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1995 - 1998 papers

Hard copy

To request a free hard copy of a paper, please contact Margaret Nash quoting the paper number.

524 - Modelling the Behaviour of the Spot Prices of Various Different Types of Coffee

Jesús G. Otero & Costas Milas

This paper investigates long-run relationships among the spot prices of four coffee types. We find two cointegrating vectors: one between the prices of Other Milds and Colombian coffee, and the other one between Unwashed Arabicas and Robustas. Following Pesaran and Shin (1996), persistence profile analysis of the two cointegrating vectors shows a rapid adjustment towards their equilibrium value. This suggests that the four coffee markets are highly related, and that discrepancies in the equilibrium relationships are short-lived. Out of sample evaluation of the model is reasonably good, except for two occasions of sharp price increases following adverse weather conditions

523 - A Dynamic Macroeconometric Model For Ssort-Run Stabilisation in India

Sushanta K. Mallick

This paper presents a small macroeconometric model examining the determinants of Indian trade and inflation to address the effects of a reform policy package similar to those implemented in 1991. This is different from previous studies along one important dimension that we explicitly incorporate the non-stationarity of the data into our model and estimation procedures, which suggest that the stationarity assumption may be a source of misspecification in previous work. So the model has been estimated using the data from 1950 to 1995 employing fully-modified Phillips-Hansen Method of estimation to obtain the cointegrating relations and short-run dynamic model. Policy simulations using dynamic simulations method compare the dynamic responses to devaluation with the responses to tight credit policy. It is shown that the trade balance effects of tight credit policy are more enduring than those of devaluation. The simulations demonstrate that the devaluation has actually worsened the trade balance and hence devaluation is not an option in response to a negative trade shock, whereas the reduction in domestic credit produces a desirable improvement in the trade balance.

521 - Maximum Sustainable Government Debt in the Overlapping Generational Model

Neil Rankin and Barbara Roffia

'The theoretical determinants of maximum sustainable government debt are investigated using Diamond’s overlapping-generations model. A level of debt is defined to be ‘sustainable’ if a steady state with non-degenerate values of economic variables exists. We show that a maximum sustainable level of debt almost always exists. Most interestingly, it normally occurs at a ‘catastrophe’ rather than a ‘degeneracy’, i.e. where variables such as capital and consumption are in the interiors, rather than at the limits, of their economically meaningful ranges. This means that if debt is increased step by step, the economy may suddenly collapse without obvious warning.'

520 - A Note on Estimated Coefficients in Random Effects Probit Models

Wiji Arulampalam

This note points out to applied researchers what adjustments are needed to the coefficient estimates in a random effects probit model in order to make valid comparisons in terms of coefficient estimates and marginal effects across different specifications. These adjustments are necessary because of the normalisation that is used by standard software in order to facilitate easy estimation of the random effects probit model.

519 - The Rising Well-Being of the Young

David G. Blanchflower and Andrew J. Oswald

Many observers believe that times are growing harder for young people in Western society. This paper looks at the evidence and finds that conventional wisdom appears to be wrong. Using the U.S. General Social Surveys and the Eurobarometer Surveys, the paper studies the reported happiness and life-satisfaction scores of random samples of young men and women. The data cover the USA and thirteen European countries. Our main finding is that from the 1970s to the 1990s the well-being of the young increased quite markedly. A number of possible explanations are considered.

518 - Too Cool For School? A Theory of Countersignaling

N. Feltovich, R. Harbaugh and T. To

In sender—receiver games high—quality types can distinguish themselves from low—quality types by sending a costly signal. Allowing for additional, noisy information on sender types can radically alter sender behavior in such games. We examine equilibria where medium types separate themselves from low types by signaling, but high types then differentiate them­selves from medium types by not signaling, or countersignaling. High types not only save the cost of signaling by relying on the additional information to stochastically separate them from low types, but in doing so they separate themselves from the signaling medium types. Hence they may countersignal even when signaling is a productive activity. To evaluate this theory we report on a two—cell experiment in which the unique Nash equilibrium of one cell involves countersignaling by high types. Experimental results confirm that subjects can learn to coun-tersignal.

517 - Programme and Proceedings of 1998 Warwick Summer Research Workshop on "Economic Aspects of Globalisation"

Ben Lockwood, Marcus Miller, Ted To & John Whalley

Programme and Proceedings of 1998 Warwick Summer Research Workshop on "Economic Aspects of Globalisation" held in the Department of Economics 13-25 July 1998

516 - Forecasting with Difference-Stationary and Trend-Stationary Models

M. P. Clements and D. P. Hendry

The behaviour of difference-stationary and trend-stationary processes has been the subject of considerable analysis in the literature. Nevertheless, there do not seem to be any direct comparisons of the properties of each for both being potential data-generation processes. We look at the consequences of incorrect choice between these models for forecasting when parameters are known, and when parameters have to be estimated. The outcomes are surprisingly different from established results.

