Abstracts of Research Papers
Relative Importance of Sectoral and Aggregate Sources of Price Changes
Abstract: This paper estimates a dynamic common factor model to assess relative importance of the aggregate and the sector-specific factors that determine changes in the prices of individual products. It also examines how aggregate price changes are affected by these factors. Two different specifications of the model are estimated: the baseline model with one aggregate factor, and a second specification with two aggregate factors. In the one factor model, the aggregate factor contributes little to the movements of changes in prices, mostly of nondurable goods whereas it seems to have important contributions to the movements of changes in prices of commodity groups mainly used as intermediate or capital goods. In the specification with two aggregate factors, the additional factor has significant effects on changes in prices of 'farm products' and 'processed foods and feeds' only. Forecast-error variance decompositions of both aggregate and disaggregate price changes suggest that sectoral factors account for most of the variability at short horizons while the contributions of the aggregate factors increase as the time horizon lengthens. The results also show that sectoral factors are not only important for relative price changes but also have significant impact on aggregate inflation. The estimated common factors have statistically significant correlations with money growth and changes in the unemployment rate.
Assessing Cross-Industry Effects of B2B E-commerce
Abstract: The productivity gain that an industry experiences by engaging in B2B e-commerce gets transmitted to other industries through input-output linkages. This paper considers a multi-industry equilibrium model that explicitly incorporates input-output structure to examine the propagation of productivity gain across industries and to provide a framework to quantitatively evaluate the overall impact of B2B e-commerce. This model also helps identify the industries with potential for largest impact on other industries. We also demonstrate how this model can be used to make projections of output growth that would result from the introduction of B2B in selected industries.
The Rise of an Enclave Economy
Abstract : Development theories of dual economy emphasize interactions between the modern sector and the traditional sector through factor and commodity market linkages for long run growth of the economy. Within this paradigm of development this paper tries to explain why substantial investments in a modern sector in Assam during the later half of the nineteenth century failed to trigger off a process of sustained growth that encompasses the agriculture-based traditional sector. On the basis of the available historical evidences - both statistical and anecdotal - it establishes that on the eve of the British colonization Assam was a labor-short, barter economy having limited trade links with the rest of the world. After the British established their rule substantial investments took place in a modern sector that consisted mainly of tea plantation. However these investments could not establish any link between the modern and the traditional sector through important linkage effects in capital, labor and commodity markets. With these missing links the dual economy that emerged, instead of projecting the economy in a path of long run growth, gave rise to an economic enclave that remained backward for years to come.
Service Sector inToday's Information Economy
Abstract: This paper presents the results of our empirical research in measuring the size and structure of the US information economy in 1992 and in assessing the growth experienced by different industries and sectors since Porat's research on the US information economy for 1967. The study indicates that the share of the information economy in total GNP grew from about 46 percent in 1967 to about 56 percent in 1992. The study further indicates that during this time period the share of service sector information activities in total GNP increased substantially, while the shares of non-service sectors declined correspondingly. The industries displaying the largest growth rates include business services, and medical and educational services. The paper also provides a critical evaluation of Porat's methodology and suggests specific improvements that are needed to obtain a more accurate measure of the size of the information economy.
Sectoral Price Changes and Output Growth: Supply and Demand in General Equilibrium
Abstract: Price changes and output growth, both at the aggregate and the sectoral level, appear to be negatively correlated. At a basic level, this suggests that sectoral "supply" shocks are more prevalent than sectoral "demand" shocks. However, it is not clear what these sectoral price-output correlations mean once one thinks in terms of general equilibrium. To help us understand the implication of these price-output correlations, this paper examines a multi-sector dynamic general equilibrium model that includes sectoral technology shocks and sectoral demand shocks, as well as aggregate money growth shocks. We show that while a model driven solely by sectoral technology shocks can generate "plausible" price-output correlations, "demand" shocks, particularly sectoral demand shocks, are needed for the model to generate the sectoral price-output correlations observed in the data. We also show that technology shocks do not always look like "supply" shocks. Positive technology shocks to sectors producing goods that are used for investment frequently result in increases in output and prices in other sectors while positive technology shocks to sectors producing goods that are used primarily as intermediate inputs look like supply shocks in other sectors.
