Niels Framroze Møller

The Long‐Run Impact of Foreign Aid in 36 African Countries: Insights from Multivariate Time Series Analysis

Studies of aid effectiveness abound in the literature, often with opposing conclusions. Since most time-series studies use data from the exact same publicly available data bases, our claim here is that such differences in results must be due to the use of different econometric models and methods. To investigate this we perform a comprehensive study of the long-run effect of foreign aid (ODA) on a set of key macroeconomic variables in 36 sub-Saharan African countries from mid-1960s to 2007. We use a well-specified (Cointegrated) VAR (CVAR) model as our statistical benchmark. It represents a much-needed general-to-specific approach which can provide broad confidence intervals within which empirically relevant claims should fall. Based on stringent statistical testing, our results provide broad support for a positive long-run impact of ODA flows on the macroeconomy. For example, we find a positive effect of ODA on investment in 33 of the 36 included countries, but hardly any evidence supporting the view that aid has been harmful. From a methodological point of view our study documents the importance of transparency in results reporting in particular when the statistical null does not correspond to a natural economic null hypothesis. Our study identifies three reasons for econometrically unsatisfactory results in the literature: failure to adequately account for unit roots and breaks; imposing seemingly innocuous but invalid data transformations; and imposing aid endogeneity/exogeneity without testing.

Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model

Examples of simple economic theory models are analyzed as restrictions on the Cointegrated VAR (CVAR). This establishes a correspondence between basic economic concepts and the econometric concepts of the CVAR: The economic relations correspond to cointegrating vectors and exogeneity in the economic model implies the econometric concept of strong exogeneity for β. The economic equilibrium corresponds to the so-called long-run value (Johansen 2005), the comparative statics are captured by the long-run impact matrix, C; and the exogenous variables are the common trends. Also, the adjustment parameters of the CVAR are shown to be interpretable in terms of expectations formation, market clearing, nominal rigidities, etc. The general-partial equilibrium distinction is also discussed.

Post-Malthusian Dynamics in Pre-Industrial Scandinavia

Theories of economic growth hypothesize that the transition from pre-industrial stagnation to sustained growth is associated with a post-Malthusian phase in which technological progress raises income and spurs population growth while offsetting diminishing returns to labor. Evidence suggests that England was characterized by post-Malthusian dynamics preceding the Industrial Revolution. However, given Englands special position as the forerunner of the Industrial Revolution, it is unclear if a transitory post-Malthusian period is a general phenomenon. Using data from Denmark, Norway and Sweden, this research provides evidence for the existence of a post-Malthusian phase in the transition from stagnation to growth in Scandinavia.

Understanding Unemployment Hysteresis: A System-Based Econometric Approach to Changing Equilibria and Slow Adjustment

What explains the persistence of unemployment? The literature on hysteresis, which is based on unit root testing in autoregressive models, consists of a vast number of univariate studies, i.e. that analyze unemployment series in isolation, but few multivariate analyses that focus on the sources of hysteresis. As a result, this question remains largely unanswered. This paper presents a multivariate econometric framework for analyzing hysteresis, which allows one to test different hypotheses about non-stationarity of unemployment against one another. For example, whether this is due to a persistently changing equilibrium, slow adjustment towards the equilibrium (persistent ?uctuations), or perhaps even a combination of the two. Different hypotheses of slow adjustment, as implied by theories of hysteresis, nominal rigidities or labor hoarding can also be compared. A small illustrative application to UK quarterly data on prices, wages, output, unemployment and crude oil prices, suggests that, for the period 1988 up to the onset of the financial crisis, the non-stationarity of UK unemployment cannot be explained as a result of slow adjustment, including sluggish wage formation as emphasized by the hysteresis theories. Instead, it is the equilibrium that has evolved persistently as a consequence of exogenous oil prices shifting the price setting relation (in the unemployment-real wage space) in a non-stationary manner.