the economics of favors abstract this paper examines the favors people perform for each other using a stochastic version of the infinitely repeated prisoner s dilemma rpd it is shown that the socially efficient outcome may not be consistent with an equilibrium because some favors are too expensive to perform on the other hand it is possible for some socially inefficient favors to be performed even so favor exchange relationships must be strictly pareto improving the model is also able to address situations in which there are market alternatives to the services being exchanged and when favors are exchanged among members of large groups or hierarchies

trend shocks and the countercyclical u s current account from 1960 2009 the u s current account balance has tended to decline during expansions and improve in recessions we argue that trend shocks to productivity can help explain the countercyclical u s current account our framework is a two country two good real business cycle rbc model in which cross border asset trade is limited to an international bond we identify trend and transitory shocks to u s productivity using generalized method of moments gmm estimation the specication that best matches the data assigns a large role to trend shocks the estimated model generates a countercyclical current account without excessive consumption volatility

feer for the cfa franc we investigate the behaviour of the real effective exchange rates reer of the two cfa franc zone monetary unions cemac and waemu vis a vis their long run equilibrium paths a reduced form of the edwards 1989 fundamentals equilibrium exchange rate feer model is estimated using the johansen s 1995 cointegration methodology and equilibrium paths and associated misalignments are derived for the period 1970 to 2005 our results suggest that for both cemac and waemu the fundamentals account for most of the exchange rates fluctuation increases in the terms of trade government consumption and productivity tend to appreciate the exchange rate while increases in investment and openness tend to depreciate it at end of 2005 we find no evidence that either the cemac or waemu reers were significantly over valued which suggests that no exchange rate action is currently needed our analysis also reveals significant differences in the fundamentals marginal impact and speed of reversion to equilibr

efficient non contractible investments in large economies abstract do investors making complementary investments face the correct incentives especially when they cannot contract with each other prior to their decisions we present a two sided matching model in which buyers and sellers make investments prior to matching once matched buyer and seller bargain over the price taking into account outside options efficient decisions can always be sustained in equilibrium we characterize the inefficiencies that can arise in equilibrium and show that equilibria will be constrained efficient we also show that the degree of diversity in a large market has implications for the extent of any inefficiency journal of economic literature classification numbers c78 d41 d51

is the cfa franc zone an optimum currency area summary in this paper we explore the features of the cfa franc zone and compare them to those of the economic and monetary union emu by operationalizing the criteria for an optimum currency area a structural vector autoregression method is used in modeling national outputs as determined by global regional and country specific shocks we find that domestic outputs of the cfa franc zone countries are strongly influenced by country specific shocks while regional shocks are far more important in european countries that have joined the emu the results suggest that the cfa franc zone countries are structurally different from each other and thus are more likely to be subjected to asymmetric shocks they do not appear to form an optimum currency area and the monetary union may have been a costly arrangement for the member countries unless they are compensated with some other benefits

screening ethics when honest agents care about fairness we analyze a principal s ability to discriminate between honest and dishonest agents who have private information about the circumstances of the exchange honest agents reveal circumstances truthfully as long as the mechanism is suciently fair the probability that an equilibrium allocation is chosen by an agent who is lying should not be too large without intolerance for lying the agent is given proper incentives if dishonest and zero rent if honest with even a small intolerance for lying the optimal mechanism is discontinuously altered it may still involve ethics screening whereby some allocation chosen by a dishonest agent is never chosen by an honest agent it happens either when the dishonest is overstating circumstances or when the principal is forced to allow for some suboptimal announcements due to an excessive intolerance for lying with limited intolerance for lying ethics screening allows for doing better than in the standard setup where the agent is dishonest with certainty even if honesty is unlikely however if intolerance for lying is too strong the principal cannot improve upon the standard setup

an investigation of the effects of exchange rate volatility on exports in east asia abstractthis study investigates the effects of the exchange rate volatility on the export flows of indonesia malaysia republic of korea singapore thailand and the philippines during 1974 2011 towards this goal a trade weighted real effective rather than the bilateral exchange rate and three different measures of volatility i e obtained from an arch model a garch model and a moving average standard deviation measure are used in this study specifically the export flows between six asian countries and the rest of the world are investigated rather than focusing on trade with only one country our findings reveal that the exchange rate volatility has a significant impact on export flows in the short run as well as in the long run for all the countries in the sample the impact in the long run is predominantly negative with the exception of singapore but in the short run the impact varies across countries moreover our results are robust to the alternative measures of volatility used and most of

