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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 Short-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.

522 - Business Cycles Asymmetries: Characterisation and Testing based on Markov-Switching Autoregressions

Michael P. Clements and Hans-Martin Krolzig

'We propose testing for business cycle asymmetries in Markov-switching autoregressive (MS-AR) models. We derive the parametric restrictions on MS-AR models that rule out types of asymmetries such as deepness, steepness, and sharpness, and set out a testing procedure based on Wald statistics which have standard asymptotics. For a two-regime model, such as that popularised by Hamilton (1989), we show that deepness implies sharpness (and vice versa) while the process is always non-steep. We illustrate with two and three-state MS models of US GNP growth, and with models of US output and employment. Our findings are compared with those obtained from standard non-parametric tests.'

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'.

506 - Hidden Corruption

Marco Pani

While most economic studies on corruption are mainly concerned with its actual occurrence, in this paper we claim that most economic effects rather derive from its mere possibility. When corruption is prevented through an expensive monitoring activity and by offering high incentives, its effects persist although corruption does not actually occur - a situation that may be described as "hidden corruption". In this paper, we formalise corruption as a particular principal-agent-client relation; we identify the essential economic characteristics of corruption, and we analyse different types of equilibria that arise under different circumstances. While corruption actually occurs in only one type of equilibria, its effects persist, although reduced in magnitude, in all the other types, where corruption is prevented but still potentially present; moreover, while equilibria of different types do not necessarily exhibit relevant differences in terms of expected utility, substantial differences appear instead when the possibility of corruption is removed. This paper also addresses other topics related to corruption, like the reasons that support the introduction of a legal norm prohibiting it, the effects of corruption on efficiency and social conflict, and the existence and implications of multiple equilibria.

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.

489 - A Comparison of the Forecasting Performance of Markov-Switching and Threshold Autoregressive Models of US GNP

Hans-Martin Krolzig and Michael P. Clements

While there has been a great deal of interest in the modelling of non-linearities in economic time series, there is no clear consensus regarding the forecasting abilities of non-linear time series models. We evaluate the performance of two leading non-linear models in forecasting post-war US GNP, the self-exciting threshold autoregressive model and the Markov-switching autoregressive model. Two methods of analysis are employed: an empirical forecast accuracy comparison of the two models, and a Monte Carlo study. The latter allows us to control for factors that may otherwise undermine the performance of the non-linear models.

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

468 - Constraints on the Desired Hours of Work of British Men

Mark B. Stewart and Joanna K. Swaffield

This paper investigates constraints on desired hours of work using information on hours preferences from the British Household Panel Survey for 1991. Over a third of male manual workers would prefer to work fewer hours at the prevailing wage than they do and we estimate that on average desired hours per week are 4.3 lower than actual hours. We hypothesize that job insecurity and scarcity of alternative job opportunities enable employers to set hours constraints above employee preferences and find that the minimum hours constraints set by firms are an increasing function of the unemployment rate an individual faces

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.

465 - The Regional Policy Portfolio and the Board of Trade, 1945-51

Stephen Rosevear

The paper focuses on the wartime planning and post war administration of regional policy in Britain. It examines negotiations between the Conservative and Labour parties and relations between the Board of Trade and individual motor manufacturers. First, the paper suggests that Labour were committed to safeguarding commercial efficiency. Second, it argues that Board of Trade officials lacked the economic knowledge to successfully administer discriminatory location policies. Given the commitment to commercial efficiency, industrialists circumvented distribution of industry controls by stressing the potential economic losses of decentralisation. Finally, the paper suggests that the Board of Trade's failings mirrored wider problems in the civil service. Throughout the 1940's bureaucrats acquired new responsibilities for which they lacked economic training. This constituted a serious constraint on Labour's policy ambitions

464 - A Monte Carlo Study of the Forecasting Performance of Empirical Setar Models

Michael P Clements and Jeremy Smith

In this paper we investigate the multi-period forecast performance of a number of empirical self-exciting threshold autoregressive (SETAR) models that have been proposed in the literature for modelling exchange rates and GNP, amongst other variables. We take each of the empirical SETAR models in turn as the DGP to ensure that the ‘non-linearity’ characterises the future, and compare the forecast performance of SETAR and linear autoregressive models on a number of quantitative and qualitative criteria. Our results indicate that non-linear models have an edge in certain states of nature but not in others, and that this can be highlighted by evaluating forecasts conditional upon the regime.

