IEPR Working Papers

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IEPR11.15

Religion and cooperative attitudes: Evidence from Indonesia

Arya Gaduh

Abstract: Using the latest round of the Indonesian Family Life Survey (IFLS),
I investigate the correlations between religion and cooperative attitudes such as altruism, trust, and tolerance. I investigate these associations for dierent religions in Indonesia, a country where Islam is the majority religion but recognizes other world religions such as Catholicism, Protestantism, Hinduism, Buddhism, as well as Confucianism. Meanwhile, the attitudes studied here naturally fall under what Guiso et al. (2011) called "civic capital", i.e., "those persistent and shared beliefs
and values that help a group overcome the free rider problem in the
pursuit of socially valuable activities".
I find that: (i) religiosity is associated with a higher willingness to help and trust of individuals within one's own community, but not with the (generalized) trust of strangers; (ii) however, religiosity is associated with more religious discrimination; (iii) interestingly, but consistent with the social psychology literature, religiosity is also as- sociated with greater ethnic discrimination; and (iv) among Muslims
and, to a much lesser extent, Protestants, religiosity is negatively associated with tolerance. The evidence, therefore, suggests that religion may be linked to "parochial altruism" (Bernhard et al., 2006; Choi and Bowles, 2007), which is altruism towards members of one's own group combined with hostility towards members of the out-groups. The link appears to be strongest for adherents of the country's majority religion.

Keywords: religion, cooperation, parochial altruism, Indonesia

JEL Classifications: D71, D72, Z12

IEPR11.14

On Identification of Bayesian DSGE Models

Gary Koop, M. Hashem Pesaran, Ron P. Smith

Abstract: In recent years there has been increasing concern about the identifi-
cation of parameters in dynamic stochastic general equilibrium (DSGE) models. Given the structure of DSGE models it may be difficult to determine whether a parameter is identified. For the researcher using Bayesian methods, a lack of identification may not be evident since the posterior of a parameter of interest may differ from its prior even if the parameter is unidentified. We show that this can even be the case even if the priors assumed on the structural parameters are independent. We suggest two Bayesian identification indicators that do not suffer from this difficulty and are relatively easy to compute. The first applies to DSGE models where the parameters can be partitioned into those that are known to be identified and the rest where it is not known whether they are identified. In such
cases the marginal posterior of an unidentiÖed parameter will equal the posterior expectation of the prior for that parameter conditional on the identified parameters. The second indicator is more generally applicable and considers the rate at which the posterior precision gets updated as the sample size (T) is increased. For identified parameters the posterior precision rises with T, whilst for an unidentified parameter its posterior precision may be updated but its rate of update will be slower than T. This result assumes that the identified parameters are pT-consistent, but similar di§erential rates of updates for identified and unidentified parameters can be established in the case of super consistent estimators. These results are illustrated by means of simple DSGE models.

JEL Classifications: C11, C15, E17

Keywords: Bayesian identification, DSGE models, posterior updating, New Keynesian Phillips Curve.

IEPR11.13

Aggregation in Large Dynamic Panels

M. Hashem Pesaran, Alexander Chudik

Abstract: This paper considers the problem of aggregation in the case of large linear dynamic panels, where each micro unit is potentially related to all other micro units, and where micro innovations are allowed to be cross sectionally dependent. Following Pesaran (2003), an optimal aggregate function is derived, and the limiting behavior of the aggregation error is investigated as N (the number of cross section units) increases. Certain distributional features of micro parameters are also identified from the aggregate function. The paper then establishes Granger's (1980) conjecture regarding the long memory properties of aggregate variables from 'a very large scale dynamic, econometric model', and considers the time profiles of the effects of macro and micro shocks on the aggregate and disaggregate variables. Some of these findings are illustrated
in Monte Carlo experiments, where we also study the estimation of the aggregate effects of micro and macro shocks. The paper concludes with an empirical application to consumer price inflation in Germany, France and Italy, and re-examines the extent to which 'observed' inflation persistence at the aggregate level is due to aggregation and/or common unobserved factors. Our findings suggest that dynamic heterogeneity as well as persistent common factors are needed for explaining the observed persistence of the aggregate inflation.

