the impact of political majorities on firm value do electoral promises or friendship connections matter this paper simultaneously estimates the impact of political majorities on the values of firms that would benefit from the platforms of the two main candidates at the 2007 french presidential election segolene royal and nicolas sarkozy and of those that are ruled or owned by sarkozy s friends we use prediction market data to track each candidate s victory probability and investigate how this relates to firms abnormal returns our estimates suggest that the value of firms that would likely benefit from the platforms of royal and sarkozy changed by 1 and 2 respectively with the candidates victory probabilities and that firms connected to sarkozy out performed others by 3 due to his election

the origins of ethnolinguistic diversity this study explores the determinants of ethnolinguistic diversity within as well as across countries shedding light on its geographic origins the empirical analysis conducted across countries virtual countries and pairs of contiguous regions establishes that geographic variability captured by variation in regional land quality and elevation is a fundamental determinant of contemporary linguistic diversity the findings are consistent with the proposed hypothesis that differences in land endowments gave rise to location specific human capital leading to the formation of localized ethnicities jel j15 j24 z13

the dynamic behavior of wages and prices cointegration tests within a large macroeconomic system the dynamic relationship between wages and prices has long held a central place within the economic literature most macroeconomic models make assumptions as to the causal relationship between the two variables unfortunately empirical investigations have produced widely divergent results in particular the present paper examines the results of time series studies and argues that the lack of a consensus is due to improperly specified models once the wage price relationship is embedded within a multiple vector system identification of a wage price cointegrating relationship is significantly improved in addition the increased efficiency yields evidence in favor of the dual feedback between wages and prices

the long and short of money short run dynamics within a structural model empirical examinations into aggregate money demand functions generally incorporate a monetary aggregate as the dependent variable while this custom may be inefficient it does not create any new difficulties for estimating the demand function s long run parameters as money supply would equal money demand the short run estimates however are not as fortunate as the monetary aggregate is a measure of supply and not demand one needs to tease out the short run responses associated with money demand changes with those which are associated with monetary supply shocks the present article therefore proposes a more complete representation of monetary sector behaviour and in doing so finds significant support for the so called buffer stock money demand models

the short run demand for money a reconsideration the partial adjustment approach to the specification of the short run demand for money has dominated the literature for more than a decade there are three basic problems with this approach first the same lag structure is imposed on all variables and each independent variable enters only as a current value in contrast a rational individual would respond to different variables income interest rates prices with quite different lags second when the general price levelis subject to gradual adjustment hut can move quickly in response to supply shocks the influence of these supply shocks should enter with a negative sign third the estimated equation for real balances may not be a money demand equation at all but rather its coefficients may represent a shifting mixture of demand and supply responses the empirical work examines several alternative dynamic specifications including a generalized partial adjustment framework and the error correction model both of the latter specifications exhibit greater structural stability after 1973 than the standard partial adjustment specification and the generalized partial adjustment model also yields relatively small errors in post sample dynamic simulations shifts in coefficients as the sample period is extended after 1973 are consistent with the interpretation that the real balance equation no longer traces out structural demand parameters hut rather a mixture of demand and supply responses this abstract was borrowed from another version of this item

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

local political business cycles evidence from philippine municipalities abstract this paper establishes the existence of short term political business cycles in the philippines over the period 2003 2009 examining a balanced panel of 1143 municipalities shows that employment levels increase in the two pre electoral quarters and drop sharply in the two quarters following elections further results are consistent with the cycles being generated by incumbents attempts to increase their chances of re election cycles are stronger in sectors that incumbents are more able to influence and when they expect stronger electoral competition evidence suggests that these cycles are detrimental to development

does a cointegrating m2 demand relation really exist in the united states this paper reexamines evidence on m2 demand cointegration in the postwar united states equilibrium relations between m2 and various sets of its determinants are analyzed using quarterly observations from 1959 1 to 1988 4 1990 4 and 1993 4 based on three different testing methods for earlier subsamples mixed results are obtained suggesting both cointegration and no cointegration for the full sample however virtually no evidence supports cointegration accordingly a m2 error correction model is no longer appropriate to investigate short run dynamics of business fluctuations in the 1990s copyright 1996 by ohio state university press

voters as fiscal conservatives voters penalize federal and state spending growth this is the central result of my analysis of voting behavior in presidential senatorial and gubernatorial elections from 1950 1988 the composition of federal spending growth seems irrelevant the vote loss to the president s party from an extra dollar of defense or nondefense spending is the same however in gubernatorial elections expansion of state welfare spending exacts a disproportionate political price deficit financing of federal or state spending does not appear to matter politically i conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility

the effect of fiscal performance on local government election results in israel 1989 1998 abstract we discuss the circumstances under which voters in local elections will reward fiscal responsibility and suggest that such circumstances evolved in israel in the mid 1990s we present empirical evidence that indeed fiscal performance of mayors substantially affected their reelection probability in the 1998 campaign but not in the 1989 and 1993 campaigns changes in the political environment enforcement of audit and financial reporting requirements tougher imposition of hard budget constraints and the development of local media are proposed as explanations the hypotheses that the fiscal variables reflect the income level at the locality or the mayor s success in extracting resources from the central government are tested and rejected

the demand for nominal and real money balances in a large macroeconomic system cointegration has become a popular empirical technique used to estimate the existence and stability of money demand relationships a common approach has been to estimate a single equation system with real money balances ml real income and an interest rate although hafer and jansen 13 friedman and kuttner 10 and stock and watson 29 find only minimal support for this specification baba hendry and starr 6 estimate a more complicated ml relation by including specific opportunity cost variables and find stronger support for the ml relation using post wwii data there have been four reasons put forth to explain the lack of a cointegrating relation between ml real income and the interest rate stock and watson 29 conclude that a stable money demand relation exists in data from 1900 89 but not for the post war period alone their explanation is that sufficient variation exists in the longer sample to identify money demand but excessive multicollinearity among variables during the post war period prevents unique identification baba hendry and starr 6 bhs maintain that misspecification of the ml relation is the reason for poor results they augment the money demand function with inflation a measure of long term bond yield and risk and learning curve weighted yields on newly introduced ml and m2 assets bhs claim their specification is able to account for the missing money period of 1975 76 the velocity decline of 1982 83 and the ml explosion of 1985 86 while standard ml models cannot friedman and kuttner 10 offer a third reason why the simple money demand equation fails they estimate a single equation model for several periods and conclude that a money demand vector exists over the 1960 2 79 4 period for ml however when data is included

buffer stock money interpreting short run dynamics using long run restrictions time series techniques are used to assess the quantitative importance of buffer stock money the short run response of real money holdings to nominal money supply shocks the empirical model a vector autoregression of real and nominal money balances captures general dynamic properties of the time series but requires theoretical restrictions for sensible interpretation the authors just identify the system by imposing a long run neutrality restriction nominal money shocks have no permanent effects on real money they find that buffer stock effects play an important role in the evolution of real m1 in the short run the evidence for m2 is less conclusive copyright 1994 by ohio state university press

wage growth and the inflationary process a reexamination the nature of the relationship between wage growth and inflation has long been the subject of ongoing debate the expectations augmented phillips curve theory contends that the two variables are mutually causal however the original wage type phillips curve model argues it is inflation that causes wage growth rather than vice versa the price markup scheme holds an opposite view and asserts that wage growth plays an independent causal role in the inflationary process of course other theories e g the monetarist deny the presence of any reliable linkage between wages and prices researchers have also expended enormous effort attempting to investigate empirically the relationship between wage growth and inflation but with mixed results for example mehra 24 and ashenfelter and card 1 report results suggesting a bidirectional causality barth and bennett 2 and stein 37 38 find causality running from prices to wages without feedback while shannon and wallace 34 and hill and robinson 19 report results showing causality only in the reverse direction from wages to prices still gordon 11 bazdarich 4 batten 3 and mehra 27 find no causal linkage between the two variables clearly such remarkably mixed evidence is unfortunate in light of the profound implications that the precise wage price relationship may have for economic and public policy a more recent and quite interesting study is that of mehra 28 mehra employed the technique of cointegration and error correction modelling on u s quarterly data for the period 1959 1 1989 3 he concluded that inflation and wage growth are cointegrated implying that their long run movements are correlated as the expectations augmented phillips curve theory predicts however contrary to this theory and in accordance with the original wage type phillips curve view mehra argued that the inflation wage growth long run correlation is primarily the outcome of the former causing the latter mehra s model encompasses three basic variables namely prices p productivity adjusted wages w and an output gap proxy g he tested each of the three variables in logs for the presence of unit roots finding evidence of two unit roots in p and w but a single unit root in g mehra then examined cointegration of the two variables having two unit roots p w his re

