covered interest rate arbitrage in the interwar period and the keynes einzig conjecture keynes 1923 conjectured that deviations from covered interest rate parity would not be arbitraged unless a profit of at least a half of one percent on an annualized basis was available and that larger deviations would still be moderately persistent because of less than perfect elasticity of supply of arbitrage funds this two part conjecture was given further emphasis by other writers on this period notably einzig 1937 we apply nonlinear econometric techniques to a previously unexploited weekly data base for the 1920s london and new york markets and find strong support for the conjecture

joseph schumpeter lecture ideology i develop a model of ideologies as collectively sustained yet individually rational distortions in beliefs concerning the proper scope of governments versus markets in processing and interpreting signals of the efficacy of public and market provision of education health insurance pensions etc individuals optimally trade off the value of remaining hopeful about their future prospects or their children s versus the costs of misinformed decisions because these future outcomes also depend on whether other citizens respond to unpleasant facts with realism or denial endogenous social cognitions emerge thus an equilibrium in which people acknowledge the limitations of interventionism coexists with one in which they remain obstinately blind to them embracing a statist ideology and voting for an excessively large government conversely an equilibrium associated with appropriate public responses to market failures coexists with one dominated by a laissez faire ideology and blind faith in the invisible hand with public sector capital this interplay of beliefs and institutions leads to history dependent dynamics the model also explains why societies find it desirable to set up constitutional protections for dissenting views even when ex post everyone would prefer to ignore unwelcome news jel h11 d72 d83 p16 z1

reprint of marriage and health selection protection and assortative mating abstract using data from the panel study of income dynamics psid and the medical expenditure panel survey meps we analyze the health gap between married and unmarried individuals of working age controlling for observables we find a gap that peaks at 10 points at ages 55 59 years the marriage health gap is similar for men and women if we allow for unobserved heterogeneity in innate health permanent and age dependent potentially correlated with timing and likelihood of marriage we find that the effect of marriage on health disappears below age 40 years while about 5 points difference between married and unmarried individuals remains at older ages 55 59 years this indicates that the observed gap is mainly driven by selection into marriage at younger ages but there might be a protective effect of marriage at older ages exploring the mechanisms behind this result we find that better innate health is associated with a higher probability of marriage and a lower probability of divorce and there is strong assortative mating among couples by innate health we also find that married individuals are more likely to have a healthier behavior compared to unmarried ones finally we find that health insurance is critical for the beneficial effect of marriage

purchasing power parity in the long run a cointegration approach this paper utilizes cointegration analysis to examine purchasing power parity relationships over a long time horizon the results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio the cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed the hypothesis that the real exchange rate follows a random walk is rejected in most cases finally a new test for common trends finds no such common trends in exchange rates or price ratios copyright 1990 by ohio state university press

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

tests of a rational theory of the size of government in many countries the political party holding power changes more frequently than the trend growth rates in government spending and taxes shifts of political power are often preceded by rhetoric about meeting needs or cutting taxes which post election performances rarely match yet changes in the size of government up and down occur on average the size of government measured by the share of taxes or spending to output has increased in many countries during the past century but changes in size occur at diffrent rates and at times the relative size of government declines

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

ideology and the growth of government abstract we analyze the impact of ideology on the size of government in a simple model the government sets redistribution and provision of public services according to the preferences of the median voter ideology is defined in terms of preferences for public services and the impact of ideology on the size of government is shown to increase with mean income this idea is tested using measures of ideology based on party manifestos we show that the interaction of ideology and mean income has a major role in explaining the increase and divergence in government size observed across oecd countries