515 - A Non-Normative Theory of Inflation and Central Bank Independence

Berthold Herrendorf and Manfred J. M. Neumann

We study monetary policy under different central bank constitutions when the labor-market insiders set the nominal wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. We show that an independent central bank, if controlled by the median voter, does not produce a systematic inflation bias, albeit equilibrium employment is too low from a social welfare point of view. A dependent central bank, in contrast, is forced by the government to collect seigniorage and to take the government's re-election prospects into account. The predictions of our theory are consistent with the evidence that central bank independence decreases average inflation and inflation variability, but does not affect employment variability.

514 - Price Leadership and the Antimonopoly Law Japan - A Statistical Study

T. Masuda

In 1977 the Japanese Antimonopoly Law introduced the report collecting system on parallel price increases, i.e., price leadership. The substantial aim of this system is to encourage self-restraint with regard to irrational parallel price increase. We investigate some features of price leadership and then assess the regulation effects of the Law. (1) We can judge such price leadership as an effective one that the leading companies played a leading role in both increase date and ratio and then other subordinate companies followed soon after the leading one. (2) Intermediary goods producers shifted fully their cost increase on to their selling price. (3) After this system was enacted, there was a considerable possibility that major companies have practiced discretionary parallel price increases. We conclude that price reporting systems do not always have regulation effects on parallel price increase contrary to the aim of Law.

513 - Distributive Politics and the Benefits of Decentralisation

Ben Lockwood

This paper integrates the distributive politics literature with the literature on decentralization by incorporating inter-regional project externalities into a standard model of distributive policy. A key finding is that the degree of uniformity (or “universalism”) of the provision of regional projects is endogenous, and depends on the strength of the externality. The welfare benefits of decentralization, and the performance of “constitutional rules” (such as majority voting) which may be used to choose between decentralization and centralization, are then discussed in this framework

512 - Tests of the Expectations Hypothesis and Policy Reaction to the Term Spread: Some Comparative Evidence

Gianna Boero and Costanza Torricelli

The aim of this paper is to evaluate the impact of monetary policy in tests of the Expectations Hypothesis of the term structure of interest rates. We apply the model developed by McCallum (1994b), in which the Expectations Hypothesis interacts with a policy reaction function and with a time-varying term premium, to eight countries with different monetary policy stances, within the period 1985 to 1995. The results suggest the importance of the treatment of monetary policy in explaining the empirical performance of the Expectations Hypothesis. Amongst other results, we also find that the model performs better for some countries than others depending upon the monetary policy stance adopted

511 - The Assignment of Powers in Federal and Unitary States

Ben Lockwood

This paper studies a model where the power to set policy (a choice of project) may be assigned to central or regional government via either a federal or unitary referendum (constitutional rule, CR). The benefit of central provision is an economy of scale, while the cost is political inefficiency. The relationship between federal and unitary CRs is characterized in the asymptotic case as the number of regions becomes large, under the assumption that the median project benefit in any region is a random draw from a fixed distribution, G. Under some symmetry assumptions, the relationship depends only on the shape of G, not on how willingnesses to pay are distributed within regions. The relationship to Cremer and Palfrey's (1996) "principle of aggregation" is established. Asymptotic results on the efficiency of the two CRs are also proved.

510 - Computing Power Indices for Large Voting Games: A New Algorithm

D. Leech

Voting Power Indices enable the analysis of the distribution of power in a legislature or voting body which uses weighted voting. Although the approach, based on co-operative game theory, has been known for a long time it has not been very widely applied, in part because of the difficulty of computing the indices when there are many players. This paper presents new algorithms for the classical power indices which have been shown to work well in real applications. We suggest that the availability of such accurate and efficient algorithms might stimulate further research in this under-researched field.

509 - Evaluating the Forecasting of Densities of Linear and Non-Linear Models: Applications to Output Growth and Unemployment

M.P. Clements and J. Smith

In economics density forecasts are rarely available, and as a result attention has traditionally focused on point forecasts of the mean and the use of mean square error statistics to represent the loss function. We extend the methods of forecast density evaluation in Diebold, Gunther and Tay (1997) to compare linear and non-linear model-based forecasts of US output growth and changes in the unemployment rate. Of prime concern is whether concentrating solely on the first moment obscures the potential usefulness of non-linear models as forecasting devices.

