Economic Issues



Volume 8 (2003)

Part 1, March

Please select from the titles below:

Part 2, September

Please select from the titles below:

Part 1, March

Estimating the Permanent and Transitory Components of the UK Business Cycle (p.1)

by T C Mills and P Wang

Abstract: We estimate a model that incorporates two key features of business cycles, comovement among economic variables and switching between regimes of boom and slump, to quarterly UK data for the last four decades. Common permanent and transitory factors, interpreted as composite indicators of coincident variables, and estimates of turning points from one regime to the other, are extracted from the data by using the Kalman filter and maximum likelihood estimation. Both comovement and regime switching are found to be important features of the UK business cycle. The components produce sensible representations of the cycles and the estimated turning points agree fairly well with independently determined chronologies.

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Time Consistency and the Development of Vaccines to Treat HIV/AIDS in Africa (p.15)

by B M Craven, C Fiala, A Shiers and G T Stewart

Abstract: AIDS is perceived to represent an unprecedented medical, political and economic challenge to African and world leaders. This paper examines the economics of pricing and supplying drugs and vaccines in the context of AIDS and HIV. It addresses the time consistency and other economic issues associated with patented drugs and research into vaccines for diseases that are mainly prevalent in poor countries. The paper examines the financial implications of treating HIV/AIDS with the medical procedures currently used to treat patients in industrialised countries. The paper concludes first that the time consistency problem is not the main obstacle preventing research into developing an HIV vaccine and thus addressing AIDS in Africa. Second, it is impracticable, at present, to mobilise adequate financial and conventional medical resources to address the perceived HIV/AIDS problem in Africa. Third, the most practical and appropriate health policy to tackle the African problem is by health education.

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The Effect of Unionisation on Wages in Great Britain: Estimates from the Labour Force Survey (p.33)

by N C O’Leary, P D Murphy and D H Blackaby

Abstract: This paper provides benchmark estimates of the impact that trade unions have on the wage rates paid to workers in Great Britain using data from the Labour Force Survey. This is done for a number of gender and occupational subgroups of the population using information on both union membership and union coverage.

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Asymmetric Unit Root Tests in the Presence of Innovation Variance Breaks: Threshold versus Consistent-Threshold Estimation (p.47)

by S Cook and N Manning

Abstract: Kim et al. (2002) demonstrate that the Dickey-Fuller unit root test can experience severe size distortion when a large decrease in the innovation variance occurs early in the sample period, leading to spurious rejection of the null. We extend this analysis to the case of spurious identification of asymmetric stationarity by the MTAR test of Enders and Granger (1998) under similar circumstances. In terms of unit root testing, the properties of the MTAR test are inferior to those of the Dickey-Fuller test. However, the MTAR test with consistent-threshold estimation outperforms both the Dickey-Fuller and the original MTAR tests when considering the unit root hypothesis; size distortion being dramatically reduced. The consistent MTAR test is also to be preferred to the original MTAR test when testing the joint hypothesis of non-stationarity and symmetry since the original test can display considerable undersizing. However, the size of the consistent MTAR test is approximately nominal in all experiments except when extreme changes in innovation variance occur towards the beginning of the sample period.

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The Rate of Depreciation of Technological Knowledge: Evidence from Patent Renewal Data (p.59)

by D Bosworth and G Jobome

Abstract: This paper is critical of studies that assume the rate of depreciation of technological knowledge is exogenously given and constant. It argues that the development of rival inventions and/or the existence of a pool of inventions from which spillovers take place impact directly on the size and value of the stock of knowledge. Patent data seem ideal to test such hypotheses as patents represent a store of R&D knowledge, and the declining value of the exclusive right to use an invention is reflected in the failure to renew patent protection. The empirical model includes not only rival invention and spillover effects, but other variables suggested by the existing literature, such as renewal costs and investment activity (representing new niches for inventions). A new quasi-panel patent data set has been constructed, tracing the survival characteristics of each cohort of patents over the period 1950-75. The data allow the first empirical tests of whether the hazard rate from the patent stock is duration dependent, which we demonstrate is linked to the highly skewed distribution of the value of patents. The long sample period also allows an exploration of whether the influences on the obsolescence of technological knowledge have changed over the post-War period.

