A two-sector growth model with institutional saving and investment

This paper develops a two-sector growth model in which institutional investors play a significant role. A necessary and sufficient condition is established under which these investors own the entire capital stock in the long run. The dependence of the long-run growth rate on the behaviour of such investors, and the effects of a productivity increase are analysed.

Saving and Re-building Lives: an Analysis of the Determinants of Disaster Relief

We analyse both theoretically and empirically, the factors that influence the amount of humanitarian aid which countries receive when they are struck by natural disasters. Our investigation particularly distinguishes between immediate disaster relief which helps the survival of victims and long term humanitarian aid given towards reconstruction and rehabilitation. The theoretical model is able to make predictions as well as explain some of the peculiarities in the empirical results. The empirical analysis, making use of some useful data sources, show that both short and long term humanitarian aid increase with number of people killed, financial loss and level of corruption, while GDP per capita has no effect. Number of people affected had no effect on short term aid, but significantly increased long term aid. Both types of aid increased if the natural disaster was an earthquake, tsunami or drought. In addition, short term aid increases in response to a flood while long term aid increases in response to storms.

Policy Labels and Investment Decision-making

Much attention in recent years has turned to the potential of behavioural insights to improve the performance of government policy. One behavioural concept of interest is the effect of a cash transfer label on how the transfer is spent. The Winter Fuel Payment (WFP) is a labelled cash transfer to offset the costs of keeping older households warm in the winter. Previous research has shown that households spend a higher proportion of the WFP on energy expenditures due to its label (Beatty et al., 2011). If households interpret the WFP as money for their energy bills, it may reduce their willingness to undertake investments which help achieving the same goal, such as the adoption of renewable energy technologies. In this paper we show that the WFP has distortionary effects on the renewable technology market. Using the sharp eligibility criteria of the WFP in a Regression Discontinuity Design, this analysis finds a reduction in the propensity to install renewable energy technologies of around 2.7 percentage points due to the WFP. This is a considerable number. It implies that 62% of households (whose oldest member turns 60) would have invested in renewable energy but refrain to do so after receiving the WFP. This analysis suggests that the labelling effect spreads to products related to the labelled good. In this case, households use too much energy from sources which generate pollution and too little from relatively cleaner technologies.

Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty

The paper studies the interaction between cyclical uncertainty and investment in a stochastic real option framework where demand shifts stochastically between three different states, each with different rates of drift and volatility. In our setting the shifts are governed by a three-state Markov switching model with constant transition probabilities. The magnitude of the link between cyclical uncertainty and investment is quantified using simulations of the model. The chief implication of the model is that recessions and financial turmoil are important catalysts for waiting. In other words, our model shows that macroeconomic risk acts as an important deterrent to investments.

The Global Side of the Investment-Savings Puzzle

In this paper we re-examine the long standing and puzzling correlation between national savings and investment in industrial countries. We apply an econometric methodology that allows us to separate idiosyncratic correlation at the country level from correlation at the global level. In a major break with the existing literature, we find no evidence of a long run relationship in the idiosyncratic components of savings and investment. We also find that the global components in savings and investments comove, indicating that they react to shocks of a global nature.

The Role of Institutions in Cross-Section Income and Panel Data Growth Models: A Deeper Investigation on the Weakness and Proliferation of Instruments

This paper investigates the role of institutions in determining per capita income levels and growth. It contributes to the empirical literature by using different variables as proxies for institutions and by developing a deeper analysis of the issues arising from the use of weak and too many instruments in per capita income and growth regressions. The cross-section estimation suggests that institutions seem to matter, regardless if they are the only explanatory variable or are combined with geographical and integration variables, although most models suffer from the issue of weak instruments. The results from the growth models provides some interesting results: there is mixed evidence on the role of institutions and such evidence is more likely to be associated with law and order and investment profile; government spending is an important policy variable; collapsing the number of instruments results in fewer significant coefficients for institutions.

Universal banking, competition and risk in a macro model

A stylized macroeconomic model is developed with an indebted, heterogeneous Investment Banking Sector funded by borrowing from a retail banking sector. The government guarantees retail deposits. Investment banks choose how risky their activities should be. We compared the benefits of separated vs. universal banking modelled as a vertical integration of the retail and investment banks. The incidence of banking default is considered under different constellations of shocks and degrees of competitiveness. The benefits of universal banking rise in the volatility of idiosyncratic shocks to trading strategies and are positive even for very bad common shocks, even though government bailouts, which are costly, are larger compared to the case of separated banking entities. The welfare assessment of the structure of banks may depend crucially on the kinds of shock hitting the economy as well as on the efficiency of government intervention.

