Essays on mixed-frequency data : forecasting and unit root testing

Doutoramento em Economia

City relative price dynamics in Australia : are structural breaks important?

This paper examines the dynamic behaviour of relative prices across seven Australian cities by applying panel unit root test procedures with structural breaks to quarterly consumer price index data for 1972 Q1–2011 Q4. We find overwhelming evidence of convergence in city relative prices. Three common structural breaks are endogenously determined at 1985, 1995, and 2007. Further, correcting for two potential biases, namely Nickell bias and time aggregation bias, we obtain half-life estimates of 2.3–3.8 quarters that are much shorter than those reported by previous research. Thus, we conclude that both structural breaks and bias corrections are important to obtain shorter half-life estimates.

Income inequality in the process of economic development : An empirical approach

This thesis studies the effect of income inequality on economic growth. This is done by analyzing panel data from several countries with both short and long time dimensions of the data. Two of the chapters study the direct effect of inequality on growth, and one chapter also looks at the possible indirect effect of inequality on growth by assessing the effect of inequality on savings. In Chapter two, the effect of inequality on growth is studied by using a panel of 70 countries and a new EHII2008 inequality measure. Chapter contributes on two problems that panel econometric studies on the economic effect of inequality have recently encountered: the comparability problem associated with the commonly used Deininger and Squire s Gini index, and the problem relating to the estimation of group-related elasticities in panel data. In this study, a simple way to 'bypass' vagueness related to the use of parametric methods to estimate group-related parameters is presented. The idea is to estimate the group-related elasticities implicitly using a set of group-related instrumental variables. The estimation results with new data and method indicate that the relationship between income inequality and growth is likely to be non-linear. Chapter three incorporates the EHII2.1 inequality measure and a panel with annual time series observations from 38 countries to test the existence of long-run equilibrium relation(s) between inequality and the level of GDP. Panel unit root tests indicate that both the logarithmic EHII2.1 inequality measure and the logarithmic GDP per capita series are I(1) nonstationary processes. They are also found to be cointegrated of order one, which implies that there is a long-run equilibrium relation between them. The long-run growth elasticity of inequality is found to be negative in the middle-income and rich economies, but the results for poor economies are inconclusive. In the fourth Chapter, macroeconomic data on nine developed economies spanning across four decades starting from the year 1960 is used to study the effect of the changes in the top income share to national and private savings. The income share of the top 1 % of population is used as proxy for the distribution of income. The effect of inequality on private savings is found to be positive in the Nordic and Central-European countries, but for the Anglo-Saxon countries the direction of the effect (positive vs. negative) remains somewhat ambiguous. Inequality is found to have an effect national savings only in the Nordic countries, where it is positive.

