Scottish Journal of Political Economy

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  • Business cycle duration dependence and foreign recessions

    This study revisits business cycle duration dependence in G7 countries by controlling for foreign recessions, defined as the number of other G7 countries in a recession. Estimates from regime switching logit models show that the monthly likelihood of ending an expansion roughly doubles for every extra G7 country in recession, but the end of foreign recessions do not affect the ending of recessions. They also show that recessions are duration dependent in all G7 countries, but expansions only in the United States and Germany. The economic importance of foreign recessions and duration in driving business cycle phase changes vary across countries.

  • On the asymmetric effects of exchange‐rate volatility on trade flows: Evidence from US–UK Commodity Trade

    We consider the response of each of the 67 industries that trade between the United States and United Kingdom to the volatility of the real dollar–pound exchange rate. When we follow previous research and estimate a linear ARDL model for each industry, we find short‐run effects of volatility in 22 US exporting industries to the United Kingdom that last into the long run only in nine industries. As for the UK exports to the United States, we find short‐run effects in 18 industries that last into the long run in 15 industries. However, when we estimate a nonlinear model for each industry, we find short‐run effects of volatility on 41 US exporting industries and on 43 UK exporting industries, all in an asymmetric manner. Short‐run asymmetric effects lasted into long‐run asymmetric effects in 24 US exporting industries to the United Kingdom and in 33 UK exporting industries to the United States. While total trade shares of industries from the linear models were negligible, those of the industries from the nonlinear models were significant in size, in the tune of one‐third of the trade.

  • What has New Zealand gained from The FTA with China?: Two counterfactual analyses†

    We investigate the effects of the 2008 New Zealand (NZ)–China free trade agreement (FTA) on exports from NZ to China, and real GDP per capita in NZ using the synthetic control method to estimate the counterfactuals. NZ exports to China were more than 200% higher in 2014 than what they would have had the FTA never been signed. NZ's food and live animals exports to China were more than 180% higher in 2014 than the counterfactual. Our counterfactuals indicate a small but negative effect of the FTA on NZ's real GDP per capita between 2009 and 2012.

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  • The stabilization role of police spending in a neo‐Keynesian economy with credit market imperfections

    Motivated by a seemingly persistent “twin‐high” phenomenon in Latin America, we present a novel theoretical framework that has linkages between three institutions (education, criminal justice, and credit) to study policy‐pertinent research questions with regards to whether police spending has the potential to serve as an unconventional policy tool for macroeconomic management. Based on a stylized parameterization, we find formal and illegal human capital to share common cyclical properties, which can be "decoupled" under a rule‐based regime to police spending. This nonetheless comes at a cost of a greater propagation of the credit friction‐induced financial accelerator effect.

  • Welfare costs of monetary policy uncertainty in the economy with shifting trend inflation

    We study welfare costs of the uncertainty about monetary policy in the economy featuring shifting trend inflation. We follow Ruge‐Murcia (J Econ Dyn Control 36: 914–‐938, 2012) to employ the SMM approach to fit the model to the US data (1979Q1‐2015Q1). We find that the monetary policy uncertainty affects economic welfare through different dimensions. On the one hand, the policy uncertainty itself distorts the economic welfare negligibly, not only by increasing volatilities of consumption and leisure, but also by decreasing their average levels. A higher level of trend inflation then signifies these changes to produce greater welfare costs. Furthermore, the adverse impacts of policy uncertainty on the economy, documented by the impulse response functions of macroeconomic variables to policy uncertainty shock, become larger when central banks raise their inflation targets. On the other hand, the costs of exogenous variations in trend inflation are larger if there is policy uncertainty.

  • Bonus incentives and team effort levels: Evidence from the “Field”*

    This study explores the effect of bonus incentive mechanisms with a focus on how such a scheme influences aggregate production levels of teams of workers, specifically. We identify this using data from a highly competitive setting in professional sport, which involves a unique tournament design rule in an elite European rugby competition. The modelling results demonstrate qualified evidence that introducing bonuses to encourage teams to score via the most‐difficult, highest‐reward mode, incentivizes teams to increase effort to earn the bonus, and without reducing production after the bonus is achieved.

  • Explaining fiscal decentralization and the role of ethnic Diversity

    This paper considers the causes of fiscal decentralization with a specific focus on the role of ethnic diversity. To do so, I employ an instrument for ethnic diversity based on the origin of anatomically modern human life. Using two measures of decentralization that capture decision making autonomy and accounting for the depth of divisions between ethno‐linguistic groups using the structure of language trees, I find that ethnic diversity has a positive effect on the degree of decentralization. It is the amount of fractionalization towards the leaves of the trees, where groups are more numerous and less distinct, that drive decentralization.

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  • Politics and the UK's monetary policy

    This paper examines whether politics causes regime shifts in deviations from the optimal monetary policy in the United Kingdom. After using a dynamic stochastic general equilibrium model to construct the welfare‐maximizing policy rule and deviations from the optimal Taylor rule, we show that politics does indeed play an important role in explaining these deviations. In addition to politics, unemployment rates account for regime shifts in the Taylor rule deviations.

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