Keywords: Aggregation, Large Dynamic Panels, Long Memory, Weak and Strong Cross Section Dependence, VAR Models, Impulse Responses, Factor Models, Inflation Persistence.

JEL Classification: C43, E31

IEPR11.12

Auctions with Resale and Bargaining Power

Harrison Cheng

Abstract: We show that when the weak bidder’s bargaining power in the resale market is weakened, the auc tioneer’s revenue from the first-price auction with resale is lower. Using the idea of Coase Theorem, we show that when the resale market is a sequential bargaining model with no commitment, the auctioneer’s revenue is substantially reduced, and the ranking is the opposite of Hafalir and Krishna (2009). We establish a version of the Coase Theorem in the context of the auctions with resale. When Coase Theorem holds, we show that the revenue of the auction with resale is lower than the revenue of the same auction without resale. We also provide the existence and uniqueness of equilibrium for our model of auctions with resale

Keywords: Resale, Existence and uniqueness of equilibrium, Bargaining Power, Auction revenue, Coase Theorem

JEL Classification: D4, D8, L1

IEPR11.11

Midwives and Maternal Mortality: How Effective has Indonesia's Village Midwife Program Been?

Shailender Swaminathan, Tomoya Matsumoto, and Jeffrey B. Nugent

Abstract:

Objective: To assess the effect of Indonesia’s Village Midwife Program on Maternal Mortality Rates

Methods: Use data from the Demographic and Health Surveys (years) to construct a time series (1985-2002) of estimates of Maternal Mortality Rates-separately for rural and urban areas- using the Sisterhood method. Use data from the Indonesian Family Life Survey (years) to construct estimates of village midwife availability, and also a time series of both the Crude Birth Rate and the Teenage Birth Rates-separately for rural versus urban areas. Use regression analysis to identify the effect of village midwives after controlling for other correlates such as maternal education, and maternal age at pregnancy.     

Findings: Between the time in 1993 when the deployment of midwives began in earnest and 2000, the majority of the trained midwives were deployed to rural areas, and resulted in a large reduction in the rural-urban gap in MMRates over this period. We also find a reduction in the rural-urban difference in Crude Birth Rates and Teenage Birth Rates. Together these results suggest that village midwives may have impacted maternal mortality rates by improving access to family planning methods, and by reducing unsafe abortion practices. The results are robust to the consideration of other factors such as changes in mother characteristics and access to other sources of maternal care.

Key Words: maternal mortality, Indonesia, village midwife

IEPR11.10

Off-farm labor supply and labor markets in rapidly changing circumstances: Bulgaria during transition

Sumon Kumar Bhaumik, Ralitza Dimova, Jeffrey B. Nugent

Abstract: This study examines off-farm labor supply in the rapidly changing conditions of Bulgaria during the 1990s. In doing so, we make use of three different waves of the Bulgarian Integrated Household Survey, each reflecting remarkably different environmental conditions. The results suggest that standard theories of off-farm labor supply provide little guidance in situations characterized by chronic excess supply in the off-farm labor market and/or rapidly changing
circumstances. In particular, the results show (1) that off-farm employment throughout the transition was predominantly determined by demand rather than by supply, and (2) that the magnitude and statistical significance of the various determinants are very sensitive to changing environmental conditions. As such, the results can be extremely relevant for both theory and policy for the many countries which may still need to go through privatization and painful restructuring as a result of financial crises and globalization.

Keywords: Off-farm labor supply, Entitlement failures, Transition economies, Bulgaria

JEL Classification: J2, P23, P36, O13, Q12

IEPR11.9

Lobbying or Information Provision-Which Functions of Associations Matter Most for Member Performance?

