bilateral trade and shocks in political relations evidence from china and some of its major trading partners 1990 2013 abstract an extensive number of studies investigate the effects of political relations on trade by estimating a gravity model using annual or quarterly data we argue that the use of low frequency data introduces an aggregation bias because the cycle of moderate political shocks is much shorter measured in weeks using monthly data from 1990 through 2013 for china we estimate a model of political relations and conclude that political shocks are short lived narrative evidence from two case studies illustrates the transitory nature of these shocks a var model shows that although political shocks influence exports to china the effects largely vanish within two months a comparison of the monthly and annual frequency gravity equation regressions illustrates the effects of temporal aggregation

tracking the new economy using growth theory to detect changes in trend productivity abstract the acceleration of productivity after 1995 prompted a debate over whether the economy s underlying growth rate would remain high in this paper we draw on growth theory to identify variables other than productivity namely consumption and labor compensation to help estimate trend productivity growth we treat that trend as a common factor with two regimes high and low growth our analysis picks up striking evidence of a return in 1997 to the high growth regime nearly 25 years after a switch from high to low growth we find that both the common factor and regime switching aspects of the model are important for identifying changes in trend productivity and also show that the trend breaks are more difficult to detect with per capita as opposed to per hour based data because of persistent labor supply shifts finally we argue that our methodology is effective in detecting changes in trend in real time in the case of the 1990s the methodology would have signaled the regime switch by 1999 or within roughly six quarters of when it occurred according to the full sample

conflict cooperation and commerce the effect of international political interactions on bilateral trade flows the public choice approach to political economy is employed to gain insight into the connection between international politics and trade flows a model is constructed in which importers are assumed to be rational utility maximizers who seek to satisfy international security as well as economic welfare objectives this model of bilateral trade flows reflects contemporary theory in the field of international economics and it explicitly incorporates the general foreign policy orientation of importers among its determinants the model is tested in 16 annual crosssectional estimations 1960 75 for a complete network of 25 countries the findings show considerable support for the hypothesis that trade flows are significantly influenced by broad political relations of amity and enmity between nations the author concludes that nations adjust trade ties to satisfy security as well as economic welfare goals and that a formal political economy of trade should reflect this fact

what separates us sources of resistance to globalization with increasing sophistication economists have been estimating gravity equations for five decades robust evidence shows that borders and distance impede trade by much more than tariffs or transports costs can explain we therefore advocate investigation of other sources of resistance despite the greater difficult involved in measuring and modelling them from our selective review of recent findings a unifying explanation emerges a legacy of historical isolation and conflict forged a world economy in which neither tastes nor information are homogeneously distributed cultural difference and inadequate information manifest themselves most strongly at national borders and over distance

the effects of the international security environment on national military expenditures a multicountry study we consider the influence of countries external security environments on their military spending we first estimate the ex ante probability that a country will become involved in a fatal militarized interstate dispute using a model of dyadic conflict that incorporates key elements of liberal and realist theories of international relations we then estimate military spending as a function of the threat of armed interstate conflict and other influences arms races the defense expenditures of friendly countries actual military conflict democracy civil war and national economic output in a panel of 165 countries 1950 to 2000 we find our prospectively generated estimate of the external threat to be a powerful variable in explaining military spending a 1 percentage point increase in the aggregate probability of a fatal militarized dispute as predicted by our liberal realist model leads to a 3 percent increase in a country s military expenditures

macroeconomic volatility and external imbalances abstract does macroeconomic volatility uncertainty affects accumulation of net foreign assets in oecd economies over the period 1970 2012 changes in country specific aggregate volatility are after controlling for a wide array of factors significantly positively associated with net foreign asset position a standard open economy model with time varying macroeconomic uncertainty can quantitatively account for this relationship the key mechanism is precautionary motive more uncertainty induces residents to save more and higher savings are in part channeled into foreign assets data and theory suggest that volatility is an important determinant of the medium long run evolution of external imbalances in developed countries

