Introduction of electronic trading in index futures : volatility and volume effects

There is continuing debate in the US over full introduction of electronic trading in those index futures contracts that are still traded at the CME via open outcry. Since the late 1990s major international exchanges trading index futures contracts have converted to full electronic trading. Recent empirical studies have focused on effects on bid/ask spreads and related price volatility following these changes. We take a different approach and investigate and test for structural change in conditional volatility and volume effects following the shift to electronic trading in the Australian Share Price Index futures contract. Multiple Switching point GARCH models are employed with the data sampled at 5, 15 and 30-minute intervals from transaction records supplied by the Sydney Futures Exchange. There is significant evidence of structural changes in both the persistence of volatility shocks and simultaneous volume effects following the change to screen trading in this futures market.

A stochastic derivation of the ratio form of contest success functions

This note provides a distribution-based justification for the ratio form of contest success functions (CSFs), in which a player’s success depends positively on her effort relative to that of her opponents. I show that the inverse exponential distribution of the random shocks yields the ratio form. Extending this approach to asymmetric contests, I also derive an asymmetric ratio form of CSFs.

New Zealand’s trade balance : evidence of the J-curve and granger causality

This article tests for the existence of any cointegration relationship between trade balance and real effective exchange rate (REER), foreign income and domestic income for New Zealand during the period 1970-2000. It also examines the direction of the casual relationship between the above variables, and applies the impulse response analysis to determine whether shocks to the REER induce the trade balance to follow a J-curve pattern. The results indicate that there is no cointegration relationship between the above variables; there is a casual connection in both directions between trade balance and foreign income; and New Zealand's trade balance exhibits a J-curve pattern when there is a depreciation of the New Zealand dollar.

Testing for a random walk in Italy's inflation in the post-war period, 1947-1996

This paper investigates the unit root properties of Italy’s inflation rate in the post-war period (1947-1996). To achieve the aim of this study, the Zivot and Andrews (1992) one break test and the Lumsdaine and Papell (1997) two breaks test for unit roots are applied. It is found that inflation for Italy was a non-stationary breakpoint for the period 1947-1996. This result has important implications for econometric modeling and in understanding the behavior of shocks to Italy’s inflation.

The relationship between saving and investment for Japan

In this paper, we revisit the saving and investment nexus as postulated by Feldstein and Horioka (FH) [Econ. J. 90 (1980) 314]. We test for cointegration between saving and investment using the recently developed bounds testing approach to cointegration and derive the long-run elasticities using the autoregressive distributed lag modeling approach for Japan over the period 1960–1999. We establish the unit root properties of the data in the presence of structural break(s) using the Zivot and Andrews (ZA) [J. Business Econ. Stat. 10 (1992) 251] and the Lumsdaine and Papell (LP) [Rev. Econ. Stat. 79 (1997) 212] tests. Finally, we ascertain the direction of causation between saving and investment by using the bootstrap approach. Amongst our key results we find that saving and investment are cointegrated for Japan; investment causes saving and saving causes investment; shocks to saving and investment have a permanent effect; and the long-run coefficient on saving is 0.68, implying a moderate rate of correlation. From the latter finding, we believe that there is no puzzle between saving and investment in the case of Japan, a result contrary to FH (1980).

The structure of tourist expenditure in Fiji : evidence from unit root structural break tests

The central aim of this paper is to investigate whether shocks to Fiji's tourism industry have a permanent effect or a transitory effect on tourist expenditure in Fiji. To accomplish this aim the Zivot and Andrews (1992) one break test and the Lumsdaine and Papell (1997) two break tests are used. The one break and two break tests reveal 1987 - the year of the military coups in Fiji - as the year of the break. Moreover, it is possible to reject the unit root null leading to the conclusion that shocks to Fiji's tourism industry have a transitory effect on tourist expenditure in Fiji.

Labour productivity trends in Australian manufacturing : some time series properties

Labour productivity plays a significant role in economic growth, labour demand and employment situation of a particular economy. In this light, the presence of a structural break in productivity, and its unit root property, has important consequences for the overall economy and in major sectors such as manufacturing. In this article, using some recently developed unit root tests, we examine: (i) the null hypothesis of a unit root in the log-level of labour productivity for 38 manufacturing subdivisions against the alternative of trend stationarity over a three-decade period; and (ii) the presence of a structural break in the series, and whether the break has had a permanent or a transitory effect on manufacturing labour productivity. Our main finding is that shocks to labour productivity have had a transitory effect, implying that policies are likely to have only short-term effects.