can a liberalization of capital outflows increase net capital inflows abstract facing massive capital inflows that put downward pressure on the real exchange rate some policymakers and analysts have recommended a liberalization of capital outflows empirically however the removal of capital outflow controls has apparently stimulated a net inflow of capital in several experiences such as britain since 1979 italy new zealand and spain in the mid to late 1980s and colombia egypt and mexico in the 1990s numerous measures to liberalize capital outflows in chile during the 1990s have not had a noticeable effect in offseting a surge of net capital inflows how can we explain the apparent paradox that reducing controls on capital outflows can actually increase net capital inflows our theoretical model provides one such explanation a liberalization of capital outflows understood here as a reduction in the minimum capital repatriation period for foreign investment reduces the degree of irreversibility of the decision to invest in a given country this in turn lowers the option value of waiting until uncertainty about a possible change in the rules of the game that affect investment in domestic assets is resolved because in this event foreigners investing at home will be stuck with the low return asset for a shorter period of time thus a reduction in the minimum repatriation period is likely to increase not decrease net capital inflows this result has an important policy implication liberalizing capital outflows may have significant benefits on its own but it may not be the appropriate policy to defend the real exchange rate in the presence of massive capital inflows because it is likely to strengthen those very capital inflows

an evolutionary approach to norms iorms provide a powerful mechanism for regulating conflict in groups even when there are more than two people and no central authority this paper investigates the emergence and stability of behavioral norms in the context of a game played by people of limited rationality the dynamics of this new norms game are analyzed with a computer simulation based upon the evolutionary principle that strategies shown to be relatively effective will be used more in the future than less effective strategies the results show the conditions under which norms can evolve and prove stable one interesting possibility is the employment of metanorms the willingness to punish someone who did not enforce a norm many historical examples of domestic and international norms are used to illustrate the wide variety of mechanisms that can support norms including metanorms dominance internalization deterrence social proof membership in groups law and reputation

make and buy balancing bargaining power abstract we analyze the optimal procurement of labor which can be supplied either internally based on wage negotiations or acquired at terms negotiated with an external subcontractor the novel feature of our model is that the subcontractor s bargaining power is a function of the proportion of output outsourced we demonstrate analytically how multiple sourcing emerges as an organizational mechanism to balance cost advantages associated with outsourcing against a subcontractor s increased bargaining power we find that the optimal proportion of outsourcing is lower with sequential negotiations than with simultaneous negotiations if the supplier to first negotiate can foreclose subsequent negotiations

exchange rate volatility and foreign trade evidence from thirteen ldc s this article investigates empirically the impact of real exchange rate volatility on the export flows of 13 less developed countries ldc s over the quarterly period 1973 1996 estimates of the cointegrating relations are obtained using johansen s multivariate procedure estimates of the short run dynamics are obtained for each country using the error correction technique the major results show that increases in the volatility of the real effective exchange rate approximating exchange rate uncertainty exert a significant negative effect on export demand in both the short run and the long run in each of the 13 ldc s these effects may result in significant reallocation of resources by market participants

participating in african monetary unions an alternative evaluation abstract this paper complementary to that of devarajan and de melo deals with the development strategies and performances of 12 franc zone african countries 11 of them gathered in two monetary unions during 1960 1981 beside the actual rate of growth the relative growth performance is considered this performance measured as a residual of a regression on exogenous factors factors independent of economic policy appears to be close to the average performance of other developing countries and better than that of other african countries the results are explained by the direct influence of the foreign exchange regime of the zone and by its impact on economic policy economic policies of individual countries show however some substantial degree of autonomy

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

search theoretic models of the labor market a survey we survey the literature on search theoretic models of the labor market we show how this approach addresses many issues including the following why do workers sometimes choose to remain unemployed what determines the lengths of employment and unemployment spells how can there simultaneously exist unemployed workers and unfilled vacancies what determines aggregate unemployment and vacancies how can homogeneous workers earn different wages what are the tradeoffs firms face from different wages how do wages and turnover interact what determines efficient turnover we discuss various modeling choices concerning wage determination and the meeting process including recent models of directed search

real effective exchange rate volatility and growth a framework to measure advantages of flexibility vs costs of volatility abstract by devising a real effective exchange rate reer index where bilateral exchange rates are weighted for relative trade shares we find that the reer volatility differently from the bilateral exchange rate volatility with the dollar has significant impact on growth of per capita income after controlling for other variables traditionally considered in conditional convergence estimates we also find that this cost of volatility effect can be reconciled with the concurring negative and significant effect on growth of the adoption of a fixed exchange rate regime advantage of flexibility effect where the latter may be also interpreted as the cost of choosing pegged regimes without harmonization of rules and macroeconomic policies with main trading partners the adoption of an reer volatility measure instead of a bilateral exchange rate with the dollar has the advantage of making it possible a joint test for these two effects this is because while fixed exchange rate regimes are strongly negatively correlated and almost collinear with bilateral exchange rate volatility with the dollar the correlation is much weaker when considering our reer volatility measure