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

power politics and international trade r recent literature attributes the relative scarcity of open international markets to the prisoner s dilemma structure of state preferences with respect to trade we argue that the prisoner s dilemma representation does not reflect the most critical aspect of free trade agreements in an anarchic international system namely their security externalities we consider these external effects explicitly doing so leads us to two conclusions 1 free trade is more likely within rather than across political military alliances and 2 alliances are more likely to evolve into free trade coalitions if they are embedded in bipolar systems than in multipolar systems using data drawn from an 80 year period beginning in 1905 we test these hypotheses the results of the analysis make it clear that alliances do have a direct statistically significant and large impact on bilateral trade flows and that this relationship is stronger in bipolar rather than in multipolar systems in the early 1970s students of international relations began what would become a long and heated debate about the political correlates of open international markets recently however an important element of consensus has begun to emerge most contributors to this debate now seem to agree that the prisoner s dilemma structure of state preferences with respect to trade explains the relative dearth of open international markets here we argue that what has become the standard prisoner s dilemma representation neglects the most critical aspect of free trade agreements in the anarchic international system namely their security externalities we consider these external effects explicitly in order to do so we construct and analyze a simple game theoretic model the results of this analysis demonstrate that tariff games between allies differ systematically from those played between actual or potential adversaries these differences imply that free trade is more likely within rather than across political military alliances however our analysis also suggests that the evolutionary prospects of alliances vary those that are the products of bipolar systems are more likely to evolve into free trade coalitions than are their multipolar counterparts less credible exit threats and clearer responsibilities for alliance stability explain the advantage of a bipolar system we test this argument using data drawn from an 80 year period beginning in 1905 the empirical analysis supports our argument it demonstrates that alliances have a direct statistically significant and large effect upon bilateral trade moreover it shows that on average alliances have a much stronger effect on trade in a bipolar than in a multipolar world 2

arming in the global economy the importance of trade with enemies and friends abstract we analyze how trade openness matters for interstate conflict over productive resources our analysis features a terms of trade channel that makes security policies trade regime dependent specifically trade between two adversaries reduces each one s incentive to arm given the opponent s arming if these countries have a sufficiently similar mix of initial resource endowments greater trade openness brings with it a reduction in resources diverted to conflict and thus wasted as well as the familiar gains from trade although a move to trade can otherwise induce greater arming by one country and thus need not be welfare improving for both aggregate arming falls by contrast when the two adversaries do not trade with each other but instead trade with a third friendly country a move from autarky to trade intensifies conflict between the two adversaries inducing greater arming with data from the years surrounding the end of the cold war we exploit the contrasting implications of trade costs between enemies versus trade costs between friends to provide some suggestive evidence in support of the theory

the effects of bilateral attitudes on imports research based on the gravity model has shown that non economic factors affect international trade and recent studies have shown that people s perception affects economic exchange in this study we explore the effects of attitudes on bilateral trade using survey data from the pew research center s global attitudes projects for 68 countries from 2002 to 2015 we find that a more favourable attitude of a country towards another country will increase the former country s imports from the latter the result is robust to an endogeneity check to different measures of attitudes and to different estimation methods however heterogeneity is observed across different types of goods and countries the result holds for trade in intermediate and consumer goods but the effects are not statistically significant for capital goods the effects are statistically significant for bilateral trade between different country groups except for high income countries imports from non high income countries

price bubbles and crashes in experimental call markets abstract price bubbles relative to intrinsic dividend value are observed using a call market trading institution market prices tend to track intrinsic value only when the same group of highly experienced traders participate in three consecutive 15 round markets

correction to the political determinants of international trade efforts to replicate our study of the effects of politics on trade flows between the major powers have revealed that the computer program written to calculate the estimates produced errors in both the coefficients and the standard errors furthermore these errors have some consequences for the results in this brief corrigendum we present corrected tables for our research note and a slightly modified interpretation of the results our study examined evidence to assess three arguments about how politics may affect trade the first contends that positive political relations in a dyad result in higher levels of trade this argument leads to two hypotheses states in conflict will have a lower level of trade than those not in conflict and trade will increase with the degree of common interests between a pair of states the second argument concludes that democratic dyads will have a higher level of trade than other dyads the third argument focuses on the security concerns of states and leads to the hypotheses that alliances will increase trade in a bipolar system but will have no effect in a multipolar system we refer readers to the original article for a fuller statement of the logic of these arguments their respective hypotheses and a complete statement of our research design and operationalization of the variables morrow siverson and tabares 1998

news noise and fluctuations an empirical exploration a common view of the business cycle gives a central role to anticipations consumers and firms continuously receive information about the future which is sometimes news and sometimes just noise based on this information consumers and firms choose spending and because of nominal rigidities spending affects output in the short run if ex post the information turns out to be news the economy adjusts gradually to a new level of activity if it turns out to be just noise the economy returns to its initial state therefore the dynamics of news and noise generate both short run and long run changes in aggregate activity this view appears to capture many of the aspects often ascribed to fluctuations the role of animal spirits in affecting demand spirits coming here from a rational reaction to information about the future the role of demand in affecting output in the short run together with the notion that in the long run output follows a natural path determined by fundamentals in this paper we examine whether this view is consistent with the data we reach three main conclusions the first two methodological the third substantive structural vars typically cannot recover news and noise shocks the reason is straightforward if agents face a signal extraction problem and are unable to separate news from noise then the econometrician faced with either the same data as the agents or a subset of these data cannot do it either while structural estimation methods cannot recover the actual time series for news and noise shocks either they can recover underlying structural parameters and thus the relative role and dynamic effects of news and noise shocks estimation of both a simple model and then of a more elaborate dsge model suggest that agents indeed solve such a signal extraction problem and that noise shocks play an important role in determining short run dynamics recent efforts to estimate business cycle models in which expectations about the future play an important role include christiano et al 2010 and schmitt grohe and uribe 2012 those papers follow the approach of jaimovich and rebelo 2009 and model news as perfectly anticipated productivity changes that will occur at

