monetary policy and the stock market theory and empirical evidence this paper gives a comprehensive review of the literature on the interaction between real stock returns inflation and money growth with a special emphasis on the role of monetary policy this is an area of research that has interested monetary and financial economists for a long time monetary economists have been interested in the question whether money has any effect on real stock prices while financial economists have investigated whether equity is a good hedge against inflation empirical studies show that money can be helpful in predicting future stock returns empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run the short run negative relation between stock returns and inflation can easily be explained by theoretical models if the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns while if it conducts a procyclical policy we could observe a positive relation according to both theoretical and empirical studies investors receive an inflation risk premium for holding equity

will business cycles in the euro area converge a critical survey of empirical research this survey of business cycle synchronization in the european monetary union focuses on two issues have business cycles become more similar and which factors drive business cycle synchronization we conclude that business cycles in the euro area have gone through periods of both convergence and divergence still there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased higher trade intensity is found to lead to more synchronization but the point estimates vary widely the evidence for other factors affecting business cycle synchronization is very mixed

on the relationship between growth and volatility abstract we study the relationship between output growth and output variability in a simple stochastic monetary growth model with nominal rigidities and learning by doing we show that this relationship may be positive or negative depending on the impulse source of fluctuations

monetary policy macro stability and growth there is greater appreciation now amongst economists of the negative effect of uncertainty on investment growth and equality especially when credit constraints are widespread this implies an important linkage between the transparency and predictability of the policy environment and growth and equality the paper begins with a literature survey on the inflation and inflation volatility link the uncertainty and investment link and the inflation volatility and growth link this framework is used to examine the experience of south africa s new monetary policy regime inflation targeting it in achieving greater macrostability south africa is an interesting case study being one of the more advanced of the emerging markets with its deep and sophisticated financial system and yet with around 35 percent unemployment and a legacy of developmental problems from the apartheid era the authors demonstrate using evidence from three sources of micro data that the new monetary regime is more credible transparent and predictable they examine the performance of monetary policy and argue it has not resulted in real interest rate levels that are a hindrance to growth they explore the better response under it to big external shocks like exchange rate depreciation as compared with the monetary regime prior to it the paradox is examined of success in achieving macro stability where greater household acquisition of debt and increased demand is both inflationary and limits saving hence constraining corporate investment the paper concludes with lessons from south africa s recent successful monetary policy experience for other emerging market countries and for less developed countries central banks e g in africa

information rational expectations and macroeconomic modelling book reivewed in this article thomas j sargent 1987 dynamic macroeconomic theory m hashem pesaran 1987 the limits to rational expectations

fiscal policy in the new open economy macroeconomics and prospects for fiscal policy coordination ceps working documents are published to give an indication of the work within ceps various research programmes and to stimulate reactions from other experts in the field unless otherwise indicated the views expressed are attributable only to the author in a personal capacity and not to any institution with which she is associated

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

insuring banks against liquidity shocks the role of deposit insurance and lending of last resort it has long been recognized that banks simultaneous provision of monitoring and liquidity services is advantageous but leaves them susceptible to liquidity shocks that may culminate in a system failure because a system failure is costly this provides a rationale for adopting arrangements including a lender of last resort and deposit insurance di to insure banks against liquidity shocks these arrangements have proven themselves very successful but they have also been the source of problems researchers have identified some of the main sources of these problems and have suggested ways to improve the design of these arrangements but there are still many issues that remain unaddressed this paper reviews the literature on the two arrangements that most countries have adopted to insure banks against liquidity shocks a lender of last resort and di and compares the design of these arrangements across countries the paper ends with a brief summary of the key lessons learned about the design of these arrangements and the issues related to them that remain unaddressed copyright blackwell publishers ltd 2006

models of banking instability a partial review of the literature abstract this paper critically examines the theoretical literature on banking instability that has followed diamond and dybvig 1983 it explores the extent to which it a explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets and b justifies government involvement in the financial intermediation industry it suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real world banks in addition the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry it suggests that arguments for government intervention are open to objection on various grounds the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models