consumption baskets and currency choice in international borrowing abstract we propose a novel explanation for the empirically low prevalence of external borrowing in local currency in emerging market economies a phenomenon sometimes referred to as the original sin of international finance we study the endogenous currency denomination of an emerging economy s assets and liabilities within the context of a dynamic stochastic general equilibrium dsge model with portfolio choice featuring non tradable goods and nominal rigidities we find that these features lower the correlation between the local currency and domestic lenders consumption they thus reduce the risk premium demanded by domestic lenders on local currency debt and can therefore help explain the low willingness of foreigners to lend in local currency

bargaining piecemeal or all at once perfect information rubinstein style bargaining models are used to explore questions about multiple issue bargaining is it ever sensible to offer on only a subset of the issues being bargained what is the effect of limiting offers so that they must cover all issues we conclude that in realistic settings the answer to the first question is yes and that restricting offers to those covering all issues may be harmful to one or both parties

exchange rate volatility and international trade a general equilibrium analysis abstract we analyze the relation between exchange rate volatility and the volume of international trade in a general equilibrium stochastic endowment economy with imperfect international commodity markets and treating both variables as endogenous even in the simplest model the sign of the relation depends on the source for the change in volatility for instance more volatility of the endowments and higher costs to international trade both boost exchange risk and lower welfare but the first increases the expected volume of trade while the second decreases trade note that even the inter equilibria relation between trade and welfare is ambiguous

identity and the economics of organizations on plebes first day at west point called r day they strip down to their underwear their hair is cut off they are put in uniform they then must address an older cadet with the proper salute and with the statement sir new cadet doe reports to the cadet in the red sash for the first time as ordered plebes must stand and salute and repeat and stand and salute and repeat until they get it exactly right all the while being reprimanded for every tiny mistake in the summary of david lipsky 2003 pp 145 154 who spent four years tracking a company of cadets at west point on r day you surrender your old self in stages but r day is just the beginning of the training and personal re engineering that is to come so that west point graduates emerge four years later as loyal officers in the u s army lipsky shows that despite some failure this tough program is remarkably successful in creating officers with the will to lead in battle economists current picture of organizations and work incentives has no place for the west point program and the motivations it seeks to inculcate in recruits in a standard economic model an individual s preferences are fixed and utility depends only on pecuniary variables the army s aim at west point is to change cadets preferences they wish to inculcate non economic motives in the cadets so that they have the same goals as the u s army alternatively stated the goal of west point is to change the identity of the cadets so they will think of themselves above all else as officers in the u s army they will feel bad about themselves they will lose utility if they fall short of the ideals of such an officer this change in identity

equilibrium binding agreements abstract we study equilibrium binding agreements the coalition structures that form under such agreements and the efficiency of the outcomes that result we analyze such agreements in a context where the payoff to each player depends on the actions of all other players thus a game in strategic form is a natural starting point unlike the device of a characteristic function explicit attention is paid to the behavior of the complementary set of players when a coalition blocks a proposed agreement a solution concept and its applications are discussed journal of economic literature classification numbers c70 c71

country portfolio dynamics this paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two country dynamic general equilibrium model the method can be easily adapted to most dynamic general equilibrium models it applies to environments in which markets are complete or incomplete and it can be used for models of any dimension moreover the approximation provides simple easily interpretable closed form solutions for the dynamics of equilibrium portfolios

equilibrium in a market with sequential bargaining this paper considers a market where pairs of agents who are interested in carrying out a transaction are brought together by a stochastic process and upon meeting initiate a bargaining process over the terms of the transaction the basic bargaining problem is treated with the strategic approach the paper derives the steady state equilibrium agreements analyzes their dependence on market conditions such as the relative numbers of agents of different types and discusses their relations with the competitive equilibrium outcome and other results in the search equilibrium literature this paper considers a market that operates in the following way pairs of agents who have mutual interest in carrying out a transaction are brought together by a stochastic process when two agents meet they initiate a bargaining process over the terms of the transaction if two agents reach an agreement a transaction takes place and they leave the market of course the bargaining positions and hence the agreement reached in any particular meeting will be affected by the conditions prevailing in the market these will include the chances that each of the negotiating parties have of meeting other partners in the event that the agreement in the current negotiations is delayed also the expected length of time required to achieve an alternative transaction and the expected behavior of alternative partners the study of such a market mechanism is of interest for two reasons firstly it captures some realistic aspects of the trade in certain specific markets e g asset markets such as housing and some labor markets secondly it contributes to an understanding of the micro mechanisms of price formation and their role in shaping market outcomes in both cases the features studied are largely neglected in the traditional market equilibrium analyses the related literature includes the articles by diamond 4 5 diamond and maskin 6 mortensen 8 9 and zusman and bell 13 these articles consider markets of the type described above in which transactions are concluded at pairwise meetings of agents the major difference between our work and these articles is in the approach to the basic bargaining problem in the cited articles it is assumed that a meeting is concluded with an instantaneous agreement which divides the associated surplus in an arbitrary predetermined way when the surplus is assumed to be divided equally the division rule is in fact nash s axiomatic bargaining solution in contrast the present paper treats the basic bargaining problem with the strategic approach see rubinstein 19 which constitutes an attempt to look into the bargaining black box this approach explicitly models the time dimension of the bargaining process describes in detail the bargaining procedure and justifies the agreement as a perfect equilibrium in