violence instability and trade evidence from kenya s cut flower sector summary we examine the implications of the violence and instability following the 2007 kenyan elections and how it affected cut flower trade between kenya and the eu using the rotterdam demand model we find that the post election violence had a negative impact on eu imports from kenya equivalent to 33 million which is significant given the importance of flowers to kenya s economy results show that even a short period of violence can have an effect on trade since instability in an exporting country causes importers to source from other countries perceived as less risky persisting even when order is restored

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

episodes of war and peace in an estimated open economy model we analyze the effects of world wars on the macroeconomic dynamics of the u s france germany and the uk by means of an estimated open economy model the model allows wars to affect the economy through capital depreciation sovereign default a military draft household preferences and spillovers on other exogenous processes productivity investment trade policy variables if the bulk of fluctuations during war episodes can be explained by the rise in government spending in the u s other factors are crucial in other countries we also discuss the size and state dependence of public spending multipliers and a counterfactual welfare exercise

international capital flows under dispersed private information abstract it is well established that private information is critical to our understanding of asset prices in this paper we argue that it also affects international capital flows and use a simple two country dsge model to illustrate its impact we show that private information i increases the volatility of both net and gross capital flows ii leads to a high correlation between capital inflows and outflows iii leads to a disconnect of capital flows from observed macro fundamentals and iv implies that capital flows contain information about the future macro fundamentals we also show that dispersed information affects capital flows both through asset prices and directly so that the impact on flows is not just the mirror image of the impact on prices

the political determinants of international trade the major powers 1907 1990 we test three arguments about the effect of international politics on trade flows the first argument states that trade flows are greater between states with similar interests than those with dissimilar interests the second that trade flows are greater in democratic dyads than nondemocratic dyads and the third that trade flows are greater between allies we examine trade flows between the major powers from 1907 to 1990 this period provides variation on all three independent variables of interest and allows us to separate the three arguments empirically we estimate a gravity model of trade with the above political variables added our results demonstrate that joint democracy and common interests increase trade in a dyad but alliances generally do not even when controlling for polarity of the system

the expectations driven us current account during the 1990s and 2000s survey expectations of long run output growth for the u s relative to the rest of the world were highly correlated with the u s current account and thus with global imbalances we show that this finding is to a large extent predicted by a two region stochastic growth model simulated using expected trend growth based on surveys in line with the intertemporal approach to the current account a major part of the buildup and subsequent reversal of the u s current account de cit appears to be consistent with an optimal response of households and firms to changing growth prospects this article is protected by copyright all rights reserved

can news be a major source of aggregate fluctuations a bayesian dsge approach we examine whether the news shocks as explored in beaudry and portier 2004 can be a major source of aggregate fluctuations for this purpose we extend a dynamic stochastic general equilibrium model a la christiano eichenbaum and evans 2005 by allowing news shocks on the total factor productivity and estimate the model using bayesian methods estimation results on the japanese and u s economies show that 1 the news shocks play an important role in business cycles 2 a news shock with a longer forecast horizon has larger effects on nominal variables and 3 the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks

political oil import diversification by financial and commercial traders abstract international politics affects the oil trade but do financial and commercial traders who participate in spot oil trading also respond to changes in international politics we construct a firm level dataset for all u s oil importing companies over 1986 2008 to examine how these firms respond to increases in political distance between the u s and her trading partners measured by divergence in their un general assembly voting patterns consistent with previous macro evidence we first show that individual firms diversify their oil imports politically even after controlling for unobserved firm heterogeneity however the political pattern of oil imports is not entirely driven by the concerns of hold up risks which exist when oil transactions via term contracts are associated with backward vertical fdi that is subject to expropriation in particular our results indicate that even financial and commercial traders significantly reduce their oil imports from u s political enemies interestingly while these traders diversify their oil imports politically immediately after changes in international politics other oil companies reduce their oil imports with a significant time lag our findings suggest that in designing regulations to avoid harmful repercussions on commodity and financial assets policymakers need to understand the nature of political risk

once an enemy forever an enemy the long run impact of the japanese invasion of china from 1937 to 1945 on trade and investment abstract in this study we exploit one of the most important conflicts of the 20th century between what are currently the world s second and third largest economies that is the japanese invasion of china from 1937 to 1945 to investigate the long term impact of conflicts between countries on cross border trade and investment we find that japanese multinationals are less likely to invest in chinese regions that suffered greater civilian casualties during the japanese invasion and these regions also trade less with japan our study shows that historical animosity still influences international trade and investment despite the trend toward an increasingly globalized world

