Journal of Policy Modeling

Published by Elsevier
Print ISSN: 0161-8938
We examine historical data of real daily wages in England for the time period 1260–1994 by means of new statistical techniques developed for estimating and testing fractional integration. The results show that when using the whole dataset, the unit-root null hypothesis cannot be rejected. If the data start after the First Industrial Revolution (FIR, 1712), this hypothesis is sometimes rejected, while starting after the Second Industrial Revolution (SIR, 1875), the unit root is rejected in favour of higher orders of integration, implying that the degree of dependence between the observations has substantially increased over time. Moreover, in the presence of shocks, stronger policy actions must be required, especially after SIR, to bring the variable back to its original level.
This paper reviews the general literature on macroeconometric modelling and highlights some important lessons from more than half a century of model-building. It appears that from the late 1940s to the 1960s, this field has contributed to the expanding knowledge of both economists and econometricians. However, from the early 1970s, several issues invalidated the use of macroeconometric models (MEMs). These issues are analysed in this paper. It is, inter alia, argued that with advancement of econometric “know-how,” the disparity of opinions between advocates and critics of macroeconometric modelling can be narrowed.
In this paper, we provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, and examine the role played by monetary and fiscal dominance in order to get fiscal solvency. The longer than usual span of the data would allow us to obtain some more robust results on the fulfilling of the intertemporal budget constraint than in most of previous analyses. First, we analyze the relationship between primary surplus and debt, following the recent critique of Bohn (2007), and investigate the possibility of structural changes occurring along the period by means of the new approach of Kejriwal and Perron (2008). The analysis is complemented in two directions: (i) performing Granger-causality tests in order to distinguish properly between a fiscal dominant and a monetary dominant regime; and (ii) presenting the impulse-response functions of debt to innovations in the primary surplus, through the approach of Canzoneri, Cumby and Diba (2001).
The striking similarities of economic problems facing Australia in the early 1990s with those of the 1930s warrant a revisit to the recovery effort during the depression. This article examines the effectiveness of various economic policies adopted to deal with the depression by simulating a computable general equilibrium (CGE) model of the 1930s in Australia. The analysis focuses on the relative importance of the exchange rate devaluation, the protection policy, the government demand expansion and the wage policy. It also evaluates the impact of alternative policies, which would have provided a different outcome that may have been crucial to the recovery. The results imply that the reduction of tariffs may be harmless to the Australian economy, and the lowering of real wages is necessary to enhance the competitiveness. Increased government expenditure can have an adverse impact on export sectors. It is suggested that a combination of appropriate wage policy with public spending program is crucial to the success of recent economic reforms in the Australian economy.
Aspects of socioeconomic development in Turkey between 1948 and 1977 are studied through the use of obliquely rotated principal compenents. The results indicate that long-term developmental trends, which appear in the cross-sectional studies of Adelman and Morris, were slowed down by problems of sociopolitical integration during the sample period. In addition, the analysis shows that multivariate techniques such as compenent analysis can be used at the initial stages of theory construction in the field of socioeconomic development. The hypotheses developed via these methods are testable by others that use the deductive approach.
Principal component analysis (PCA) is applied to six macroeconomic time series observed over 1959-2007. Six periods in US economic history are identified by a cluster analysis of observations in the PCA score plot. The method is data driven with no a priori information on the number or dates of breaks. Our findings give independent support to the effect of the oil price shock in 1973, and the introduction of the Great Moderation period. Of the five transition periods, two have been identified by previous studies as breaks (1973, 1984), one is a well-known date of monetary policy change (1979), and two had not previously been identified (1970, 1977-1978). In the long-run inflation and the federal funds rate are unrelated to industrial production and unemployment. Inflation and interest are positively associated as predicted by the Fisher hypothesis. These long-run relations argue against the use of monetary policy to peg the rate of unemployment or real interest rates. In the short-run inflation acts a leading indicator for unemployment for the period 1959-1997, but not for the period after 1997. The well-established reduction in macroeconomic volatility in the mid-1980s is specific to the period from 1985 to 1997; volatility subsequently rises above pre-1979 levels.
We show that when real-wage flexibility is defined in terms of cointegration of the product real-wage and productivity, the wage formation system in Finnish manufacturing maintains considerable real-wage flexibility. We develop an empirical error- correction model of wages and show that the responsiveness of wages to changes in unemployment is much less important in explaining real-wage flexibility than existing studies suggest. For example, we find hysteresis effects, which are usually associated with real-wage rigidity rather than flexibility. This puzzle is resolved by pointing out that theoretically hysterisis is only a necessary condition for rigidity. Empirically, strong equilibrating mechanisms, including labor market policies, have induced considerable wage flexibility even in the presence of hysteresis. Our conclusions are substantiated by tests of parameter invariance and encompassing.