adjustment and economic performance under a fixed exchange rate a comparative analysis of the cfa zone abstract this paper examines the economic performance of the cfa franc zone versus non cfa countries in recent years a modified control group approach is used to compare the evolution of macro economic indicators in the cfa countries vis a vis other sub saharan african countries controlling for initial conditions changing exogenous internal and world environment and policy stance in addition our approach allows for a formal testing of whether zone membership is a random the implication of randomness i e no selection bias is that the cfa zone economies would have performed in the same fashion as the rest of sub saharan africa for example in the absence of the zone our results show that the randomness assumption is only valid for the cases of gdp growth and inflation for other indicators savings investment and export ratios to gdp the decision to participate in the zone is endogenous and is related to the expectation of improved economic performance subsequently in the estimation of the zone s effects on the latter group of indicators we corrected for the ensuing sample selectivity bias by estimating that status indicator participation versus non participation via a probit model our estimation results indicate a weakening competitive position of the cfa members during the second half of 1980s relative to the first half compared with the non cfa countries in terms of output growth as well as the performance of exports investment and savings the exception is domestic inflation with the cfa countries faring better on that front results for a longer term comparison the 1970s versus the 1980s are somewhat mixed while the estimated coefficients for the marginal effect of zone participation corroborates a better performance for the cfa zone over the group of comparators in terms of exports domestic savings and investment and inflation the zone failed to distinguish itself with regard to economic growth in the long run

hard or soft pegs choice of exchange rate regime and trade in africa summary this paper revisits the link between fixed exchange rate regimes and trade in the context of africa s exchange rate arrangements differentiating the effects of hard pegs currency unions from conventional soft pegs using a novel dataset of exchange rate regime classification the paper augments the gravity model of bilateral trade flows with measures of currency unions and conventional pegged arrangements and benchmarks africa s experience against the rest of the world we find that in both samples currency unions and pegs increase trade vis a vis more flexible exchange rate arrangements through channels in addition to reduced exchange rate volatility however the effect is almost twice as large for africa in addition the trade generating effect of pegs is at least as large for africa as that of currency unions suggesting that pegs could present a viable option perhaps an alternative to currency unions to promote trade in the region

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

international portfolios a comparison of solution methods we compare the performance of the perturbation based local portfolio solution method of devereux sutherland 2010a 2011 with a global solution method as a test suite we use model specifications that broadly capture features of international financial trade between advanced economies and between advanced and emerging economies we consider both symmetric country setups and asymmetric setups that capture important empirical facts such as differences in macroeconomic volatility differences in portfolio composition and high equity premia we find that the local method performs well at business cycle frequencies both in the symmetric and asymmetric settings while significant differences arise at long horizons in asymmetric settings

a solution to the problem of externalities when agents are well informed the author describes a class of simple two stage mechanisms that implement efficient allocations as subgame perfect equilibria for economic environments involving externalities these mechanisms known as compensation mechanisms solve a wide variety of externalities problems including implementation of lindahl allocations regulation of monopoly and efficient solutions to the prisoner s dilemma copyright 1994 by american economic association

international portfolio flows with growth shocks this paper investigates the impacts of level and growth rate productivity shocks on the cyclical dynamics of gross portfolio flows between two economies using an endogenous portfolio choice problem within a dsge framework we find that the level shocks yield procyclical gross equity flows while the growth rate shocks produce countercyclical flows these dynamics cannot be replicated by only employing persistent shocks to the level of productivity

growth and exchange rate volatility a panel data analysis the aim of this article is to assess the role of real exchange rate rer volatility on long run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009 with an accurate measure for exchange rate volatility the results for the two step system generalized method of moments gmm panel growth models show that a more less volatile rer has a significant negative positive impact on economic growth the results are also robust for different model specifications