Relative Efficiency of Modern Small Scale Industries in India : An Inter-State Comparison
Abstract : This paper presents measures of relative efficiency for nine small scale industries in fifteen major states of India. An index of relative efficiency based on total factor productivity is used. It is observed that there are wide differences in efficiency of these industries among the states. The extent of variations in efficiency is much wider in intermediate product and consumer non-durable industries than in consumer durable industries. Relative size, as measured by the value of production per unit, is found to be an important source of inter-state differences in efficiency. It is also found that intermediate product industries have substantial economies of scale.
Nominal Rigidities in a Multisector Model
Abstract: This paper uses a multisector sticky price model with cash-in-advance constraint to examine the implications of sectoral nominal price rigidities for the cyclical behavior of sectoral and aggregate movements in prices and output. The data suggest that correlations between sectoral output and price changes are substantially lower than would be implied by a flexible price model with sectoral technology shocks. Some degree of price stickiness (but not too much) can help reconcile the price-output relationship implied by a multisector general equilibrium model to that seen in the data. Also, the sticky-price model produces aggregate inflation persistence comparable to that observed in the data.
Relative Price Changes as Supply Shocks: Evidence from U.S. Cities
Abstract: This paper estimates a fixed effects regression model using panel data on prices for U.S. cities to test the supply-side theory of inflation that takes the distribution of relative price changes as an aggregate supply shock. The results indicate that the positive correlation between inflation and relative price variability is a robust empirical regularity that gives some credibility to the supply-side theory of inflation. However, during the early eighties this relationship, though positive, weakens indicating predominance of monetary shocks in determining changes in the aggreagte price level. On the other hand, inflation and skewness are not found to be strongly related when the aggregate macroeconomic effects are controlled for.
Small Menu Costs and Large Business Cycles: An Extension of the Mankiw Model
Abstract: Using a general equilibrium model with monopolistically competitive firms, this paper shows that if the firms perceive the aggregate demand shock to be permanent then they may require 'not small' but 'relatively large' menu costs to convince them not to change prices. Thus small menu costs may not always be a cause of large business cycles.
Inflation and Relative Price Variability: Short-Run vs. Long-Run
Abstract: This paper uses recent developments in measuring correlation to examine the relationship between inflation and relative price variability. The results suggest that the positive correlation holds not only in the short-run but also in the long-run. This finding has important implications for theoretical models that purport to explain this relationship: such models must incorporate features that generate positive relationships that hold even in the long-run.
Export-led Growth in Bangladesh: A Time Series Analysis
Abstract: This paper examines time series evidence to investigate the link between exports and economic growth in Bangladesh. Using quarterly data for a period from 1976 to 2003 the paper finds that industrial production and exports are cointegrated. The results of an Error Correction Model (ECM) suggest that there is a long-run unidirectional causality from exports to growth in Bangladesh.
Size, structure and growth of the US information economy
Abstract: This paper presents the results of our empirical research in measuring the size and structure of the US information economy in 1992 and 1997, and in assessing the growth experienced by different industries and sectors since Porat's research on the US information economy in 1967. The study indicates that the share of the information economy in total GNP grew from about 46 percent in 1967 to about 56 percent in 1992, and to 63 percent in 1997. The study further indicates that during this time period the share of service sector information activities in total GNP increased substantially, while the shares of non-service sectors declined correspondingly. The industries displaying the highest growth rates include business services, and medical and educational services. The paper also provides a critical assessment of Porat's methodology and suggests specific improvements that may be made to obtain a more plausible measure of the size and structure of the information economy.
Foreign Direct Investment and Inequality in Productivity across Countries
Abstract: Using data for 93 countries for a period from 1970 to 2000, this paper examines the effects of foreign direct investment (FDI) on cross-country differences in productivity. We construct a spatial Gini coefficient of labor productivity across countries, and weighted indices of FDI and gross domestic investment (GDI). We then examine their time series properties to explore the relations of FDI and GDI with productivity. Although we find little evidence of FDI flows – which have increased manifold in last three decades – reducing inequality in productivity for the entire sample, our analysis shows that these three variables are cointegrated for developed, high and middle income developing countries, indicating existence of a long-run equilibrium relationships between FDI, GDI and productivity. FDI seems to reduce inequality in productivity among high and middle income developing countries while it widens productivity gaps among developed countries in the long-run though these effects are statistically significant only for high income developing countries. In middle income developing countries, higher GDI seems to have significant effect in reducing productivity differences. Granger causality tests further suggest that FDI causes productivity differences among petroleum exporting countries. Furthermore, GDI granger causes FDI in high income countries and productivity differences Granger cause FDI into the middle income developing countries.