nonlinear purchasing power parity under the gold standard 1 introductionrecent theoretical analysis of purchasing power deviations see e g dumas 1992 sercu uppal and van hull 1995 and o connell and wei 1997 demonstrates how transactions costs or the sunk costs of international arbitrage induce nonlinear adjustment of the real exchange rate to purchasing power parity ppp globally mean reverting this nonlinear process has the important property of exhibiting near unit root behavior for small deviations from ppp since small deviations from ppp are left uncorrected if they are not large enough to cover the transactions costs or the sunk costs of international arbitrage a parametric nonlinear model suggested by the theoretical literature that captures the nonlinear adjustment process in aggregate data is the exponential smooth transition autoregression model estar of ozaki 1985 a smooth rather than discrete adjustment mechanism is motivated by the theoretical analysis of dumas 1992 also as postulated by terasvirta 1994 and demonstrated theoretically by berka 2002 in aggregate data regime changes may be smooth rather than discrete given that heterogeneous agents do not act simultaneously even if they make dichotomous decisions 1 recent empirical work e g michael nobay and peel 1997 taylor peel and sarno 2001 peel and venetis 2002 has reported empirical results that suggest that the estar model provides a parsimonious fit into a variety of data sets particular for monthly data for the interwar and postwar floating period as well as for annual data spanning 200 years as reported in lothian and taylor 1996 in addition nonlinear impulse response functions derived from the estar models show that although the speed of adjustment for small shocks around equilibrium will be highly persistent larger shocks mean revert much faster than the glacial rates previously reported for linear models rogoff 1996 in this respect the estar models provide some solution to the ppp puzzle outlined in rogoff 1996 2the estar model can also provide an explanation of why ppp deviations analyzed from a linear perspective appear to be described by either a nonstationary integrated i 1 process or alternatively described by fractional processes see e g diebold husted and rush 1991 taylor peel and sarno 2001 and pippenger and goering 1993 show that the dickey fuller tests have low power against data simulated from an estar model michael nobay and peel 1997 and byers and peel 2003 show that data that is generated from an estar process can appear to exhibit the fractional property that this would be the case was an early conjecture by acosta and granger 1995 given that the estar model has a theoretical rationale whereas the fractional process is a relatively nonintuitive one the fractional property might reasonably be interpreted as a misleading linear property of ppp deviations granger and terasvirta 1999 whereas the empirical work employing estar models provides some explanation of the glacially slow adjustment speeds obtained in linear models there is one aspect of the empirical work that is worthy of further attention a second way of explaining the rogoff puzzle raised by rogoff himself 3 is to relax the assumption that the equilibrium real exchange rate is a constant see e g canzoneri cumby and diba 1996 and chinn and johnston 1996 theoretical models such as that of balassa 1964 and samuelson 1964 imply a nonconstant equilibrium in the real exchange rate if real productivity growth rates differ between countries 4 nonlinear models that incorporate proxies for these effects are found to parsimoniously fit post bretton woods data for the main real exchange rates see venetis paya and peel 2002 and paya venetis and peel 2003 naturally models that ignore this effect may generate misleading speeds of ppp adjustment to shocks in this regard the empirical results of hegwood and papell 2002 for the gold standard period are particularly interesting

domestic foreign interest rate differentials near unit roots and symmetric threshold models this paper investigates the near unit root behavior of interest rate differentials across countries using a symmetric band tar model that allows for a heteroscedastic error process we find that the time series properties of monthly short term interest differentials over the period 1974 2005 between the united states and canada france germany japan and the united kingdom can be characterized by a symmetric band tar process which can explain its near unit root behavior reported in the extant literature results significantly reject a linear model in favor of the alternative hypothesis of a two regime symmetric threshold model that exhibits significantly greater persistence within the threshold bands than when outside the threshold bands

demand for health insurance and precautionary motives for savings among the elderly abstract this paper examines whether or not the elderly have precautionary motives for savings against uncertain and potentially large medical costs i analyze the relationship between purchases of actuarially unfair health insurance and the individual s ability to self insure in order to create a complete model of this behavior the government programs of medicare and medicaid are also incorporated into the analysis the major results from this paper are that individuals do tend to behave in a manner that is consistent with precautionary behavior and that even among those who do not hold private insurance most act in a manner consistent with their being over insured by medicare

implications of increasing college attainment for aging in general equilibrium we develop an overlapping generations general equilibrium model of the u s economy with heterogeneous consumers who face idiosyncratic earnings and health risk to study the implications of increasing college attainment decreasing fertility and increasing longevity 2005 2100 while all three trends contribute to a higher old age dependency ratio increasing college attainment has different implications because it increases labor productivity decreasing fertility and increasing longevity require the government to increase the average labor tax rate from 33 5 to 47 1 percent increasing college attainment lowers the required tax increase by 12 0 percentage points the labor tax rate required to balance the government budget is higher under general equilibrium than in a small open economy with a constant interest rate because the reduction in the interest rate lowers capital income tax revenues

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

the process followed by ppp data on the properties of linearity tests recent research has reported the lack of correct size in stationarity test for ppp deviations within a linear framework however theoretically well motivated nonlinear models such as the estar appear to parsimoniously fit the ppp data and provide an explanation for the ppp puzzle employing monte carlo experiments we analyze the size and power of the nonlinear tests against a variety of nonstationary hypotheses we also fit the estar model to data from high inflation economies our results provide further support for estar specification

fiscal policy effects in a heterogeneous agent olg economy with an aging population this paper incorporates the aging population projected by the u s social security administration to a heterogeneous agent olg model with idiosyncratic wage shocks and analyzes its effects on individual households the government budget and the overall economy the fiscal gap caused by the demographic change is 2 92 of gdp under the ssa s intermediate projection the effect of the aging population is large by itself and depends significantly on how the government finances the cost of the demographic change there is a strong trade off between efficiency and equity and this paper quantitatively assesses the pros and cons of stylized fiscal reform plans

some evidence of smooth transition nonlinearity in colombian inflation evidence of smooth transition autoregressive star representations is found in two out of three time series of different measures of annual inflation in colombia during this decade for monthly data the star type nonlinearities are asymmetric for inflation computed as the variation of cpi while for a measure of core inflation are symmetric thus lstar and estar models were respectively estimated no evidence of nonlinearity is found for traded goods inflation given the local dynamic properties of the estimated lstar model only positive shocks to prices could shift negative accelerating inflation rate from the upper to the lower regime by the same token only stochastic shocks can move the core accelerating inflation rate from the outer regime to the middle one but the explosive nature of this regime will impulse the accelerating inflation rate to the outer one

