School of Economics and Finance · Te Kura Ohaoha Pūtea: Working Paper Series
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The School of Economics and Finance has an active research environment with very strong links to business, government and financial institutions in Wellington and wider New Zealand.
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Item Open Access Manual of VIKAASA: An application capable of computing and graphing viability kernels for simple viability problems(Te Herenga Waka—Victoria University of Wellington, 2011) Krawczyk, Jacek B.This manual introduces and provides usage details for an application we have developed called VIKAASA, as well as the library of functions underlying it. VIKAASA runs in GNU Octave or MATLAB®, using the numerical computing and graphing capabilities of those packages to approximate, visualise and test viability kernels for viability problems involving a differential inclusion of two or more dynamic variables, a rectangular constraint set and a single scalar control.Item Open Access A boosted HP filter for business cycle analysis: evidence from New Zealand’s small open economy(Te Herenga Waka—Victoria University of Wellington, 2022) Hall, Viv B; Thomson, PeterWe investigate whether the boosted HP filter (bHP) proposed by Phillips and Shi (2021) might be preferred for New Zealand trend and growth cycle analysis, relative to using the standard HP filter (HP1600). We do this for a representative range of quarterly macroeconomic time series typically used in small theoretical and empirical macroeconomic models, and address the following questions. Tradition dictates that business cycle periodicities lie between 6 and 32 quarters (e.g. Baxter and King, 1999) (BK). In the context of more recent business cycle durations, should periodicities up to 40 quarters or more now be considered? Phillips and Shi (2021) propose two stopping rules for selecting a bHP trend. Does it matter which is applied? We propose other trend selection criteria based on the cut-off frequency and sharpness of the trend filter. Are stylised business cycle facts from bHP filtering materially different to those produced from HP1600? In particular, does bHP filtering lead to New Zealand growth cycles which are noticeably different from those associated with HP1600 or BK filtering? HP1600 is commonly used as an omnibus filter across all key macroeconomic variables. Does the greater flexibility of bHP filtering provide better alternatives? We conclude that the 6 to 32 quarter business cycle periodicity is sufficient to reflect New Zealand growth cycles and determine stylised business cycle facts and, for our representative 13-variable macroeconomic data set, using a bHP filter (2HP1600) as an omnibus filter is preferable to using the HP1600 filter.Item Open Access Estimating bias of technical progress with a small dataset(Te Herenga Waka—Victoria University of Wellington, 2017) Khaled, Mohammed SEconomic historians frequently face the challenge of estimation and inference when only a small sample of the relevant data is available. We illustrate solutions to the challenges through a case study analysis of the Uselding and Juba (1973) data. They have only seven observations available to estimate of the bias of technical progress in United States manufacturing in the nineteenth century. They are able to offer estimates of the bias only by assuming that production technology is not Cobb-Douglas, technical progress is non-neutral and that elasticity of substitution between labour and capital is less than 0.9. These assumptions could not be tested owing to the paucity of the required historical data. This case study illustrates the use of both additional theoretical information and appropriate statistical techniques to alleviate problems of estimation and inference with small samples.Item Open Access Income and Extratropical Cyclones in New Zealand(Te Herenga Waka—Victoria University of Wellington, 2021) Apurba, Roy; Ilan, Noy; Harold E., CuffeAotearoa New Zealand is highly vulnerable to extratropical cyclones because of its unique location in the midlatitude south pacific region. This study empirically investigates the impact of the extratropical cyclones on individual income, combining the data from Statistics New Zealand’s Integrated Data Infrastructure (IDI) and the weather-related insurance claims data from the Earthquake Commission. Our sample covers the administrative longitudinal panel data of all the IRD registered individual taxpayers between 2010 and 2019. We estimate a set of panel regressions with individual and time-fixed effects to assess the impact of extratropical cyclones on the affected individual’s annual income. We find that income from salaries and wages is negatively affected by the cyclones across various specifications. Extratropical cyclones also negatively affect the total individual income from wages and salaries, benefit and compensation, and sole tradership. However, we have limited success in identifying individual characteristics influencing the affected people's income level in our study.Item Open Access Economic consequences of pre-COVID-19 epidemics: A literature review(Te Herenga Waka—Victoria University of Wellington, 2021) Noy, Ilan; Uher, TomášIn 2020, we all realized we should know more about the economic impacts of pandemics. Here, we summarize the contemporary research on the economic consequences of past epidemics and pandemics with a primary focus on highly infectious pathogens such as influenza and Ebola (as distinct from less infectious, but maybe ultimately more lethal or damaging diseases like AIDS). The paper draws exclusively from scientific research relating to events preceding the current COVID-19 crisis, though it does describe the many new studies completed recently in connection to the renewed scientific interest in past events. We do not focus on the on-going COVID-19 global crisis, since we believe it is premature to attempt to provide a thorough summary of our state of knowledge about this event. The economic consequences of epidemics are categorized into macroeconomic, microeconomic, socio-economic, sectoral and long-term impacts. Impact pathways and impact determinants relating to these effects are also described. This body of research suggests that epidemics have a broad range of inter-connected economic consequences through both supply and demand-side channels, with the behavioral response of individuals, communities, societies, and governments being one of the most important determinants of these impact (rather than disease prevalence and progression itself). Furthermore, the economic effects of epidemics can be long-lasting.Item Open Access Motherhood Employment Penalty and Gender Wage Gap Across Countries: 1990–2010(Te Herenga Waka—Victoria University of Wellington, 2021) Chu, Yu-Wei Luke; Cuffe, Harold E; Doan, NguyenIn this paper, we employ twin birth as an instrument to estimate the effects of fertility on female employment using 72 censuses from 37 countries in 1990–2010. Next, we document a strong linear association between gender wage gap and the estimated motherhood employment penalty both across countries and within countries. Reductions in the gender wage gap are associated with decreases in motherhood employment penalty. Our estimates suggest that a reduction of one percentage-point in the gender wage gap is associated with a decrease of 0.4 percentage-points in the estimated motherhood employment penalty. Our finding supports the notion that job prospects and gender equality in the labor market play a direct role in a mother’s labor supply response to childbirth.Item Restricted Influences on Sponsor Voluntary Contributions to Defined Benefit Pension Plans in the US(Te Herenga Waka—Victoria University of Wellington, 2020) Tabassum, Tanjila; Ulm, Eric R.Many financially insolvent private pension funds have put Defined Benefit (DB) plans under a microscope over the last few decades. Despite government imposed rules to ensure minimum required funding, sponsors might choose to underfund the plans for short term benefits. This paper investigates the influences— plan and firm specific characteristics, and enforcement of full funding limits— on sponsor contributions (1991-2016) to DB pension plans in the US private sector. We apply Heckman model to the voluntary contributions to eliminate sample selection bias resulting from decisions to contribute only the legally required minimum. Allowing tax deductible contributions up to a full funding limitation has a positive marginal effect on voluntary contributions. Sponsors are less likely to contribute when the S&P stock return increases, but more likely when the 10-year treasury rate does. A lower pension plan funding ratio than required increases the likelihood of contribution.Item Open Access Effects of Sea Surface Temperature on Tuna Catch: Evidence from Countries in the Eastern Pacific Ocean(Te Herenga Waka—Victoria University of Wellington, 2020) Mediodia, Hanny John PTuna move towards higher latitudes or deeper waters in response to ocean warming. The spatial redistribution of tuna will affect countries in the Eastern Pacific Ocean (EPO). We apply a production function approach to establish the relationship between sea surface temperature (SST) and yellowfin and skipjack tuna catch of purse seines. We use data for 1° latitude/longitude grids within the exclusive economic zones of countries in the EPO. Catch of yellowfin and skipjack tuna increases with SST in all countries with high values recorded in the eastern coastal borders. The biggest increase in revenue from yellowfin and skipjack tuna as result on 1°C increase in SST is for Mexico while the smallest is for Kiribati. However, if we adjust these values by coastal population, highest values are for Kiribati and French Polynesia. The higher tuna catch due to ocean warming translates to higher government revenue from tuna fishing licenses and more jobs for tuna fishers and those in the tuna processing industry in the state. However, it is possible that the recorded positive effects on tuna catch will be offset by the reduction on catch of other species and may even result in negative net impact overall. We highlight the importance of conducting research on SST that must be species-,gear-,and location¬ specific to fully account for the impact of ocean warming.Item Open Access Over-valued or over-looked? A theoretical and empirical investigation of agricultural land values against profitability in Aotearoa New Zealand(Te Herenga Waka—Victoria University of Wellington, 2020) Allan, Corey; Kerr, Suzi; Owen, SallyWe investigate whether New Zealand’s rural land is over-valued when compared to its agricultural profitability. First, we develop a theoretical time-series framework showing that a positive profit shock in one agricultural land use should raise the value of land in that use, inducing land-use change. On average, the present value of expected future profits from national rural land should have a one-to-one relationship with the value of agricultural land when both are weighted by respective land use share. Second, we develop