205,255 research outputs found
Euro Area Inflation: Aggregation Bias and Convergence
EMU monetary policy targets aggregate Euro Area inflation. Concerns are growing that a focus on aggregate inflation may cause national inflation rates to diverge. While different explanations for diverging aggregate Euro Area inflation have been brought forward, the very impact of aggregation on divergence has however not been studied. We find a striking difference in convergence depending on the level of aggregation. While aggregate national inflation rates are diverging, disaggregate inflation rates are converging. We find that aggregation appears to bias evidence towards non-convergence. Our results are consistent with prominent theoretical and empirical evidence on aggregation biasEuro Area Inflation; Aggregation Bias; Convergence
Scale Effects, An Error of Aggregation Not Specification: Empirical Evidence
In a set of influential papers, Charles Jones (1995a, 1995b, 1999) argued that R&D based endogenous growth models are inconsistent with the data. He showed, in a very striking manner, that the scale effects prediction of early endogenous growth models (e.g. Romer, 1986 and 1990, Grossman and Helpman, 1991, and Aghion and Howitt, 1992) is not borne out in the data. Standard endogenous growth models attribute constant or increasing returns in the stock of knowledge or technology to the aggregate level of resources. This assumption leads to the counterfactual prediction that the rate of productivity growth should be increasing in the aggregate amount of resources devoted to accumulating knowledge. This paper presents empirical evidence in support of R&D based endogenous growth models without scale effects (e.g. Young, 1998, Howitt, 1999, Thompson, 2001, and Peretto and Smulders, 2002). In these models the average level of workers or R&D workers per firm drives growth as opposed to the aggregate level and do not share the scale effects property in the limit. Using data for the US covering 1964-2001, we show that when the number of employees or scientists/engineers are scaled down on a per establishment basis, the empirics support the latter version of endogenous growth models. Specifically, the long-run size of establishments is stable, neither declining or growing in the long-run, where size is measured in two ways: by workers per establishment and R&D workers per establishment. Second, we demonstrate a positive effect running from average establishment size to productivity growth as predicted by the theories.
Temporal Aggregation and Risk-Return Relation
The function form of a linear intertemporal relation between risk and return is suggested by Merton’s (1973) analytical work for instantaneous returns, whereas empirical studies have examined the nature of this relation using temporally aggregated data, i.e., daily, monthly, quarterly, or even yearly returns. Our paper carefully examines the temporal aggregation effect on the validity of the linear specification of the risk-return relation at discrete horizons,and on its implications on the reliablility of the resulting inference about the risk-return relation based on different observation intervals. Surprisingly, we show that, based on the standard Heston’s (1993) dynamics, the linear relation between risk and return will not be distorted by the temporal aggregation at all. Neither will the sign of this relation be flipped by the temporal aggregation, even at the yearly horizon. This finding excludes the temporal aggregation issue as a potential source for the conflicting empirical evidence about the risk-return relation in the earlier studies.
