nep-cmp New Economics Papers
on Computational Economics
Issue of 2005‒05‒23
fifteen papers chosen by
Stan Miles
York University

  1. ACE Models of Endogenous Interactions By Nicolaas J. Vriend
  2. Simulating the Future Pension Wealth and Retirement Saving in Sweden By Röstberg, Anna; Andersson, Björn; Lindh, Thomas
  3. Convergence properties of the likelihood of computed dynamic models By Jesús Fernández-Villaverde; Juan Francisco Rubio-Ramírez; Manuel Santos
  4. Offshore financial centers: parasites or symbionts? By Andrew K. Rose; Mark M. Spiegel
  5. Tracking the source of the decline in GDP volatility: an analysis of the automobile industry By Valerie A. Ramey; Daniel J. Vine
  6. Investment-specific and multifactor productivity in multi-sector open economies: data and analysis By Luca Guerrieri; Dale W. Henderson; Jinill Kim
  7. The performance of monetary and fiscal rules in an open economy with imperfect capital mobility By Marcela Meirelles-Aurelio
  8. The importance of nonlinearity in reproducing business cycle features By James Morley; Jeremy M. Piger
  9. Home bias and high turnover in an overlapping generations model with learning By Massimo Guidolin
  10. Can the standard international business cycle model explain the relation between trade and comovement? By M. Ayhan Kose; Kei-Mu Yi
  11. Migration, Co-ordination Failures and EU Enlargement By Tito Boeri; Herbert Brücker
  12. Variable Selection using Non-Standard Optimisation of Information Criteria By George Kapetanios
  13. Choosing the Optimal Set of Instruments from Large Instrument Sets By George Kapetanios
  14. Cluster Analysis of Panel Datasets using Non-Standard Optimisation of Information Criteria By George Kapetanios
  15. Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis By Andrea Cipollini; George Kapetanios

  1. By: Nicolaas J. Vriend (Queen Mary, University of London)
    Abstract: Various approaches used in Agent-based Computational Economics (ACE) to model endogenously determined interactions between agents are discussed. This concerns models in which agents not only (learn how to) play some (market or other) game, but also (learn to) decide with whom to do that (or not).
    Keywords: Endogenous interaction, Agent-based Computational Economics (ACE).
    JEL: C6 C7 D1 D2 D3 D4 D5 D6 D8 L1 M3
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp542&r=cmp
  2. By: Röstberg, Anna (Uppsala University); Andersson, Björn (Sveriges Riksbank); Lindh, Thomas (Institute for Futures Studies)
    Abstract: In this paper the wealth consequences of the Swedish pension system in the transition from a defined benefit to notional defined contribution system are simulated with almost exact institutional detail, using life cycle profiles estimated from detailed longitudinal micro data. Projected wealth, including different types of pension wealth, are computed and compared between cohorts, gender, wealth deciles and occupational categories. Consistent saving rates and replacement rates allowing consumption to stay constant after retirement are computed. Two different macroeconomic scenarios are considered, one using stylised values for growth, inflation etc. and another using demographically based forecasts. Some conclusions are that the cohorts born in the 1940s are relatively favoured, and so are the wealthiest deciles. Stylised macro assumptions yield more optimistic wealth projections than those corresponding to demographically based projections.
    Keywords: Future Pension Wealth; Retirement Saving in Sweden
    JEL: G23 H55 J14
    Date: 2004–09
    URL: http://d.repec.org/n?u=RePEc:hhs:ifswps:2005_006&r=cmp
  3. By: Jesús Fernández-Villaverde; Juan Francisco Rubio-Ramírez; Manuel Santos
    Abstract: This paper studies the econometrics of computed dynamic models. Since these models generally lack a closed-form solution, economists approximate the policy functions of the agents in the model with numerical methods. But this implies that, instead of the exact likelihood function, the researcher can evaluate only an approximated likelihood associated with the approximated policy function. What are the consequences for inference of the use of approximated likelihoods? First, we show that as the approximated policy function converges to the exact policy, the approximated likelihood also converges to the exact likelihood. Second, we prove that the approximated likelihood converges at the same rate as the approximated policy function. Third, we find that the error in the approximated likelihood gets compounded with the size of the sample. Fourth, we discuss convergence of Bayesian and classical estimates. We complete the paper with three applications to document the quantitative importance of our results.
