Short-run Increase Research Articles

Financial Development and Economic Growth An Empirical Analysis for Greece

Problem statement: This study investigated the causal relationship between financial development and economic growth for Greece for the period 1978-2007 using a Vector Error Correction Model (VECM). Questions were raised whether financial development causes economic growth or reversely taking into account the positive effect of industrial production index. Financial market development is estimated by the effect of credit market development and stock market development on economic growth. The objective of this study was to examine the causal relationships between these variables using Granger causality tests based on a Vector Error Correction Model (VECM). Approach: To achieve this objective unit root tests were carried out for all time series data in their levels and their first differences according to Dickey-Fuller (1979). Johansen co-integration analysis was applied to examine whether the variables are co-integrated of the same order taking into account the maximum eigenvalues and trace statistics tests. A vector error correction model was selected to investigate the long-run relationship between financial development and economic growth. Finally, Granger causality test was applied in order to find the direction of causality between the examined variables of the estimated model. Results: A short-run increase of stock market index per 1% leaded to an increase of economic growth per 0.06% in Greece, also an increase of bank lending per 1% leaded to an increase of economic growth per 0.14% in Greece, while an increase of productivity per 1% leaded to an increase of economic growth per 0.32% in Greece. The estimated coefficient of error correction term found statistically significant with a negative sign, which confirmed that there was not any problem in the long-run equilibrium between the examined variables. The results of Granger causality tests indicated that economic growth causes stock market development and industrial production index, while industrial production index causes credit market development for Greece. Conclusions: Therefore, it can be inferred that economic growth has a positive effect on stock market development and credit market development through industrial production growth in Greece.

Ethanol, Corn, and Soybean Price Relations in a Volatile Vehicle-Fuels Market

The rapid upward shift in ethanol demand has raised concerns about ethanol’s impact on the price level and volatility of agricultural commodities. The popular press attributes much of this volatility in commodity prices to a price bubble in ethanol fuel and recent deflation. Market economics predicts not only a softening of demand to high commodity prices but also a positive supply response. This volatility in ethanol and commodity prices are investigated using cointegration, vector error corrections (VECM), and multivariate generalized autoregressive conditional heteroskedascity (MGARCH) models. In terms of derived demand theory, results support ethanol and oil demands as derived demands from vehicle-fuel production. Gasoline prices directly influence the prices of ethanol and oil. However, of greater significance for the fuel versus food security issue, results support the effect of agricultural commodity prices as market signals which restore commodity markets to their equilibriums after a demand or supply event (shock). Such shocks may in the short-run increase agricultural commodity prices, but decentralized freely operating markets will mitigate the persistence of these shocks. Results indicate in recent years there are no long-run relations among fuel (ethanol, oil and gasoline) prices and agricultural commodity (corn and soybean) prices.

New Orders and Asset Prices

This paper investigates the asset pricing and macroeconomic implications of the ratio of new orders (NO) to shipments (S) of durable goods. NO/S is a measure of investment commitments by firms, and high values of NO/S are associated with a business cycle peak. High NO/S predicts a short-run increase in output, mainly from equipment and inventory investment, but a dramatic long-run decline in fixed investment, inventories, and GDP growth. We find that NO/S proxies for a short-horizon component of risk premia that is not captured by the predictive variables identified in prior work. Higher levels of NO/S forecast lower excess returns on a broad set of assets, including equities, long- and intermediate-term Treasury bonds, and highand low-grade corporate bonds, at horizons from one month to one year. For stocks, and to some extent for bonds, these effects are robust to the inclusion of common return predictors. For all assets, predictability is significant on an out-of-sample basis as well. We also address the term structure of risk premia. To measure longer term investment commitment, we construct a similar ratio based on construction starts and show that it proxies for long term risk premia, predicting stock and bond returns primarily at longer horizons.

Communication, Renegotiation, and the Scope for Collusion

We use experiments to analyze what type of communication is most effective in achieving cooperation in a simple collusion game. Consistent with the existing literature on communication and collusion, even minimal communication leads to a short run increase in collusion. However, in a limited message-space treatment where subjects cannot communicate contingent strategies, this initial burst of collusion rapidly collapses. When unlimited pre-game communication is allowed via a chat window, an initial decline in collusion is reversed over time. Content analysis is used to identify multiple channels by which communication improves collusion in this setting. Explicit threats to punish cheating prove to be by far the most important factor to successfully establish collusion, consistent with the existing theory of collusion. However, collusion is even more likely when we allow for renegotiation, contrary to standard theories of renegotiation. What appears critical for the success of collusion with renegotiation is that cheaters are often admonished in strong terms. Allowing renegotiation therefore appears to increase collusion by allowing for an inexpensive and highly effective form of punishment.

