Giorgio Canarella

Unit Roots and Structural Change: An Application to US House-Price Indices

This paper employs time-series analysis to investigate the price dynamics of the house price indices included in the S&P/Case–Shiller Composite10 index and the validity of the ‘ripple effect’, following the approach outlined by Meen (1999). More specifically, the paper first considers the time-series properties of the capital gain from the sale of houses. That is, it examines whether shocks to the capital gain series produce permanent or transitory changes. In general, the findings lack uniformity and depend upon the assumptions imposed by the testing procedures. Secondly, it considers the time-series properties of the ratio of regional house price indices to the Composite10 index. That is, it examines whether shocks to these house price ratios exhibit trend reversion. The tests of this ‘ripple effect’ also display conflicting evidence.

The ‘Efficiency’ of the London metal exchange: A test with overlapping and non-overlapping data

In this paper the three approaches available to test the hypothesis that the futures price is an unbiased predictor of future spot prices are utilized to analyze the ‘efficiency’ of the London Metal Exchange for the period January 1975–December 1983. The first technique uses non-overlapping observation and derives a test of this hypothesis using OLS. The second uses overlapping data and models explicitly the moving average process in the error structure using ARMA procedures. The third uses a FIML technique to estimate a bivariate stochastic stationary process of the spot and futures prices and tests the unbiased predictor hypothesis in the form of complex non-linear cross-equation restrictions. The results conform to the predictions of the unbiased predictor hypothesis regardless of the methodology and/or data employed.

The Optimal Utilization of Slaves

A Major theme in the historiography of American slavery is the analysis of the slave plantation as a capitalist market oriented enterprise. Much of the controversy surrounding the work of such scholars as Stanley Elkins, Kenneth Stampp and Eugene Genovese stems from differing views of the interaction of commercial capitalism with the ancient institution of slavery. A recurrent topic in this literature is the impact of the profit motive and competitive market conditions on the relationship between master and slave. A major concern is the extent these capitalist incentives may have motivated the master to either brutalize or ameliorate the conditions of the slaves existence.We wish to thank the following who read earlier drafts of this paper and made useful suggestions and criticisms: Professors Jerry Fastrup, George Jensen, Roger Ransom, Richard Roseman, and an anonymous referee. This study is part of a larger project, “The Optimal Accumulation and Utilization of Slaves†(forthcoming), which extends both static and dynamic neoclassical models of the firm to cases involving slavery.

New insights into executive compensation and firm performance: Evidence from a panel of “new economy” firms, 1996‐2002

Purpose - This paper aims to examine the relation between executive compensation, firm size and firm performance on a panel of the so-called “new economy” firms in the USA over the period 1996-2002. Design/methodology/approach - The authors use two measures of performance, total shareholder return and return on assets, and concentrate on total CEO compensation, which includes stock option compensation, as equity-based compensation practices have been prevalent in new economy firms. The estimation process uses both the feasible generalized least squares method of Parks and Kmenta and the panel corrected standard error method of Beck and Katz. These methodologies investigate error structures that do not conform to the classical ordinary least squares assumptions. Findings - The econometric results indicate that estimates on firm size are robust to alternative specifications of the error structures. There is evidence however that the effect of firm size on CEO compensation is more significant after the stock market crash of 2000. The opposite holds true for the estimates on firm performance. In addition, estimates on firm performance are more sensitive to the estimation method and the specification of the error structures. Research limitations/implications - The research presented in this paper is a first step in the direction of understanding the pay to performance relation in the “new economy” industries in the USA. Additional research is warranted, which should extend both the time series and the cross section aspects of the data. Originality/value - The paper fills an important gap in the existing literature by providing rigorous econometric evidence on the pay to performance relation in the so-called “new economy” industries. The evidence provided in this paper is relevant as it complements the findings in the literature on executive compensation in the so-called “old economy” industries, which typically make up the samples of most previous studies.

Firm Profitability: Mean-Reverting or Random-Walk Behavior?

We analyze the stochastic properties of three measures of profitability, return on assets (ROA), return on equity (ROE), and return on investment (ROI), using a balanced panel of US firms during the period 2001-2010. We employ a panel unit-root approach, which assists in identifying competitive outcomes versus situations that require regulatory intervention to achieve more competitive outcomes. Based upon conventional panel unit-root tests, we find substantial evidence supporting mean-reversion, which, in turn, lends support to the long-standing “competitive environment” hypothesis originally set forward by Mueller (1976). These results, however, prove contaminated by the assumption of cross-sectional independence. After controlling for cross-sectional dependence, we find that profitability persists indefinitely across some sectors in the US economy. These sectors experience extremely slow, or non-existent, mean-reversion.