international capital flows external assets and output volatility abstract cross sectional evidence for 119 developing emerging and developed countries shows over the last three decades that countries with an on average higher volatility of output growth experience more procyclical capital outflows over the business cycle than those countries with the same growth rate but a more stable output path this stylized pattern shows up in addition to the recently established fact that countries with higher macroeconomic uncertainty tend to accumulate higher external asset positions to explain this finding we present an open economy real business cycle model with stochastic growth rates in which higher uncertainty of the expected income stream increases the precautionary savings of households we show that the combination of income risk and the precautionary savings motive leads to both more procyclical capital outflows in the shorter run and a higher long run external asset position

product quality and sustainability the effect of international environmental agreements on bilateral trade this paper addresses the impact of sustainability in production on international trade in particular it examines the effect of the international tropical timber agreement itta on tropical timber trade the empirical analysis is based on a gravity equation in a difference in difference setting which is estimated by a panel heckman s selection model this accounts for the potentially systematic selection of trading partners into timber trade activity we then conduct a comprehensive comparative static analysis solving the structural gravity model with and without the itta this allows us to determine the trade impact of an itta induced increase in sustainability for participating as well as for third countries we find that countries participating in the itta exhibit a significant and substantial increase in trade intensity ranging from 4 to 6 furthermore we observe that this effect is more pronounced for smaller member countries non itta countries are confronted with reduced tropical timber flows

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

consumer misperceptions uncertain fundamentals and the business cycle abstract this paper estimates the importance of shocks to consumer misperceptions noise shocks for u s business cycle fluctuations i embed imperfect information as in lorenzoni 2009 into a smets and wouters 2007 type dsge model agents only observe aggregate productivity and a signal about the permanent component contaminated with noise based on this information agents form beliefs about the temporary and the permanent component of productivity shocks to the signal noise shocks trigger aggregate fluctuations unrelated to changes in productivity bayesian estimation shows that noise shocks explain up to 14 percent of output and up to 25 percent of consumption fluctuations nominal rigidities and the specification of the monetary policy rule are crucial for the importance of noise shocks these features help to resolve conflicting results in the previous literature

exchange rate regimes and international trade evidence from the classical gold standard era in this paper we show that the spread of the classical gold standard in the late nineteenth century increased international trade flows this positive effect was compounded whenever a group of countries formed a monetary union applying the gravity model of trade to more than 1 100 country pairs during the 1870 1910 period we find that two countries on gold would trade 60 percent more with each other than with countries on a different monetary standard moreover a monetary union would more than double bilateral trade flows our findings are relevant for current discussions on alternative monetary arrangements for the twenty first century

alliances preferential trading arrangements and international trade c oncerns about the stability of the international trading system have become widespread in recent years many observers feel that the relatively liberal system forged after world war ii is being undermined by the proliferation of preferential trading arrangements these concerns have spawned a great deal of empirical research much of which has found that such arrangements exert a substantial effect on trade flows yet these studies have neglected the role political military alliances play in shaping patterns of commerce this omission is important because there is ample reason to expect that alliances guide trade flows and preferential trading arrangements often are comprised of allies as a result extant analyses risk confusing the effects of alliances and preferential trading arrangements on commerce and systematically overstating the effects of the latter in this study we analyze the effects of alliances and preferential trading arrangements on bilateral trade flows both factors are likely to promote trade among members but we argue that the interaction between them is central to explaining patterns of commerce the combination of an alliance which creates political incentives for participants to engage in trade and a commercial institution which liberalizes trade among members is expected to provide a considerable impetus to commerce among parties to both 1

a structural decomposition of the u s trade balance productivity demographics and fiscal policy abstract the us external deficits have been the most striking manifestation of global imbalances this paper investigates the contribution of productivity growth demographics and fiscal policy in accounting for the evolution of the us external imbalances against industrialized countries during the last three decades productivity growth plays a dominant role demographics explain a non negligible and nearly permanent component of the us trade deficit furthermore the international demographic transition is crucial for large us external imbalances to be consistent with the persistent decline of world real interest rates observed in the data fiscal policy is of minor importance

terror networks and trade does the neighbor hurt abstract this paper studies how network related terrorism redistributes trade flows across countries including those countries that are not a direct source of terror we first develop a game theoretical framework with imperfect information on the spatial location of transnational terrorism to show how the resulting security measures produce a non monotonic effect on the distribution of trade across countries neighbors adjacent to terror even when they do not source it have trade reduced through enhanced security measures while countries farther away benefit from those security measures second to empirically assess the distortional effects of terrorism on trade we first estimate the structural gravity equation derived from our theory then armed with the estimates of the partial effect of neighbor terror on bilateral trade we perform a counterfactual experiment and confirm the non monotonic general equilibrium effect of neighbor terror on trade