463 - A Model of Currency Crisis of 1992: The Case of the British Pound and the Italian Lira

A. Mongiardino

The purpose of this paper is to develop a theoretical model of the attack on the Italian Lira and the British pound and the subsequent exit of these currencies from the ERM in September 1992. One element that has been crucial in the formulation of agents' expectations of future exchange rates, and hence the sustainability of the system, has been the degree of willingness of the Bundesbank to intervene and support the weak currencies of the System. The model will focus on this aspect and will provide a framework where the agents' uncertainty about the stance of the Bundesbank towards the 'weak' currencies of the System is reflected in increasingly high interest rate differentials between the 'weak' countries and Germany, a well known characteristics of the period immediately preceding the ERM crisis of 1992

462 - Regulating Oligopoly I: The Virtual Maximisation Approach

Jonathan Cave

The standard analysis of single-product monopoly regulation with hidden information is adapted to an oligopoly setting using a simple "virtual objective function" approach (which also provides a novel approach to oligopolistic collusion).

461 - Regulating Oligopoly

Jonathan Cave

The standard analysis of single-product monopoly regulation with hidden information is adapted to an oligopoly setting using two simple approaches: a "virtual objective function" approach (which also provides a novel approach to oligopolistic collusion) and a Bayesian mechanism design analysis

460 - Econometric Evidence on LDC Exports: A Contribution to the Hong Kong Debate

Dennis Leech and G. Halstead

This paper argues that previous empirical work on the explanation for Hong Kong's export growth, by focusing on the values of the estimated price and income elasticities, has failed to provide a full account. It is necessary also to look at changes in the explanatory variables in the model, both their signs and their magnitudes: a large change in a variable with a small elasticity may explain more than a small change in one with a large elasticity. It also shows that a previous test of the hypothesis that Hong Kong is a "small country" whose exports are independent of world income lack power. It supports the conclusion that Hong Kong's export growth can be better explained by growth in income in export markets than by price reductions

459 - Debt Relief

Aydin Hayri

I develop a model of secondary market pricing of sovereign debt when the creditors can reduce the debt. The sovereign obtains a stochastic revenue flow from the external sector and have a constant debt flow obligation. Default is costly for both the sovereign and the creditors and the possibility to reduce debt creates a surplus. The creditors can capture this surplus only if they can continuously adjust the debt flow. With discrete adjustments, they have to share with the sovereign. I find that the more volatile the sovereign's revenue flow (ie, the underlying process is favourable for the sovereign), the bigger and later will be the debt relief. A country going through multiple debt reductions will get bigger reductions in later rounds, and the secondary market price of its debt will have bigger jumps at later reductions. Previous empirical work on sovereign debt provides empirical support for my model.

458 - Non- Linear Pricing in Vertical Differentiation Setting Beyond the "No Distortion at the Top" Case

Maria Vagliasindi

This paper examines the relevance of the well known "no distortion at the top" result in a model of vertical differentiation. The analysis shows that the no crossing condition is a sufficient but not necessary condition in order to get no distortion at the top. Relaxing some of the canonical preferences' assumptions we generate non standard cases. We also extend the analysis allowing consumers to buy more than one unit of the products. In the presence of interactions between quality and quantity the occurrence of non standard cases become more likely, though the implications on the optimal customers' bundles are less obvious.

457 - Evaluating the rationality of fixed-event forecasts

Michael P. Clements

A test of forecast rationality based on the weak efficiency of fixed-event forecasts has recently been proposed by Nordhaus (1987). This paper considers the scope for pooling fixed-event forecasts across 'events' to deliver more powerful tests of the weak-efficiency hypothesis. In an empirical illustration we demonstrate the usefulness of this approach when only a small number of forecasts are available. We also suggest an interpretation of the rejection of the null hypothesis of weak efficiency in favour of negative autocorrelation in series of revisions to fixed-event forecasts. The relationship between weak efficiency and rationality when loss functions are asym¬metric and prediction error variances are time-varying is also considered

