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.