commercial policy the terms of trade and the real exchange rate revisited abstract we estimate the effects of commercial policy and changes in the external terms of trade on the real exchange rate for four latin american economies using data on internal relative prices we find that the greater the elasticity of the non traded price level with respect to the price of importables the larger is the real exchange rate effect of import restrictions but the smaller is the real exchange rate effect of changes in the external terms of trade

adjustment costs uncertainty and the behavior of the firm this paper examines the effects of demand and cost uncertainty on a firm s investment output and pricing decisions but unlike most earlier studies in which demand and cost are simply not known at the time an output or pricing decision is made here i consider uncertainties over future demand and costs it will be seen that the effects of such uncertainties depend critically on the characteristics of the firm s adjustment costs i treat demand uncertainty in a dynamic context by letting the market demand function shift randomly but continuously through time according to a stochastic process this means that today s demand is known exactly but future demand may be larger or smaller and has a variance that increases with the time horizon likewise uncertainty over factor costs is characterized by treating those variables as stochastic processes i combine this characterization of uncertainty with a dynamic model of the firm in which some factor inputs can be adjusted freely in response to stochastic demand changes but other factors are quasi fixed in that adjustment costs are incurred when they are changed in this model the firm s price and output are random processes but we can examine the firm s behavior in expected value terms of interest is whether the presence of uncertainty should cause competitive or monopolistic firms to invest and produce more or less than they would otherwise how the effects of uncertainty are influenced by the presence of risk aversion and how the use of inventories can alter the impact of uncertainty on capacity and sales of course these questions have been addressed by others in the past among the earliest studies of demand uncertainty are those of edwin mills 1959 1962 and samuel karlin and charles carr 1962 mills examined a single period monopolistic firm that sets both output and price and showed that additive demand uncertainty i e the demand function is of the form q q p u where u is a random variable leads to a lower price if marginal cost is constant so that the firm reduces the expected loss from discarding unsold production karlin and carr confirmed for both the static case and the multiperiod case with inventory carryover that additive uncertainty tends to reduce the price and increase the output of a risk neutral firm while multiplicative uncertainty does the opposite other papers have been concerned with the way in which the error term enters the demand function additively multiplicatively or nonlinearly the implications of choosing price ex ante instead of output the implications of risk aversion and the use of inventories for example agnar sandmo 1971 and david baron 1970 showed that a risk averse competitive firm will produce less when the price is a random variable or subject to an additive error term but a riskneutral firm will not alter its production hayne leland 1972 extended these results to a monopolistic firm whose demand can depend in a general way on a random error term for example q q p u and showed that uncertainty reduces the production of a

evolution of preferences super 1 we endogenize preferences using the indirect evolutionary approach individuals are randomly matched to play a two person game individual subjective preferences determine their behaviour and may differ from the actual objective pay offs that determine fitness matched individuals may observe the opponents preferences perfectly not at all or with some in between probability when preferences are observable a stable outcome must be efficient when they are not observable a stable outcome must be a nash equilibrium and all strict equilibria are stable we show that for pure strategy outcomes these conclusions are robust to allowing almost perfect and almost no observability with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability despite being stable with no observability copyright 2007 wiley blackwell

evolution of preferences1 we endogenize preferences using the indirect evolutionary approach individuals are randomly matched to play a two person game individual subjective preferences determine their behaviour and may differ from the actual objective pay offs that determine fitness matched individuals may observe the opponents preferences perfectly not at all or with some in between probability when preferences are observable a stable outcome must be efficient when they are not observable a stable outcome must be a nash equilibrium and all strict equilibria are stable we show that for pure strategy outcomes these conclusions are robust to allowing almost perfect and almost no observability with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability despite being stable with no observability

a theory of kindness reluctance and shame for social preferences abstract recent experimental evidence from dictator games suggests that proposers take money from receivers when taking is an option and that many proposers are reluctant to play the game this paper proposes a behavioral model with two components a choice correspondence that depends on the endowed allocation and the menu of allocations available and a preference ordering over endowment menu pairs the choice correspondence governs behavior when the proposer actually plays a game and the preference ordering governs the proposer s willingness to play a particular game the model is then used to characterize notions of proposer kindness reluctance and shame

cross border returns differentials were the u s to persistently earn substantially more on its foreign investments u s claims than foreigners earn on their u s investments u s liabilities the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases however we find that the returns differential of u s claims over u s liabilities is far smaller than previously reported and importantly is near zero for portfolio equity and debt securities for portfolio securities we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of u s investors and the u s equity and bond portfolios of foreign investors in the context of equity and bond portfolios we find no evidence that the u s can count on earning more on its claims than it pays on its liabilities finally we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits the net international investment position and the net income balance jel codes f3