mitigating america s demographic dilemma by pre funding social security abstract financing social security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current us demographic developments using a general equilibrium overlapping generations model with realistic patterns of fertility and lifespan extension this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes which crowd out savings and slow real wage growth below the rate of technological progress a faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them addressing the financing problem by reducing social security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees by contrast a pre funding of social security financed with consumption taxes more evenly spreads the welfare losses across generations and it helps future generations especially the poor by stimulating capital formation

social security and the rise in health spending abstract in a quantitative model of social security with endogenous health i argue that social security increases the aggregate health spending of the economy because it redistributes resources to the elderly whose marginal propensity to spend on health is high i show by using computational experiments that the expansion of us social security can account for over a third of the dramatic rise in us health spending from 1950 to 2000 in addition social security has a spill over effect on medicare as social security increases health spending it also increases the payments from medicare thus raising its financial burden

real exchange rate behavior abstract using random simulations with artificial data with identical sample characteristics to the long sample exchange rate data employed by lothian and taylor lothian j r and taylor m p 1996 the recent float from the perspective of the past two centuries journal of political economy 104 488 509 we show that standard unit root tests have extremely low power over sample sizes corresponding to the recent float the probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans

wealth inequality and intergenerational links previous work has had difficulty generating household saving behaviour that makes the distribution of wealth much more concentrated than that of labour earnings and that makes the richest households hold onto large amounts of wealth even during very old age i construct a quantitative general equilibrium overlapping generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability i show that voluntary bequests can explain the emergence of large estates while accidental bequests alone cannot and that adding earnings persistence within families increases wealth concentration even more i also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data

u s tax policy and health insurance demand can a regressive policy improve welfare abstract the u s tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers who also tend to have a relatively high income moreover the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy to understand the effect of the policy we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance a complete removal of the subsidy may lead to a partial collapse of the group insurance market reduce the insurance coverage and deteriorate welfare there is however room for improving the coverage and welfare by extending a refundable credit to the individual insurance market

the provision of public goods under alternative electoral incentives politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork barrel spending we compare a winner take all system where all the spoils go to the winner to a proportional system where the spoils of office are split among candidates proportionally to their share of the vote in a winner take all system the public good is provided less often than in a proportional system when the public good is particularly desirable we then consider the electoral college system and show that it is particularly subject to this inefficiency

nonlinear time series analysis of stock volatilities summary the absolute value of the mean corrected excess return is used in this paper to measure the volatility of stock returns we apply various nonlinearity tests available in the literature to show that such volatility series are strongly nonlinear we then explore the use of threshold autoregressive tar models in describing monthly volatility series the models built suggest that the volatility series exhibit significant lower order serial correlations when the volatility is large indicating certain volatility clustering in stock returns out of sample forecasts are used to compare the tar models with linear arma models and nonlinear garch and egarch models based on mean squared error and average absolute deviation the comparisons show that a the tar models consistently outperform the linear arma models in multi step ahead forecasts for large stocks b the tar models provide better forecasts than the garch and egarch models also for the volatilities of large stock returns and c the egarch model gives the best long horizon volatility forecasts for small stock returns

uncertain medical expenses and precautionary saving near the end of the life cycle this paper introduces a dynamic structural model of household consumption decisions in which elderly families consider the effects of uncertain future medical expenses when deciding current levels of consumption the model with uncertain medical expenses implies a potentially important role for precautionary saving incentives to explain slow rates of dissaving among elderly americans during retirement rather than just simulating the stochastic dynamic model preference parameters are estimated using panel data on health wealth and expenditures for retired families the health uncertainty model predicts consumption levels closer to observed expenditures than a life cycle model with uncertain longevity however elderly families typically dissave their financial assets more slowly than even the baseline health uncertainty model predicts is optimal

implications of population ageing for economic growth the share of the population aged 60 and over is projected to increase in nearly every country in the world during the period 2005 50 population ageing will tend to lower both labour force participation and savings rates thereby raising concerns about a future slowing of economic growth our calculations suggest that oecd countries are likely to see modest but not catastrophic declines in the rate of economic growth however behavioural responses including greater female labour force participation and policy reforms including an increase in the legal age of retirement can mitigate the economic consequences of an older population in most non oecd countries declining fertility rates will cause labour force to population ratios to rise as the shrinking share of young people will more than offset the skewing of adults towards the older ages these factors suggest that

