Summer issue of Journal of Applied Economic Sciences

The summer issue of the Journal of Applied Economic Sciences has been published. It includes our paper "A win-win monetary policy in Canada", pp.160-180

Abstract

The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterization of such breaks has been a major econometric task ever since. We have developed an integral technique similar to CUSUM using an empirical model quantitatively linking the rate of inflation and unemployment to the change in the level of labour force in Canada. Inherently, our model belongs to the class of Phillips curve models, and the link between the involved variables is a linear one with all coefficients of individual and generalized models obtained by empirical calibration. To achieve the best LSQ fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements (integral) method. The distance between the cumulative curves (in L2 metrics) is very sensitive to structural breaks since it accumulates true differences and suppresses uncorrelated noise and systematic errors. Our previous model of inflation and unemployment in Canada is enhanced by the introduction of structural breaks and is validated by new data in the past and future. The most exiting finding is that the introduction of inflation targeting as a new monetary policy in 1991 resulted in a structural break manifested in a lowered rate of price inflation accompanied by a substantial fall in the rate of unemployment. Therefore, the new monetary policy in Canada is a win-win one.

Keywords: structural break, inflation, unemployment, labor force, modeling

Ireland and Solow's exogenous growth model

Three months ago we revisited the evolution of real GDP per capita in Ireland. This was an example of a country which demonstrated an extremely high annual increment of GDP per capita growth between 1990 and 2005. This observation undermined our concept of constant increment in GDP per capita in developed countries which expresses the idea of inertia in economic growth (see our post on theory of economic growth).  In this post, we present an updated version of the previous post on Ireland with new estimates of GDP per capita as published by the Conference Board in 2011. The newly published set includes readings for 2010 and also revises the previous estimates, sometimes severely. It allows seeing the case of Ireland in some new light and strongly supports our concept. As we supposed 5 years ago, Ireland GDP was highly overestimated and has fallen quickly to fit the concept of constant annual increment or inertial growth.  

Originally, the concept of constant annual increment in real GDP per capita, G, as observed in all developed countries, was introduced 5 years ago in a working paper [1] and then published in the Journal of Applied Economic Sciences [2]. We found that in the long run the trajectory of GDP growth is a linear function of time:

G(t-t₀)= G₀+B(t-t₀)

where G₀ is the initial level of GDP per capita at time t₀ in a given country, B is the country dependent increment measured in dollars. Therefore, the rate of growth of real GDP per capita, dlnG/dt, has a decelerating trend:

dlnG/dt = B/G

This assumption gives excellent statistical results and explains the evolution of real GDP per capita in the biggest developed countries. There were two exceptions – Ireland and Norway. (The latter economy is likely driven by oil demand.) Before 1990, Japan also demonstrated a larger positive deviation from the constant trend but then quickly returned to it during the 1990s and 2000s. We foresaw the same effect for Ireland.

So, five years ago, I wrote 

An opposite example of an excellent recovery gives Ireland with corresponding results displayed in Figure 11. A slow start was quickly compensated and the last twenty years of an extremely fast growth resulted in the leading position in the world economy with the mean increment $678. There are some doubts, however, that future will be so successful. Such a long and quick growth always ends up in a depression. This was observed in Japan and is related to the long-term decrease in the number of the specific age population [Kitov, 2005a]. Ireland has managed to increase birth rate for a very long period and has an age structure similar to that observed in Japan 20 years ago. The population distribution is currently peaked near 20 years with the defining age of 18 years. The years to come will demonstrate only decrease in the defining age population.

Fig. 11. Same as in Figure 4 for Ireland. The mean value is $678. The growth of the real GDP per capita is outstanding during the last twenty years. There is a downward tendency during the last four years, however.

In Figure 11 borrowed from the paper, one can observed an extremely high deviation of constant increment. Nevertheless, we put the progress of the Irish economy under doubt. The reason was its similarity to the Japanese case and the underlying model of real GDP growth, which includes population of a country specific age. In January 2011, we presented a new version of the curves in the above Figure (see Figure 1 below) with data up through 2009 which were available in January 2011. The slope of the trend was +0.0272 instead of +0.0608 in 2004, i.e. fell by a factor of 2. This slope is much close to the zero value.

Figure 1. Same as in Fig. 11  above with data between 1950 and 2009. The increment of real GDP per capita vs. real GDP per capita in Ireland. All data are borrowed from the Conference Board data base (http://www.conference-board.org/economics/database.cfm).

The revised GDP per capita data and one new reading present a quite different picture in Figure 2. The positive excursion between $30000 and $50000 in the curve does not look so dangerous for our concept and the slope now is only +0.0155, i.e. by a factor of 3 lower than in 2004. Hence, the Irish GDP per capita is not an exclusion form the general rule that real GDP per capita does grow with a constant increment in the long run, as other developed countries.

This observation makes Solow's model of economic growth empirically inconsistent, and thus, void.  

 

Figure 2. Same as in Figure 1 for the 2011 version of the Conference Board Total Economic Database

The near future of the Irish GDP per capita is under question as well: it will likely decrease or increase just marginally in 2011 and in the next several years. We will keep reporting on the case.   Ireland provides a higher volatility in the GDP growth, which is driven by unusual population pyramids with a strong peak at one age. (Same shape is observed in Japan, but the peak age is 25 years larger.) 

References

[1] Kitov, I., (2006). Real GDP per capita in developed countries, MPRA Paper 2738, University Library of Munich, Germany, http://ideas.repec.org/p/pra/mprapa/2738.html

[2] Kitov, I., (2009). The Evolution of Real GDP Per Capita in Developed Countries, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. IV(1(8)_ Summ), pp. 221-234.