456 - The Effect of Seasonal Adjustment Linear Filters on Cointegrating Equations: A Monte Carlo Investigation

Jesus Otero and Jeremy Smith

In this paper we assess, via Monte Carlo simulations, the effects of some seasonal adjustment linear filters on cointegrating regressions. We find that the use of filters has adverse consequences in terms of the power of the Augmented Dickey and Fuller and Phillips and Perron tests for cointegration. As an empirical application, we re examine the results of the money demand modelling exercise performed by Carrasquilla and Galindo (1994); we find that when one attempts to model the variables' seasonal pattern using simple methods, instead of removing it by filtering the data, the null hypothesis of non-cointegration is no longer accepted.

455 - Bargaining Power and Local Labour Market Influences on Wage Determination

Jennifer C Smith

This paper uses a unique panel of data at the level of the bargaining group to examine aspects of `right-to-manage' models of wage determination. Empirical measures of firms' and unions' bargaining power are identified and found to be important influences on wage setting. The role of union characteristics in wage determination is examined; results confirm their importance and illuminate previous survey findings. Features of the local labour market are shown to affect bargained wages over and above the influence of aggregate factors.

454 - Real Interest Rates, Saving and Investment

Jennifer C Smith

This paper investigates the determinants of real interest rates at world and country level. The starting point is the idea that real interest rates reflect the interaction of desired saving and planned investment, using the framework developed by Barro and Sala-i-Martin (1990) and Barro (1992). The paper updates previous results and extends the analysis to study long real interest rates. We analyse which factors have been responsible for real rate `regime shifts' during 1959 to 1992. We examine the determinants of interest rate differentials across ten major industrialised countries and provide estimates of the extent of capital market integration

453 - The Research Assessment Exercise and Transfer of Academics Among Departments

Aydin Hayri

In these times of budget cutting, government departments are looking into performance based funding schemes for public institutions, such as universities and hospitals, to obtain more output (research or patient care) for the same amount of total funds. A key difference from other applications of relative performance schemes lies in the fact that here the performance of institutions depends on their personnel who can move from one institution to another. Thus the incentives that are meant for individual researchers or doctors are provided via institutions and labour markets. This paper is a first attempt in the literature to look at such schemes.

452 - Macroeconomic Stabilization in Russia: Lessons of Reform, 1992-1995

Robert Skidelsky & Liam Halligan

Seventy-six per cent of all Russians agree that inflation is the country's most pressing problem.' Similarly, all mainstream parties in Russia agree on the need to lower inflation. The question is how. In this Paper, we outline the main theories of persisting high inflation and test them informally by reference to the three main attempts to stabilise the Russian macroeconomy between 1992-4. We then assess the prospects for the success of the fourth and current effort. Our main conclusion is that the political and financial preconditions for a rapid reduction of inflation to low levels — to below the 40 per cent a year achieved by the successful post-Communist economies — were not in place at the start of the reforms in 1992 and have only slowly and painfully been assembled from repeated experience of failure or partial success. This does not mean that the reformers were wrong to try. It is sometimes necessary to act even if the prospects for success are poor on a cool estimate of probabilities. A degree of illusion is probably a necessary prerequisite for action, since too vivid a conception of the difficulties in store can paralyse the will. This is not to deny that technical mistakes were made. But it seems to us that most of them were avoidable only with hindsight. Yegor Gaidar has offered the most telling insight into the state of mind of the first post-Communist reformers.

451 - Why Inflation Targeting May Partly Substitute for Explicit Precommitment

Berthold Herrendorf

This paper considers an institutional arrangement, in which the government assigns a publicly announced inflation target to an instrument independent central bank, but retains the discretion to revise the target after wages have been set. We argue that since this arrangement is perfectly transparent, it resolves Canzoneri's private information problem, ensures perfect monitoring of the government, and enhances the effectiveness of reputational forces. The paper characterizes cases in which, for this reason, inflation targeting mitigates the inflationary bias of monetary policy

450 - Rogoff's 'Conservative' Central Banker Restored

Berthold Herrendorf and Ben Lockwood

This paper shows that delegation of monetary policy to a weight—conservative central banker is optimal, although the government can also use an inflation contract, an employment target, an inflation target, or any combination of these, to control the central banker. The key feature of our model is a stochastic inflation bias, arising when wage setters receive some information about a supply shock prior to signing nominal wage contracts. Weight—conservatism is shown to be desirable if the stochastic inflation bias cannot be eliminated by optimal choice of the delegation parameters.

