the real effects of financial integration abstract this paper shows how correlations in gdp fluctuations rise with financial integration finance serves to increase international correlations in both consumption and gdp fluctuations which explains the persistent gap between the two in the data a quantity puzzle the positive association between financial integration and gdp correlation constitutes a puzzle as theory suggests a negative relation if anything nevertheless it prevails in the data even after the effects of finance on trade and specialization are accounted for

trade finance specialization and synchronization i investigate the determinants of business cycle synchronization across regions the linkages between trade in goods financial openness specialization and business cycle synchronization are evaluated in the context of a system of simultaneous equations the main results are as follows i specialization patterns have a sizable effect on business cycles most of this effect is independent of trade or financial policy but directly reflects differences in gdp per capita ii a variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized even though they also tend to be more specialized iii the estimated role of trade is closer to that implied by existing models once intra industry trade is held constant the results obtain in a variety of data sets measurement strategies and specifications they relate to a recent strand of international business cycle models with incomplete markets and transport costs and on the empir

financial markets are markets in stories some possible advantages of using interviews to supplement existing economic data sources abstract fifty two research interviews were conducted with money managers controlling over 500 billion this paper presents detailed material from one interview to argue interviews usefully describe their shared reality and provide information about the conditions of action facing financial decision makers with implications for aggregate behaviour their shared reality was dominated by radical uncertainty and information ambiguity which severely limited the scope for fully rational decision making how they managed to commit to decisions was by creating narratives the study suggests it may be useful to reconsider prejudices against the usefulness of talking to individual economic agents about what they actually do

monetary policy rules macroeconomic stability and inflation a view from the trenches i estimate a forward looking monetary policy reaction function for the federal reserve for the periods before and after paul volcker s appointment as chairman in 1979 using information that was available to the fomc in real time from 1966 to 1995 the results suggest broad similarities in policy and point to a forward looking approach to policy consistent with a strong reaction to inflation forecasts during both periods this contradicts the hypothesis based on analysis with ex post constructed data that the instability of the great inflation was the result of weak fomc policy responses to expected inflation a difference is that prior to volcker s appointment policy was too activist in reacting to perceived output gaps that retrospectively proved overambitious drawing on contemporaneous accounts of fomc policy i discuss the implications of the findings for alternative explanations of the great inflation and the improvement in macroeconomic stability since then

borders and business cycles abstract we document that business cycles of u s census regions are substantially more synchronized than those of european countries data from regions within european countries confirm a european border effect within country correlations are substantially larger than cross country correlations these results continue to hold after controlling for exogenous factors such as distance and size we consider the role of four factors that have received attention in the debate about emu sectoral specialization the level of trade monetary policy and fiscal policy we find that the lower level of trade between european countries explains most of the observed border effect

exchange rate fluctuations firm size and export behavior an empirical investigation in this paper we examine how changes in the exchange rate and its volatility affect the export behavior of manufacturing firms we also investigate whether both exchange rate changes and exchange rate volatility affect firms of different sizes differently applying the two step system generalized method of moment estimator on our data for a sample of 221 pakistani manufacturing firms we find that the real exchange rate depreciation has positive impacts whereas the exchange rate volatility has negative impacts on firms exports we also find that compared to large sized firms small and medium sized exporting firms are more likely to benefit from currency depreciations yet regarding the effect of exchange rate volatility we find that the adverse impact of exchange rate volatility is weaker for large sized firms as compared to small and medium sized firms our findings confirm the presence of nonlinearity in export deterring favoring effects of exchange rate volatility depreciation on exporting behavior depending on firm size pakistan should design and implement export favoring preferential policies by emphasizing on real exchange rate stabilization and providing incentives to large firms to come into being small and medium sized enterprises should develop such export strategies that help reduce their size disadvantages particularly in managing exchange rate risks

on the relationship between firm size and export intensity export marketing literature supports the view that firm size is positively related to export intensity although the empirical findings have been mixed a number of theoretical arguments are used to support this proposition i e international marketing economies of scale limited managerial and financial resources of small firms decisionmaker s risk perception based on a large survey of the italian manufacturing industry the article falsifies the proposition and challenges some widely held assumptions in export marketing literature

occbin a toolkit for solving dynamic models with occasionally binding constraints easily abstract the toolkit adapts a first order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints our examples include a real business cycle model with a constraint on the level of investment and a new keynesian model subject to the zero lower bound on nominal interest rates compared with a high quality numerical solution the piecewise linear perturbation method can adequately capture key properties of the models we consider a key advantage of the piecewise linear perturbation method is its applicability to models with a large number of state variables

