Empirical Economics

This article tests whether health has improved income or income has improved health in OECD countries over the last 50 years. A theoretical framework for both directions of causation is first outlined. A panel time-series approach is then taken and, unlike similar work, common shocks across countries (‘cross-sectional dependence’) are taken into account in the analysis using the PANIC (Panel Analysis of Non-stationarity in Idiosyncratic and Common components) approach of Bai and Ng. It is found that better health improves income more generally while income in turn also affects health. This finding is shown to be robust to dynamic specification.

This paper investigates how corporate governance quality affects the analyst’s stock recommendations, forecast efficiency and target price accuracy on New York Stock Exchange. In particular, as corporate governance is often uncertain and ambiguous to investors, expert financial advisors may use transparent corporate governance information to set their recommendations and improve the level of accuracy of their earnings forecasts. According to agency and signaling theories, good governance mechanisms aim to mitigate agency conflicts and boost corporate transparency. Thus, we argue that they can serve as mediators during the forecasting process and we expect a strong significant relationship between the effectiveness of corporate governance mechanisms and analyst activity. Five hypotheses are tested with a large sample of 154 US market firms over a 17-year period (2004–2020). Our empirical findings point out some special features of US stock markets. We find evidence that analysts tend to issue favorable recommendations, more accurate, less dispersed and more optimistic earnings forecasts for most well-governed firms. Furthermore, we show that higher-quality governance transparency is an important determinant of financial analysts’ behavior in the USA. The results also indicate that higher-quality governance appears valuable with financial analysts during pre- and post-crisis period, while it is not generally detected in COVID-19 times. However, we report the weakness of analysts’ outputs–governance quality for small firms. Thus, our findings cast doubts over the corporate governance-based analyst practices of US small and unaffiliated firms. The main implication of these findings is to improve understanding of how investors’ behavioral characteristics affect the transmission mechanism of information in money market and capital market prices. This paper has important implications for the decision making of financial analysts and investors by requesting firms to significantly improve their information environments in the good and bad times. It also offers insights into how firms establishing good corporate governance mechanisms can help the analysts to predict future stock prices.

A central issue in the analysis of public goods is the relationship between the optimal provision level and the distribution of income. Theoretical research has stressed the conditions under which the optimum is independent of the distribution of income. Here we focus on numerical analysis of more policy-relevant concerns. Specifically, to what extent is a given redistribution of income likely to affect the optimal level of public good supply? And how significant are the welfare costs of not adjusting public good supply when income distribution changes? We use an applied general equilibrium (AGE) model of the Australian economy and public sector to generate numerical estimates of the impacts of redistributive policies on these variables. Results suggest that the traditional separation of allocation and distribution in determining the level of public good supply may be a justifiable empirical simplification, except where very dramatic redistributions are involved.

This study is concerned with the impact of wages on job search decisions in Eastern Germany immediately after reunification and in later periods. Several concepts measuring wage effects are used. The results of bivariate probit estimates with incomplete classification for a global and local job search show that the wage level had stronger effects on the former than on the latter job search decision directly after the collapse of the Berlin Wall. The degree of satisfaction with current income and the earnings capacities were irrelevant for the search decision. Low-paid East German workers had a higher propensity to search for a new job in the old Länder than others. This is contrary to the misleading result of isolated estimates about the job search in Western Germany. In the subsequent periods the situation has changed. The difference of earnings capacities between Eastern and Western Germany, specific East German wage premiums and intraregional wage inequality affect the decision to search for a new job in the west.

As a reflection of both strong persistence of debt-to-GDP ratios and correlation of respective innovations with governments’ primary surpluses, standard t-tests in policy reaction functions show actual significance levels that are up to five times larger than their nominal reference. Adopting size-controlled inference by means of Monte Carlo-based and asymptotic Bonferroni critical values, we diagnose fiscal policies in the US and the UK to be sustainable in samples covering more than 100 years. Conditioning on post-WWII subsamples and 5% nominal significance, conventional t-tests signal fiscal sustainability for these countries. In contrast, size-corrected inference hints at a lack of fiscal sustainability and, thus is recommended for the ‘real-time’ monitoring of public debt. The fiscal policy of Portugal is found to lack sustainability irrespective of the considered sample period.

We analyze the nature of persistence in macroeconomic fluctuations. The current view is that shocks to macroeconomic variables (in particular realGNP) have effects that endure over an indefinite horizon. This conclusion is drawn from the presence of a unit root in the univariate time series representation. Following Perron (1989), we challenge this assessment arguing that most macroeconomic variables are better construed as stationary fluctuations around a breaking trend function. The trend function is linear in time except for a sudden change in its intercept in 1929 (The Great Crash) and a change in slope after 1973 (following the oil price shock). Using a measure of persistence suggested by Cochrane (1988) we find that shocks have small permanent effects, if any. To analyze the effects of shocks at finite horizon, we select a member of theARMA(p, q) class applied to the appropriately detrended series. For the majority of the variables analyzed the implied weights of the moving-average representation have the once familiar humped shape.

This paper analyzes the financial implications on local public budgets of disseminating information about the prosecution of political corruption at the local level. We build a database from a wave of corruption scandals in Spain to use a quasi-experimental design and find that after corruption is revealed, both local public revenues and expenditures decrease significantly (approximately by 7 and 5%, respectively) in corruption-ridden municipalities. The effect lasts for a period of time equivalent to a full electoral term and comes mostly from other economic agents’ unwillingness to fund or start new projects in municipalities where the prosecution of corruption has been revealed. These results imply that if one of the consequences of corruption is the inefficient allocation of funds to areas where corrupt politicians can extract more rents, the revelation of the corruption scandal frees up resources that can be used to fund activities with a higher social return.

Over the last few years, there has been a growing interest in DSGE modelling for predicting macroeconomic fluctuations and conducting quantitative policy analysis. Hybrid DSGE models have become popular for dealing with some of the DSGE misspecifications as they are able to solve the trade-off between theoretical coherence and empirical fit. However, these models are still linear and they do not consider time variation for parameters. The time-varying properties in VAR or DSGE models capture the inherent nonlinearities and the adaptive underlying structure of the economy in a robust manner. In this article, we present a state-space time-varying parameter VAR model. Moreover, we focus on the DSGE–VAR that combines a microfounded DSGE model with the flexibility of a VAR framework. All the aforementioned models as well simple DSGEs and Bayesian VARs are used in a comparative investigation of their out-of-sample predictive performance regarding the US economy. The results indicate that while in general the classical VAR and BVARs provide with good forecasting results, in many cases the TVP–VAR and the DSGE–VAR outperform the other models.

This paper takes an innovative look at the relationship between commodity futures prices and speculation. Contrary to other studies, we analyze the effect of speculation on temporary and permanent futures price shocks estimated from a cointegrated system of pairwise short- and long-dated contracts. Where cointegration is found, the long-term equilibrium is determined by the long-dated contract, while the adjustment toward equilibrium is restored by the short-dated contract (except for cotton). Granger causality tests cannot reject the null hypothesis that speculation as measured by Working’s T index has no effect on squared permanent price shocks for 7 out of 9 commodities. Where the null hypothesis is rejected, the relationship exhibits a negative sign, i.e., speculation has a stabilizing effect.