the imf a bird s eye view of its role and operations the international monetary fund imf is the world s premier international financial institution with 184 member countries and active programmes in a significant number of them at any one time the fund attracts a great deal of attention much of it critical but the discussion is often polemic in style strongly held but frequently opposing views are expressed this survey attempts to examine in an objective way the theory and evidence relating to the fund s operations many aspects of the empirical research are relatively recent and a universal consensus is yet to emerge as a consequence there is scope for disagreement to persist however the research is also gradually clarifying many important issues the format for the survey is to examine the life cycle of imf arrangements what makes a country turn to the fund for assistance should the imf be lending what influences the outcome of negotiations and the design of programmes are imf programmes effective and why do some countries make prolonged use of imf resources for completeness there is also some discussion of the history of the imf the extent to which fund policies have been influenced by advances in economic theory and the fund s systemic role important organisational and governance issues are also covered briefly although primarily adopting an economist s perspective the survey reflects the growing recognition that in order to understand the imf s operations economics has to be combined with politics examining the imf is an exercise in applied political economy copyright 2007 the author journal compilation 2007 blackwell publishing ltd

inflation and growth stories short and tall this paper reviews the stories that economists tell about the growth effects of inflation informal accounts are common but there are few models that get to grips with the effects that are probably central partly as a result of this and partly as a result of many econometric problems much of the empirical evidence remains unconvincing the paper assesses the various contributions and suggests possible improvements

elusive persistence wage and price rigidities the new keynesian phillips curve and inflation dynamics abstract we review the main new keynesian inflation equations that have arisen as a result of aggregation from individual firms price rigidities we find that on the whole they cannot account for inflation persistence a key feature of the empirical dynamics of inflation and with important policy implications the only exceptions seem to be when indexation is allowed in price setting or when price stickiness is combined with wage rigidity and staggering

issues in new political economy an overview a brief overview of the historical background nature and rapid growth in volume and scope of new political economy since the early 1980s is provided the paper continues with some general reflections on the strengths and weaknesses of the new political economy approach illustrated by the other contributions to this special issue of the journal of economic surveys the final section summarises these contributions

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

lending to small businesses the role of loan maturity in addressing information problems we investigate what determines the maturity of lines of credit to small businesses our results provide strong support for the hypothesis that shorter loan maturities serve to mitigate the problems associated with borrower risk and asymmetric information that are typical of small business lending we find that maturity is shorter for firm owners that have poor credit histories are older and less experienced and for firms that are more informationally opaque supporting the notion that collateral and maturity are substitute mechanisms in mitigating agency problems we also find strong evidence that maturity increases with collateral pledges that personal collateral is associated with longer maturities than business collateral and that collateral types that better mitigate agency problems reduce the sensitivity of loan maturity to informational asymmetries and risk finally while it is argued that relationship lending may mitigate information asymmetry we find no relation between loan maturity and stronger firm creditor ties

taking stock a critical assessment of recent research on inventories empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s no one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories macroeconomists routinely thought of inventories as a destabilizing factor yet the prevailing micro theory viewed inventories as a stabilizing factor it was a fascinating question that was barely explored instead somewhat inexplicably interest in inventories dried up as if inventories were of minor economic significance and little intrinsic interest by the early 1980s then economists once again knew something they had known in the 1950s that inventory investment is of first order importance in business cycles but they were also beginning to realize that the standard production smoothing buffer stock model of inventories was in deep trouble this paper focuses on developments since that realization

common property institutions and sustainable governance of resources abstract the literature on common property based resource management comprises many important studies that seek to specify the conditions under which groups of users will self organize and sustainably govern resources upon which they depend using three of the more comprehensive such studies and with an extensive review of writings on the commons this paper demonstrates that the enterprise of generating lists of conditions under which commons are governed sustainably is a flawed and impossibly costly research task for a way out the paper examines the relative merits of statistical comparative and case study approaches to studying the commons it ends with a plea for careful research design and sample selection construction of causal mechanisms and a shift toward comparative and statistical rather than single case analyses such steps are necessary for a coherent empirically relevant theory of the commons

economic growth in transition this paper sets the contributions to this issue in the context of a large and rapidly growing literature it argues on theoretical and empirical grounds that future research should focus on transitional growth dynamics

