House prices and consumption: how model specification matters

What is the impact of a decrease of house prices on consumption? If you go by the wealth hypothesis, one should see that home owners would reduce their consumption significantly because their wealth has suffered, while young renters are barely affected. According to the common factor hypothesis, both agent classes should respond in the same way, because they respond to common factors, for example future income prospects. It should be easy to test one hypothesis against the other and settle this. It turns out that using the exact same dataset, John Campbell and João Cocco could not reject the first, while Orazio Attanasio, Laura Blow, Robert Hamilton and Andrew Leicester could not reject the second. Well, that is embarrassing.

Annalisa Cristini and Almudena Sevilla Sanz replicate these results and show that because the two models are not nested, they cannot test against each other. Worse, it all boils down to the specification: estimate an Euler equation (which uses consumption growth) and the wealth hypothesis wins; estimate a consumption function, with consumption in levels, and the common factors hypothesis wins. So I am afraid it is not sufficient to estimate a single equation, one needs to estimate the whole structural model jointly.

Why I am boycotting Elsevier

It is not secret to regular readers that I am no friend of Elsevier. It is engaging in unethical behavior (exhibits I and II), it is abusing its near monopoly power in the diffusion of research, yielding profit margins in the order of an incredible 30%. But foremost, it is actively trying to prevent the dissemination of research by hiding articles behind expensive paywalls and lobbying for making illegal various initiatives promoting Open Access in science.

A few years ago, biologists had enough and managed to create a group of journals in Open Access that are now the most respected in the profession, and that in just a couple of years. Mathematicians seem to be the next, and they invite a signature campaign for boycotting submissions to and refereeing for Elsevier journals. The site is here, and appears to suffer from the strain of its sudden popularity. Bookmark it to sign on when it is back on. You can certainly can count me in, as I have already been following such a boycott for a few years. It is not always easy, especially when I refuse to referee for editor friends, but they are understanding.

Exchange rate modelling: is the random walk beatable?

Forecasting price movements on asset markets is very difficult, especially at high frequencies. This is also true for exchange rates, where economists have been hard-pressed to come up with a theoretical or statistical model that can beat a random walk. And when they did, it did not hold up to the test of time. So what is the latest in this quest?

Mario Cerrato, John Crosby and Muhammad Kaleem point out the the statistical tests used to evaluate the forecasting performance and not relevant. Indeed, one does not care whether the mean square errors are low out of sample, or what the Sharpe ratio is. What really matters is how a portfolio managed using the forecasting model performs. And there, the news is good, one can beat the random walk. And this not even with a purely statistical model, but rather with a model that has some theoretical foundations. Very few of those are needed: money and GDP growth in both countries, and a time trend, the latter not being essential to beat the random walk. One can imagine that a more elaborate model could do even better.

But note that nobody here has claimed you can beat the market.

About fertility declines in wars

A typical war has a large impact on demographics. People die, mostly men. Fewer people are born, because men a missing, both because they are on the battlefield or, as mentioned, dead. At the end of the war, fertility shoots up to catch up for "missed opportunities", and we get baby booms. Well that is the conventional wisdom, and it is not necessarily right. For example, there is some evidence, discussed here before, that the baby boom after World War II was not about the men returning home and catching up on baby making. And one could also challenge the idea that fertility drops during the war because of the absence of men.

Guillaume Vandenbroucke does this for World War I in France. he draws a model of fertility choice where couples factor in that the potential father may die in war. Of course, this reduces fertility, but the question is how much. To get an answer, the model is carefully calibrated to pre-war fertility, mortality and income figures. Then 97% of the drop in fertility is explained by expectations. Of course, this assumes that the French correctly predicted the probability of death. Given that this war lasted much longer than expected and introduced killing technologies of never-seen-before efficacy, I doubt this is a correct assessment of the expectations at the time.

The impact of poor scheduling of international football tournaments on English GCSE results

For every big sports event, there are two types of economic studies that make the news: the ones about the economic impact, which essentially add up all the expenses somewhat related to the event (sometimes applying a multiplier), never mind the fact that all this could have been spent on something else, and the studies about productivity losses because people are sleepy or distracted at work. I remember from school days that these events would also have a tendency to fall on exam period, which was a serious drag on exam preparation. How much? Someone finally figured it out.

Robert Metcalfe, Simon Burgess and Steven Proud exploit the fact that every two years a major international football tournament overlaps with important exams at the end of compulsory schooling in England. And their results are not pretty: male students as well as disadvantaged students suffer disproportionately from the competition for their attention. From them, exam scores are reduced by 0.2 standard deviations, which substantial, and as the authors note as large as some policy interventions. Just rescheduling those exams could be more effective than pouring money into some school initiatives.

Women's rights and economic growth

Women have few rights in poor economies. They enjoy much more rights in rich economies. There is no doubt the correlation is positive, but what is the causation? Asking this question puts you on a slippery slope, as advocates of women's emancipation are quick to dismiss any hint that underlying economic forces could be the origin of new rights for women, rather than an exogenous political push. What does the literature have to say about this? Luckily, two surveys came out within a week of each other, with contrasting views.

Matthias Doepke, Michèle Tertilt and Alessandra Voena start from two observations consistently documented in the literature. 1) Giving women more rights refocuses private and public spending towards children, in particular health and education. Both lead to more growth. 2) Technological progress increased the costs of a male-dominated society and encourage females to join the labor force. Both lead to women's emancipation. And not put 1) and 2) together, and you have a theory of growth with female empowerment, where males are willing to step back for their own good. If technological progress initiates this virtuous cycle, it is actually not necessary once the cycle started spinning, and we have endogenous growth.

The other survey is due to Esther Duflo, who does not see anything self-sustaining in this cycle. In particular, one needs a constant exogenous push for women's equal rights to keep it going. While the paper above looks at long trends, the second focuses on natural and artificial experiments where the analysis is rather short-term. It is thus not clear to me whether it is really about growth or development. I am thus more convinced by the first paper and hopeful that the virtuous cycle will continue feeding itself.

Detection of wage under-reporting

The recent publication by Greece of the names of the most notorious tax cheat is the latest event in a recent trend by tax authorities across the world as they try to secure more revenue. Of course, it is difficult to evaluate how much underreported taxable income there is. One way, recently reported here, is to look at money circulation. A "natural experiment" can be much more illuminating.

Péter Elek, János Köllő, Balázs Reizer and Péter Szabó look at a recent reform in Hungary, wherein a minimum contribution to social security is imposed for any wage below twice the minimum wage. Firms paying below this threshold also face more scrutiny from tax authorities. One has to understand that one feature of wage under-reporting is that it can lead to a the declaration of an official wage at the minimum wage with the rest paid under the table. The Hungarian reform had the potential to change this for cheaters, who would then want to declare twice the minimum wage.

Using a double-hurdle model, because there is also a censoring problem with the minimum wage in additions to the tax cheating selection, the authors find that about 50% of the minimum wage job before the reform were fraudulent. With about a third of workers declaring a minimum wage, that is a considerable share of cheaters. And there may of course be more, who declare more than minimum.

The tyranny of the (secessionist) minority

When we mention majority voting, we think about the rule of the median voter and how majorities can oppress minorities. There are plenty of example of the latter, especially in countries where ethnicity matters and people foremost vote along those lines. But there are also substantial counterexamples, countries where a minority manages to extract substantial rents from the majority. Prime examples are Spain, Canada, Belgium, Bolivian and the United Kingdom. What they have in common is that some part of the country is threatening secession, and the rest of the country makes concessions to appease the secessionists.

Vincent Anesi and Philippe De Donder do a formal analysis of such secessionist movements. There starting point is that a majority that wants to prevent secession will make concessions. That is obvious. What is more interesting is that they analyze what the remaining risk of secession is in such an equilibrium. It depends on a numbers of variables, like the strength of the secessionist drive, as measured by cultural divides and the region size for example, the amplitude of the accommodation, and institutional factors that make a secession possible. The next step is naturally to find a way to either estimate such a formula, or to calibrate it.

Pregnant women should not fast during Ramadan

As Jim Heckman and consorts have much emphasized, schooling and labor market outcomes are determined to a large extend very early in life, before school even starts. This puts a considerable burden on mother to provide the right environment for their children, and this is sometimes very difficult for them. With single motherhood or in the absence of sufficient paid maternal leaves, for example, it often becomes impossible to provide a nurturing environment. But one can go back even further. Birth weight is also a very important determinant, and anything that influences it matters.

Douglas Almond, Bhashkar Mazumder and Reyn van Ewijk show that it may not be sufficient to look at the final birth weight but also at how the fetus was nourished on a daily basis. During the month of Ramadan, practicing Muslims fast during daylight, and this includes pregnant women. The analysis shows that Ramadan during early pregnancy is related to lower test scores for the child at age seven. One may think this has to do with cut-off months for school entrance, but the analysis was performed looking at Pakistani and Bangladeshi children in England, thus there is a control population with the same cut-offs and socio-demographic characteristics but no Ramadan observance: Caribbean children. Beyond Muslims, this implies that nutrition is very important in early pregnancy, but this is very difficult to control as pregnancy is not apparent yet. Which means nutrition is important at any time for women in child bearing age.

A history of national accounting

We use national account data without realizing the efforts that lie behind the construction of these account. And frankly, it is sometimes like sausage making, but less and less so as the United Nations have managed to enforce rather widely its standards. But getting to these standards has been a very process.

Frits Bos documents the history of national accounting over three centuries. He shows that significant efforts and advances in national accounting arouse from two kinds of needs: understanding recent major crises and the increase of influence of the state and its policy making. To fix an economy, you need to know what is wrong with it, or at least the symptoms. To set policy, one needs measures to establish goals and how they have been reached.

Reclassification risk in health insurance

The American health care system has his fair share of problems, a prominent one being health insurance. One particularly frustrating one is when premiums are significantly raised after a health event, so-called health insurance reclassification. Economically, this can be explained by the fact that the insured has revealed being of higher risk. But it seems self-evident that there a large room for improvement in insurance outcome if such reclassification would not occur, that is, if premiums would be almost invariant to health outcomes.

Not so, say Svetlana Pashchenko and Ponpoje Porapakkarm. Their points are that 1) with most people insured under group coverage of their employer, relatively few people are subjects to reclassification; 2) for the latter, means-tested government transfers cushion well the shock of reclassification (or loss of insurance). To come to this conclusion, they use a stochastic overlapping generation general equilibrium model, trying to match the major institutional features of US health care (including Medicaid, uninsureds, private and employer-sponsored insurance) and calibrated using Medical Expenditure Panel Survey.

Pashchenko and Porapakkarm find that introducing guaranteed renewable insurance contracts with constant premiums lowers the proportion on uninsured from 25% to 19%, the difference taking such contracts. Thus it appears that, not surprisingly, eliminating premium fluctuations is welfare-improving. But the welfare gain is very small. For one, These new insurance contracts tends to be more expensive, especially in the first years when standard insurance premiums are low for healthy (and young) people, who tend also to be more liquidity constrained. If there is no guaranteed renewable insurance contract, the government provides a similar insurance: Medicaid, which has essentially the same conditions but is free and asset-tested. The fact that it is a last resort insurance provides the right smoothing benefits for extreme cases, much like insuring premium fluctuations does. The latter is just a little broader, because there is no asset test, and hence the welfare improvement is small if it is priced actuarilly.