Sticky House Price? – Barcelona GSE Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Sticky House Price?

Author:

Vorada Limjaroenrat

Master Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

The assumption of fully flexible house price is widespread in several general equilibrium monetary models. In this paper, I provide selective survey of existing evidence, arguing that rigidities do exist in house price movements, along with empirical and theoretical contributions. In the 18 OECD countries evidence-based VAR analysis of monetary transmission mechanism, a rent puzzle arises as real rent increases in response to exogenous increase in interest rate, opposite with what the theory suggests. In the final part of the paper, 18 OECD countries are divided into two subgroups of low and high credit market flexibility. The results present interesting linkages between sticky price, bubbles, monetary policy, and credit market condition that should be high on future research agenda.

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Multimarket Contact and Collusion in the Ecuadorian Pharmaceutical Sector – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


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Multimarket Contact and Collusion in the Ecuadorian Pharmaceutical Sector

Authors:

Jerónimo Callejas and Igne Grazyte

Master Program:

Competition and Market Regulation

Paper Abstract:

The paper analyses the effects of multimarket contact on prices in the Ecuadorian pharmaceutical sector and its capacity to serve as a tool to facilitate collusion. We estimate the effect that the multimarket contact has on firms’ price setting behaviour by applying multimarket contact models and simple econometric techniques. Our findings show that multimarket contact has a positive effect on multivitamin prices in Ecuador and could indeed be helping to sustain collusion between firms.

Conclusions:

We have tried to estimate the possible effect that multimarket contacts might have on prices and collusion in the Ecuadorian pharmaceutical industry. For the purposes of this paper we have chosen to limit our analysis and only focus on the market for multivitamins defined at the 4th ATC level. To test our predictions we tried to replicate simple techniques used by Ciliberto and Williams (2013), Evans and Kessides (1994) and Coronado (2010). We have constructed a multimarket contact index and estimated its effect on prices by using IV and then Panel Data with fixed effects estimations and also correcting for endogeneity.

As seen in section 5, our model gives robust results and provides a reasonable confirmation of our expectations: the coefficients predicted by the two models (IV and panel data with fixed effects) have the correct sings and are highly significant. Our results show that the IV estimation alone is insufficient to successfully solve all endogeneity issues, however we find that using panel data with fixed effects and also instrumenting endogenous variables (MMC) we can successfully remove the endogeneity problem from the proposed regression and obtain unbiased estimates. Our analysis shows that average multimarket contact index has a significant positive effect on price, thus confirming our predictions that the contacts between firms in different product markets can lead to higher prices for pharmaceutical products. Although we believe that this result could be indicative of possible collusive practices in the sector, the actual existence of collusion could only be confirmed by direct evidence, such as direct contacts between firms with the aim of setting prices or sharing markets.

Due to time constraints we were only able to conduct our analysis in one market and using only simple estimations and models of multimarket contact index. Therefore possible future extensions to this paper could include estimating the effect of the multimarket contact index in other markets, possibly taking into account both private and public markets; or to estimate the effect of multimarket contact by using more complex models, such as nested logit model used in Ciliberto and Williams (2013).

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Why Do Labels Work? – Barcelona GSE Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Why Do Labels Work? A Theoretical Analysis and Proposed Test Design of Mechanisms Underlying Labeled Cash Transfers

Authors:

Angela Bouzanis, Victoria Gonsior, Rozália Kepes, and Eva Werli

Master Program:

Economics

Paper Abstract:

Labeled Cash Transfers (LCTs) are Unconditional Cash Transfers (UCTs) with a specific label attached stating the purpose of the cash transfer in order to guide recipients in allocating funds. Recent economic research has provided evidence for the efficiency of LCTs, but the literature is still missing theoretical foundations. In this paper, we propose four mechanisms based on behavioral economics that have the potential to explain why LCTs work. We construct a theoretical framework for designing labels based on (1) mental accounting, (2) lying aversion, (3) social norms, and (4) informational updates. Additionally, we put forward a randomized controlled trial (RCT) with four treatments according to these four theories in order to test which of these mechanisms have a significant effect on educational outcomes. While at this stage we cannot analyze results, we present our identification strategy and address some general issues and specific concerns regarding our experiment.

