International Journal of Sustainable Economy (8 papers in press)
Effects of Macroeconomic Shocks on Public Debt in Nigeria: A Non-Linear Structural VAR Approach
by Muhammed Adekunle Yusuf, Toluwanimi Segun
Abstract: This study employs a public debt identity in a nonlinear structural VAR to appropriately track Nigeria public debts evolution. It considers effects of shocks to fiscal policy, inflation, output growth, and debt interest rate on the public debt path. We find that shocks to primary deficits and debt interest rate significantly raise the debt-to-GDP ratio, while output growth and inflation significantly reduce it. All shocks to debt are persistent, but their gradual decay suggests a stable, non-explosive debt path. Future debt projections indicate a sustained increase, averaging 23.3% of GDP between 2017 and 2020. Beyond 2020 debt growth begins to slow, eventually stabilizing at 28% - the steady state. Given the evidence of persistent effects of macroeconomic shocks on the debt ratio, we recommend combining a macroprudential framework and effective fiscal rules to mitigate exposure to fiscal shocks and promote a low debt profile.
Keywords: Public Debt; Fiscal Policy; Nonlinear Structural VAR; Debt Stability; Macroeconomic Shocks; Debt Sustainability.
Do real exchange rates in small Central and Eastern European economies obey purchasing power parity?
by Jani Beko, Alenka Kavkler
Abstract: This study contributes to the Purchasing Power Parity (PPP) literature in two ways. First, in order to circumvent the pitfalls of linear specifications in testing the behaviour of exchange rates, we apply a nonlinear unit root test based on the exponential smooth transition autoregressive model. Second, we test the PPP theory for a class of ten Central Eastern European economies comprising the period from January 2001 to December 2016. The results of unit root tests imply that the null hypothesis of nonstationarity of real exchange rates cannot be rejected for the whole period. Our fragmentary evidence on PPP is reduced to individual subsamples for a small number of Central Eastern European countries. The weak evidence on PPP, found in this study, suggests that the process of real integration of Central and Eastern European economies and the subsequent price convergence among European markets remains incomplete.
Keywords: purchasing power parity; real exchange rates; nonlinear rolling window unit root test.
Determinants of the Current Account Balance in Lesotho: A Structural Vector Autoregression Analysis
by Moeti Damane, Maselone Thite
Abstract: This paper investigates the macroeconomic factors that affect the current account balance in Lesotho and the interrelations among these factors using the structural vector autoregression (SVAR) framework and annual time series data from 1980 to 2015. The main results of the study show that variations in the current account are mostly influenced by own shocks and shocks in the trade balance. Policy recommendations are for the Government of Lesotho to encourage and support a deliberate export oriented approach to trade anchored on product diversification and value addition. This will foster competitiveness of Lesotho's exports in the international markets and yield a favourable current account position.
Keywords: Current account balance; SVAR; IRF; FEVD; Historical decomposition; Lesotho.
Do Infrastructure Development and Urbanization Lead to Rural-Urban Income Inequality? Evidence from some Asian Countries
by Amritkant Mishra, Amba Agarwal
Abstract: This empirical analysis aspires to unearth the nexus between infrastructure development, urbanization, and rural-urban income inequality in Asian perspective by reasonably using panel data of nine Asian countries for the specific period of 1991 to 2016. The precise result of panel dynamic OLS (Ordinary Least Squares) proffers that some proxies of infrastructure development like electric power, transport as well as telecommunication lead to a potential reduction in rural-urban income disparity while on the other hand, the water and sanitation access escalate the same. The key variables such as urbanization and inflation lead to inequality in these specific countries. The ultimate outcome of causality unearths the evidence of unidirectional causality running from inflation to rural-urban income imparity, and bidirectional from urbanization to rural-urban income inequality. Additionally, it also reveals that there is no causality running from any of the latent variables of infrastructure development towards the inequality or vice-versa.
Keywords: Infrastructure; urbanization; income inequality; panel dynamic OLS; causality.
Political Risk Modelling and Measurement From Stochastic Volatility Models
by Sovan Mitra
Abstract: The past decades have seen an unprecedented global rise in unforeseen political events, which have led to social unrest, economic declines and a renewed interest in political risk modelling. Whilst continuous time financial models have been developed for a range of risk factors, there is currently no method for political risk modeling. In this paper we propose a new model for political risk modeling; to the best of our knowledge this is the first model for continuous time stochastic volatility models. We derive a method for obtaining political risk states from a continuous time stochastic volatility model, and our model enables us to derive the evolution of political risk states over time. We derive two important properties of our political risk model: we find a solution for the characteristic function and prove weak convergence. Next, we derive a method for calculating standard risk measures for our political risk, namely Value at Risk, variance, moments, as well as upside and downside risk measurement. We also provide numerical experiments to illustrate our results.
Keywords: stochastic volatility; political risk; social risk; risk measurement; sustainability.
Revisiting Current Account Sustainability in Turkey: Analysis via Fourier Techniques
by Onder Ozgur, Muhammed Sehid Gorus, Erdal Tanas Karagol
Abstract: The primary purpose of this study is to examine the current account sustainability in Turkey using quarterly data covering the period between 1992:1 and 2017:1. To this end, the study applies two recently developed stationarity and cointegration tests based on intertemporal budget constraint. Both avenues analyse the mean-reverting behaviour of the current account balance using Fourier unit root and cointegration analysis which can scrutinize an unknown number of structural breaks, capture sharp breaks, and approximates them as smooth gradual processes. Empirical findings show that Fourier KPSS unit root test rejects the nonstationarity of current account balance to GDP ratio implying that shocks to current account balance are not persistent. Besides, empirical findings also exhibit weak form sustainability in the short-run whereas its form is strong in the long-run.
Keywords: Cointegration analysis; current account sustainability; Fourier techniques; Turkey; unit root analysis.
Pension funds and stock market development: Evidence from OECD countries
by YILMAZ BAYAR, Metin Kilic
Abstract: Pension funds have experienced considerable expansions in the value of their asset holdings after gradual transition from single tier pension system to multi-tiered pension systems in the world, because public pensions became financially unsustainable. Increases in the value of financial asset holdings of the pension funds enhanced their efficiency in capital markets. This paper investigates the effect of pension funds as an institutional investor on stock market development in 18 OECD member states for the period 2001-2015 with panel data analysis. The findings suggested that pension funds affected stock market development positively in the long run.
Keywords: pension funds; stock markets; panel data analysis.
NATURAL CAPITAL AND ECONOMIC GROWTH: A PANEL STUDY APPROACH
by Sa-ad Iddrisu
Abstract: This paper employs panel data study of 63 developing countries to examine the relationship between natural capital and economic growth. Natural capital per capita and GDP per worker are used as proxies for natural capital and economic growth respectively. Using three regression models, the results suggest there is a statistically significant positive relationship between natural capital and economic growth, and a long-run relationship (co-integration) between the variables. Therefore treating natural capital as a substitute rather than as a complement in the production process, undermines the important role natural capital plays for economic growth and development. Hence national level governments should pay important attention to their natural capital.
Keywords: Developing countries; Economic growth; GDP; Natural capital; Sustainability.