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

opportunistic and partisan election cycles in brazil new evidence at the municipal level this article tests the hypothesis of opportunistic and partisan cycle models using a new large data set of brazilian municipalities over the 1989 2005 period the results show an increase in total and current expenditures and a decrease in municipal investments local tax revenues and budget surplus in election years they also show that partisan ideology exerts a relative influence on the performance of the local public accounts these results confirm that both opportunistic and partisan cycles have occurred in the management of the budgets of brazilian municipalities after the end of the military government

multivariate estimates of the permanent components of gnp and stock prices the economic assumption that a present value relation holds between consumption and income and between stock prices and dividends or the statistical assumption that the consumption income ratio and the dividend price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair either assumption then allows us to estimate the variance of the permanent component of one series gnp stock prices from the variance of the permanent component of the other consumption dividends or from the covariance of the two series permanent components this paper presents such estimates and finds that the permanent components are about half those estimated by similar univariate methods a series of recent papers has examined the importance of a potential unit root to the behavior of real gnp campbell and mankiw 1986 1987 cochrane 1986 clark 1987 and stock prices fama and french 1986 lo and mai if by 0 the series is stationary the response can be any real number which is the innovation in these estimates instead of forcing us to ask the dichotomous question is there a unit root or not they allow us to continuously measure the importance of a potential unit root the actual estimating technique used in these papers varied somewhat cochrane poterba and summers and lo and mai if a series is stationary the variance of k differences will tend to a precursor to this paper appeared under the title spectral density estimates of unit roots we thank masanao aoki lam hansen masao ogaki and chris sims for helpful suggestions the computer programs and data used in this paper are available on request from the authors

the demand for m1 in the u s a 1960 1988 estimated u s m1 demand functions appear unstable regularly breaking down over 1960 1988 e g missing money great velocity decline m1 explosion we propose a money demand function whose arguments include inflation real income long term bond yield and risk t bill interest rates and learning curve weighted yields on newly introduced instruments in m1 and non transactions m2 the model is estimated in dynamic error correction form it is constant and with an equation standard error of 0 4 variance dominates most previous models estimating alternative specifications explains earlier breakdowns showing the model s distinctive features to be important in accounting for the data

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

ethnic diversity social sanctions and public goods in kenya abstract this paper examines ethnic diversity and local public goods in rural western kenya the identification strategy relies on the stable historically determined patterns of ethnic land settlement ethnic diversity is associated with lower primary school funding and worse school facilities and there is suggestive evidence that it leads to poor water well maintenance the theoretical model illustrates how inability to impose social sanctions in diverse communities leads to collective action failures and we find that school committees in diverse areas do impose fewer sanctions on defaulting parents we relate these results to the literature on social capital and economic development and discuss implications for decentralization in less developed countries

collective action in diverse sierra leone communities scholars have identified ethnic divisions as a leading cause of underdevelopment due partially to their adverse effects on public goods we investigate this issue in post war sierra leone one of the world s poorest and most ethnically diverse countries to address concerns over endogenous local ethnic composition we use an instrumental variables strategy using earlier census data on ethnicity and include several historical and geographic covariates perhaps surprisingly we find that local diversity is not associated with worse public goods provision across multiple outcomes and specifications with precisely estimated zeros we investigate the role of historical factors in generating the findings

the behavior of money demand in the 1980s existing money demand functions did not predict the strength in m1 in the 1980s this strength derived from the combination of a change in the character of m 1 due to elnancial deregulation and the sharp fall in market rates that began in 1982 the public s m2 demand function however remains unaffected by the forces that altered the m1 demand function the character of the public s m 1 demand function changed with the legalization nationwide in january 1981 of the checkable deposits known as nows because nows pay explicit interest they are used by the public as an instrument for saving as well as for effecting transactions mehra 1986 the addition of nows to m1 therefore caused m1 to become more highly substitutible with the savings instruments included in the non ml component of m2 that is savings deposits small time deposits money market deposit accounts mmdas and money market mutual funds of noninstitutional investors mmmfs furthermore financial institutions move the rate paid on nows only sluggishly in response to changes in market rates in contrast the rates paid on small time deposits mmdas and mmmfs move promptly in response to changes in market rates consequently when market rates fell beginning in late summer 1982 the differential between the rates paid on the non ml components of m2 and on nows fell sharply the public then substituted out of the non ml components of m2 and into the nows in m1 these substitutions increased m1 de

consumption technology and the intrafamily distribution of resources adult equivalence scales reexamined adult equivalence scales are supposed to measure differences in the needs of households of different demographic composition formally they purport to measure the change in the cost of attaining a certain welfare level when the family composition varies this paper shows that the definition and the measurement of these scales depend crucially on the concept of welfare used when welfare is the utility parents derive from their own consumption one has to assume separability of parents and children s consumption this assumption implies that the only way of imputing the intrafamily allocation of resources is by observing the consumption patterns of adult goods regardless of the definition used one cannot separate the factors reflecting home technology i e needs from those determining the intrafamily distribution rule i e wants out of consumption data

