Jim Granato

The effect of cultural values on economic development: Theory, hypotheses, and some empirical tests

Theory: Cultural variables are incorporated into a baseline endogenous economic growth model. Hypotheses: Cultural attitudes toward achievement and thrift have a positive effect on economic growth. Cultural attitudes concerning postmaterialism have a negative effect on economic growth. Methods: Ordinary least squares regression is used to test economic and cultural models of growth on a cross section of 25 countries. The encompassing principle is used to resolve competing theoretical specifications and to generate a final parsimonious model. A variant of Leamers Extreme Bounds Analysis (EBA) is used to evaluate the sensitivity of parameter estimates. The conclusions are further supported by nonparametric methods including robust regression and bootstrap resampling. The data for the analysis are from the World Values Survey (1990) and from Levine and Renelt (1992). Results: An empirical model that incorporates both cultural and economic variables is superior to an explanation emphasizing one set of these variables. The final model is robust to: (1) alterations in the conditioning set of variables; (2) elimination of influential cases; and (3) variations in estimation procedures.

Near-Integrated Data and the Analysis of Political Relationships

Theory: In finite samples, near-integrated data, widely thought to be stationary, mimic the same nonstationary data properties as integrated data. Hypothesis: Regressing two independent and near-integrated series results in high false rejection rates of the null hypothesis (spurious regressions). Method: Analytical derivations and numerical (Monte Carlo) analysis. We also extend the spurious regression test to actual data used in political science-macropartisanship-and a simulated near-integrated series. Results: False rejection of the null hypothesis is comparable to the integrated case (Granger and Newbold 1974). In addition, solutions to the spurious regression problem apply with equal force to the near-integrated situation.

Puzzles, Proverbs, and Omega Matrices: The Scientific and Social Significance of Empirical Implications of Theoretical Models (EITM)

What has changed since William Rikers statement was written? No doubt Political Science has made considerable headway in going beyond traditional methods. For example, social choice theory, formal models of party systems, and statistical methods for analyzing electoral and roll-call data have made it possible to make scientific progress in the study of democratic institutions and party systems. The authors thank Chris Achen, John Aldrich, Bill Bernhard, Norman Bradburn, Brian Humes, Mark Jones, Richard Lempert, Phil Shively, Joan Sieber, Duncan Snidal, and Paul Wahlbeck for their comments on earlier versions of this paper. They also thank Henry Brady and Jennifer Hochschild for their comments and assistance through this process. We dedicate this paper to the memory and scientific accomplishments of EITM Workshop participant Richard McKelvey.

Testing Monetary Policy Intentions In Open Economies

Temple (2002) argues that the inflation level used in Romer (1993) lacks power in revealing the policy intentions of monetary authorities. Temple also points out that Romers use of the openness–inflation correlation cannot be explained by time consistency theory. In this article, we demonstrate that more open economies experience less inflation volatility and persistence. We attribute our findings to the hypothesis that monetary authorities in more open economies adopt more aggressive monetary policies. This pattern emerges strongly after 1990. Our results indicate that the near-universal regime shift in 1990 is not just a simple process of increased monetary policy aggressiveness, but an increased response to economic openness.

Learning from the Expectations of Others

The assumption of perfectly rational representative agents is commonly questioned. This paper explores the equilibrium properties of boundedly rational heterogeneous agents. We combine an adaptive learning process in a modified cobweb model within a Stackleberg framework. We assume that there is an asymmetric information diffusion process from leading to following firms. In contrast to a simple cobweb model which has a unique REE, our model may produce multiple restricted perceptions equilibria (RPE). However, a unique and learnable RPE, under certain conditions, can exist in our model. In addition, the following firms’ forecasts can confound the leading firms’ forecasts - when the following firms misinterpret information coming from the leading firms. We refer this situation to the boomerang effect. We also find that the leading firms’ mean squared forecast error can be even larger than that of following firms if the proportion of following firms is sufficiently large in the market.