Essays on growth and environment

This thesis consists of a summary and four self-contained papers. Paper [I] Following the 1987 report by The World Commission on Environment and Development, the genuine saving has come to play a key role in the context of sustainable development, and the World Bank regularly publishes numbers for genuine saving on a national basis. However, these numbers are typically calculated as if the tax system is non-distortionary. This paper presents an analogue to genuine saving in a second best economy, where the government raises revenue by means of distortionary taxation. We show how the social cost of public debt, which depends on the marginal excess burden, ought to be reflected in the genuine saving. We also illustrate by presenting calculations for Greece, Japan, Portugal, U.K., U.S. and OECD average, showing that the numbers published by the World Bank are likely to be biased and may even give incorrect information as to whether the economy is locally sustainable. Paper [II] This paper examines the relationships among per capita CO2 emissions, per capita GDP and international trade based on panel data spanning the period 1960-2008 for 150 countries. A distinction is also made between OECD and Non-OECD countries to capture the differences of this relationship between developed and developing economies. We apply panel unit root and cointegration tests, and estimate a panel error correction model. The results from the error correction model suggest that there are long-term relationships between the variables for the whole sample and for Non-OECD countries. Finally, Granger causality tests show that there is bi-directional short-term causality between per capita GDP and international trade for the whole sample and between per capita GDP and CO2 emissions for OECD countries. Paper [III] Fundamental questions in economics are why some regions are richer than others, why their growth rates differ, whether their growth rates tend to converge, and what key factors contribute to explain economic growth. This paper deals with the average income growth, net migration, and changes in unemployment rates at the municipal level in Sweden. The aim is to explore in depth the effects of possible underlying determinants with a particular focus on local policy variables. The analysis is based on a three-equation model. Our results show, among other things, that increases in the local public expenditure and income taxe rate have negative effects on subsequent income income growth. In addition, the results show conditional convergence, i.e. that the average income among the municipal residents tends to grow more rapidly in relatively poor local jurisdictions than in initially “richer” jurisdictions, conditional on the other explanatory variables. Paper [IV] This paper explores the relationship between income growth and income inequality using data at the municipal level in Sweden for the period 1992-2007. We estimate a fixed effects panel data growth model, where the within-municipality income inequality is one of the explanatory variables. Different inequality measures (Gini coefficient, top income shares, and measures of inequality in the lower and upper part of the income distribution) are examined. We find a positive and significant relationship between income growth and income inequality measured as the Gini coefficient and top income shares, respectively. In addition, while inequality in the upper part of the income distribution is positively associated with the income growth rate, inequality in the lower part of the income distribution seems to be negatively related to the income growth. Our findings also suggest that increased income inequality enhances growth more in municipalities with a high level of average income than in municipalities with a low level of average income.

Non-Parametric Tests of Real Exchange rates in the Post-Bretton Woods Era

This paper examines the mean-reverting property of real exchange rates. Earlier studies have generally not been able to reject the null hypothesis of a unit-root in real exchange rates, especially for the post-Bretton Woods floating period. The results imply that long-run purchasing power parity does not hold. More recent studies, especially those using panel unit-root tests, have found more favorable results, however. But, Karlsson and Löthgren (2000) and others have recently pointed out several potential pitfalls of panel unit-root tests. Thus, the panel unit-root test results are suggestive, but they are far from conclusive. Moreover, consistent individual country time series evidence that supports long-run purchasing power parity continues to be scarce. In this paper, we test for long memory using Lo's (1991) modified rescaled range test, and the rescaled variance test of Giraitis, Kokoszka, Leipus, and Teyssière (2003). Our testing procedure provides a non-parametric alternative to the parametric tests commonly used in this literature. Our data set consists of monthly observations from April 1973 to April 2001 of the G-7 countries in the OECD. Our two tests find conflicting results when we use U.S. dollar real exchange rates. However, when non-U.S. dollar real exchange rates are used, we find only two cases out of fifteen where the null hypothesis of an unit-root with short-term dependence can be rejected in favor of the alternative hypothesis of long-term dependence using the modified rescaled range test, and only one case when using the rescaled variance test. Our results therefore provide a contrast to the recent favorable panel unit-root test results.

Growth, convergence and trade: The services sector in India’s states

India’s success story in services is well documented at the national level, but similar literature does not exist for India’s states. In this paper, we bridge this gap in research by looking at India’s services growth at the sub-national level and in doing so, also challenge existing literature by arguing that this growth has positive implications for income distribution. We find that even as per capita income is not converging across India’s states, per capita services are; evidence is provided both in terms of traditional measures of sigma- and beta-convergence and more recent panel unit root tests. A more disaggregated analysis of services sectors reveals convergence in railways, public administration and financial services. Finally, a Jensen & Kletzer (2005) approach to determining tradability provides evidence of most services being “traded” across India’s states, suggesting the role of such trade in the services growth and convergence story.

