international consumption risk sharing this paper formally examines the implications of international consumption risk sharing for a panel of industrialized countries we theoretically derive the international consumption insurance proposition in a simple setup and show how to modify it in more complicated models we analyze the implications of the theory for pairs of countries and find that aggregate domestic consumption is almost completely insured against idiosyncratic real demographic fiscal and monetary shocks over short cycles but that it covaries with these variables over medium and long cycles the cross equation restrictions imposed by the theory are rejected the policy implications are discussed

the real effects of financial integration abstract this paper shows how correlations in gdp fluctuations rise with financial integration finance serves to increase international correlations in both consumption and gdp fluctuations which explains the persistent gap between the two in the data a quantity puzzle the positive association between financial integration and gdp correlation constitutes a puzzle as theory suggests a negative relation if anything nevertheless it prevails in the data even after the effects of finance on trade and specialization are accounted for

are corporate tax rates or countries converging abstract the statutory rate and effective tax rate imposed on corporation income as well as the dispersion of these rates began to decline in the 1980s is this due to changes in the domestic determinants of corporate taxation or increases in international pressures for tax competition this paper finds clear evidence that the corporate tax rate is insulated from a country s revenue needs across countries there is no association of the expenditure gdp ratio with the corporate statutory rate and only weak evidence of a positive association with the average rate there is suggestive but not definitive evidence that the domestic role of the corporate tax as a backstop to the individual income tax is important across countries there is indeed a strong association between the top individual rate and the top statutory corporate rate there is intriguing evidence about the role of international competitive pressures on corporate taxation measures of openness are negatively associated with statutory corporate rates although not with revenues collected as a fraction of gdp strikingly larger more trade intensive countries do collect more corporate tax but this may be because these countries are more attractive venues for investment

why hasn t tax competition triggered a race to the bottom some quantitative lessons from the eu abstract the integration of european financial markets in the early 1980s created an environment of near perfect capital mobility across countries that had harmonized indirect taxes but maintained large differences in factor taxes the years that followed witnessed several rounds of competition in capital taxes with puzzling results instead of the dreaded race to the bottom in capital taxes the uk lowered its capital tax to a rate closer to those of france germany and italy while capital taxes changed slightly in these countries the uk increased its labor tax marginally but the other countries increased theirs sharply this paper shows that these results are consistent with the quantitative predictions of a dynamic neoclassical general equilibrium model of tax competition that incorporates the key international externalities of tax policy operating via relative prices wealth distribution and fiscal solvency tax competition is modeled as a one shot game over time invariant capital taxes with dynamic payoffs relative to a status quo calibrated to european data the calibration is preceded by an empirical analysis that shows that the relationship linking taxes to labor supply and the investment rate in the model are in line with empirical evidence and that domestic taxes seem to respond to foreign taxes the solutions of the games show that when countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency there is no race to the bottom and the nash equilibrium is close to observed taxes in contrast if consumption taxes adjust to maintain fiscal solvency competition over capital taxes triggers a race to the bottom but this outcome entails large welfare gains surprisingly the gains from coordination are small in all of these experiments

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

collateral avoids ponzi schemes in incomplete markets without introducing either debt constraints or transversality conditions to avoid the possibility of ponzi schemes we show the existence of equilibrium in an infinite horizon incomplete markets economy with a collateral structure

default and punishment in general equilibrium we extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools the equilibrating variables include expected delivery rates along with the usual prices of assets and commodities by reinterpreting the variables our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive general equilibrium framework perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates it also makes for a simple equilibrium refinement which we propose in order to rule out irrational pessimism about deliveries of untraded assets we show that refined equilibrium always exists in our model and that default in conjunction with refinement opens the door to a theory of endogenous assets the market chooses the promises default penalties and quantity constraints of actively traded assets

