Quantification of Instruments’ Strength

Economics master project by Oriol González, Marko Irisarri, Santiago Iglesias, Asier Beristain and Manuel Cabado ’19

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Abstract

Weak identification is known to yield unreliable standard instrumental variables (IV) inference. A large literature has focused on addressing this issue by proposing methods to detect weak instruments, mainly through the first-stage F-statistic. Our paper evaluates the weak identification in two leading empirical analyses by using the novel alternative approach developed by Ganics, Inoue and Rossi (2018), who base their tests on confidence intervals for the bias of the two-stage least squares estimator, and the size distortion of the associated Wald test. We illustrate the behavior of the tests in empirical settings, and compare how the conclusions differ to those using the standard tests. Our findings suggest that, in our empirical application, the results obtained using this approach are in line with those using previous tests in the literature, confirming it to be a robust alternative. An R package to directly compute these novel tests is also presented.

Main conclusions

The contribution of our paper is mainly twofold. On the one hand, we aim at motivating the usefulness of the novel approach developed by Ganics et al. (2018) to evaluate the robustness of empirical analyses to the potential presence of weak instruments. On the other hand, we make these tests accessible to researchers via the proposed R function. The paper shows how recent tests applied to previous literature unveil new interesting information about the results obtained and hence the conclusions drawn from them. We highlight the consequences of IV estimates displaying both high sampling uncertainty and high specification uncertainty, as minor specification changes can lead to very different estimates, which is in line with current findings in the IV literature (see Yogo, 2004; Kleibergen and Mavroeidis, 2009; Mavroeidis, 2010; Mavroeidis et al., 2014; Ganics, 2017; or Barnichon and Mesters, 2019). Another remarkable issue that arises, mirroring the recent findings in Young (2019), is the importance of the baseline assumptions on the structure of the error variance to correctly interpret the estimation results.

girtest
Output retrieved by the proposed girtest function in R

References

  • Barnichon, R. and Mesters, G. (2019), ‘Identifying modern macro equations with old shocks’, Barcelona GSE Working Paper Series (Working Paper n◦1097).
  • Ganics, G. (2017), Essays in macroeconometrics, PhD thesis, Universitat Pompeu Fabra.
  • Ganics, G., Inoue, A. and Rossi, B. (2018), ‘Confidence intervals for bias and size distortion in IV and local projections-IV models’, Banco de España Working Paper.
  • Kleibergen, F. and Mavroeidis, S. (2009), ‘Weak instrument robust tests in gmm and the new keynesian phillips curve’, Journal of Business & Economic Statistics 27(3), 293-311.
  • Mavroeidis, S. (2010), ‘Monetary policy rules and macroeconomic stability: some new evidence’, American Economic Review 100(1), 491-503.
  • Mavroeidis, S., Plagborg-Møller, M. and Stock, J. H. (2014), ‘Empirical evidence on inflation expectations in the new keynesian phillips curve’, Journal of Economic Literature 52(1), 124-88.
  • Yogo, M. (2004), ‘Estimating the elasticity of intertemporal substitution when instru- ments are weak’, Review of Economics and Statistics 86(3), 797-810.
  • Young, A. (2019), ‘Consistency without inference: Instrumental variables in practical application’, Unpublished manuscript.

About the Barcelona GSE Master’s Program in Economics

Bank Assets, Liquidity and Credit Cycles

Forthcoming publication by Federico Lubello ’12 (Economics)

My paper, “Bank Assets, Liquidity and Credit Cycles” with Ivan Petrella (Warwick and CEPR) and Emiliano Santoro (University of Copenhagen) has been accepted at the Journal of Economic Dynamics and Control. In the paper, we uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.

Abstract

We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers’ assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers’ financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.

Federico Lubello ’12 is a Research Economist at Banque centrale du Luxembourg. He is an alum of the Barcelona GSE Master’s in Economics.

LinkedIn

Uncertainty in learning, choice and visual fixation

Paper by Hrvoje Stojić (Economics ’11, GPEFM ’17)

source: Stojić et al

Hrvoje Stojić (Economics ’11 and GPEFM ’17) is co-author on a new paper, “Uncertainty in learning, choice and visual fixation,” now available in pre-print on PsyArXiv.

The authors on the paper illustrate the interdisciplinary nature of this research. Hrvoje and co-author Raymond Dolan are researchers at the Max Planck UCL Centre for Computational Psychiatry and Ageing Research; Jacob Orquin of Aarhus University specializes in the role of eye movements in decision making; Peter Dayan is at the Max Planck Institute for Biological Cybernetics), and Maarten Speekenbrink is affiliated with the UCL Department of Experimental Psychology.