Grigor Sukiassyan, Jeffrey nugent

Abstract: Private firms are of growing importance in virtually all transition economies but operate in market and institutional conditions that are still far from competitive and transparent. Although firms have at their disposal various alternative strategies for dealing with their problems, in this paper we focus on two: making unofficial payments to officials and joining business associations. Choices between these strategies may be affected by both firm and industry characteristics and institutional conditions. This paper has two objectives: (1) to compare the effects of two alternative strategies (unofficial payments and association memberships) on various alternative measures of firm performance; and (2) in the case of association membership, to determine which particular functions—lobbying, information, or other— have the greatest effects on several different measures of firm performance. To accomplish these objectives, we make use of the 2002 and 2005 waves of the Business Environment and Enterprise Performance Surveys in twentyeight transition economies. Estimates are obtained from both separate cross sections for 2002 and 2005 and a smaller panel of firms for which the information is available for both years. The estimates show that memberships in business associations, and especially access to their information functions, contribute more to firm performance than unofficial payments and lobbying, despite the fact that much of the literature asserts the opposite and assumes lobbying to be the primary function of business associations, especially in transition economies.

IEPR11.8

Is there an optimal forecast combination?

Cheng Hsiao, Shui Ki Wan

Abstract: We consider several geometric approaches for combining forecasts in large samples – a simple eigenvector approach, a mean corrected eigenvector and trimmed eigenvector approach. We give
conditions where geometric approach yields identical result as the regression approach. We also consider a mean and a mean and scale corrected simple average of all predictive models for finite sample and give conditions where simple average is an optimal combination. Monte Carlos are conducted to compare the finite sample performance of these and some popular forecast combination and information combination methods and to shed light on the issues of "forecast combination" vs "information combination". We also try to shed light on whether there exists an optimal forecast combination method by comparing various forecast combination methods to predict US real output growth rate and excess equity premium.

IEPR11.7

Measurement Errors and Censored Structural Latent Variables Models

Songnian Chen, Cheng Hsiao, Liqun Wang

Abstract: We consider censored structural latent variables models where some exogenous variables are subject to additive measurement errors. We demonstrate that overidentification conditions can be exploited to provide natural instruments for the variables measured with errors and we propose a two stage estimation procedure. The first stage involves substituting available instruments in lieu of the variables that are measured with errors and estimating the resulting reduced form parameters using consistent censored regression methods. The second stage obtains structural form parameters using the conventional linear simultaneous equation model estimators.

Keywords: Censored responses; errors-in-variables; instrumental variables; latent variables; limited dependent variables; simultaneous equations; Tobit model.

JEL Classification: C13; C34.

IEPR11.6

Measuring correlations of integrated but not cointegrated variables: a Semiparametric approach

Yiguo Sun, Cheng Hsiao, Qi Li

Abstract: Many macroeconomic and financial variables are integrated of order one (or I(1)) processes and are correlated with each other but not necessarily cointegrated. In this paper, we propose to use a semiparametric varying coefficient approach to model/capture such correlations. We propose two consistent estimators to study the dependence relationship among some integrated but not cointegrate time series variables. Simulations are used to examine the finite sample performances of the proposed estimators.

Keywords: Integrated time series; Non-cointegration; Semiparametric varying coefficient models.

JEL Classification: C13, C14, C20

IEPR11.5

Method of Moments Estimation and Identifiability of Semiparametric Nonlinear Errors-in-Variables Models

Liqun Wang, Cheng Hsiao

Abstract: This paper deals with a nonlinear errors-in-variables model where the distributions of the unobserved predictor variables and of the measurement errors are nonparametric. Using the instrumental variable approach, we propose method of moments estimators for the unknown parameters and simulation-based estimators to overcome the possible computational difficulty of minimizing an objective function which involves multiple integrals. Both estimators are consistent and asymptotically normally distributed under fairly general regularity conditions. Moreover, root-n consistent semiparametric estimators and a rank condition for model identifiability are derived using the combined methods of nonparametric technique and Fourier deconvolution.

