bargaining enforcement and multilateral sanctions when is cooperation counterproductive scholars and policymakers generally assume that multilateral cooperation is a necessary condition for economic sanctions to be of any use however previous statistical tests of this assumption have shown that sanctions are more successful with lower levels of cooperation this puzzle calls into question established theories of economic statecraft as well as theories of international cooperation in this article i test possible explanations for the ineffectiveness of multilateral cooperation on sanctions events using james fearon s 1998 breakdown of cooperation into bargaining and enforcement phases as a framework for discussion the empirical results show that when multilateral economic sanctions fail their failure is due to enforcement not bargaining problems without the support of an international organization cooperating states backslide from promises of cooperation backsliding occurs because of domestic political pressures and uncertainty about the intentions of the other sanctioning countries backsliding causes an initial burst of cooperative behavior to decay over time without institutional support cooperation is worse than useless it is counterproductive this result suggests that international cooperation is a more fragile equilibrium than previously thought but undercuts realist arguments that international organizations are unimportant

conform or challenge adjustment strategies of sanction torn companies the literature on sanctions often neglects the role of domestic firms in sender states although sanctions only have a real economic effect when senders firms reduce their activities on the target s market in contrast sanctions avoidance and increasing investments in the target country the observed behaviour of many companies facing the eu sanctions against russia imposed in 2014 mitigate the impact of these restrictive measures while sanctions increase the political risk for companies they also offer economic opportunities and previous studies could not settle the debate on which factor prevails by evaluating responses from british french german italian and polish enterprises to an online survey distributed in 2017 we analyse at the firm level how sanction torn companies adjust to new political orders and what drives their strategic decisions we find evidence that resource dependency induces strategies that challenge sanction policies in particular non fungible assets in the target country incentivise companies to further increase their engagement these defiance strategies diminish the real economic effect of sanctions and generate a new economic equilibrium which has negative long term implications on the choice set of policymakers to further pursue the imposition of sanctions and which even outlasts the lifting of these restrictive measures

government size and macroeconomic stability abstract we analyze the effects of government size on output variability in the context of a rbc model in which government size is parameterized by the income tax rate and the share of government purchases in output the model implies that i income taxes are destabilizing and ii for most specifications considered government purchases are stabilizing we compare those predictions with the results of simple cross country regressions using data for 22 oecd countries the estimated relationship between empirical indicators of government size and measures of gdp variability appears far stronger than the model predicts and often has the opposite sign

a method for taking models to the data abstract this paper develops a method for combining the power of a dynamic stochastic general equilibrium model with the flexibility of a vector autoregressive time series model to obtain a hybrid that can be taken directly to the data it estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar us economy the stability of the real business cycle model s structural parameters and the performance of the hybrid model s out of sample forecasts

government policies market imperfections and foreign direct investment the internalization eclectic theory of foreign direct investment includes the important insight that government policies create market imperfections which make foreign direct investment an economically rational strategic alternative for firms this paper reexamines the effects of government policies on market imperfections and foreign direct investment fdi it broadens and refines the analysis of the impact of government policies by developing the following arguments 1 there is a wide range of government policies that affect firms fdi decisions via their effects on market imperfections 2 there are numerous dimensions of variability in government policies that need to be identified in order to understand fully the effects of government policies on market imperfections and hence fdi flows 3 some of the effects of government policies on market imperfections and fdi are the opposite of those previously noted in the fdi literature 4 the effects of government policies vary across the several individual components of fdi flows the paper thus examines the following variables and relationships more extensively and precisely than has the previous literature government policy variables as causal factors affecting fdi market imperfection variables as intervening factors in the causal connections between government policies and fdi and the multiple indicators of the various dimensions of fdi as dependent variables

on the determinants of the success of economic sanctions an empirical analysis theory theories predicting the success of economic sanctions are tested on the universe of sanction episodes from 1914 to 1989 hypotheses the probability of success depends upon the cost to the target nation the extent of trade linkages between target and sender the stability of the target the amount of time sanctions are in force and whether financial sanctions are utilized method data are analyzed using logistic regression results the factors affecting success depend upon the goals of the sending nations when that goal is simply destabilization the principal determinant of success is the initial stability of the target for other goals the use of financial sanctions is most effective we also find evidence of a modest downward trend over time in the relative effectiveness of sanctions in the latter category

