Oxford Economic Papers - Advance Access

Keeping up with the Vaishyas? Caste and relative standing in India

Carlsson, F., Gupta, G., Johansson-Stenman, O. — 2008-05-07

People care about relative, and not only absolute, income. This paper investigates the importance of relative income within and between castes in the Indian caste system, using a choice experimental approach. The results indicate that slightly more than half of the marginal utility of income comes from some kind of relative income effects, on average. This is comparable to the results from previous studies in other countries. Belonging to a low caste and having a low family income are associated with higher concern for relative income. Moreover, an increase in the mean income of the caste to which the individual belongs, everything else held constant, reduces utility for the individual. Thus, the negative welfare effect of having a reduced relative income compared to the own caste average income dominates the positive welfare effect due to increased relative income of the own caste compared to the income of other castes.

Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model

Milas, C. — 2008-04-14

March 2007 saw an increase of 3.1% in UK inflation and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i) the relationship between inflation and M4 growth is not stable over time, and (ii) the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 9.8%. Above this threshold, the money effect on inflation is very small. The implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates.

JEL classifications: C51, C52, E52, E58.

Does pleasing export-oriented foreign investors help your balance of payments? A general equilibrium analysis

Razmi, A. — 2008-04-14

Many developing countries have adopted investor-friendly policies in order to attract export-oriented foreign direct investment (FDI). The effects of these policies on the external accounts have largely been ignored. We endogenize FDI inflows in a structuralist general equilibrium framework to contribute towards filling this gap. Our economy consists of: (i) a non-tradable goods sector and (ii) an export processing zone (EPZ) that hosts transnational corporations. We find that most of the commonly pursued policies considered are likely to have a negative impact on the balance of payments due to: (i) income re-distribution towards groups more likely to spend on imported goods, (ii) higher capacity utilization in the (more import-intensive) EPZ, and (iii) the excess supply of non-tradables created, which in turn has an adverse valuation effect via a real internal depreciation. Strong backward linkages, however, may under certain conditions help offset the adverse impact through a favorable valuation effect.

Exporting, R&D, and absorptive capacity in UK establishments

Harris, R., Li, Q. C. — 2008-03-28

This paper models the determinants of exporting (both in terms of export propensity and export intensity), with a particular emphasis on the importance of absorptive capacity and the endogenous link between exporting and undertaking R&D. Based on a merged dataset of the 2001 Community Innovation Survey and the 2000 Annual Respondents Database for the UK, our results suggest that establishment size plays a fundamental role in explaining exporting. Meanwhile, alongside other factors, undertaking R&D activities and having greater absorptive capacity (for scientific knowledge, international co-operation, and organizational structure) significantly reduce entry barriers into export markets, having controlled for self-selectivity into exporting. Nevertheless, conditional on entry into international markets, only greater absorptive capacity (associated with scientific knowledge) seems to further boost export performance in such markets, whereas spending on R&D no longer has an impact on exporting behaviour once we have taken into account its endogenous nature.

Mind the gap? Estimating the effects of postponing higher education

Holmlund, B., Liu, Q., Nordstrom Skans, O. — 2008-03-19

This paper estimates the effects on earnings of ‘gap years’ between high school and university enrollment. The effect is estimated by means of standard earnings functions augmented to account for gap years and a rich set of control variables using administrative Swedish data. We find that postponement of higher education is associated with a persistent and non-trivial earnings penalty. The main source of the persistent penalty appears to be the loss of work experience after studies. Two years postponement reduces the present value of lifetime earnings by nearly one half of one year's peak earnings.

Decision-making at the Bank of England: a critical appraisal

Downward, P., Mearman, A. — 2008-03-19

This paper investigates the process of decision-making within the Bank of England and the Monetary Policy Committee (MPC): specifically, the extent of triangulation in the process. Triangulation is the mixing of two or more methods, investigators, theories, or data in a single investigation. Extensive evidence of limited triangulation is found within the MPC process. It is suggested that to enhance the logical consistency of their recommendations, the Bank engages in greater method triangulation. Further, in keeping with the moves towards transparency in the MPC process, it is proposed that procedures for employing the existing triangulation be codified.

The composition of government spending and growth: is current or capital spending better?

Ghosh, S., Gregoriou, A. — 2008-03-06

In an endogenous growth framework with two public goods with differing productivities, this paper analytically characterizes optimal fiscal policy for a decentralized economy, whereby the optimal values of the growth rate, tax rate and expenditure shares on the two public goods are linked directly to their productivity parameters. Using panel data for 15 developing countries over 28 years, we show using GMM techniques, that current (capital) spending has positive (negative) and significant effects on the growth rate, contrary to commonly held views. For instance, spending on operations and maintenance has a stronger impact on growth than both health and education spending. We consider the various components on the revenue side of the government budget constraint to take into account possible omitted variable bias that could arise if tax revenue alone was considered.

Targets, zones, and asymmetries: a flexible nonlinear model of recent UK monetary policy

Boinet, V., Martin, C. — 2008-03-05

We estimate a flexible model of the behaviour of UK monetary policymakers in the era of inflation targeting based on a new representation of policymaker's preferences. This enables us to address a range of issues that are beyond the scope of the existing literature. We find a complex relationship between interest rates and inflation: interest rates are passive when inflation is close to the target but there is an increasingly vigorous response as inflation deviates further from the target.

Does human capital generate social and institutional capital? Exploring evidence from South African time series data

Fedderke, J. W., Luiz, J. M. — 2008-03-04

This paper presents an analysis of the interaction of human capital investment and the development of social and political institutions. We find that human capital matters—for growth through its quality dimension; for distributional conflict by raising political aspirations. But human capital does not stand alone either. The level of economic development (output) matters, distributional (instability) conflict as well as the rights dispensation can come to influence human capital investment decisions in their own right. Social, human capital, political as well as economic dimensions are densely interwoven in webs of association.

JEL classifications: O4, O1, I2, Z13.

The implications of growth regressions for equality of opportunity

O'Neill, D. — 2008-03-04

In this paper we consider the usefulness of alternative measures of convergence in an equality of opportunity framework. In particular we use established results from the public finance and mobility literature to show that a form of β-convergence is both a necessary and sufficient condition for a reduction in inequality of opportunity for a wide range of popular inequality measures. We illustrate our approach using regional data from the United States, Japan, and Europe.

JEL classifications: O47, R11

Central bank independence and price stability: evidence from OECD-countries

Daunfeldt, S.-O., de Luna, X. — 2008-02-23

In this paper, we use a non-parametric regression method to compare the transition process from high to low inflation with the implementation dates of central bank independence reforms. In most countries, price stability is achieved before more independence is given to the central bank. Moreover, for those countries which have implemented a central bank independence reform under a high inflation regime, no evidence is found that the reforms have actually led to price stability. This suggests that the credibility of a low inflation goal can be achieved without institutional reforms which grant the central bank more independence from the political policymakers.

JEL classifications: C14, E52, E58

The rise (and fall) of labour market programmes: domestic vs. global factors

Gaston, N., Rajaguru, G. — 2008-02-13

We provide a simple model to illustrate that tax and redistributive considerations as well as increasing globalization may lead workers unexposed to the threat of unemployment to prefer government spending on active labour market programmes to passive spending, e.g., on unemployment benefits. In the empirical work, panel data for OECD countries are used to examine the relationship between active and passive labour market spending and various controls relevant for analysing the political economy of labour market policies. Overall, we find that domestic concerns, such as government indebtedness, are far more important determinants of labour market expenditures than global influences.

JEL classifications: J68, H53, C33, P16

Fertility, income inequality, and labour productivity

Guest, R., Swift, R. — 2008-02-07

There is mounting evidence of a complex system of multi-directional links between fertility, productivity and inequality. The contribution of this study is a multi-country analysis of these three variables as a simultaneous system in a VECM framework using annual time series data for the UK, USA, Australia, Japan, and Sweden. The results highlight some differences between countries in the relationships between the variables. For the UK and Australia, the VECM analysis reveals a long run relationship between fertility and productivity to which both fertility and productivity adjust. This calls into question pro-fertility policies in these countries that aim to offset the costs of population ageing, because an increase in fertility may be associated with lower productivity in the long run. The results for the USA suggest that raising productivity in the long run will be associated with a decrease in both inequality and fertility. No significant long run relationships were found for Japan and Sweden.

JEL classifications: C3, E6, H3, O4

Voting games and computational complexity

Harrison, G. W., McDaniel, T. — 2008-01-18

Voting rules over three or more alternatives suffer from a general problem of manipulability. However, if the rule is ‘difficult’ to manipulate, in some formal computational sense that is intrinsic to the rule or some cognitive sense specific to the set of voters, then one might not observe manipulation in practice. We evaluate this hypothesis using controlled laboratory experiments. We conclude that one voting rule, due originally to Condorcet, is indeed behaviorally incentive-compatible despite being theoretically manipulable if the underlying preference environment is sufficiently diverse that voters have difficulty ascertaining others’ preferences.

Merger policy to promote 'global players'? A simple model

Haufler, A., Nielsen, S. B. — 2007-12-17

We use a simple framework where firms in two countries serve their respective domestic markets and a world market to analyse under which conditions cost-reducing mergers will be beneficial for the merging firms, the home country, and the world as a whole. For a national merger, the policies enacted by a national merger authority tend to be overly restrictive from a global efficiency perspective. In contrast, all international mergers that benefit the merging firms will be cleared by either a national or a regional regulator, and this laissez-faire approach is also globally efficient. Finally, we allow for multiple mergers and analyse whether national mergers, international mergers or no mergers will be the equilibrium market structure when the firms' decisions to merge are either taken non-cooperatively or cooperatively.

Financial constraints to innovation in the UK: evidence from CIS2 and CIS3

Canepa, A., Stoneman, P. — 2007-12-06

The role of financial factors as constraints to innovation in the UK is explored using data on individual returns to the second and third Community Innovation Surveys. It is found that financial factors do impact upon innovative activity and that impact is more severe in higher tech sectors and for smaller enterprises. These results extend but largely confirm the results in the extant literature by using a different approach to the standard cash flow based method, encompassing a wider class of investment phenomena (innovation rather than just R&D) and exploiting a new data base.

Financial intermediation, monitoring, and liquidity

Marini, F. — 2007-11-21

This paper constructs a theoretical model that integrates the two objectives of capital adequacy requirements and deposit insurance, namely avoiding banking crises and protecting small depositors. The paper also addresses the related question: why do banks fund loans with both equity and demand deposits? The model determines the optimal bank capital structure. In comparison with a Diamond-Dybvig bank which funds loans with demand deposits only, a capitalized financial intermediary provides liquidity to its depositors at a lower cost, and channels more funds to the most efficient investments. The model identifies the sources of market failure that may justify banking regulation.

JEL classifications: G21,G28.

The political economy of financial development

Girma, S., Shortland, A. — 2007-11-21

Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be obstructed to deny access to finance to potential competitors. We use panel data on developed and developing countries from 1975–2000 to examine the effect of a country's democracy characteristics and regime change on financial development. Our results show that regime stability and democracy promote financial development, with additional benefits from fully democratic regimes.

JEL classifications: G18; K0; O16; P16.

Effects of government initiatives on youth crime

Sabates, R., Feinstein, L. — 2007-10-10

This paper evaluates the impacts on male juvenile burglary conviction rates of two UK government interventions, the Reducing Burglary Initiative and Educational Maintenance Allowances, only the former of which had crime reduction as an explicit objective. Using difference-in-differences estimation techniques, the paper shows that in areas where both initiatives were introduced convictions for 16 to 18 year olds for burglary fell between 1.1 and 1.5 per 1,000 relative to areas where neither programme was introduced. This is also a much greater crime reduction than for areas that introduced the EMA or the RBI singly. We conclude, therefore, that educational policies can complement direct interventions for crime prevention. These findings also highlight the importance of joined-up thinking in policy delivery, i.e. the interconnections between departmental programmes in the delivery of desirable outcomes.