Keywords: Fourier deconvolution, identifiability, instrumental variables, measurement error, method of moments, root-n consistency, semiparametric estimator, simulation-based estimator.

JEL Classification: C13, C14, C15.

IEPR11.4

China's Emergence in the World Economy and Business Cycles in Latin America

Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci, TengTeng Xu

Abstract: The international business cycle is very important for Latin America's economic performance as the recent global crisis vividly illustrated. This paper investigates how changes in trade linkages between China, Latin America, and the rest of the world have altered the transmission mechanism of international business cycles to Latin America. Evidence based on a Global Vector Autoregressive (GVAR) model for 5 large Latin American economies and all major advanced and emerging economies of the world shows that the long-term impact of a China GDP shock on the typical Latin American economy has increased by three times since mid-1990s. At the same time, the long-term impact of a US GDP shock has halved, while the transmission of shocks to Latin America and the rest of emerging Asia (excluding China and India) GDP has not undergone any significant change. Contrary to common wisdom, we find that these changes owe more to the changed impact of China on Latin America's traditional and largest trading partners than to increased direct bilateral trade linkages boosted by the decade-long commodity price boom. These findings help to explain why Latin America did so well during the global crisis, but point to the risks associated with a deceleration in China's economic growth in the future for both Latin America and the rest of the world economy. The evidence reported also suggests that the emergence of China as an important source of world growth might be the driver of the so called "decoupling" of emerging markets business cycle from that of advanced economies reported in the existing literature.

Keywords: China, GVAR, Great Recession, Emerging Markets, International Business Cycle, Latin America, Trade linkages.

JEL Classification: C32, F44, E32, O54.

IEPR11.3

Beyond the DSGE straitjacket

M. Hashem Pesaran, Ron P. Smith

Abstract: Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on micro-foundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach.

KeyWords: Macroeconometric models, DSGE, VARs, long run theory

JEL Classifications: C1, E1

IEPR11.2

Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit

Alexander Chudik, M. Hashem Pesaran

Abstract: This paper extends the analysis of infinite dimensional vector autoregressive (IVAR) models proposed in Chudik and Pesaran (2011) to the case where one of the variables or the cross section units in the IVAR model is dominant or pervasive. It is an important extension from empirical as well theoretical perspectives. In the theory of networks a dominant unit is the centre node of a star network and arises as an efficient outcome of a distance-based utility model. Empirically, the extension poses a number of technical challenges that goes well beyond the analysis of IVAR models provided in Chudik and Pesaran. This is because the dominant unit influence the rest of the variables in the IVAR model both directly and indirectly, and its effects do not vanish as the dimension of the model (N) tends to infinity. The dominant unit acts as a dynamic factor in the regressions of the non-dominant units and yields an infinite order distributed lag relationship between the two types of units. Despite this it is shown that the effects of the dominant unit as well as those of the neighborhood units can be consistently estimated by running augmented least squares regressions that include distributed lag functions of the dominant unit and its neighbors (if any). The asymptotic distribution of the estimators is derived and their small sample properties investigated by means of Monte Carlo experiments.

Keywords: IVAR Models, Dominant Units, Star Networks, Large Panels, Weak and Strong Cross Section Dependence, Factor Models, Spatial Models.

JEL Classification: C10, C33, C51

IEPR11.1

An Accounting Method for Economic Growth

Hongchun Zhao

Abstract: As Chari et al. (2007) indicate, many growth theories explaining frictions in real economies are equivalent to a competitive economy with some exogenous taxes. Using this idea, I develop an accounting method for identifying fundamental causes of economic growth. A two-sector neoclassical growth model with taxes is used as a prototype economy, and its equilibrium conditions define wedges. These wedges endogenously determine the long run growth rate, which is exogenous and not correlated with any other variables in a one-sector growth model. Furthermore, the importance of wedges in explaining the long-run growth rate can be evaluated through the prototype economy. Applying this method to fifty countries reveals that, among seven wedges, two wedges are important in explaining economic growth.

JEL Classifications: E13, O11, O41, O47