how complicated does the model have to be simple macroeconomic models based on is lm have become unfashionable because of their lack of micro foundations and are in danger of being effectively forgotten by the profession yet while thinking about micro foundations is a productive enterprise complex models based on such foundations are not necessarily more accurate than simple ad hoc models three decades of attempts to base aggregate supply on rational behaviour have not displaced the phillips curve inter temporal models of consumption do not offer reliable predictions about aggregate demand meanwhile the ease of use of small models makes them superior for many practical applications so we should not allow them to be driven out of circulation copyright 2000 by oxford university press

firm size and export behaviour an indian case study in the context of indian industry this article argues that in the presence of capital market imperfections and sub optimal contractual arrangements small firms face higher transaction or selling costs in the domestic market one of the strategic responses by small firms towards overcoming the mobility barriers imposed by high transaction costs in the domestic market is to break into the competitive world market small firms that could realise a critical level of production efficiency and possible information externalities that arise through inter firm linkages might be the ones that could succeed in exports the empirical observations derived from the analysis of firm level survey data provide reasonable support to the main arguments

the liquidity trap and the pigou effect a dynamic analysis with rational expectations a keynesian idea of considerable historical importance is that in the presence of a liquidity trap a competitive economy may lack despite price flexibility automatic market mechanisms that tend to eliminate excess supplies of labor the standard classical counterargument which relies upon the pigou effect has typically been conducted in a comparative static framework but as james tobin has recently emphasized the more relevant issue concerns the dynamic response in real time of an economy that has been shocked away from full employment the present paper develops a dynamic analysis in a rather standard model under the assumption that expectations are formed rationally the analysis permits examination of tobin s suggestion that because of expectational effects such an economy could be unstable also considered is martin j bailey s conjecture that in the absence of a stock pigou effect keynesian problems could be eliminated by expectational influences on disposable income this abstract was borrowed from another version of this item

the structure of economic modeling of the potential impacts of climate change grafting gross underestimation of risk onto already narrow science models scientists describe the scale of the risks from unmanaged climate change as potentially immense however the scientific models because they omit key factors that are hard to capture precisely appear to substantially underestimate these risks many economic models add further gross underassessment of risk because the assumptions built into the economic modeling on growth damages and risks come close to assuming directly that the impacts and costs will be modest and close to excluding the possibility of catastrophic outcomes a new generation of models is needed in all three of climate science impact and economics with a still stronger focus on lives and livelihoods including the risks of large scale migration and conflicts

sectoral effects of exchange rate volatility on united states exports abstract we analyze the effects of real exchange rate volatility on the proportions of bilateral exports of nine categories of goods from the united states to seven major industrial countries using a fixed effect framework in six of the nine categories the volatility of the real exchange rate significantly affects the value of exports and in five of these categories the effect is positive these results are consistent with a model in which risk neutral firms increase supply of elastically demanded exports in response to an increase in the volatility of the real exchange rate

international risk sharing and european monetary unification abstract we explore income and consumption smoothing patterns among european community ec countries and among oecd countries during the period 1966 90 we find that for oecd as well as for ec countries about 40 percent of shocks to gdp are smoothed at the one year frequency with about half the smoothing achieved through national government budget deficits and half by corporate saving at the three year differencing frequency only 25 percent of shocks to gdp are smoothed mainly via government lending and borrowing in the absence of alternative income and consumption smoothing mechanisms the restrictions on budget deficits imposed by the maastricht treaty should be relaxed to allow governments to run large temporary deficits in response to output shocks

how does globalization affect the synchronization of business cycles this paper examines the impact of rising trade and financial integration on international business cycle comovement among a large group of industrial and developing countries the results provide at best limited support for the conventional wisdom that globalization has increased the degree of synchronization of business cycles the evidence that trade and financial integration enhance global spillovers of macroeconomic fluctuations is mostly limited to industrial countries one striking result is that on average cross country consumption correlations have not increased in the 1990s precisely when financial integration would have been expected to result in better risk sharing opportunities especially for developing countries this abstract was borrowed from another version of this item

america s historical experience with low inflation the inflation of the 1970s was a marked deviation from america s typical peacetime historical pattern as a hard money country we should expect america to continue to be a hard money low inflation country in the future at least in peacetime the low rate of future inflation that we thus forecast changes the balance of macroeconomic risks and opportunities the risk of debt deflation mediated recessions is somewhat higher because a low trend rate of goods and services price index inflation somewhat increases the chances of deflation but it does not raise such risks as much as one might think the failure of the fisher effect to hold empirically means that a low inflation era will in all likelihood be a high real interest rate era but such high real interest rates do not appear to significantly discourage investment or growth

