Student Research Conference: Academic Year 1993-1994

Ann Chalstrom did her honors research with Dr. Pamela Lowry on Inflation in the European Community: A Study Before and After German Unification.

ABSTRACT: This project focuses on the economic interaction among the member nations of the European Community (EC) by studying inflation rates in the EC before and after German unification, which occurred in 1990. The first hypothesis tested in this project sates that before 1991, the implementation in the EC of a fixed exchange rate system with a band along with a strong, stable German economy, led to inflation rate convergence by the EC member nations to German inflation rates. The second hypothesis tested in this study states that German unification, which has had a destabilizing effect on the German domestic economy, resulted in inflation rate divergence from Germany by EC member nations. The implementation of a fixed exchange rate system is the theory which explains convergence of inflation rates. The results, presented in descriptive graphs, statistical tests, and a regression model, show that inflation rate convergence by EC members to German inflation rates occurred before German unification, while after unification, EC members' inflation rates were no longer drawn to Germany's rates of inflation.

John DeHerrera did his honors research with Dr. Michael Seeborg on Investments in Human Capital and the Transition Out of Poverty for Youths.

ABSTRACT: Economic theory suggests that an important strategy in moving youths out of poverty is to increase their earnings potential by investing in their human capital. Of course, such strategies can follow several alternate courses. These include pursuing higher education, vocational training, and military enlistment, to name a few. This paper seeks to explore the effects of specific strategies of human capital investment on the movement of youths out of poverty using the human capital model to explain the effects of various economic influences. Hypotheses will be tested by employing the National Longitudinal Survey of Youth (NLSY). This database is particularly well-suited to the proposed research in that it surveyed a large sample of youths aged 14-17 in 1979. It then interviewed them every year thereafter through 1991. Hence it is possible to trace each youth's human capital decisions over this time period. A model will then be developed using logit equations to estimate the effects of various human capital investment decisions on the probability of moving out of poverty when controlling for a set of background variables. The model will allow for background factors to be altered to test the effects on many different hypothetical individuals. It is proposed that formal education is the most powerful predictor poverty status.

Paul Halley did his independent research with Dr. Robert Leekley on the McLean County JDC: An Evaluative Tool for Determining the Feasibility of Outsourcing Juvenile Detention.

ABSTRACT: The purpose of this research was to compose a systematic procedure, using cost-effectiveness analysis to determine the feasibility of expanding government services by constructing on-site juvenile detention facilities, as opposed to outsourcing juvenile detention to nearby counties. This research dissected and evaluated McLean County, Illinois officials' recent decision to build a juvenile detention center (JDC). By examining the local economic impact (i.e. property values, sales taxes and property taxes) of the JDC, this research focused on the costs associated with the McLean County Government, employees of the JDC, McLean County citizens, and juveniles. Results indicated that the decision to build a JDC was not cost-effective, as the long run costs associated with the outsourcing of juvenile detention were less than those associated with the construction of the JDC. Possible implications concerning the future use of this analysis for other counties to determine detention feasibility are discussed.

Lisa Kumazawa did her honors research with Dr. Michael Seeborg on Educational Attainment: The Effects of Socioeconomic Differences.

ABSTRACT: Education has important functions in contemporary American society. In economics, it is considered an investment in human capital which enhances the recipient's future productivity. The U.S. is a nation comprised of ethnically diverse peoples. Unfortunately, the level of educational attainment varies significantly across some of these groups. Past research in economics and sociology has attributed this disparity in achievement to income differentials and changing family structures. It is yet to be determined if cultural values play a major role in unequal opportunities available to these minority youth.

My research focuses on comparing four prominent population groups in the United States: Caucasians, African-Americans, Hispanics, and Asians; to determine is socioeconomic background and other intervening factors such as ability and educational aspirations take on culturally different meanings for each group. A sample of 5806 youth between the ages of fourteen and eighteen in 1979 are drawn from the National Longitudinal Survey of Youth. The statistical method of Ordinary Least Squares regression analysis is used to determine the extent that their educational attainment in 1990 has met their earlier aspirations. This step will involve direct comparisons of educational attainment and aspirations between and within these groups.

