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ECONOMIC ISSUES

Volume 17 (2012)

Part 1, March

Please select from the titles below:

Part 2, September

Please select from the titles below:

Part 1, March

Can abnormal returns be earned on bandwidth-bounded currencies? Evidence from a genetic algorithm (p.1-22)

by P Godinho

Abstract: Most of the studies about the Foreign Exchange market (Forex) analyse the behaviour of currencies that are allowed to float freely (or almost freely), but some currencies are still bounded by bandwidths (either disclosed or undisclosed). In this paper, I try to find out whether two bandwidth-bounded currencies, the Hong Kong dollar (HKD) and the Singapore dollar (SGD), present opportunities for abnormal returns. I consider a set of trading rules, and I use a genetic algorithm to optimise both the subset of rules to be used and their parameters, using real market data. I use four pairs of currencies, two of them involving currencies bounded by bandwidths and two others involving only free-floating currencies. I compare the results obtained for the different pairs, both in terms of profitability and in terms of the types of the rules that are used. Evidence of profitability is more consistent for the only pair including a bandwidth bounded currency without a narrow price band, the USD/SGD. Trend reversing rules are preferred for this currency pair, while the preferred type of rule seems to depend on the pair of currencies when free-floating currencies are considered. In the case of the SD/HKD, the small number of price changes, as well as the price stability (possibly consequences of a narrow price band) do not allow me to obtain conclusive results.

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Smoking Ban and Life Satisfaction: Evidence from the UK (p.23-48)

by T Hinks and A Katsaros

Abstract: This paper contributes to the literature on happiness economics by testing whether a national smoking ban contributes to changes in smoking behaviour amongst smokers in England, Wales and Northern Ireland. Based on 'set-point' theory and the idea of the hedonic treadmill it is argued that the ban may only have a temporary impact on happiness of smokers and non-smokers.

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Human Economists and Abstract Methodology (p.49-76)

by R W Bailey

Abstract: Many economists, and even methodologists, believe that the very abstractness of abstract methodology (AM) betrays it into either authoritarianism or vapidity. But though AM can certainly suffer from these defects, abstractness is not the cause of them. The root problems, arising from AM’s justificationist history, are its impersonalism, its assumption that the logic of research is Aristotelian, and its stress on the distracting empiricist distinction between observation and on observation. Perhaps, then, AM can be revived in a form which attends to individual researchers and their actual use of logic, and applies to all branches of research. A revived normative AM, attempting to foster ‘logical progress’, would consider the situation of the individual researcher, learning from the approach to ethics called ‘virtue theory’ as it did so. Methodologists of economics, despite considerable agreement about the deficiencies of modern economic research, have proved impotent to correct them. They should switch some of their attention from research outputs towards individual researchers and their progress; and to developing ‘research utopias’ in which progressive researchers, and hence research, might flourish.

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Stock Market Efficiency, Non-Linearity, Thin Trading and Asymmetric Information in MENA Stock Markets (p.77-93)

by B Harrison and W Moore

Abstract: The concept of market efficiency has been investigated thoroughly in recent years, with most studies focussing on developed economies. Far fewer investigations have been carried out into emerging markets, and results have been mixed. Some emerging markets appear to be weak form efficient whereas others seem to be inefficient. Emerging markets are typically characterised by thin trading and low levels of liquidity as well as, in some cases, ill-informed investors with access to information that is sometimes less than reliable. This might partly explain why some emerging markets are information inefficient. In this paper we investigate stock market efficiency in a group of emerging markets in the Middle East and North Africa (MENA) region. In particular we test the results of Abdmoulah (2010) who finds that the MENA region markets investigated are inefficient and, despite growth in size and the implementation of reforms designed to improve the operation of markets in the region, they exhibit little evidence of evolving market efficiency. This raises the possibility that further reform is necessary. We test for evolving market efficiency using a methodology that extends the approach adopted by Abdmoulah (2010). However, our results are broadly similar.

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Part 2, September

Fiscal stimulus: an overlapping generations analysis (p.1-26)

by R Guest and A J Makin

Abstract: Motivated by the revival of Keynesian-inspired fiscal activism in response to the global financial crisis of 2008-09, this paper analyses stylised simulations of fiscal stimulus using an overlapping generations model that allows for feedback effects of stimulus spending on intertemporal consumption decisions of households, via the tax rate, wages and the interest rate. Simulations vary according to the size and type of stimulus, and the speed and way in which the stimulus is unwound. The main qualitative result is that the short run output gains from fiscal stimulus are transitory — the fiscal multiplier turns negative and remains negative long after the stimulus ends, mainly because it must be reversed in some way. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.