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Developing a Fairtrade Cocoa Sector in Nicaragua – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.

Photo credit: X. Scheldemann/Bioversity International
Photo credit: X. Scheldemann/Bioversity International

 Developing a Fairtrade Cocoa Sector in Nicaragua

Authors:

Giuliano J. Bandeen, Armen Khederlarian, Edmund Moshammer, Tommaso Operto, and Christoph Sponsel

Master Program:

International Trade, Finance and Development

Project Summary:

This is a policy proposal directed at the Government of Nicaragua. Nicaragua’s cocoa industry achieves a very low export unit value in comparison to global competitors in West Africa, South East Asia and Latin America. Given the promising prospective growth of the cocoa world market and the higher price paid for Fairtrade cocoa, the aim of the present policy memo is to examine whether Nicaragua could benefit if farmers were to switch to certified cocoa production standards. We show that under perfect market conditions this would indeed result in higher profits. However we also identify that there are currently several obstacles preventing farmers from switching. These obstacles include minimum quantity requirements of international buyers, price information asymmetries, a low negotiation power in the supply chain, and financial and technological constraints. We propose three policies targeting these obstacles which consist of a provision of storage facilities, a credit guarantee and an educational campaign. All of them rely on group forming of farmers with mutual liability agreements.

Comparing the net present value profit of selling conventional cocoa with an investment in our proposed policies, which allows selling Fairtrade cocoa, we calculate an internal rate of return. This rate varies between both potential clients, European chocolate manufacturers Ritter Sport and Zotter and is 129% and 20% respectively. This hence encourages our policy proposal. By comparing different scenarios of government intervention we find that the highest average welfare gain results from an intermediate level of intervention. In this scenario the government would pay for warehouse construction and an educational campaign, and would provide a credit line guarantee to avoid that cooperatives pay a high risk premium. Additionally we include several robustness checks where we allow for changes in investment horizon, fertilizer effectiveness, government interest rate, farmers’ risk premium and most importantly international cocoa prices. We show that implementing our policies promises high potential gains from switching for individual farmers and the entire economy under a wide range of scenarios.

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Interest rates after the credit crunch crisis: single versus multiple curve approach

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Interest rates after the credit crunch crisis: single versus multiple curve approach

Authors:

Oleksandr Dmytriiev, Yining Geng, and Cem Sinan Ozturk

Master Program:

Finance

Paper Abstract:

For interest rate derivative pricing, 2007 crisis was a turning point. Prior to the crisis, market interest rates showed consistencies that allowed the use of a single curve for both forwarding and discounting. After the crisis, the inconsistencies in the market interest rates led to development of a new method of the pricing interest rate derivatives, which is called Multi-Curve Framework. We studied the influence of the multi-curve approach on the interest rate derivative pricing. We calculated and compared the price of a simple swap in both multi-curve and single curve approaches. We suggested the generalization of the lattice approach, which is usually used to approximate the short interest rate models, for milti-curve framework. This is a novel result, which have not been developed in the scientific literature. As an example, we showed how to use the Black-Derman-Toy interest rate model on binomial lattice in multi-curve framework and calculated the price of the 2-8 period swaption in a single (LIBOR) curve and two-curve (OIS+LIBOR) approaches. This technique can be used for pricing any interest rate instrument.

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Hate is in the air: The effect of Czech and German radio on elections in pre-war Czechoslovakia

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Hate is in the air: The effect of Czech and German radio on elections in pre-war Czechoslovakia

Authors:

Bruno Baránek, Kryštof Krotil, and Samuel Škoda

Master Program:

Economics

Paper Abstract:

In this paper we assess the role of radio broadcasting in parliamentary elections of 1935 in Czechoslovakia. In our main specification, we regress the vote shares of multiple parties on the signal strengths of Czech and German radio while controlling for demographic and socio-economic characteristics. In particular, we focus on SdP – the ethnic German party with separatist tendencies, which was supported by Hitler’s NSDAP. We find that propaganda contained in the German broadcasts had a polarizing effect on the Czechoslovak political spectrum as it increased the number of votes for SdP and also for Czech communists and nationalists. This increase was compensated by the fall in votes for centrist democratic parties. On the other hand, the Czech radio, which was politically neutral, tended to neutralize the effect of the German radio.

