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Papers from 1998 onwards are available on-line as .PDF files.

10 Most Recent Papers

15/10 Dimitrios Varvarigos

Adobe Acrobat (PDF) 15/10 Cultural Norms, the Persistence of Tax Evasion, and Economic Growth

I study the effects of tax evasion on economic growth by focusing on the cultural aspects of tax compliance and their effect on the extensive margin of tax evasion. A cultural norm that determines the contemptibility of tax dodging practices links the past incidence of tax evasion with the tax payers’ current incentives to conceal sources of income. This dynamic complementarity may lead to multiple equilibria in the evolution of tax evasion. Due to the latter’s effect on capital accumulation, this multiplicity may lead economies in divergent development paths, as long as they differ in the initial magnitude of tax evasion. This happens even though economies may be, on the outset, identical in terms of capital stock and structural characteristics, including those that govern tax enforcement.

15/09 Wojciech Charemza, Carlos Díaz, Svetlana Makarova

Adobe Acrobat (PDF) 15/09 Ex-post Inflation Forecast Uncertainty and Skew Normal Distribution: ‘Back from the Future’ Approach

Empirical evaluation of macroeconomic uncertainty and its use for probabilistic forecasting are investigated. New indicators of forecast uncertainty, which either include or exclude effects of macroeconomic policy, are developed. These indicators are derived from the weighted skew normal distribution proposed in this paper, which parameters are interpretable in relation to monetary policy outcomes and actions. This distribution is fitted to forecast errors, obtained recursively, of annual inflation recorded monthly for 38 countries. Forecast uncertainty term structure is evaluated for U.K. and U.S. using new indicators and compared with earlier results. This paper has supplementary material.

15/08 Wojciech Charemza, Carlos Díaz, Svetlana Makarova

Adobe Acrobat (PDF) 15/08 Choosing the Right Skew Normal Distribution: the Macroeconomist’ Dilemma

The paper discusses the consequences of possible misspecification in fitting skew normal distributions to empirical data. It is shown, through numerical experiments, that it is easy to choose a distribution which is different from that which generated the sample, if the minimum distance criterion is used. The distributions compared are the two-piece normal, weighted skew normal and the generalized Balakrishnan skew normal distribution which covers a variety of other skew normal distributions, including the Azzalini distribution. The estimation method applied is the simulated minimum distance estimation with the Hellinger distance. It is suggested that, in case of similarity in values of distance measures obtained for different distributions, the choice should be made on the grounds of parameters’ interpretation rather than the goodness of fit. For monetary policy analysis, this suggests application of the weighted skew normal distribution, which parameters are directly interpretable as signals and outcomes of monetary decisions. This is supported by empirical evidence of fitting different skew normal distributions to the ex-post monthly inflation forecast errors for Poland, Russia, Ukraine and U.S.A., where estimations do not allow for clear distinction between the fitted distributions for Poland and U.S.A.

15/07 Wojciech Charemza, Carlos Díaz, Svetlana Makarova

Adobe Acrobat (PDF) 15/07 Conditional Term Structure of Inflation Forecast Uncertainty: The Copula Approach

The paper introduces the concept of conditional inflation forecast uncertainty. It is proposed that the joint and conditional distributions of the bivariate forecast uncertainty can be derived from estimation unconditional distributions of these uncertainties and applying appropriate copula function. Empirical results have been obtained for Canada and US. Term structure has been evaluated in the form of unconditional and conditional probabilities of hitting the inflation range of ±1% around the Canadian inflation target. The paper suggests a new measure of inflation forecast uncertainty that accounts for possible inter-country dependence. It is shown that evaluation of targeting precision can be effectively improved with the use of ex-ante formulated conditional and unconditional probabilities of inflation being within the pre-defined band around the target.

