John T. Cuddington

Trends and Cycles in the Net Barter Terms of Trade: A New Approach

This study has two objectives. First, it uses time-series techniques (including unit root tests) to reexamine the classic Prebisch-Singer hypothesis that the relative prices of primary commodities, in terms of manufactured goods, are characterized by secular deterioration. Second, commodity price movements are decomposed into permanent and cyclical components using the Beveridge and Nelson (1981) technique. The latter information is valuable when assessing the viability of commodity stabilization funds and formulating countercyclical macroeconomic policy responses to commodity booms and busts. Copyright 1989 by Royal Economic Society.

Long-run trends in 26 primary commodity prices: A disaggregated look at the Prebisch-Singer hypothesis

Abstract This paper uses time series techniques to re-examine the Prebisch-Singer hypothesis that there has been a secular deterioration in primary commodity prices in terms of manufactured goods. Instead of using price indices, it considers 26 individual commodity prices over the period 1900–1983. This avoids possible aggregation and interpretation problems associated with the use of aggregate indices. The study finds that 16 of the 26 prices are trendless. Five have statistically significant negative trends; the remaining five have positive trends. It concludes that the Prebisch-Singer hypothesis should certainly not be considered a universal phenomenon or ‘stylized fact’.

Assessing the impact of AIDS on the growth path of the Malawian economy

More than 1% of people of sub-Saharan Africa aged 15-49 years are infected with HIV, with over half likely to develop AIDS in the next decade. As rates of HIV infection continue to climb, there will be staggering financial consequences to bear in the years ahead in terms of high medical treatment costs and crippled macroeconomies. The authors employ a modified Solow growth model to simulate the impact of the AIDS epidemic on output capacity and other key macroeconomic aggregates in Malawi. They compare a counterfactual no-AIDS scenario to medium and extreme AIDS projections and find that average real GDP growth over the 1985-2010 period will be 0.2-0.3 percentage points lower in the medium case and 1.2-1.5% lower in the extreme case relative to the no-AIDS case. The size of the economy by 2010 will therefore be reduced from a real GDP of 5.03 billion (constant 1985) Kwacha without AIDS to 4.81-4.77 and 3.80-3.46 billion Kwacha in the medium and extreme scenarios, respectively.

Analyzing the Sustainability of Fiscal Deficits in Developing Countries

The author surveys the recent literature on the sustainability of fiscal deficits, most of which focuses on the United States and other industrial countries, to see how useful it might be in developing countries. The accounting approach to analysis focuses on steady states and assumes that a fiscal deficit (or surplus) that leads to unchanging debt/GDP ratios over time is sustainable. The data required to apply this approach are relatively modest. The present-value constraint (PVC) approach assumes that the sustainability of fiscal policy depends ultimately on what level of fiscal deficit is financeable, which depends in turn on the behavior of lenders. Recent empirical implementations of this approach concentrate on methods for testing whether maintaining current fiscal policy (as captured by historical time series on government spending, revenue, and debt) violates the present-value-constraint or, equivalently, the no-Ponzi-game (NPG) condition. The econometric methods used in this literature (such as tests for the prsence of unit roots and cointegration) require long-time series over a constant fiscal regime, requirements that may be unrealistic in many countries. Typically, analyzing the sustainability of deficits in developing countries involves issues that are not particularly important in industrialized countries. Developing countries rely far more on seignorage to finance deficits, although the degree of that reliance varies greatly among countries; the simultaneous presence of both domestic and foreign-currency borrowing is central in a growing number of developing countries; and concessional lending and grants may also be an important part of fiscal finance. The author generalizes the PVC approach to economies that use money-financing of deficits, economies for which concessional financing is available, and economies that incur both domestic and foreign debt. He proposes a possible compromise in approaches: rather than use time series techniques to describe constant fiscal regimes, one can specify fiscal rules into the foreseeable future based on country-specific information about fiscal targets (perhaps as stated in IMF stabilization programs). Then one can calculate the implied time path for domestic and foreign debt, given current debt levels as initial conditions. Using this hypothesized time path for debt, one can ask whether it satisfies the no-Ponzi-game condition. If it does, fiscal policy is -by this definition- sustainable. If the NPG condition is violated, fiscal policy is unsustainable.

The Beveridge-Nelson Decomposition of Economic Time Series: A Quick Computational Method

This note describes a much simpler computational method for carrying out the Beveridge and Nelson decomposition of economic time series into permanent and cyclical components.

Purchasing power parity over two centuries

Abstract This paper re-examines the purchasing power parity hypothesis for the dollar–sterling exchange rate using the two centuries of data from Lothian and Taylor (LT) (1996) [Real exchange rate behavior: the recent float from the perspective of the past two centuries. Journal of Political Economy 104 (3), 488–509]. Unlike LT, we conclude that the dollar–sterling RER is nonstationary, implying a rejection of the long-run PPP hypothesis. The differences in our conclusions are explained by: (1) sensitivity of ADF unit root tests to the choice of lag length, and/or (2) the presence of significant time trends in the ADF or Phillips–Perron unit root test equations.

Technological Change, Depletion, and the U.S. Petroleum Industry

A common claim in the nonrenewable resource literature is that improvements in technology may largely offset the effects of increasing scarcity over time. This study provides perhaps the first empirical evidence on this issue by analyzing the determinants of the average finding cost for additional petroleum reserves in the U.S. over the 1967-90 period. Using a new index of the level of technology, our analysis suggests that technological change played a major role in allaying what would otherwise have been a sharp rise in the average cost of finding additional reserves of natural gas. The impact of technological change on finding costs for U.S. crude oil reserves has been more modest.

Budget deficits and the current account : an intertemporal disequilibrium approach

The objective of the present paper is to develop an intertemporal disequilibrium model of a monetary economy to explain the effects of fiscal policy on the current account. We wish to emphasize the role of aggregate demand-determined output fluctuations and flexible exchange rates within a microtheoretic optimizing framework. Furthermore, the differing effects of monetary versus non-monetary (i.e. tax or bond) finance of government expenditures are considered.

A dynamic aggregative model of the AIDS epidemic with possible policy interventions

Abstract The primary goal of this article is to analyze long-term growth in the presence of the AIDs epidemic and its interaction with population dynamics and the macroeconomy. Health-sector policies for preventing the spread of HIV or helping AIDs patients to cope with the disease are considered. Policies aimed at reducing HIV transmission can significantly reduce the prevalence of AIDs and can even bring the economy to a no-AIDs steady state. Model simulations using parameters representing a typical sub-Saharan country show how powerful these policies could be: a rise in condom use from 0 to 10 percent cuts steady-state AIDs prevalence nearly in half, from 31 percent to 19 percent of the population.

Trends and cycles in Colombia's real GDP and fiscal deficit

Abstract The purpose of this paper is twofold. The first is methodological. We review the Beveridge-Nelson technique for decomposing economic time series, and illustrate its usefulness for examining the cyclical and secular movements in real GDP in Colombia. Second, we examine government expenditures and revenues in order to assess the extent to which the sharp increase in the fiscal deficit in the early 1980s should be viewed as a cyclical rather than a secular phenomenon.