Heterogeneity in Panel Data: Are There Stable Production Functions?

We estimate separate productions functions for approximately 450 manufacturing firms each in France and the United States and for 850 manufacturing firms in Japan, covering the 13 year period 1967-1979, and focus on the wide dispersion in the estimated slope coefficients in all three countries. The main question asked Is: "Is this dispersion real?" Could it be just a reflection of sampling variability or is it an indication of real heterogeneity? We estimate the "true" dispersion using three different approaches: Maximum Likelihood, regressions of squares and cross-products of residuals, and Swamy's "residual" method, and try to interpret the somewhat different answers which emerge. In particular, we investigate the "reality" of the estimated heterogeneity by looking at its stability over time and by relating it to differences in capital shares and the industrial structure. We conclude that the observed heterogeneity is not "real." It is caused by some non-stable misspecification of our simple model, implying that we are unlikely to discern different but stable individual production relations in samples of this size which contain only a limited number of the economically relevant variables.

Cyclical Expenditure Policy, Output Volatility, and Economic Growth

This paper provides a comprehensive empirical assessment of the relation between the cyclicality of fiscal expenditure policy, output volatility, and economic growth, using a large cross-section of 88 countries over the period 1960 to 2004. Identification of the effects of (endogenous) cyclical expenditure policy is achieved by exploiting the exogeneity of countries political and institutional characteristics, which we find to be relevant determinants of the cyclicality of expenditures. There are three main results: First, both pro- and countercyclical expenditure policy amplify output volatility, much in a way like pure fiscal shocks that are unrelated to the cycle. Second, output volatility, due to variations in cyclical and discretionary fiscal policy, is negatively associated with economic growth. Third, there is no direct effect of cyclicality on economic growth other than through output volatility. These findings advocate the introduction of fiscal rules that limit the use of (discretionary and) cyclical fiscal (expenditure) policy to improve growth performance by reducing volatility. (author's abstract

Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.