financial globalization and real regionalization over the period 1972 1986 the correlations of gdp employment and investment between the united states and an aggregate of europe canada and japan were respectively 0 76 0 66 and 0 63 for the period 1986 to 2000 the same correlations were much lower 0 26 0 03 and 0 07 real regionalization at the same time u s international asset trade has significantly increased for example between 1972 and 1999 united states gross fdi and equity assets in the same group of countries rose from 4 to 23 percent of the u s capital stock financial globalization we argue that these two trends are intimately related we document that the correlation of real shocks between the u s and the rest of the world has declined we then present a model in which international financial market integration occurs endogenously in response to less correlated shocks financial integration further reduces the international correlations in gdp and factor supplies we find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle

a portfolio model of capital flows to emerging markets since the crises of the late 1990 s most emerging market economies have built up substantial positive holdings of us dollar treasury bills while at the same time experiencing a boom in fdi capital inflows this paper develops a dsge model of the interaction between an emerging market economy and an advanced economy which incorporates two way capital flows between the economies the novel aspect of the paper is to make use of new methods for analyzing portfolio choice in dsge models we compare a range of alternative financial market structures in each case computing equilibrium portfolios we find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital fdi can achieve a considerable degree of international risk sharing this risk sharing can be enhanced by a more stable monetary policy in the advanced economy

long run income and price elasticities of demand for colombian nontraditional exports a multivariate cointegration framework a long run income and price elasticities of demand is estimated for colombian nontraditional exports through a multivariate cointegration analysis based on the combination of cointegration and exogeneity concepts and the inclusion of the complete dynamic system the paper shows the existence of a long run relationship among nontraditional exports relative price and foreign demand and higher long run elasticities than those provided by the long run cointegration vector coefficients that are usually reported in the trade literature

price and monetary convergence in currency unions the franc and rand zones abstract theory suggests that a currency union will impose significant macroeconomic disciplines on its members the law of one price for example should lead to convergence of price levels at least for what may be regarded as tradeable goods likewise arbitrage would imply convergence of interest rates this paper looks at the two main surviving currency unions the franc and rand zones in africa to see whether and to what extent these generally accepted propositions find confirmation in the data each of the african currency unions has a dominant or core member france in the case of the franc zone and the republic of south africa rsa in the case of the rand zone our focus is on the small members in the periphery and for them there is the additional presumption that inflation and interest rates will be imported from the core despite some rather wide short run divergences and although convergence is slow we find that in the long run consumer price inflation is largely determined in the core the limited evidence available suggests that uncontrolled interest rates also converge to core country levels jel f31

competing premarital investments this paper studies premarital parental investments in children s wealth where spousal wealth is a public good in marriage by investing in their children s wealth parents increase the wealth of their children and the quality of the spouses that their children can marry in large marriage markets the hedonic return to investment internalizes all the external benefits of premarital investment in wealth so that the competitive equilibrium is efficient marriage market competition also increases investments in small marriage markets relative to no competition but equilibrium investments are not efficient

currency hedging and goods trade abstract a puzzle in empirical international finance is the difficulty in finding a large and negative effect of exchange rate volatility on international trade a common explanation is the availability of hedging instruments this paper examines the empirical validity of this explanation using data on over 1000 country pairs which countries have currency hedging instruments is not perfectly observable this paper deals with the problem by specifying an endogenous regime switching regression there are two main findings first there is no evidence in the data to support the validity of the hedging hypothesis second for country pairs with large trade potential exchange rate volatility deters goods trade to an extent much larger than that typically has been documented in the literature without using the switching regression specification

evolution of preferences we endogenize preferences using the indirect evolutionary approach individuals are randomly matched to play a two person game individual subjective preferences determine their behaviour and may differ from the actual objective pay offs that determine fitness matched individuals may observe the opponents preferences perfectly not at all or with some in between probability when preferences are observable a stable outcome must be efficient when they are not observable a stable outcome must be a nash equilibrium and all strict equilibria are stable we show that for pure strategy outcomes these conclusions are robust to allowing almost perfect and almost no observability with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability despite being stable with no observability

transplants and implants the economics of self improvement this article examines equilibrium self improvement and marriage proposal strategies in a two sided search model with nontransferable utility singles are vertically differentiated some make better marriage partners than others a complete characterization of equilibrium is provided it is shown there are two externalities to self improvement decisions further these externalities may support multiple pareto rankable equilibria by encouraging everybody to self improve society can create a situation where everybody is forced to improve to remain acceptable but a preferred equilibrium may exist where there is less costly self improvement