Does Job Loss Shorten Life?

This paper examines the impact of job loss on overall and cause-specific mortality. Using linked employer-employee data, we identified the workers displaced due to all establishment closures in Sweden in 1987 and 1988. Hence, we have extended the case study approach, which has dominated the plant closure literature. The overall mortality risk among men increased by 44 percent during the first four years following job loss, while there was no impact on either female overall mortality or in the longer run. For both sexes, however, there was an about twofold short-run increase in suicides and alcohol-related mortality.

Credit Market Development and Economic Growth

Problem statement: This study investigated the relationship between credit market development and economic growth for Italy for the period 1965-2007 using a Vector Error Correction Model (VECM). Questions were raised whether economic growth spurs credit market development taking into account the negative effect of inflation rate on credit market development. This study aimed to investigate the short-run and the long-run relationship between bank lending, gross domestic product and inflation rate applying the Johansen cointegration analysis. Approach: For this objectives unit root tests were carried out according to Dickey-Fuller (1979) and Johansen cointegration analysis was applied to examine whether the variables are cointegrated of the same order taking into account the maximum eigenvalues and trace statistics tests. Finally, a vector error correction model was selected to investigate the long-run relationship between economic growth and credit market development. Results: A short-run increase of economic growth per 1% induces an increase of bank lending 0.4% in Italy, while an increase of inflation rate per 1% induces a relative decrease of bank lending per 0.5% in Italy. The estimated coefficient of error correction term is statistically significant and has a negative sign, which confirms that there is not any a problem in the long-run equilibrium between the examined variables. Conclusions: The empirical results indicated that economic growth has a positive effect on credit market development, while inflation rate has a negative effect. Bank development is determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates.

Does Job Loss Shorten Life?

This paper examines the impact of job loss on overall and cause-specific mortality. Using linked employer-employee data, we identified the workers displaced due to all establishment closures in Sweden in 1987 and 1988. Hence, we have extended the case study approach, which has dominated the plant closure literature. The overall mortality risk among men increased by 44 percent during the first four years following job loss, while there was no impact on either female overall mortality or in the longer run. For both sexes, however, there was an about twofold short-run increase in suicides and alcohol-related mortality.

Regulation and efficiency in transition: the case of Romanian banks

Using disaggregated panel data for the period 1996–2002, this paper estimates the cost efficiency of Romanian banks and relates it to regulation implemented by the National Bank of Romania. We estimate efficiency using a model that combines the frameworks of both stochastic frontier analysis and shadow cost functions. Our results indicate that, for all types of banks, the cost of technical inefficiency decreases in the years following tightening of regulation. A significant part of this decrease can be attributed to the policy change. Overall, the short-run increase in cost due to additional regulation exceeds the benefits from reduced technical inefficiency. However, our model does not account for other benefits, besides changes in X-inefficiency, such as stability of the banking system, which may be significant.

Has the Export Pricing Behaviour of German Enterprises Changed?

Summary The question as to whether the globalisation-related increase in competitive pressure may have caused the importance of cost pass-through (CPT) and pricing-to-market (PTM) for export pricing in Germany to shift since the 1990s is addressed by testing the long-run export pricing behaviour of German enterprises for changes in the impact of its determinants. As globalisation may have affected competitive pressure in individual product markets differently, export pricing is analysed for 11 product categories. Analytically, this problem is solved by applying the Saikkonen (1991) approach to estimate the individual export price categories in single equations. The first hypothesis – that CPT is stronger, and PTM weaker, for heterogeneous products than for homogeneous products – is found to hold more for CPT than for PTM. The second hypothesis, which presumes that CPT has weakened and PTM has strengthened since the 1990s, is confirmed with respect to the overall outcome, although for several product categories the results conflict with the hypothesis. Moreover, error correction models are used to test exporters’ short-run price-setting behaviour for asymmetry, ie whether short-run increases in the export price determinants are passed through to a different extent than decreases. It is shown that symmetric export pricing is seldom rejected.

Economic reforms and bank efficiency in developing countries: the case of the Indian banking industry

Using the Indian banking industry as a case study, this paper proposes and tests hypotheses regarding the possibility of a relationship between three elements of the Economic Reforms (ERs) – namely, fiscal reforms, financial reforms, and private investment liberalisation – and bank efficiency in developing countries. Bank efficiency is measured using data envelopment analysis (DEA); the relationship between the measured efficiency and various bank-specific characteristics and environmental factors associated with the ERs is examined using the OLS and the GMM estimations. Our results show an improvement in the efficiency of banks, especially that of foreign banks, after the ERs. We find a positive relationship between the level of competition and bank efficiency. However, a negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks. Furthermore, we find that ...

