fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

perfect equilibria in a trade liberalization game the credibility of temporary protection is examined in a simple infinite horizon perfect information game of timing in which the domestic government uses the threat of future liberalization to induce the domestic firm to invest all pure strategy subgame perfect equilibria are cyclical and surprisingly one of them implements optimal temporary protection however this equilibrium fails to pass another credibility criterion called renegotiation proof the game has a unique stationary subgame perfect equilibrium in mixed strategies copyright 1990 by american economic association

what explains global exchange rate movements during the financial crisis abstract a striking and unexpected feature of the financial crisis has been the sharp appreciation of the us dollar against virtually all currencies globally the paper finds that negative us specific macroeconomic shocks during the crisis have triggered a significant strengthening of the us dollar rather than a weakening macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of us shocks in particular countries with low fx reserves weak current account positions and high direct financial exposure vis a vis the united states have experienced substantially larger currency depreciations during the crisis overall and to us shocks in particular

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

debt maturity and the international financial architecture this paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture the analysis is based on a model in which the need to roll over external debt disciplines the policies of debtor countries but makes them vulnerable to unwarranted debt crises due to bad shocks the paper presents a welfare analysis of several measures that have been discussed in recent debates such as international lending in last resort or the establishment of a mechanism for suspending payments on the external debt of crisis countries jel f34 o19

the tragedy of the commons and economic growth why does capital flow from poor to rich countries we analyze a differential game in which all interest groups have access to a common capital stock we show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons we use this model to analyze capital flight in many poor countries property rights are not well defined since safe bank accounts in rich countries the inferior technology are available to citizens of these countries they engage in capital flight we show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare

bivariate cointegration among european monetary system exchange rates in past research on the long run behaviour of exchange rates the possibility of cointegration among spot rates has been rejected this rejection is surprising as some exchange rates are bound by official agreements to comove over time the european monetary system ems is an example of such an officially coordinating system in this paper we extend past research by focusing on only ems rates and use potentially more powerful cointegration tests to show that ems rates are cointegrated

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

rare disasters and exchange rates we propose a new model of exchange rates which yields a theory of the forward premium puzzle our explanation combines two ingredients the possibility of rare economic disasters and an asset view of the exchange rate our model is frictionless has complete markets and works for an arbitrary number of countries in the model rare worldwide disasters can occur and affect each country s productivity each country s exposure to disaster risk varies over time according to a mean reverting process ri sky countries command high risk premia they feature a depreciated exchange rate and a high interest rate as their risk premium mean reverts their exchange rate appreciates therefore currencies of high interest rate countries appreciate on average to make the notion of disaster risk more implementable we show how options prices might in principle uncover latent disaster risk and help forecast exchange rate movements we then extend the framework to incorporate two factors a disaster risk factor and a business cycle factor we calibrate the model and obtain quantitatively realistic values for the volatility of the exchange rate the forward premium puzzle regression coefficients and near random walk exchange rate dynamics finally we solve a model of stock markets across countries which yields a series of predictions about the joint behavior of exchange rates bonds options and stocks across countries the evidence from the options market appears to be supportive of the model jel e43 e44 f31 g12 g15

opportunism corruption and the multinational firm s mode of entry abstract the paper develops a theoretical approach to the boundaries of the multi national firm in the context of institutional constraints in host countries focusing especially on corruption the model incorporates two types of corruption petty bureaucratic corruption and high level political corruption the model predicts that in the absence of corruption multinational firms will prefer fdi internal expansion with strong control rights to debt arm s length expansion with loose control rights the weaker the host country s ability to commit however both types of corruption shift the trade off marginally toward debt cross country panel empirical evidence supports these conclusions corruption has a second order marginal effect and matters mostly through its interaction with political risk

the value of trade agreements in the presence of political pressures an argument often heard in favor of trade agreements is that by committing to free trade a government can credibly distance itself from domestic lobbies but several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process we develop a small country model in which factors are sector specific in the short run but mobile in the long run we show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade and hence it may value a trade agreement