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

the long run link between money growth and inflation is inflation always a monetary phenomenon many economists believe that the link between money growth and inflation in the u s has weakened over the last two decades due in part to the federal reserve s policy experiment in 1979 1982 and innovations in the financial sector of the economy i find that the long run relationship between money growth and inflation is strong in a statistical sense and important economically the key result is that the trend or growth component in cpi inflation is entirely due to the trend component of monetary base growth jel c32 e31 e51

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

how well does the is lm model fit postwar u s data postwar u s time series for money interest rates prices and gnp are characterized by a multivariate process driven by four exogenous disturbances those disturbances are identified so that they can be interpreted as the four main sources of fluctuations found in the is lm phillips curve model money supply money demand is and aggregate supply shocks the dynamic properties of the estimated model are analyzed and shown to match most of the stylized predictions of the model the estimated decomposition is also used to measure the relative importance of each shock to interpret some macroeconomic episodes and to study sources of permanent shocks to nominal variables

a longitudinal analysis of sibling correlations in economic status numerous previous studies have used sibling correlations to measure the importance of family background as a determinant of economic status the sibling correlations estimated in these studies however have been depressed by a failure to distinguish transitory and permanent income variation and in some cases by overly homogeneous samples this paper presents a methodology to address these problems and applies it to longitudinal data from the panel study of income dynamics our main conclusion is that family background exerts greater influence on economic status than has been indicated by most earlier research

imports as a threat to cartel stability abstract it is an old story that increased imports may have competitive effects on a domestic market the usual effect is felt through a reduction in demand for the products of the domestic industry what is more subtle is the effect that imports in particular an unexpected surge in imports from a new source country may have on the stability of a domestic cartel and more generally on the conduct of a domestic oligopoly implying a further competitive influence of international trade this paper discusses the issue in the context of several models and presents some relevant evidence from a recent case brought before the u s international trade commission

ex ante actions and ex post public responses to drought shocks evidence and simulations from zimbabwe abstract the study examines the consequences of alternative public responses to drought shocks it does so by drawing on household data from resettlement areas of rural zimbabwe from 1992 93 to 1995 96 and the estimation of four behavioral relations the determinants of crop income the determinants of investment in livestock the determinants of investment in agricultural capital stock and the determinants of private transfers this information is used to construct a series of simulations in which drought relief received in the aftermath of the 1994 95 the ex post response is made available to households in the form of agricultural capital stock and extension advice an ex ante action doing so is found to raise household welfare in nondrought years but provides only limited protection in the aftermath of drought

the stability of long run money demand in five industrial countries abstract this study provides strong evidence for the stability of long run demand functions for narrowly defined money m1 in five industrial countries u s japan canada u k and west germany using post war quarterly data evidence of stability is examined using two different estimation techniques and through a formal test of parameter constancy designed specifically for cointegrating vectors in the majority of these countries the key to stability is the imposition of a unitary long run income elasticity that is rarely rejected by the data

forecasting in a large macroeconomic system this paper examines the efficiency gains yielded from estimating multiple equation cointegrated systems as compared to their single equation counterparts in particular this paper is concerned with the ability of utilizing the cointegrating information to improve forecasting performance recently an inability to improve forecasts of real income once money demand error correction terms were introduced has been used to argue that the m2 relationship had broken down during the early 1990s however the results suggest that once the underlying responses of variables are more closely investigated the behaviour of m2 has remained stable

electoral manipulation via voter friendly spending theory and evidence abstract we present a model of the political budget cycle in which incumbents try to influence voters by changing the composition of government spending rather than overall spending or revenues rational voters may support an incumbent who targets them with spending before the election even though such spending may be due to opportunistic manipulation because it may also reflect sincere preference of the incumbent for types of spending voters favor classifying expenditures into those which are likely targeted to voters and those that are not we provide evidence supporting our model in data on local public finances for all colombian municipalities our findings indicate both a pre electoral increase in targeted expenditures combined with a contraction of other types of expenditure and a voter response to targeting

