Fiscal stringency and fiscal sustainability : panel evidence from the American state and local governments

Most state (and local) governments in the U.S. operate under formal fiscal rules which limit their ability to run budget deficits and resort to debt financing. A priori, one would expect to find evidence in favor of an intertemporally balanced budget, or fiscal sustainability, for these states, especially those characterized by a relatively high degree of fiscal stringency. We test this hypothesis for a panel of 47 state–local government units (1961–2006) using four budget balance definitions and several subsamples defined based on regional classifications, or presence of certain balanced budget requirements (BBRs). Our results, obtained from panel estimation techniques that allow for general forms of serial and cross-sectional dependence, suggest that a sufficient condition for “strong” sustainability is consistently satisfied for the full sample and all subsamples in relation to balances that include special funds and/or federal grants. However, we find evidence consistent with the “weak” version of sustainability for the full sample and some regional subsamples (particularly Far West dominated by California) in at least one of the two balances that exclude these items. Finally, the BBRs seem to matter only in relation to the sustainability of the more narrowly defined balances. We discuss the implications of these findings for the role of fiscal rules and federal grant policies.

Does electricity consumption panel Granger cause GDP? A new global evidence

The goal of this paper is to undertake a panel data investigation of long-run Granger causality between electricity consumption and real GDP for seven panels, which together consist of 93 countries. We use a new panel causality test and find that in the long-run both electricity consumption and real GDP have a bidirectional Granger causality relationship except for the Middle East where causality runs only from GDP to electricity consumption. Finally, for the G6 panel the estimates reveal a negative sign effect, implying that increasing electricity consumption in the six most industrialised nations will reduce GDP. © 2010 Elsevier Ltd. All rights reserved.

Panel multi-predictor test procedures with an application to emerging market sovereign risk

As a response to the inefficient practices and possibly misleading inferences resulting from the unit-by-unit application mostly found in the literature, the current paper develops a block bootstrap based panel predictability test procedure that accommodates multiple predictors. As an empirical illustration we consider emerging market sovereign risk where data are usually available across multiple countries, and local and global predictors. The results, which are in agreement with the existing literature on the determinants of sovereign risk, suggest that the global predictors are best and that the predictive ability of the local predictors is limited, at best.

Estimating money demand functions for South Asian countries

In this paper, we estimate a money demand function for a panel of five South Asian countries. We find that the money demand and its determinants, namely real income, real exchange rate and short-term domestic and foreign interest rates are cointegrated both for individual countries as well as for the panel, and panel long-run elasticities provide robust evidence of statistically significant relationships between money demand and its determinants. Our test for panel Granger causality suggests short-run causality running from all variables, except foreign interest rate, to money demand, and we find evidence that except for Nepal money demand functions are stable.

Does environmental quality influence health expenditures? empirical evidence from a panel of selected OECD countries

In this paper we examine the role of environmental quality in determining per capita health expenditures. We take a panel cointegration approach in order to explore the possibility of estimating both short-run and long-run impacts of environmental quality. Our empirical analysis is based on eight OECD countries, namely Austria, Denmark, Iceland, Ireland, Norway, Spain, Switzerland, and the UK for the period 1980–1999. We find that per capita health expenditure, per capita income, carbon monoxide emissions, sulphur oxide emissions and nitrogen oxide emissions are panel cointegrated. While short-run elasticities reveal that income and carbon monoxide emissions exert a statistically significant positive effect on health expenditures, in the long-run in addition to income and carbon monoxide, we find that sulphur oxide emissions have a statistically significant positive impact on health expenditures.

The purchasing power parity revisited : new evidence for 16 OECD countries from panel unit root tests with structural breaks

In this paper, we apply a range of univariate unit root tests including the Lagrangian multiplier (LM) univariate and panel unit root tests to examine PPP for 16 OECD countries. In addition to incorporating structural breaks in the univariate exchange rate series, we also incorporate structural breaks in the panel exchange rate models. Our main finding from univariate tests, with and without structural breaks and panel LM test with one break, is that real exchange rates are not stationary, inconsistent with PPP hypothesis. However, when we incorporate two structural breaks in the univariate LM test, for most countries we find that real exchange rates are stationary. Moreover, we obtain overwhelming support for PPP when we apply panel LM unit root tests with two structural breaks.

A panel data analysis of the military expenditure-external debt nexus : evidence from six middle eastern countries

While a number of studies examine the nexus between military expenditure and economic growth, little consideration has been give to the effect of military expenditure on external debt. This article examines the impact of military expenditure and income on external debt for a panel of six Middle Eastern countries - Oman, Syria, Yemen, Bahrain, Iran, and Jordan - over the period 1988 to 2002. The Middle East represents an interesting study of the effect of military expenditure on external debt because it has one of the highest rates of arms imports in the world and it is one of the most indebted regions in the world. The study first establishes whether there is a long-run relationship between military expenditure, income, and external debt in the six countries using a panel unit root and panel cointegration framework and then proceeds to estimate the long-run and short-run effects of military expenditure and income on external debt. The study finds that external debt is elastic with respect to military expenditure in the long run and inelastic with respect to military expenditure in the short run. For the panel of six Middle Eastern countries, in the long run a 1% increase in military expenditure results in between a 1.1 % and 1.6% increase in external debt, while a 1% increase in income reduces external debt by between 0.6% and 0.8%, depending on the specific estimator employed. In the short run, a 1% increase in military expenditure increases external debt by 0.2%, while the effect of income on external debt is statistically insignificant.