the stock market and consumer confidence european evidence this paper studies the short run relationship between stock market developments and consumer confidence in eleven european countries over the years 1986 2001 we find that stock returns and changes in sentiment are positively correlated for nine countries with germany as the main exception moreover stock returns generally granger cause consumer confidence at very short horizons two weeks to one month but not vice versa the stock market confidence relationship is driven by expectations about economy wide conditions rather than personal finances this suggests that the confidence channel is not part of the conventional wealth effect but a separate transmission channel

informational linkages across trading regions evidence from foreign exchange markets abstract using a new high frequency data set from electronic broking services ebs this paper examines informational linkages in the euro dollar and dollar yen exchange rates across five trading regions asia pacific the asia europe overlap europe the europe america overlap and america information is proxied by exchange rate return direction of return volatility trading activity and order flow we find that informational linkages are statistically significant at both own region and inter region levels but own region spillovers dominate in economic significance especially for volatility and trading activity in addition order flow spillovers from the europe america overlap trading region are the most important source of spillovers to other trading regions for both currency pairs

north south lending and endogenous domestic capital market inefficiencies abstract we develop an open economy model of intertemporal trade under asymmetric information capital market imperfections are endogenous and depend on a country s stage of economic development relative to the perfect information benchmark north south capital flows are dampened and possibly reversed and world interest rates are lower whereas riskless rates are equalized across borders the domestic loan rate is higher in poorer countries the model can be applied to a number of policy issues including the debt overhang problem the indexation of foreign public debts and the effect of income distribution on growth

environmental management under subnational institutional constraints this study uses the institutional perspective to examine the interaction effects between the subnational institutional context and firm level parameters on corporate environmental behaviors based on a unique cross sectional data set of private firms compiled from three different sources in china our results suggest that both enforcement stringency of environmental regulations at the provincial level and private firms foreign ownership negatively affect compensation fees which are levies charged for firms emissions enforcement stringency also moderates the firm level relationship between foreign ownership and compensation fees but such a cross level moderating effect holds only for private firms with non hmt hong kong macau or taiwan investments

does short term debt increase vulnerability to crisis evidence from the east asian financial crisis abstract does short term debt increase vulnerability to financial crisis or does short term debt reflect rather than cause the incipient crisis we study the role that short term debt played in the collapse of the east asian financial sector in 1997 1998 we alleviate concerns about the endogeneity of short term debt by using long term debt obligations that matured during the crisis we find that debt obligations issued at least three years before the crisis had a negative albeit sometimes insignificant effect on the probability of failure our results are consistent with the view that short term debt reflects rather than causes distress in financial institutions

extending the bargaining power model explaining bargaining outcomes among nations mnes and ngos participants in international bargaining include different types nation states mnes ngos and multilateral organizations and different numbers of these actors our theoretical contribution is to extend the bargaining power paradigm with a framework that models bargaining in this complex environment as a network the configuration of supports and constraints among all participating actors in the bargaining environment is captured in the structure of the network antecedents of an actor s bargaining influence in the network include the actor s basis of power network position bargaining outcome preferences and motivation to influence bargaining the network bargaining power nbp model uses network theory to build upon and integrate insights from previous literature in a way that allows us to simultaneously apply these different insights to explain bargaining outcomes these insights include effects of coalitions strategies of less powerful actors leveraging more powerful allies integration of international and domestic politics and applicability to mne related issues beyond fdi finally we illustrate nbp in a scenario of privatized utilities in the dominican republic in which the bargaining power outcome predicted by nbp differs from that of the canonical bargaining power perspective

corporate environmental citizenship variation in developing countries an institutional framework this study focuses on why some companies in developing countries go beyond environmental regulations when implementing their corporate environmental social responsibilities or citizenship behavior drawing mainly upon the new institutional theory this study develops a conceptual framework to explain three institutional factors companies market orientations industrial characteristics and corporate identities accordingly we suggest that companies from developing countries that are oriented to markets in developed countries operate in highly concentrated industries and have missionary identities adopt corporate environmental citizenship behavior by going beyond environmental regulations the study also discusses the theoretical policy and managerial implications of the conceptual framework