statistical arbitrage and securities prices this article introduces the concept of a statistical arbitrage opportunity sao in a finite horizon economy a sao is a zero cost trading strategy for which i the expected payoff is positive and ii the conditional expected payoff in each final state of the economy is nonnegative unlike a pure arbitrage opportunity a sao can have negative payoffs provided that the average payoff in each final state is nonnegative if the pricing kernel in the economy is path independent then no saos can exist furthermore ruling out saos imposes a novel martingale type restriction on the dynamics of securities prices the important properties of the restriction are that it 1 is model free in the sense that it requires no parametric assumptions about the true equilibrium model 2 can be tested in samples affected by selection biases such as the peso problem and 3 continues to hold when investors beliefs are mistaken the article argues that one can use the new restriction to empirically resolve the joint hypothesis problem present in the traditional tests of the efficient market hypothesis in a fairly general environment this article proposes a novel martingaletype restriction on the dynamics of securities prices this restriction has a number of important properties most notably the restriction may be viewed as model free because it requires no parametric assumptions about the true equilibrium model to derive the restriction we rely on the concept of statistical arbitrage a generalization of pure arbitrage a pure arbitrage opportunity pao is a zero cost trading strategy that offers the possibility of a gain with no possibility of a loss as is well known the existence of paos is incompatible with a competitive equilibrium in asset markets the fundamental theorem of the financial theory establishes a link between the absence of paos and the existence of a positive pricing kernel which supports securities prices while the absence of paos is a necessary condition for any equilibrium model this condition alone often yields pricing implications that are too weak to be practically useful for example when valuing options in incomplete markets the no arbitrage bounds on option prices are typically very wide to strengthen pricing implications several recent articles

here a chief there a chief the rise of the cfo in the american firm this article examines the rise of the chief financial officer cfo position among american firms during the period 1963 2000 building on event history models of cfo adoptions among a sample of some 400 large corporations this analysis documents two stages in the diffusion of the cfo model that occurred prior to its ultimate embodiment of the shareholder value ideal the cfo function originated as part of the conglomerate ideal to handle the funding of diversifying acquisitions in response to an ambiguous regulatory change in accounting rules in 1979 which threatened to reduce reported earnings further at a time when corporate earnings already were under great strain corporate leaders and finance professionals reconstructed the cfo as a solution the cfo s popularity quickly surged as a result and the role kept expanding in the following years to focus on managing shareholders and stock prices

capital mobility and international sharing of cyclical risk this paper investigates whether the international globalization of financial markets allows for significant cross country risk sharing at the business cycle frequency we find that cross country risk sharing is still limited and this is unlikely to be the result of financial frictions that limit state contingent contracts part of the limited international risk sharing could be the consequence of frictions that de facto reduce the short term mobility of financial capital but even with these frictions we find significant divergence between model predictions and the data

channels of interstate risk sharing united states 1963 1990 we develop a framework for quantifying the amount of risk sharing among states in the united states and construct data that allow us to decompose the cross sectional variance in gross state product into several components which we refer to as levels of smoothing we find that 39 percent of shocks to gross state product are smoothed by capital markets 13 percent are smoothed by the federal government and 23 percent are smoothed by credit markets the remaining 25 percent are not smoothed we also decompose the federal government smoothing into subcategories taxes transfers and grants to states

why financial executives do bad things the effects of the slippery slope and tone at the top on misreporting behavior this paper employs theory of normal organizational wrongdoing and investigates the joint effects of management tone and the slippery slope on financial reporting misbehavior in study 1 we investigate assumptions about the effects of sliding down the slippery slope and tone at the top on financial executives decisions to misreport earnings results of study 1 indicate that executives are willing to engage in misreporting behavior when there is a positive tone set by the chief financial officer cfo kind attitude toward employees and non aggressive attitude about earnings regardless of the presence or absence of a slippery slope a negative tone set by the cfo does not facilitate the transition from minor indiscretions to financial misreporting in study 2 we find that auditors evaluating executives decisions under the same conditions as those in study 1 do not react to the slippery slope condition but auditors assess higher risks of fraud when the cfo sets a negative tone overall our results indicate that many assumptions about the slippery slope and tone at the top should be questioned we provide evidence that pro organizational behaviors and incrementalism yield new insights into the causes of ethical failures financial misreporting behavior and failures of corporate governance mechanisms

solving the feldstein horioka puzzle with financial frictions unlike the prediction of a frictionless open economy model long term average savings and investment rates are highly correlated across countries a puzzle first identified by feldstein and horioka 1980 we quantitatively investigate the impact of two types of financial frictions on this correlation one is limited enforcement w here contracts are enforced by the threat of default penalties the other is limited spanning where the only asset available is noncontingent bonds we find that the calibrated model with both frictions produces a savings investment correlation and a volume of capital flows close to the data to solve the puzzle the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data and the limited spanning friction needs to exogenously restrict capital flows to the observed level when combined the two frictions interact to endogenously restrict capital flows and thereby solve the feldstein horioka puzzle