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

estimated general equilibrium models for the evaluation of monetary policy in the us and europe a persistent criticism of general equilibrium models of monetary policy which incorporate nominal inertia in the form of the new keynesian phillips curve nkpc is that they fail to capture the extent of inflation inertia in the data in this paper we derive a general equilibrium model based on optimising behaviour but which also implies a data consistent nkpc specifically our model accounts for nominal inertia in both price and wage setting as well for habits in consumption using us and european data from 1970 to 1998 our parameter estimates reveal that i there is relatively more inertia in price setting in europe ii wage contracts last longer in the us iii the extent of backward looking behaviour in price and wage setting is statistically significant but small in both the us and europe and iv significant habits effects are present in european consumption finally we simulate the effects of monetary policy and find that while the magnitude of the impact of monetary policy on the endogenous variables in our estimated models are similar to other econometric studies the dynamic paths for variables display less inertia than is typically found in studies which use output gaps to proxy changes in marginal costs

can exchange rate predictability be achieved without monetary convergence evidence from the ems by kenneth rogoff the author shows that the ems has contributed to stabilizing the exchange rates of member countries and attributes the stabilization to the implementation of capital controls however this success becomes a failure as departing from market rules is a source of inefficiency therefore the ems experience should be rejected as a lesson for an extended monetary coordination among countries with large capital markets we concur broadly with the author s conclusions concerning the variability of exchange rates and interest rates but believe that his rejection of the ems as a lesson on monetary coordination with a view to stabilizing exchange rates remains a moot point in particular the ems experience has demonstrated that a large sterilized foreign exchange interventions in the presence of a risk premium have also contributed to stabilizing exchange rates together with capital controls and b this exchange rate arrangement has succeeded in fostering strong incentives towards policy coordination and convergence of inflation rates among some member countries

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

domestic opposition and signaling in international crises this article explores the effect of domestic political competition on the escalation of international crises it combines an incomplete information model of crisis bargaining with a simple model of two party electoral choice one state has two strategic actors a government and an opposition party both of which declare openly whether they support the use of force to alter the status quo the rival state updates its beliefs and selects its strategy in response to both signals the parties payoffs depend upon a retrospective evaluation by the domestic electorate the model shows that the inclusion of a strategic opposition party decreases the ex ante probability of war by helping to reveal information about the state s preferences this finding has important implications for research on democracy and international conflict since it suggests a mechanism through which democratic states can overcome informational asymmetries which have been identified as a central obstacle to negotiation

how many hands to make sanctions work comparing eu and us sanctioning efforts abstract one of the core disputes in the literature on economic statecraft addresses the conditions under which multilateral sanctions are more successful than unilateral ones our game theoretic model implies that extant assessments do not sufficiently differentiate between the varying abilities of multilateral and unilateral senders in credibly threatening and carrying out sanctions we introduce a selection argument that focuses on the complex decision making process of the european union eu to impose sanctions in comparison to the united states us the institutional structure of the eu and conflicting economic interests of multiple principals make the imposition of sanctions much more difficult in addition the international organization is less accountable vis a vis the voters both mechanisms render sanction threats by the eu less credible since the united states as a unilateral sender can issue more credible sanction threats imposed us sanctions are a negative selection of cases and thus less successful than restrictive measures imposed by the eu we test these propositions with a new dataset on threatened and imposed sanctions by the european union and the united states for the period between 1989 and 2015 the empirical evidence demonstrates that eu sanctions are indeed more successful than those by the us in contrast us sanction threats are more successful than those by the eu we provide evidence for the difficulties of multilateral senders to impose sanctions by showing that eu sanctions are both less likely and less severe the more varied the economic links of the multilateral sender with the sanctioned state are

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

solving consumption models with multiplicative habits this paper provides derivations necessary for solving an optimal consumption problem with multiplicative habits and a crra outer utility function either for a microeconomic problem with both labor income risk and rate of return risk or for a macroeconomic representative agent model

distinguishing characteristics of degrees of success and failure in economic sanctions episodes this paper uses 104 episodes from the hufbauer et al 1985 1990 dataset to examine the correlates of classes of outcomes of economic sanctions the parsimonious equations presented identify the characteristics of sanctions episodes conducive to success rather than marginal success and the characteristics productive of failure rather than marginal failure failure is most likely if there is significant third party assistance to the target and if the pre existing trade linkage between sender and target is small success is most easily achieved when the objective is not classified as modest and when pre sanction relations between sender and target are cordial or neutral the equations presented overcome data and methodological flaws of earlier studies exhibit reasonable predictive accuracy and satisfy a battery of tests of statistical significance hypothesized coefficient sign goodness of fit high likelihood and informational efficiency

rationalist explanations for war realist and other scholars commonly hold that rationally led states can and sometimes do fight when no peaceful bargains exist that both would prefer to war against this view i show that under very broad conditions there will exist negotiated settlements that genuinely rational states would mutually prefer to a risky and costly fight popular rationalist and realist explanations for war fail either to address or to explain adequately what would prevent leaders from locating a less costly bargain essentially just two mechanisms can resolve this puzzle on strictly rationalist terms the first turns on the fact that states have both private information about capabilities and resolve and the incentive to misrepresent it the second turns on the fact that in specific strategic contexts states may be unable credibly to commit to uphold a mutually preferable bargain historical examples suggest that both mechanisms are empirically plausible