an evolutionary approach to understanding international business activity the co evolution of mnes and the institutional environment this paper examines the co evolution of mne activities and institutions external and internal to the firm we develop a theoretical framework for this analysis that draws on the more recent writings of douglass north on institutions as a response to complex forms of uncertainty associated with the rise in global economic interconnectedness and of richard nelson on the co evolution of technology and institutions we link historical changes in the character of mne activities to changes in the institutional environment and highlight the scope for firm level creativity and institutional entrepreneurship that may lead to co evolution with the environment we argue that the main drivers for institutional entrepreneurship are now found in the increasing autonomy of mne subsidiaries thus mne agency derives from more decentralized forms of experimentation in international corporate networks which competence creating nodes of new initiatives can co evolve with local institutions unlike most other streams of related literature our approach connects patterns of institutional change in wider business systems with more micro processes of variety generation and experimentation within and across individual firms this form of co evolutionary analysis is increasingly important to understanding the interrelationships between mne activities and public policy

an international multilevel analysis of product innovation this paper studies multilevel determinants of product innovation by incumbent firms with data from 68 countries covering over 25 000 firms in eight manufacturing sectors the author assesses the predictions of interdisciplinary research on firm behavior in different contexts which have emphasized that product innovation is affected by three sets of factors the extent of global engagement information spillovers and market structure the empirical model of the probability of observing a product innovation a probit model by a firm considers three levels of analysis firm characteristics industry characteristics and the national context the econometric evidence supports the global engagement and information spillovers hypotheses but the evidence on the role of market structure is mixed regarding global engagement the evidence suggests that product innovation by incumbent firms is positively correlated with the act of investing in r d and licensing of foreign technologies and country level average import tariffs reduce the probability of product innovation regarding information spillovers the evidence also shows that a country s patent density is positively correlated with product innovation in contrast concerning the market structure hypotheses country level indicators of business density and of policy induced costs of entry are not robustly correlated with product innovation

inefficient foreign borrowing a dual and common agency perspective studying the implications of uncoordinated borrowing the paper first looks at whether and when countries borrow too much in the aggregate it then revisits the original sin debate analyzing whether and when equity portfolio investment international portfolio diversification domestic currency denomination and longer maturities enhance borrowing countries access to international lending the paper thereby relates a country s level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings their location the extent of control rights held by political authorities and the interests of dominant domestic political forces

testing the bargaining hypothesis in the manufacturing sector in developing countries the bargaining power model of hc mnc host country multinational corporation interaction conceives of economic nationalism in terms of rational self interest and assumes both inherent conflict and convergent objectives in extractive industries there is strong evidence that outcomes are a function of relative bargaining power and that as power shifts to developing hcs over time the bargain obsolesces a cross national study of the bargaining model using data from 563 subsidiaries of u s manufacturing firms in forty nine developing countries indicates that while the bargaining framework is an accurate model of mnc host country relationships manufacturing is not characterized by the inherent structurally based and secular obsolescence that is found in the natural resource industries shifts in bargaining power to hcs may take place when technology is mature and global integration limited in industries characterized by changing technologies and the spread of global integration the bargain will obsolesce very slowly and the relative power of mncs may even increase over time

political connections and industrial pollution evidence based on state ownership and environmental levies in china we investigate how state involvement in the ownership of non listed entrepreneurial firms affects pollution fees levied by national and provincial governments in china environmental levies while the national government sets minimum environmental standards provincial governments can enact requirements that exceed these minimums and they are largely responsible for enforcing even the national standards so environmental levies can measure concessions that provinces make to encourage development and employment furthermore state ownership is a good proxy for a firm s political connections which can influence the relationship between the firm and the environmental authorities we find that firms with state ownership pay lower environmental levies which indicates that concessions are made for political or economic purposes however these concessions are conditional on the level of development of the province offering them with better developed provinces providing fewer concessions

excess comovements between the euro us dollar and pound sterling us dollar exchange rates abstractthe aim of this article is to discuss excess comovements of the euro us dollar and pound sterling us dollar exchange rates i e we look for comovements of exchange rates which are stronger