sovereign insolvency procedures a comparative look at selected proposals abstract the most practicable short term approaches for sovereign debt restructuring would include a code of conduct voluntary approach and collective action clauses contractual approach in the medium term a sovereign insolvency procedure statutory approach may have an important role to play because it would be a comprehensive instrument designed to coordinate different creditor groups prior to and during a debt crisis this paper provides a survey of six comprehensive policy proposals for a sovereign bankruptcy procedure it points to approaches that could improve existing proposals and creates a basis for new proposals which could prove conducive to reaching political consensus

nonparametric and semiparametric evidence on the long run effects of inflation on growth abstract in this paper we adopt both a nonparametric and a semiparametric iv estimator to show that the relationship between inflation and output growth is non linear and that there exists a threshold level below which inflation has no effects on growth

measuring and explaining the impact of productive efficiency on economic development a limitation of most empirical cross country studies that focus on determinants of gross domestic product gdp is that they fail to distinguish explicitly between inputs used in production and conditions that facilitate production for example physical capital human capital and labor are production inputs whereas the quality of institutions macroeconomic stability and market quality are conditions that facilitate production this article takes this distinction seriously and uses a stochastic frontier approach to study factors affecting economic performance a panel data set of 71 countries for the 1980 98 periods is used to estimate a production frontier with physical capital human capital and labor as inputs the article also analyzes what drives productive efficiency using the institutional framework macroeconomic stability market quality and urbanization as possible explanatory factors urbanization turns out to be an important determinant with the rule of law inflation rate and market quality also affecting productive efficiency

real business cycle models of the great depression a critical survey recent years have witnessed a revival of interest in the great depression of the 1930s among the differing new interpretations the real business cycle rbc approach is particularly significant it represents an outstanding methodological innovation in trying to cast the great depression within an equilibrium framework this paper critically reviews the rbc interpretation of the great depression clarifying its theoretical and methodological foundations and paving the way for future assessments of its validity

inflation thresholds and the finance growth nexus abstract the robustness of the cross sectional relationship between the size of a country s financial sector and its rate of economic growth is by now well established in this article we examine whether the strength of this relationship varies with the inflation rate using five year averages of standard measures of financial development inflation and growth for 84 countries from 1960 to 1995 a series of rolling panel regressions show that there is an inflation threshold for the finance growth relationship that lies between 13 and 25 percent when inflation exceeds the threshold finance ceases to increase economic growth we also find that the level of financial depth varies inversely with inflation in low inflation environments and that disinflation is associated with a positive effect of financial depth on growth

speculative currency attacks and balance of payments crises abstract this paper reviews the recent theoretical literature on collapsing exchange rate regimes using a combination of technique intuition and realworld observation we discuss the literature s main insights point out some unresolved questions and offer suggestions for future research the survey should be of interest to both specialists and non specialists in the field of international macroeconomics

crises and human capital accumulation this paper studies the effects of crises on human capital formation theoretically a crisis undermines total factor productivity which reduces the return to working and to accumulating physical capital if the crisis is temporary young agents will study now and work later human capital rises to test our model we rely on inflation crises as our main empirical proxy using gmm panel procedures our analysis for 86 countries in 1970 2000 confirms the positive effects of crises on human capital our main findings survive several robustness tests jel classification e31 d90 ce memoire etudie les effets des crises sur la formation de capital humain theoriquement une crise mine la productivite totale des facteurs de production ce qui reduit le rendement sur le travail et l accumulation du capital physique si la crise est temporaire les jeunes agents vont alors se mettre aux etudes et decident de travailler plus tard le capital humain s accroit pour mettre au test ce modele on etudie les crises inflationnistes comme reference a l aide des procedures d analyse de donnees de panels a la gmm l etude de 86 pays pour la periode 1970 2000 confirme les effets positifs des crises sur le capital humain les principaux resultats survivent bien a divers tests de robustesse

