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Economics Working Papers, 2002

Copies may be downloaded on pdf, or hard copies may be requested from Joshua Hall, Working Paper Coordinator.

02 - 01: DU, Ding.


Abstract: To explain the time-varying stock return-inflation relation observed in US data, Kaul (1987) considers changes in monetary policy regime, while Hess and Lee (1999) propose changes in the composition of structural shocks. The model in this paper shows that both changes in monetary policy regime and the relative importance of demand and supply shocks can cause changes in the stock return-inflation relation. To assess quantitatively the relative importance of these two explanations, we study the stock return-inflation relation from 1926 to 1999. We first use the Bai and Perron (1998) methodology to endogenously search for structural breaks in the stock return-inflation relation, and then examine which explanation is relatively more important in describing the changes in the stock return-inflation relation. Our findings support Kaul's (1987) explanation in that: (1) the only break in the stock return-inflation relation occurs in 1940, and (2) changes in monetary policy regime are quantitatively more important in explaining the change in the stock return-inflation relation.

02 - 02: MAFI, Elham and SOBEL, RUSSELL S.

Does a Less Active Central Bank Lead to Greater Economic Stability? Evidence from the European Monetary Union.

Abstract: Substantial disagreement exists among economists about the degree to which central banks should pursue discretionary stabilization policy. Activists believe that central banks can promote greater macroeconomic stability through the use of discretionary policy, while nonactivists (such as the monetarists) do not. In particular, monetarists believe that lags and timing problems will result in even the best-intentioned discretionary policy actually resulting in less (rather than more) macroeconomic stability. The formation of the European Monetary Union provides a unique opportunity to test whether a shift to a less active central bank has resulted in more or less macroeconomic stability for these countries.

02 -03: KREFT, Steven F.

An Efficiency Comparison of City Managers and Elected Mayors.

Abstract: Previous research has concluded that there are no efficiency differences between elected mayor-council (EMC) and council-manager (CM) city governments. What remains then, is a puzzle as to why so many cities are switching from an EMC form to a CM form. This paper provides an alternative method of testing the relative efficiency of the two forms of government. Relying on capitalization theory of local public services and taxes, I develop a hedonic price model for home sales occurring in the six largest Ohio metropolitan areas. Results show that houses within a CM city have a pricing premium that can be attributed to the greater efficiency of the CM form of government.

02 - 04: KREFT, Steven F.

Do International Border Crossings Contribute to Motor-Vehicle Fatalities? An Analysis of the Michigan-Ontario Border Crossings.

Abstract: U.S. citizens of certain states have the opportunity to avoid nationally uniform drinking age laws by crossing an international border. For example, Michigan's current legal drinking age is twenty-one, while Ontario, Canada's drinking age is nineteen. Because of the difference in the legal drinking age, it has been hypothesized that many nineteen and twenty-year-old residents cross the border to obtain and consume alcohol, and the presence of the border crossing will increase alcohol consumption (and the things that come along with it) among individuals aged nineteen and twenty. One of the most serious consequences of mixing alcohol consumption and driving is motor-vehicle fatalities. In this paper, I explore the impact that the border crossings have on motor-vehicle fatalities occurring in Michigan counties for all-age drivers and, more specifically, for drivers age nineteen and twenty. My results show that the closer the county is to the border crossing, it will have higher motor-vehicle fatalities for all drivers and for drivers age nineteen and twenty.

02 - 05: PALARDY, Joseph.

International Real Business Cycle Models, Habit Formation, and Decisions before Shock.

Abstract: In this essay, an IRBC model is constructed that incorporates habit formation and economic frictions in the form of requiring agents to make investment, trade, and labor decisions prior to the realization of any economic shock. If these two additions are combined with a productivity shocks that are less persistent than typical, the resulting model solves the output/consumption anomaly. Additionally, this essay demonstrates that calibration and thus simulation results can change if aberrant data is accounted for by using robust-estimation techniques.

02 -06: PALARDY, Joseph.

Autoregressive Lag Selection Criteria and Random Contamination Models.

Abstract: This essay conducts Monte Carlo simulations to show that in the context of random contamination models, automatic autoregressive selection criteria are inaccurate. Additionally if the estimated model is miss-specified, the accuracy of forecasting a contaminated model may be considerably reduced. Selection criteria based on the MM-estimator (Yohai 1986) limit the influence of contamination and provide superior selection accuracy to those criteria based on ordinary least squares. The robust estimators provide more accurate model specifications and mre accurate point estimates. The improved selection accuracy leads to improved out-of-sample forecasts. Oil prices are used to illustrate this point.

02 - 07: MAFI, Elham.

The Relationship Between Currency Competition and Inflation.

Abstract: This paper investigates whether barriers to currency competition placed on either private or public suppliers of money are associated with higher rates of inflation. First, I look at historical data on average annual inflation rates for nine countries that experienced periods of free banking. Then I compare the countries' average inflation rates during free banking to their averages under central banking. Second, using a cross-section of OECD countries, I find that countries allowing citizens to legally hold foreign currency tend to have lower average rates of inflation. My results show that allowing competition among currency issuers heightens the incentives for monetary issuers to pursue lower inflation rates.