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

a model of the demand for longevity and the value of life extension we specify a demand function for longevity or quantity of life along with corresponding demand functions for indicators of quality of life and a value of health and life extension function we show that the demand for health must be derived in conjunction with that for longevity and the related consumption plan and that all choices depend on initial individual endowments and terminal conditions our comparative dynamics predictions indicate that optimal health and longevity are increasing functions of endowed wealth rather than necessarily current income that improvements in opportunities to produce health can accentuate the differences between endowed health and attained longevity levels and that the value individuals ascribe to their health may be increasing over a good portion of their life cycle we use this model to analyze observed empirical variations in levels and trends of life expectancy and in exposure to health risks across different population groups

the carry trade and fundamentals nothing to fear but feer itself the carry trade is the investment strategy of going long in high yield target currencies and short in low yield funding currencies recently this nave trade has seen very high returns for long periods followed by large crash losses after large depreciations of the target currencies based on low sharpe ratios and negative skew these trades could appear unattractive even when diversied across many currencies but more sophisticated conditional trading strategies exhibit more favorable payos we apply novel within economics binary outcome classication tests to show that our directional trading forecasts are informa tive and out of sample loss function analysis to examine trading performance the critical conditioning variable we argue is the fundamental equilibrium exchange rate feer expected returns are lower all else equal when the target currency is overvalued like traders researchers should incorporate this information when evaluating trading strategies when we do so some questions are resolved negative skewness is purged and market volatility vix is uncorrelated with returns other puzzles remain the more sophisticated strategy has a very high sharpe ratio suggesting market ineciency

real exchange rate adjustment in european transition countries abstract in single equation tests real exchange rates show mean reversion for nine of 10 central and eastern european transition countries for the period january 1993 to december 2005 because of the shift from controlled to market economies and accompanying crises failed policy regimes and changes in exchange rate regimes unit root tests for transition countries often require allowance for structural changes accounting for structural breaks gives substantially faster mean reversion speeds than those found for major industrialized countries these fast adjustment speeds are plausible transition countries had perhaps 10 years to make unprecedented adjustments required for accession to the european union a number of papers have applied non linear models to the central and eastern european countries this paper investigates four non linear models and compares them with piece wise linear break models the break models appear superior in detecting mean reversion for the central and eastern european transition countries

purchasing power parity as a long run relation dickey fuller and stock watson tests of purchasing power parity ppp as a long run proposition are provided within the cointegration framework proposed by granger since different countries use different weights to construct price indices the traditional constraint that the coefficients on the price indices should be unity in the log linear ppp relation is relaxed the absence of a general ppp relation cannot be rejected at most a ppp relation is indicated in five out of fifteen country pairs that are examined even if a long run ppp relation exists it is not found to be useful in predicting future nominal exchange rates which is consistent with efficient speculative markets

the size and scope of government comparative politics with rational politicians we try to demonstrate how economists may engage in research on comparative politics relating the size and composition of government spending to the political system a downsian model of electoral competition and forward looking voting indicates that majoritarian as opposed to proportional elections increase competition between parties by focusing it into some key marginal districts this leads to less public goods less rents for politicians more redistribution and larger government a model of legislative bargaining and backward looking voting indicates that presidential as opposed to parliamentary regimes increase competition between both politicians and voters this leads to less public goods less rents for politicians less redistribution and smaller government we confront these predictions with cross country data from around 1990 controlling for economic and social determinants of government spending we nd strong and robust support for the prediction that the size of government is smaller under presidential regimes and weaker support for the prediction that majoritarian elections are associated with less public goods

how puzzling is the ppp puzzle an alternative half life measure of convergence to ppp summary evidence of lengthy half lives for real exchange rates in the presence of a high degree of exchange rate volatility has been considered as one of the most puzzling empirical regularities in international macroeconomics this paper suggests that the measure of half life used in the literature might be problematic and proposes alternative measures with desirable properties their focus on the cumulative effects of the shocks distinguishes them from the measures used in the literature an empirical analysis of bilateral us dollar real exchange rates employing the alternative half life measure produces results consistent with theory and indicates that the ppp puzzle is less pronounced than initially thought copyright 2012 john wiley sons ltd

wagner s hypothesis in time series and cross section perspectives evidence from real data for 115 countries internationally comparable data on income and government expenditure for 115 countries covering the period 1950 80 are used to assess the validity of wagner s hypothesis individual country time series data and several intercountry cross sections are studied besides a tremendous diversity in the position for various countries the results indicate that while there is support for the hypothesis in some time series data sets such support is lacking in most cross section estimates much of the support for the hypothesis reported in many earlier studies therefore was probably due to either use of limited samples or inadequate data comparability across the observations studied copyright 1987 by mit press

electoral systems and public spending we study the effects of electoral institutions on the size and composition of public expenditure in oecd and latin american countries we emphasize the distinction between purchases of goods and services which are easier to target geographically and transfers which are easier to target across social groups we present a theoretical model in which voters anticipating government policymaking under different electoral systems have an incentive to elect representatives more prone to transfer public good spending in proportional majoritarian systems the model also predicts higher total primary spending in proportional majoritarian systems when the share of transfer spending is high low after dee ning rigorous measures of proportionality to be used in the empirical investigation we e nd considerable support for our predictions

constitutional rules and fiscal policy outcomes we investigate the effect of electoral rules and forms of government on fiscal policy outcomes in a large sample of democracies we rely on different estimation methods to address prospective problems of statistical inference due to non random selection of these constitutional rules the findings are consistent with our theoretical priors presidential regimes induce smaller governments than parliamentary democracies while majoritarian elections lead to smaller governments and smaller welfare programs than proportional elections