Post-Bretton Woods evidence on PPP under different exchange rate regimes

This article investigates the behaviour of exchange rates across different regimes for a post-Bretton Woods period. The exchange rate regime classification is based on the classification of Frankel et al. (2004) who condensed the 10 categories of exchange rate regimes reported by the International Monetary Fund (IMF) into three categories. Panel unitroot tests and panel cointegration are used to examine the Purchasing Power Parity (PPP) hypothesis. The latter test is used to check for both the weak and strong forms of PPP. The panel unit-root tests show no evidence of PPP and suggest there is no difference in the behaviour of exchange rates across different regimes. However, failure to detect PPP across any of the regimes could be due to structural breaks. This assumption is reinforced by the results of cointegration tests, which suggest that there exists at least a weak form of PPP for the different regimes. The evidence for strong PPP decreases as the exchange rate regime moves away from a flexible exchange rate regime.

Explaining economic growth in developed economies after 1980

We use the Aguion and Howitt (2009) theoretical model of endogenous economic growth to explain the declining economic growth in developed economies in the period 1981-2009. Aguion and Howitt theoretical framework combines Solownian and Schumpeterian elements in a single scenario, so that labor-augmenting technological progress and capital accumulation per efficiency unit of labor are both caused not only by exogenous changes in the investment rate but also by shocks to the degree of efficiency in the Research and Development (R&D) expenditure process. Empirical results revealed that per worker output growth rates and capital stock per efficiency unit of labor growth rates both have a common panel unit root. Since the panel cointegration tests and estimates revealed a statistical significant negative long-run relationship between per worker output growth rate and capital stock per efficiency unit of labor, the interpretation of the econometric results analized from the Aguion and Howitt ́s theoretical perspective is that labor-augmenting technological progress is endogenously falling over time mainly because of an exogenous deterioration of the environment conditions for the transformation of the investment rate and R&D expenditures in technological progress.

Services growth and convergence: Getting India’s states together

India’s success story in services is well documented at the national level, but similar literature does not exist for India’s states. In this paper, we bridge this gap in research by looking at India’s services growth at the sub-national level and in doing so, also challenge existing literature by arguing that this growth has positive implications for income distribution. The first interesting finding is that even as per capita income is not converging across India’s states, per capita services are and we provide evidence for this both in terms of traditional measures of sigma- and beta-convergence and more recent panel unit root tests. Secondly, not only is external demand an important determinant of services value added at the state level, but this demand also emanates from all over the country rather than being concentrated in the neighbouring or richer states. This suggests that the benefits from services growth are being distributed more widely than may be perceived.

Sostenibilidad fiscal: una aproximación con datos panel para 8 países Latinoaméricanos

Este documento examina la hipótesis de sostenibilidad fiscal para 8 países de Latinoamérica. A partir de un modelo de datos panel, se determina si los ingresos y gasto primario de los Gobiernos entre 1960 - 2009 están cointegrados, es decir, si son sostenibles a largo plazo. Para esto, se utilizaron pruebas de raíz unitaria y cointegración de segunda generación con datos panel macroeconómicos, lo que permite tener en cuenta la dependencia cruzada entre los países, así como los posibles quiebres estructurales en la relación que estén determinados de manera endógena; en particular, se usan la prueba de estacionariedad de Hadri y Rao (2008) y la prueba de cointegración de Westerlund (2006). Como resultado del análisis se encontró evidencia empírica de que en el período bajo estudio el déficit primario en los 8 países latinoamericanos es sostenible pero en sentido débil.

An analysis of the relationship between wages in the public and private sector in colombia : a panel data approach

This document examines the time-series properties of the wage differentials that arise between the public and private sector in Colombia during the sample period 1984 to 2005. We Find conflicting results in unit-root and stationary tests when looking at wage differentials at an aggregate level (such as for men, women or both). However, when we analyse wage differentials at higher levels of disaggregation, treat them jointly as a panel of data, and allow for the presence of potential cross section dependence, there is more supportive evidence for the view that wage differentials are stationary. This implies that although wage differentials do exist, they have not been consistently increasing (or decreasing) over time.