449 - Estimating the Contribution of Informal Sector Activity to the Gross Domestic Product of Ghana

H. Coulombe, A.D. McKay and J.I. Round

The conceptual basis underlying the identification of household economic activity, and of informal sector activity in particular, suggests that estimates of value added ought to be derived at an economy-wide level for different categories of activity. The new 1993 SNA makes a distinction between household enterprises owned and operated by own-account workers, that is, family enterprises; and household enterprises of employers, which we refer to as micro-enterprises. But there is also a sectoral dimension, starting with the distinction between farm and non-farm enterprises, although a much finer disaggregation of activities is desirable for national accounts purposes.

448 - Modelling Work-Related Training and Training Effects Using Count Data Techniques

Wiji Arulampalam, Alison L. Booth and Peter Elias

This paper examines the impact of work-related training on expected wages growth, using longitudinal data from the British National Child Development Study. The analysis covers a crucial decade in the working lives of a cohort of young men - the years from the age of 23 to the age of 33. We use hurdle negative binomial models to estimate the number of work-related training events. This approach, which has not been used for training before, allows us to account for the fact that more than 50% of sample members experienced no work-related training over the period 1981 to 1991. We find evidence of strong complementarities between past general education and training, suggesting that reliance on job-related training to increase the skills of the British workforce will result in an increase in the skills of the already-educated, but will not improve the skills of individuals entering the labour market with a low level of education. The results generated from the hurdle count model are subsequently used in estimation of the wages growth model. We find that each additional training event is estimated to increase wages growth by 0.7 per cent, for young men experiencing at least one training occurrence over the decade.

447 - Multi-Step Estimation for Forecasting

Michael P. Clements and David F. Hendry

We delineate conditions which favour multi-step, or dynamic, estimation for multi-step forecasting. An analytical example shows how dynamic estimation (DE) may accommodate incorrectly-specified models as the forecast lead alters, improving forecast performance for some misspecifications. However, in correctly-specified models, reducing finite-sample biases does not justify DE. In a Monte Carlo forecasting study for integrated processes, estimating a unit root in the presence of a neglected negative moving-average error may favour DE, though other solutions exist to that scenario. A second Monte Carlo study obtains the estimator biases and explains these using asymptotic approximations.

446 - Importing Credibility Through Exchange Pegging

Berthold Herrendorf

This paper employs an optimal taxation framework in order to study the credibility of monetary policy—making in an open economy. Since inflation is, in part, uncontrollable due to stochastic disturbances, the authority's actions cannot be monitored perfectly when the exchange rate floats, thus implying that reputational forces may become ineffective. In contrast, pegging the nominal exchange rate to a low—inflation currency allows perfect monitoring, because the exchange rate is, in principle, controllable. For this reason, exchange rate pegging may import credibility and result in the best reputational equilibrium, even though the authority retains the discretion to devalue unexpectedly

445 - Taxing Economic Rents in Oil Production : An Assessment of UK PRT

Lei Zhang

Using an irreversible investment model of oil development, this paper shows how a fiscal regime can be neutral in that the decision to develop is not affect by tax and efficient in recouping economic rents where cumulated operating profits are taxed if and only if they surpass an appropriate level of tax deductible allowances. For a simplified version of the Petroleum Revenue Tax (PRT) applied to the United Kingdom Continental Shelf until 1993, numerical calculations suggest that PRT was both neutral and relatively efficient. Why then was it substantially removed in 1993? One explanation is that the tax regime may be responding to the oil price so the fiscal change may be reversible, another is that it had disincentive effects not captured in our analysis.

444 - On Centralized Bargaining in a Symmetric Oligopolistic Industry

Amrita Dhillon and Emmanuel Petrakis

In this paper we study interactions between labour and product markets, in an imperfectly competitive industry with centralized wage bargaining. Firms jointly bargain with the union over wages and then compete in prices or quantities. We show that the bargained wage is independent of the number of firms, the degree of substitutability of firms' products, and the type of market competition, in a broad class of industry specifications, including the standard linear symmetric demand system - linear one factor technology one. These results are robust with respect to different specifications of union's objectives. Finally we propose, motivated by the above independence property, that the bargained wage in a Bertrand homogenous market be taken as the limit of the solution of the differentiated case as the degree of substitutability goes to one.