macroeconomic consequences of population aging in the united states overview of a national academy report author s lee ronald d abstract the us population will age rapidly for several decades and then more slowly with less aging than most rich nations health of the elderly has greatly improved but disability stagnated after 2000 retirement age reversed its decline in the mid 1990s and health status leaves ample room for increased elder labor supply many older people have inadequate retirement savings and face additional risks including uncertainty about both public and private pensions and health insurance population aging may cause a small decline in rates of return the main problem is the impact of population aging on public programs for the elderly

social mobility and redistributive politics just like economists voters have conflicting views about redistributive taxation because they estimate its incentive costs differently we model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs in the long run left wing dynasties believing less in individual effort and voting for more redistribution coexist with right wing dynasties this allows us to explain why individual mobility experience and not only current income matters for political attiitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

exchange rate pass through and inflation a nonlinear time series analysis abstract this paper investigates the relationship between the exchange rate pass through erpt and inflation by estimating a nonlinear time series model based on a simple theoretical model of erpt determination we show that the dynamics of erpt can be well approximated by a class of smooth transition autoregressive star models using the past inflation rate as a transition variable we employ several u shaped transition functions in the estimation of the time varying erpt to us domestic prices the estimation result suggests that declines in the erpt during the 1980s and 1990s are associated with lowered inflation

price regulation and relative price convergence evidence from the retail gasoline market in canada this paper explores price regulation and relative price convergence in the canadian retail gasoline market we use monthly data 2000 2010 on retail gasoline prices in 60 canadian cities to investigate i whether the retail gasoline market in canada has experienced a relative price convergence to the mean which is expected given the increased economic integration across canadian provinces and ii whether the introduction of price regulation mechanisms in new brunswick and nova scotia in july 2006 had any impact on the price convergence in these provinces we use a nonlinear panel unit root test and find solid evidence that canadian retail gasoline markets are well integrated across locales however the share of converging cities reveals a significant decline since july of 2006 the impact of price regulation on price convergence is mixed our results indicate that since the enactment of the regulation in all new brunswick cities 9 included in the dataset gasoline prices converge to the national mean volatility of price is also significantly reduced in contrast in the wake of price regulation in nova scotia all 6 cities of the province are non convergent to the mean with increased volatility and overall price level

the dynamics of inflation a study of a large number of countries over the last twenty years the statistical properties of inflation persistence has been the subject of intense investigation and debate without reaching a unanimous conclusion yet in this article we attempt to shed further light to this debate using a battery of econometric techniques in order to provide robust evidence on the degree of inflation persistence and whether this has changed during the period in which several countries have followed inflation targeting regimes or new monetary regimes we consider the inflation rates of thirty developed and emerging economies using quarterly data for the period 1958 to 2007 which include alternative monetary policy regimes the coefficient of the inflation parameter is estimated by ordinary least squares ols autoregressive moving average arma and autoregressive fractionally integrated moving average arfima models furthermore the grid bootstrap median unbiased mub estimator approach developed by hansen 1999 is used to estimate the finite sample ols

the curious attraction of wagner s law wagner s law of increasing state activity has recently been subjected to intensive use of recondite econometric testing procedures an examination of the relevant articles reveals ignorance both of wagner s definition of state activity and of his insistence that he was not engaged in prediction consequently the omission of public enterprises contained in wagner s definition leads to a model misspecification and the object of testing his hypothesiss remains obscure

price indices and nonlinear mean reversion of real exchange rates author affiliation jyh lin wu institute of economics national sun yat sen university kaohsiung 804 taiwan jlwu2 mail nsysu edu tw and the department of economics national chung cheng university chia yi 106 taiwan ecdjlw ccu edu tw corresponding authorpei fen chen department of international business and trade shu te university kaohsiung taiwan cpf mail stu edu tw acknowledgment we thank two anonymous referees for interesting and constructive comments on an earlier version of the paper any remaining errors are ours 1 introduction are price indices crucial for the existence of a nonlinear mean reversion of real exchange rates do prices or exchange rate adjustments dominate when deviations from purchasing power parity ppp occur is the half life implied by a nonlinear model reasonable the purpose of this article is to address the above three questions for the uk and new zealand over the period of recent float the ppp hypothesis has been one of the most intensive research issues in empirical international finance over the past two decades the rationale behind it is a simple arbitrage hypothesis which results in a linear adjustment of deviations from ppp and the stationarity of real exchange rates empirically existing evidence based on unit root tests provide mixed results for ppp abuaf and jorion 1990 mark 1990 o connell 1998a theoretically there are several reasons for the nonlinear adjustment of deviations from ppp such as the existence of market frictions or transaction costs sercu uppal and van hulle 1995 in addition models of pricing to market and exchange rate pass through give rise to impediments to goods arbitrage krugman 1987 froot and klemperer 1989 the implication is that the speed of adjustment of deviations from ppp depends on the magnitude of the deviations on the other hand the adoption of a price index is crucial in examining ppp several authors have argued that the consumer and producer price indices cpi and ppi respectively do not correspond to their theoretical counterparts and contain measurement errors and aggregation biases cheung and lai 1993 imbs et al 2005 in addition the commodity basket for cpi and ppi includes nontradable goods which impart a nonstationary component to real cpi or ppi exchange rates engel 1999 recently xu 2003 argues that the price index of traded goods tpi is the appropriate one for ppp since it reflects the behavior of arbitrage better than the cpi or ppi the purpose of this article therefore is to examine the nonlinear dynamics of tpi based real exchange rates several authors have applied a smooth transition autoregressive star model to capture the nonlinear dynamics of real exchange rates as it allows for a smooth adjustment between regimes michael nobay and peel 1997 taylor peel and sarno 2001 there are several reasons for us to apply a band threshold autoregressive tar instead of a star type model in our empirical analysis first our empirical evidence fails to reject the unit root hypothesis against the hypothesis of a nonlinear star stationary process based on the test provided by kapetanios shin and snell 2003 1 second the plots of cpi ppi and tpi based real exchange rates in figure 1 show that the tpi based real rate has the largest variation among these three real rates third our empirical evidence rejects the null hypothesis of linearity against tar type nonlinearity and supports the hypothesis that real exchange rates are tar type stationary figure 1 plots of real exchange rates for the uk and new zealand figure omitted see article image several empirical studies have applied a threshold type process to examine the nonlinear mean reversion of real exchange rates obstfeld and taylor 1997 o connell 1998b taylor 2001 sarno taylor and chowdhury 2004