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Using Choice Experiments for Non-Market Valuation  (p.83)

by F Alpizar, F Carlsson and P Martinsson

Abstract: This paper provides the latest research developments in the method of choice experiments applied to valuation of non-market goods. Choice experiments, along with the, by now, well-known contingent valuation method, are very important tools for valuing non-market goods and the results are used in both cost-benefit analyses and litigations related to damage assessments. The paper should provide the reader with both the means to carry out a choice experiment and to conduct a detailed critical analysis of its performance in order to give informed advice about the results. A discussion of the underlying economic model of choice experiments is incorporated, as well as a presentation of econometric models consistent with economic theory. Furthermore, a detailed discussion on the development of a choice experiment is provided, which in particular focuses on the design of the experiment and tests of validity. Finally, a discussion on different ways to calculate welfare effects is presented.

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Part 2, September

Are Devaluations Expansionary or Contractionary? A survey article (p.1)

by M Bahmani-Oskooee and I Miteza

Abstract: Earlier studies that investigated the impact of devaluation on domestic production relied upon the aggregate demand analysis. They argued that by making a country’s exports cheaper and imports expensive, devaluation is said to stimulate the aggregate demand and thus, domestic production. In this case, devaluation is said to be expansionary. Recent studies, however, have argued that by raising the cost of imported inputs, devaluation contracts aggregate supply. If decrease in aggregate supply more than offsets the increase in aggregate demand, output eventually declines. In this case, devaluation is said to be contractionary. This article reviews the existing research on the effects of devaluation on domestic production and concludes that the impact is country specific and depends on model specification and results depend on the estimation technique.

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Ex post Moral Hazard in Crop Insurance: Costly State Verification or Falsification? (p.29)

by R M Rejesus

Abstract: This article examines the extent to which actual crop insurance indemnification behaviour conforms to the theoretical predictions of two ex post moral hazard models — costly state verification and costly state falsification — and then explores whether the closely conforming model can indeed help deter ex post moral hazard in the United States (US) crop insurance program. The results suggest that indemnification behaviour in crop insurance is more in line with the costly state verification model. Following the theoretical predictions of the costly state verification model, however, may not be the optimal policy to deter ex post moral hazard since it is possible for insured producers to deceive loss adjusters and for loss magnitudes to not be truthfully verified.

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An Error Correction Model of the Median Voter’s Demand for Public Goods in Mauritius (p.47)

by S K Sobhee

Abstract: From an optimizing framework, the median voter’s demand for public goods is derived and estimated using data pertaining to the economy of Mauritius over the period 1970-1999. Empirical findings reveal that a long run relationship exists between the quantity demanded of public goods and the income of the median voter, the latter's perceived tax price (for these goods) and overall population. Public goods are found to be basic necessities rather than luxury goods. Moreover, the rising number of beneficiaries generates an increase in the demand for public goods, though not in a manner that would substantiate the congestion hypothesis. A disaggregation of the temporal elasticities through the formulation of an Error Correction Mechanism indicates that, while in the short run, it is basically the perceived tax-price variable which predominates, in the long run, all the three variables — price, income and population become significant in influencing the median voter's demand. A major policy implication emanating from these findings is it may be necessary but not sufficient to curb public spending by simply eliminating fiscal deficits.

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A Complete Characterization of Economies with the Nonsubstitution Property (p.63)

by T Fujimoto, C Herrero, R R Ranade, J A Silva and A Villar

Abstract: A complete characterization of economies with the nonsubstitution property is presented for linear models. In this characterization, a degree of proper joint production as well as the existence of durable capital goods is allowed for.

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The Frontier Approach to the Measurement of Productivity and Technical Efficiency (p.71)

by V Sena

Abstract: In 1957, Farrell proposed to measure technical (in)efficiency as the realised deviation from a frontier isoquant. Since then, the research has developed several methods to derive the production frontier and it has also extended its scope in applying frontier techniques to the measurement of total factor productivity. In this paper, I present the core techniques for the measurement of technical efficiency and productivity based on the notion of frontier and introduce the more rcent technological advances in the field.

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