508 - Keynes and Employment Policy in the Second World War

R. Skidelsky

It is widely assumed that Keynesianism is as dead as the dodo, and that Keynes's own life and thought are matters of purely historical interest. I am not going to challenge the first proposition head on: I have some sympathy with it. There is no future in the hubristic Keynesianism of thirty years ago, which regarded economies as machines to be pushed and pulled this way and that by technical experts on the basis of huge macroeconomic forecasting models. But I have a great affection for the mind and spirit of John Maynard Keynes, and hope to show that much of his thought retains its freshness over the gap of fifty two years since he died.

507 - Keynes's Road to Bretton Woods - An Essay in Interpretation

R. Skidelsky

As the well-known story of Bretton Woods has it, there were two plans, the White Plan and the Keynes Plan. The White Plan, from the US Treasury, championed liberal internationalism'; the Keynes Plan, from the UK Treasury, tried to secure for Britain sufficient freedom from international pressures to be able to pursue full employment and other desirable social policies. The British saw internationalism as a constraint, the Americans as an opportunity. The Bretton Woods Agreement was a successful attempt to reconcile these two views; each country accommodated the requirements of the other, without sacrificing its own aims. The result was the 'golden age' of the 1950s and 1960s, so different from the interwar years. In 1946 President Truman called the Agreement 'a cornerstone upon the foundation of which a sound economic world can -and must -be erected'. And a leading historian of the Agreement wrote in 1978 that 'during a quarter of a century' it had stood as the 'foundation upon which world trade, production, employment and investment were gradually built'.

505 - Dynamic Price Adjustment Under Imperfect Competition

C. Eberwein and Ted To

We study dynamic price adjustment under imperfect competition when consumers have non-time-separable preferences. In our model an intertemporal link arises in the consumers' maximization problems because current consumption decisions affect the utility of future consumption. Thus future demand depends on the current price and ,firms must take this into account when making their decisions. The main result is that equilibrium prices follow a dynamic stochastic process in which the current price depends on past prices and on random disturbances. The convergence of prices to the 'long run expected price' is monotonic if current and future consumption are substitutes and oscillatory if they are complements.

504 - Non-linearities in Exchange Rates

Michael P. Clements and Jeremy Smith

We consider the forecasting performance of two SETAR exchange rate models proposed by Krager and Kugler (1993). Assuming that the models are good approximations to the data generating process, we show that whether the non-linearities inherent in the data can be exploited to forecast better than a random walk depends on both how forecast accuracy is assessed and on the 'state of nature'. Evaluation based on traditional measures, such as (root) mean squared forecast errors, may mask the superiority of the non-linear models. Generalized impulse response functions are also calculated as a means of portraying the asymmetric response to shocks implied by such models.

503 - Institutional Investors, Stock Markets and Firms' Information Disclosure

Gregorio Impavido

This paper argues that a mutual relationship exists between the development of institutional investors, and more specifically the development of pension funds, and the development of stock markets. It is shown that the development of pension funds promotes the development of stock markets directly through bargaining or indirectly through improving funds allocation efficiency. Growth is eventually achieved through a larger number of firms listed on the stock exchange and with firms disclosing a larger volume of information. This in turn, positively affects the development of pension funds and corporate governance mechanisms.

502 - The Optimal Design of Transfer Pricing Rules: a Non-Cooperative Analysis

P. Raimondos-Moller and Kim A Scharf

The literature on the regulation of multinationals' transfer prices has not considered the possibility that governments choose their transfer pricing rules in a non-cooperative fashion. The present paper fills this gap and shows that a non-cooperative equilibrium is characterised by above-optimal levels of effective taxation in comparison with a cooperative solution. We also derive conditions under which harmonisation of transfer pricing rules lead to a Pareto improvement, and show that harmonisation according to the 'arm's length' principle — the form of harmonisation advocated by international organisations such as the OECD — is not Pareto improving relative to the non¬cooperative outcome.

501 - Implementing Tax Coordination

Amrita Dhillon, Carlo Perroni and Kim A. Scharf

This paper investigates whether tax competition can survive under tax coordination, when information is private or nonverifiable. We focus on a two-jurisdiction model where capital can move across borders, and where jurisdictions have different public good requirements, but are otherwise identical. In this setting, coordination may call for a second-best allocation supported by differentiated tax rates. If, however, information on jurisdictions' types is private or nonverifiable, such a second-best allocation may not be implementable. We show that incentive compatibility requirements will generally affect not only the choice of coordinated rates in states where jurisdictions are different, but also the choice of harmonized rates in states where jurisdictions have identical preferences for public consumption.

500 - Union Wage Effects: Does Membership Matter?

E. Barth, O. Raaum and Robin Naylor

We exploit rare information on the union status of both individual employees and of their workplaces to address two related issues. First, we find a positive effect of workplace trade union density on the level of the individual's pay. Second, we find that the individual's union membership status loses its significance when we control for establishment-level union density. The union wage effect is therefore a pure public good, with individual membership conveying a positive wage externality.

499 - A Study of Labour Markets and Youth Unemployment in Eastern Europe

David G. Blanchflower and Andrew J. Oswald

The paper examines the labour markets of Eastern Europe. It studies the problem of high levels of joblessness among young people. New microeconomic data are used -- drawing upon the latest Eurobarometer Surveys and samples from the International Social Survey Programme. These two data sets are designed to allow comparative research. They provide detailed information on approximately 60,000 randomly sampled adult and youth workers in the transition economies. To provide a comparison, the paper uses Western data from the same sources. The paper begins by showing that, in both the West and East, adult and youth unemployment rates are closely correlated. It provides scatter-plot evidence using country cross-sections for the early 1990s. This suggests that to understand joblessness among the young it is necessary to understand joblessness among the old.

498 - Tiebout with Politics: Capital Tax Competition and Jurisdictional Boundaries

Carlo Perroni and Kim A. Scharf

This paper examines how capital tax competition affects jurisdiction formation. We describe a locational model of public goods provision, where jurisdictions are represented by coalitions of consumers with similar tastes, and where the levels of taxation and local public goods provision within jurisdictions are selected by majority voting. We show that in this setting interjurisdictional tax competition results in an enlargement of jurisdictional boundaries, and can raise welfare for all members of a jurisdiction even in the absence of intrajuris-dietional transfers.

497 - Voting for Taxes and Tax Incentives for Giving

Kim A. Scharf

We describe a fiscal choice model where individuals vote over levels of proportional income taxation and over tax incentives for giving, and investigate how tax incentives for giving affect political equilibrium outcomes. We show that the availability of tax incentives can cause a regime switch and induce a low income policymaker to select a private provision regime over a pure public provision regime even when the median voter is a donor. Although such a switch involves a higher relative burden for high income individuals, this can be offset by induced changes in fiscal choices by policymakers, and improve welfare for both low and high income types

496 - Unemployment Equilibria and Input Prices: Theory and Evidence from the United States

Alan A. Carruth, Mark A. Hooker and Andrew J. Oswald

This paper develops an efficiency-wage model where input prices affect the equilibrium rate of unemployment. We show that a simple framework based on only two prices (the real price of oil and the real rate of interest) is able to explain the main post-war movements in the rate of U.S. joblessness. The equations do well in forecasting unemployment many years out-of-sample, and provide evidence that the oil-price spike associated with Iraq’s invasion of Kuwait appears to be a component of the “mystery” recession which followed.

495 - Low Pay Dynamics and Transition Probabilities

Mark B. Stewart and Joanna K. Swaffield

This paper investigates transitions into and out of low pay in Britain in the 1990s. It finds considerable persistence in low pay. In addition, the low paid are more likely to move into non-employment; those entering employment from a spell outside are more likely to be low paid; and those who had been low paid prior to the spell of non-employment are even more likely than other entrants to be low paid again when they subsequently move back into employment. There is thus evidence of a cycle of low pay and no pay. Modelling transition probabilities into and out of low pay requires the 'initial conditions' problem to be addressed. Simple probability models of these transitions suffer from endogenous selection bias as a result of conditioning on the initial low pay state. This paper uses a bivariate model with endogenous selection to address this problem and parental variables to instrument the initial state. The empirical evidence presented indicates that exogenous selection into the initial state is strongly rejected and that ignoring the endogenous selection of conditioning on the initial low pay state distorts the estimated coefficients. Typically the estimated coefficients (and their t-ratios) are much reduced (in absolute value) when allowance is made for endogenous selection. Ignoring the endogenous selection is found to result in the collective effect of observed current heterogeneity being overstated by a factor of about 2. However factors such as training, plant size, union coverage and gender generally retain their significant influence on the probability of remaining low paid, although with substantially reduced effects. There is evidence of considerable ceteris paribus dependence of the probability of being low paid on whether or not an individual was low paid in the previous year.

494 - Power Relations in the International Monetary Fund: a Study of the Political Economy of A Priori Voting Power using the Theory of Simple Games

Dennis Leech

In general in organisations whose system of governance involves weighted majority voting, power and voting weight differ. Power indices are a value concept for majority voting games which provide a means of analysing this difference. This paper provides new algorithms for computing the two classical power indices (the Banzhaf index and the Shapley-Shubik index) and applies them to the voting distribution in the two governing bodies of the IMF in each year since its foundation. The focus is both substantive, being an analysis of the political economy of the IMF, and methodological, as a study of the use of the power indices. Power relations are studied with respect to two types of decisions: ordinary decisions requiring a simple majority and decisions requiring a special majority of 80% or 85%. Clear cut results are obtained for the former: among the G5 countries discrepancies between power and voting weight have declined over time with the exception of the United States which continues to have much more power than its weight even though that weight has declined. In the nineteen forties the United Kingdom's power was considerably below its relatively large nominal voting power, similarly to some extent for France. Both power indices give results which are qualitatively comparable. For decisions requiring special majorities, however, few general results emerge because of conflict between the indices.

493 - Technical Efficiency, Farm Productivity and Farm Size in Indian Agriculture

R. Jha and Mark J. Rhodes

Although there is a very large literature on the links between farm size and farm productivity in Indian agriculture there is virtually none that discusses the influence of farm size on technical efficiency. hi this paper we try to fill this gap. We use panel data on a large number of farms for two Indian states, Haryana (which has been significantly affected by the Green Revolution) and Madhya Pradesh (where the Green Revolution has had less effect), to estimate a translog production frontier for wheat production and model the determinants of technical efficiency. It is discovered that a separate frontier, of the non-neutral type proposed by Huang and Liu (1994), for each state is needed. In Haryana larger farm size and ownership of land and machines positively influence technical efficiency. This is not the case in Madhya Pradesh. Thus, with the Green Revolution advancing, policy to increase farm productivity will call for land consolidation and vesting of ownership rights of land and capital with farmers. Several policy conclusions are also advanced.

492 - Heterogeneous 'Credit Channels' and Optimal Monetary Policy in a Monetary Union

Leonardo Gambacorta

The growing prospect of European monetary integration has prompted interest in the study of differences in financial systems and their consequences for monetary transmission processes. This paper analyses the case of a monetary union composed of countries with heterogeneous "credit channels". In order to better insulate the economies from the asymmetric effects produced by differences in national financial systems, a money supply process, based on the interest rate on bonds and its spread with respect to the bank lending rate, is proposed. Using a two-country rational expectations model, this study compares the performance of the "pure" policies (money targeting, interest rate on bonds and spread pegging) and highlights the properties of the optimal monetary instrument.

491 - Extended Sensitivity Analysis for Applied General Equilibrium Models

Christina Dawkins

Previous sensitivity analysis procedures for applied general equilibrium models have focussed on the values of exogenously assigned elasticity parameters, while the calibrated parameters - those that are obtained from combining elasticity information with flow or stock data - have been largely ignored. Calibrated parameters are central to a model's specification, and uncertainty surrounding their values influences the credibility of the model's results. This paper introduces and illustrates a calibrated parameter sensitivity analysis (CPSA) which, when combined with previous elasticity sensitivity analysis procedures, allows modelers to undertake sensitivity analysis over the full set of model parameters. The 'extended sensitivity analysis' methodology is illustrated for tax incidence results from an applied general equilibrium model of C6te d'Ivoire.

490 - Cooperative Bargaining and Intrahousehold Allocations: Demand Systems and Comparative Statics

Cavelle Creightney

This paper examines the cooperative bargaining approach to intrahousehold distribution. The 2-person symmetric Nash model is extended to a gener­alized model for several household members. Also a model employing a generalized utilitarian solution is proposed and the intrahousehold models suggested by Chiappori (1992) are reviewed. It is argued that the traditional model is a special case of Chiappori's efficiency model, in turn a special ease of the generalized utilitarian model which is in turn a special case of the generalized Nash model. The demand functions and comparative statics of these models are obtained and a structure of nested hypotheses is derived. These results extend those of McElroy (1990). It is also argued that the sharing rule and Pareto efficiency models proposed by Chiappori are not equivalent as has been suggested. The distinction between exogenous and endogenous household sharing rules is emphasized. Two further cooperative bargaining solutions, namely the dictatorial and the egalitarian solutions, are examined and applied to the intrahousehold bargaining problem. The demand functions implied by these solutions and the comparative statics of the models are obtained and discussed. The analyses in this paper show that different cooperative bargaining solutions yield different predictions for de­mand functions and for the response of individual and household demands to parameter changes. The choice of an appropriate bargaining solution cannot be settled theoretically and is therefore essentially an empirical question.

488 - Programme and Proceedings of 1997 Warwick Summer Research Workshop on "Dynamic Games and their Economic Applications"

(Special Paper 1997)


487 - Forecasting Seasonal UK Consumption

Michael P. Clements and Jeremy P. Smith

Periodic models for seasonal data allow the parameters of the model to vary across the different seasons. This paper uses the components of UK consumption to see whether the periodic autoregressive (PAR) model yields more accurate forecasts than non-periodic models, such as the airline model of Box and Jenkins (1970), and autoregressive models that pre-test for (seasonal) unit roots. We analyse possible explanations for the relatively poor forecast performance of the periodic models that we find, notwithstanding the apparent support such models receive from the data in-sample.

486 - Optimising Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks

Guido Ascari

In this paper we incorporate staggered wage setting a' la Taylor (1979) into an optimising dynamic general equilibrium framework. The aim is to study whether staggered wages could induce a high degree of persistence in the real effects of money shocks, as some recent studies have suggested. Firstly, we are able to investigate how the parameters of Taylor's model depend upon the microeconomic fundamentals and the conduct of monetary policy. Secondly, we show that, once explicit microfoundations are taken into account: (0 the model is highly non-linear and consequently a log-linear approximation becomes a bad approximation for a staggered wage economy; (ii) the conduct of monetary policy affects the structural parameters of Taylor's wage setting equation, providing a clear example of the Lucas critique; (iii) the inertia of the system and the short-run output-inflation trade-off are inversely related to the level of average inflation. Thirdly, we conclude that high persistence of the real effects of money shocks in staggered wage models is an unlikely outcome. Sensible values of the microeconomic parameters and/or a moderate rate of underlying inflation as we observe in western economies cut down persistence not only far below a near random-walk behaviour, but also below any level notably different from zero

485 - Public Sector Wage Differentials in Great Britain

Andrew Benito

The paper considers the estimation of wage differentials both between and within public and private sector labour markets, employing data from the 1991 BITS. When controlling for a range of individual and job characteristics, including industry affiliation, the mean differential is estimated at 30 % for public sector women but is insignificantly different from zero for men. Employees in the N. H. S. or Higher Education sectors experience a 10 - 12 % pay penalty relative to those employed in local government. Differences in wage premia on the basis of education, workplace size, gender, race and union presence between public and private sectors are also found.

484 - Seasonality, Cointegration, and the Forecasting of Energy Demand

Michael P. Clements and Reinhardt Madlener

Much of the short—run movement in energy demand in the UK appears to be seasonal, and the contribution of long—run factors to short—run forecasts is slight. Nevertheless, using a variety of techniques, including a recently developed test that is applicable irrespective of the orders of integration of the data, we obtain a long—run income elasticity of demand of about one third, and we are unable to reject a zero price elasticity. Periodic models that allow for a seasonally varying response of demand to its principle determinants are shown to provide superior short—run forecasts to well—known seasonal time series models, and to univariate periodic models, even ex ante, when the determinants themselves have to be forecast. However, the relatively short data sample and small number of forecasts suggests caution in generalising these results.

483 - A Bankruptcy Procedure for Sovereign States

Marcus Miller and Lei Zhang

Do emerging economies need a bankruptcy procedure to handle potential debt defaults? Jeff Sachs and John Williamson, for example, say yes. But others, including notably the two Working Groups who issued reports on Crisis Resolution (on behalf of G10 and the Institute of International Finance) say no — mainly on account of "moral hazard" ascribed to debtors. But could the replacement of syndicated bank lending with widely held bond debt under the Brady plan have posed a problem of inter-creditor conflict sufficiently pressing to have tipped the balance in favour of having an orderly procedure? To investigate this, we use the basic tools of finance, starting with the valuation of corporate debt and then going on to sovereign debt. What we find is that, without "water-tight" sovereign immunity, creditors face a serious Prisoner's Dilemma in the absence of a code. Though it may be collectively inefficient, individual creditors may see it in their self-interest to grab what they can of the available collateral in a "race of the vultures". Avoiding inter-creditor conflicts of this sort is the primary reason for having a bankruptcy code. Our simulations also suggest that the case is fairly robust in the face of "moral hazard" problems among debtor countries.

482 - Eurosclerosis, Eurochicken and the Outlook for EMU

Marcus Miller

Europe is rushing headlong into monetary union armed with preconditions reflecting mistrust among would-be partners rather than what is needed for a successful common currency. Current negotiations on the future structure and policy of EMU, in particular, seem to resemble a game of "Chicken"! It is surely unlikely that this will produce the sort of monetary policy needed to mitigate the effects of Eurosclerosis. It is suggested, therefore, that willingness to initiate labour market reforms would be a far more effective criterion for membership than the current Maastricht conditions.

481 - Shareholders and Stakeholder: Human Capital and Industry Equilibrium

Marcus Miller, R. Ippolito and Lei Zhang

Producing high technology output and supplying sophisticated services often involves costly investment in industry specific skills. But the threat of poaching means that it is the individual "stakeholder", not the firm, who must bear the cost. We investigate various mechanisms for funding human capital investment in an industry equilibrium framework where capital market imperfections would (in the absence of intervention) result in underinvestment. The main result is that government provision of loan guarantees (conditional on no-bankruptcy) leads to wage hikes which (by forcing exit of some firms thus increasing monopoly power) raise profits in a socially inefficient manner: income contingent loans and levy subsidy schemes, meanwhile, can result in a socially efficient outcome.

480 - Union Wage Strategies and International Trade

Robin A. Naylor

In this paper, we analyse the relationship between wage outcomes and the nature of international trade and economic integration when labour markets are unionised and a homogeneous product market is characterised by intra-industry trade. We characterise the full set of possible trade regimes for different combinations of wages and derive unions' wage reaction functions. We show that a union's choice between a high and a low-wage strategy will depend on the value of trade costs. We find that: (i) compared to a non-union setting, unions reduce the prohibitive trade cost and that (ii) this rules out trade in that region of trade costs over which, in the non-union model, welfare falls as trade costs fall, (iii) in any trade equilibrium, falling trade costs lead monopoly unions to set higher wages, (iv) there is a range of trade costs for which equilibrium is non-existent and (v) the characterisation of the union wage-setting game as a Prisoners' Dilemma, and hence the incentives for international union coordination of wage demands, depend upon the extent of trade costs.

479 - Forecasting Seasonal UK Consumption Components

Michael P. Clements and Jeremy Smith

Periodic models for seasonal data allow the parameters of the model to vary across the different seasons. This paper uses the components of UK consumption to see whether the periodic autoregressive (PAR) model yields more accurate forecasts than non-periodic models, such as the airline model of Box and Jenkins (1970), and autoregressive models that pre-test for (seasonal) unit roots. We analyse possible explanations for the relatively poor forecast performance of the periodic models that we find, notwithstanding the apparent support such models receive from the data in-sample.

478 - Happiness and Economic Performance

Andrew J. Oswald

If a nation's economic performance improves, how much extra happiness does that buy its citizens? Most public debate assumes -- without real evidence -- that the answer is a lot. This paper examines the question by using information on well-being in Western countries. The data are of four kinds: on reported happiness, on reported life satisfaction, on reported job satisfaction, and on the number of suicides. These reveal patterns that are not visible to the anecdotal eye. In industrialized countries, well-being appears to rise as real national income grows. But the rise is so small as to be sometimes almost undetectable. Unemployment, however, seems to be a large source of unhappiness. This suggests that governments ought to be trying to reduce the amount of joblessness in the economy. In a country that is already rich, policy aimed instead at raising economic growth may be of comparatively little value.

477 - Crime and Drugs: An Economic Approach

Chris Doyle and Jennifer C. Smith

We present a model which ties together rational drug consumption, taxation, crime and other drug-related externalities. Drug control policy is addressed using an optimal tax framework. Consumption, possession and production of a drug may be prohibited, legalized or decriminalized. In all regimes illicit production of a drug may take place and drug-related crime occurs. We show that illicit drug production, the price elasticity of demand for a drug, the addictive nature of a drug, the effectiveness of drug enforcement strategies, and income distribution all influence optimal (second best) policy. Prohibition is contrasted with decriminalization and legalization, and where legalization yields a higher welfare than prohibition we show that this can be associated with greater drug-related crime and more drug addiction. The model is discussed in the context of US National Drug Control Strategy

476 - Status Risk Aversion and Following Behaviour in Social and Economic Settings

Andrew J. Oswald

This paper describes a theory of rational emulation and deviance. It assumes that individuals care about relative position (or 'status'), and constructs a model of decision-making in social and economic settings. The analysis shows why individuals who want to be different from others will, paradoxically, find it rational to imitate other people. The model demonstrates that status-risk-averse individuals follow others while status-risk-lovers act deviantly. The paper also provides a choice-theoretic foundation for a number of ideas in the social psychology and economics literatures.

475 - A Conjecture on the Explanation for High Unemployment in Industrialized Nations: Part 1

Andrew J Oswald

The paper conjectures that the high unemployment of the Western economies has been produced by the decline of the private house-rental market and the rise of home-ownership. Evidence is provided for the developed nations, the states of the USA, and the regions of the UK, Italy, France and Sweden. Although its calculations should be viewed as tentative, the paper's results imply that a 10 percentage point rise in the owner-occupation rate is associated with an increase of approximately 2 percentage points in the unemployment rate. This would be sufficient to explain a significant part of the rise in joblessness in the industrialized countries

474 - Rent-Sharing in the Labor Market

Andrew J. Oswald

Is the labor market well-approximated by a competitive model, or is wage determination instead a kind of non-competitive rent-sharing? This unsealed question lies at the heart of labor economics and macroeconomics. The paper argues that new research -- drawing upon data of a kind not available to previous generations of researchers — appears to provide persuasive evidence for the existence of rent-sharing in the labor market.