the effect of real exchange rate uncertainty on exports empirical evidence unless very specific assumptions are made theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports on the one hand convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector on the other potential asymmetries in the cost of adjusting factors of production for example investment irreversibility and risk aversion tend to make the uncertainty exports relation negative this article examines these issues using a simple risk aversion model export equations allowing for uncertainty are then estimated for six developing countries contrary to the ambiguity of the theory the empirical relation is strongly negative estimates indicate that a 5 percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run these effects are substantially magnified in the long run

does black market exchange rate volatility deter the trade flows iranian experience previous studies that investigated the impact of exchange rate volatility on the trade flows employed official exchange rate data to construct a measure of exchange rate uncertainty in this paper we show that in countries that there is a black market for foreign exchange the black market exchange rate volatility could have adverse effect on the trade flows we show this by using data from iran and cointegration analysis

economics and identity this paper considers how identity a person s sense of self affects economic outcomes we incorporate the psychology and sociology of identity into an economic model of behavior in the utility function we propose identity is associated with different social categories and how people in these categories should behave we then construct a simple game theoretic model showing how identity can affect individual interactions the paper adapts these models to gender discrimination in the workplace the economics of poverty and social exclusion and the household division of labor in each case the inclusion of identity substantively changes conclusions of previous economic analysis

exchange rates and investment in united states industry the path of the dollar has significantly influenced investment activity in u s industry the effects of both exchange rate levels and exchange rate volatility have been more pronounced in the 1980s than in the 1970s although aggregate investment data mask some of these relationships the effects of exchange rates on investment are most pronounced in the disaggregate data for manufacturing durable goods sectors and nonmanufacturing sectors these relationships also have changed over time in contrast to the conventional wisdom in the 1980s real dollar depreciations appreciations were likely to be associated with investment contractions expansions copyright 1993 by mit press

endogenous games and equilibrium adoption of social norms and ethical constraints abstract we consider a situation in which games are formed endogenously in two senses 1 there is a pregame in which agents choose to learn a subset of all feasible strategies and can then employ only these strategies in subsequent play and 2 agents choose their game partners through a costly search process we show that at any subgame perfect equilibrium agents will constrain their action sets in the pregame in such a way that a single social norm prevails thus all agents in a society will abide by the same ethical standard although what standard this will be cannot be predicted we also show that these are essentially the only spe outcomes we suggest that this provides at least a partial explanation for experimental observations that agents apparently choose strategies that do not maximize their payoffs

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

oecd imports of leather indian performance and real exchange rates of the indian rupee this article reports an econometric investigation of shares by source in imports of leather and leather manufactures into oecd markets over the period 1974 87 at four digit sitc level the indian share at each destination relative to that of other major exporters taken serially and independently is tested for sensitivity to relative price fluctuations as measured by the real bilateral exchange rate between the indian rupee and the currency of the fellow exporter the pattern of findings by product category and destination provides important guidelines for exchange rate policy and export strategy

evaluating participation in african monetary unions a statistical analysis of the cfa zones abstract thirteen african nations are engaged in two monetary unions with france often referred to as the cfa zone despite the acknowledged benefits of zone membership a convertible currency pooled resources and greater monetary and fiscal discipline several observers have questioned whether particular aspects of the zone such as the lack of autonomy of the two central banks and the surrender of the exchange rate as a policy instrument have impeded its members growth this paper addresses that question by testing whether cfa zone countries had different gnp growth rates from selected comparator countries during 1960 1982 results show that cfa countries grew significantly faster than comparator sub saharan african countries but usually slower and often significantly so than the whole sample of developing countries when the comparison is made by subperiod before and after 1973 cfa countries performance vis a vis that of their comparators improved during the 1973 1982 period casting further doubt on the claim that the monetary union is not functioning adequately

threshold cointegration and causality relationship between energy use and growth in seven african countries abstract the paper investigates the long run and the causality relationship between energy consumption and economic growth for seven sub saharan african countries during the period 1970 2007 using the gregory and hansen 1996a 1996b testing approach to threshold cointegration we find that energy consumption is cointegrated with economic growth in cameroon cote d ivoire ghana nigeria and south africa moreover this test suggests that economic growth has a significant positive long run impact on energy consumption in these countries before 1988 and this effect becomes negative after 1988 in ghana and south africa furthermore causality tests suggest bidirectional causality between energy consumption and real gdp in cote d ivoire and unidirectional causality running from real gdp to energy usage in the case of congo and ghana

valuation effects with transitory and trend productivity shocks abstract changes in asset prices of a country s foreign assets and liabilities valuation effects are commonly thought of as stabilizing they counteract current account movements and mitigate the impact of the current account on the country s net foreign asset nfa position this paper shows that whether valuation effects are stabilizing or not depends critically on the nature of the underlying productivity shocks in response to transitory shocks valuation effects are stabilizing but in response to trend shocks such effects amplify the impact of the current account on nfa position these contrasting effects arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income this theoretical result finds empirical support with g7 countries data and is illustrated by the pattern of external imbalances between the u s and other g7 countries since the 1990s