dissecting the ppp puzzle the unconventional roles of nominal exchange rate and price adjustments the conventional view as expounded by sticky price models is that price adjustment determines the ppp reversion rate this study examines the mechanism by which ppp deviations are corrected nominal exchange rate adjustment not price adjustment is shown to be the key engine governing the speed of ppp convergence moreover nominal exchange rates are found to converge much more slowly than prices with the reversion being driven primarily by nominal exchange rates real exchange rates also revert at a slower rate than prices as identified by the ppp puzzle j econ lit 34 1996 647 c 2003 elsevier b v all rights reserved

aging and health financing in the u s a general equilibrium analysis abstract we quantify the effects of population aging on the u s healthcare system our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre 2010 u s data we find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of private vs public insurance without the affordable care act aca aging by itself leads to a 40 increase in health expenditures by 2060 and a 9 6 increase in gdp which is mainly driven by the increase of the fraction of older higher risk individuals in the economy as well as behavioral responses to aging and the subsequent expansion of the healthcare sector aging increases the premium in group based health insurance ghi markets and enrollment in ghi decreases while the individual based health insurance ihi market medicaid and medicare expand significantly the size of medicare will almost double by 2060 as the elderly dependency ratio increases additional funds equivalent to roughly 2 7 of gdp are required to finance medicare and medicaid the introduction of the aca increases the fraction of insured workers to almost 100 by 2060 compared to 82 without the aca this increase is driven by the stabilization of ghi markets and the further expansions of medicaid and the ihi market the aca mitigates the increase of healthcare costs by reducing the number of the uninsured who pay the highest market price for healthcare services overall the aca adds to the fiscal cost of population aging mainly via the medicaid expansion our findings demonstrate the importance of accounting for behavioral responses structural changes in the healthcare sector and general equilibrium adjustments when assessing the economy wide effects of aging

a fractional cointegration analysis of purchasing power parity a generalized notion of cointegration called fractional cointegration is introduced to examine the long run purchasing power parity ppp hypothesis by allowing deviations from equilibrium to follow a fractionally integrated process the fractional cointegration analysis can capture a wider range of mean reversion behavior than standard cointegration analyses this gain is flexibility in modeling subtle mean reverting dynamics is found to be important for a proper evaluation of long run ppp empirical results based on historical data for the 1914 1989 period show that ppp reversion exists and can be characterized by a fractionally integrated process in three out of five countries studied the results support ppp as a long run phenomenon though significant short run deviations from ppp can exist

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

characterizing nonlinearities in business cycles using smooth transition autoregressive models during the past few years investigators have found evidence indicating that various time series representing business cycles such as production and unemployment may be nonlinear in this paper it is assumed that if the time series is nonlinear then it can be adequately described by a smooth transition autoregressive star model the paper describes the application of these models to quarterly logarithmic production indices for 13 countries and europe tests reject linearity for most of these series and estimated star models indicate that the nonlinearity is needed mainly to describe the responses of production to large negative shocks such as oil price shocks

comparative politics and public finance we propose a model with micropolitical foundations to contrast different political regimes compared to a parliamentary regime the institutions of a presidential congressional regime produce fewer incentives for legislative cohesion but more separation of powers these differences are reflected in the size and composition of government spending a parliamentary regime has redistribution toward a majority less underprovision of public goods and more rents to politicians a presidential congressional regime has redistribution toward powerful minorities more underprovision of public goods but less rents to politicians the size of government is smaller under a presidential regime this last prediction is consistent with cross country data