443 - Is Delegating Half of Demand Management Sensible?

Neil Rankin

A 1990s view is that inflation is best avoided by delegating monetary policy to an independent central bank. However most analyses overlook fiscal policy, which cannot be delegated. Here we make a very simple extension of the usual policy game by introducing the government as a third player, in charge of a fiscal instrument for demand management. If the government delegates monetary policy, there will be a battle over aggregate demand. Although the bank wins, so that inflation is avoided, it is at the cost of an excessive interest rate. Society's welfare may be lower than with no delegation

442 - Comparing the Bias and Misspecification in Arfima Models

Jeremy Smith, Nick Taylor and Sanjay Yadav

A number of papers have looked at the bias in the fractional integration parameter, d, using a variety of alternative estimation techniques. This paper supplements that literature by investigating the bias in both the short-term and long-term parameters for a range of ARFIMA models using a more comprehensive range of estimation techniques. The results suggest that all estimation procedures yield slightly biased estimates of the long-run parameter, and that these biases become larger with the introduction of short-term AR or MA parameters. The bias in the short-run parameters mirrors that in the long-run parameters. These biases often causes model selection criteria to select an incorrect ARMA specification, having filtered out the long-run parameter. Incorrect specification of the short-run parameters in the ARFIMA model can accentuate the bias in the long-run parameter

441 - A Comparison of the Performance of Flexible Functional Forms for Use in Applied General Equilibrium Analysis.

Carlo Perroni and Thomas F. Rutherford

This paper presents a procedure for testing the global properties of functional forms which recognizes their specific role in economic equilibrium modelling. This procedure is employed to investigate the regularity and the third-order curvature properties of three widely used flexible functional forms, the Translog, the Generalized Leontief and the Normalized Quadratic functional forms. We contrast the results from these flexible forms with a globally regular flexible form, the Non-separable Nested Constant-Elasticity-of-Substitution functional form. Our results indicate that inherently regular representations are best suited for equilibrium analysis.

440 - Work-Related Training and Earnings Growth for Young Men in Britain

S. Wiji Arulampalam, Alison Booth and Peter Elias

This paper uses the data from the National Child Development Study (NCDS) to examine the impact of vocational education and training received over the period 1981 to 1991 on the wages growth of young men in employment in both 1981 and 1991. Issues of sample selectivity and of training endogeneity are also addressed. In particular, the paper examines the durability and transferability of work-related training and educational courses received over the period 1981 to 1991, and estimates the extent to which employer-provision, job mobility and certification of courses affect individual productivity, as proxied by wages growth in a fixed effects model.

439 - The Folk Theorem in Repeated Games of Incomplete Information.

Martin W. Cripps and Jonathan P. Thomas

The paper analyzes the Nash equilibria of discounted repeated games with one-sided incomplete information. If the informed player is arbitrarily patient relative to the uninformed player, then the characterization is essentially the same as that in the undiscounted case. This implies that even small amounts of incomplete information can lead to a discontinuous change in the equilibrium payoff set. For the case of equal discount factors, however, a result akin to the folk theorem holds when a complete information game is perturbed by a small amount of incomplete information

437 - Market Insurance, Self-Protection and the Family : A Beckerian Analysis

Clive D. Fraser

We study parents' demand for insurance and protection in a Beckerian context. Parents derive utility from the household's material living standard and number of children and there is a trade-off between the two. Several important new results emerge. These include: first, a duality between how an increase in an exogenous child mortality risk affects the demand for children and how an exogenous increase in the number of children affects the demand for physical safety for a given child; second, a distinction between and the different implications of endogenous safety as a private good and as a local public good for the household; third, the important interactions between the parents' demand for insurance and personal and household safety and the presence and nature of their bequest functions.