the euro exchange rate during the european sovereign debt crisis dancing to its own tune abstract this paper studies the determinants of the euro exchange rate volatility during the european sovereign debt crisis allowing a role for macroeconomic fundamentals policy actions and the public debate by policy makers it finds that the euro exchange rate mainly danced to its own tune with a particularly low explanatory power for macroeconomic fundamentals the findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared still there are instances where exchange rate volatility increased in response to news such as on days when several politicians from aaa rated countries went public with negative statements suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions

institutional investors and long term investment evidence from chile developing countries are trying to develop long term financial markets and institutional investors are expected to play a key role this paper uses unique evidence on the universe of institutional investors from the leading case of chile to study to what extent mutual funds pension funds and insurance companies hold and bid for long term instruments and which factors affect their choices the paper uses monthly asset level portfolios to show that despite the expectations mutual and pension funds invest mostly in short term assets relative to insurance companies the significant difference across maturity structures is not driven by the supply side of debt or tactical behavior instead it seems to be explained by manager incentives related to short run monitoring and the liability structure that combined with risk factors tilt portfolios toward short term instruments even when long term investing yields higher returns thus the expansion of large institutional investors does not necessarily imply longer term markets

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

can debt crises be self fulfilling abstract several papers argue that debt crises can be the result of self fulfilling expectations that no one will lend to a country triggering default and rationalizing the refusal to lend i show these coordination failures can be eliminated by a combination of state contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well this suggests that runs on the debt of a single borrower such as the government can be eliminated and that self fulfilling features are more plausible when externalities among many decentralized borrowers allow for economy wide debt runs to occur

globalization and the environment determinants of firm self regulation in china critics assert that globalization is detrimental to the environment because it encourages location of polluting industries in countries with low environmental regulations we suggest that globalization might also have positive environmental effects because global ties increase self regulation pressures on firms in low regulation countries using survey data from firms in china we find that multinational ownership multinational customers and exports to developed countries increase self regulation of environmental performance

market liberalization and firm performance during china s economic transition this paper examines the impact of market liberalization on firm performance through institutional changes during the economic reform in china the conceptualization focuses on the decentralization of control ownership restructuring and industrial policy as the primary institutional changes to implement market liberalization in china these institutional changes affect firm performance by shaping managerial incentives affecting transaction and agency costs and making selective resource allocations across and within industries using a large scale data set including 23 577 firms between 1992 and 1996 the study examines how market liberalization affects the profitability and productivity of chinese firms and the relationship between ownership change and the performance of state owned enterprises

fiscal increasing returns hysteresis real wages and unemployment european unemployment is widely regarded as a problem of excessive real wages this view as it is usually expressed carries the disturbing implication that there is a sharp conflict between the interests of those currently employed and the unemployed because it suggests that increases in employment will require reductions in the real wages of those currently employed the first part of this paper shows that increases in employment in europe are likely to be associated with rising real take home pay for workers because of fiscal increasing returns increases in employment and output will make possible reductions in taxes sufficiently large to offset any effects of diminishing returns to labor the second part of the paper considers alternative explanations for the failure of nominal wages to adjust so as to restore full employment and their implications for the efficacy of fiscal policies it concludes that under a variety of plausible conditions tax cuts would succeed in stimulating employment this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

foreign direct investment in china recent trends and current policy issues by john henley colin kirkpatrick georgina wilde john henley is professor of international management at the department of business studies university of edinburgh colin kirkpatrick is professor of development economics at the institute for development policy and management university of manchester georgina wilde was previously regional director asia pacific with the economist intelligence unit london and is now an independent consultant the paper has been developed from presentations made at a seminar on investment and development in central and western china wuhan hubei province pr china november 1997 and was also presented at the development studies association trade and industry study group meeting march 1998 the comments of participants at both meetings and of two anonymous referees are gratefully acknowledged