15/06 Arkadiusz Szydlowski

Adobe Acrobat (PDF) 15/06 Endogenous Censoring in the Mixed Proportional Hazard Model with an Application to Optimal Unemployment Insurance

In economic duration analysis, it is routinely assumed that the process which led to censoring of the observed duration is independent of unobserved characteristics. The objective of this paper is to examine the sensitivity of parameter estimates to this independence assumption in the context of an economic model of optimal unemployment insurance. We assume a parametric model for the duration of interest and leave the distribution of censoring unrestricted, allowing it to be correlated with both observed and unobserved characteristics. This leads to loss of point-identification. We provide a practical characterization of the identified set with moment inequalities and suggest methods for estimating this set. In particular, we propose a profiled procedure that allows us to build a confidence set for a subvector of the model parameters. We apply this approach to estimate the elasticity of exit rate from unemployment with respect to unemployment benefit and find that both positive and negative values of this elasticity are supported by the data. When combined with the welfare formula in Chetty (2008), these estimates do not permit us to put an upper bound on the size of the welfare change due to an increase in the unemployment benefit. We conclude that given the available data alone, one cannot credibly judge if the unemployment benefits in the US are close to the optimal level.

15/05 Dimitrios Varvarigos, Guangyi Xin

Adobe Acrobat (PDF) 15/05 Social Interactions, the Evolution of Trust, and Economic Growth

We present a model where the dynamics of trust and the process of capital accumulation are jointly determined. Trust evolves intergenerationally, as the process of social interactions with people from different backgrounds creates experiences and forms opinions that are bequeathed to the next generation, thus shaping their level of trust. The provision of public goods and services is also a supporting factor towards the formation of trust. A key result is the possibility of social segregation if the level of trust is below a critical threshold. As a result, long-run equilibria are path-dependent. Both the current level of trust and the current stock of capital are important in determining the economy’s long-term prospects.

15/04 Aristotelis Boukouras, Kostas Koufopoulos

Adobe Acrobat (PDF) 15/04 Efficient Allocations in Economies with Asymmetric Information when the Realized Frequency of Types is Common Knowledge

We consider a general economy, where agents have private information about their types. Types can be multi-dimensional and potentially interdependent. We show that, if the realized frequency of types (the exact number of agents for each type) is common knowledge, then a mechanism exists, which is consistent with truthful revelation of private information and which implements first-best allocations of resources as the unique equilibrium. The result requires the single crossing property on utility functions and the anonymity of the Pareto correspondence.

15/03 R. Emre Aytimur, Aristotelis Boukouras, Robert Schwagerz

Adobe Acrobat (PDF) 15/03 The Citizen-Candidate Model with Imperfect Policy Control

We present a modified citizen-candidate model where the implemented policy arises from a compromise between the government and an unelected external power. We show that the two-candidate equilibria of this model differ significantly from the original: however small the cost of candidacy, the distance between the candidates' policies, both ideal and implemented, remains strictly above a threshold. Moreover, there may be one-candidate equilibria in which the only candidate is not the one most preferred by the median voter. Both results point out that, even with negligible cost of entry, there are limits to strategic delegation.

15/02 Aristotelis Boukouras

Adobe Acrobat (PDF) 15/02 Separation of Owenership and Control: Delegation as Commitment Device

This paper provides a theoretical model for explaining the separation of ownership and control in firms. An entrepreneur hires a worker for providing effort to complete a project. The worker's effort determines the probability that the project is completed on time, but the worker receives private benefits for every period she is employed. We show that hiring a manager on a short-term contract may increase firm value and we identify the conditions under which separation of ownership and control is optimal.

15/01 Caterina Calsamiglia, Francisco Martinez-Mora, Antonio Miralles

Adobe Acrobat (PDF) 15/01 School Choice Mechanisms, Peer Effects and Sorting

We study the e¤ects that school choice mechanisms and school priorities have on the degree of sorting of students across schools and neighborhoods, when school quality is endogenously determined by the peer group. Using a model with income or ability heterogeneity, we compare the popular Deferred Acceptance (DA) and Boston (BM) mechanisms under several scenarios. With residential priorities, students and their households fully segregate into quality-anked schools and neighborhoods under both mechanisms. With no residential priorities and a bad public school, DA does not generate sorting in general, while BM does so between a priori good public schools. With private schools, the best public school becomes more elitist under BM.

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