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ECB Outright Monetary Transactions – Master Projects 2014

Editor’s note: This is the first post in a series that will showcase Barcelona GSE master projects by students in the Class of 2014. The master project is a required component of every master program.


 An Evaluation of the ECB’s Outright Monetary Transactions

Authors:

Madalen Castells, Alexandros Georgakopoulos, Edgar Giménez Trill, Jesse Lastunen, and Karolos Lymperakis-Pitas

Master Program:

International Trade, Finance and Development

Project Summary:

Since early 2009, the euro crisis has influenced most countries of the European Monetary Union (EMU), contributing to persistent low economic growth, high unemployment, steeply rising public financial costs and several problems with the region’s banks. As a result, a wide variety of policy measures have been adopted to address these problems. The central actors have included not only individual member states but also the European Central Bank (ECB), European Commission (EC) and International Monetary Fund (IMF).

While the success of many of the policies in recent years have been contested by different parties, the ECB’s Outright Monetary Transactions (OMT) program initiated in the summer of 2012 has been widely welcomed. Our paper attempts to understand and investigate OMT’s claimed success, motivated especially by the recent efforts to discontinue the policy. The implications with regard to the continuation of the program are potentially enormous, both economically and in terms of the social welfare of European citizens. Altogether, our motivation stems from the catastrophic consequences of the crisis, mixed success of most mid-crisis policy responses, and the uncertain destiny of OMT – perhaps one of the most crucial policy initiatives adopted in Europe after 2008.

Our research questions build on the uncertain contribution of OMT to the declining bond spreads in the peripheral euro nations. We ask whether OMT was responsible for the decline in their spreads after mid-2012, why this might be the case, and whether the policy can be successful in the future. The underlying policy question is simply whether European legislators should resume OMT. Our study is based on two steps: we first examine the ”theory and practice” of the program, also conducting a compact literature survey on other research studying its effectiveness, and then turn to quantitative methods. Our quantitative analysis consists of a regression study and the application of the synthetic control method to examine OMT’s effect on declining bond spreads in the periphery. In the process, we also analyze the nature and dynamics of the post-Lehman hikes in peripheral bond spreads.

Our results suggest, firstly, that the post-Lehman takeoff in sovereign bond spreads in the periphery was largely induced by fears of sovereign default that were separated from ”normal” associations between spreads and economic fundamentals. In particular, the synthetic control countries we construct based on spread determinants in the peripheral countries do not experience any such increases in their spreads. Our regression analysis also indicates that the mid-crisis evolution of peripheral spreads differs strikingly from the values predicted based on the stable period between 2000 and 2008. Furthermore, countries outside the periphery do not suffer from the pronounced association between spreads and fundamentals.

Secondly we find that OMT was very likely to be responsible for the rapid decline in peripheral spreads after mid-2012. The synthetic control countries we construct are not significantly affected by OMT, and some actually experience slight upward trends in their spreads after the policy is announced. The method lends strong support to OMT’s role in the declines in peripheral spreads. Similarly, the regression analysis suggests that post-OMT trends in spreads approach the stable values predicted based on the pre-crisis period. In most peripheral countries, OMT also breaks up the upward trend predicted based on the period before OMT.

Our results broadly validate earlier studies by Krishnamurthy et. al (2013) and Altavilla et al. (2014) regarding OMT’s effect, and Arghyrou and Kontonikas (2011), De Grauwe and Yi (2012) and Di Cesare et al. (2012) regarding the panic-driven nature of the increased peripheral bond spreads during the crisis. Although we consider that further research regarding the suggested long-term costs of OMT is needed, we strongly believe that the benefits of the policy outweigh the hypothetical concerns, and OMT should therefore be resumed by European policymakers. In particular, OMT had the intended effect of reducing bond spreads and stabilizing monetary policy in the European Monetary Union, and there is no indication that actually implementing bond purchases through the program will be necessary.

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