the buffer stock notion in monetary economics not the least of harry johnson s contributions to our discipline was the series of survey papers on aspects of monetary economics which he produced during the 1960s and 1970s it is no exaggeration to say that the way in which the literature of monetary economics is organised even now follows the design which johnson first set out in 1962 and built on in the subsequent decade nevertheless the subject has not stood still and one of the more interesting developments of the last few years has involved the introduction of what has been variously described as the disequilibrium money shock absorber or as i prefer to call it the buffer stock notion into monetary economics the development of this line of thought was getting underway before johnson s untimely death much of it indeed under the auspices of his own research programme at the lse even so this did not happen early enough for the relevant ideas to be put in their proper niche by johnson himself and the buffer stock approach is not yet fully integrated into the mainstream of monetary economics much of the relevant literature is empirical concerned with modelling particular aspects of the monetary experience of specific countries hence it is fragmented and contains few papers which attempt a coherent account of just what this approach is and how it relates to other approaches to monetary analysis although essays by goodhart 1982a b and judd and scadding 1982a contain important discussions of these issues to the best of my knowledge only jonson 1976a and knoester 1979a have devoted entire papers solely to this central issue and these are relatively inaccessible and hence less widely known than they deserve to be in this lecture i shall attempt to give a brief account of the essentials of this approach first i shall sketch out its microeconomic background and then i shall discuss those theoretical characteristics which differentiate it from the neo austrian analysis of robert e lucas jr and his associates as well as from the conventional keynesian approach to monetary economics last but by no means least i shall argue that it yields simple theoretical insights into important empirical and policy related issues which are troublesome for alternative approaches in short my tribute to harry

exogeneity within the m2 demand function evidence from a large macroeconomic system a large body of literature investigates whether a stable and predictable long run association between money and its arguments exists one point of variation between models is whether to include an interest rate measure directly within the long run relationship several recent studies indicate that empirical findings are sensitive to the choice therefore the present article reexamines the empirical significance of the interest rate within a four equation macroeconomic system the results suggest that the interest rate 1 may be excluded from the m2 demand function 2 is strongly exogenous to most of the system s remaining variables and 3 may represent a common trend jel e41 e52 c32 i introduction much of recent macroeconomic literature has been dedicated to investigating whether long run relationships exist between macroeconomic variables 1 such preoccupation is understandable given the myriad models in which these relationships play a dominant role a significant portion of this literature has focused on whether a long run relationship exists between money demand and its arguments 2 of course the close association between the variables is an integral part of theories that suggest that the monetary authority may qualitatively influence the direction of the aggregate economy the estimation of long run money demand models have differed in their methodological approach and in countless other ways one specific way in which they may differ in whether the investigator s incorporates an interest rate measure directly within the long run relationship for example although fischer and nicholetti 1993 and baba et al 1992 incorporate various interest rate measures to identify the long run money demand function hendry and mizon 1998 and hendry and ericsson 1991 estimate the long run money demand function without an interest rate measure although the theoretical importance of the interest rate within the money demand function predates pigou s 1917 classic treatment and has been discussed at length elsewhere the importance empirically has recently been high lighted by sims 1980 in examining whether money granger causes output sims s results suggest that the tests are sensitive to whether a short term interest rate measure is included campbell and perron 1991 further argue that sims s findings are an outgrowth of whether the trivariate model of money prices and output are cointegrated that is i 0 or whether reduction to stationarity requires the introduction of a fourth variable the interest rate reduction to stationarity is important because estimating granger causality with nonstationary residuals may yield biased estimates due to nonstandard residual distributions the present article reexamines the significance of the interest rate within the long run money demand function specifically i examine two aspects of interest rate money behavior the initial examination is to test whether the interest rate measure three month treasury bill rate can be directly excluded from the long run m2 demand function following the methodology advanced by hendry and mizon 1993 johansen and juselius 1992 1994 and ericsson et al 1990 the test involves estimating the long run relationship with the interest rate measure and then impose the overidentifying zero restriction the associated log likelihood ratio statistics are distributed chi square n where n represents the number of overidentifying restrictions this approach however only examines whether the interest rate may be removed from the long run money demand vector a second area of interest is concerned with the short run responses of the interest rate more specifically the short run responses provide a test for granger causality within the cointegrated variables following ericsson et al 1998 granger causality is estimated where one or more cointegrated variables reject strong exogeneity

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

political budget cycles in indonesia at the district level we find significant political budget cycles pbcs for indonesian districts only for direct not for indirect elections pbcs are significantly stronger if the incumbent runs for reelection they are well identified due to the exogenously different timing of elections

time series representations of economic variables and alternative models of the labour market accepting the hypothesis that the time series facts of the aggregate labour market may be summarized by the linear autoregressive and moving average representations of wages prices unemployment and interest rates implies that a useful theory ought to lead to predictions about these representations following this approach this paper first catalogues many of the time series facts about the aggregate labour market and then compares them against alternative models of the labour market based on the intertemporal substitution and staggered contract hypotheses