Unanticipated monetary growth, output, and the price level in Latin America: An empirical investigation

Abstract This paper provides statistical evidence on the response of real output and the price level to movements in unanticipated monetary growth for 16 Latin American countries in the context of Barros version of the rational expectations-natural rate theory. ARIMA ( p, d, q ) modeling of the growth rate of M2 is employed for each country and the residuals of the selected model utilized to estimate the parameters of the real output and price level equations. Careful attention is devoted to the autocorrelation structure of the residuals of the real output and price level equations. The empirical results suggest that generally unanticipated monetary growth has positive effects on real output and negative effects on the price level. Such patterns, however, do not exhibit an unambiguous symmetric response.

Monetary and Public Debt Shocks: Tests and Efficient Estimates

IN AN ARTICLE IN THE JMCB, Barro [1] defined a form of intertemporal efficiency for the behavior of marginal tax rates (and expected tax rates). Given certain additional conditions on government expenditures, Barros definition of efficiency implied that particular relationships and time paths would characterize federal deficits. In that paper, two of the seven predicted relationships were tested: (1) the sign of the relationship between the deficit and the ratio of output to its trend value, and (2) the effect of anticipated inflation on the deficit. Those tests were performed under the joint assumptions of the rational expectations hypothesis (REH) and predictable policy irrelevance (or structural neutrality (SN)) with regard to both monetary and debt policies. In this paper, Barros tests of the efficiency hypothesis are reexamined within a wider context by means of the statistically efficient full information maximum likelihood (FIML) method [4 6].1 Specifically, by allowing the imposition of cross-equation and within-equation parameter constraints, the FIML method makes it possible to: (a) directly test the REH and SN propositions (jointly and separately

Unemployment Rate Hysteresis and the Great Recession: Exploring the Metropolitan Evidence

This paper explores the mean-reverting behavior of the unemployment rate using monthly geographically disaggregated data for the period 1991:01 through 2012:02. We apply both standard unit-root tests and tests that allow for one and two structural breaks in the mean. We find evidence that favors both unit-root and stationary processes. No series exhibits stationarity around a constant mean, which does not support the traditional natural-rate hypothesis, but about half of the series exhibit stationarity around a shifting mean. For these series, we find that the break occurs at the Great Recession. To complement the unit-root analysis, we also examine the behavior of the series using the Bai and Perron methods to detect multiple regimes at unknown points of time. We find that the Great Recession also altered the persistence of the unemployment rate series over the identified regimes. In general, the values of the estimated persistence within regimes decrease between those regimes, implying faster absorption of shocks later in the sample period.

Inflation Persistence Before and After Inflation Targeting: A Fractional Integration Approach

We investigate the empirics of the persistence in the inflation series for 13 OECD countries that use an inflation targeting regime. We estimate persistence in the pre- and post-targeting periods using the fractional integration framework suggested by Kim and Phillips (2006, 2000) and Phillips (2007). We find that (i) inflation exhibits a fractional behavior over the entire sample period and, in most cases, in the pre- and post-targeting periods, (ii) the adoption of inflation targeting represents a structural break in all the inflation series, (iii) significant variations and asymmetries exist in inflation persistence across the inflation targeting countries, (iv) about half of the countries in the sample persistence experience significantly lower persistence in the inflation targeting period, (v) in the inflation targeting period all inflation series exhibit mean reversion, and (vi) for one country, South Africa, persistence increases after the adoption of inflation targeting.

Inflation persistence and structural breaks

The purpose of this paper is to report on a sequential three-stage analysis of inflation persistence using monthly data from 11 inflation targeting (IT) countries and, for comparison, the USA, a non-IT country with a history of credible monetary policy.,First, the authors estimate inflation persistence in a rolling-window fractional-integration setting using the semiparametric estimator suggested by Phillips (2007). Second, the authors use tests for unknown structural breaks as a means to identify effects of the regime switch and the global financial crisis on inflation persistence. The authors use the sequences of estimated persistence measures from the first stage as dependent variables in the Bai and Perron (2003) structural break tests. Finally, the authors reapply the Phillips (2007) estimator to the subsamples defined by the breaks.,Four countries (Canada, Iceland, Mexico, and South Korea) experience a structural break in inflation persistence that coincide with the implementation of the IT regime, and three IT countries (Sweden, Switzerland, and the UK), as well as the USA experience a structural break in inflation persistence that coincides with the global financial crisis.,The authors find that in most cases the estimates of inflation persistence switch from mean-reversion nonstationarity to mean-reversion stationarity.,Monetary policy implications differ between pre- and post-global financial crisis.,Global financial crisis affected the persistence of inflation rates.,First paper to consider the effect of the global financial crisis on inflation persistence.