Testing for the random walk hypothesis in the case of visitor arrivals : evidence from Indian tourism

Testing for the random walk hypothesis, which asserts that a series is a non-stationary process or a unit root process, in the case of visitor arrivals has important implications for policy. If, for instance, visitor arrivals are characterized by a unit root, then it implies that shocks to visitor arrivals are permanent. However, if visitor arrivals are without a unit root, this implies that shocks to visitor arrivals are temporary. This study provides evidence on the random walk hypothesis for visitor arrivals to India using the recently developed Im et al. (2003) and Maddala and Wu (1999) panel unit root tests. Both tests allow one to reject the random walk hypothesis, implying that shocks to visitor arrivals to India from the 10 major source markets have a temporary effect on visitor arrivals.

Achieving growth in the Pacific islands : an introduction

The Small Island Developing States (SIDS)1 in the Pacific, spread out over an area of 30 million square kilometres of ocean, and home to over 9 million people, face a complex and unique set of development challenges. As small, highly open economies they are particularly susceptible to external shocks, including fluctuations in import prices and export earnings in particular. Remoteness from major ports and export markets, low levels of connectivity with the outside world and susceptibility to natural hazards further complicate matters and have resulted in the Pacific islands being amongst the most vulnerable economies in the world. In spite of their increasing integration into global markets, most face further challenges owing to very limited absorptive capacities, limited resources, inadequate technology, lack of infrastructure and poor economic management and institutional capabilities. As a consequence, economic growth and related outcomes in most remain heavily reliant on external resources, typically including at least one of aid, migrant remittances, and foreign direct investment (FDI) (AusAID 2008 and McGillivray et al. 2008). The particular constraints and growth challenges of Pacific SIDS are too often overlooked in the development research literature. Moreover, the policy debate on how to promote and achieve growth in the Pacific islands can benefit from a deeper understanding of the nature and consequences of these often unique, combination of constraints. This Focus is devoted to development challenges facing these islands, specifically relating to the achievement of economic growth, and draws on five papers that were presented or tabled at the World Institute for Development Economics Research (WIDER) ‘Fragility and Development’ research project meeting held in Fiji in December 2006.

Vulnerability, trade, financial flows and state failure in small island developing states

Small Island Developing States (SIDS) are very different to other developing countries. Relative to GDP they have the highest levels of foreign trade and aid receipts of all developing countries. Remittances from abroad are a far more important source of income for SIDS, and some depend very heavily on export revenues. The quality of governance varies tremendously among SIDS, they are over-represented among countries classified as fragile states and many are prone to state failure. These and other factors combine to make SIDS highly vulnerable to external economic shocks. Achieving development in SIDS is as a consequence an especially complex task that requires an understanding of the roles played by aid, trade, remittances and governance in these countries. This paper looks at these issues, along with providing various stylised facts about SIDS. In so doing it serves as a background and broad contextual setting for the papers that follow in this Special Issue on 'Fragility and Development in Small Island Developing States'.

Technology uncertainty and market collusion

In this paper, we propose technology uncertainty as a new factor relevant to market collusion. We analyze an infinitely repeated quantity game where, for each firm, the marginal productivity of the input employed in the production process is affected by an unobservable shock. Each firm faces technology uncertainty, measured by the variance of the shocks, in every period. We show that, under both grim trigger strategies and optimal punishments, technology uncertainty enhances cartel stability, suggesting that, in industries characterized by technology uncertainty, the actions of the antitrust authorities should be intensified. We also show that collusion is less likely when technology shocks are highly correlated, implying that regulators interested in deterring collusion should promote the formation of industrial clusters.