A note on Romer's openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy

Temple (2002) empirically challenges Romers (1993) negative openness-inflation relation on empirical grounds. This article links economic openness to the slopes of aggregate supply (AS) and aggregate demand (AD) to explain why the openness-inflation relation can be ambiguous. Starting with a widely used assumption initiated by Romer (1993) that more open economies face greater output inflation tradeoffs, we demonstrate that greater output-inflation tradeoffs in more open economies (reflected in the steeper AS) induce policymakers to adopt more aggressive optimal monetary policy (reflected in the flatter AD). Empirical results from 15 developed countries’ data support our theoretical explanation on the recent empirical failure in finding the negative openness-inflation relation.

The Effect of Foreign Direct Investment on International Migration: Does Education Matter?

Using migration data in 1990 and 2000, we find that inward foreign direct investment (FDI) in non‐OECD countries affects the out‐migration of individuals with tertiary and secondary education to OECD countries originating the investments, but has no significant effect on the out‐migration of individuals with primary education. Distinguishing between linkage and home effects, our results show a dominant home effect of FDI for individuals with tertiary education, but a stronger linkage effect for those with secondary education. The existing stock of former migrants in foreign countries influences the out‐migration of individuals with primary education.

The Role of Policymakers in Business Cycle Fluctuations

This paper examines the role of a policymaker in macroeconomic outcomes. A standard model of aggregate supply is linked with an interest rate policy rule that targets in‡ation and output stability. The role of the policymaker centers on using policy rule targets in a countercyclical manner to encourage e¢cient business cycle outcomes (price and output stability). The model produces the following results: 1) In the presence of supply and demand shocks, there are pareto improving combinations of in‡ation and output targets; 2) Outside the optimal combinations of in‡ation and output targeting, increasing emphasis on an in‡ation (output) target destabilizes output (in‡ation); 3) In the presence of a demand shock, aggressive application of countercyclical policy is a pareto improving result. On the other hand, a similar policy tack when a supply shock is present results in a trade-o¤ between the two policy targets; and 4) An aggressive policy creates interest rate volatility and is generally inconsistent with policy implementation designed to smooth interest rates. Therefore, pareto improving results only apply to in‡ation and output stability. The Role of Policymakers in Business Cycle Fluctuations Jim Granato¤ Sunny M. C. Wong Second Draft ¤ Earlier versions of this paper were presented at the Annual Meeting of the Midwest Political Science Association, Chicago, Illinois (April, 2001), and the Centro de Estudios para el Desarrollo Institucional (CEDI), Universidad de San Andres, Buenos Aires, Argentina (June, 2001). Granato is currently Political Science Program Director, National Science Foundation, 4201 Wilson Blvd., Suite 980, Arlington, Virginia 22230 (e-mail: jgranato@nsf.gov). Wong is in the Department of Economics, University of Oregon, Eugene, Oregon 97403 (e-mail: wong@darkwing.uoregon.edu). We would like to thank Jim Alt and Mary Bange for their comments. The views and ...ndings in this paper are those of the authors and do not necessarily re‡ect those of the National Science Foundation.

Openness and Aggressive Monetary Policy: A Study of Inflation Volatility and Persistence

This paper investigates the relation between economic openness and the aggressiveness of monetary authorities to ensure price stability. In a sample of 114 countries for the period 1949-2001, we find that more open economies tend to have more aggressive monetary policies which results in less inflation volatility and persistence. We find this pattern emerges strongly after 1990. This latter finding suggests that the universal regime shift in 1990 is not just a simple process of increased policy aggressiveness. Countries also conduct more aggressive monetary policies in response to increased economic openness.

Aggressive Monetary Policy and Inflation Persistence: An Adaptive Learning Approach

We investigate the effectiveness of an aggressive anti-inflation monetary policy on the ability of agents to achieve rational expectations equilibrium (REE) forecasts of inflation. An aggressive anti-inflation policy includes a willingness to respond more forcefully to deviations from an inflation target. Using an adaptive learning framework, we develop a model that uses a real contracting rigidity in conjunction with an interest rate rule and an IS curve. The model equilibrium indicates that only an aggressive anti-inflation policy enables agents to learn the REE inflation forecast. The model also shows that inflation persistence (volatility) has a negative relation with policy aggressiveness. Empirical tests confirm this negative relation but these tests also indicate there is a lag between aggressive policy shifts and effective changes in inflation persistence (volatility).