validity of purchasing power parity for selected latin american countries linear and non linear unit root tests abstract the aim of this study is to examine empirically the validity of ppp in the context of unit root tests based on linear and non linear models of the real effective exchange rate of argentina brazil chile colombia mexico peru and venezuela for this purpose we apply the harvey et al 2008 linearity test and the non linear unit root test kruse 2011 the results show that the series with linear characteristics are argentina brazil chile colombia and peru and those with non linear characteristics are mexico and venezuela the linear unit root tests indicate that the real effective exchange rate is stationary for chile and peru and the non linear unit root tests evidence that mexico is stationary in the period analyzed the results show support for the validity of ppp in only three of the seven countries

empirical evidence on the strength of the monetary transmission mechanism in canada an aggregate approach abstract this paper examines the transmission of monetary policy in canada it emphasizes the transmission through interest rates and the exchange rate rather than through changes in monetary aggregates and provides empirical evidence on the strength of these channels using a highly aggregated structural model implications of these structural equations for the dynamic effects of monetary policy are explored through a simulation analysis

the size of government in majoritarian and consensus democracies this article looks at the effect of democratic institutions on the size of government with the help of the ordinary least squares regression analysis of data from the organization for economic cooperation and development oecd countries from 1974 to 1995 the study provides considerable evidence that the variance in the type of democracy measured by the lijphart index of majoritarian consensus political institutions has a systematic effect on the variance in the size of government measured both by total government outlays as well as total government revenue as a percentage of gross domestic product the article further argues that such institutional effects on the size of government are strengthened by partisan politics more specifically the analysis demonstrates the presence of the multiplicative interaction effect of the mutually reinforcing nature between the institutional structure and partisan composition of government in their association with the size of government

health and other asset holdings despite clear evidence of correlations between financial and medical statuses and decisions most models treat financial and health related choices separately this article bridges this gap by proposing a tractable dynamic framework for the joint determination of optimal consumption portfolio holdings health investment and health insurance we solve for the optimal rules in closed form and capitalize on this tractability to gain a better understanding of the conditions under which separation between financial and health related decisions is sensible and of the pathways through which wealth and health determine allocations welfare and other variables of interest such as expected longevity or the value of health furthermore we show that the model is consistent with the observed patterns of individual allocations and provide realistic estimates of the parameters that confirm the relevance of all the main characteristics of the model

constitutions politics and economics a review essay on persson and tabellini s the economic effects of constitutions in this essay i review the new book by torsten persson and guido tabellini the economic effects of constitutions which investigates the policy and economic consequences of different forms of government and electoral rules i also take advantage of this opportunity to discuss the advantages and disadvantages of a number of popular empirical strategies in the newly emerging field of comparative political economy

threshold nonlinearities in output some international evidence the empirical adequacy of linear ar and nonlinear setar models of trend stationary and difference stationary representations of output for canada germany japan the uk and the us are appraised test results suggest the presence of linear model residual structure of some form for all series and nonlinearities of specifically threshold form in trend stationary data for canada germany japan and the us and difference stationary data for germany japan and the us with the exception of canada estimated threshold nonlinear models imply asymmetric dynamics are able to account for all nonlinear structure in the data on the basis of bds statistics and provide sizeable reductions in residual variance in several cases most notably for germany

ideology and the size of us state government this paper theorizes that the impact of ideology on the size of us state governments increases with state income this idea is tested using state level ideology data derived from the voting behavior of state congressional representatives empirically the interaction of ideology and mean income is a key determinant of state government size at 1960s levels of income the impact of ideology is negligible at 1997 levels of income a one standard deviation move towards the left of the ideology spectrum increases state government size by about half a standard deviation estimated income elasticities differentiated by state and time are found to be increasing with ideology and diminishing with income as predicted by the theory

partisan politics and public finance changes in public spending in the industrialized democracies 1955 1989 this paper evaluates the role that partisan politics plays in altering public spending levels the analysis covers over three decades of data on the developments of the public sectors in 16 oecd countries the results of the analysis lend firm support to the partisan politics model of special note is the distinction between the electorate and the government ideological preferences and the dominant role that the former plays the results also suggest contrary to conventional wisdom that partisan political influences have not been eliminated with the tightening of linkages to the international economy

measuring core inflation in this paper we argue that measured rpi inflation is conceptually mismatched with core inflation the difference is more than just measurement error we propose a technique for measuring core inflation based on an explicit long run economic hypothesis core inflation is defined as that component of measured inflation that has no medium to long run impact on real output a notion that is consistent with the vertical long run phillips curve interpretation of the co movement in inflation and output we construct a measure of core inflation by placing dynamic restrictions on a vector autoregression var system

the value of life and the rise in health spending over the past half century americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result debate on health policy often focuses on limiting the growth of health spending we investigate an issue central to this debate is the growth of health spending a rational response to changing economic conditions notably the growth of income per person we develop a model based on standard economic assumptions and argue that this is indeed the case standard preferences of the kind used widely in economics to study consumption asset pricing and labor supply imply that health spending is a superior good with an income elasticity well above one as people get richer and consumption rises the marginal utility of consumption falls rapidly spending on health to extend life allows individuals to purchase additional periods of utility the marginal utility of life extension does not decline as a result the optimal composition of total spending shifts toward health and the health share grows along with income in projections based on the quantitative analysis of our model the optimal health share of spending seems likely to exceed 30 percent by the middle of the century

