DO00026147/IAER2006-015; No. of Pages 144

Research Notes

Testing the Growth Effects of Fiscal Policies Using Modified MLE

CARSTEN COLOMBIER*

Swiss Federal Finance AdministrationVSwitzerland

By introducing a robust modified maximum likelihood estimator (MMLE) to growthempirics, this study shows that in the case of fiscal data, a relevant amount of badoutliers, i.e., gross errors, are present. This problem of data quality causes the widelyused least square estimator (LSE) to be biased and inefficient. As a consequence, theresults based on LSE regressions are not too reliable. Unfortunately, practically eachstudy, which has dealt with the question of public finances and growth, uses LSE. Incontrast, this study applies MMLE which is robust against a fraction of 50 percentoutliers in the underlying sample. One main outcome of this study is that there is apositive growth effect from publicly provided infrastructures of transportation andcommunication. In opposition to the latter, no growth effects of taxation are found. Thus,endogenous growth theory is not corroborated in this respect. Ultimately, theestimations indicate that the relation between fiscal policies and growth is rather weak.However, regulations or the quality of government outlays, such as education, couldconceivably be more decisive. (JEL C23, E62, H50)

Causality Between Saving and Growth: The Turkish Case

ASLI ALICI

Kadir Has UniversityVTurkey

The recent empirical studies conducted on the direction of the relationship betweensaving and investment have put forth varying results. In this respect, the view, based onthe Solow Model, which may be qualified as a traditional notion, arguing that a high levelof saving should bring about a high level of growth rate, is questioned through theresearches conducted. Moreover, in most studies applying the panel estimation method,it is evident that reverse causation between national saving and domestic income exists.The main goal of this study is to investigate the relationship between saving andinvestment in the Turkish economy by using the tests of causal chains in a time seriessetting for the period from 1950 to 2003. The relationship between saving and GDP hasbeen studied in the framework of bivariate vector autoregressive (or the vector error-correction model) for the periods between 1950Y2003, 1950Y1980, and 1980Y2003. Theobtained results indicate that causal chains linking saving and output differ across timeperiods considered. Especially during the period of economic liberalization in the post1980 era, Solow’s model prediction that higher saving leads to higher economic growthhas not been supported, and a casual chain from saving to growth has not beendetermined. (JEL C32, E21, O11)

International Advances in Economic Research (2006)12:139–144 * IAES 2006

DOI: 10.1007/s11294-006-6147-6

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The Kinked Demand Curve: A Theoretical Error

ALAN HOCHSTEIN

Concordia UniversityVCanada

This paper is concerned with the lower portion of the demand curve, below the kinkof the famous kinked demand curve model (Sweezy; Hall, and Hitch, 1939). It was arguedthen, and is still argued today in managerial econonic texts, that this section of thedemand curve applies if Firm A lowers its price and its rivals lower their prices as well.This part of the demand curve facing Firm A is sometimes called the mutatis mutandissection. This is wrong. If rivals lower prices, this changes an important, ceteris paribus,condition in the demand function of Firm A, and it will force a shift in the entire curvebelow the kink (above the kink, rival prices remain unchanged). Prices below the kinkwill not hit a much more inelastic region of a single demand curve; they will hit aleftward shifted demand curve. The size of the inward shift will depend upon thestrength of the industry income effect, since all firms have lowered prices and thesubstitution effect will be inoperable. It is simply an inappropriate theory to join a pointon one demand curve at one price to a point on a shifted demand curve at another price.(JEL D00)

The Effect of Labor Share on the Natural Interest Rate

PEDRO GOMES*, PEDRO BOM**, AND PEDRO LEAO***

*London School of EconomicsVUK, **Tilburg UniversityVNetherlands

and ***Lisbon Technical UniversityVPortugal

Standard estimations of Taylor’s monetary policy rule assume that the natural realrate of interest can be regarded as constant. By contrast, we argue that the natural realinterest rate is positively influenced by the long-run movements in the labor share in thenational incomeVa result which follows from the propensity to spend out of wage incomebeing higher than the propensity to spend out of non-wage income. We test ourhypothesis using a re-specification of a forward-looking Taylor rule, where the naturalrate of interest depends on a moving average of the labor share. Using the GMMestimator, and performing a series of robustness analysis, the results confirm ourhypothesis. Furthermore, the results suggest that, because of the omitted variable bias,the previous econometric studies of the Taylor rule have over estimated the interest rateresponse to inflation and have under estimated its response to the output gap. The policyimplications are twofold. First, as the labor share falls, the margin of maneuver of thecentral bank to stimulate the economy shrinks. Second, the labor share should beincluded among the large set of information taken into account by central banks in theirinterest rate decisions. (JEL E43, E52)