The impact of human and public capital on growth is a major issue in economic theory and in policy evaluation. Using a cointegrated vector autoregression (VAR), we estimate a Cobb-Douglas production function for Portugal with public and human capital. Return rates are then computed with and without dynamic feedbacks. Without these, human capital yields a return comparable to private investment, and smaller than public investment. Considering dynamic feedbacks, private capital responds positively to a shock in public capital, but negatively to a shock in human capital. Consequently, the dynamic feedbacks return on human capital is much lower than on public capital.
In this paper we aim at identifying the natural real rate of interest, defined here as the (unobservable)component of the real interest rate hich has no contemporaneous and lagged correlation with the output gap. We first discuss the theoretical underpinnings and the possible empirical advantages of this measure. Based on this definition and taking a measure of the output gap as given, we then derive an estimate of the natural interest rate for the euro area over a sample period from 1960 to 2003. The corresponding estimate of the natural interest rate measure is found to fluctuate significantly, a finding which appears to be well explained by economic and institutional developments in the euro area over the past 4 decades. Moreover, the resulting estimate of the real rate gap is found to have some forward-looking information content on inflationary pressure in the euro area.
Recursive estimates of the short run coefficient b ECM . 
In this note, the national saving–domestic investment correlation is examined in terms of an error correction model to gain some insight into the degree of capital mobility, using Greek data for the period 1960–1997. In particular, we employ cointegration analysis with an emphasis on the error correction process of the time series on annual data for Greece. Our work follows the study of Bajo-Rubio [Appl. Econ. Lett. 5 (1998) 769] that deals with the case of Spain. However, we use a longer time period, which enable us to examine with more preciseness the saving–investment relationship in Greece and its implications for capital mobility. The results show that Greek domestic investments and national savings during 1960–1997 are to a great extent cointegrated and that a significant long-run relationship exists.
Following the emergence of the Lucas critique, traditional Phillips curves relating inflation to a measure of the level of activity, and augmented to include past inflation (assumed to proxy expected inflation), have been deemed to be highly unstable over time. In this paper we try to investigate, using recent econometric developments, whether such a statement can be supported over a long time period. In the empirical application, we analyze the case of Spain along the period 1964–2002.
Unlike most empirical works on fertility analysis, this study investigates the question as to whether family-planning programs can “cause” a significant fertility decline in a country characterized by very low levels of socioeconomic development. The analysis is based on the application of the following dynamic time-series techniques in a multivariate context: cointegration, vector error-correction modeling, variance decompositions, and impulse response functions. These four dynamic tools are recently developed and hitherto untried in fertility analysis in the context of a poor developing economy such as Bangladesh. Our findings appear to be consistent with the new theoretical view that holds that fertility decline may result from either of two distinct developmental phases, one short-term and the other long-term. According to this view, the second phase (comprising the “sufficient” condition for fertility decline) incorporates the conventional view that in the long term, fertility decline may result from a complex dynamic interaction with organized family planning and significant socioeconomic structural change. In contrast, the first phase (comprising the “necessary” condition for fertility decline) may not need such significant structural change in order to effect fertility decline in the short term. All it may require is a predominantly client-oriented, affordable, persuasive, and well-organized family-planning program—a program that is firmly supported by the political and social elite at all levels of that society, as well as being adapted to the sociocultural realities of the vast masses of the people of that region.
Empirical investigations are undertaken by estimating the system of an aggregate translog cost and cost-share equations for the Korean economy, using annual data for the period 1969–2000. We found inelastic demand for factor inputs, low substitution between labor and capital, and a complementary relationship between structure capital and equipment capital. The Korean economy exhibited increasing returns to scale and labor saving and capital using embodied technological progress. Capital accumulation and TFP growth are the proximate source of output growth. TFP growth includes the estimated embodied capital-using technological change. The technological change is as much as one and half times TFP growth between 1969 and 2000. Hence, investment is the most important engine of growth.
In this paper, we study the conditions (ie., social disarticulation) by which choices in government policy priorities toward sectoral production may instigate increased income inequality. A dynamic multisectoral model is proposed in which the main link that is put forward is the necessary correspondence between rapid growth of production of certain types of goods and the expansion of demand for those same goods in the internal market. Application to Brazil illustrates the possibilities of such a tool for economic analysis and shows that the regressive wage policy implemented in Brazil was indeed consistent with that country's economic priorities and policy emphases.
A review of the literature indicates that no single exchange rate model has been able to track successfully the movements of the Canadian dollar for both the 1970–1976 period and the period thereafter. The purchasing power parity model, irrespective of whether based on relative wholesale prices, unit labor costs, GNP deflators, or export prices performs very poorly; the monetarist models collapse because of their strict adherence to the purchasing power parity and interest rate parity assumptions; the portfolio demand models require a significant adjustment for the post-1976 period. This paper presents a medium-term eclectic model of the global exchange rate of the Canadian dollar and examines a spectrum of broad issues that reflect on the efficiency of the foreign exchange market of Canada. These issues are basically related to the interest parity assumption, the role of speculation, and the test of rational expectations. The global exchange rate is defined as the value of the Canadian dollar measured in terms of a unit of basket of currencies comprising currencies of France, West Germany, Japan, the U.K., and the USA. The model belongs to the same genre of balance of payments structural models that explain the exchange rates by balancing demand and supply of foreign currencies. The model simultaneously explains both spot and forward rates, and it has been estimated and tested by using the quarterly data for 1971–1981.
This comment points out some methodological weaknesses in the Canadian global exchange rate model and the associated efficiency tests of Marwah and Bodkin. The model is found to be inadequate for policy analysis.
This paper examines the relationship between the household balance sheet and consumer durables expenditure. A number of observers have pointed to the negative effect of balance sheet restructuring as an explanation for the slow recovery from the early 1990s’ recession in some OECD countries. The household balance sheet may also provide a channel of transmission of monetary policy. For The Netherlands we find no evidence of the claim that “excessive” household debt ratios are directly responsible for slowing down consumer durables expenditure. Household wealth is clearly important. The empirical results provide some minor evidence for the extended life cycle-permanent income model, which includes the liquidity hypothesis developed by Mishkin (1976).
This work models money in the complex, highly inflationary environment of Argentina (1977–1988). First, cointegration techniques proposed by Engle and Granger (1987) and extended by Johansen (1988) are applied and show that real cash balances, income and inflation are cointegrated. Second, data information are used to specify the dynamics of this relationship, following the “general-to-specific” methodology developed by Hendry et al. The model selected appears to be a satisfactory representation of money demand, including being empirically constant over 1985–1988, during which there were major policy changes. However, constant, well-specified inflation or interest rate equations cannot be obtained by inverting the money demand equation, given the results found when testing for super exogeneity.
This paper examines the underlying causes for the rapid rise of the import share of the U.S. automobile market in the 1979 to 1981 time frame. Using data on the import share by state for the 1975–1979 period, a logit model is developed explaining movements in the import share. The principal purpose is to demonstrate that the rapid growth of the import share was due to a unique set of short-run factors such as constrained U.S. small car production capacity and exceptional consumer preference for fuel efficient automobiles. The sensitivity of the import share to changes in different factors is examined. The article concludes that U.S. policy makers concerned with the long-run viability of the U.S. automobile industry should discriminate between changes in import penetration caused by short-run factors and those caused by a secular deterioration of the U.S. comparative advantage in automobile production.
This article presents an aggregate global model that projects steel markets for the period 1980–1995, with particular attention to investment in production capacities. The model is developed as a linear complementarity programming problem. The model distinguishes between newly constructed steel mills and average mills to characterize price formation and quantity balances respectively. Various validation tests of the model are discussed.
This paper describes an applied general equilibrium model for policy evaluation in the small open price-taking economy case. We use the approach to analyze the effects of Canadian energy price policies. The net outcome in terms of national welfare depends on two separate effects. Consumer and producer prices set below world prices result in over-consumption and under-production of energy, and welfare loss. Producer prices of energy set below world prices reduce the factor returns accruing to owners of resources in Canada, many of whom are foreigners. Our results portray the rent transfer effect against foreigners as the dominant effect of these policies. Removing price controls is a nationally welfare worsening change, since the increased rents transferred to foreigners more than outweigh the welfare gain.
The purpose of this paper is to analyse Okun's law for the Spanish regions over the period 1980-2004. Based on its "gap" specification, the results show that an inverse relationship between unemployment and output holds for most of the regions and for the whole country. However, the quantitative values of Okun's coefficients are quite different, a result that is partially explained by regional disparities in productivity growth. These differences imply that, when it comes to policy issues, conventional aggregate demand/supply management policies should be combined with region-specific policies.
This article builds a sectoral equilibrium model of the Danish economy and uses the model to evaluate recent policy reforms. We believe that these policy reforms, with their emphasis on supply-side measures and structural adjustment, is best evaluated with a sectoral medium-term model. The model includes a detailed description of the Danish manufacturing industries. Their technology treats capital as a quasi-fixed factor which gives the model its medium-term horizon and uses a two good output function to make a distinction between the supply of domestic goods and the supply of exports.
Top-cited authors
James B Ang
  • Nanyang Technological University
Anthony Enisan Akinlo
  • Redeemer's University
Mario Arturo Ruiz Estrada
  • University of Malaya
Samuel Adams
  • Ghana Institute of Management and Public Administration
Dominick Salvatore
  • Fordham University