appears to be related to decades long movements in expected returns which may be more consistent with a long-run risks model.

Dynamic Career Incentive Versus Policy Rent-Seeking in Institutionalized Authoritarian Regimes: Testing a Long-Run Model of Trade Policy Determination in China

:In this paper, I study the effect of political elites’ career incentives on China’s trade policy formation. I propose a theoretical dynamic view in which China’s authoritarian leaders can preempt protectionist actions of their selectorate (bureaucrats) by offering them future promotion opportunities within the authoritarian hierarchy as long as the leaders can credibly commit to these political promises. Drawing on a database of China’s sectors for 1999–2007, the empirical results support the dynamic perspective that while political organization still matters for China’s trade policy outcomes, it is less likely for a sector with a higher promotion expectation score to get politically organized.

Through the Looking Glass: Indirect Inference via Simple Equilibria

This paper proposes an indirect inference (Gourieroux, Monfort and Renault, 1993; Smith, 1993) estimation method for a large class of dynamic equilibrium models. Our approach is based on the observation that the econometric structure of these systems naturally generates auxiliary equilibria that can serve as building blocks for estimation. We use this insight to develop an accurate estimator for the long-run risk model of Bansal and Yaron (2004). We demonstrate the accuracy of our method by Monte Carlo simulation and estimate the long-run risk model on U.S. data. We also illustrate the good performance of the methodology on an asset pricing model with investor learning.

Oil Spill(over)s: Linkages in Petroleum Product Pricing Policies in West African Countries

The volatility in international oil prices has important implications for policies that determine national retail prices of petroleum products. This paper addresses a number of issues regarding petroleum product pricing in Western Africa emphasizing international spillovers that may limit the ability of policymakers to adopt first best policies. We use panel unit root rests and long-run modelling based on vector error correction models to assess links and convergence in petroleum product prices across countries. Our results indicate that in general over the long-run there is convergence in prices across countries. Furthermore, the estimation results for models including gasoline and diesel prices suggest the presence of economically important spillovers with long run multipliers varying significantly according to the country groupings and econometric specifications considered. In contrast, the econometric results for kerosene prices not only indicate a weaker link between prices across countries, but also a much slower adjustment to equilibrium. In light of these important spillovers, the need to better coordinate pricing and tax policies towards petroleum products at the regional level becomes apparent.