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ECONOMIC ISSUES

Volume 21 (2016)

Part 1, March

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Articles

Book Reviews

Part 2, September

Articles

Book Reviews

Part 1, March

Does importing more inputs raise productivity and exports? Some evidence from Indian manufacturing (p.1)

by C Sharma

Abstract: This study aims to analyse the role of imported inputs on productivity and export performance of the manufacturing industries of India. Our results indicate that imported inputs are crucial determinates of Total Factor Productivity (TFP). However, the impact varies greatly across industries. Furthermore, results regarding research and development (R&D) intensity suggest that inhouse R&D activities do not play a significant role in the productivity performance of Indian manufacturing firms. Our results also indicate that imports lead to a substantial growth in exports. In particular, exports in the chemical, machinery and transport equipment industries are highly dependent on imported intermediate goods. The results also indicate that although R&D is not linked with the productivity of industries, it has an important role in the export performance of these industries. TFP is also estimated to have a significant and sizable impact on export performance. This, in turn, supports the self-selection hypothesis, which explains the self-selection of more productive firms into the export market. Overall, our results support both hypotheses: learning by importing and self-selection in the import market.

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How important are foreign and domestic investments, exports and human capital for Greece's economic growth? (p.23)

by P Pegkas and C Tsamadias

Abstract: This study investigates empirically the causal relationship between economic growth and its determinants (foreign direct investment, domestic investment, exports, human capital) in Greece over the period 1970-2012. It uses time series analysis and estimates the effect of these determinants on economic growth, by applying a modification of Mankiw, Romer and Weil (1992) model. The empirical analysis reveals that there is evidence of unidirectional long-run and shortrun Granger causality running from foreign direct and domestic investments, exports and human capital to economic growth; and that there is a positive effect, in the long-run, of all determinants on economic growth. The contribution size of these economic variables, especially of foreign direct investment, is probably not adequate and sufficient to bring the Greek economy back to growth. Greece needs to implement many important structural reforms which will enhance the contribution of these determinants to economic growth.

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The effectiveness of R&D and external interaction for innovation: Insights from quantile regression (p.47)

by J Doran and G Ryan

Abstract: This paper utilises censored quantile regression techniques to analyse the impact of various forms of innovation inputs on the innovation output of a sample of Irish firms, using data from the Irish Community Innovation Survey 2008- 2010. While there is a substantial literature on the drivers of innovation, there is a new and growing research interest in the application of quantile regression in the context of innovation. The advantage of quantile regression is that it moves beyond the typical assumption of variation around a mean, and allows for insights into the changing effectiveness of innovation inputs across the full innovation distribution. However, most papers treat innovation output as a continuous variable, when in fact it is more accurate to treat this variable as censored. Therefore, this paper applies a censored quantile regression estimator to evaluate the impact of innovation inputs on innovation output and to assess whether the effectiveness of these inputs varies, depending on how innovative a firm is. The key results of the paper are that both intramural and extramural R&D decline in effectiveness as firms become more innovative. We also find evidence that external networking is more important for less innovative firms.

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The stability of the demand for money function in Islamic and non-Islamic monetary policy regimes (p.67)

by I L Awad and A M Soliman

Abstract: This study, using quarterly data from Egypt and Iran, extends the literature on demand for money by examining the stability of money demand functions in two different monetary policy regimes, an Islamic banking system and a conventional banking system. A stable demand for money enables central banks accurately to predict the demand for money and hence attain a price stability objective through the adjustment of the money supply. This paper adopts a restructured form of Friedman's (1956) model, which considers real demand for money as an extension to the theory of demand for durable goods. The study estimates the long-run demand for money functions in Iran, which represents an Islamic banking system, and Egypt, which represents a conventional banking system. The study then examines empirically the stability of the demand for money function under two different financial systems. The study finds that the demand for money function is stable under the Islamic banking system and unstable under the interest-based banking system.

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A problem with the course presentation of the single-price alternative to 3rd-degree price discrimination (p.87)

by M Borland and R Howson

Abstract: The typical procedure for the determination of output, price, and profit associated with the single-price alternative to 3rd-degree price discrimination found in intermediate texts, managerial texts, and other texts concerned with pricing works well under certain specifications with respect to revenue and cost, but not all. It is oversimplified and, as such, unreliable for the determination of output, price, and profit, dependent on arbitrary, but specific, choices of values for the parameters of associated revenue and cost functions; and is, therefore, at least non-general. Suggestions for course presentation of the single-price alternative, given the reconsideration of the procedure for the determination of output, price, and profit and the computation of a discriminating critical value developed in this paper, are easily inferred. Illustrations are provided throughout.