when are sanctions effective a bargaining and enforcement framework although a considerable literature identifies the conditions under which sanctions are more likely to be successful few studies examine the question of when sanctioning states or senders are willing to enforce their sanctions laws against their firms using a game theoretic model we argue that imposing sanctions creates a strategic dilemma for senders we demonstrate that senders often have disincentives to enforce their sanctions policies given that the restriction on economic transactions with targeted states may undermine their firms competitiveness the model indicates that sanctions are more likely to succeed when the sender s firm retains a moderate share of the target s market relative to its foreign competitors however the model also demonstrates that sanctions are likely to be imposed only when the conditions do not favor their success the empirical implications of the model are tested using the threat and imposition of economic sanctions ties data set

markets market failures and development a central question in development economics is how can we account for differences in the levels of income and the rates of growth between the developed and less developed economies in the 1950s and 1960s there was a standard answer to this question the poor are just like the rich except they are poorer they have less human and nonhuman capital there was an immediate prescription for this diagnosis increase the resources of ldcs either by transferring capital to them either direct aid or education or by encouraging them to save more today these answers seem less convincing that they did two decades ago if the problem were primarily a shortage of physical capital the return to capital should be much higher in ldcs than in developed countries and the natural avarice of capitalists would lead to a flow of capital from the more developed to the less developed economies see howard pack 1984 and my 1988 paper if the problem were primarily a shortage of human capital then the educated in ldcs should receive a higher absolute as well as relative income than the educated in more developed economies how then can we account for high levels of unemployment among the educated and the migration of the educated from ldcs to more developed economies moreover the predictions of the standard neoclassical growth model of a convergence of growth rates in per capita income with permanent differences in per capita consumption being explained by differences in savings rates and reproduction rates do not seem to have been borne out these observations suggest that the ldcs differ from the developed countries in at least some other important respects and this view is corroborated by those studies which have looked at the productivity of similar plants operating in developed and less developed economies see pack 1984 1987 the difference can be attributed perhaps tautologically to differences in economic organization to how individuals factors of production interact and to the institutions which mediate those interactions among the most important of these institutions are markets it is by now well recognized that there are many instances of market failures in more developed economies see bruce greenwald and myself 1986 in some cases market failures may be ameliorated by nonmarket institutions if for instance capital markets do not function well perfectly if only because of costly and imperfect information nonmarket institutions internal capital markets within large conglomerates may develop market failure is more prevalent in ldcs and the nonmarket institutions that ameliorate its consequences are at least in many instances less successful in doing so the objective of this paper is to explore the causes and consequences of these market failures and the failure of private nonmarket solutions and to suggest possible roles for government intervention tdiscussants anne 0 krueger duke university stanley fischer world bank

the hidden hand of economic coercion why do policymakers consistently employ economic sanctions even though scholars consider them an ineffective tool of statecraft game theoretic models of economic coercion suggest the success rate may be understated because of selection effects when the targeted country prefers conceding to incurring the cost of sanctions it has an incentive to acquiesce before the imposition of sanctions the bulk of successful coercion episodes should therefore end with sanctions threatened but not imposed this contradicts the recent literature on sanctions which assumes that sanctions rarely if ever work at generating significant concessions from the targeted country and are imposed for domestic or symbolic political reasons if the game theoretic argument is correct the crucial cases to study are those in which coercion is threatened but not implemented a statistical analysis of data on sanctions in pursuit of economic or regulatory goals strongly supports the gametheoretic argument these results suggest that the significance of economic coercion has been undervalued in the study of statecraft and international relations more generally

economic interdependence bargaining power and political influence bargaining theory is used to evaluate the proposition that asymmetrical economic interdependence among states is a source of political power it is shown that asymmetrical economic interdependence does not imply that less dependent actors will be able to exercise political influence over more dependent ones the use of economic interdependence for political influence requires instead that the exchange of economic resources for political concessions make both parties to a relationship better off than they would be if they bargained over the distribution of the gains from the economic relationship alone whether this is true is independent of the degree of asymmetry in the economic relationship or its direction an explanation is given for the fact that other scholars have reached different conclusions and the implications of these results for our understanding of a variety of types of relations among governments are derived

estimation and control of an optimization based model with sticky prices and wages abstract this paper provides estimates of an optimization based equilibrium model with sticky prices and wages the estimated model is used to analyse the welfare properties of various interest rate rules for conducting monetary policy an important feature of this model is that it involves a tradeoff between the variances of price and wage inflation and the output gap this tradeoff implies that it is desirable for the monetary authority to respond to wage inflation in addition to price inflation output and past interest rates when setting the current interest rate the issue whether wages and prices can be indexed to steady state inflation has important implications both for the characterization of optimal interest rate rules and interest rate volatility in particular optimal policy in the presence of indexation induces implausibly high steady state inflation