costly external finance corporate investment and the subprime mortgage credit crisis abstract we study the effect of the recent financial crisis on corporate investment the crisis represents an unexplored negative shock to the supply of external finance for non financial firms corporate investment declines significantly following the onset of the crisis controlling for firm fixed effects and time varying measures of investment opportunities consistent with a causal effect of a supply shock the decline is greatest for firms that have low cash reserves or high net short term debt are financially constrained or operate in industries dependent on external finance to address endogeneity concerns we measure firms financial positions as much as four years prior to the crisis and confirm that similar results do not follow placebo crises in the summers of 2003 2006 nor do similar results follow the negative demand shock caused by september 11 2001 the effects weaken considerably beginning in the third quarter of 2008 when the demand side effects of the crisis became apparent additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature

solutions to the moral hazard problem arising from the lender of last resort facility the provision of liquid funds via a lender of last resort facility has been the chief means by which governments have chosen to prevent or stay bank runs the introduction of such a facility however leads to a moral hazard problem which weakens each financial manager s commitment to sound banking and hence may ultimately make the few bank runs which do occur more dramatic in both size and seriousness in this paper i provide a survey of the various policy measures which have been proposed to mitigate the effects of the moral hazard problem arising from the introduction of a lender of last resort facility

transfer seeking and avoidance on the full social costs of rent seeking we would like to thank gordon tullock and an anonymous referee of this journal for their helpful comments and suggestions this abstract was borrowed from another version of this item

where do financial constraints originate from an empirical analysis of adverse selection and moral hazard in capital markets despite the voluminous and growing literature on financial constraints the origins of the constraints are hardly ever empirically analyzed this paper offers such an analysis we study in particular the empirical prevalence of adverse selection and moral hazard in capital markets using a unique survey data on finnish small and medium sized enterprises smes the survey data suggest that adverse selection is empirically more prevalent than moral hazard in the capital markets that the smes face we also find that of the variables indicating the presence of adverse selection and moral hazard the former has more explanatory power in regressions modeling the availability of external finance to the smes than the latter finally we document that our proxies for adverse selection and moral hazard are inversely related to the age of firms just like peter diamond s 1989 model predicts

directly unproductive profit seeking dup activities this paper propses directly unproductive profit seeking dup activities as a general concept that embraces a wide range of recently analyzed economic activities including the subset of rent seeking activities considered by krueger it then proceeds to provide a synthesis and generalization of the welfare theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the dup activity thus a unification and overview of the subject are achieved

long term debt maturity and financing constraints of smes during the global financial crisis we use the recent financial crisis to investigate financing constraints of private small and medium sized enterprises smes in belgium we hypothesize that smes with a large proportion of long term debt maturing at the start of the crisis had difficulties to renew their loans due to the negative credit supply shock and hence could invest less we find a substantial variation in the maturity structure of long term debt firms which at the start of the crisis had a larger part of their long term debt maturing within the next year experienced a significantly larger drop in investments in 2009 this effect is driven by firms which are ex ante more likely to be financially constrained consistent with a causal effect of a credit supply shock to corporate investments we find no effect in placebo periods without a negative credit supply shock

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

population age structure saving capital flows and the real exchange rate a survey of the literature this paper surveys the existing literature on the effects of population age structure on saving capital flows and the real exchange rate we build on previous surveys of age structure and saving behaviour by including extensive discussion of international linkages specifically the impact on capital flows and real exchange rates we also point to unresolved issues that need to be addressed given that population aging has serious policy implications in the developed economies these days

thresholds in the finance growth nexus a cross country analysis thresholds of inflation government size trade openness and per capita income for the finance growth nexus are investigated using five year averages of standard variables for 84 countries from 1965 to 2004 the results suggest that i high inflation crowds out positive effects of financial depth on long run growth ii small government sizes hurt the finance growth nexus in low income countries while large government sizes hurt high income countries iii low levels of trade openness are sufficient for finance growth nexus in high income countries but low income countries need higher levels of trade openness for similar magnitudes of the finance growth nexus and iv catch up effects through the finance growth nexus are higher for moderate per capita income levels