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

a quantitative assessment of the decline in the u s current account low frequency changes in the u s current account can be understood in terms of the influence of differences in productivity growth rates across time and across countries using standard growth theory in particular the secular decline is primarily driven by the increase in the u s tfp growth rate relative to its trading partners differences in population growth rates or fiscal policy have no significant effects on the low frequency changes in the u s current account

does trade still follow the flag t he economic ties between any two nations are frequently affected by a warming or cooling of bilateral diplomatic relations but there is little to be found in modern economics or political science that helps us understand the connections between international politics and commerce the notion that international economics could be studied in isolation from its political underpinnings or consequences would have been quite alien to mercantilist thinkers in the eighteenth century or to the critics or advocates of imperialism in the nineteenth that economics and politics were inextricably intertwined was taken as a matter of course indeed trade follows the flag was central to these people s understanding of world politics and international economics intellectual trends over the past century radically changed this worldview the ascendancy of liberalism in economic thought brought with it a compartmentalization of disciplines that may now be eroding but we are left with theories of international politics and economics that are very weakly bridged the objective of this study is to map one of the many connections between international politics and commercial ties specifically i seek to identify and measure the effect of changes in state to state diplomatic relations on trade flows between those nations theoretical underpinnings of my effort are in the tradition of public choice political economy frey 1984 because i treat importers as rational utility maximizers and their behavior as determined by preferences pursued within a context of specified constraints the model i put forward is wholly consistent with contemporary neoclassical trade theory but i extend the economists notion of welfare and contend that importers take account not only of the price and quantity of goods and services but of the place of origin of these products and the political relationship between the importing and the exporting nation they do so essentially for traditional security reasons that is importers are motivated to manage their trade relations in ways that minimize risks of disruption in supply or the possibility of hurting friends or

news driven business cycles insights and challenges there is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations the news view of business cycles offers a formalization of this perspective in this paper we discuss mechanisms by which changes in agents information due to the arrival of news can cause business cycle fluctuations driven by expectational change and we review the empirical evidence aimed at evaluating their relevance in particular we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established jel d83 d84 e13 e32 o33

an exploration into pigou s theory of cycles abstract this paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy s future needs in terms of capital the idea has a long history in the macroeconomic literature as reflected by the work of pigou industrial fluctuation macmillan london 1926 the contribution of this paper is twofold first we illustrate the type of general equilibrium structure that can give rise to such phenomena second we examine the extent to which such a model can explain the observed pattern of u s recessions frequency depth without relying on technological regress we argue that such a model offer a framework for understanding elements of both the recent u s recession and of the asia downturns of the late 1990s

collateral damage trade disruption and the economic impact of war abstract conventional wisdom in economic history suggests that conflict between countries can be enormously disruptive of economic activity especially international trade we study the effects of war on bilateral trade with available data extending back to 1870 using the gravity model we estimate the contemporaneous and lagged effects of wars on the trade of belligerent nations and neutrals controlling for other determinants of trade as well as the possible effects of reverse causality we find large and persistent impacts of wars on trade national income and global economic welfare we also conduct a general equilibrium comparative statics exercise that indicates costs associated with lost trade might be at least as large as the conventionally measured direct costs of war such as lost human capital as illustrated by case studies of world wars i and ii

efficiency of experimental security markets with insider information an application of rational expectations models the study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one priced security returns to the security depended upon a randomly drawn state of nature some agents insiders whose identity was unknown to other agents knew the state before the markets opened with replication of market conditions the predictions of a fully revealing rational expectations model are relatively accurate prices adjusted immediately to near rational expectations prices profits of insiders were virtually indistinguishable from non insiders and efficiency levels converged to near 100 percent

impact of historical conflict on fdi location and performance japanese investment in china historical relations between countries bring important explanatory power for foreign direct investment fdi decisions yet little is known on whether a home host country relation exhibits heterogeneous effects on fdi across the country s subnational regions in this study we examine the long term impact of historical conflict on fdi location choices and performance using a sample of 8 646 japanese fdi in china we show that civilian casualties in different provinces of china during the second sino japanese war exert deterring effects on japanese fdi location choices furthermore we demonstrate that civilian casualties negatively affect japanese fdi performance and political capital accumulation strategies in the forms of excessive tax payment and local employment can reduce this negative effect this study contributes to the discussion on how within country differences of historical factors affect fdi location decisions and performance the findings on firms political capital accumulation strategies also provide important implications for fdi operation in an environment characterized by historical animosity