Managing Canada’s Federal Debt:A Risk Analysis of Alternative Debt Instruments

FAZLEY K. SIDDIQ

Dalhousie UniversityVCanada

This study considers the risks associated with reducing the more expensive butrelatively more stable fixed-rate share of the debt, while increasing the lower cost but

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more volatile floating-rate share. In particular, the study goes beyond the notion ofstriking an arbitrary balance between low financing costs and cost stability through ananalysis of the relative merit of alternative borrowing strategies in managing public debt.The investigation tends to suggest that the Canadian government’s debt managementstrategy of relying very heavily on the fixed-rate share of the debt since 1997Y1998 hasbeen essentially one of mirroring the minimum risk combination. Despite the statedpolicy of maintaining a balance between stability in debt service charges (i.e., low risk)and low borrowing costs, the former has clearly dominated. A carefully designed debtmanagement strategy could potentially lead to a significant reduction in debt servicecharges through a readjustment of the maturity structure and composition of the debtwithout taking undue risks.

The simulation results show that there is considerable room to move down the road ofreducing the fixed-rate share of the debt in favor of the flexible-rate share. The increasein the associated risk would be minimal, but the reduction in debt service charges wouldbe substantial given the historic difference in the interest rate spread between thelonger-term marketable bonds and the 90-day Treasury bills. It would also revitalize themoney market through increased turnover and visibility of federal debt instruments.(JEL E6, G10, H6)

The Role of the IMF on Global Financial Institutions and Markets

HOSSEIN KAZEMI* AND NILOUFER SOHRABJI***Stonehill College and **Simmons CollegeVU.S.A.

One of the major lessons learned from the recent financial crises is the need forfinancial restructuring prior to investment liberalization in transition economies. Whilesequencing of reforms is gaining importance, more attention is needed to put into place,concrete institutions, rules and regulations for investment liberalization to proceedsmoothly. In this paper, we set up a model to predict a crisis. We focus on four areas thatcontribute to a crisis, including the choice of the exchange rate regime, contagion, thetype and extent of international investment, and problems in the banking sector, such asexcessive lending, non-performing loans, and moral hazard. The variables include bothqualitative and quantitative factors. Using data from countries that have experiencedfinancial crises, we identify qualitative markers and threshold levels for the quantitativeindicators and, thereby, determine the predictors of a crisis. These predictors providelessons for restructuring that is necessary in transition economies prior to large-scaleliberalization. Moreover, this information allows us to analyze the role that the IMFshould play in transition economies so that we may avoid future crises. (JEL F30)

Impact of the European Union Standards on the Polish Financialand Fiscal Policies

EMIL ANTONISZYNUniversity of OpoleVPoland

Poland’s accession to the European structure will exert a considerable impact on ourlegislation. The adjustment of Polish law to the law binding in the EU constitutes one ofthe basic integration conditions. Further transformation of Polish political and socio-economic system is conditioned by the creation of the modern and efficient financing

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system. In the conditions of the so-called centrally commanded economy, the financialsystem was rudimentary and supportive to direct instruments of commanded economy.In the market economy, the role of finance and financial instruments increases. The mostimportant transformations have been made, but still the whole system is being enrichedand amended. The changes in the financial system should lead to the establishment anddevelopment of financial institutions and mechanism typical of the market economy andaim at standard adjustment to those in the EU. By setting such aims, the principledirection of legislative normalization is clear. The transformation process of the Polishfinancial system was launched at the beginning of the 1990s. Priority was given to thefollowing aims: building the capital market; building the monetary market; restructuringthe banking system; the development of banking intermediation institutions; thetransformation of the tax system; and changes in the state budget policy, especially inthe system of public debt management. The significant structural and economictransformations were launched in the 1990s, but its foundations were created muchearlier. (JEL G28)

The Effect of Salary Arbitration on NHL Player Performance

BRETT P. SHIRREFFS AND PAUL M. SOMMERSMiddlebury CollegeVU.S.A.