the underpinnings of country risk assessment abstract this paper surveys the history and current status of country risk assessment the motivation is to understand why it is that country risk assessors have such a poor track record in anticipating the onset of financial crises the development of the field reflects changes in the composition of international capital flows these changes have confounded a definition of country risk especially if a definition is centered on a particular event it is then argued that the field has reached an impasse and this impasse is related to the methods of abstraction and the current crisis of vision within the science of economics this crisis of vision as it pertains to theories of financial crises has led to increased reliance on quantitative methods in the field of country risk the paper concludes by proposing a new direction for the field the first step towards which is to recognize that the object of country risk assessment is not to monitor for a particular event or symptom of financial crisis but rather to monitor for a particular state of the economy

price stability and the ecb s monetary policy strategy abstract this paper focuses on the price stability objective within the framework of the single monetary policy strategy it starts by reviewing what this objective which is common to all central banks means second this paper focuses exclusively on the anchoring of short to medium term inflation expectations part 2 several measures show that this anchoring is effective a two pillar small structural macro economic model framework is used to analyze the impact that this anchoring of expectations has on the determination of the short to medium term inflation rate from this point of view observed inflation in the euro area seems to be in line with the theory and the ecb s action seems to be very effective third we focus on the other aspect of monetary stability the degree of price level uncertainty and the anchoring of inflation expectations in the medium to long term even though this assessment is more difficult than it is in the short to medium term since we only have a track record covering 6 years various indicators from the theoretical analysis paint a fairly reassuring picture of the effectiveness of the device used by the ecb

the resurgence of inventory research what have we learned abstract recent empirical and theoretical research on business inventories is surveyed and critically evaluated while most inventory research has had macroeconomic motivations we focus on its microtheoretic basis and on potential conflicts between theory and evidence the paper asks two principal questions first how can inventories which are allegedly used by firms to stabilize production nonetheless be a destabilizing factor at the macroeconomic level second why if firms are following the production smoothing model is production more variable than sales in many industries we suggest that the so called s s model may help answer both questions

locational asymmetry and the potential for cooperation on a canal abstract illegal water diversions and lax rule enforcement are common on irrigation canals we present a mathematical programming model of a watercourse calibrated to a canal in maharashtra on which farmers voted to cooperate to control water theft the model solution computes the crop choices and profits of individually optimizing farmers who differ in their location it reveals the spatial distribution of gains and losses from cooperation it illuminates why voluntary bargaining will rarely achieve an efficient water allocation it also shows that landless laborers might well be against local cooperation if the expropriated water nurtures labor intensive crops

the empirical analysis of fiscal illusion this paper examines the empirical analysis of the five main hypotheses subsumed under the generic term fiscal illusion after placing these hypotheses within a common theoretical framework the paper attempts to evaluate empirical research into the revenue complexity hypothesis the revenue elasticity hypothesis the flypaper effect renter illusion and debt illusion

the determinants of the maturity of corporate debt issues we document the determinants of the term to maturity of 7 369 bonds and notes issued between 1982 and 1993 our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum this pattern is consistent with the theory that risky firms do not issue short term debt in order to avoid inefficient liquidation but are screened out of the long term debt market because of the prospect of risky asset substitution traditionally capital structure research has focused on how much of a firm s future cash flows should be paid out to debtholders instead of equityholders an equally important issue is when future cash flows should be paid out to debtholders a firm that finances its projects with short term debt risks serious financial difficulty if the debt cannot be extended similarly a firm that finances its activities with long term debt can sacrifice profits by needlessly risking mismanagement of resources after cash flows are returned from investments but before they are due to debtholders this study investigates the factors that firms consider when choosing the maturity of their liabilities we document the determinants of the maturity of 7 368 public debt issues made by u s corporations between 1982 and 1993 our empirical tests are based on existing theoretical models that relate the maturity of a firm s borrowings to the riskiness of its cash flows the time until investments pay off the quality of information held by outsiders the expected

commons regulation and rent seeking behavior the dilemma of pakistan s guzara forests curred over the past 120 years these forests known locally as guzara forests can be characterized as regulated commons the regulation by placing quantitative restrictions on felling aimed at an orderly exploitation of these forests on the surface the failure of regulation seems to be a simple case of enforcement failure however a closer look reveals a fairly complex picture in which factors such as the delineation of property rights and the rent seeking behavior of those subject to regulation as well as of the regulators themselves have contributed to the problems of these forests the evidence presented in this article shows that the way the regulation was devised gave rise to a discordant structure of property rights involving the government and the local inhabitants despite early signals that it could not be effectively enforced no rectifying change was introduced in the structure of rights which has persisted into the postcolonial era indeed there was a reversal of some potentially beneficial institutional changes that had been introduced toward the end of the colonial period while the process of degradation was set in motion by discordances that arose in the process of delineating property rights it is the theory of rentseeking behavior that provides an adequate explanation of its persistence as well as of the subsequent reversals an effective response to the problem of the guzara forests must take account of two additional features in the regulation of these forests first in addition to the common property externality that leads to the tragedy of the commons these forests also display interjurisdictional externality by virtue of their location second a common

independent fiscal agencies abstract there has been a considerable literature regarding the incentives of policymakers as a prime reason for persistent fiscal deficits and a variety of fiscal rules have been proposed as a remedy however the often inadequate flexibility of rules and the success of policy delegation in the monetary realm have motivated a small but growing number of studies that suggest delegating some aspects of fiscal policy to what will here be called independent fiscal agencies this paper surveys the related literature with a focus on three aspects the motivation for the establishment of such agencies their potential design and the experience with these types of institutions

bank capital requirements business cycle fluctuations and the basel accords a synthesis abstract in order to survey the mechanisms through which the introduction of basel ii bank capital requirements is likely to accentuate the procyclical tendencies of banking this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the basel accords we conclude that the theoretical models that revisit the bank capital channel under the new accord generally support the basel ii procyclicality hypothesis and that the magnitude of the procyclical effects essentially depends on i the composition of banks asset portfolios ii the approach adopted by banks to compute their minimum capital requirements iii the nature of the rating system used by banks iv the view adopted concerning how credit risk evolves through time v the capital buffers over the regulatory minimum held by the banking institutions vi the improvements in credit risk management and vii the supervisor and market intervention under basel ii the recent events and instability in financial markets all over the world have led the procyclicality issue to enter the agendas of several political international fora and some measures to mitigate procyclicality are being put forward the bank capital channel literature should now play an important role in evaluating their effectiveness

political macroeconomics a survey of recent developments the paper surveys political macroeconomics covering its development from rogoff s conservative central banker to the most recent discussions of monetary policy and institutional design topics include the inflation stabilization trade off central bank independence with escape clauses and overruling with costs inflation targets performance contracts for monetary authorities and the consequences of output persistence for these issues further topics are the political business cycle when output is persistent the political macroeconomics of fiscal policy the government spending bias and the game theoretic interaction between fiscal and monetary policy all work is discussed within a coherent analytical framework

financial reporting quality and the cost of debt of smes this study explores a large and detailed dataset of financial statements of belgian small and medium sized enterprises smes over the 1997 2010 period using accruals quality as a proxy for the quality of smes financial reports we find that the quality of smes financial statements is negatively related to those companies effective interest cost this result is also highly economically significant the findings in this paper are consistent with the idea that earnings are important for creditors in predicting smes reimbursement capacity i e future cash flows and that less estimation error in accruals enhances earnings ability to predict future cash flows we deliver evidence of an important economic benefit of financial reporting for smes to wit the potential to reduce information asymmetry between smes and their creditors through higher quality financial reporting

financing patterns around the world are small firms different using a firm level survey database covering 48 countries we investigate how financial and institutional development affects financing of large and small firms our database is not limited to large firms but includes small and medium size firms and data on a broad spectrum of financing sources including leasing supplier development and informal finance small firms and firms in countries with poor institutions use less external finance especially bank finance protection of property rights increases external financing of small firms significantly more than of large firms mainly due to its effect on bank finance small firms do not use disproportionately more leasing or trade finance compared with larger firms so these financing sources do not compensate for lower access to bank financing of small firms we also find that larger firms more easily expand external financing when they are constrained than small firms finally we find suggestive evidence that the pecking order holds across countries