teaching modern macroeconomics at the principles level ideas taught at the macroeconomics principles level should satisfy two goals first they should be simple enough to be both understandable and memorable for the beginning student second they should be consistent both with the modem economy and with the macroeconomic models of this economy that are used in practice for policy evaluation there is no necessary conflict between these two goals the greater the consistency between the ideas taught in the classroom and the models used in practice the easier the ideas are to understand and the worthier they are of being remembered it would be an exaggeration to say that a consensus now exists in advanced research about how macroeconomics should evolve in the future debates continue for example about the usefulness of models with representative agents or what it means to have a fully articulated model of money nevertheless at the practical level a common view of macroeconomics is now pervasive in policyresearch projects at universities and central banks around the world this view evolved gradually since the rational expectations revolution of the 1970 s and has solidified during the 1990 s it differs from past views and it explains the growth and fluctuations of the modern economy it can thus be said to represent a modem view of macroeconomics 1 the purpose of this paper is to show how this modem macroeconomics can be taught at the principles level i focus on macroeconomic concepts including economic growth and fluctuations and their graphical representation rather than on techniques of delivery whether active learning experiments or the use of new media 2 the teaching ideas are similar to those used by david romer 2000 and taylor 1998 but the purpose of this paper is to show how closely they represent modern macroeconomics

determinants of business cycle comovement a robust analysis abstract this paper investigates the determinants of business cycle comovement between countries our dataset includes over 100 countries both developed and developing we search for variables that are robust in explaining comovement using the approach of leamer amer econom rev 73 1983 31 variables considered are i bilateral trade between countries ii total trade in each country iii sectoral structure iv similarity in export and import baskets v factor endowments and vi gravity variables we find that bilateral trade is robust however two variables that the literature has argued are important for business cycles industrial structure and currency unions are found not to be robust

meade s general theory model a geometric reprise james meade s 1937 two sector formalization of keynes s general theory is reconsidered in some detail this paper developes a geometric scheme that facilitates the use of comparative statics in working with the meade model to demonstrate the richness of its possibilities the paper also argues that the meade model might have provided a superior starting point for the development of algebraic interpretations of keynes s system when compared with john r hicks s is ll framework particularly since the meade model affords a direct bridge toward james tobin s monetary transmission mechanism copyright 1987 by ohio state university press

the geography of trade in goods and asset holdings gravity models have been widely used to describe bilateral trade in goods portes and rey portes r rey h 2005 the determinants of cross border equity flows journal of international economics 65 2 269 296 applied this framework to cross border equity flows and found that distance which proxies information asymmetries is a surprisingly very large barrier to cross border asset trade we adopt a different point of view and explore the complementarity between bilateral trade in goods and bilateral asset holdings in a simultaneous gravity equations framework providing different instruments for both endogenous variables we show that a 10 increase in bilateral trade raises bilateral asset holdings by 6 to 7 the reverse causality is also significant albeit smaller controlling for trade the impact of distance on asset holdings is drastically reduced keywords gravity models international finance international trade simultaneous equations

secular stagnation a supply side view secular stagnation on the supply side takes the form of a slow 1 6 percent annual growth rate of us potential real gdp roughly half the 3 1 percent annual growth rate of actual real gdp realized from 1972 to 2004 this slowdown stems from a sharp decline in the growth rate of aggregate hours of work and of output per hour this paper attributes the productivity growth decline to diminishing returns in the digital revolution that had its peak effect business hardware software and best practices in the late 1990s but has resulted in little change in those methods over the past decade

exchange rate volatility and exports a firm level analysis the relationship between real exports and exchange rate volatility is investigated using panel data analysis at the firm level results indicate that there is no negative or positive relationship between volatility and real exports in addition firm size and level of international activity do not influence the size and significance of the volatility effect on exports however there is some evidence that firms use import revenue to lower their exchange rate exposure

house prices and consumer spending recent empirical work shows large consumption responses to house price movements this is at odds with a prominent theoretical view which using the logic of the permanent income hypothesis argues that consumption responses should be small we show that in contrast to this view workhorse models of consumption with incomplete markets calibrated to rich cross sectional micro facts actually predict large consumption responses in line with the data to explain this result we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule of thumb formula the marginal propensity to consume out of temporary income times the value of housing in our model consumption responses depend on a number of factors such as the level and distribution of debt the size and history of house price shocks and the level of credit supply each of these effects is naturally explained with our simple formula

uncertainty and export performance evidence from 18 countries we study a sample of nine developed and nine developing countries to evaluate the questions of how foreign income uncertainty and real exchange rate rer uncertainty impact international trade and how those impacts vary according to stage of development rer uncertainty has a negative and significant impact on export growth for six of the nine less developed countries in our sample while it has an insignificant effect for a majority of the developed countries in both groups foreign income uncertainty has a more pervasively significant and frequently larger influence on trade than does rer uncertainty

measuring the determinants of business cycle synchronization using a panel approach abstract this paper investigates the gdp synchronization determinants using a new index for panel data that captures time variability effects although most of our evidence is in line with previous studies the effect of financial openness differs from the standard findings

risk sharing and industrial specialization regional and international evidence the authors provide empirical evidence that risk sharing enhances specialization in production to the best of their knowledge this well established and important theoretical proposition has not been tested before the empirical procedure is summarized as follows first the authors construct a measure of specialization in production and calculate an index of specialization for each of the european community ec and non ec oecd countries u s states canadian provinces japanese prefectures latin american countries and regions of italy spain and the united kingdom then they estimate the degree of capital market integration a measure of risk sharing within each of these groups of regions the ec countries the non ec oecd countries the united states canada japan italy spain and the united kingdom and rely on another author s estimate for latin america finally they perform a regression of the specialization index on the degree of risk sharing controlling for relevant economic variables they find a positive and significant relation between the degree of specialization of individual members of a group of countries provinces states or prefectures and the amount of risk that is shared within the group the authors perform regressions using variables such as shareholder rights and the size of the financial sector relative to gdp as instruments for the amount of inter regional risk sharing these regressions confirm that risk sharing facilitated by a favorable legal environment and a developed financial system is a direct causal determinant of industrial specialization this abstract was borrowed from another version of this item

financial integration within europe and the international transmission of business cycles among industrialized countries we exploit a dataset on financial integration within europe to answer a novel question in the international real business cycle rbc literature does financial integration within europe matter for the international transmission of business cycles between the united states and europe we find that it does and that as european countries become more financially integrated among themselves european business cycles start to decouple from those in the united states we show that this is true for three macro indicators of economic activity gross domestic product gdp consumption and investment and for five alternative measures of the degree of financial integration we also show that the effect of trade linkages becomes insignificant once financial factors are accounted for our work has interesting policy implications since it unveils the importance of further integration in the eu to slow down the transmission of aggregate shocks among industrialized nations

firm size and export intensity solving an empirical puzzle this paper presents a transaction costs analysis of the firm size and export intensity relationship we submit that relation specific investments and the costs of safeguarding these investments play a significant role in export relationships firm size related differences with respect to these factors are used to explain the different relationships between firm size and export intensity that have been found in previous studies the theoretical framework is tested empirically and support is found for different industries

meade s general theory model stability and the role of expectations this paper develops a one sector version of james meade s keynesian system 1937 in contrast to the traditional is lm model expectations are endogenous and the valuation of capital by financial markets plays a central role in meade s model the model formalizes keynes s views on the role of the stock market and the sensitivity of long term expectations to current events with sufficiently elastic expectations wage flexibility causes a downward spiral of wages prices and output an outcome james tobin 1975 argued may represent keynes s contribution better than an underemployment equilibrium sustained by rigid wages copyright 1992 by ohio state university press

macroeconomic issues for latin america abstract recent macroeconomic issues in latin america are reviewed with an emphasis on theory topics covered include multiple equilibria from hysteresis or increasing returns exchange rate management and the output and asset market effects of devaluation speculation interest rate management and financial reform government behavior income distribution and growth inertial inflation and heterodox policy shocks and disequilibrium theories

the response of firms leverage to risk evidence from uk public versus nonpublic manufacturing firms this article empirically investigates the effects of macroeconomic and firm specific risk on firms leverage the analysis is carried out for a large panel of public and nonpublic uk manufacturing firms over the period 1999 2008 our investigation provides evidence that uk manufacturing firms use less short term debt during periods of high risk however the leverage of nonpublic manufacturing firms is more sensitive to firm specific risk in comparison to their public counterparts while macroeconomic risk affects both types of firms similarly our investigation also shows that firms with high liquid assets reduce their leverage more less during periods of heightened firm specific macroeconomic risk jel c23 g32

hicks a teoria geral e a teoria geral generalizada despite the most common interpretation of john hicks s formalization of the general theory that it was mainly oriented to achieve mathematical elegance this paper shows that hicks s results are based on theoretical arguments and specific causality relations hicks acknowledges the importance of the liquidity preference doctrine and examines the effects of investment on income the multiplier as well as the effects of income on investment the accelerator our interpretation of hicks s formulation and especially of the role of the rate of interest rate in his paper avails the understanding of the success of the so called neoclassical synthesis