Empirical Economics

Herzer, Dierk; Donaubauer, Julian

doi: 10.1007/s00181-016-1206-1pmid: N/A

This paper examines the long-run effect of the level of foreign direct investment (FDI) on the level of total factor productivity (TFP) for 49 developing countries for the period 1981–2011 using panel cointegration and causality techniques. It is found that (i) FDI has, on average, a negative long-run effect on TFP in developing countries, (ii) long-run causality runs in only one direction, from FDI to TFP, (iii) in the short run, TFP has a negative effect on FDI, and (iv) the long-run effect of FDI of TFP differs between selected groups of countries: While the estimated long-run FDI–TFP coefficients are always relatively large, negative, and significant for countries with lower levels of human capital, financial development, and trade openness, the estimated effects are relatively small, insignificant, or even significantly positive for subgroups of countries with higher levels of human capital, financial development, and trade openness.

Bacchini, Fabio; Bontempi, Maria; Golinelli, Roberto; Jona-Lasinio, Cecilia

doi: 10.1007/s00181-016-1211-4pmid: N/A

In this paper, we model the dynamics of business investment taking into account asset-specific characteristics potentially affecting the reactivity of aggregate and disaggregate capital accumulation over the business cycle. We estimate Information and Communication Technologies (ICTs) and traditional investment (non-ICT) determinants within a Vector Error Correction Model testing the assumptions of the flexible accelerator and neoclassical model as well as the role of financial constraints and uncertainty. We evaluate our model on Italian data over the period 1980–2012, and we check our results also with Spanish and UK data. Our findings support the assumption that capital is heterogeneous since short- and long-run determinants are significantly different across the assets. Traditional assets experience stock adjustment costs while ICT investment incurs flow adjustment cost. In the short run, liquidity is a key determinant of investment independently of the asset type. In the long run, uncertainty significantly affects ICT. Finally, the results of the counterfactual exercises support the idea that ICT is a key policy variable to foster economic growth.

Fukuyama, Hirofumi; Hashimoto, Atsuo; Tone, Kaoru; Weber, William

doi: 10.1007/s00181-016-1202-5pmid: N/A

This paper develops a dynamic–network DEA (data envelopment analysis) model where total output is jointly produced from two sectors: a human capital sector and a physical capital sector. Each prefecture produces a final output and an intermediate product which is used to augment future physical capital. The optimization method allows future production possibilities to be enhanced if some final output in the current period is foregone so that larger amounts of the intermediate product can be produced. The goal is to choose the amounts of final output and intermediate product so as to maximize the size of the production possibility set. The method also allows identification of whether output is constrained by a lack of physical capital, a lack of human capital or a lack of both types of capital. We apply our method to 47 Japanese prefectures during the period 2007–2009. A key finding is that a lack of human capital is constraining potential output.

Afonso, António; Baxa, Jaromír; Slavík, Michal

doi: 10.1007/s00181-016-1210-5pmid: N/A

We use a threshold VAR analysis to study the linkages between changes in the debt ratio, economic activity and financial stress within different financial regimes. We use quarterly data for the US, the UK, Germany and Italy, for the period 1980:4–2014:1, encompassing macro, fiscal and financial variables, and use nonlinear impulse responses allowing for endogenous regime-switches in response to structural shocks. The results show that output reacts mostly positively to an increase in the debt ratio in both financial stress regimes; however, the differences in estimated multipliers across regimes are relatively small. Furthermore, a financial stress shock has a negative effect on output and worsens the fiscal situation. The large time-variation and the estimated nonlinear impulse responses suggest that the size of the fiscal multipliers was higher than average in the 2008–2009 crisis.

Poghosyan, Tigran

doi: 10.1007/s00181-016-1215-0pmid: N/A

We employ the duration framework to study determinants of public debt cycles in 57 advanced and emerging economies over the 1960–2014 period, with a particular focus on the impact of financial cycles. The results suggest that the association between financial and debt cycles is asymmetric. Debt expansions preceded by overheating in credit and financial markets tend to last longer than other expansions, but there is no significant association between financial cycles and debt contractions. There is strong evidence of duration dependence in both phases of the cycle, with the likelihood of expansions and contractions to end increasing with the length of their respective spells. Higher initial level of debt increases the spell of contractions (persistence of adjustment effort hypothesis) and reduces the spell of expansions (debt sustainability hypothesis). The results are robust to the inclusion of global factors, openness, political stability, and debt crisis indicators as additional controls.