home biased expectations and macroeconomic imbalances in a monetary union abstract under monetary union economic dynamics may diverge across countries due to regional inflation differentials and a pro cyclical real interest rate channel yet stability is generally ensured through endogenous adjustment of the real exchange rate the speed of adjustment depends inter alia on the way agents form expectations we propose a model in which agents expectations are largely based on domestic variables and less so on foreign variables we show that such home bias in expectations strengthens the real interest rate channel and causes country specific shocks to generate larger and more prolonged macroeconomic imbalances

bubbles and information an experiment a symmetric distribution of information although omnipresent in real markets is rarely considered in experimental economics we study whether information about imminent future dividends can abate bubbles in experimental asset markets we find that markets with asymmetrically informed traders have significantly smaller bubbles than markets with symmetrically informed or uninformed traders hence fundamental values are better reflected in market prices implying higher market efficiency when some traders know more than others about future dividends this suggests that bubbles are abated when traders know that a subset of them have an edge in information over others this paper was accepted by brad barber teck ho and terrance odean special issue editors

war signals a theory of trade trust and conflict we construct a dynamic theory of civil conflict hinging on inter ethnic trust and trade the model economy is inhabitated by two ethnic groups inter ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group since conflict disrupts trade the onset of a conflict signals that the aggressor has a low propensity to trade agents observe the history of conflicts and update their beliefs over time transmitting them to the next generation the theory bears a set of testable predictions first war is a stochastic process whose frequency depends on the state of endogenous beliefs second the probability of future conflicts increases after each conflict episode third accidental conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust plunging a society into a vicious cycle of recurrent conflicts a war trap the incidence of conflict can be reduced by policies abating cultural barriers fostering inter ethnic trade and human capital and shifting beliefs coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects

make trade not war this paper analyses theoretically and empirically the relationship between military conflicts and trade we show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial military conflicts reduce trade and leaders are rational when war can occur because of the presence of asymmetric information the probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains however countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict we test our predictions on a large data set of military conflicts on the 1950 2000 period using different strategies to solve the endogeneity issues including instrumental variables we find robust evidence for the contrasting effects of bilateral and multilateral trade openness for proximate countries we find that trade has had a surprisingly large effect on their probability of military conflict

bilateral trade flows the linder hypothesis and exchange risk bilateral trade flows are used to examine the linder hypothesis and the effect of exchange rate variability in a gra vity type trade model derived from an underlying demand and supply mo del a behavioral model is used to justify examining these issues joi ntly the model performs well empirically using a sample of seventeen countries for the period 1974 82 the authors find overwhelming supp ort for the linder hypothesis and this version of the gravity model moreover they find strong support for the hypothesis that increased exchange rate variability affects bilateral trade flows copyright 1987 by mit press

a new world order explaining the international diffusion of the gold standard 1870 1913 abstract the gold standard gradually became an international monetary regime after 1870 similarly some nations in the european union are waiting to adopt the euro while others have joined immediately what explains the timing of exchange rate regime adoption to find out the international diffusion of the gold standard is analyzed duration analysis shows that network externalities operating through trade channels the desire to decrease borrowing costs on international capital markets and the level of development matter some evidence shows that the level of exchange rate volatility or inflationist agricultural interests did not matter for the timing of adoption

insecure resources bilateral trade and endogenous predation a game theoretic analysis of conflict and trade this article analyzes how interstate conflict over resources affects the incentives to trade and how greater trade openness affects the endogenous decisions of arming by enemy countries we identify conditions under which there is trade between two adversary countries and show that each adversary s arming affects domestic welfare in three different ways the first is an export revenue effect which increases welfare because arming causes export revenue to go up i e there is an arming induced terms of trade improvement the second is a resource predation effect which increases welfare because arming increases the appropriation of a rival country s resource input to produce a consumption good the third is an output distortion effect which reduces welfare because arming lowers the domestic production of civilian goods based on these effects we show circumstances in which greater trade openness reduces the intensity of arming we also discuss the implications of resource security asymmetry for conflict and trade

ex tridenti mercatus sea power and maritime trade in the age of globalization this paper tests an implication of the hypothesis that hegemons provide increased global stability and thus promote international commerce specifically we measure the influence of naval power projections on global trade during the latter 19th and early 20th centuries a time of relative peace and robust commercial activity we use archival data on the navies of britain france the united states and germany capturing longitudinal measures of ship deployment tonnage and ship personnel first we develop an empirical naval arms race model and demonstrate that the navies of britain and france in particular responded rigorously to each other we then use our estimates of naval power projected around the world by britain and france to measure their effects on bilateral trade in a panel data gravity model results indicate that while navies had some positive impact on their own nation s trade other nations trade suffered our results show that rather than bolster globalization the first global arms race damaged commercial interests and lowered trade potential around the world