About the paper

Hrvoje shares an overview of the paper in this Twitter thread:

Get the pre-print

The paper can be downloaded from PsyArXiv.

alumni

Hrvoje Stojić (Economics ’11, GPEFM ’17) is a researcher at UCL. He is an alum of the Barcelona GSE Master’s in Economics and PhD from GPEFM (UPF and Barcelona GSE).

LinkedIn | Twitter | Github

City Design, Planning, Policy Innovations: The Case of Hermosillo

IDB publication co-authored by Miguel Angel Santos (ITFD ’11, Economics ’12)

credit: IDB

After a lengthy review process we are proud to announce that our book “City Design, Planning, Policy Innovations: The Case of Hermosillo” is published and available for download from the Inter-American Development Bank. Cutting edge research on cities featuring my work with Douglas Barrios, my colleague at the Center for International Development’s Growth Lab at the Harvard Kennedy School. Thanks to Andreina Seijas and Diego Arcia for the superb coordination and editing work.

About the book

This publication summarizes the outcomes and lessons learned from the Fall 2017 course titled “Emergent Urbanism: Planning and Design Visions for the City of Hermosillo, Mexico” (ADV-9146). Taught by professors Diane Davis and Felipe Vera, this course asked a group of 12 students to design a set of projects that could lay the groundwork for a sustainable future for the city of Hermosillo—an emerging city located in northwest Mexico and the capital of the state of Sonora. Part of a larger initiative funded by the Inter-American Development Bank and the North-American Development Bank in partnership with Harvard University, ideas developed for this class were the product of collaboration between faculty and students at the Graduate School of Design, the Kennedy School’s Center for International Development and the T.H. Chan School of Public Health.

Miguel Angel Santos (ITFD ’11, Economics ’12) is Director of Applied Research at the Growth Lab at Harvard Kennedy School.

LinkedIn | Twitter

The UK productivity puzzle

Speech by Gavin Jackson ’12 (Economics) to the Oxford Economics Society

Image: OES

This June, Gavin Jackson ’12 (Economics) returned to his undergrad alma mater, University of Oxford, and gave a talk to the Oxford Economics Society about the slowdown in productivity in the United Kingdom and where productivity in the UK might be headed.

He listed five contributing factors to the slowdown: “changes in financial regulation, the patent cliff, mismeasurement of telecommunications, attempts to cope with climate change, and the troubles with getting more oil out of the North Sea.”

Looking ahead, he remarked, “I don’t think we can or should go back to the past. We do not want to go back on environmental on financial regulation, as the US is doing right now. But what we can do as a society is try to be open to new opportunities and technologies that are coming along and that means investing in the basics of education, infrastructure and research to make sure that we are able to make the most of things like e-commerce and working out what to do about those who lose out from these transitions.”

Gavin Jackson ’12 is an Economics Reporter at the Financial Times. He is an alum of the Barcelona GSE Master’s in Economics.

LinkedIn | FT Articles

The Zero Lower Bound was irrelevant

Blog post for AIER by Brian C. Albrecht ’14 (Economics of Public Policy)

empty building floor

Brian Albrecht is a PhD candidate at the University of Minnesota and a graduate of the Barcelona GSE Master’s Program in Economics of Public Policy, as well as a past editor of the Barcelona GSE Voice. He is also a contributor to the Sound Money Project, a blog from the American Institute for Economic Research (AIER).

In a recent post, Brian talks about a recent paper by Barcelona GSE professors Davide Debortoli, Jordi Galí, and Luca Gambetti, “On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint.” He writes:

Many economics writers, including Ben BernankeNeil Irwin, and Justin Wolfers, worry that the Fed will not be able to combat the next recession. Current interest rates, the sad story goes, are already close to zero. Since a downturn will push the economy to the zero lower bound (ZLB), the Fed will not be able to lower rates further, thereby prolonging the recession.

Of course, for such a story to make sense, the ZLB must be a fundamental constraint that inhibits monetary policy. In a new NBER working paper, Davide Debortoli, Jordi Galí, and Luca Gambetti consider whether the ZLB was actually the problem during the last recession. They say the ZLB was irrelevant. The authors come to this conclusion by studying two types of evidence: measures of macro volatility, and the response of macro variables to aggregate shocks through a vector autoregression.

Brian C. Albrecht for Sound Money

Read Brian’s full post on this paper and find a list of all his recent posts over on the AIER website.

alumni

Brian C. Albrecht ’14 is a PhD candidate in Economics at the University of Minnesota. He is an alum of the Barcelona GSE Master’s in Economics of Public Policy.