Trade liberalization, Growth and Inequality in Bangladesh: An Empirical Analysis
Abstract: This paper examines time series evidence to establish a link between trade, economic growth and income inequality in Bangladesh. The empirical results from a Vector Autoregression (VAR) model suggest that there is some evidence of trade liberalization accelerating growth in Bangladesh. Trade openness promotes investment. We find little evidence of trade affecting income distribution or of income distribution affecting growth or investment. Given poor quality of the data on inequality measures, there is scope for further investigation. Sensitivity analysis with change in the sample time period suggests that during the post independence period investment has significant positive impact on trade liberalization.
Trade, Foreign Direct Investment and Growth: Evidence from Transition Economies
Abstract: This paper examines the effects of trade and foreign direct investment (FDI) on growth using data for 10 transition economies in Central and Eastern Europe. In the literature, the endogenous growth theory framework has been used to explore the interrelationship between trade, FDI and growth. This literature suggests that an export-oriented trade environment could be a catalyst in attracting FDI while both trade and FDI contribute to growth. Central and Eastern European countries have witnessed substantial increase in exports and FDI during the first decade of their transition from plan to market economy. Using a panel data set that ranges for a period from 1990 to 2000, this paper examines the effects of trade and FDI on growth, and the inter-linkage between exports and FDI. Our results suggest that domestic investment is the most important determinant of growth in transition economies. There is mixed evidence of FDI having positive effects on growth. Furthermore, our results do not strongly corroborate the hypothesis that export-oriented liberal trade regime enhance the growth effect of FDI in transition economies. However, if we use per capita real GDP as a measure of economic performance of those economies, both FDI and exports seem to have significant positive impact on per capita GDP. Moreover, FDI and exports together have significant positive effect.
The Effect of a Discount Rate on Price Change Behavior: An Empirical Analysis
Abstract: This paper examines if there is any empirical evidence to support the results of a multi-period general equilibrium extension of Mankiw's menu cost model (Nath and Stretcher, 2003) that indicate that with high discount rates firms will be less likely to change prices in response to a monetary shock. Using the level of medium term real interest rates as a proxy for the discount rate and producer price indices for fifteen major commodity groups we examine how interest rates affect firms' decisions to change prices. Impulse responses calculated from a simple multivariate VAR model of producer prices and real interest rate suggest that except for a few commodity groups, namely 'farm products', 'processed foods and feeds', 'fuels, related products and power' and 'lumber and wood products', a higher interest rate seems to persuade most firms in the other commodity groups not to change prices.
Simulation of FOMC Meeting: Learning About Monetary Policy by Doing
Abstract: This paper describes a classroom simulation of the FOMC meeting designed for an upper-level monetary economics class. This is a role-playing exercise in which students are assigned various roles as individuals or as groups that directly or indirectly participate in the FOMC meeting and in the conduct of monetary policy. As the semester progresses, lectures explain central banking, monetary policy making and effects of money supply in the economy. Concurrently, the students research different aspects of the U.S. economy and prepare the green book, the blue book and the beige book. By the end of the semester, the FOMC meets and deliberates over the information gathered by various groups, determines the course of the overall economy and takes a decision on the monetary policy action.
Diminishing Marginal Impatience: Its Promises for Asset Pricing
Abstract : This article argues that diminishing marginal impatience ( DMI ) as an intuitively plausible behavioral assumption of endogenous time preference has the potential for resolving important issues like the equity premium puzzle . It shows that, while applied to a model in the traditional overlapping generations ( OG ) framework, DMI is capable of generating assets prices with magnitude and volatility higher than those suggested by standard models with constant marginal impatience ( CMI ).
Remittances, Relative Price Variability and Inflation in Mexico
Abstract : Using generalized impulse responses derived from a vector autoregression (VAR) model this paper examines the effects of remittances on inflation and the distribution of relative price changes in Mexico for the period between 1980 and 2005. While we find little evidence of any significant impact of remittances on inflation and relative price variability for the entire sample period, remittances seem to have significant positive effects after 1994. Furthermore, we find that a positive relationship between inflation and relative price variability holds for Mexico irrespective of our model specification and choice of sample period.