Using a panel structure to discuss the Feldstein-Horioka puzzle in developing countries

The purpose of this paper is to test the implications of current account solvency for the savinginvestment correlation in developing countries. Since solvency is a long-run phenomenon, and given that the power of the standard unit root and cointegration tests is low, we exploit the panel structure of the sample of 29 developing countries. We find evidence that saving and investment are cointegrated and that the current account is stationary. Therefore, the Feldstein-Horioka correlations are not a puzzle in the sense they reflect the intertemporal budget constraint. The same results are obtained for different subsamples (Africa, Asia, and Latin America) and for different periods of time (1960-74 and 1975-96). We, then, suggest that an error correction model should distinguish between the long-run correlation, which reflects the solvency condition, and the short-run correlation, which could measure capital mobility.

Energy consumption, economic growth and prices: A reassessment using panel VECM for developed and developing countries

This paper reinvestigates the energy consumption-GDP growth nexus in a panel error correction model using data on 20 net energy importers and exporters from 1971 to 2002. Among the energy exporters, there was bidirectional causality between economic growth and energy consumption in the developed countries in both the short and long run, while in the developing countries energy consumption stimulates growth only in the short run. The former result is also found for energy importers and the latter result exists only for the developed countries within this category. In addition, compared to the developing countries, the developed countries' elasticity response in terms of economic growth from an increase in energy consumption is larger although its income elasticity is lower and less than unitary. Lastly. the implications for energy policy calling for a more holistic approach are discussed. (c) 2006 Elsevier Ltd. All rights reserved.

A DYNAMIC FRAMEWORK FOR THE RELATIONS BETWEEN FOREIGN EXCHANGE RATES, SAVINGS AND INVESTMENTS

The Meese-Rogoff forecasting puzzle states that foreign exchange (FX) rates are unpredictable. Since one country’s macroeconomic conditions could affect the price of its national currency, we study the dynamic relations between the FX rates and some macroeconomic accounts. Our research tests whether the predictability of the FX rates could be improved through the advanced econometrics. Improving the predictability of the FX rates has important implications for various groups including investors, business entities and the government. The present thesis examines the dynamic relations between the FX rates, savings and investments for a sample of 25 countries from the Organization for Economic Cooperation and Development. We apply quarterly data of FX rates, macroeconomic indices and accounts including the savings and the investments over three decades. Through preliminary Augmented Dickey-Fuller unit root tests and Johansen cointegration tests, we found that the savings rate and the investment rate are cointegrated with the vector (1,-1). This result is consistent with many previous studies on the savings-investment relations and therefore confirms the validity of the Feldstein-Horioka puzzle. Because of the special cointegrating relation between the savings rate and investment rate, we introduce the savings-investment rate differential (SID). Investigating each country through a vector autoregression (VAR) model, we observe extremely insignificant coefficient estimates of the historical SIDs upon the present FX rates. We also report similar findings through the panel VAR approach. We thus conclude that the historical SIDs are useless in forecasting the FX rate. Nonetheless, the coefficients of the past FX rates upon the current SIDs for both the country-specific and the panel VAR models are statistically significant. Therefore, we conclude that the historical FX rates can conversely predict the SID to some degree. Specifically, depreciation in the domestic currency would cause the increase in the SID.

Reviewing the sustainability/stationarity of current account imbalances with tests for bounded integration

We investigate for 26 OECD economies whether their current account imbalances to GDP are driven by stochastic trends. Regarding bounded stationarity as the more natural counterpart of sustainability, results from Phillips–Perron tests for unit root and bounded unit root processes are contrasted. While the former hint at stationarity of current account imbalances for 12 economies, the latter indicate bounded stationarity for only six economies. Through panel-based test statistics, current account imbalances are diagnosed as bounded non-stationary. Thus, (spurious) rejections of the unit root hypothesis might be due to the existence of bounds reflecting hidden policy controls or financial crises.