Economics Faculty Research and Publications

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https://hdl.handle.net/2097/13826

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Open Access
Are There Price Asymmetries in the U.S. Beef Market?
(2020-02-01) Bachmeier, Lance J.; Pozo, Veronica F.; Schroeder, Ted C.; lanceb
We examine price transmissions among farm, wholesale and retail U.S. beef markets using two types of retail price data, one collected by the Bureau of Labor Statistics (BLS), and the other one collected at the point of sale using electronic scanners. Using a test based on the simulation of nonlinear impulse response functions, we find no evidence of vertical asymmetric price transmissions in models estimated using scanner data. However, prices adjust asymmetrically in models estimated using BLS data. Because scanner prices are more reflective of actual consumer purchases, the U.S. beef market is not as inefficient as previous studies suggest.
Open Access
Do Jet Fuel Price Movements Help Forecast Airline Fares and the Demand for Air Travel?
(2018-07-30) Atems, Bebonchu; Bachmeier, Lance J.; Williams, Corey; lanceb
The paper studies the predictive content of jet fuel prices for the U.S. aviation industry through in-sample and out-of-sample forecasting exercises. Our results suggest the possibility of limited improvements in the predictions of airline fares, and little evidence of predictability from jet fuel prices to measures of air travel demand.
Open Access
Oil Prices and the Macroeconomy
(2018-06-05) Bachmeier, Lance J.; Plante, Michael; lanceb
The combination of high inflation and high unemployment experienced in the 1970s and early 1980s has been perhaps the most important macroeconomic event since the Great Depression. Figure 1 shows that there were two spikes in the price of oil in this time period, and both were followed by large increases in inflation and unemployment. This was widely viewed as evidence that changes in the price of oil have large effects on the economy. Not surprisingly, this episode has been the subject of considerable research.
Open Access
Oil Shocks and Stock Return Volatility
(2018-11-01) Bachmeier, Lance J.; Nadimi, Soheil R.; lanceb; soheil; Bachmeier, Lance J.
Asset return volatility is important to the macroeconomy. This paper asks whether oil price volatility can be used as a predictor of stock return volatility. In contrast with previous research, we focus on the out-of-sample predictive power of oil price volatility rather than on in-sample inference. Formal tests of out-of-sample predictive ability find no evidence supporting the use of oil price volatility as a predictor of future stock return volatility. Further analysis using rolling window estimation and structural break tests shows that the coefficients of this relationship are very unstable. The coefficients can be positive, negative, or close to zero depending on the sample that is chosen. We discuss the implications of this finding for monetary policy.
Open Access
Determinants of electricity demand in Jordan
(2016-05-01) Alawin, M.; Al-Hamdi, Mohaned; Alomeri, M.; alhamdi
Electricity is the most known form of energy that is related to production and crucial determinant of economic growth. This paper aims at identifying the determinants of electricity demand in Jordan. To achieve that goal the study employs an economic model that includes the following explanatory variables: Real GDP growth rate, population growth, the domestic energy price index and improvement in production efficiency in the manufacturing sector. This approach will be carried out using the Auto Regressive Distribution Lags (ARDL) model in order to find the determinants of electricity demand in Jordan. The findings of the study came to be consistent with the economic theory by showing that the demand for electricity grows directly and significantly with the growth of the real GDP and population. Means as the population of the country grows at rapid rates, policy makers should be prepared to make the necessary actions to face larger electricity demand in the future. Interestingly, the results show that a higher level of domestic inflation gives incentives to people to save on the electricity consumption. Finally, as expected, the results show that with an improvement in the performance of the manufacturing sector, demand on electricity goes down. Based on these results, the government should facilitate all procedures for economic units to adapt advanced means of production and consumption of energy to meet the increasing electricity demand.
Open Access
Small-scale New Keynesian model features that can reproduce lead, lag and persistence patterns
(2014-09-01) Cassou, Steven P.; Vázquez, Jesús; scassou
This paper uses a new method for describing dynamic comovement and persistence in economic time series which builds on the contemporaneous forecast error method developed in den Haan [den Haan, W. J. 2000. “The Comovement between Output and Prices.” Journal of Monetary Economics 46: 3–30]. This data description method is then used to address issues in New Keynesian model performance in two ways. First, well known data patterns, such as output and inflation leads and lags and inflation persistence, are decomposed into forecast horizon components to give a more complete description of the data patterns. These results show that the well-known lead and lag patterns between output and inflation arise mostly in the medium-term forecasts horizons. Second, the data summary method is used to investigate a small-scale New Keynesian model with some important modeling features to see which of these features can reproduce lead, lag and persistence patterns seen in the data. We show that a general equilibrium model with habit formation, persistent IS curve shocks and persistent supply shocks can reproduce the lead, lag and persistence patterns seen in the data.
Open Access
crs: A package for nonparametric spline estimation in R
(2014-01-27) Ho, Anson T.Y.; Huynh, Kim P.; Jacho-Chávez, David T.; atyho
crs is a library for R written by Jeffrey S. Racine (Maintainer) and Zhenghua Nie. This add-on package provides a collection of functions for spline-based nonparametric estimation of regression functions with both continuous and categorical regressors. Currently, the crs package integrates data-driven methods for selecting the spline degree, the number of knots and the necessary bandwidths for nonparametric conditional mean, IV and quantile regression. A function for multivariate density spline estimation with mixed data is also currently in the works. As a bonus, the authors have also provided the first simple R interface to the NOMAD (‘nonsmooth mesh adaptive direct search’) optimization solver which can be applied to solve other mixed integer optimization problems that future users might find useful in other settings. Although the crs package shares some of the same functionalities as its kernel-based counterpart—the np package by the same author—it currently lacks some of the features the np package provides, such as hypothesis testing and semiparametric estimation. However, what it lacks in breadth, crs makes up in speed. A Monte Carlo experiment in this review uncovers sizable speed gains compared to its np counterpart, with a marginal loss in terms of goodness of fit. Therefore, the package will be extremely useful for applied econometricians interested in employing nonparametric techniques using large amounts of data with a small number of discrete covariates.
Open Access
Visualizing the influence of geography, oil and geopolitics on civil wars in the Arab world: A novel application of self-organizing maps and duration models
(2014-12-02) Mostafa, Mohamed M.; Al-Hamdi, Mohaned T.; alhamdi
The aim of this paper is to investigate why some internal conflicts are terminated quickly, while others linger for several decades without a looming resolution in the horizon. In an attempt to achieve this objective, the role played by geopolitical factors in the Arab world's internal conflicts was investigated. More specifically, we used Kohonen self-organizing maps, an artificial intelligence-based neural network technique, along with event duration models to investigate the role played by distance from the capital, access to international borders, terrain, valuable natural resources such as oil, and rebels fighting capability in civil wars in the Arab world. Using recently validated data spanning more than 50 years of Arab civil wars (1948–2003), our findings indicate that previously ignored geopolitical factors seem to play an important role in the duration of internal conflicts in the Arab World.
Open Access
The mortgage interest deduction and its impact on homeownership decisions
(2013-04-10) Hilber, Christian A. L.; Turner, Tracy M.; turner
This paper examines the impact of the combined U.S. state and federal mortgage interest deduction (MID) on homeownership attainment, using data from 1984 to 2007 and exploiting variation in the subsidy arising from changes in the MID within and across states over time. We test whether capitalization of the MID into house prices offsets the positive effect on homeownership. We find that the MID boosts homeownership attainment only of higher-income households in less tightly regulated housing markets. In more restrictive places, an adverse effect exists. The MID is an ineffective policy to promote homeownership and improve social welfare.
Open Access
Why don’t oil shocks cause inflation? Evidence from disaggregate inflation data
(2011-08-16) Bachmeier, Lance J.; Cha, Inkyung; lanceb; icha
This paper uses disaggregate U.S. inflation data to evaluate explanations for the breakdown of the relationship between oil price shocks and consumer price inflation. A data set with measures of inflation, energy intensity, labor intensity, and sensitivity to monetary policy is constructed for 97 sectors that make up core CPI inflation. A comparison of the 1973–85 and 1986–2006 time periods reveals that substitution away from energy use in production and monetary policy were both important, with approximately two-thirds of the change in response of inflation to oil shocks being due to reduced energy usage, and one-third to monetary policy. We find no evidence that other factors, such as changes in wage rigidities or changes in the persistence of oil shocks, played a role.
Open Access
Employment comovements at the sectoral level over the business cycle
(2013-06-12) Cassou, Steven P.; Vázquez, Jesús; scassou
This paper implements the technique suggested by Den Haan (J Monet Econ 46:3–30, 2000) to investigate contemporaneous as well as lead and lag correlations among economic data for a range of forecast horizons. The lead/lag approach provides a richer picture of the economic dynamics generating the data and allows one to investigate which variables lead or lag others, and whether the lead or lag pattern is short term or long term in nature. This technique is applied to monthly sectoral level employment data for the USA and shows that among the ten industrial sectors followed by the US Bureau of Labor Statistics, six tend to lead the other four. These six have high correlations indicating that the structural shocks generating the data movements are mostly in common. Among the four lagging industries, some lag by longer intervals than others and some have low correlations with the leading industries. These low correlations may indicate that these industries are partially influenced by structural shocks beyond those generating the six leading industries, but they also may indicate that lagging sectors feature a different transmission mechanism of shocks.
Open Access
Non-exclusionary input prices
(2014-04-01) Nadimi, Soheil R.; Weisman, Dennis L.; weisman
This paper models a vertically-integrated provider that is a monopoly supplier of an input that is essential for downstream production. An input price that is “too high” can lead to inefficient foreclosure and one that is “too low” creates incentives for non-price discrimination. The range of non-exclusionary input prices is circumscribed by the input prices generated on the basis of upper-bound and lower-bound displacement ratios. The admissible range of the ratio of downstream to upstream price-cost margins is increasing in the degree of product differentiation and reduces to a single ratio in the limit as the products become perfectly homogeneous.
Open Access
Time variation in an optimal asymmetric preference monetary policy model
(2013-08-13) Cassou, Steven P.; Vázquez, Jesús; scassou
This paper considers a time varying parameter extension of the Ruge-Murcia’s (Ruge-Murcia, F. J. 2003. “Does the Barro-Gordon Model Explain the Behavior of us Inflation? A Reexamination of the Empirical Evidence.” Journal of Monetary Economics 50: 1375–1390; Ruge-Murcia, F. J. 2004. “The Inflation Bias When the Central Bank Targets the Natural Rate of Unemployment.” European Economic Review 48: 91–107.) model to explore whether some of the variation in parameter estimates seen in the literature could arise from this source. A time varying value for the unemployment volatility parameter can be motivated through several means including variation in the slope of the Phillips curve or variation in the preferences of the monetary authority. We show that allowing time variation for the coefficient on the unemployment volatility parameter improves the model fit and it helps to provide an explanation of inflation bias based on asymmetric central banker preferences, which is consistent across subsamples.
Open Access
On the efficiency of codeshare contracts between airlines: is double marginalization eliminated?
(2013-11-01) Gayle, Philip G.; gaylep
Previous research has suggested that codeshare agreements eliminate double marginalization that exists when unaffiliated airlines independently determine the price for different segments of an interline trip. Using a structural econometric model, this paper investigates whether codeshare contracts do eliminate double marginalization. The results suggest that both upstream and downstream margins persist when the operating carrier of a codeshare product also offers competing single-carrier product(s) in the concerned market. Furthermore, counterfactual simulations from the model suggest that efficient pricing of these codeshare products would lower their price, and yield nontrivial increases in consumer welfare.
Open Access
Financial dependence and growth: diminishing returns to improvement in financial development
(2013-08-01) Shen, Leilei; lshen
This paper examines how much financial development facilitates economic growth by nonparametrically estimating the e ffect of fi nancial development on reducing the costs of external fi nance to fi rms. The data reveal substantial evidence of diminishing returns to improvement in financial development.
Open Access
Policy effects of the elasticity of substitution across labor types in life cycle models
(2013-09-01) Cassou, Steven P.; Gorostiaga, Arantza; Uribe Zubiaga, Iker; scassou
This paper investigates how the production function elasticity of substitution across different labor types impacts the results of policy analysis in multiperiod lived agent overlapping generations models. We critique and investigate the popular structure that simply assumes that workers with different age, experience or education are perfectly substitutable in production. This structure is inconsistent with empirical evidence of production complementarities. We couch our findings in the context of two types of policy reforms: a social security reform and a tax reform. These reforms were chosen in part not only because of the large interest in them, but also because of their differing effects on life cycle decisions. We find that ignoring production complementarity may influence the conclusions of policy analysis.
Open Access
Government education expenditures in early and late childhood
(2013-04-01) Abington, Casey; Blankenau, William F.; blankenw
Human capital investment in early childhood can lead to large and persistent gains. Beyond this window of opportunity, human capital accumulation is more costly. Despite compelling evidence in support of this notion, government education spending is allocated disproportionately toward late childhood and young adulthood. We consider the consequences of a reallocation using an overlapping generations model with private and public spending on early and late childhood education. Taking as given the higher returns to early childhood investment, we find that the current allocation may nonetheless be appropriate. When we consider a homogeneous population, this can hold for moderate levels of government spending. With heterogeneity, this can hold for middle income workers. Lower income workers, by contrast, may benefit from a reallocation.
Open Access
Identification in models of gasoline pricing
(2013-07-01) Bachmeier, Lance J.; lanceb
This paper presents evidence that the price of oil does not respond contemporaneously to shocks to the US gasoline market. We find no support for the hypothesis of feedback from the US gasoline market to the price of oil, justifying the identfi cation of impulse response functions by applying a Choleski decomposition (see, e.g., Kilian (2010)). Our results have implications for tests of asymmetric gasoline price responses and forecasting models of the price of crude oil.
Open Access
Labor supply, income, and welfare of the farm household
(2012-06-01) Chang, Yang-Ming; Huang, Biing-Wen; Chen, Yun-Ju; ymchang
Considering family labor and hired labor as heterogeneous inputs, we present a theoretical framework in which the optimal decisions of a farm household on on-farm family and hired labor, off-farm labor supply, and leisure are determined uniquely and endogenously. Focusing on two alternative settings with and without off-farm employment constraints, we show that imperfect substitutability between family labor and hired labor is not critical to the separation of household production and consumption. The validity of the separation proposition is shown to depend crucially on whether or not the availability of off-farm job opportunities is limited. We further examine how changes in external economic conditions and government policies affect the time allocation decisions of the household, as well as the composition of household income (i.e., on-farm income and off-farm labor earnings).
Open Access
Regulating regulators in transitionally competitive markets
(2012-01-03) Sappington, David E. M.; Weisman, Dennis L.; weisman
During the course of the first thirty CRRI conferences, we have gained considerable insight about how to design regulatory policy in the presence of developing competition. The insight to date has focused on how to harness competitive forces to motivate incumbent suppliers to serve the best interests of consumers. This paper stresses the importance of considering the incentives of regulators and explores the associated changes in standard recommendations for regulatory policy design in the presence of developing competition.