Forward Looking and Myopic Regional Computable General Equilibrium Models. How Significant is the Distinction?

We present a stylized intertemporal forward-looking model able that accommodates key regional economic features, an area where the literature is not well developed. The main difference, from the standard applications, is the role of saving and its implication for the balance of payments. Though maintaining dynamic forward-looking behaviour for agents, the rate of private saving is exogenously determined and so no neoclassical financial adjustment is needed. Also, we focus on the similarities and the differences between myopic and forward-looking models, highlighting the divergences among the main adjustment equations and the resulting simulation outcomes.

Balanced Budget Government Spending in a Small Open Regional Economy

This paper investigates the impact of a balanced budget fiscal policy expansion in a regional context within a numerical dynamic general equilibrium model. We take Scotland as an example where, recently, there has been extensive debate on greater fiscal autonomy. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment even with a high level of congestion; but crowding out effects might arise in the short-run if agents are myopic.

Stability of Growth Models with Generalised Lag Structures

This paper considers the lag structures of dynamic models in economics, arguing that the standard approach is too simple to capture the complexity of actual lag structures arising, for example, from production and investment decisions. It is argued that recent (1990s) developments in the the theory of functional differential equations provide a means to analyse models with generalised lag structures. The stability and asymptotic stability of two growth models with generalised lag structures are analysed. The paper concludes with some speculative discussion of time-varying parameters.

A balance of questions: what can we ask of climate change economics?

The standard approach to the economics of climate change, which has its best known implementation in Nordhaus's DICE and RICE models (well described in Nordhaus's 2008 book, A Question of Balance) is not well equipped to deal with the possibility of catastrophe, since we are unable to evaluate a risk averse representative agent's expected utility when there is any signi cant probability of zero consumption. Whilst other authors attempt to develop new tools with which to address these problems, the simple solution proposed in this paper is to ask a question that the currently available tools of climate change economics are capable of answering. Rather than having agents optimally choosing a path (that differs from the recommendations of climate scientists) within models which cannot capture the essential features of the problem, I argue that economic models should be used to determine the savings and investment paths which implement climate targets that have been suggested in the physical science literature.

Political Risk, Economic Integration, and the Foreign Direct Investment Decision

In this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible. Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad.

Countercyclical Fiscal Policy and Cyclical Factor Utilization

In a neoclassical growth model with monopolistic competition in the product market, the presence of cyclical factor utilization enhances the stabilization role of countercyclical taxes. The costs of varying capital utilization take the form of varying rates of depreciation, which in turn have amplifying effect on investment decisions as well as the volatility of most aggregate variables. This creates an additional channel through which taxes affect the economy, a channel that enhances the stabilization role of countercyclical taxes, with particularly strong effects in the labor market. However, in terms of welfare, countercyclical taxes are welfare inferior due to reduced precautionary saving motives.

Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa

In this paper we diverge from the existing empirical literature on FDI determinants in two ways. First, we decompose the sources of the foreign direct investment (FDI) gap between Sub-Saharan Africa (SSA) and other developing regions. Once market size has been accounted for, we nd that SSA's FDI de cit is mostly explained by insufficient provision of public goods: low human capital accumulation, especially health, in SSA explains 100-140% of the inter-regional FDI gaps. Second, we estimate the indirect effect of infectious diseases on FDI through their direct impact on health. We find that a 1% point rise in HIV prevalence in the adult population is associated with a decrease in net FDI inflows of 3.5%, while a country in which 100% of the population is at risk of contracting deadly malaria receives about 16% less FDI than a similar country located in a malaria-free region.

Climbing to the top? Foreign Direct Investment and Property Rights.

This paper operates at the interface of the literature on the impact of foreign direct investment (FDI) on host countries, and the literature on the determinants of institutional quality. We argue that FDI contributes to economic development by improving institutional quality in the host country and we attempt to test this proposition using a large panel data set of 70 developing countries during the period 1981 and 2005, and we show that FDI inflows have a positive and highly significant impact on property rights. The result appears to be very robust and is and not affected by model specification, different control variables, or a particular estimation technique. As far as we are aware this is the first paper to empirically test the FDI – property rights linkage.