Bent E. Sørensen

Channels of Interstate Risk Sharing: United States 1963–1990

We develop a framework for quantifying the amount of risk sharing among states in the United States, and construct data that allow us to decompose the cross-sectional variance in gross state product into several components which we refer to as levels of smoothing. We find that 39 percent of shocks to gross state product are smoothed by capital markets, 13 percent are smoothed by the federal government, and 23 percent are smoothed by credit markets. The remaining 25 percent are not smoothed. We also decompose the federal government smoothing into subcategories: taxes, transfers, and grants to states.

GMM Estimation of a Stochastic Volatility Model: A Monte Carlo Study

We examine the properties of alternative GMM procedures for estimation of the lognormal stochastic autoregressive volatility model through a large scale Monte Carlo study. We demonstrate that there is a fundamental trade-off between the number of moments, or information, included in estimation and the quality, or precision, of the objective function used for estimation. We provide a fairly transparent characterization of the trade-off in the present model. Furthermore, a large sample approximation to the optimal weighting matrix is utilized to explore the impact of the weighting matrix for estimation, specification testing and inference procedures, and to obtain practical efficiency bounds for the given class of GMM estimators. The results provide guidelines for obtaining desirable finite sample properties through the choice of the appropriate estimation design, and although the findings are specific to the model, the conclusions are likely to apply to a wide range of settings characterized by strong conditional heteroskedasticity and correlation among the moments.

Risk Sharing and Industrial Specialization: Regional and International Evidence

We provide empirical evidence that risk sharing enhances specialization in production. To the best of our knowledge, this well-established and important theoretical proposition has not been tested before. Our empirical procedure is summarized as follows. First, we construct a measure of specialization in production, and calculate an index of specialization for each of the European Community (EC) and non-EC OECD countries, U.S. states, Canadian provinces, Japanese prefectures, Latin American countries, and regions of Italy, Spain, and the United Kingdom. Then, we estimate the degree of capital market integration (a measure of risk sharing) within each of these groups of regions: the EC countries, the non-EC OECD countries, the United States, Canada, Japan, Italy, Spain, and the United Kingdom (and rely on another authors estimate for Latin America). Finally, we perform a regression of the specialization index on the degree of risk sharing, controlling for relevant economic variables. We find a positive and significant relation between the degree of specialization of individual members of a group of countries, provinces, states, or prefectures, and the amount of risk that is shared within the group. We perform regressions using variables such as shareholder rights and the size of the financial sector (relative to GDP) as instruments for the amount of inter-regional risk sharing. These regressions confirm that risk sharing--facilitated by a favorable legal environment and a developed financial system--is a direct causal determinant of industrial specialization.

International risk sharing and European Monetary Unification

We explore risk sharing patterns among European Community (EC) countries and among OECD countries during the period 1966-90. We find that, for OECD as well as for EC countries, about 40 percent of shocks to GDP are smoothed at the one year frequency, with about half the smoothing achieved through national government budget deficits and half by corporate saving.

Economic Integration, Industrial Specialization, and the Asymmetry of Macroeconomic Fluctuations

We show empirically that regions with a more specialized production structure exhibit output fluctuations that are less correlated with those of other regions (less \symmetric fluctuations). Combined with the causal relation running from capital market integration to regional specialization found in an earlier study, this finding supports the idea that higher capital market integration leads to less symmetric output fluctuations. This mechanism counter-balances the effect of lower trade-barriers on the symmetry of fluctuations quantified by Frankel and Rose (1998). It is further argued that more asymmetric output shocks do not necessarily imply more asymmetric income shocks, since more cross-country ownership of productive assets may actually render income shocks more symmetric despite the greater asymmetry of output shocks. Some evidence in support of this claim is reported. Deriving a simple closed form expression for the gains from risk sharing for CRRA utility is an independent contribution of the present article.

Efficient method of moments estimation of a stochastic volatility model: A Monte Carlo study

Abstract We perform an extensive Monte Carlo study of efficient method of moments (EMM) estimation of a stochastic volatility model. EMM uses the expectation under the structural model of the score from an auxiliary model as moment conditions. We examine the sensitivity to the choice of auxiliary model using ARCH, GARCH, and EGARCH models for the score as well as nonparametric extensions. EMM efficiency approaches that of maximum likelihood for larger sample sizes. Inference is sensitive to the choice of auxiliary model in small samples, but robust in larger samples. Specification tests and ‘t-tests’ show little size distortion.

Worker flows and job flows in Danish manufacturing, 1980-91

The authors map turnover of workers and jobs in Danish manufacturing over the 1980 to 1991 period, using information about all individual manufacturing plants. They examine the relation between worker flows and job flows and the authors study separations from, and hires to, existing jobs (replacement hiring) in detail. Their results reveal large heterogeneity among workers as well as plants, even adjusting for the level of job flows. The cyclical properties of worker reallocation point to worker-flow dynamics being driven by workers quitting in upturns to find better jobs, rather than by plants upgrading the labor force in recessions.

Output fluctuations and fiscal policy: U.S. state and local governments 1978–1994

What are the cyclical properties of U.S. state and local government fiscal policy? The budget surplus of local and, in particular, state governments is procyclical, smoothing disposable income and consumption of state residents. This happens over both short- and medium-term horizons. Procyclical surpluses are the result of strongly procyclical revenues, and weakly procyclical expenditures. The budgets of trust funds and utilities are procyclical. Federal grants are procyclical, exacerbating the cyclical amplitude of state level income movements; although they smooth the idiosyncratic component of shocks to state output. State and local budget surpluses are affected by balanced budget rules at the short- but not at the medium-term horizon. Further, budgets are less procyclical in conservative states.

U.S. Banking Deregulation, Small Businesses, and Interstate Insurance of Personal Income

We estimate the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970–2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. We find that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. We further show that the impact of deregulation is stronger for proprietors’ income than other components of personal income. Our explanation of this result centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Our analysis casts light on the real effects of bank deregulation, on the insurance function of banks, and on the integration of bank markets.

Finding Cointegration Rank in High Dimensional Systems Using the Johansen Test: An Illustration Using Data Based Monte Carlo Simulations

The authors examine the ability of the Johansen (1991) test to estimate the number of unit roots in high dimensional systems. They use data based Monte Carlo methods as a simple means of evaluating the validity of inference using asymptotic critical values. These simulations for a typical annual post-World War II dataset illustrate how the estimated number of unit roots change in a nonmonotone fashion with the dimension of the system, and with the number of lags in the VAR representation. The authors find that overparametrization in high dimensions is as bad as underparametrization. The Bayes information criteria outperforms the Akaike information criteria in their setup. Copyright 1996 by MIT Press.