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The Austrian perspective on the global financial crisis: a critique (p.27-56)

by J Morgan and I Negru

Abstract: The global financial crisis (GFC) and its aftermath have not just been a challenge to mainstream economics. It has also required a response from heterodox approaches. In the following paper we explore the Austrian response. We argue that Austrians have focused primarily on the role of government intervention in creating the conditions for the GFC. This focus, however, neglects the role of private agent error. We set out the role of collateralised debt obligations and credit default swaps as part of the GFC, in order to highlight that private agent error raises several problems of consistency under an Austrian approach. The basis of private agent error is separable from the role of government intervention (specifically the role of interest rates). Furthermore, the role of private agent error is one rooted in approaches to uncertainty, prediction, and control that are antithetical to an Austrian approach. The implication is that one cannot assume that private agents will produce a spontaneous order in the absence of interference that is preferable to one in which there is intervention. A consistent Austrian approach must also recognise its own historical commitments to the institutional dynamics of an economy. However, as the GFC and its aftermath illustrate, this creates a challenge for Austrian adherents to address the problem of potentially productive regulation.

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The information content of cashflows in the context of dividend smoothing (p.57-70)

by B Al-Najjar and Y Belghitar

Abstract: This paper aims to investigate the information content of cash flows in the context of dividend smoothing. Unlike previous studies, we propose a novel partial adjustment model based on cash flows, and compare it to Lintner's (1956) model. The results show that UK firms smooth their cash flows and that cash flows are the key determinant of dividend policy. Moreover, our proposed dividend partial adjustment model has a lower adjustment coefficient than Lintner's model, suggesting that our estimates are much closer to reality. The results are consistent across different measures of cash flows. 

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Beyond the CFA Franc: an empirical analysis of the choice of an exchange rate regime in the UEMOA (p.71-94)

by A Des’ Adom

Abstract: The CFA franc, originally created in 1945, currently serves as the common monetary unit for the eight member countries of the West African Economic and Monetary Union (UEMOA). In recent years, one has witnessed repeated calls from economists and politicians alike for the introduction of a new currency, which will be more reflective of fundamentals in UEMOA member countries' economies. This paper attempts to provide a road map for decision-makers in their choice of an exchange rate regime, when they decide to switch to a new currency. The model utilises an ordered logistic model to investigate which type of exchange rate regime — a currency board, a fixed but adjustable regime (FBAR), a managed float or a free float — will be appropriate for the Union in light of the economic and institutional fundamentals of its members. Our findings suggest that an FBAR will be the most suitable exchange rate regime, for it will have greater stimulus effects on investment and economic growth. The adoption of an FBAR will help UEMOA member states reach a two-fold objective: (i) to achieve sustained economic growth, (ii) while reinforcing the credibility and authority of their central bank, the BCEAO.

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Uncertainty of inflation and inflation rate: Does credibility of inflation policy matter? (p.95-110)

by H Sintim-Aboagye, C Chakraborty, and S Byekwaso

Abstract: We subject country level data to causality tests within a panel cointegration framework, to examine the relationship between inflation rates and the uncertainty of inflation for a panel of twenty two emerging economies, over the time period 1968 to 2010. Using the GARCH framework, a time series of conditional variances of inflation has been generated to serve as proxies for uncertainty of inflation. This series has been utilised to determine whether and how the relative degrees of central bank independence (CBI) influence the relationship between inflation rates and the uncertainty of inflation across the selected countries. Results of cointegration tests in the total sample confirm a robust long run equilibrium relationship between inflation and the uncertainty of inflation. For causality tests, although the long run outcomes are similar, short run results show some differences along the lines of the degree of CBI. For high CBI countries, the causal link in the short run is unidirectional and supports the Friedman-Ball hypothesis. By contrast, the low CBI countries display bidirectional causal links in the short run and provide support for both the Friedman- Ball and Cukierman-Meltzer hypothesis. In the long run, the entire panel and the two subgroups of countries all provide significant evidence affirming the Friedman-Ball hypothesis. The unambiguous conclusion of the empirical investigation suggests that the Friedman-Ball hypothesis is a long run phenomenon, regardless of differences in degrees of central bank independence.

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