Rationing can backfire : the day without a car in Mexico City

In November 1989, Mexico City's administration imposed a regulation banning each car from driving on a specific day of the week. The regulation has been both popular and controversial. Some feel that it is a reasonable concession aimed at alleviating congestion and pollution problems. Others feel it is both inefficient and unfair: inefficient in the way most rationing systems are inefficent, and unfair in that it is costly to some and easily avoided or accommodated by others. Some feel that it may also be so inefficient that it is counterproductive. The authors found evidence to support that view. Many households bought an additional car to get additional driving permits, and the amount of driving increased. Greater use of old cars and increased weekend driving may have contributed to the disappointing results of Mexico's one-day ban on driving: high welfare costs and none of the intended benefits.Roads&Highways,Economic Theory&Research,Environmental Economics&Policies,Financial Crisis Management&Restructuring,Country Strategy&Performance,Economic Theory&Research,Environmental Economics&Policies,Roads&Highways,Financial Crisis Management&Restructuring,Transport and Environment

Foreign aid's impact on public spending

Using a model of aid fungibility, the authors examine the relationship between foreign aid and public spending. Based on a panel of cross-country and time-series data, their results show that roughly 75 cents of every dollar given in net development assistance goes to current spending and 25 cents to capital spending in the recipient countries. But concessionary loans - a component of development assistance - stimulate far more government spending. Their results also show that aid increases both public and private investment. To test aid fungibility across both public spending categories, they use a newly constructed data series on the net disbursement of concessionary loans. They find that concessionary loans given to the transport and communication sector are fully nonfungible. But loans to the energy sector are converted into fungible monies and part of the funds leak into transport and communications. Loans to agriculture and education are also fungible. There is no evidence of concessionary funds being diverted for military purposes. Their results show that total public spending in the health sector has no impact on reducing infant mortality, but concessionary loans to the health sector do. This finding leads the authors to conclude that linking foreign aid to an agreed-upon public spending program in areas critical to development might be an effective way to transfer resources to developing countries.Decentralization,Gender and Development,Development Economics&Aid Effectiveness,Public Sector Economics&Finance,Economic Theory&Research,Inequality,Development Economics&Aid Effectiveness,Public Sector Economics&Finance,National Governance,Economic Stabilization

Is demand for polluting goods manageable? an econometric study of car ownership and use in Mexico

Charging for social marginal costs is efficient regardless of price elasticities, but the importance of getting prices"right"is greater the more manageable, or elastic, the demand. In efficient pollution control programs, options to make cars cleaner are combined optimally with demand conservation. The roles played by"cleaner cars"as compared with"fewer trips"are determined by empirical parameters: cheap, clean technologies would imply a great role for cleaner cars, while high demand elasticities lead to a greater role for demand reduction. In seminal research, evisence was found to support the hypothesis that demand for commodities such as gasoline should have lower price elasticities and higher income elasticities in developing than in industrial countries. The authors estimate a model of gasoline demand and car ownership in Mexico, using a panel of annual observations by state. Key features they introduce are instrumental variables on different data and the treatment of (1) possible dynamics, (2) measurement errors in the data, and (3) unobserved characteristics in individual states. They use tests of serial correlation in the residuals to model the dynamics properly. The resulting model is one of almost immediate adjustment, with a short-term price elasticity for gasoline close to the long-term estimate of -0.8. The model displays elasticities that are lower (for income) and higher (for price) than those hypothesized, and are within the range of elasticities found in industrial countries. Byproducts of the model: The elasticity of car purchases with respect to gasoline prices is positive. Scrappage decisions are affected by income and by car and gasoline prices. And these elasticities are not significantly different in the richer states. For policy purposes, these findings do not support"elasticity pessimism"The use of car services is sensitive to pricing, which suggests that consumers, for some of their demand, have reasonably good alternatives to car services. Consideration of external costs - such as accidents, congestion, air pollution, and road damage - thus involve considerable demand conservation.Inequality,Transport and Environment,Energy and Environment,Economic Theory&Research,Environmental Economics&Policies

Estimating the Equilibrium Real Exchange Rate

An equilibrium exchange rate is here defined as the level that is consistent with simultaneous internal and external balances as specified in Montiel (1996). Exogenous “fundamental” variables determining these balances are identified. Along the lines of Edwards (1994), a reduced form is estimated with the cointegration technique for Finland for the period 1975-95. The estimation produced a reasonable set of equilibrium exchange rates that appreciate with positive shocks to the terms of trade, world real interest rates, and the productivity differential between Finland and its trading partners.

Does Good Financial Performance Mean Good Financial Intermediation in China?

Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy''s financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001-07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.Financial intermediation;Bank supervision;Banking;Banking sector;Banks;Depositories;Economic models;Financial management;Performance indicators;Profits;banking system, financial repression, agricultural bank, joint stock, deposit rates, financial institutions, financial sector, financial system, reserve requirement, bank intermediation, interbank market, financial stability, financial capital, financial systems, bank ownership, deposit interest rates, prudential regulation, banking industry, net interest margin, bank market, bank service, deposit interest, foreign exchange, bank value, international standards, interest rate ceilings, reserve requirements, banking activities, bank holding companies, partial derivative, monetary authority, bank loan, capital adequacy, banks ? loans, bank of greece, banking structure, bank lending, excess demand, derivative, financial structure, financial reforms, recapitalization, capital adequacy ratio, return on assets, interest rate controls, bank branches, bank law, financial resources, capital base, banks ? loan, deposit rate, money market, banking system developments, financial markets, nonperforming loan, moral hazard, retained earnings, tier 2 capital, banking institutions, bank holding

Analysis of nonlinear, non-normal economic time-series and its applications

We introduce and analyze a general bivariate non-linear dynamic system in order to assess the non-linearities and non-normalities in economic time series data that cannot be accounted for by non-linear models like ARCH, Bilinear or TAR. The system is in state space form with an unobservable state variable. Its most crucial property is conditional non-normality. For the estimation of the unobserved variable that may change at each time period, we derive a set of non-linear filters which is more general than the extended Kalman filter. We show that if the true system is conditionally Gaussian, the filter equations collapse to the Kalman filter. We introduce three models with non-linearity, non-normality complications and assess the performance of the non-linear filter via simulation. The simulation results indicate that as non-linearity in the system plays a more important role, the extended Kalman filter\u27s performance deteriorates substantially, while the non-linear filter performs consistently well. The filter is successful in extracting the unobserved variable for many different non-linear non-normal systems. However, this cannot be generalized for all non-linear models and all parameter values. The estimation of the system parameters are also discussed. The non-linear filtering methodology is used to discover the behavior of exchange rates that are assumed to be generated by a subordinate stochastic process. The parameters are estimated by the Generalized Method of Moments and the information variable series are estimated via the non-linear filters. The directing process extracted through non-linear filtering easily lends itself to be interpreted as information flow; it increases during high volatility clusters and levels off during calm periods. The effect of liquidity constraints on firm behavior is also analyzed. For estimation, we use Kitagawa\u27s filtering technique which utilizes the spline method for linear but non-normal models. We find that liquidity constraints are large and positive for all years in our sample, with a pattern paralleling other attempts to measure credit market tightness

Rationing Can Backfire: The "Day without a Car" in Mexico City

A ban restricting each car from driving on a specified weekday is found to have increased total driving in Mexico City. Because of the ban, cars effectively represent "driving permits," and some households have bought an additional car and increased their driving. Greater use of old cars, congestion effects, and increased weekend driving may also have contributed to the disappointing results. The ban has high welfare costs and does not deliver the intended benefits of reduced driving—quite the contrary. The experience provides an interesting lesson in applied welfare economics. Theory indicates that this is a costly way of reducing traffic and pollution. But the finding that the strategy is counterproductive could be made only with applied quantitative analysis. In November 1989 the Mexico City administration imposed a regulation banning each car from driving a specific day of the week. Called Hoy no circula (this one does not circulate today), the "Day without a Car" regulation specifies that cars with license plate numbers ending with digits 0 or 1 do not drive on Monday, 2 or 3 do not drive on Tuesday, and so on. Restrictions do not apply on weekends. The regulation applies to all cars (except those of the fire department) and thus to firms as well as households. We use the term household for simplicity. Compliance is generally believed to be high: the police are visible and fines are heavy. The regulation has been both popular and controversial. Some people argue that it places a reasonable burden on car owners in order to alleviate congestion and pollution problems. Others argue that it is inefficient and unfair: inefficient in the way most rationing devices are inefficient; unfair because it is more easily avoided or accommodated by some than by others. Finally, some people are arguing that the regulation is counterproductive, actually increasing the levels of congestion and pollution because many households have purchased additional cars to circumvent the ban. This article analyzes the policy pragmatically. Section I shows how the results of rationing can be compared with those that would be obtained using marke Document type: Boo

Does Inflation in China Affect the United States and Japan?

With China''s share in global trade increasing rapidly, some argued in 2002-03 that China was exporting deflation to other countries as it was dumping cheap goods in mature markets. Later, others argued that China was sucking in commodities and thus causing sharp increases in global prices. The theoretical literature so far has provided mixed conclusions regarding the strength of international transmission of inflation. This paper uses a number of econometric techniques to assess the extent of the link between inflation rates between China and the United States and Japan. It finds only limited empirical evidence at the aggregate level for consumer price inflation in China leading to price changes in the United States and Japan. However, it finds some evidence that inflation in the United States has an impact on Chinese inflation, consistent with the literature that argues that inflation is propagated from the reserve currency economy to other economies. In either case, the impact is short lived. At a more disaggregate level, there appears to be stronger sector-specific linkages between prices in China and in the United States and Japan, both for food and at the household level for manufactured goods.Trade;Economic models;inflation, inflation rates, price inflation, monetary fund, price level, inflation rate, inflationary pressures, increase in inflation, monetary policy, central bank, monetary economics, retail price inflation, inflation equation, deflationary effect, low inflation, relative prices, effects of inflation, international monetary policy, rise in inflation, retail price index, macroeconomic performance