Twitter | Website

Women in Economics seminar

Master’s students Analía García ’19 (ITFD) and Lorena Franco ’19 (Economics) organized the seminar to highlight research by female PhD students and professors

Women in Economics seminar

This May, BGSE Master’s students Analía García ’19 (ITFD) and Lorena Franco ’19 (Economics) organized the Women in Economics two-day seminar, which meant to highlight female PhD students and faculty members’ research.

Three students and four Barcelona GSE Affiliated Professors presented their work, which varied from family economics to political economics and experimental economics. More information of the speakers and their topics below.

Organizers Analía García ’19 and Lorena Franco ’19

These efforts, nonetheless, started over two months ago when both students, who are from Latin America and the Caribbean, organized an open forum on International Women’s Day. Having prior work experience and noting the clear lack of female representation in economics and academia, they wanted to expand the conversations on the topic and discuss what we could do to potentially “make it better” within their parameters. The Women in Economics seminar was born from the conversations during the first and second open forums, and thanks to the ideas of Marta Morazzoni and Claudia Meza, both PhD students at GPEFM (UPF and Barcelona GSE).

Putting this together was a challenge given this had not been done at BGSE before, but the organizers hope this was insightful for all those who attended.

More female and racial diversity in economics and academia, please!

The speakers and the titles of the work were the following (listed alphabetically):

PhD Students

  • Marta Morazzoni “Family Dynamics in Macroeconomics: when the representative household does not represent us anymore”
  • Marta Santamaría “The Gains from Reshaping Infrastructure: Evidence from the Division of Germany”
  • Alina Velias “When to Tie Odysseus to the Mast: Costly Commitment Under Biased Expactations”

Professors

  • Enriqueta Aragonés “Stability of a Multi-level Government: A Catalonia in Spain”
  • Rosa Ferrer “Consumers’ Costly Responses to Product-Harm Crises” and “Gender Gaps in Performance: Evidence from Young Lawyers”
  • Ada Ferrer-i-Carbonell “Relative Deprivation in Tanzania”
  • Rosemarie Nagel “Regularities in the Lab, Brain, and Field: A Cognitive Reasoning Model”

Asymmetric Social Distance Effects in the Ultimatum Game

Publication by Orestis Vravosinos ’18 (Economics) with Kyriakos Konstantinou

The Ultimatum Game Comic
Comic author: Zach Weinersmith

A paper by Orestis Vravosinos (Economics ’18, UPF MRes in Economics ’19) and Kyriakos Konstantinou (LSE) has just been published in the Review of Behavioral Economics. Below is an overview of the paper.


The Ultimatum Game

Given that in experiments ultimatum game outcomes are often significantly different from Nash equilibrium predictions under standard assumptions on preferences, many studies have examined the impact of fairness on players’ considerations and how the effect of the sense of fairness on players’ actions may vary, while other factors change. It has been argued that increased stakes (larger sum of money distributed) can reduce sensitivity to fairness of player 2 making it more likely that she accepts lower shares of the total sum, thus, giving player 1 the opportunity to offer a lower share.

Social Distance

Social distance has also been found to affect fairness. In the existing literature, social distance commonly varies only from players being close relatives or friends to complete strangers, even though negatively-valenced relationships can be important from an economic point of view. Our study aims to fill this gap by introducing negatively-valenced relationships between the players. We argue that altruistic and empathetic behavior of the proposer towards the responder may not vary (increase) as significantly in the region of negative relationships compared to the region of positive relationships. Similarly, social distance effects stemming from reciprocity may vary less in the region of negative relationships. Thus, we hypothesize that in the ultimatum game social distance effects are asymmetric with their magnitude varying more in the spectrum of positively compared to negatively-valenced relationships.

Our experimental results support this hypothesis; in the region of positively-valenced relationships, the proposers increase the percentage they offer as relationship quality increases more drastically compared to when the relationship is negatively-valenced, in which case they appear more invariant to relationship effects. Also, by eliciting a minimum share which the responder is willing to accept out of the total sum, we provide clearer results on the social distance and stakes effects on the latter’s behavior. Last, we find a negative effect of relationship quality on the minimum acceptable share. This contradicts a strand of the literature which suggests that closer-“in-group” individuals may be punished more severely, so that cooperation in a group is maintained.

References

Orestis Vravosinos and Kyriakos Konstantinou (2019), “Asymmetric Social Distance Effects in the Ultimatum Game”, Review of Behavioral Economics: Vol. 6: No. 2, pp 159-192.

Orestis Vravosinos

Orestis Vravosinos ’18 is an MRes student at GPEFM (UPF and Barcelona GSE). He is an alum of the Barcelona GSE Master’s in Economics.