the effect of sanctions on u s foreign direct investment for years the united states has imposed economic sanctions to com pel countries to alter their behavior an important concern is whether government sanctions influence private foreign direct investment fdi decisions the largest source of foreign capital in the first study to assess empirically the relationship between economic sanctions and fdi we consider whether u s sanctions influence u s fdi inflows into targeted countries using panel data for 171 countries from 1965 to 2000 we find strong evidence that u s investors pull out of countries targeted for u s sanctions prior to their imposition this disinvestment is not permanent and invest ment tends to return after the sanctions are imposed the results provide support for fdi studies that show the effect of risk on investor decision making the use of economic sanctions by the united states to compel countries to alter their behavior has increased in recent years at the same time u s foreign direct investment fdi has expanded with u s multinational corporations mncs rep resenting the largest share of global fdi despite the growth of u s fdi and the u s government s imposition of sanctions no empirical work has considered the relationship between sanctions and u s investor decisions how do u s mncs react to the use of u s sanctions and does u s fdi make sanctions more or less effective in this article we analyze the impact of u s sanctions on investment decisions made by u s mncs building on investors risk calculations that are critical to the fdi literature 1 we propose several reasons why risk linked to economic sanctions influences fdi flows we hypothesize that u s firms significantly draw down their investment in tar geted countries prior to the imposition of sanctions as risk levels are most height ened however after sanctions have been in place long enough for investors to understand their specific restrictions uncertainty surrounding the amount of risk decreases and u s fdi is expected to return to levels near the pre sanction period

optimal patenting and licensing of financial innovations recent court decisions starting with the state street decision in 1998 allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations this new patentability paradigm and the heterogeneity of characteristics associated with financial innovations pose an immediate decision problem for senior management what to patent we present a parsimonious decision framework that answers this question we show that for innovations with certain characteristics it is optimal not to patent even if the option of patenting and licensing is available our model emphasizes the role of embedded real options that arise from certain types of financial innovations the model provides an explanation of observed patenting behavior of financial institutions and the success of a wide class of innovations including swaps credit derivatives and pricing algorithms

the theory of international economic sanctions a public choice approach comment william kaempfer and anton lowenberg in this review september 1988 have developed an engaging model of the sanctions process grounded in public choice they identify potentially influential private forces that might affect the nature of a sanctions package while the spirit of their effort is laudable the model fails to incorporate some absolutely essential information about the legal institutional and strategic framework in which sanctions decisions are made as a consequence they reach a conclusion that flies in the face of existing facts contrary to what is suggested by kaempfer and lowenberg kl and contrary to the implications of their model the evidence clearly indicates there is an unequivocal bias against the use of import restrictions in favor of export controls the recent history of economic sanctions shows that only somewhat more than one third of sanction episodes involved both export and import controls further gary hufbauer and jeffrey schott 1985 observe that in instances where only one or the other is invoked export controls are almost always preferred to restrictions on imports 2 an almost exclusive reliance on export controls in economic foreign policy measures is particularly evident in the actions of the united states in the 1970s 3 the purpose of this comment is to explore the causes of this asymmetry there are at least three reasons why export controls have been favored over import controls reasons that play no part in the kl model first the general agreement on tariffs and trade gatt has institutionalized a bias against import barriers in favor of export controls second in the united states domestic legal constraints favor export controls and discourage import controls third as will be argued export controls are more easily reversed than import controls and reversibility is a desirable component in any foreign policy based trade intervention consider these points in turn in the 1946 1948 period during which time the gatt was first negotiated trade barriers were identified most often with those artificial impediments to trade that restrict foreign access to domestic markets especially tariffs for this reason gatt rules and actions have sought primarily to dismantle import barriers john jackson 1969 p 502 notes that despite the fact that extensive export controls do exist there has been only one complaint with respect to such controls reflected in gatt documents this is the czechoslovakian complaint against the united states in 1949 for the imposition of discriminatory export controls 4 jackson p 502 observes that there is very little if any effective gatt policing of export control policy and he comments later p 539 that insofar as any gatt obligations can be avoided without consequences this avoidance operates in effect as an exception this suggests that those foreign policy export controls that are pro department of economics university of arizona tucson az 85721 i thank alan deardorff bernard hoekman and robert stem for helpful discussions on work related to this note my thanks also to two anonymous referees for their constructive comments see p 28 and tables 4 1 4 5 pp 70 77 hufbauer and schott 1985 2ibid p 28 3see for example richard cooper 1987 pp 301 302 and p 305 and kenneth abbott 1981 p 741 4this is confirmed more recently by barry carter 1988 p 97 the only other event involving export restrictions challenged before the gatt was the u s embargo against nicaragua in 1985 which involved both import and export restrictions