    Date: 2004
    URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2004-27&r=cmp
  4. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper analyzes the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedfam:2005-05&r=cmp
  5. By: Valerie A. Ramey; Daniel J. Vine
    Abstract: Recent papers by Kim and Nelson (1999) and McConnell and Perez-Quiros (2000) uncover a dramatic decline in the volatility of U.S. GDP growth beginning in 1984. Determining whether the source is good luck, good policy or better inventory management has since developed into an active area of research. This paper seeks to shed light on the source of the decline in volatility by studying the behavior of the U.S. automobile industry, where the changes in volatility have mirrored those of the aggregate data. We find that changes in the relative volatility of sales and output, which have been interpreted by some as evidence of improved inventory management, could in fact be the result of changes in the process driving automobile sales. We first show that the autocorrelation of sales dropped during the 1980s, and that the behavior of interest rates may be the force behind the change in sales persistence. A simulation of the assembly plants' cost function illustrates that the persistence of sales is a key determinant of output volatility. A comparison of the ways in which assembly plants scheduled production in the 1990s relative to the 1970s supports the intuition of the simulation.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-14&r=cmp
  6. By: Luca Guerrieri; Dale W. Henderson; Jinill Kim
    Abstract: In the last half of the 1990s, labor productivity growth rose in the U.S. and fell almost everywhere in Europe. We document changes in both capital deepening and multifactor productivity (MFP) growth in both the information and communication technology (ICT) and non-ICT sectors. We view MFP growth in the ICT sector as investment-specific productivity (ISP) growth. We perform simulations suggested by the data using a two-country DGE model with traded and nontraded goods. For ISP, we consider level increases and persistent growth rate increases that are symmetric across countries and allow for costs of adjusting capital-labor ratios that are higher in one country because of structural differences. ISP increases generate investment booms unless adjustment costs are too high. For MFP, we consider persistent growth rate shocks that are asymmetric. When such MFP shocks affect only traded goods (as often assumed), movements in `international' variables are qualitatively similar to those in the data. However, when they also affect nontraded goods (as suggested by the data), movements in some of the variables are not. To obtain plausible results for the growth rate shocks, it is necessary to assume slow recognition.
    Keywords: Industrial productivity ; Labor productivity
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgif:828&r=cmp
  7. By: Marcela Meirelles-Aurelio
    Abstract: This paper studies monetary and fiscal policy rules, and investigates the characteristics of optimal policies. The central focus of the paper is on the comparison of two types of fiscal rules: a balanced budget and a target for the primary surplus. Balanced budget rules (or, more generally, numeric ceilings to the overall budget deficit) are criticized because they may dictate higher taxes in periods of weak economic activity. The primary surplus rule, in contrast, has a less pro-cyclical nature, given that it does not require higher fiscal austerity in periods when the cost of servicing public debt is higher. In a nutshell, it allows a higher degree of tax smoothing. It is not clear, however, if (inevitable) fiscal adjustments should be postponed. These issues are investigated in the context of a dynamic stochastic general equilibrium model that describes an open economy, with capital accumulation, and where nominal rigidities are present. The model shows that previous findings drawn from open economy models—in particular with respect to the characteristics of optimal monetary policy—do not hold once the implications of certain fiscal regimes are taken into account, and once different scenarios concerning the degree of capital mobility are considered. The model is calibrated and simulated for the case of Brazil, a country that since 1999 has targets for inflation and for the primary surplus. The main finding is that a fiscal regime characterized by a target for the primary surplus delivers superior economic performance, a property captured by the shape of the efficient policy frontier. 
    Keywords: Monetary policy ; Fiscal policy ; Inflation (Finance)
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-01&r=cmp
  8. By: James Morley; Jeremy M. Piger
    Abstract: This paper considers the ability of simulated data from linear and nonlinear time-series models to reproduce features in U.S. real GDP data related to business cycle phases. We focus our analysis on a number of linear ARIMA models and nonlinear Markov-switching models. To determine the timing of business cycle phases for the simulated data, we present a model-free algorithm that is more successful than previous methods at matching NBER dates in the postwar data. We find that both linear and Markov-switching models are able to reproduce business cycle features such as the average growth rate in recessions, the average length of recessions, and the total number of recessions. However, we find that Markov-switching models are better than linear models at reproducing the variability of growth rates in different business cycle phases. Furthermore, certain Markov-switching specifications are able to reproduce high-growth recoveries following recessions and a strong correlation between the severity of a recession and the strength of the subsequent recovery. Thus, we conclude that nonlinearity is important in reproducing business cycle features.
    Keywords: Business cycles
    Date: 2004
    URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-032&r=cmp
  9. By: Massimo Guidolin
    Abstract: This paper develops a two-country OLG model under the assumption that investors are on a Bayesian learning path. While investors from both countries receive identical information flows, domestic investors start off with less precise prior beliefs concerning foreign fundamentals. On a learning path, differences in beliefs and estimation risk generate portfolio biases similar to those observed empirically: home bias in equity portfolios and trend-chasing in international flows. In addition, due to the higher volatility of the estimates of foreign state variables, our model produces excessive turnover in foreign securities as reported by Tesar and Werner (1995). We use real GDP data for the US and Europe to calibrate the model and produce simulations that show that under the assumption of a financial liberalization during the 1970s, substantial home bias and excess turnover should have been observed in the subsequent years.
    Keywords: International finance ; Investments
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-012&r=cmp
  10. By: M. Ayhan Kose; Kei-Mu Yi
    Abstract: Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pair’s business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model.
    Keywords: Business cycles ; International trade
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:05-3&r=cmp
  11. By: Tito Boeri (Bocconi University Milan, IGIER and IZA Bonn); Herbert Brücker (DIW Berlin, Aarhus School of Business and IZA Bonn)
    Abstract: European migration policies are characterised by a fundamental paradox: they are getting tighter and tighter just while public opinion is becoming more favourable to migrants and the immobility of European citizens expands the scope for spatial arbitrage, accruing the benefits, of immigration. In this paper we consider two possible explanations for this puzzle. At first, based on a computable general equilibrium model, we evaluate whether migration to "rigid labour markets" a-la European involves cost, which are neglected by economic theory. Our results suggest that the economic benefits from international migration are, at a GDP gain of 0.2-0.3% at a migration of 1% of the labour force, but that natives in the receiving countries may lose out especially when generous unemployment benefits are provided to the migrants. Then, we evaluate effects of co-ordination failures in the setting of national migration policies, documenting that a race-to-the-top in migration restrictions has indeed occurred in the case of the Eastern Enlargement of the EU and has involved significant diversion of migration from more restrictive to less restrictive countries. Finally we discuss two potential ways to invert the trend towards stricter barriers to migration, namely i) restricting access to welfare and ii) adopting an EU-wide migration policy.
    Keywords: migration, enlargement, welfare door
    JEL: J61 F16 F2
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1600&r=cmp
  12. By: George Kapetanios (Queen Mary, University of London)
    Abstract: The question of variable selection in a regression model is a major open research topic in econometrics. Traditionally two broad classes of methods have been used. One is sequential testing and the other is information criteria. The advent of large datasets used by institutions such as central banks has exacerbated this model selection problem. This paper provides a new solution in the context of information criteria. The solution rests on the judicious selection of a subset of models for consideration using nonstandard optimisation algorithms for information criterion minimisation. In particular, simulated annealing and genetic algorithms are considered. Both a Monte Carlo study and an empirical forecasting application to UK CPI infation suggest that the new methods are worthy of further consideration.
    Keywords: Simulated Annealing, Genetic Algorithms, Information criteria, Model selection, Forecasting, Inflation.
    JEL: C11 C15 C53
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp533&r=cmp
  13. By: George Kapetanios (Queen Mary, University of London)
    Abstract: It is well known that instrumental variables (IV) estimation is sensitive to the choice of instruments both in small samples and asymptotically. Recently, Donald and Newey (2001) suggested a simple method for choosing the instrument set. The method involves minimising the approximate mean square error (MSE) of a given IV estimator where the MSE is obtained using refined asymptotic theory. An issue with the work of Donald and Newey (2001) is the fact that when considering large sets of valid instruments, it is not clear how to order the instruments in order to choose which ones ought to be included in the estimation. The present paper provides a possible solution to the problem using nonstandard optimisation algorithms. The properties of the algorithms are discussed. A Monte Carlo study illustrates the potential of the new method.
    Keywords: Instrumental Variables, MSE, Simulated Annealing, Genetic Algorithms.
    JEL: C12 C15 C23
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp534&r=cmp
  14. By: George Kapetanios (Queen Mary, University of London)
    Abstract: Panel datasets have been increasingly used in economics to analyse complex economic phenomena. One of the attractions of panel datasets is the ability to use an extended dataset to obtain information about parameters of interest which are assumed to have common values across panel units. However, the assumption of poolability has not been studied extensively beyond tests that determine whether a given dataset is poolable. We propose an information criterion method that enables the distinction of a set of series into a set of poolable series for which the hypothesis of a common parameter subvector cannot be reject and a set of series for which the poolability hypothesis fails. The method can be extended to analyse datasets with multiple clusters of series with similar characteristics. We discuss the theoretical properties of the method and investigate its small sample performance in a Monte Carlo study.
    Keywords: Panel datasets, Poolability, Information criteria, Genetic Algorithm, Simulated Annealing.
    JEL: C12 C15 C23
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp535&r=cmp
  15. By: Andrea Cipollini (Queen Mary, University of London); George Kapetanios (Queen Mary, University of London)
    Abstract: In this paper we compare the performance of a regional indicator of vulnerability in predicting, out of sample, the crisis events affecting the South East Asian region during the 1997-98 period. A Dynamic Factor method was used to retrieve the vulnerability indicator and stochastic simulation is used to produce probability forecasts. The empirical findings suggest evidence of financial contagion.
    Keywords: Financial contagion, Dynamic factor model.
    JEL: C32 C51 F34
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp538&r=cmp

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