Thirty-four NHL players filed for salary arbitration at the end of the 2002Y2003season [see http://sportsillustrated.cnn.com/hockey/news/2003/07/16/arbitration_list/].Because players are motivated to put together a good season before their case is heard,performance in 2002Y2003 was compared to the years before and after arbitration. Of the27 skaters who played in the NHL before and after arbitration, assists per game andpoints (goals plus assists) per game increased from 2001Y2002 to 2002Y2003 ( p = 0.007and p = 0.014, respectively). When the sample was divided into two age groups, therewere no discernable differences in any one of the three performance measures for players27 years of age or younger. For older players, however, both assists per game ( p = 0.019)and points per game ( p = 0.027) were significantly higher in 2002Y2003. These resultssuggest that the arbitration process imparts strong work incentives among older NHLplayers who because of their age may not have the opportunity to repeat arbitration. Inthe year after arbitration (2003Y2004), older players scored fewer goals per game ( p =0.014). However, the productivity of younger players, who may return to arbitration andhave no incentive to curtail effort, did not decline in any category. (JEL J41, L83)

Information Technology and Productivity: A Cross Country Analysis

SOTIRIS K. PAPAIOANNOU AND SOPHIA P. DIMELISAthens University of Economics and BusinessVGreece

This paper provides new evidence on the effects of Information and CommunicationTechnology (ICT) on aggregate productivity, by establishing a positive ICT impact indeveloping countries and investigating the separate effects of the individual ICT parts(hardware, software, and communications). A Cobb Douglas production function is es-timated by applying the random effect panel data estimator and utilizing ICT data fromthe World Information Technology and Services Alliance (WITSA), covering a sample of43 developed and developing countries, in the 1993Y2001 period. Contrary to previous

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evidence, a positive and significant effect was estimated in both groups, which was largerin size and significance in the group of developed countries. The existence of a significantgap in infrastructure investments as well as in human capital levels might be a possiblereason for the higher returns achieved from developed countries. Decomposing the over-all ICT effect, it was found that the hardware and telecommunication parts exert ahighly positive and significant impact, while the software spending variable is insignifi-cant. These effects differentiate between developed and developing countries, showingthat hardware and software are more important for the former ones and telecommuni-cations for the latter. (JEL O11, O47)

Consumer Risk Perception, Addictive Behavior,and the Purchasing Decision

HSIU-LI CHENMing Chuan UniversityVTaiwan

The so-called addiction represents a consumer’s physiological or psychologicaldependency on certain products or services. This paper examines the relationshipbetween consumer’s risk perception and the addiction process. The main hypothesis isthat consumers’ risk perceptions are more likely to directly influence their attitudestowards addictive products and indirectly to influence their purchase intentions. Becker(1992) indicated that if a habit is harmful or beneficial, it means that greater presentconsumption lowers or raises future utility. Accordingly, this study empirically examinescigarette smoking and exercise. First, it concluded that is relatively easy to get addictedto a harmful habit compared to a beneficial habit. Second, current smokers have lowerrisk perceptions than non-smokers, while people who exercise have higher riskperceptions (of not doing exercise) than people who do not exercise. Third, a strongerassociation between three information cues exists, such as public information, priorbelief, and individual experience Y and risk perception when consumers are addicted toharmful habits than when they are addicted to beneficial habits. Finally, the empiricaldata are fitted into the LISREL structure model. Namely, the path of the addictionprocess: risk formation Y risk perception Y attitude Y purchase intention. (JEL M31)

An Empirical Analysis of the Secondary Market Pricing of the LDC Debt

HOSSEIN S. KAZEMI* AND AYLA OGUS***Stonehill CollegeVU.S.A. and **Izmir University of EconomicsVTurkey

The secondary market price for less developed countries’ (LDC) debt is a good proxyfor perceived success of debt management. Due to the rapid expansion of the emergingmarkets’ debt, it has become more essential for the policymakers to have a better andclearer understanding of the factors that affect investors’ expectations of LDC debt.Debts of LDC, even those that have undertaken significant reforms and have achievedsubstantial reductions in their foreign debt, trade at a high rate of discount. A present-value model of LDC debt is developed to understand the factors that affect the discounton the secondary market. LDC debt trades at a substantial discount on the secondarymarket. This paper investigates the determinants of the discount for a sample of 13countries over a nine-year period. The findings show that debt-exports, reservesYimports

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ratio, and total debt service to exports ratios are significant determinants of thesecondary market prices of LDC debt. The discount is higher in countries where debtYexports ratio is higher and is lower for those with lower reservesYimports ratios. Con-centration of debt with money center banks has a positive and significant effect on thesecondary market price of debt. (JEL G15)

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