international perspectives on financing evidence from japan a current issue of considerable concern is whether the financial environment of british firms inhibits their competitive position and growth performance the argument is often put in terms of the short sightedness of the investment strategies of british firms or their managers a contrast is drawn between this situation and that in countries where the financial structure encourages managers to take a longer term view similar concerns have been expressed in other countries particularly the usa an international comparison of corporate finance provides a timely opportunity to evaluate these concerns

further empirical evidence on popularity and electoral cycle effects this paper empirically examines the hypothesis that popularity is typified by electoral cycle effects we suggest that if the data is filtered on the basis of a model assuming informed voters there is no evidence for the electoral cycle hypothesis

financial factors and investment in belgium france germany and the united kingdom a comparison using company panel data we construct company panel data sets for manufacturing firms in belgium france germany and the united kingdom covering the period 1978 1989 these data sets are used to estimate empirical investment equations and to investigate the role played by financial factors in each country a robust finding is that cash flow and profits terms appear to be both statistically and quantitatively more significant in the united kingdom than in the three continental european countries this is consistent with the suggestion that financial constraints on investment may be relatively severe in the more market oriented u k financial system

an equilibrium politico economic model an equilibrium politico economic model i introduction recent empirical studies by alesina and sachs 1986 and haynes and stone 1987 have found that political elections have significant implications for the time paths of employment and inflation explnations of this phenomenon fall into two general categories political business cycle theories and partisan theories in political business cycle models it is assumed that the government has both the ability and desire to manipulate the economy for electoral purposes partisan theories suggest that if competing parties follow different policies it is the surprise of an election result that causes a response from the economy however partisan theories can only explain why different parties experience different levels of employment and output early in an electoral term here a partisan model is developed in which economic and political shocks before an election have asymmetric effects on inflation employment and voting behavior depending on which party is in power and which economic variables effect voting ii political structure and voting two political parties compete periodically for control of the government the parties are distinguished by their expected monetary growth rates denoted mu sup h high and mu sup l low the electorate consists of a continuum of voters distributed uniformly on the interval p p individuals located closer to p are more favorably pre disposed to party h let x sub t be an index of the relative popularity of the parties at time t if x sub t 0 party h has a plurality of support if x sub t in nonelection years the expected monetary growth rate will be the incumbents trend rate while in election years it will be the probabilistically weighted average of the two parties expected monetary growth rates iii economic structure the economy is described by a rational expectations macro model unemployment is determined by the surprise phillips curve u sub t eta sub 0 eta sub 1 sub t 1 pi sup e sub t pi sub t epsilon sub t where sub t 1 pi sup e sub t denotes expected inflation and epsilon sub t a real shock distributed epsilon sub t is approx n 0 sigma sup 2 sub epsilon independent over time eta sub 0 is greater than 0 and eta sub 1 is greater than 0 are constants eta sub 0 is the natural rate the rate of inflation is given by pi sub t mu sup s sub t mu sup d sub t where mu sup s sub t and mu sup d sub t are respectively the growth rates of the nominal money supply and demand for real beginning of period cash balances

general economic conditions and national elections the fact that economic conditions influence voters is a leading commonplace of conversation in election years the question is is this fact in fact a fact despite the overwhelming popularity of the fact it has received neither an explicit theoretical analysis presumably because it is so obvious that economic adversity should create political adversaries nor until recently a satisfactory statistical analysis gerald h kramer has presented a multivariate analysis of congressional elections which would strongly suggest that fluctuations in the rate of unemployment have no appreciable effect upon elections but that fluctuations in per capita real income are influential in the following pages i propose to 1 reaffirm his finding on the electoral unimportance of ordinary fluctuations in unemployment 2 argue that contrary to kramer fluctuations in real income also do not have important electoral effects and 3 present an argument based upon rational voter behavior for the unimportance of general economic conditions in national elections

taxation and presidential approval separate effects from tax burden and tax structure turbulence previous research has established that taxation may impose significant electoral costs on politicians this literature however focuses exclusively on the effect of the tax burden in this paper we test the hypothesis that both the level of the tax burden and the change in the tax structure affect the us president s approval ratings over the 1959 2006 period our results support this proposition specifically we find a negative impact from the magnitudes of the tax burden and the deficit as well as from changes in the tax structure on presidential approval ratings