long run impacts of inflation across sectors in a small sample of countries this article investigates the long run effects of inflation on economic output for 10 sectors of the economy with a sample of 7 countries the analysis is done using long run restrictions in a vector autoregression and reports long run multipliers with bootstrapped confidence bands the results suggest that some sectors seem to be affected differently than others as well as significant heterogeneity across countries the results suggest the strongest effects in the low inflation countries germany and japan as has been found in similar studies in contrast to research using growth regressions the evidence suggests a positive long run effect of inflation on output

high value forests hidden economies and elite capture evidence from forest user groups in nepal s terai abstract this paper argues that the policy on decentralised forest management in nepal informed by experiences from the middle hills overlooks the complexity and conflictual potential of establishing effective and equitable user groups in the terai our case study evidence from west central terai suggests that the combination of high forest value and weak institutional control mechanisms create opportunities for local elites to siphon off substantial shares of the benefits generated by valuable local forests the rents created by autonomous fug policies give rise to stark distributional biases a scramble for control and institutional instability we estimate the extent of elite capture and argue that institutional reform needs are intimately linked to controlling what we call the hidden economy of forest user groups

collective action clauses in international sovereign bond contracts whence the opposition in the debate on strengthening the international financial architecture which peaked in 2002 after a series of emerging market sovereign debt crises the universal adoption of collective action clauses cacs was the most promising reform proposal academics and the official sector had been promoting cacs at least since 1995 yet market practice did not begin to change until 2003 this delay is often attributed to the opposition of investors and sovereign borrower to cacs this paper evaluates the publicly stated as well as the suspected private motives of the two sides to block the spread of cacs it draws on a wide range of existing evidence and adds some new theoretical considerations to show that there is no reason to be sceptical of cacs unless bailouts exist as an alternative crisis resolution mechanism this conclusion may be of interest purely for the sake of historical accuracy but more importantly it may help to better understand any potential future resistance by market participants e g in the process of introducing cacs in bonds governed by german law

the structure of a contract and the theory of a non exclusive resource the process of arriving at a useful concept of analysis is not only slow and painful but also may go astray and attain nothing useful someone begins with one example or observation followed by a theory which is intuitively plausible a theoretical term associated with a vague concept is coined examples of a seemingly different type emerge which call for another theory the process goes on as examples and theories continue to accumulate the different categories under the same heading of analysis serve only to confuse and each associated theory becomes ad hoc such has been the fate of the concept of externality a more useful approach i think is via contractual conditions the example chosen for illustration is marine fisheries where the fishing right is taken

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

price wage staggering and persistence a unifying framework in this paper we provide a general unified framework to clarify the issue of persistence of real effects of money shocks in staggered wage price models we mainly aim to i highlight which features of the underlying economy and particularly of the labour market are crucial for generating output persistence ii analyse the differences between price and wage staggering copyright blackwell publishing ltd 2003

inflation investment and growth a money and banking approach output growth investment and the real interest rate in long run evidence tend to be negatively affected by inflation theoretically inflation acts as a human capital tax that decreases output growth and the real interest rate but increases the investment rate opposing evidence this paper resolves this puzzle by requiring exchange for investment as well as consumption inflation then decreases the investment rate and still decreases both output growth and real interest up to some moderately high rate of inflation above which increasingly low investment finally causes capital to fall relative to labour and the real interest rate to rise

hyperinflations their origins development and termination abstract this paper summarizes and critically surveys research on hyperinflation appraisal and review of the literature considers the origins development termination and the lessons to be learned from hyperinflations the historical evidence as well as the econometric evidence is analyzed it is concluded that while the lessons to be learned from such episodes perhaps have been overstated a number of useful implications may be derived from studying hyperinflations such as an understanding of the forces which link monetary and fiscal policies to inflation and policy makers role in influencing individuals expectations

macroeconomic policy evaluation and optimal control theory a critical review of some recent developments abstract this survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design this literature focuses on strategic interactions between governments and private agents engaged in dynamic non cooperative games and emphasizes such issues as precommitment credibility and reputation as important and endemic aspects of optimal policy design a dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single stage full information games without commitment this may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium the type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players beliefs under uncertainty included here are separating and pooling equilibria involving notions of learning signalling and information revelation additional dimensions exist in stochastic systems which introduce other forms of uncertainty optimal control and game theory have also been applied to international macroeconomic policy design with emphasis on the potential costs and benefits of non cooperative and cooperative behaviour between countries and problems of international policy coordination

financing the german mittelstand this paper describes how the german mittelstand or small and medium sized enterprises are financed in germany the role of the german mittelstand both in a static and in a dynamic framework is described and contrasted with that of the same size group in other leading industrialised countries we find that in general the mittelstand has played a mmore important role in germany than in other industrialised nations such as the united states or the united kingdom the traditional success of the german mittelstand is partly attributable to a system of finance that is richly layered by complementary institutions designed to meet the financial needs of both large and smaller enterprises however we find evidence that even under the german system of finance liquidity constraints exist and are greater for smaller firms the german system of finance moreover seems particularly deficient in the channeling of funds to new firm startups in the newer industries

the assessment the new economy the remarkable economic success of the united states in the 1990s led many observers to talk about a new economy this paper provides an overview of the main issues including faster productivity growth the stability of inflation despite very low unemployment the reduction in output volatility the role of monetary policy and the boom in the stock market the paper also considers whether or not the acceleration in productivity growth can be sustained and the possible implications for the rest of the world copyright 2002 oxford university press

the maturity structure of corporate debt we provide an empirical examination of the determinants of corporate debt maturity our evidence offers strong support for the contracting cost hypothesis firms that have few growth options are large or are regulated have more long term debt in their capital structure we find little evidence that firms use the maturity structure of their debt to signal information to the market the evidence is consistent however with the hypothesis that firms with larger information asymmetries issue more short term debt we find no evidence that taxes affect debt maturity

phillips curves and unemployment dynamics a critique and a holistic perspective the conventional wisdom that inflation and unemployment are unrelated in the long run implies that these phenomena can be analysed by separate branches of economics the macro literature tries to explain inflation dynamics and estimates the nairu the labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment we show that the orthodox view that the new keynesian phillips curve is vertical in the long run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate in the light of these results we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment

business environment economic agglomeration and job creation around the world based on a comprehensive worldwide firm survey this paper looks at how the business environment and economic agglomeration affect job creation holding constant conventional determinants of firm growth such as firm ownership size and age the analysis finds that economic agglomeration is most important especially modern telecommunications access to export markets concentration of economic activity in large cities and capacity agglomeration the concentration of large firms in a city although the business environment affects job growth less than agglomeration does some elements of the business environment matter such as labor flexibility unionization and local skill levels there is strong heterogeneity in job creation across firm size and age

in search of a stylised fact do real wages exhibit a consistent pattern of cyclical variability the paper surveys the studies on the cyclical behaviour of real wages published from the twenties onwards the traditional simple neoclassical model of the labour market suggests that real wages tend to move countercyclically however from a theoretical viewpoint there are few reasons to expect this behaviour once the simple model is extended to account for imperfect competition uncertainty lagged responses or contracting between firms and workers empirical studies give different answers to the problem the contributions reviewed in the paper are arranged roughly in a chronological order the interwar period the postwar pre econometric studies the econometric work using aggregate data the evidence produced on the basis of longitudinal data the analyses of the shock responsiveness of real wages and finally the most recent papers attempting a reconciliation of the somewhat conflicting evidence derived from aggregate and panel data

second generation models of currency crises until the beginning of the 1990s currency crises were typically analyzed within the framework of a generation of models that assumed that the foreign exchange reserves of a country that was running a fixed exchange rate policy were falling because the government was running a deficit on its budget that was financed by printing money when the foreign exchange reserves reached a lower bound a speculative attack on the fixed exchange rate was launched today this theory is no longer the benchmark when explaining the occurrence of a currency crisis actually a new generation of models that seeks to take explicitly into account the costs and benefits associated with the maintenance of a fixed exchange rate has emerged this paper surveys these second generation models of currency crises this generation of models emphasizes that it is an endogenous decision if a government chooses to abandon a policy of fixed exchange rates the survey pays special attention to the fact that the second generation of currency crises models often generates multiple equilibria for the rate of devaluation given one state of the economic fundamentals a currency crisis can thus occur even if no secular trend in economic fundamentals can be identified as in recent currency crises