uncertainty capital flows and maturity mismatch abstract this paper explores a how the financial uncertainty generated by volatile international capital flows interacts with maturity mismatch on the balance sheets of nonfinancial firms to increase the volatility of output investment and total factor productivity tfp in emerging market economies i build a model of a small open economy in which financial frictions force firms to fund long term projects with short term debt in response to changes in the level of uncertainty regarding the availability of foreign borrowing firms adjust their long term investment contributing to the volatility of investment and output as well as generating endogenous fluctuations in aggregate productivity using data from a panel of major emerging markets i show that the volatility of portfolio debt flows negatively affects output by dampening investment while the volatility of equity flows which do not generate maturity mismatch has no effect consistent with the mechanism in the model the negative impact of capital flow volatility is larger at low levels of financial development and in industries with longer time to build lags my estimates imply that shocks to capital flow volatility account for one fifth of the excess output volatility of the emerging markets in my sample relative to a set of small open advanced economies

animal spirits investment and international capital movements abstract in the aftermath of the debt crisis developing countries are endeavoring to repatriate flight capital and to resume domestic private investment yet investment and the associated capital inflows continue to be disappointing and highly uneven over time in many cases this paper provides a model of investment and capital movements in and out of such countries central to the paper is the introduction of fiscal increasing returns to domestic capital into a standard dynamic optimizing model the resulting system may display multiple steady states and surprising dynamic behavior initial conditions and expectations both matter in selecting the equilibrium on which the economy converges for some initial conditions animal spirits can determine the course of investment and capital flows a limit cycle may occur around one of the welfare inferior equilibria along that cycle capital stocks and relative prices display endogenous fluctuations

complementary resources and capabilities for an ethical and environmental management a qual quan study managers commitment to contribute to sustainable development holds the key to their long term business success and may be a source of competitive advantage the managerial perception of business ethics is influenced by the level of moral development and personal characteristics of managers these perceptions are also shaped by forces existing in the environment of the firm including available resources societal expectations sector and regulations the resource based perspective can thus contribute to the analysis of ethical issues offering important insights on how they can influence the environmental strategy of the firm the findings of this study show that firm resources have a strong influence on business managers ethical attitudes in addition the application of resource based rationales to ethical issues can be justified in the following several ways it influences a managerial perception of natural environment as a competitive opportunity it requires investments of financial and human resources flexibility and speed in the adaptation to environmental changes and it creates new resource based opportunities through changes in prevention pollution technology policy process and market forces

the social and environmental responsibilities of multinationals evidence from the brent spar case this paper argues that multinational corporations face levels of environmental and social responsibility higher than their national counterparts drawing on the literatures of stakeholder salience corporate reputation management and evidence from the confrontation between shell and greenpeace over the brent spar in 1995 two mechanisms international reputation side effects and foreign stakeholder salience are identified and their contribution in creating an environment more restrictive in terms of environmental and social responsibility is elaborated on the paper concludes with discussing the links of the work presented here with a number of ongoing debates within the filed of international business ethics and the managerial implications of the two mechanisms identified

risky public domestic debt composition in emerging economies abstract this paper explains why public domestic debt composition in emerging economies can be risky namely in foreign currency with a short maturity or indexed it analyses empirically the determinants of these risk sources separately developing a new large dataset compiled from national sources for 33 emerging economies over 1994 2006 the paper finds that economic size the breadth of the domestic investor base inflation and fiscal soundness are all associated with risky public domestic debt compositions yet to an extent that varies considerably in terms of magnitude and significance across sources of risk only inflation impacts all types of risky debt underscoring the overarching importance of monetary credibility to make domestic debt compositions in emerging economies safer given local bond markets rapid development monitoring risky public domestic debt compositions in emerging economies becomes increasingly relevant to global financial stability

foreign lenders and the real sector we develop a theory of the interaction between the entry of lenders and the real sector the high liquidation skills of incumbent lenders render them too tough in terminating high risk return projects being foreign to the market newcomers have lower ability to liquidate than incumbents this makes them softer in liquidating high risk return projects but renders their funding more costly we show that the entry of lenders and the share of high risk return projects can reinforce each other through firms liquidation values this interaction dampens the output impact of liquidity shocks hence financial liberalization can enhance stability