econometric estimations of popularity functions a case study for austria in this paper we investigate the effects of changes in economic conditions on the popularity of political parties in austria after a brief description of the austrian political system we estimate single equations and simultaneous systems of popularity functions for different parties based on traditional theoretical foundations results show that some effects of economic variables on popularity exist although they are different between different policy regimes traditional popularity functions nevertheless outperform models based on the assumption of voters rational expectations which claim that only unexpected changes in economic conditions affect political popularity

modeling government popularity in postwar britain a methodological example economic theory suggests that government popularity may be related to the rate of change of nonstationary economic quantities and the level of stationary financial variables like inflation or interest rates political theory suggests that this relationship may not be stable over time we find that there is a well defined relationship between u k government popularity in the postwar period and a small set of economic variables i e unemployment inflation and real interest rates unusual political events are also important voters appear to discount history at a high rate remarkably the estimated equation is very stable and passes a battery of stability tests including postsample parameter stability tests furthermore estimation using the kalman filter shows no tendency for the parameters to vary systematically over time implying that voter preferences have remained broadly constant throughout the postwar years

an empirical test of the asymmetric models on innovative activity who invests more into r d the incumbent or the challenger the theoretical discussion concerning the question whether the incumbent or the potential entrant invests more into r d has attracted considerable interest this paper reports the results of an empirical study on this question using data of about 3500 german firms over the years 1992 to 1995 the survey explicitly asks the firms for their motives to undertake innovative activity it is thus possible to take account of intended not just completed market entry it turns out that the challenger invests more into r d in order to enter a new market than the incumbent thus the patent racing model by reinganum and others seems to characterize innovative activity more accurately than the competing auction model of gilbert and newbery we use a heteroscedastic tobit as well as a tobit model with selectivity in order to deal with the econometric problems of double censoring

company bankruptcies and births matter this paper constructs a simple supply orientated model of the economy in which company bankruptcies which lead to a loss of capital and births have impacts on macroeconomic variables bankruptcies will reduce output increase unemployment worsen the balance of payments and also impact upon inflation empirical work based on data from both the usa and the uk finds a significant granger causality relationship between bankruptcies and births and these four macroeconomic variables the standard granger causality regression is supplemented by non linear granger causality tests

the vp function a survey of the literature on vote and popularity functions after 25 years vp functions explain the support for the government at votes and polls by economic and political variables most studies analyze macro time series we also cover studies of individual voters socio economic groups and regional cross sections the theory starts from the responsibil ity hypothesis voters hold the government responsible for economic conditions it works in two party block systems but not else voters in most countries are found to be sociotropic egotropic voting also occurs voters myopia is well established voting is retrospective as expectations are static it costs the average government almost 2 of the vote to rule

is public r d a complement or substitute for private r d a review of the econometric evidence is public r d spending complementary and thus additional to private r d spending or does it substitute for and tend to crowd out private r d conflicting answers are given to this question we survey the body of available econometric evidence accumulated over the past 35 years a framework for analysis of the problem is developed to help organize and summarize the findings of econometric studies based on time series and cross section data from various levels of aggregation laboratory firm industry country the findings overall are ambivalent and the existing literature as a whole is subject to the criticism that the nature of the experiment s that the investigators envisage is not adequately specified we conclude by offering suggestions for improving future empirical research on this issue

clientelism and polarized voting empirical evidence one must take country specific institutional features into account when analyzing former communist countries transformation process to new political institutions we do so for post communist albania where the regional and cultural polarization that has existed for centuries has evolved to clientelism in the new democracy we show how clientelistic parties give rise to very particular voting patterns these reveal major differences across regions not only in party choice but also in voters responses to government policies these responses depend on the party in government and on the region concerned this is in sharp contrast with results obtained when applying the same model to a large number of more advanced democracies with similar electoral institutions a proper evaluation of democratization in albania thus requires looking beyond the formal institutions governing elections and taking clientelism and its effect on voter behavior into account

the political theory of the business cycle two strands of recent empirical work pose a challenge for the macro theorist when brought together one is the rational expectations interpretation of the business cycle the other is the political theory of the business cycle this paper attempts a reconciliation of these two strands in a theory where national political parties have to satisfy the preference of their own supporters as well as the floating voter the implications are that party voters evaluate government performance with respect to expected inflation and output and their variances and that parties will pursue different feedback rules

bread and the attrition of power economic events and german election results aggregate votes for incumbent parties in post war germany were determined by the weighted average growth of real per capita disposable income each percentage point of per capita real disposable income growth sustained over the legislative term yielded approximately two percentage points of votes in germany no other economic variables add value or significantly perturb the coefficients of our model however attrition of power reduced the vote share in election years 1961 1994 and 1998

electoral cycles in active labor market policies we examine how electoral motives influence active labor market policies that promote short term job creation such policies reduce measures of unemployment using german state data for the period 1985 to 2004 we show that election motivated politicians pushed job promotion schemes before elections

effectiveness of r d tax incentives in small and large enterprises in quebec in this paper we evaluate the effectiveness of r d tax incentives in quebec using manufacturing firm data from 1997 to 2003 originating from r d surveys annual surveys of manufactures and administrative data the estimated price elasticity of r d is 0 10 in the short run and 0 14 in the long run with slightly higher elasticities for small firms than for large firms we show that there is a deadweight loss associated with level based r d tax incentives that is particularly acute for large firms for small firms it is not sizeable enough to suppress the r d additionality at least not for quite a number of years after the initial tax change incremental r d tax credits do not suffer from this deadweight loss and are from that perspective preferable to level based tax incentives

evolutionary voter sophistication and political business cycles the concept of the sophisticated electorate is central to many contemporary political economic models however no existing studies have yet clarified how voters could develop a sophisticated way of evaluating economic performance this study suggests a transitional hypothesis that removes the constraint that voters have prior knowledge about the macroeconomic environment and the true economic intent of the incumbent government the hypothesis permits behavioral innovation from learning and predicts that the evolutionary process toward sophistication may be triggered by socially suboptimal political business cycles that reveal the self serving characteristic of the government the empirical analyses using recent japanese experiences show that japanese political support behavior shifted from naivete to sophistication in the early 1970s after political manipulation occurred in the 1969 and 1972 parliamentary elections

political business cycles and endogenous elections empirical research of political business cycles pbcs may suffer from endogeneity bias when incumbent governments have discretion to call for an early election using an instrumental variable iv routine on data from japan and the u k we find strong evidence to support the notion that election timing is a function of the economy rather than the macroeconomy being driven by elections as assumed in pbc in single equation regressions no evidence of political cycles are found but hausman tests suggest elections are endogenous in our regressions a monetary cycle in japan and an inflation cycle in the u k are uncovered through iv estimation

rational adaptive and learning behavior of voters evidence from disaggregated popularity functions for sweden the disaggregated study confirms earlier aggregated studies showing that unemployment strongly affects the popularity of the swedish government the results presented here however suggest that there are differences among popularity functions estimated across groups differing in age income and gender consequently popularity functions estimated at an aggregated level ignore reaction patterns within various groups in society

variable rational partisan business cycles theory and some evidence the variable rational partisan business cycle model is developed where agents face uncertainty regarding the timing and outcome of the next election the model predicts that partisan influences on the economy persist throughout the government s rule and are further influenced in the opposite direction by which party ruled in the previous period party popularity also has a causal effect on the business cycle finally the effects from changes in election timing expectations are dependent on which party ruled in the previous period empirical results for output and unemployment in canada germany and united kingdom yield mixed support for the model jel classification d72 e32 le modele des cycles d affaires variables fonde sur le comportement du partisan rationnel theorie et resultats le modele de cycles d affaires variables fonde sur le comportement du partisan rationnel est developpe pour le cas ou les agents font face a de l incertitude quant au moment du declenchement des elections et quant aux resultats des prochaines elections le modele predit que les influences partisanes sur l economie persistent tout au long du mandat du gouvernement et qu elles sont influencees dans la direction opposee par le type de parti au pouvoir au cours du mandat anterieur la popularite du parti a un effet de causalite sur le cycle d affaires enfin les effets des changements dans les anticipations du moment du declenchement des elections dependent de quel parti etait au pouvoir au cours de la periode anterieure les resultats empiriques de la calibration du modele pour la production et le chomage au canada en allemagne et au royaume uni donnent des resultats mitiges

pace sequencing and credibility of structural reforms abstract this paper reviews the theory and empirical evidence on the main policy issues relating to the pace credibility and sequencing of structural reforms in less developed countries and post socialist economies it highlights areas where there is broad consensus as well as widespread disagreement among policymakers and economists pointing out along the way areas where more research would be useful

granger causality rational expectations and aversion to unemployment and inflation this paper presents a new test for rational expectations this is done within the context of public concern or aversion over inflation and unemployment it is found that inflation aversion granger causes inflation but unemployment aversion does not granger cause unemployment this implies both that inflation aversion is partially determined by expected inflation and that such expectations have a rational element however rational expectations of unemployment do not determine unemployment aversion the consequences of these results for political business cycle theory are then examined

are firms that received r d subsidies more innovative this paper looks at the effectiveness of r d grants for canadian plants that already benefit from r d tax credits using a non parametric matching estimator we find that firms that benefited from both policy measures introduced more new products than their counterparts that only benefited from r d tax incentives they also made more world first product innovations and were more successful in commercializing their innovations

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

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

the assessment financial liberalization financial systems and economic growth the report addresses four sets of issues mac roeconomic policy to promote growth the role of financial liberalization govemmentinterventionin credit markets and the design of financial systems it puts forward the following blueprint for reform reform should start by getting the fiscal deficit under control and establishing macroeconomic stability the government should then scale down its directed credit programs and adjust the level and pattern of interest rates to bring them into line with inflation and other market forces in the initial stage of reform the govern ment should also try to improve the foundations of finance that is the accounting and legal systems procedures for the enforcement of contracts disclosure requirements and the structure of prudential regulation and supervision it should encourage managerial au tonomy in financial institutions if institutional insol vency is widespread the government may need to re structure some financial institutions in the early stages of reform world bank 1989 p 127

assessment of the public tools used to promote r d investment in spanish smes in this paper we identify the potential determinants of firm r d to understand the effectiveness of public policies our results suggest a considerably low impact of tax credits and public grants on the r d investment of the spanish manufacturing firms tax credits are mainly considered by large firms that use them as a reduction in the tax burden in the corporate tax while smes use public grants to alleviate financial constraints this evidence leads to discuss alternatives to the current design of the public policies analyzed

recent developments in the theory of corporate finance the field of corporate finance is a vast one in order to keep this paper manageable i shall focus on two well known puzzles of corporate finance the first has been described by black 1976 as the dividend puzzle and the second by myers 1984 as the capital structure puzzle underlying these two puzzles are similar considerations both originate in the application of competitive equilibrium analysis to corporate financial behaviour in two classic papers by modigliani and miller modigliani and miller 1958 miller and modigliani 1961 modigliani and miller showed that if firms and investors enjoy the same financial opportunities then under conditions of perfectly competitive capital markets no asymmetries of information between different agents and no variations in the tax treatment of different forms of finance corporate financial policy is irrelevant the value of a firm is determined entirely by its real decisions and is completely unaffected by the ratio of debt to equity finance in its capital structure or by the amount of dividends it pays out for a given investment plan the stark contrast between modigliani and miller s theoretical analysis and empirical observations of the importance attached to capital structure and dividend decisions by both firms and investors is part of the capital structure and dividend puzzles but it is not all for it remains true that nearly thirty years after the original modigliani miller paper was first published despite enormous efforts on the part of many researchers a proper understanding of what determines companies borrowing and dividend decisions is still elusive

r d tax incentives in eu countries does the impact vary with firm size this paper studies the effect of r d tax incentives on the research activity of manufacturing firms based in france italy spain and the uk over the period 2007 2009 using a matching procedure we show that in all the examined countries but spain r d tax incentives induced a statistically significant increase in the intensity of r d expenses over sales however this effect is driven only by the behaviour of small firms by assessing the benefit cost ratio of r d tax policies we find evidence of substantial additional effects in italy and the uk

political accountability for price stability and unemployment in a multi party system with coalition governments a model of party popularity for multi party systems is presented and applied to the netherlands main conclusions are first inflation and unemployment and their interaction affect the popularity of parties second it is important to take into account that voters may reckon with a trade off between these variables third it is wrong to handle a coalition government as a homogeneous entity

rationality causality and the relation between economic conditions and the popularity of parties an empirical investigation for the federal republic of germany 1971 1982 abstract two questions are discussed using german popularity data from 1971 to 1982 it is asked whether it is true that using time series methods no relation can be found between economic variables and the popularity of parties taking ex post predictions strong evidence is presented that such a relation exists even if usual granger causality tests cannot detect it but is this relation compatible with rational expectations of the electorate this is at best partly the case as the anticipated part of the unemployment rate has a significant impact on the popularities of the two major german parties

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework