New ERSA working papers

ERSA has released new working papers - and some are from UJ academics!

• Revisiting independence and stochastic dominance for compound lotteries Alexander Zimper

We establish mathematical equivalence between independence of irrelevant alternatives and monotonicity with respect to first order stochastic dominance. This formal equivalence result between the two principles is obtained under two key conditions. Firstly, for all m E N, each principle is de.ned on the domain of compound lotteries with compoundness level m. Secondly, the standard concept of reduction of compound lotteries applies.

• Modeling the Rand-Dollar Future Spot Rates: The Kalman Filter Approach Lumengo Bonga-Bonga

A number of studies have contended that it is challenging to explain exchange rate movement with macroeconomic fundamentals. A naive model such as a random walk forecasts exchange rate movements more reliably than existing structural models. This paper confirms that it is possible to improve the forecast of structural exchange rate models, by explicitly accounting for parameter instability when estimating these models. Making use of the Kalman filter as an estimation method that accounts for time-varying coefficients in the presence of parameter instability, this paper indicates that forward exchange rates with different maturities predict the future spot exchange rates more reliably than the random walk model for the Rand exchange rates.

• Costly Tax Enforcement and Financial Repression Rangan Gupta and Emmanuel Ziramba

Using an overlapping generations production-economy model characterised by financial repression, purposeful government expenditures and tax collection costs, we analyse whether financial repression can be explained by the cost of raising taxes. We show that with public expenditures affecting utility of the agents, modest costs of tax collection tend to result in financial repression being pursued as an optimal policy by the consolidated government. However, when public expenditures are purposeless, the above result only holds for relatively higher costs of tax collection. But, more importantly, costs of tax collection cannot produce a monotonic increase in the reserve requirements. Of critical importance in this regard, are the weights the consumer assigns to the public good in the utility function and the size of the government.

• Will availing credit incentives to Zimbabwean farmers trigger a maize output response? Sophia Musuna and Edwin Muchapondwa

This paper evaluates the impact of credit availability on communal and commercial sector maize output in Zimbabwe. This is important given the increased use of concessionary credit for agriculture as a policy strategy to increase agricultural output and food security, in response to the disruption caused by controversial land reform. The results show that communal sector maize output does not respond to credit availability. Neither does it respond to area under cultivation. Rainfall is the single most important driver of communal agriculture. The commercial sector responds to credit incentives albeit with a very low elasticity. Therefore, credit availability is a rather impotent device for enhancing maize output and, generally, agricultural output in Zimbabwe. Since most of the newly resettled farmers typically operate like communal farmers, both the land reform programme and concessionary credit for agriculture will not be likely to increase agricultural output. An urgent review of the beneficiaries of the controversial land reform programme is needed to ensure that only profit maximizing farmers will have their landownership confirmed, while unproductive farmers are replaced, if the agricultural sector is to help revive the Zimbabwean economy. Thus, commercialisation - rather than communalisation - of the agricultural sector is the appropriate strategy to trigger an increased agricultural output response.