long swings in exchange rates are they really in the data several authors have reported evidence of long swings in u s dollar exchange rates by rejecting the random walk in favor of a markov regime switching model we show that this evidence is not robust to an extension of the sample period one should however not conclude that long swings are thus absent because the tests may have insufficient power a possible reason for this is the low data frequency because existing tests are based on quarterly data and we find that the power can be increased substantially by raising the data frequency indeed weekly data reject the random walk so we conclude that long swings are in the data this conclusion is supported by significant superiority of regime switching over random walk out of sample forecasts of the direction of change

currency mismatches and monetary policy a tale of two equilibria we develop a model of a small economy whose residents choose whether to borrow in domestic or foreign currency the central bank in turn chooses fixed or flexible exchange rates taking the currency denomination of debts as given we characterize the simultaneous determination of portfolios and exchange rate regime both floating and fixed rates can occur as equilibrium outcomes fear of floating may emerge endogenously and in association with a currency mismatch in assets and liabilities if equilibria with both fixed rates and floating rates coexist the latter is pareto superior lessons for current de dollarization proposals are discussed

how does environmental corporate social responsibility matter in a dysfunctional institutional environment evidence from china drawing on institutional and signaling theories this study examines how environmental corporate social responsibility ecsr affects firm performance in a dysfunctional institutional environment we extend the ecsr literature by suggesting that ecsr indirectly influences firm performance through the mediating effects of business and political legitimacy based on a dataset of 238 firms in china we find that ecsr affects business and political legitimacy followed by firm performance moreover legal incompleteness weakens and legal inefficiency strengthens the effects of ecsr on business and political legitimacy

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

presidential address debt and money financial constraints and sovereign finance economic analyses of corporate finance money and sovereign debt are largely considered separately i introduce a novel corporate finance framing of sovereign finance based on the analogy between fiat liabilities for sovereigns and equity for corporations the analysis focuses on financial constraints at the country level making explicit the trade offs involved in relying on domestic versus foreign currency debt to finance investments or government expenditures this framing provides new insights into issues ranging from the costs and benefits of inflation optimal foreign exchange reserves and sovereign debt restructuring

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

financial market globalization symmetry breaking and endogenous inequality of nations this paper investigates the effects of financial market globalization on the inequality of nations the world economy consists of inherently identical countries which differ only in their levels of capital stock each country is represented by the standard overlapping generations model modified only to incorporate credit market imperfection an integration of financial markets affects the set of stable steady states as it changes the balance between the equalizing force of the diminishing returns technology and the unequalizing force of the wealth dependent borrowing constraint the model is tractable enough to allow for a complete characterization of the stable steady states in the absence of the international financial market the world economy has a unique steady state which is symmetric and stable in the presence of the international financial market symmetry breaking occurs under some conditions that is the symmetric steady state loses its stability and stable asymmetric steady states come to exist in the stable asymmetric steady states the world economy is endogenously divided into the rich and poor countries the borrowing constraints are binding in the poor but not in the rich the world output is smaller the rich are richer and the poor are poorer in any of the stable asymmetric steady states than in the unstable symmetric steady state

time inconsistency of protectionist programs protectionist trade policies have long been advocated as second best instruments to achieve certain national objectives in situations where there is a market imperfection in essence protection provides time and resources for firms to undertake cost reducing investments recently there has been an emergence of new arguments to justify the implementation of a national industrial policy to encourage investment and to ensure the competitiveness of targeted industries also at the theoretical level a new argument known as strategic trade policy has emerged according to this argument protectionism gives domestic firms strategic advantage against foreign firms to capture a greater share of export markets where rents are not competed away actually the performance of protectionist programs has been grim industries have not adapted and protection has had to be renewed again and again arguments justifying protection have avoided this issue by implicitly assuming that authorities can credibly precommit to eliminate protection this is a very strong assumption in fact government actions are not exogenous but they are rather the result of an optimization process or they are best responses to political pressures as stressed in the public choice literature 2 therefore if authorities capitulate to protectionist pressures in the present they are unlikely to resist them in the future in the event that the targeted firm would not have adapted the inability of authorities to precommit to the unconditional elimination of protection generates a trade off for the firm if during the program the firm does not invest sufficiently in cost