Robstad, Ørjan

doi: 10.1007/s00181-016-1222-1pmid: N/A

This paper investigates the responses of house prices and household credit to monetary policy shocks in Norway, using Bayesian structural VAR models. The analysis indicates that the effect of a monetary policy shock on house prices is large, while the effect on household credit is muted. This is consistent with a relatively small refinancing rate (refinancing rate refers to the share of outstanding mortgages that are refinanced each period due to changes in, for example, house prices or interest rate) of the mortgage stock each quarter. Using monetary policy to guard against financial instability by mitigating property-price movements may prove effective, but trying to mitigate household credit may prove costly in terms of GDP and inflation variation.

Kuper, Gerard

doi: 10.1007/s00181-016-1225-ypmid: N/A

This paper investigates political pressure from incumbent Presidents and Congress on US monetary policy during the period that Greenspan was the chairman of the Federal Reserve. We propose an expectations-augmented Taylor rule in which we replace realized values with expectations, and use the unemployment gap instead of the output gap. We apply a state-space framework that allows the use of mixed frequency data. Our findings suggest that the Federal Reserve under Greenspan did not create election driven cycles, but also did not strictly follow the Taylor rule. The deviations from the Taylor rule are not driven by partisan politics, but are rooted in the expected economic conditions.

Bräuning, Christina; Fendel, Ralf

doi: 10.1007/s00181-017-1238-1pmid: N/A

We empirically analyze the influence of inflationary pressure originating from persistent national misalignments on the ECB’s interest rate decisions between 2000 and mid-2010. To do so, we introduce an indicator that summarizes the threat to euro area price stability originating from self-reinforcing expected inflation differentials. The indicator is computed based on persistent deviations of national expected inflation and GDP growth rates from the corresponding euro area aggregate. It thereby captures area-wide excess demand pressure on the euro area inflation rate. In order to determine the information content of this indicator, we add it to an empirical monetary policy reaction function. We then analyze this reaction function in the framework of a generalized ordered choice model that fits the data a lot better than its commonly used, more restricted counterpart. Within this empirical framework, we find that after controlling for several area-wide aggregates, national information does not provide additional information that is indicative of the ECB’s policy rate decision.

Valera, Harold; Holmes, Mark; Hassan, Gazi

doi: 10.1007/s00181-016-1212-3pmid: N/A

We examine the relationship between inflation targeting and the behavior of the level and volatility of inflation for eight Asian countries over the period 1987–2013. In contrast to existing studies that rely upon time series methods, we employ a novel panel GARCH model that accounts for heterogeneity and interdependence across countries. Our main contribution is to shed new light on the inflation targeting credibility hypothesis based on lower inflation and inflation volatility as well as on the correlation between unanticipated inflation shocks within a panel GARCH framework. We find strong evidence of a reduction in the level of inflation that operates from the impact of actual inflation targets in the Philippines, South Korea and Thailand. We also find that the adoption of inflation targeting helped lower inflation volatility in the Philippines and South Korea. Overall, the results suggest that Asian inflation targeting regimes are more credible in terms of reducing the level of inflation than lowering inflation volatility. There is also evidence that the covariance of inflation shocks among inflation targeting and non-targeting countries tends to increase.

Carcel, Hector; Gil-Alana, Luis

doi: 10.1007/s00181-016-1223-0pmid: N/A

Though not working toward an imminent transition to a monetary or currency union, the Central American Monetary Council (or CMCA, from Spanish Consejo Monetario Centroamericano) serves as an institution promoting economic and financial stability among five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and the Dominican Republic. Econometric studies conducted by researchers from CMCA have mostly focused on studying inflation levels of these countries, making use of econometric tools such as VECM and cointegration. We expand the study of inflation stability in the member countries of the CMCA by adopting a long memory and fractionally integrated approach and implementing cointegration methods that have not yet been used in the study of the Central American Monetary Council. Our results first show that all the series of prices are nonstationary, with orders of integration equal to or higher than 1 in all cases. Looking at long-run equilibrium relationships among the countries, we only found strong evidence of a cointegration relationship in the case of Honduras with El Salvador. All the other vis-a-vis relationships seem to diverge in the long run. Policy implications of the results obtained are also derived in the paper.