Domestic Taxes and International Trade: Some Evidence

The effects on trade performance of corporate taxes and the value-added tax (VAT) continue to excite controversy but have received little empirical attention. This paper uses panel data for OECD countries from 1967 to 2003 to examine the effects of these taxes on export performance, paying particular attention to the potentially complex dynamic effects to which theory points. It finds that increased reliance on VAT revenue tends to be associated with a sharp reduction in net exports, which quickly fades. This may reflect unrelated movements in consumption, and our preferred specifications point to no trade effects of the VAT in either the short or the long run. Our results also point, however, to powerful and complex effects from the corporate tax, the pattern of which is as theory would predict from a source-based tax of this kind. Increases in corporate taxation-whether measured by revenues or the statutory rate-are associated with sharp short-run increases in net exports (consistent with induced capital flows abroad); these are then subsequently and quickly reversed (consistent with increased income from investments abroad), leaving an increase in net exports that converges to zero.

Hiccups for HIPCs? Implications of Debt Relief for Fiscal Sustainability and Monetary Policy

Abstract In this paper we discuss fiscal and monetary policy issues facing heavily-indebted poor countries (HIPCs) who receive debt reduction via the enhanced HIPC initiative. This debt relief program is distinguished from previous ones by its conditionality: freed resources must be used for poverty reduction. We argue that (i) this conditionality severely limits the extent to which the initiative provides significant debt relief; (ii) depending on the response of monetary policy to an increase in social spending there could be a short-run increase in inflation in HIPC countries and (iii) the keys to long-run fiscal sustainability in the HIPCs are significant fiscal reforms by their governments, and the effectiveness of their poverty reduction programs in raising growth.

Economic and financial integration in emerging markets: A European policy

This paper extends to test if the same short-run increase in cyclical volatility arising from financial integration is observed in this specific sample of "emerging markets". This work finds signs that, contrary to other emerging markets, this does not happen: for the future member states financial integration, similarly to the outcome observed in mature market economies, reduces cyclical volatility both in the short and in the long run. Weak indications are found that this may happen partially due to the anchoring of expectations provided by the EU Accession, and to the more robust institutional framework imposed by this process onto the countries in question.

Money Growth, Output Growth, and Inflation: A Reexamination of the Modern Quantity Theory's Linchpin Prediction

1. IntroductionOver the years, the quantity theory of has been extended and refined. All versions, however, begin with the well-known equation of exchange, MV = PQ, where Q is the level of national output (real gross domestic product, GDP), P is the general price level, V is the velocity of circulation, and M is the quantity of money. To convert this equation--actually an identity--into a theory, one of the four variables contained therein must be specified as functionally dependent on the other three. Monetarists argue that P is the dependent variable (Sprinkel 1971). Specifically, they argue that M is determined by the national monetary authority; that V is determined by a variety of both secular and cyclical factors;1 that changes in V do not consistently offset changes in M; and that Q is determined by capital, labor, and technological advances (Sprinkel 1971).The monetarist theory of inflation is a long-run theory; it does not purport to explain short-run increases in the general price level (Hafer and Wheelock 2001). Monetarists argue that short-run inflation stabilization is not feasible and, therefore, that monetary policy should be confined to inflation concerns over a relatively long horizon.2John Moroney (2002, p. 399) asserts that in the traditional version of the quantity theory, ... a country's long-run inflation rate increases [one-to-one] with its rate. The modern wrinkle is that inflation is mitigated by real GDP growth (emphasis added). This assertion is consistent with the famous dictum of Milton Friedman (1968, p. 18) that ... inflation is always and everywhere a monetary phenomenon, produced in the first instance by an unduly rapid in the quantity of money (emphasis added). Friedman's assertion is not that an increased rate is the sole cause of inflation in the long run--just the most important cause (Friedman and Friedman 1980). An increase in inflation can also be caused by a decrease in the rate of Q (or, theoretically, even an increase in the rate of V), as is easily seen by solving the equation of exchange for P and then taking logs and first differences.After taking logs and first differences,3 Moroney (2002) obtains an estimating equation in which inflation is functionally dependent on the rates of the stock and real GDP:(Formula Omitted. See article image.) where Y is Δ ln P, X is Δ ln M, Z is Δ ln Q, and u is a random disturbance term that includes velocity changes. (Δ is the first difference operator.) The modern quantity theory's model-implied restrictions--which are testable predictions--are that the intercept is zero, the coefficient of the stock rate is plus one, and the coefficient of the rate of real GDP is minus one. Arguably, this joint hypothesis is the linchpin prediction of the modern quantity theory: If the hypothesis is rejected by the data, the theory falls.Using long-run (1980-1993) cross-section data on 81 countries, which he takes from the World Bank's World Development Report 1995, Moroney (2002) tests the joint hypothesis (β0 = 0, β1 = 1, β2 = -1) and incorrectly claims that the hypothesis cannot be rejected at even the 0.01 level of significance.4 As will be shown in the next section, the joint hypothesis is rejected decisively. Fortunately, however, it will also be shown that a modification to Moroney's model specification helps to salvage the most substantive part of the modern quantity theory's implied restrictions.2. Modification to the Quantity Theory SetupIn contrast to the conventional quantity theory setup, in which the economy's real activity is determined entirely outside its monetary sector (Fama 1982; Moroney 2002)--that is, in which no provision is made for the possibility that the monetary authority's actions could have an adverse effect on output5--the present article entertains the possibility that Y and Z are jointly determined. …