the influence of hymer s dissertation on the theory of foreign derect investment the great contribution of stephen hymer s seminal dissertation 1960 was to escape from the intellectual straightjacket of neoclassical type trade and financial theory and move us towards an analysis of the multinational enterprise mne based upon industrial organization theory the magnitude of this breakthrough can be put into perspective by considering the state of the art when hymer wrote twenty five years ago in 1960 the prevailing explanation of international capital movements relied exclusively upon a neoclassical financial theory of portfolio flows in this frictionless world of perfect competition with no transaction costs capital moves in response to changes in interest rate or profit differentials see carl iversen 1936 according to this arbitrage theory capital is assumed to be transacted between independent buyers and sellers that is there is no role for the mne at the time there was no separate theory of foreign direct investment fdi the work did not even ask the question of why is there fdi despite the evidence of sectoral cross investments and the existence of large mnes with intra industry trade if anything the early work on fdi focused upon the where of investment in a particular nation or industry for example dunning 1958 was chiefly interested in explaining u s fdi in britain there was little interest in understanding the reasons for the mne or the nature of its operations the pioneering conceptual insight of hymer was to break out of the arid mold of international trade and investment theory and focus attention upon the mne per se this permits us to treat fdi as a modality by which firms extend their territorial horizons abroad the unique feature of fdi is a mechanism by which the mne maintains control over productive activities outside its national boundaries that is fdi means international production in this view fdi is more than a process by which assets or claims are exchanged internationally see robert aliber 1970 1983 hymer s great insight was in focusing attention upon the mne as the institution for international production rather than international exchange until hymer articulated the process of fdi as an international extension of industrial organization theory it was not possible to understand why the mne transfers intermediate products such as knowledge or technology among its units across different nations while still retaining property rights over such assets today it is widely recognized that the theory of fdi i e international production is primarily about the transfer of nonfinancial and ownershipspecific intangible assets by the mne which needs to appropriate and control the rate of use of its internalized advantage s see rugman 1981 david teece 1981 1982 richard caves 1982 and mark casson 1983 in this paper we first acknowledge hymer s contribution to the theory of fdi and then move on to reinterpret his dissertation in the light of the modern theory of the mne we tdiscussants raymond vernon harvard university robert z aliber university of chicago paul streeten boston university

the distribution of foreign direct investment in china foreign direct investment fdi has played a major role in china s push toward a market oriented economy recent inflows account for 40 percent of combined flows of fdi to all developing countries making china the biggest developing country fdi recipient this record is impressive but certain problems must be overcome if fdi is to continue to help sustain the country s record growth rate and further its economic development for one thing fdi in china is highly concentrated geographically and its sector distribution is highly uneven the authors empirically analyze the geographic determinants of fdi in china they find that fdi s geographical distribution in china is determined mostly by gnp infrastructure development level of general education and coastal location although the sectoral distribution of fdi is coming into line with the rest of the world in the past fdi has been biased toward speculative types of investment especially in the real estate sector

country solidarity in sovereign crises when will solidarity which emerges spontaneously from the fear of spillovers be reinforced through contracting the optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing a borrowing cap but no joint liability while joint liability augments total surplus the borrowing country cannot compensate the deep pocket guarantor by contrast the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability provided that shocks are sufficiently independent spillovers sufficiently large liquidity needs moderate and available sanctions sufficiently tough

european monetary union a cointegration analysis this paper employs systems based cointegration techniques developed by johansen 1988 1995 to determine which european union countries would form a successful economic and monetary union emu based on long run behavior of the nominal convergence criteria laid down in the maastricht treaty the original 12 european union countries are analyzed together nominal exchange rates real exchange rates longterm interest rates and government budget deficits are each analyzed for co movements among the 12 countries and various subgroups of them the results suggest that not all of the 12 original countries of the european union could possibly form a successful emu over time unless several countries made significant adjustments