Franklin N. Nnebe did his honors research with Dr. Pamela Lowry on How Does Export Composition Affect Growth in Developing Countries?

ABSTRACT: Exports of developing countries are recognized as a source of valuable foreign exchange as well as an area of additional productive activity. A few developing countries have based a large part of their economy on export production and have accomplished rapid and sustained growth. This has caused wider support for the idea of trade as an integral part in development. Recently, the literature has examined whether, in addition to or aside from the large share of exports to GDP, the composition of exports was also a vital factor in distinguishing the superior growth performances of these few countries relative to that of the majority of developing countries. Available empirical studies have proxies for this factor by using countries classified as either "manufactured-oriented" or "primary-oriented." Their results have largely urged further investigation on this newer issue. The purpose of this study, then, is to seek more conclusive evidence on the importance of export composition for growth in developing countries. The model proposes that with all other factors constant, an increase in the manufactured share of production over time should strongly and positively encourage growth, as theorized in the literature. The countries selected are carefully chosen according to region, inward/outward trade bias, and export composition, in order to allow for a "balanced" sample. In addition, the export-based economies of southeast Asia are excluded from the sample due to their high share of exports in GDP. The relevant period for the study is 1970-1985.

Ossi Saarinen performed his honors research with Dr. Robert Leekley on An Empirical Study of Covered Interest Arbitrage Margins During the European Monetary Crisis.

ABSTRACT: Interest parity in international financial markets exists when the interest rate differential between two countries is exactly offset by the forward exchange premium/discount. If at any moment the interest parity condition is not satisfied, traders can execute covered interest arbitrage. Covered interest arbitrage entails a series of four transactions in the currency and securities markets which results in a practically riskless profit. Although traditional economic theory predicts that the opportunities will be wiped out as individuals take advantage of the situation, covered interest arbitrage margins (CIAMs) have been observed to exist over extended periods of time.

Previous research in the area has attempted to rectify the discrepancy by identifying factors outside the basic arbitrage equation which work to negate profit opportunities. The most dominant of such factors in the literature have been transaction costs, partly because they are quantifiable. Other factors, such as political/financial center risk, timing problems, and imperfect elasticities of demand and supply have been explored as well, but are more difficult to pin down empirically.

My research attempts to show that transaction costs alone are not enough to explain away CIAMs. Rather, I wish to show that the political/financial center risk plays an important role in establishing effective interest parity. The focus is on the time period of summer 1992, when the European Monetary System crisis occurred, bringing along with it heavy speculation, volatility, and intervention in currency markets. A higher political/financial center risk for London is hypothesized to exist during this time period, producing margins that cannot be explained away by simple transaction costs. To achieve our goal, weekly calculations of CIAMs are computed along with proxies for transactions costs. To expose political/financial center risk, a traditional as well as non-traditional pair of securities is used. It is hoped that data from the non-traditional pair coupled with transaction costs will explain a higher proportion of the observed CIAMs than the traditional pair/transaction costs combination, and thus reveal the importance of considering political/financial center risk in establishing market efficiency.

Carl Tierney did his independent research with Dr. Margaret Chapman on The Effect of Disintermediation of the Banking System on the Money Multiplier.

ABSTRACT: The purpose of this research project is to determine how the shift from bank to non-bank lending affects the Federal Reserve Bank's ability to control the money supply. Traditional monetary policy holds that as the monetary base is increased through an expansion of bank reserves, the quantity of money in the economy should also increase. The transmission channel through which bank reserves become money is also the money multiplier. This study involves a time series study of the effect of the disintermediation of banking on the money multiplier.

Based on the model developed by Garfinkel and Thorton of the St. Louis Federal Reserve Bank, this study tries to further explain changes in the currency demand deposit ratio based on the hypothesis that alternative sources of borrowing and lending have become substitutes for currency and demand deposits. The currency leakage from the money multiplier can be partially explained as a result of disintermediation. According to the theory that I have developed, as the amount of bank disintermediation increases, there should be a corresponding decrease in the money multiplier as a result of increased leakages in the form of a larger currency to demand deposit ratio.