tax evasion and orders of risk aversion abstract the classic allingham and sandmo s journal of public economics 1 1972 323 338 portfolio choice approach to income tax evasion has been increasingly criticised because it requires an excess degree of risk aversion to explain the observed rate of tax compliance in this paper we argue that there may not necessarily be excess risk aversion and that the evidence can be explained by the distinction between orders of risk aversion as defined by segal and spivak journal of economic theory 51 1990 111 125 and considered in regard to the same problem of anomalous excess risk aversion in financial and insurance markets

exchange rate variability and the export demand for malaysia s semiconductors an empirical study this article examines the effects of exchange rate variability on export demand for semiconductors which is the largest sub sector of electronics industry in malaysia as reported by malaysian industrial development authority mida 2004 the empirical results which are estimated based on the johansen s multivariate cointegration tests and error correction model suggest that there is a unique long run relationship among quantities of export relative price real foreign income and real exchange rate variability the major finding of this article is that the variability of real exchange rate has some effect on semiconductor exports in both the long run and the short run in the light of rapid advances in technology in the global markets for electronics products the findings are useful to policy makers for the design and target of appropriate exchange rate and industrial policies to enhance the export competitiveness of semiconductor industry

on the adequacy of monetary arrangements in sub saharan africa we examine the economic rationale for monetary union s in sub saharan africa through the use of cluster analysis on a sample of 17 countries the variables used stem from the theory of optimum currency areas and from the fear of floating literature it is found that the existing cfa franc zone cannot be viewed as an optimum currency area cemac and uemoa countries do not belong to the same clusters and a core of the uemoa can be defined on economic grounds the results support the inclusion of the gambia ghana and sierra leone in an extended uemoa arrangement or the creation of a separate monetary union with the core of the uemoa and the gambia rather than the creation of a monetary union around nigeria finally the creation of the west african monetary zone wamz around nigeria is not supported by the data

adjustment with a fixed exchange rate cameroon cote d ivoire and senegal as members of the cfa franc zone cameroom cote d ivoire and senegal cannot use the nominal exchange rate as a tool of macroeconomic adjustment this article considers these countries responses to the commodity and oil price shocks of the 1970s in light of this and other institutional constraints using a two sector model it shows that there exist instruments that in principle permit the real exchange rate depreciation necessary for adjusting to macroeconomic imbalances the authors interpret the very different adjustment experiences of the three countries despite their common economic structure and institutional setting in terms of different uses of these instruments alternative assumptions about the labour market leave the qualitative nature of the results unaltered statistical analysis of data from the three countries confirms the model s linking of the current account and real exchange rate with the instruments of adjustment

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

a theory of endogenous commitment commitment is typically modelled by assigning to one of the players the ability to take an initial binding action the weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed as it is assumed this paper presents a framework in which commitment power arises endogenously from the fundamentals of the model we construct a finite dynamic game in which players are given the option to change their minds as often as they wish but pay a switching cost if they do so we show that for games with two players and two actions there is a unique subgame perfect equilibrium with a simple structure this equilibrium is independent of the order and timing of moves and is robust to other protocol specifications moreover despite the perfect information nature of the model and the costly switches strategic delays may arise in equilibrium the flexibility of the model allows us to apply it to various environments in particular we study an entry deterrence situation its equilibrium is intuitive and illustrative of how commitment power is endogenously determined copyright 2008 wiley blackwell

tiebout economies with differential genetic types and endogenously chosen crowding characteristics abstract we consider a tiebout economy with differential crowding and public projects in which agents are distinguished by their tastes and genetic endowments agents choose which crowding characteristic for example a skill they wish to express and this affects their value to other members of their jurisdiction club firm etc an agent s choice is influenced both by his genetic endowment which affects his cost of acquiring crowding characteristics and by his preferences over which crowding characteristic he expresses we show that if small groups are strictly effective the core is equivalent to the set of anonymous competitive equilibrium outcomes but that the core generally contains taste homogeneous jurisdictions journal of economic literature classification numbers h41 h72

valuation effects and the dynamics of net external assets abstract valuation effects can imply that the traditional current account is an inaccurate measure of the change in the net foreign asset nfa position this paper uses new developments in the analysis of portfolio choice in general equilibrium to investigate valuation effects in a two country model broadly speaking the valuation effects in the model correspond to those observed in the data but there is a key distinction between unanticipated and anticipated valuation effects unanticipated effects can be large dominating the movement in nfa but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterizations