Janice Boucher Breuer

Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity

Simulations demonstrate that when unit-root behavior is rejected in a Levin and Lin panel test, it is incorrect to infer that all series are stationary. Recent tests proposed by Im, Pesaran and Shin, and by Sarno and Taylor, are also incapable of determining the mix of I(0) and I(1) series in a panel setting. This paper introduces a new unit-root test that allows the researcher to discern which series are I(0) and which ones are I(1). The test has double to triple the power of single-equation augmented Dickey-Fuller tests. Copyright 2001 by Blackwell Publishing Ltd.

Series-Specific Unit Root Tests with Panel Data

A unit root testing procedure is presented that exploits the well-established power advantages of panel estimation while rectifying a deficiency in other panel unit root tests. This test (called SURADF) is based on seemingly unrelated regressions applied to Augmented Dickey-Fuller (ADF) tests for a unit root. In contrast to extant panel unit root tests, our test allows for determination of which members of the panel reject the null hypothesis of a unit root and which ones do not. The power of the test is investigated with Monte Carlo simulation and demonstrated with application to several panels of real exchange rates. We find that when the contemporaneous cross-correlations of the residuals are high, our procedure has substantially more power to reject a unit root than the single equation Dickey-Fuller test. Copyright 2002 by Blackwell Publishing Ltd

The commodity composition of US-Japanese trade and the yen/dollar real exchange rate

Abstract We use a highly disaggregated data set on trade between the United States and Japan to answer three questions concerning the composition of trade. First, we ask “how has the composition of US exports to Japan and US imports from Japan changed?” Second, we ask “what are the exchange rate elasticities of each of the commodities and are they different over periods of dollar appreciation versus depreciation?” Third, we ask “are the elasticities systematically related to commodity characteristics such as durability or share of production costs that are fixed?”

Purchasing power parity and real factors

It is acknowledged that purchasing power parity (PPP) fails in empirical tests. The position adopted is that real factors are an omitted variable from the PPP relationship and are the cause of divergences from PPP. The real exchange rate as being determined by supply and demand shift factors (as in Stockman, 1987 and Neary, 1988) is modelled. We then empirically estimate a real exchange rate equation and use the fitted value as a generated regressor in tests of PPP. It is demonstrated that when changes in the real exchange rate are incorporated into the PPP relationship, PPP improves.

Respect, Responsibility, and Development

We develop a theory that explains how two core values – Respect for others and Responsibility – affect productivity, the accumulation of capital, and output per worker. Using data from the World Values Survey, we empirically test the model using a panel dataset that includes 82 countries over six distinct years. We find that these two core values are important to production and that their impact is substantial. We also show that Respect and Responsibility reduce the influence of trust and mitigate the negative macroeconomic effects associated with fractionalized societies. Our results are robust to various treatments for endogeneity and under alternative samples.

Misleading Inferences from Panel Unit Root Tests: A Reply

Ford et al. (this issue) point out that the SURADF panel unit root test may be sensitive to panel composition. This reply shows that they overstate the case since they focus on a short time series of 44 observations. Type II errors are much more likely in this environment so that inconsistent conclusions may arise for individual panel members across differently composed panels. We demonstrate that this problem becomes much less likely when the number of time-series observations increases.

The return of convergence in the US states

We analyse convergence of per capita income across the US states for the period 1929–2011. We find that absolute convergence was in evidence early, but it broke down around 1978. It appears to have returned in 1990, although more weakly than before. We use two standard metrics to evaluate convergence: (1) σ-convergence, a reduction in the SD of state per capita income and (2) β-convergence, the fact that poor states grow faster than rich states.

Trustworthiness and economic performance

Intrinsically trustworthy agents never cheat. A societys willingness to trust and the quality of its institutions have their origins in the intrinsic trustworthiness of its citizens. Trustworthiness is the basis for maximizing output in economic exchange and in explaining differences in standards of living around the world. We measure intrinsic trustworthiness with a question from the World Values Survey and estimate its effect using a sample of 60 countries. We find that trustworthiness is important for output per capita and that the effect of trust is likely to come from trustworthiness.

Endogenous Trust and the Distribution of Caution

Trust is an important component of social capital that has been linked to improvements in macroeconomic performance. The exogeneity of trust, however, is questionable. We develop a theoretical model in which trust is endogenous and depends on three factors: institutions for capture and punishment of dishonest behavior, the share of intrinsically trustworthy people, and the distribution of risk aversion or caution across individuals. We show how the mean and variance of the distribution of caution have direct and indirect effects on trust. The indirect effects work through the perception of trustworthiness to influence trust. The indirect effects may dominate the direct effects so that more caution may counterintuitively lead to greater trust. For more homogenous societies, we find that greater caution increases trust; for more heterogeneous societies, trust declines as caution increases. We also draw out the effects of caution on trustworthiness and output per capita. Finally, we show that institutions have the expected effect on trustworthiness, trust, and output per capita.