Journal of Applied Economic Sciences. Fall 2010

JAES 3(13). / Fall 2010

Contents

Mongi ARFAOUI, Ezzeddine ABAOUB. On the Determinants of International Financial Integration  in The Global Business Area …153

Melita CHARITOU, Petros LOIS, Adamos VLITTIS, Do Capital Markets Value Earnings and Cash Flows Alike?  International Empirical Evidence … 173

Madalina CONSTANTINESCU, Laura UNGUREANU, Laura STEFANESCU. Portfolio Optimal Choice under Volatility and Price Risk Impact  Applied to Derivative Transactions … 184

Georg ERBER, The Problem of Money Illusion in Economics … 196

Marco FIORAMANTI, Estimation and Decomposition of Total Factor Productivity Growth in the EU Manufacturing Sector: A Long Run Perspective … 217

George E. HALKOS, Marianna K. TRIGONI, Financial and Real Sector Interactions: The Case of Greece … 231

Cosmin FRATOSTITEANU, Guidelines for Promoting Science, Technology and Technical–Scientific Creativity, By Analyzing the Companies’ Performances, in the Context of the Globalized Economy …247

Drama Bedi Guy HERVE, Yao SHEN, Management of Stock Price and its Effect on Economic Growth:  Case Study of West African Financial Markets … 258

Bernard LANDAIS, The Monetary Origins of the Economic and Financial Crisis … 280

Piotr MISZTAL, Public Debt and Economic Growth in the European Union …292

New issue of JAES

Volume V of the Journal of Applied Economic Sciences has been issued. I am proud to co-author one of the papers.

Alessio Emanuele BIONDO, Growth Rate for a Sustainable Economy … 7

Maria BOBROVA, Arndt KÜMPEL, Reasoning on Evolution of Culture and Structure

… 21

A.B. BONACHE, J. MAURICE, K. MORIS, A Best Evidence Synthesis on the Link between Budgetary Participation and Managerial Performance … 34

Ginters BUSS, Forecasts with Single-Equation Markov-Switching Model: An Application to the Gross Domestic Product of Latvia … 48

Lisi GAETANO, The Unemployment Volatility Puzzle: The Role of the Underground Economy … 59

Giuseppe GAROFALO, Patrizio MIRGANTI, The Financing of R&D Investments: Effects on Growth and Financial Structure … 70

Ivan O. KITOV, Oleg I. KITOV, Dynamics of Unemployment and Inflation in Western Europe: Solution by the 1-D Boundary Elements Method … 94

Abstract

Using an analog of the boundary elements method in engineering and science, we analyze and model unemployment rate in Austria, Italy, the Netherlands, Sweden, Switzerland, and the United States as a function of inflation and the change in labor force. Originally, the model linking unemployment to inflation and labor force was developed and successfully tested for Austria, Canada, France, Germany, Japan, and the United States. Autoregressive properties of neither of these variables are used to predict their evolution. In this sense, the model is a self-consistent and completely deterministic one without any stochastic component (external shocks) except that associated with measurement errors and changes in measurement units. Nevertheless, the model explains between ~65% and ~95% of the variability in unemployment and inflation. For Italy, the rate of unemployment is predicted at a time horizon of nine (!) years with pseudo out-of-sample root-mean-square forecasting error of 0.55% for the period between 1973 and 2006. One can expect that the unemployment will be growing since 2008 and will reach ~11.4% [0.6 %] near 2012. After 2012, unemployment in Italy will start to descend.

Evgenia MOTCHENKOVA, Daniel LELIEFELD, Adverse Effects of Corporate Leniency Programs in View of Industry Asymmetry … 114

Rajesh K. PILLANIA, Indo-China Trade: Trends, Composition and Future … 129

Georg QUAAS, Was the Worldwide Asymmetry in Current Accounts Caused by the Macroeconomic Policy of the Global Economy’s Leader? … 138

Journal of Applied Research in Finance

I am happy to introduce a brand-new journal: The Journal of Applied Research in Finance
which is a descendant to the Journal of Applied Economic Sciences, where I was lucky to publish four articles

So,

Journal of Applied Research in Finance
Editor in Chief: Mădălina Constantinescu
Managing Editor: Laura Ungureanu
Co-Editor: Laura Stefănescu
Redactor: Cristiana Bogdănoiu



Published two times a year, the journal is the official publication of The European Centre of Managerial and Business Studies, academic organization devoted to the study and promotion of knowledge about financial economics.
The journal has been established in year 2009 as a descendant to Journal of Applied Economic Sciences (JAES). Two issues are published per volume. All articles and communications are available online for free. Printed copies can be ordered at a cost. The editors maintain classic double blind peer review procedure aiming at high academic standards but at the same time emphasize dynamic referee process so that the journal tracks scientific progress in real time.
The Journal of Applied Research in Finance invites paper submissions on issues related but are not limited to:
Monetary Economics,
Money and Interest Rates,
Monetary Policy, Central Banking, and the Supply of Money and Credit,
Macroeconomic Aspects of Public Finance,
International Finance,
Macroeconomic aspects of Finance,
General Financial Markets,
Financial Institutions and Services,
Corporate Finance and Governance,
Taxation, Subsidies, and Revenue,
Fiscal Policies and Behavior of Economic Agents,
Public Finance,
Behavioral Finance.
Submissions to Journal of Applied Research in Finance are welcome. The paper must be an original unpublished
work written in English (consistent British or American), not under consideration by other journals.
Invited manuscripts will be due till May 31, 2009, and shall go through the usual, albeit somewhat expedited,
refereeing process.
Schedule
Deadline for Submission of Papers: 30th May 2009

Expected Publication Date: June (e-version) – July (hard-copy) 2009
E-mail: jarf_secretary@yahoo.com Cc: jaes_secretary@yahoo.com