436 - Income Taxation, Environmental Emissions and Technical Progress

Carlo Perroni

This paper examines the implications of environmental externalities for income tax design in a growing economy. We describe a model with endogenously generated knowledge, in which technical progress reduces the emissions generated by production activities. In this setting, the lack of internalization of environ-mental externalities results in an above-optimal long-run rate of growth and leads to an inefficient input mix. If emission taxes are infeasible, differential income tax sheltering of physical and knowledge investment can be effective as a second-best remedy. Simulation results from a calibrated model, under a uniform specification of intertemporal and intratemporal substitution possibilities, indicate that the intertemporal allocative effects associated with environmental externalities could dominate intratemporal distortions; hence, income tax reform could outperform indirect tax reform as a second-best Pigouvian instrument, and perform well in comparison with a first-best instrument, even in economies where environmental emissions are sectorally concentrated.

435 - Structural Breaks and Seasonal Integration.

Jeremy Smith and Jesus Otero

Perron (1989) investigated the effects of an exogenous change in either the level or growth rate of a series and found that the Augmented Dickey-Fuller unit root test, allowing for such a change under the alternative hypothesis, yielded a markedly more skewed test statistic. This paper looks at the effects on the HEGY tests of an exogenous change in the level or seasonal pattern of a series. The distribution of the test statistics associated with the HEGY test are more skewed. Applying these findings to Colombian money supply and GDP series as well as UK transportation expenditure, initial results suggesting the need for a unit and seasonal root are over-turned

434 - International Capital Tax Evasion and the Foreign Tax Credit Puzzle

Kimberley A. Scharf

This paper examines the role of international tax evasion for the choice of an optimal foreign tax credit by a capital exporting region. Since a foreign tax credit raises the opportunity cost of concealing foreign source income, it can be employed to discourage evasion activity. The existence of international tax evasion possibilities could thus help rationalize a choice of tax credit in excess of a deduction-equivalent credit level. Our analysis shows that, under certain conditions, the presence of international tax evasion can indeed result in a higher optimal foreign tax credit for a capital exporting country, but the conditions for this result to hold are quite restrictive. We find that: (i) although an increase in the foreign tax credit unambiguously reduces evasion activity per unit of exported capital, it also encourages exports, and may thus result in higher total evasion costs; (ii) the presence of evasion reduces the "compounding" effect of the double taxation of foreign source income, thereby reducing the need for a foreign tax credit; (iii) by making residence based taxes distortionary, the presence of international tax evasion raises the marginal cost of the public funds that are obtained through domestic taxes, and hence raises the social cost of a foreign tax credit.

433 - Risk, Insurance and the Demand for Irreplaceable Commodities, the Case of Children.

Clive Fraser

Using a Beckerian model in which parents derive utility from per capita household consumption and the number of children, we examine how child mortality risk and insurance against this affect the demand for children. We show that child mortality risk increases the demand for children and, contrary to claims in the literature, optimal fair insurance against child mortality risk will not result in parents equalising marginal utilities of consumption across states of the world and can result in them opting for payouts in states where children die. This calls into question some of the criticisms levied against the operations of tort as an implicit insurance system.

432 - Modeling Monopolistic Behavior of Product and Household within CGE Framework - A Simple Model for Poland.

Zbigniew Zolkiewski

In the paper, aggregated computable general equilibrium (CGE) model with monopolistic behaviour of producers and households (trade unions) is developed. Monopolistic firms face downward sloping demand curve what makes them reduce output and factor demands so as to maximize profits. Trade unions push wages up over market clearing level when maximizing surplus of wage incomes over disutility of labour. Model has been calibrated for Poland, 1990 assuming certain level of monopolisation of both product and labour market. Simulations have been done that illustrate potential welfare gains of elimination of monopolistic behaviour at either of the market and at both.

417 - Nominal Rigidity and Monetary Uncertainty

N. Rankin

A dynamic, stochastic optimising macromodel with predetermined money wages and labour market monopoly power is used to examine the effect on current macroeconomic variables of a temporary increase in variability of the future money supply. As a benchmark, we show that under perfect wage-price flexibility 'uncertainty irrelevance' holds, when monetary uncertainty is appropriately defined. The introduction of wage stickiness causes future monetary uncertainty to raise the nominal interest rate, with a deflationary impact on current price and output, for plausible parameterisations. It also causes the money wage to be set higher, increasing the 'natural' rate of unemployment.