VaR-implied tail-correlation matrices : [Version October 2013]
Empirical evidence suggests that asset returns correlate more strongly in bear markets than conventional correlation estimates imply. We propose a method for determining complete tail correlation matrices based on Value-at-Risk (VaR) estimates. We demonstrate how to obtain more efficient tail-correlation estimates by use of overidentification strategies and how to guarantee positive semidefiniteness, a property required for valid risk aggregation and Markowitz{type portfolio optimization. An empirical application to a 30-asset universe illustrates the practical applicability and relevance of the approach in portfolio management
Aggregation of Producer Durables with Exogenous Technical Change and Endogenous Useful lives
The received theory of aggregation has been erected on certain fundamental hypotheses. One of them is that producer durables deteriorate exponentially, which implies that their replace-ment is proportional to the corresponding capital stocks. However the proportionality hypothesis conflicts with most of the available theoretical and empirical evidence. So an effort to relax it is long overdue. To this end the present paper investigates the conditions for consistent aggregation in a two-sector vintage capital model with exogenous technological change and endogenous use-ful lives. In the model aggregation is achieved by adaptation of the procedure first suggested by Haavelmo (1960). From the simulations of the solution with data from the United States in the post-war period it is found that the conventional approach to aggregation may be responsible for significant biases in the measurement of the economy-wide capital stock.E20
Monetary aggregation and policy decisions : an empirical evaluation across currency-equivalent, divisia, and simple sum aggregates
This study evaluates the relative empirical performance of two weighted monetary aggregation methods and the simple sum method. In particular, the performance of monetary aggregates constructed by currency equivalent (CE) and Divisia (D) indices is compared relative to each other and relative to their simple sum (SS) counterparts. The empirical performance is measured by the ability of these aggregates to explain fluctuations in real output, nominal output, and prices. Further, their ability to predict changes in output and prices is evaluated and compared to the predictions of the standard macroeconomic theory. This is the first study to comprehensively evaluate all the aggregation methods across the conventional four levels of monetary aggregation (M1 through L). Multivariate time series techniques, in particular vector autoregression (VAR) and vector error correction (VEC) models are used. Several VAR and VEC models are constructed and estimated to provide evidence on the empirical differences between CE, D, and SS aggregates. Dynamic simulations of the systems (using impulse response functions, IRFs, and forecast error variance decompositions, FEYDs) suggest that there are important differences between the performance of CE, D, and SS monetary aggregates in empirical applications. At the M1 level of monetary aggregation, results here indicate that the behavior of CE, D, and SS aggregates is similar and consistently weak. At broader levels of monetary aggregation, the empirical differences between CE, D, and SS aggregates are more pronounced, in particular between CE and D aggregates. Evidence from IRFs and FEVDs indicates that currency equivalent aggregates are notably less informative about changes in either real or nominal economic activity, relative to Divisia aggregates. This evidence suggests that CE aggregates are less useful in applied work as a measure of money, and therefore a less useful policy tool than D aggregates. Similar conclusion is drawn when comparing currency equivalent aggregates against simple sum counterparts. Furthermore, the empirical evidence presented in this study shows a close similarity in the behavior of D and SS aggregates in predicting real and nominal economic activity
Looking Into the Black Box: A Survey of the Matching Function
We survey the microfoundations, empirical evidence and estimation issues underlying the aggregate matching function. Several microeconomic matching mechanisms have been suggested in the literature with some successes but none is generally accepted as superior to all others. Instead, an aggregate matching function with hires as a function of vacancies and unemployment has been successfully estimated for several countries. The Cobb-Douglas restrictions with constant returns to scale perform well. Recent work has utilized disaggregated data to go beyond aggregate estimates, with many refinements and suggestions for future research.Matching function, search, mismatch, Beveridge curve, co-ordination failure, stock-flow matching, ranking, on-the-job search, space aggregation, time aggregation
"The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged
Recent empirical work has made headway in exploring the non-linear dynamics of deviations from the law of one price and" purchasing power parity that are apt to arise from transaction costs. However, there are two important facets of this work that need improvement. First, the choice of empirical specification is arbitrary. Second, the data used are typically composite price indices which are subject to potentially serious aggregation biases. This paper examines the evidence for transport-cost-induced nonlinear price behavior within the U.S. We address both of the above shortcomings. First, we use a simple continuous-time model to inform the choice of empirical specification. The model indicates that the behavior of deviations from price parity depends on the relative importance of fixed and variable transport costs. Second, we employ data on disaggregated commodity prices, yielding a pure' measure of the deviations from price parity. We find strong evidence of nonlinear reversion in these deviations. The nature of this reversion suggests that fixed costs of transportation are integral to an understanding of law-of-one-price deviations.
Reconsidering Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets
The ability of markets to aggregate diverse information is a cornerstone of economics and finance, and empirical evidence for such aggregation has been demonstrated in previous laboratory experiments. Most notably Plott and Sunder (1988) find clear support for the rational expectations hypothesis in their Series B and C markets. However, recent studies have called into question the robustness of these findings. In this paper, we report the result of a direct replication of the key information aggregation results presented in Plott and Sunder. We do not find the same strong evidence in support of rational expectations that Plott and Sunder report suggesting information aggregation is a fragile property of markets
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