LinkedIn | Website

Setting an example? Spillover effects of Peruvian Magnet Schools

Economics ’18 master project turned working paper by alumni Mariel Bedoya, Karen Espinoza, Bruno Gonzaga, and Alejandro Herrera Jiménez

What started out as a Barcelona GSE master project has developed into a full-fledged working paper by four alumni of the Master’s in Economics Class of 2018: Mariel Bedoya, Karen Espinoza, Bruno Gonzaga, and Alejandro Herrera Jiménez.

The team after submitting their Economics master project, June 2018

The paper, “Setting an example? Spillover effects of Peruvian Magnet Schools,” is now part of the Development Research Working Paper Series of the Institute for Advanced Development Studies (INESAD), a research center in La Paz, Bolivia.

Mariel explains that the idea to research this topic occurred to her because before doing the master in BGSE, she worked in the Ministry of Education of Peru, in the Impact Evaluation Division.

“The topic was interesting for us because although there is plenty of literature studying these selective schools’ first order effects (that is, effects on the students who directly benefited from the creation of these schools), we found scarce evidence about second-order effects (effects on students who shared environments with the high achieving student previously). Even more, analyzing externalities seemed of importance for a program such as COAR in Peru since the expenditure per student for the program is relatively high,” Mariel says.

The team has presented their research in three seminars so far, two in Peru and one in Bolivia.

“We aim to continue this research project in the near future. We got the opportunity of presenting findings of our research for public servants within the Ministry of Education last year, including the Director of the Division of Specialized Education Services, who is in charge of the COAR Program. This research complements ongoing efforts of the Ministry of Education of evaluating COAR’s first order effects. They seemed keen on helping us, especially because we do not have yet the necessary data to conclude on the mechanisms that may be driving the results we find, and they would like us to tell them more about this point in particular. We hope to have a new version of this paper by the end of the year.”

About the authors

Mariel Bedoya ’18 is a Policy and Research Associate with Abdul Latif Jameel Poverty Action Lab (J-PAL) in Peru. LinkedIn | Twitter

Bruno Gonzaga ’18 is a Senior Analyst in the Juncture Analysis Department of the Central Reserve Bank of Peru. LinkedIn | Twitter

Alejandro Herrera Jiménez ’18 is an Associate Researcher at INESAD in Bolivia. LinkedIn | Twitter

Karen Espinoza ’18 is Coordinator of the Innovation Lab of the Ministry of Education in Peru (MineduLAB). LinkedIn

The Transition to the Knowledge Economy, Labor Market Institutions, and Income Inequality in Advanced Democracies

Publication by Angelo Martelli ’11 (Economics)

Angelo Martelli '11

Hot off the press! My publication “The Transition to the Knowledge Economy, Labor Market Institutions, and Income Inequality in Advanced Democracies” with David Hope (King’s College) is finally out in World Politics.

A good read for all those interested in understanding the extent to which the relationship between the changing nature of work and income inequality is influenced by national labor market institutions.


Paper abstract

Recent work in comparative political economy has found that labour market institutions can mitigate the inequality-enhancing effects of the transition to the knowledge economy (Hope and Martelli 2019). While this work enhances our understanding of the role and importance of labour market institutions in the post-industrial era, it cannot tell us much about the underlying mechanisms. This paper aims to fill that gap in the literature by undertaking a micro-level econometric study on Denmark using a unique longitudinal dataset with linked employer-employee data, the Integrated Database for Labour Market Research (IDA). The central analysis in the paper will explore the influence of union membership and collective bargaining on within and between firm inequality in knowledge-intensive sectors. It will also test competing hypotheses as to why labour market institutions have been able to damp down the effects of the transition to the knowledge economy on income inequality.

A couple of takeaways

The transition to the knowledge economy began in earnest after the crisis of Fordism in the 1970s. Figure 1 (below) shows the employment expansion in knowledge-intensive service sectors, such as finance, insurance, business services, and telecommunications, between 1970 and 2006. Growth of knowledge employment was ubiquitous in the advanced democracies over this period; the average employment expansion was close to nine percentage points. The rise of the knowledge economy is clearly demonstrated by this substantial shift in economic structure away from traditional industries and toward ICT-intensive service sectors.

figure 1

Figure 2 (below) shows that for the income share of the top 1 percent, an increase in knowledge employment is associated with an increase in inequality when wage coordination and collective bargaining coverage are very weak, but has little or no effect when they’re at their highest levels.

figure 2

You can read more about this research in a blog post I wrote with my coauthor based on a previous version of the paper on LSE’s European Politics and Policy blog (EUROPP).

Next we are planning to work on A Micro-Level Study of the Knowledge Economy, Institutions, and Income Inequality.

alumni

Angelo Martelli ’11 is a Postdoctoral Research Fellow at LSE. He is an alum of the Barcelona GSE Master’s in Economics.

LinkedIn | Twitter