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

does government ideology matter in monetary policy a panel data analysis for oecd countries this paper examines whether government ideology has influenced monetary policy in oecd countries we use quarterly data in the 1980 1 2005 4 period and exclude emu countries our taylor rule specification focuses on the interactions of a new time variant index of central bank independence with government ideology the results show that leftist governments have somewhat lower short term nominal interest rates than rightwing governments when central bank independence is low in contrast short term nominal interest rates are higher under leftist governments when central bank independence is high the effect is more pronounced when exchange rates are flexible our findings are compatible with the view that leftist governments in an attempt to deflect blame of their traditional constituencies have pushed market oriented policies by delegating monetary policy to conservative central bankers

fiscal cost of demographic transition in japan abstract this paper quantifies the fiscal cost of demographic transition that japan is projected to experience over the next several decades in a life cycle model with endogenous saving consumption and labor supply in both intensive and extensive margins retirement waves of baby boom generations combined with a rise in longevity and low fertility rates raise the old age dependency ratio to 85 by 2050 the highest among major developed countries and generate a significant budget imbalance as the government faces rising costs of public pension and health and long term care insurance preserving the current level of the transfers will require a major increase in taxation using consumption taxes to balance the government budget the tax rate reaches the maximal value of 48 in late 2070s a pension reform to reduce benefits by 20 results in a peak tax rate of 37 which can be reduced further to 28 if the retirement age is also gradually raised by 5 years

public provision of private goods government may provide a good that can if legally permitted be supplemented by private purchases policy is determined by majority rule under standard assumptions on preferences a majority voting equilibrium exists a regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision combined public and private expenditure on the good is higher under this dual provision regime than under either of the alternatives under some preference configurations the median income voter is pivotal under others a voter with income below the median is pivotal

dynamic hedge ratio for stock index futures application of threshold vecm this study represents one of the first papers in stock index futures arbitrage literature to investigate the effects of arbitrage threshold on stock index futures hedging effectiveness by using threshold vector error correction model hereafter threshold vecm moreover in contrast to prior studies focusing on examining case studies involving mature stock markets this study not only adopts us s p 500 stock market as the sample but also adds an analysis of one emerging stock market hungarian bsi and examines the differences between them finally this investigation employs a rolling estimation process to examine the impact of arbitrage threshold behaviours on the setting of futures hedging ratio the empirical findings of this study are consistent with the following notions first arbitrage behaviour reduces co movement between futures and spot markets and increases the volatility of both futures and spot markets second this article denotes the outer regime of futures spot market for the case of hung

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

revisiting the uncertain unit root in gdp and cpi testing for non linear trend reversion we test for the presence of a unit root in u s gdp and cpi allowing for non linear trend reversion under the alternative hypothesis in contrast to most previous results we find evidence in favour of trend stationarity for both variables

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

noisy information distance and law of one price dynamics across us cities abstract us micro price data at the city level suggests that both the volatility and the persistence of law of one price deviations are rising in the distance between us cities a standard two city equilibrium model with trade costs can predict the relationship between volatility and distance but not between persistence and distance we show that if there is imperfect information about the state of nominal aggregate demand with noisy signals that are asymmetric across cities then distance and persistence will be positively correlated our main results are shown to be robust to the introduction of sticky prices and multiple cities

the effects of railroad development on price convergence among the states of the usa from 1866 to 1906 this study examines the effects of the reduced transaction costs on the price behaviours in the second half of the nineteenth century where declines in transaction costs were mainly caused by railroad development during this period it employs a panel test introduced by levin and lin 1992 on the convergence of wheat and corn prices using a panel of 48 us states from 1866 to 1906 the results show that by decreasing transportation costs railroads played an important role in price convergence among states of the usa for wheat and corn during the postbellum period

transactions costs and nonlinear adjustment in real exchange rates an empirical investigation eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity ppp conventional cointegration tests which ignore the effect of transactions costs may be biased against the long run ppp hypothesis our results using both monthly data for the interwar period and annual data spanning two centuries clearly reject the linear framework in favor of an exponential smooth transition autoregressive process the systematic pattern in the estimates of the nonlinear models provides strong evidence of mean reverting behavior for ppp deviations and helps explain the mixed results of previous studies

the roles of nominal exchange rate and relative price adjustments in ppp reversion this paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity ppp by estimating their dynamics with a bivariate threshold vector error correction model our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices however these two variables play different roles in restoring ppp the nominal exchange rate adjusts to restore ppp only outside the threshold band within the band ppp is restored mainly through adjustments in relative prices

a century of purchasing power parity confirmed the role of nonlinearity abstract taylor 2002 claims that purchasing power parity ppp has held over the 20th century based on strong evidence of stationary for century long real exchange rates for 20 countries lopez et al 2005 however found much weaker evidence of ppp with alternative lag selection methods we reevaluate taylor s claim by implementing a recently developed nonlinear unit root test by park and shintani 2005 we find strong evidence of nonlinear mean reversion in real exchange rates that confirms taylor s claim we also find a possible misspecification problem in using the estar model that may not be detected with taylor approximation based tests

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound