Researchers in the department of economics study reasoned choice in the context of scarce resources and competing interests—and many became recipients of some of those scarce resources when the Social Sciences and Humanities Research Council of Canada announced its latest grants. Here are some of the funded research projects.
Capital investments and research and development enhance the growth potential and labour productivity of a nation’s economy, so understanding the effects of product market rivalry on capital investment and cooperative R&D can enhance Canada’s competitiveness and quality of life. Zhiqi Chen is investigating how the intensity of competition affects firms’ investment behaviour and implications for economic growth, and firms’ incentives to enter into, and the consequences of, cooperative R&D arrangements. The improved understanding of firms’ incentives to invest and to innovate will have policy implications; in turn, policies can be developed to promote investments and innovations in Canada and to improve the competitiveness of the Canadian economy.
Pat Coe is examining wage rigidity in Canada between 1900 and 1950 to look at two questions in economic history and macroeconomics: during the Great Depression, what were the implications of the adjustments to nominal wages (the money paid rather than its purchasing power) on real wages, and is there a floor under the current level of nominal wages such that they don’t adjust downwards? Since much of the current evidence supporting the presence of downward nominal wage rigidity comes from periods of positive inflation, Coe will use data from a period that saw two sharp deflations to make an informative comparison with the existing evidence. The research will also provide an interesting comparison with the U.S., as Canada saw similar output declines and deflation but did not experience programs to relieve poverty and reform the financial system comparable to the U.S.’s New Deal.
Two central issues in modern finance will be examined by Huntley Schaller. With one grant, he’ll test the standard account of the role of the stock market and the misallocation account, which make different predictions about the discount rates used by firms in making their investment decisions. With the other, he’ll look at the interaction between financial markets and the economy. Given that asset misvaluation can have economic consequences, Schaller will examine whether a capital gains tax reduces “bubbles”, a situation in which asset prices are different than the fundamental value of the asset.
Many industries are characterized by a turbulent situation where firms are constantly entering and exiting an industry. Marcel Voia and collaborators are investigating the determinants of Canadian firm and industry dynamics, such as growth, survival, entry and exit. The study has implications for how Canadian policymakers might foster the growth and success of firms as the aggregate fluctuations of the Canadian economy are generated by the movements of many individual businesses.
In a second project, Voia is one of six researchers and a graduate student partnering with Statistics Canada to develop and make ready for analysis a longitudinal data source that combines information on employment, product demand and firm financial position. The only dataset in the world that extends these observations to both private and public, small and large, and manufacturing and service firms, the new LEAP-T2 database will lay the foundation for much original research on the survival of heterogeneous firms, firms’ financial structure and how firms react to policy changes.
Hashmat Khan is tackling macroeconomic topics related to business cycles under investment adjustments costs, technical change and globalization. Costs to adjusting investment plans have been assumed in theoretical models of business cycles, but there is little evidence to support that assumption. Khan will examine whether such costs help account for the prolonged effects of interest rate changes on business investment. He will also examine the quantitative effects of technical change on sectoral employment and output fluctuations in small open economies like Canada and the U.K. His findings will inform the debate on whether technical change leads to less or more employment in the short run. Finally, Khan will tackle the question of how increased competition among firms due to globalization makes domestic inflation less sensitive to fluctuations in economic activity. Globalization has been singled out as a key reason why many industrialized countries experienced a period of low inflation since the 1990s, and Khan aims to clarify the precise channels responsible for this outcome.
Lynda Khalaf, a professor in the department of economics, received a 2008 Carleton University Research Achievement Award for her research on the formulation, fitting and checking of financial models for the analysis of market integration. Using specific examples of econometric challenges, Khalaf will design and apply new statistical tools that will account for technical complexities. “At a time when financial stability is a key determinant of economic growth, the project aims to address empirical challenges that arise when increasingly complex financial models—driven by technological advances and the need to find more policy-relevant approaches—are applied to current methods of analyzing data.”
Next …