Economic Issues



Volume 14 (2009)

Part 1, March

Please select from the titles below:

Part 2, September

Please select from the titles below:

Part 1, March

S-Curve Dynamics of Trade: Evidence from US-Canada Commodity Trade (p.1)

by M Bahmani-Oskooee and A Ratha

Abstract: The J-Curve effect is a concept used to describe the short-run effects of currency depreciation on the trade balance, i.e., an initial deterioration of the trade balance followed by an improvement. A concept close to the J-Curve is the S-Curve introduced by Backus, et al (1994) who found that the cross-correlation function between current terms of trade and future values of the trade balance is positive, but between current terms of trade and past values of the trade balance it is negative. The S-curve, however, did not receive strong support in the cases of Canada and the US Suspecting that the lack of an S-Curve pattern for each of the two countries could be to the result of using aggregate trade data, we disaggregate the trade data between the two countries by commodity and provide overwhelming support for the S-Curve in 41 out of 60 industries, that account for more than 80 per cent of the bilateral trade between the two countries.

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The Impact of Institutions on the Employment Performance in European Labour Markets (p.17)

by H Buscher, C Dreger, R Ramos and J Surinach

Abstract: This paper investigates the role of the institutional framework for the labour market performance in EU countries. The point of departure is the labour demand equation that is derived from cost minimization behaviour of firms. Labour demand is expressed by its structural parameters, i.e. the output and real wage elasticity. Cointegration relationships between employment, output and wages are revealed by efficient estimation techniques. The long run parameters are explained by indicators for product and labour market institutions using panel fixed effects models. The results suggest that higher flexibility in the product and labour markets could be a strategy to improve the employment record. The response of employment to macroeconomic conditions is stronger in a more deregulated environment, and the absorption of shocks can be relieved.

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The Theoretical Analysis of Income Tax Evasion Revisited (p.35)

by E Gahramanov

Abstract: There exists an important puzzle in the income tax evasion literature, that higher tax rates unambiguously encourage tax compliance (Yitzhaki’s (1974) result). In this paper I show that by simply relaxing the assumption that higher tax rates necessarily translate into higher penalty payments at the initial optimum when caught, it is possible to generate rigorously an important extra disincentive to compliance, which is absent from the previous works. It can also be shown that Yitzhaki's (1974) result is a special case of the present formulation.

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Immigration, Trade and Product Differentiation (p.43)

by R White

Abstract: Immigrant-trade links are examined with an emphasis placed on variation across product types and home country income classifications. Data for the US and 70 trading partners spanning the 1980-1997 period are employed. We find the immigrant-trade relationship varies based on degree of product differentiation and by home country per-capita income. In response to a hypothetical 10 percent increase in the immigrant stock variable, US imports of differentiated goods from high income countries increase by approximately 2 percent. A like increase in the immigrant stock from low income countries increases US differentiated goods imports by 4.25 percent, while exports of homogenous goods increase by 2.5 to 4.3 percent. Imports of homogenous goods from high income nations and exports of all product types to these nations appear unaffected by immigrant stock levels.

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The Influence of Innovation and Imitation on Economic Performance (p.65)

by S Geisendorf

Abstract: The importance of innovation and imitation for the economy is discussed in different branches of economic theory. Some study the macro, others the micro level. Macroeconomic theories, concerned with technological progress do not explicitly distinguish between innovation and imitation. Microeconomic case studies, examine the advantage of one strategy over the other for individual firms, but do not study the macroeconomic effects. The present paper attempts to close this gap by proposing a model capturing the innovative and imitative activity on the micro level and the resulting performance on the macro level. This is done on the basis of a multi-agent simulation. The model gives a comprehensive picture of an evolving economy over time, first because it depicts the interplay of innovation and imitation and second because the agents are placed in a changing economic landscape, forcing them to discover new products. Apart from detecting a predominant strategy, the model shows to what extent the strategies depend on each other. A main result is that the significance of innovation is overemphasised in some parts of the literature. Imitation is the more important strategy, but it is actually the right mixture with a large proportion of imitation that is advancing an economy.

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Part 2, September

The Employment and Earnings of Britain’s Senior Citizens (p.1)

by D Leslie, D Blackaby, P Murphy and N O’Leary

Abstract: Britain's senior citizens, in common with the rest of Europe, are the fastest growing age group among the population and the numbers working have grown substantially. In 2007 the numbers working at or beyond the state pension age (65 and over for men, 60 and over for women) was 1.26 million, a number that has doubled over the past decade. In Europe generally these numbers will rise substantially. Using (mainly) a pooled dataset from the Labour Force Survey, the paper explores the determinants of the decision to work by household type (those with a partner and those without) as well as earnings, which are generally low. Female disadvantage appears to be a feature, just as with the working age population. Some comments about data discrimination against senior citizens are also made.

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Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy (p.27)

by P Arestis and A Mihailov

Abstract: This paper demonstrates that recent influential contributions to monetary policy imply an emerging consensus whereby neither rigid rules nor complete discretion are found optimal. Instead, middle-ground monetary regimes based on rules (operative under 'normal' circumstances) to anchor inflation expectations over the long run, but designed with enough flexibility to mitigate the short-run effect of shocks (with communicated discretion in 'exceptional' circumstances temporarily overriding these rules), are gaining support in theoretical models and policy formulation and implementation. The opposition of 'rules versus discretion' has, thus, reappeared as the synthesis of 'rules cum discretion', in essence as inflation-forecast targeting. But such synthesis is not without major theoretical problems, as we argue in this contribution. Furthermore, the very recent real-world events have made it obvious that the inflation targeting strategy of monetary policy, which rests upon the new consensus paradigm in modern macroeconomics is at best a 'fair weather' model. In the turbulent economic climate of highly unstable inflation, deep financial crisis and world-wide, abrupt economic slowdown nowadays this approach needs serious rethinking to say the least, if not abandoning it altogether.

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Testing for Long-Run Comovement, Common Features and Efficiency in Emerging Stock Markets: Evidence from the Caribbean (p.55)

by T Lorde, B Francis and A Greene

Abstract: This study investigates comovement, common features and efficiency in CARICOM stock markets. The stock markets of Barbados, Jamaica and Trinidad and Tobago are examined for the period 1991:1-2006:12, using the techniques of cointegration and common feature testing. No evidence is found of long-run or short-run comovement, or common features. These findings imply that (1) the BSE, JSE and TTSE are weakly efficient; (2) markets are segmented; and (3) there may be benefits from regional diversification of asset portfolios.

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The Role of International Diversification in Public Pension Systems: The Case of Pakistan (p.81)

by W Pfau

Abstract: Pakistan's pension system is in the process of increasing funding in anticipation of providing for a growing elderly population. The pension assets are mainly invested domestically, as only in January 2007 were regulations changed to allow the purchase of international assets. In this paper, we quantify how diversification of the pension funds to include world financial assets could help in improving the sustainability of Pakistan pensions, by simultaneously increasing expected returns and decreasing volatility. These arguments are made using historical data, and the robustness of our findings is demonstrated using a large variety of alternative assumptions about future asset returns, risks, and correlations. We find that international diversification could dramatically help to create sustainability for Pakistan's main public pension system available to private workers.

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Testing for Non-linearity in the Balancing Item of Balance of Payments Accounts: The Case of 20 Industrial Countries (p.107)

by T Tang

Abstract: The non-linearity of financial and economic time series is becoming a fundamental issue both at the theoretical and empirical level. This applies equally to balance of payments statistics such as balancing item (net errors and omissions), which is a residual variable needed to ensure that all debit and credit entries in the balance of payments statement sum to zero. This univariate variable is only one of a number of accounting balances that can be established in economic statistics that are used in assessing the accuracy of the balance of payments statistics. Except for Tang et al (forthcoming), the existing works which have studied the balancing item either disregard the presence of non-linearity or assume at the outset that the non-linearity takes a particular form. An AR(p) model is employed in the present paper to remove any linear structure from the balancing item series. Applying a battery of non-linearity tests, the assumption of linearity is tested for 20 industrial countries' balancing item. In general, the statistical tests reveal the presence of non-linear dependencies in the balancing item series for 16 out of the 20 industrial countries. An implication is that the non-linear dynamics of these balancing item series should be incorporated in the modelling and forecasting exercises for a majority of the countries.

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