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Part 2, September

A post-mortem of austerity: the Greek experience (p.1)

by C Alexiou and J Nellis

Abstract: The policies of economic austerity are invoked whenever a country's public deficit is spiralling out of control. Given the intricate channels through which deficits and debt can be financed, i.e. either through borrowing or money creation, manipulation of public deficits may pose significant constraints on economic growth, social cohesion and political stability. In this context, austerity is a policy expedient that, if applied irresponsibly, might have irreversible effects on both economic and social structures. In Greece economic policies of austerity, in conjunction with internal devaluation, have been adopted in an attempt to improve competitiveness, correct external deficits and promote export-led growth. In this paper, by scrutinising a range of key economic indicators, we argue that austerity has depressed significantly the real economy in Greece, threatening further an already crippled economic environment with a danger of further stagnation. We also provide econometric evidence for the period 2000 - 2013 which shows that the positive contribution of net exports to economic growth in Greece has been as a result of relatively low domestic demand, not to relative gains in the international price competitiveness of Greek enterprises. Finally, it is envisaged that the lack of adequate endogenous capacity as a means of galvanising economic growth has the potential to usher in prolonged periods of economic depression.

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The dynamics of electricity consumption and private investment in Nigeria (p.33)

by J A Omojolaibi, E P Mesagan and T D Oladipupo

Abstract: This study investigates the nexus between electricity consumption and private investment in Nigeria. The study spans the period 1981-2013 and uses the Johansen co-integration analysis and error correction model. The results show that the components of electricity consumption induced a positive and significant effect on private investment. The study further shows the possibility of long-run equilibrium convergence between the components of electricity consumption and private investment. The research therefore recommends that the government should ensure that private investments in electricity are properly encouraged in a manner that it will raise the nation's production capacity. Also, the government should create an enabling environment for the development of electricity markets.

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Investigating the oil price-exchange rate nexus: evidence from Africa 1970-2004 (p.53)

by S Coleman, J C Cuestas and E Mourelle

Abstract: In this paper, we aim to provide further insights into the importance of the real oil price as a determinant of real exchange rates, for a pool of African countries. While this relationship has been explored extensively for industrialised economies, African countries have received little attention. By means of cointegration techniques and nonlinear dynamics we find that, for some of these countries, shocks in the real price of oil are particularly important in determining the real exchange rates, even in the long run. These results are of interest for policymakers, to help them deal more effectively with exchange rate policy decisions aiming at promoting economic growth in the area.

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Can financial inclusion and financial stability go hand in hand? (p.81)

by M J R Garcia

Abstract: This study addresses the relation between financial inclusion and financial stability. In order to do so, we review studies on the diverse possible links between these two financial phenomena for developing countries. Although some results are still preliminary, from the reviewed studies we can draw some conclusions. First, risk may rise from rapid credit growth associated with new financial inclusion institutions and instruments, and from unregulated parts of the financial system. However, broader access to deposits that leads to a more diversified base of deposits, could improve significantly the resilience of the overall financial system and thus financial stability. A further conclusion is that it is important to specify what type of state intervention or regulation is necessary in the particular case of financial inclusion. The application of standards and other measures that guarantee financial stability might prove to be a setback to inclusion processes.

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Resilience of developing countries to shocks: Case study of WAEMU countries with SUR and VAR Approaches (p.104)

by A D Adom

Abstract: This article investigates the economic resilience of West African Economic and Monetary Union (WAEMU) member states to shocks. Towards that end, an indepth study is conducted with, first, seemingly unrelated regression (SUR) and structural vector auto-regression (SVAR) models. Second, two indexes - namely,
a resistance index and a recovery index — capturing two major aspects of economic resilience in a given country, or group of countries, are constructed. Following a comprehensive analysis of results, five key elements stand out: (i) the WAEMU as a whole takes longer than the individual member countries to
accommodate both domestic and external shocks; (ii) contrary to expectations, the impacts of changes in economic conditions from Europe are weak; (iii) the concept of 'engineering resilience' embodies more closely the type of resilience experienced in the WAEMU; (iv) with respect to resistance and recovery postshock, the 'best students' appear to be Senegal, Côte d'Ivoire and Niger in the former case, while Togo and Côte d'Ivoire emerge on top in the latter, and (v) member states exhibit more dissimilarities in terms of resistance than recovery. A five-point course of action, at both macro and microeconomic levels, aimed at enhancing the degree of economic resilience in individual countries, and the Union, as well as reducing resilience gaps among countries, seem appropriate. This course, if diligently pursued, will strengthen the effectiveness of monetary policy tools at the disposal of authorities as they deal with shocks, both internal and external.

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