473 - Social Security, the Golden Rule and the Optimal Allocation of Resources: The Case of Endogenous Retirement and A Strategic Bequest Motive

Graham Aylott

Following the seminal work of Samuelson (1975), a theoretical literature has grown examining the macroeconomic relationship between social security, aggregate saving and the allocation of resources within an overlapping generations economy. One such paper by Hu (1979) suggests inter alia that a "pay-as-you-go" (PAYG) pension scheme cannot secure the optimal allocation of resources in the presence of either endogenous retirement or a bequest motive. This paper aims to extend the analysis of this issue, by showing that a suitably designed two tier PAYG pension scheme can in fact secure the first best outcome in the presence of endogenous retirement, provided either that no bequest motive is present, or that it takes the strategic form introduced by Bernheim et al. (1984, 1985). Under such a scheme the total pension benefit paid is positively related to the working lifetime of the individual.

472 - Financing Optimal Provision of Public Public Expenditure by Decentralised Agencies

R. Boadway, I. Horiba and R. Jha

It has realized since Pigou (1947) that if public goods are financed by distortionary taxa¬tion, the marginal social cost of providing the public good will exceed the actual resource cost by the marginal deadweight cost of taxation. Atkinson and Stern (1974) formally derived public goods decision rules for an economy financing the public goods using linear taxes. Subsequent work by Browning (1978), Wildasin (1984) and Usher (1986). has expanded our understanding of the way in which distortionary taxes influence the optimal size of the public sector. As the survey by Auerbach (1987) reveals, the direction of subsequent research on the marginal cost of public funds has been manifold, and has admitted, among other things, more complicated production structures, the effects of pre existing taxes, risk, and imperfect information. Recent has analyzed the marginal cost and marginal benefit of public funds when public goods are substitutes/complements to private goods (Mikami (1993)), when equity is an objective of taxation (Wilson (1991), when non-linear taxes are used to finance the public goods (Tuomala (1990), Boadway and Keen (1993)), and during a process of tax reform (Schob (1994))

469 - Price and Non-Price Competition in Food Retailing: Constructing a Balance

Carlo Morelli

The objective of this paper is to examine the transition from atomistic to oligoplistic competition within the grocery food retailing market and to locate this transition within a wider industrial economics and economic history literature. The focus of the paper is the period from the end of post-war rationing in 1954 to the passing of the Trading Stamps Act in 1964. The paper maintains that it is this decade that determined the future pattern of development within the grocery retailing market. The findings of the paper are then discussed in relation to debates over theories of the firm, British relative economic decline and contemporary competition policy

467 - Performance of Alternative Forecasting Methods for Setar Models

Michael P Clements and Jeremy Smith

We compare a number of methods that have been proposed in the literature for obtaining h-step ahead minimum mean square error forecasts for SETAR models. These forecasts are compared to those from an AR model. The comparison of forecasting methods is made using Monte Carlo simulation. The Monte Carlo method of calculating SETAR forecasts is generally at least as good as that of the other methods we consider. An exception is when the disturbances in the SETAR model come from a highly asymmetric distribution, when a Bootstrap method is to be preferred. An empirical application calculates multi-period forecasts from a SETAR model of US GNP using a number of the forecasting methods. We find that whether there are improvements in forecast performance relative to a linear AR model depends on the historical epoch we select, and whether forecasts are evaluated conditional on the regime the process was in at the time the forecast was made.

466 - Tax Policy and Human Capital Accumulation in a Resource Constrained Growing Dual Economy

R. Jha and A. P. Sahu

This paper examines the role tax policy can play in fostering human capital accumulation in a resource constrained dual economy whose population is growing. The study shows how human capital accumulation, in turn, affects the intersectoral terms of trade and the economic growth process of such an economy. The dual economy is assumed to consist of two sectors, agriculture and manufacturing. Production in agriculture requires unskilled labor, land and capital whereas production in the manufacturing sector requires skilled and unskilled labor and capital. Schooling facilities are limited and access is rationed by the government. Moreover, schooling requires an investment of time. The paper demonstrates the existence of a unique short run equilibrium. It also demonstrates that the steady state equilibrium is unique and locally stable. Comparative steady state analysis suggests that a balanced budget increase in public investment in education (financed by a tax increase on capital income and/or incomes of skilled workers), alters the terms trade between agriculture and manufacturing sectors and favorably affects the economic growth process.