Impacts of monetary policies on housing affordability in Australia

Housing affordability has become a major policy issue in many countries across the world since the rapid inflation of house prices. This paper empirically investigates how monetary policies affect housing affordability in Australia from 1998 to 2009. Three primary variables associated with the housing sector and monetary policy, which are money supply, interest rates and house prices, are studied for all eight capital cities in Australia in this research. Shocks of such variables are identified by a structural vector autoregression (SVAR) model with restrictions that are consistent with economic theoretical framework. Based upon the analysis using the structural decomposition of impulse response on quarterly data, it can be discovered that the monetary policy plays an active role in housing affordability via adjustments of money supply and interest rates during the observed period in Australia. The empirical results from this research may be used for decision makers to determine money supply and interest rates from the perspective of housing affordability.

Economic network structures, growth and poverty

While investors are advised to diversify in order to manage risk, developing countries are advised instead to liberalise their trade regimes and specialise according to their current comparative advantage. This study uses 67 regions of the GTAP database to investigate the effects of unilateral liberalisation and its impacts on countries’ economic structures and the extent to which this affects countries’ vulnerability to an economic shock. While liberalisation resulted in improvements in GDP and welfare on average, there were significant variations. A number of countries experienced contractions in their GPDs and declines in welfare. While there was no evidence of a relationship between the percentage change in GDP and the initial export or output concentration, there was a positive relationship between the percentage change in GDP and the percentage change in export and output concentrations. On average, increases in GDP following liberalisation were associated with increases in concentration in both the export sector and in overall industrial output and also reductions in the fraction of unskilled labour employed by the main export sector. Initial GDP per capita has no significant effect, implying that once concentration measures and the fraction of costs in the main export are accounted for, the per capita income levels of a country show no systematic effects on the percentage change in GDP induced by the liberalisation. For developing countries undergoing unilateral liberalisation, the results imply that they are likely to experience an increase in GDP, but an increase accompanied by more highly concentrated industrial output and exports, and also a lower fraction of main export costs due to unskilled labour. Following liberalisation, the responses of liberalised and non-liberalised versions of the region’s economies to a shock were compared. The rest of the world’s productivity in the country’s main export was increased by 10%, with the liberalised economies faring marginally worse on average in welfare and terms of trade effects, but slightly better on GDP effects. When the net effects of the initial liberalisation and subsequent technology shock were compared, countries were better off on average if they had liberalised. But this average masked important sectoral differences. Countries specialising in sectors with high proportions of own-commodity inputs in their main export’s total cost, such as manufacturing, did best, while those specialising in food tended to suffer welfare declines. Higher levels of export and output concentration also tended to reduce welfare. This suggests that increased concentration does indeed make countries more vulnerable to certain economic shocks. Finally, the economic network structures of the two extreme cases, Tanzania and Vietnam are compared visually as an aid to interpretation.

A factor-augmented VAR approach : the effect of a rise in the US personal income tax rate on the US and Canada

In this paper a factor-augmented vector autoregressive (FAVAR) model is estimated to characterize the dynamic effects of shocks in the personal income tax rate in the United States on United States and Canadian economies. The representation and the estimate of the FAVAR model is based on Stock and Watson (2005) and the shocks are recovered applying the identification scheme proposed by Bernanke et al. (2005); this method allows impulse response functions to be generated for all the variables in the dataset and provides a description of the domestic and international transmission mechanisms of United States movements in the personal income tax rate. A distinguishing feature of our model is the disaggregation of traded goods sector where imports and exports are disaggregated into 12 and 13 industries, respectively. This provides extra information on the domestic and international transmission mechanism across the two countries. The results show that the FAVAR approach generates a reasonable characterisation of the effects of United States movements in the US personal income tax rate on the United States economy and its transmission to the Canadian economy.

Understanding the economic dynamics behind growth-inequality relationships

In this paper, a dynamic general equilibrium (DGE) model of growth–inequality relationships, with missing credit markets, knowledge spillover and self-employed agents, is calibrated to New Zealand data. The model explains how two distinct policy shocks involving redistribution and immigration imply, subsequently, two completely opposite outcomes. Agents’ inability to borrow aggravates a negative macroeconomic effect of heterogeneity on growth. Redistribution mitigates that effect but creates microeconomic disincentives on saving and work-effort. Consequently, immigration shocks that perturb variance of efficiency induce a negative growth–inequality relationship, while redistribution shocks, in New Zealand’s case, produce larger fluctuations in incentives than in macro benefits, implying a positive growth–inequality relationship.