learning and shifts in long run productivity growth abstract an extensive literature has analyzed the macroeconomic effects of shocks to the level of aggregate productivity however there has been little corresponding research on sustained shifts in the growth rate of productivity in this paper we examine the effects of shocks to productivity growth in a dynamic general equilibrium model where agents do not directly observe whether shocks are transitory or persistent we show that an estimated kalman filter model using real time data describes economists long run productivity growth forecasts in the united states extremely well and that filtering has profound implications for the macroeconomic effects of shifts in productivity growth

what are the categories of geopolitical risks that could drive oil prices higher acts or threats abstract this study characterizes the oil market as a nonlinear switching phenomenon and examines its dynamics in response to changes in geopolitical risks over low and high risk scenarios we separate the shocks due to geopolitical acts from those due to geopolitical threats to address whether the serious effects of geopolitical risks are mostly due to increased threats of adverse events or to their realization as acts while we find the acts to generate a positive and strong impact on oil price dynamics the effect of threats appears to be moderate or non significant imperfect information in the oil price determination the history of oil supply disruptions emanating from geopolitical events the continued rise in populism in the world oil market volatility multifractility and the time varying degree of weak form efficiency have been advanced to explain the unforeseen responses of oil prices to geopolitical threats to accommodate recent oil related events we construct a composite geopolitical risk indicator by accounting for contemporaneous sources of geopolitical risks namely global trade tensions us china relation risks us iran tensions saudi arabia s uncertainty and venezuela s crisis the combined effects have an outsized impact on oil prices

clear and clean the fixed effects of the liberal peace in their article in this issue donald p green soo yeon kim and david h yoon claim contrary to liberal theory and extensive evidence that neither joint democracy nor economic interdependence significantly reduces the frequency of militarized interstate disputes in pooled time series analyses when dyadic fixed effects are taken into account similarly their fixed effects analyses contradict theory and previous evidence that democracies have higher levels of trade with one another than do other types of states our reexamination however refutes both claims and reinforces previous findings their fixed effects analyses of disputes produces distorted results because they consider a relatively short time period 1951 92 in which variation in the binary dependent variable and the key independent variables democracy and trade is limited when we analyze a longer period 1886 1992 the results confirm liberal theory the differences between our analyses of bilateral trade and those of green kim and yoon primarily arise from a seemingly minor methodological decision a more reasonable method confirms that democracies do have higher levels of trade than expected on purely economic grounds though we do not advocate a fixed effects model for analyzing these data and have serious reservations about its general usefulness our findings provide additional confirmation of liberal theories of international relations

global imbalances globalization demography and sustainability if you sum up the current account deficits of all nations that are running deficits in the world economy the u s deficit accounts for about 70 percent of the total in any country s national accounts it will hold true as an identity that the current account deficit the excess of payments m to the rest of the world for goods services investment income and unilateral transfers over receipts x from the rest of the world for similar items exactly equals apart from measurement errors which may be substantial the excess of aggregate expenditure e for goods and services over national output y which in turn equals the excess of investment i over savings both public t g and private s in symbols

regional trading arrangements natural or supernatural members of the customs union the potential unfavorable effects arise from the introduction of distortions in the relative price between the goods of members and nonmembers in terms of classic customs union theory the trade off is between trade creation and trade diversion the entire exercise assumes that the firstbest solution of worldwide free trade is not attainable for political reasons thus the choice between a status quo of nondiscriminatory most favored nation mfn tariffs and a move to preferential trading arrangements pta s is an exercise in the theory of the second best this paper summarizes recent research by the authors we make an evaluation of the

sovereign risk credibility and the gold standard 1870 1913 versus 1925 31 author s obstfeld maurice taylor alan m abstract what determines sovereign risk we study the london bond market from the 1870s to the 1930s our findings support conventional wisdom concerning the low credibility of the interwar gold standard before 1914 gold standard adherence effectively signalled credibility and shaved up to 30 basis points from country borrowing spreads in the 1920s however simply resuming prewar gold parities was insufficient to secure benefits countries that devalued before resumption were treated more favorably and markets scrutinized other signals public debt and british empire membership were important determinants of spreads after world war one but not before

international trade and finance complementaries in the united kingdom 1870 1913 and the united states 1920 1930 abstract do international trade and finance flow together in a variety of theoretical models trade and finance can be shown to have the potential to be substitutes or complements so the matter must be resolved empirically we study trade and financial flows from the united kingdom from 1870 to 1913 and the united states in the interwar years these were the two major capital exporters and key financial centers in each era we find that trade and finance were robustly correlated for each case we consider simultaneity issues we also discuss evidence from the british empire which casts doubt on the idea that trade is a punishment device in the event of a default