How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines*

This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors’ actual entry. It uses a case study from the passenger airline industry—specifically, the evolution of Southwest Airlines’ route network—to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut fares significantly when threatened by Southwest’s entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O’Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this demand-building motive to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.

How do Incumbents Respond to the Threat of Entry on Their Networks? Evidence from the Major Airlines

This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors' actual entry. It uses a case study from the passenger airline industry specifically, the evolution of Southwest Airlines' route network - to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut fares significantly when threatened by Southwest's entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O'Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this demand-building motive to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.

Financial Liberalization and Business Cycles: The Experience of New EU Member States in the Baltics and Central Eastern Europe

This paper extends the work of Kaminsky and Schmukler (2003) to the Baltic and Central Eastern European new Member States of the European Union, to test if the same short-run increase in cyclical volatility arising from financial integration is observed in this specific sample of markets. This work finds signs that, contrary to other emerging markets, this does not happen: for the new Member States, financial integration, similarly to the outcome observed in mature market economies, reduces cyclical volatility both in the short and in the long run. Weak indications are found that this may happen partially due to the anchoring of expectations provided by the EU Accession, and to the more robust institutional framework imposed by this process onto the countries in question.

Financial Liberalization and Business Cycles: The Experience of Countries in the Baltics and Central Eastern Europe

This paper extends the work of Kaminsky and Schmukler (2003) to the Baltic and Central Eastern European future Member States of the European Union, to test if the same short-run increase in cyclical volatility arising from financial integration is observed in this specific sample of ?emerging markets?. This work finds some signs that, contrary to other emerging markets, this does not happen: for the future Member States, financial integration, similarly to the outcome observed in mature market economies, reduces cyclical volatility both in the short and in the long run. Weak indications are found that this may happen partially due to the anchoring of expectations provided by the EU Accession, and to the more robust institutional framework imposed by this process onto the countries in question.

Educational Inequality

Abstract. This paper develops a theoretical model of the inequality in wages and salaries associated with differences in years of schooling (educational inequality, for short). Our model assumes that in the long run individual decisions to become more educated equalize the lifetime earnings of more educated workers and comparable less educated workers. Given this assumption, our model implies that innovations that increase the relative demand for more educated labor, and which cause short‐run increases in educational inequality, in the long run induce offsetting increases in the relative supply of more educated labor. But our model also has the novel implication that innovations that increase differences between the wages and salaries received by workers with the same years of education who are more or less able (ability premiums, for short) cause a smaller fraction of workers to choose to become more educated. Consequently, innovations that increase ability premiums in the long run also cause educational inequality to be larger than otherwise. In applying our theory to recent changes in educational inequality in the USA, we suggest that, to the extent that innovations that increase ability premiums are contributing to educational inequality, the increases in educational inequality during the 1980s and 1990s are unlikely to be reversed soon.

Testing hypotheses about mechanisms for the unknown carbon sink: A time series analysis

We test hypotheses about the unknown sink for carbon by analyzing time series for the unknown carbon sink, carbon emissions, atmospheric concentrations, and surface temperature between 1860 and 1990. During this period, the time series for the unknown carbon sink is determined by annual changes in carbon emissions and summer land surface temperature in the northern hemisphere. The first difference of carbon emissions indicates that an increase in carbon emissions may generate a short run increase in oceanic uptake that is not simulated correctly by models. The temperature effect may have its greatest impact on terrestrial vegetation in the midlatitudes and high latitudes of Eastern North America and Europe. We also test and reject hypotheses that increases in the atmospheric concentration of CO2, nitrogen deposition associated with fossil fuel combustion, or uncertainty about the rate at which forests are cut and/or regrow are responsible for changes in the unknown carbon sink over time.