Oxford Economic Papers - Advance Access

Fiscal policy and monetary integration in Europe: an update

Candelon, B., Muysken, J., Vermeulen, R. — 2009-06-28

By distinguishing between discretionary and non-discretionary fiscal policy, this paper analyses the stability of fiscal rules for EMU countries before and after the Maastricht Treaty. Using both Instrumental Variables and GMM techniques, it turns out that discretionary fiscal policy has remained procyclical after 1992. This result contradicts the previous findings of Galí and Perotti. It also appears that fiscal rules differ between large and small countries; large countries follow a procyclical discretionary policy. Furthermore, the paper shows that discretionary fiscal policy exhibits different behaviour when facing supply or demand constraints. A procyclical discretionary policy is followed mainly during upswings, when supply constraints are prevalent. Finally, there is no support for the presence of a ‘fatigue effect’ in fiscal discipline.

Robust monetary policies in small open economies

Sen Gupta, A. — 2009-06-20

Recent research on model uncertainty has focused mainly on closed economies. Levin and Williams confirm the existence of robust rules across competing closed economy models. In this paper, we evaluate three small open economy models exhibiting different degrees of inflation and output gap persistence. We find that the above result does not carry over to the open economy, primarily due to the mutually exclusive degree of interest rate smoothing that yields stability in the three models. We also confirm the existence of robust rules across the closed economy versions of these models. Finally, a first difference rule, though yields dynamic stability across the open economy models, continues to perform poorly in at least one of the models. Thus, the cost of choosing the wrong model is extremely high in open economies compared to closed economies, and policymakers must invest more resources to know the true structure of these economies.

Are leading papers of better quality? Evidence from a natural experiment

Coupe, T., Ginsburgh, V., Noury, A. — 2009-06-19

European countries in which universities rely on public funding increasingly follow the lead of the United Kingdom and run Research Assessment Exercises. Given the subjective nature of such evaluations, some scientists prefer verifiable measures such as citation counts. This, however, also is prone to problems since the number of cites is correlated, among others, with the order of appearance in an issue. In particular, leading papers are more cited. It is, thus, difficult to assess whether they are of better quality, or whether this happens because they appear first in an issue. We make use of a natural experiment that was carried out by a journal in which papers are randomly ordered in some issues, while this order is at the editors’ discretion in other issues. Our estimates suggest that approximately two thirds of the additional cites are due to going first, and one third to higher quality.

Strategic licensing, exports, FDI, and host country welfare

Sinha, U. B. — 2009-06-10

This paper analyses the preference of a foreign firm over serving a host country market and its impact on the host country welfare. We show that the foreign firm can choose licensing its superior technology to a host firm strategically which influences the foreign firm's subsequent preference over exporting and FDI. The effect on the host country welfare depends on the structure of license fee and it is shown that strategic licensing might lead to welfare loss for the host country. To this end this paper also prescribes either an optimal tariff scheme or a ban on licensing to maximize the host country welfare.

Banking panics, bank failures, and the lender of last resort: the Showa Depression of 1930-1932

Akiyoshi, F. — 2009-06-02

By using bank-level data pertaining to the period of the Showa Depression in Japan, we examine whether banking panics caused solvent banks to close down and fail. We find that bank fundamentals were weakly related to the failures during the panics. This result implies that the confusion on the part of depositors regarding bank asset quality was not negligible during the panics. Further, we find that during the panics, the Bank of Japan (BoJ) selectively provided liquidity assistance to solvent banks that suffered heavy withdrawals. The BoJ as a lender of last resort prevented the closures of these solvent banks and mitigated the potential problems of the panics.

On the sensitivity of firms' investment to cash flow and uncertainty

Baum, C. F., Caglayan, M., Talavera, O. — 2009-06-02

We investigate the analytical and empirical linkages between cash flow, uncertainty, and firms' capital investment behavior. Our empirical approach constructs measures of own- and market-specific uncertainty from firms' daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty is an important determinant of firms' investment behavior. Depending on the measure of uncertainty used, investment may be stimulated or curtailed by the effects of uncertainty on its own or through its interactions on cash flow.

Innovation and the determinants of company survival

Buddelmeyer, H., Jensen, P. H., Webster, E. — 2009-05-15

Although many companies compete through the development of new technologies and products, it is well known that innovation is inherently risky and therefore may increase the ex ante likelihood of both exceptional company performance and bankruptcy. However, existing empirical studies consistently find a positive relationship between innovative activity and company survival. We argue that this conclusion may be a result of a simple selection effect caused by the degree of uncertainty embodied in the innovation proxies used. Using a panel of almost 300,000 Australian companies, we estimate a piecewise-constant exponential hazard rate model to examine the relationship between innovation and company survival. As expected, we find that the degree of uncertainty embodied in different innovation proxies does shape the pattern of company survival.

Monopolistic unions, Brainard uncertainty, and optimal monetary policy

Henckel, T. — 2009-05-15

Some authors have argued that multiplicative uncertainty may benefit society as the cautionary motive reduces the inflation bias. However, when there are non-atomistic wage setters, higher multiplicative uncertainty may raise the wage premium and unemployment and thus reduce welfare. Furthermore, since central bank preferences also affect the wage premium, delegating policy to an independent central banker with an optimal degree of conservatism cannot deliver a second-best outcome.

What does excess bank liquidity say about the loan market in Less Developed Countries?

Khemraj, T. — 2009-05-14

Evidence about commercial banks’ liquidity preference says the following about the loan market in less developed countries (LDCs): (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over an exogenous foreign interest rate, marginal transaction costs, and a risk premium. In order to present its case, the paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise demonstrates that the hypothesis of a minimum mark-up loan rate is largely consistent with the observed stylized facts of flat liquidity preferences.

Eastham's commodity storage model in a modern context

Carter, C. A., Revoredo-Giha, C. L. — 2009-04-24

This paper revives the seminal work of Jack Kenneth (J.K.) Eastham, an economist from the Dundee School of Economics, who in the 1930s wrote on the theoretical aspects of storable commodity markets. First, we present Eastham's contribution and show that despite using a graphical analysis, Eastham's model anticipated the modern competitive storage model (e.g., the presence of speculative stockholders acting as arbitrageurs and the shape of the aggregate commodity demand curve). Second, we explore the writings that may have influenced Eastham in the formulation of his model, by considering contributions of Wicksteed, through the influence of the London School of Economics; Keynes; and economists from the United States such as Mordecai Ezekiel and John Williams. Finally, our paper explores possible reasons why Eastham's contribution on storable commodity markets was overlooked in the subsequent literature.

An inaugural conjecture

Kemp, M. C. — 2009-04-20

In his inaugural lecture of 1953 Hicks conjectured that any uniform expansion of a country's production set would benefit its trading partner. Corden and Ikema later provided conditions on that country's consumption which, if added to Hicks’ condition on production, would validate Hicks’ conjecture. However neither related his conditions to the fundamental determinants of the partner's welfare, viz. the preferences, technology, and resources of the expanding country. Later again, Kemp and Wan showed that the conjecture is valid if preferences in the expanding country are homothetic. The present note provides less severe necessary and sufficient conditions for the Hicksian outcome.

How does investing in cheap labour countries affect performance at home? Firm-level evidence from France and Italy

Barba Navaretti, G., Castellani, D., Disdier, A.-C. — 2009-04-17

Transferring low tech manufacturing jobs to cheap labour countries is often seen by part of the general public and policy makers as a step into the de-industrialization of the European economies. However, recent contributions have shown that the effects on home economies are rarely negative. Our paper contributes to this literature by examining how outward investments to developing and less developed countries (LDCs) affect home activities of French and Italian firms that turn multinational in the period analysed. The effects of these investments are also compared to the effects of investments to developed economies (DCs). The analysis is carried out by using propensity score matching. We find no evidence of a negative effect of outward investments to LDCs. In Italy they have a positive long term effect on value added and employment. For France we find a positive effect on the size of domestic output and employment.

Over-optimism and lender liability in the consumer credit market

Iossa, E., Palumbo, G. — 2009-04-13

Credit purchases of consumer goods are commonly made upon terms governed by an agreement between the lender and the seller. The puzzle that the paper addresses is the issue that in this type of purchase the lender should be jointly liable with the seller for breach of sale contract by the seller (principle of joint responsibility). We study the rationale for this principle in situations where market failure arises because consumers underestimate the risk of product failure—for example due to seller misrepresentation—and it is difficult to enforce seller responsibility. We show that joint responsibility increases welfare and reduces the incentives of sellers to misrepresent the quality of their products.

How do Russian depositors discipline their banks? Evidence of a backward bending deposit supply function

Karas, A., Pyle, W., Schoors, K. — 2009-04-13

Using a database from post-communist, pre-deposit-insurance Russia, we demonstrate the presence of quantity-based sanctioning of weaker banks by both firms and households. Evidence for the standard form of price discipline, however, is weak. This combination of findings is unusual within the context of the literature on market discipline. But it is consistent with depositors interpreting the deposit rate as a complementary proxy of otherwise unobserved bank-level risk. Testing this hypothesis, we estimate the deposit supply function and show that, particularly for poorly capitalized banks, interest rate increases exhibit diminishing, and eventually negative, returns in terms of deposit attraction.

Higher education academic salaries in the UK

Walker, J., Vignoles, A., Collins, M. — 2009-03-26

It is widely believed that higher education academic salaries are too low, and that this may lead to a ‘brain drain’ and also lower quality in higher education, as universities fail to attract the ‘brightest and the best’. We compare the salaries of higher education teaching professionals in the UK with those of other comparable professionals. We compare academic salaries to a range of occupational groupings that one might view as similar, in terms of unobserved characteristics, to academics. We conclude that HE teaching professionals earn lower earnings than most public sector graduates and do particularly poorly compared to most other comparable professionals. In particular, academic earnings compare poorly to those in the legal professions, consultant physicians and dental practitioners (across both the public and private sectors). On the other hand, some public sector workers do worse than HE academics, e.g. FE teachers.

Who pays brokers' commissions? Evidence from fine wine auctions

Marks, D. — 2009-03-26

As brokers between consignors and buyers, auction houses routinely charge successful bidders a broker's commission—a percent of their successful bids. This study considers the extent to which differences in brokers’ commissions are reflected in differences in winning bids in fine wine auctions, drawing upon an unusually detailed collection of auction data for Bordeaux wine and providing a ‘natural experiment’ for testing the incidence of brokers’ commissions. The data allow not only a test of the extent to which the commission charged to buyers is reflected in the buyers’ bids but also a reasonably comprehensive explanation of variations in wine auction prices. The results indicate that buyers’ premia are capitalized fully into bids so that bids fall accordingly with obvious consequences for the proceeds from the sale.

Sovereign risk: constitutions rule

Kohlscheen, E. — 2009-03-23

This paper models the executive's choice of whether to reschedule external debt as the outcome of an intra-governmental negotiation process. The key issue the paper tries to explain is the stark difference in default rates between the group of developing countries that have presidential forms of government and those that are parliamentary (6.0%/year vs 1.6%/year). This difference is present in spite of the fact that the latter group tends to have a somewhat higher turnover of the executive. The conditions under which parliamentary democracies will deliver lower probabilities of default than presidential countries are derived in a model with opportunistic politicians. Empirically, I find that middle-income democracies with parliamentary regimes, more checks on the executive, lower turnover in leadership and coalition governments show lower default propensities.