u s war costs two parts temporary one part permanent military spending fatalities and the destruction of capital all of which are immediately felt and are often large are the most overt costs of war they are also relatively short lived but the costs of war borne by combatants and their caretakers which includes families communities and the modern welfare state tend instead to be lifelong in this paper i show that a significant component of the budgetary costs associated with u s wars is long lived one third to one half of the total present value of historical war costs are benefits distributed over the remaining life spans of veterans and their dependents even thirty years after the end of hostilities typically half of all benefits remain to be paid estimates of the costs of injuries and deaths suggest that the private burden of war borne by survivors namely the uncompensated costs of service related injuries are also large and long lived

elections and political risk new evidence from the 2008 taiwanese presidential election abstract we examine the effects of party platforms on the economic opportunities of firms using a unique data set from a political prediction market in taiwan a country with two dominant parties whose political cleavage derives mainly from a single issue the one china principle we find that during the 2008 presidential campaign the share price of taiwanese firms with investments in the mainland responded strongly and positively to a positive electoral outlook for the kmt the party which advocates lifting caps on cross strait investment in mainland china the response is strongest for those firms who have already hit their caps

trade blocs trade flows and international conflict the relationship between foreign trade and political conflict has been a persistent source of controversy among scholars of international relations existing empirical studies of this topic have focused on the effects of trade flows on conflict but they have largely ignored the institutional context in which trade is conducted in this article we present some initial quantitative results pertaining to the influence on military disputes of preferential trading arrangements ptas a broad class of commercial institutions that includes free trade areas common markets and customs unions we argue that parties to the same pta are less prone to disputes than other states and that hostilities between pta members are less likely to occur as trade flows rise between them moreover we maintain that heightened commerce is more likely to inhibit conflict between states that belong to the same preferential grouping than between states that do not our results accord with this argument based on an analysis of the period since world war ii we find that trade flows have relatively little effect on the likelihood of disputes between states that do not participate in the same pta within ptas however there is a strong inverse relationship between commerce and conflict parties to such an arrangement are less likely to engage in hostilities than other states and the likelihood of a military dispute dips markedly as trade increases between them

institutional differences and the direction of bilateral foreign direct investment flows are south south flows any different than the rest we explore the asymmetric effects of institutional differences on bilateral foreign direct investment fdi flows conditional on countries development levels previous experiences of foreign investors and bilateral trade relations the empirical results using bilateral fdi data from 134 countries during 1990 2009 suggest that institutional differences create entry barriers for foreign investors only in north south and south north directions and more so for the former furthermore southern investors appear to have a comparative advantage in institutionally different developing countries finally we find no evidence that investor experiences in other institutionally different countries or existing trade linkages negate the negative effect of institutional distance

mars or mercury the geopolitics of international currency choice we assess the role of economic and security considerations in the currency composition of international reserves we contrast the mercury hypothesis that currency choice is governed by pecuniary factors familiar to the literature such as economic size and credibility of major reserve currency issuers against the mars hypothesis that this depends on geopolitical factors using data on foreign reserves of 19 countries before world war i for which the currency composition of reserves is known and security alliances proliferated our results lend support to both hypotheses we find that military alliances boost the share of a currency in the partner s foreign reserve holdings by 30 percentage points these findings speak to current discussions about the implications of possible u s disengagement from global geopolitical affairs in a hypothetical scenario where the u s withdraws from the world our estimates suggest that long term u s interest rates could rise by as much as 80 basis points assuming that the composition of global reserves changes but their level does not

fixed exchange rates and trade abstract a classic argument for a fixed exchange rate is its promotion of trade empirical support for this however is mixed while one branch of research consistently shows a small negative effect of exchange rate volatility on trade another more recent branch presents evidence of a large positive impact of currency unions on trade this paper helps resolve this disconnect our results which use a new data based classification of fixed exchange rate regimes show a large significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it these results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates

international politics and import diversification abstractthis paper examines how international politics affects trade in the absence of empires or wars we first show that deterioration of relations between the united states and another country measured by divergence in their united nations general assembly voting patterns reduced u s imports from that country during 1962 2000 though statistically significant the magnitude of the effect of political distance on trade is small indeed we show that except for petroleum and some chemical products u s imports are not affected by international politics american firms however diversify their oil imports significantly away from political opponents of the united states oil trade is often associated with backward vertical foreign direct investment that is subject to the expropriation risk in contrast to the usual claim that oil is a strategic commodity we provide suggestive evidence that trade in products when rents are appropriable is more likely to be affected by international politics

emerging market business cycles learning about the trend abstract emerging market business cycles feature a higher variability of consumption relative to output and a strongly countercyclical trade balance an equilibrium business cycle model in which agents learn to distinguish between the permanent and transitory components of total factor productivity shocks using the kalman filter accounts for these features calibrated to mexico the model accounts for the behavior of consumption and the trade balance for a wide range of variability and persistence of permanent shocks relative to transitory shocks estimation for mexico and canada suggests more severe informational frictions in emerging markets than in developed economies