The effect of inflation and real wages on productivity: new evidence from a panel of G7 countries

This article examines the effect of inflation and real wages on productivity within a panel unit root and panel cointegration framework for the G7 countries over the period 1960 to 2004. The main contribution of the article is to provide panel long-run estimates of the effect of inflation and real wages on productivity in the G7 countries over this period. The article finds that for the panel as a whole a 1% increase in real wages generates a 0.6% increase in productivity, while the effects of inflation on productivity are statistically insignificant for most of the individual countries and for the panel as a whole.

A panel data analysis of the determinants of oil consumption : the case of Australia

The goal of this paper is to examine the determinants of oil consumption for a panel consisting of six Australian States and one territory, namely Queensland, New South Wales, Victoria, Tasmania, South Australia, Western Australia, and the Northern territory, for the period 1985–2006. We find that oil consumption, oil prices and income are panel cointegrated. We estimate long-run elasticities and find that oil prices have had a statistically insignificant impact on oil consumption, while income has had a statistically significant positive effect on oil consumption.

Are shocks to real output permanent or transitory? Evidence from a panel of Pacific Island countries

Panel unit root and stationarity tests without structural breaks suggest that for eight Pacific island economies real gross domestic product (GDP) per capita contains a unit root. The panel stationarity test that accommodates structural change in the trend function, however, finds evidence in favour of regimewise trend stationarity. This result points to the importance of taking structural breaks into account. The finding implies that, for the period considered, the permanent secular component of output is dominated by transitory fluctuations accompanied by infrequent changes in the trend function. The only exceptions are Fiji and Kiribati, for which individual stationarity tests with multiple structural breaks suggest that real GDP per capita contains a unit root.

The productivity-wage and productivity-employment nexus : a panel data analysis of Indian manufacturing

This article investigates the long-run relationship between labour productivity and employment, and between labour productivity and real wages in the case of the Indian manufacturing sector. The panel data set consists of 17 two-digit manufacturing industries for the period 1973–1974 to 1999–2001. We find that productivity-wages and productivity-employment are panel cointegrated for all industries. We find that both employment and real wages exert a positive effect on labour productivity. We argue that flexible labour market has a significant influence on manufacturing productivity, employment and real wages in the case of Indian manufacturing.

The tax-spending nexus : evidence from a panel of US state–local governments

We re-examine the tax-spending nexus using a panel of 50 US state–local government units between 1963 and 1997. We find that, unlike tax revenues, expenditures adjust to revert back to a long-term equilibrium relationship. The evidence on the short-term dynamics is also consistent with the tax-and-spend hypothesis. One implication of this finding is that the size of the government at the state–local level is not determined by expenditure demand, but rather by resource supply. This is consistent with the fact that many US state and local governments operate under constitutional or legislative limitations that seek to constrain deficits.

A panel vector error correction approach to forecasting demand in regional construction markets

Reliable forecasting as to the level of aggregate demand for construction is of vital importance to developers, builders and policymakers. Previous construction demand forecasting studies mainly focused on temporal estimating using national aggregate data. The construction market can be better represented by a group of interconnected regions or local markets rather than a national aggregate, and yet regional forecasting techniques have rarely been applied. Furthermore, limited research has applied regional variations in construction markets to construction demand modelling and forecasting. A new comprehensive method is used, a panel vector error correction approach, to forecast regional construction demand using Australia’s state-level data. The links between regional construction demand and general economic indicators are investigated by panel cointegration and causality analysis. The empirical results suggest that both long-run and causal links are found between regional construction demand and construction price, state income, population, unemployment rates and interest rates. The panel vector error correction model can provide reliable and robust forecasting with less than 10% of the mean absolute percentage error for a medium-term trend of regional construction demand and outperforms the conventional forecasting models (panel multiple regression and time series multiple regression model). The key macroeconomic factors of construction demand variations across regions in Australia are also presented. The findings and robust econometric techniques used are valuable to construction economists in examining future construction markets at a regional level.

Testing for stock return predictability in a large Chinese panel

This paper proposes a simple panel data test for stock return predictability that is flexible enough to accommodate three key salient features of the data, namely, predictor persistency and endogeneity, and cross-sectional dependence. Using a large panel of Chinese stock market data comprising more than one million observations, we show that most financial and macroeconomic predictors are in fact able to predict returns. We also show how the extent of the predictability varies across industries and firm sizes.