an empirical application using a new nationally consistent dataset of rural property sales and average agricultural profits for the period 1980-2012. Using a novel two-stage least squares approach to account for endogeneity, we find a positive relationship between the present value of expected agricultural profitability and rural land values. Furthermore, we cannot reject the hypothesis that this relationship is one-for-one, indicating that New Zealand's rural land does not appear to be over-valued. Our time-series methodology provides a roadmap for studies in other jurisdictions.Item Open Access Does Hamilton’s OLS regression provide a “better alternative” to the Hodrick-Prescott filter? A New Zealand Business Cycle Perspective(Te Herenga Waka—Victoria University of Wellington, 2020) Hall, Viv B; Thomson, PeterWithin a New Zealand business cycle context, we assess whether Hamilton’s (H84) OLS regression methodology produces stylised business cycle facts which are materially different from HP1600 measures, and whether using the H84 predictor and other forecast extensions improves the HP filter’s properties at the ends of series. In general, H84 produces exaggerated volatilities and less credible trend movements during key economic periods so there is no material advantage in using H84 de-trending over HP1600. At the ends, the forecast-extended HP filter almost always performs better than the HP filter with no extension which performs slightly better than H84 forecast extension.Item Restricted Do Struggling Students Benefit From Continued Student Loan Access? Evidence From University and Beyond(Te Herenga Waka—Victoria University of Wellington, 2020) Chu, Yu-Wei Luke; Cuffe, Harold EWe estimate the effects of access to student loans on university students’ educational attainment and labor market returns in New Zealand. We exploit the introduction of a policy mandating a minimum pass rate of 50% for student loan renewals using a fuzzy regression discontinuity design and linked administrative records. For students around the threshold, retaining access to student loans increases their likelihood of re-enrollment and bachelor’s degree completion rate. The effects are observed primarily among female students due to a substantial gender difference in compliance with the pass rate criterion. We find that retaining student loan access leads to large labor market returns for struggling female students. The additional student loan debt from further borrowing declines quickly due to faster repayment.Item Open Access Analytic Valuation of GMDB Options with Utility Based Asset Allocation(Te Herenga Waka—Victoria University of Wellington, 2020) Ulm, EricA number of analytic solutions have been found for Variable Annuity Guaranteed Minimum Death Benefit (GMDB) option values under a variety of mortality laws. To date, the solutions are for Risk-Neutral valuation only. Where policyholder decisions are allowed, it is assumed that they act to maximize the risk-neutral value of the GMDB. We examine situations where the asset allocation decisions are made to maximize expected utility rather than option value. We find analytic solutions for both return of premium and ratchet options at small values of bequest motive for a number of mortality laws.Item Open Access Changes in New Zealand’s Business Insolvency Rates after the GFC(Te Herenga Waka—Victoria University of Wellington, 2019) Hall, Viv; McDermott, JohnWe examine the question of whether the rate of business insolvencies in New Zealand is related to overall macroeconomic conditions. In particular, our interest is in whether the rate of business insolvencies changed in the wake of the Global Financial Crisis (GFC). We find that there was a large increase in insolvencies in New Zealand following the onset of the GFC in 2008. We also find that the timing of the change did not occur uniformly over the country but occurred at different times in four key regional centres. Sharply rising relative costs were the most important macroeconomic factor influencing corporate insolvencies in New Zealand, Auckland, Waikato and Wellington, but have been immaterial in determining New Zealand’s total personal insolvencies. It is employment growth and house price inflation that have been significant in explaining total personal insolvencies.Item Open Access The Save More Tomorrow™ plan can boost retirement savings in New Zealand(Te Herenga Waka—Victoria University of Wellington, 2019) Feld, Jan; Noy, ShakkedSave More Tomorrow is a retirement savings plan developed by Richard Thaler and Shlomo Benartzi that incorporates insights from Behavioural Economics. In this paper, we describe how the plan works and discuss how it can be used to increase retirement savings in New Zealand.Item Open Access Students are Almost as Effective as Professors in University Teaching(Te Herenga Waka—Victoria University of Wellington, 2019) Feld, Jan; Salamanca, Nicolas; Zolitz, UlfIn a previous paper, we have shown that academic rank is largely unrelated to tutorial teaching effectiveness. In this paper, we further explore the effectiveness of the lowest-ranked instructors: students. We confirm that students are almost as effective as senior instructors, and we produce results informative on the effects of expanding the use of student instructors. We conclude that hiring moderately more student instructors would not harm students, but exclusively using them will likely negatively affect student utcomes. Given how inexpensive student instructors are, however, such a policy might still be worth it.Item Open Access Droughts and farms’ financial performance in New Zealand: A micro farm level study(Te Herenga Waka—Victoria University of Wellington, 2019) Pourzand, Farnaz; Noy, Ilan; Sağlam, YiğitWe quantify the impacts of droughts in New Zealand on the profitability of dairy, and sheep and beef farms. Using a comprehensive administrative database of all businesses in New Zealand, we investigate the impact of droughts on farm revenue, profits, return on capital, business equity, debt to income ratio, and interest coverage ratio. Over the period we examine (2007-2016) about half of the districts experienced severe droughts, and almost 85% of districts were affected by more moderate droughts at least once. For dairy farms, there is a strong negative relationship between the occurrence of droughts two years earlier and farms’ revenue, profit and consequently their return on capital. More surprisingly, we found that current (same fiscal year) drought events have positive impacts on dairy farms’ revenue and profit; this effect is most likely attributable to drought-induced increases in the price of milk solids (New Zealand is the market maker in this global market). In general, dairy farmers ‘benefit’ more from drought events when compared to sheep/beef farms, whereas the latter sector has less impact on global prices. These findings are useful for shaping climate-change adaptation as there is a clear variation in the future climate-change projections of drought intensities and frequencies for different regions in New Zealand.Item Open Access Who cares? Future sea-level-rise and house prices(Te Herenga Waka—Victoria University of Wellington, 2019) Filippova, Olga; Nguyen, Cuong; Noy, Ilan; Rehm, MichaelGlobally, the single-most observable, predictable, and certain impact of climate change is sea level rise. Using a case study from the Kapiti Coast District in New Zealand, we pose a simple question: Do people factor in the warnings provided by scientists and governments about the risk of sea-level rise when making their investment decisions? We examine the single most important financial decision that most people make – purchasing a home, to see whether prices of coastal property change when more/less information becomes available about property-specific consequences of future sea level rise. The Kapiti Coast District Council published detailed projected erosion risk maps for the district’s coastline in 2012 and was forced to remove them by the courts in 2014. About 1,800 properties were affected. We estimate the impact of this information on home prices using data from all real estate transactions in the district with a difference-in-differences framework embedded in a hedonic pricing model. We find that the posting of this information had a very small and statistically insignificant impact on house prices, suggesting people do not care much about the long-term risks of sea-level rise as they do not incorporate these risks in their investment decisions.Item Open Access Recent Changes in the Nature of Distribution Dynamics of US County Incomes(Te Herenga Waka—Victoria University of Wellington, 2020) Park, Seonyoung; Shin, DonggyunAnalysis of US county per capita incomes from 1970 to 2017 reveals the emergence of bipolarizing distribution dynamics from the early 1990s. This bipolarization process is characterized by the vanishing middle income counties mostly joining the high end of the distribution of county incomes. Cross-county differences in education and industry composition contribute to the bipolarization, but government transfers effectively reverse it. The results for these recent decades weakly support the two-club convergence hypothesis. A simulation of various nonlinear income growth dynamics and corresponding distributional dynamics reveals certain conditions on growth patterns for income bipolarization.Item Open Access Inflation and wage rigidity/flexibility in the short run(Te Herenga Waka—Victoria University of Wellington, 2019) Park, Seonyoung; Shin, DonggyunA recent literature uses accurate wage data from payroll records and provides compelling evidence against the conventional belief that nominal wages are downward sticky. This paper provides a unique contribution to this literature by conducting a formal analysis of the role of inflation in cyclical wage rigidity/flexibility. Analysis of payroll-based wage data from the Korean labor market for the period 1971 to 2014 finds that the degree of downward nominal wage flexibility is countercyclical, and the countercyclicality becomes stronger during a deflationary, relative to inflationary, recession. This serves as a counter-example to the conventional theory of cyclical wage rigidity.Item Open Access Welfare consequences of rising wage risk in the United States: Self-selection into risky jobs and family labor supply adjustments(Te Herenga Waka—Victoria University of Wellington, 2020) Park, Seonyoung; Shin, DonggyunWages in the United States have become more volatile since the early 1970s. This paper quantitatively demonstrates that the welfare cost caused by this change is substantially overstated when heterogeneity in individual risk preferences and workers'risk choices are neglected. Family labor supply adjustments reduce the welfare cost and do so most effectively when borrowing and saving behavior is allowed. It is also found that wives increase their labor supply signi ficantly in response to increases in the variance of husbands' permanent wage shocks, and this `added-worker' effect is mostly accounted for by wives' labor supply adjustments on the extensive margin.