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

leading by example values based strategy to instill ethical conduct years of research clearly shows that relying on traditional organizational power bases is not effective when companies want to promote business ethics and performance it is not only that the use of legitimate power to establish ethics codes and coercive power to punish employees who do not comply does not work this study based on a multi method research approach in the retail industry indicates that the classic iron fist leads to unethical business values and lower service performance but there is a light at the end of the tunnel for forward looking managers the ethical attitudes and behaviors of employees within international organizations is a dynamic variable that is possible to change by the use of values based leadership our extensive study of a large grocery store chain owned by a multinational corporation indicates that managers who lead by example will boost team values and commitment

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

taxes and international risk sharing abstract we extend a standard model of international risk sharing to include an empirically plausible distortion taxes the tax inclusive theory implies even under full risk sharing a predictable relationship between consumption growth and the consumption and capital income tax rates both within and across countries we find strong empirical evidence in favor of this relationship while idiosyncratic output fluctuations account for substantially more of cross country consumption growth variability than do taxes trends in tax differentials are found to be informative about the dynamic evolution of international risk sharing in particular adjusting for capital taxes reveals a marked improvement in risk sharing over the last three decades that is absent in baseline measures this improvement has been driven by the convergence of average tax rates on capital income across oecd countries toward the united states average capital tax rate

pareto weights as wedges in two country models abstract in models with recursive preferences endogenous variation in pareto weights would be interpreted as wedges from the perspective of a frictionless model with additive preferences we describe the behavior of the relative pareto weight in a two country world and explore its interaction with consumption and the real exchange rate

gain loss and asset pricing we develop an approach to asset pricing in incomplete markets that bridges the gap between the two fundamental approaches in finance model based pricing and pricing by no arbitrage we strengthen the absence of arbtrage assumption by precluding investment opportunities whose attractiveness to a benchmark investor exceeds a specified threshold in our framework the attractiveness of an investment opportunity is measured by the gain loss ratio we show that a restriction on the maximum gain loss ratio is equivalent to a restriction on the ratio of the maximum to minimum values of the pricing kernel by limiting the maximum gainloss ratio we can restrict the admissible set of pricing kernels which in turn allows us to restrict the set of prices that can be assigned to assets we illustrate our methodology by computing price bounds for call options in a black scholes economy without intermediate trading when we vary the maximum permitted gainloss ratio these bounds can range from the exact prices implie

how does globalization affect the synchronization of business cycles this paper examines the impact of rising trade and financial integration on international business cycle comovement among a large group of industrial and developing countries the results provide at best limited support for the conventional wisdom that globalization has increased the degree of synchronization of business cycles the evidence that trade and financial integration enhance global spillovers of macroeconomic fluctuations is mostly limited to industrial countries one striking result is that on average cross country consumption correlations have not increased in the 1990s precisely when financial integration would have been expected to result in better risk sharing opportunities especially for developing countries this abstract was borrowed from another version of this item

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

financial integration and international risk sharing abstract conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk there is little evidence however that countries have increased risk sharing despite widespread financial liberalization we show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets while actual markets are far from frictionless financial contracts are incomplete and contract enforceability is limited when countries remove official capital controls default risk is still present as an implicit barrier to capital flows if default risk were eliminated capital flows would be six times greater and international risk sharing would increase substantially

asymmetric tax competition abstract the paper analyzes nash equilibrium when two jurisdictions set tax rates on a tax base which is mobile between them population differences imply tax differences the smaller jurisdiction levies a lower tax rate in equilibrium and its residents are better off than those in the larger jurisdiction the nash equilibrium is inefficient if the two jurisdictions merged the resulting allocation would be efficient however if differences in population are great enough residents of the small jurisdiction would be made worse off by such a merger

can capital income taxes survive in open economies optimal tax theory forecasts that small open economies should not tax capital income yet countries do tax capital income why the inconsistency this paper shows that use of the double taxation convention whereby governments credit taxes paid abroad against domestic taxes helps explain this inconsistency in particular capital income will be taxed if a dominant capital exporter acts as a stackelberg leader when setting its tax policy due to the convention other countries will then tax capital imports making it attractive for the dominant capital exporter to tax capital income without a dominant capital exporter however the model still forecasts no capital income taxes can taxation of capital income survive the increasing integration of world capital markets a number of recent papers suggest not diamond and mirrlees 1971 for example showed that a small open economy would not choose to tax the income generated by the physical capital located within the country this is because production would occur efficiently under an optimal tax system which requires that domestic investments earn the rate of return available on the world capital market in principle a country might still attempt to tax income earned on the savings of its residents however in practice income from savings invested outside the country is virtually impossible for a government to monitor individuals therefore can evade tax on such savings with very little risk as razin and sadka 1989 show such capital flight in theory eliminates any possibility of a tax on savings investors will simply transfer their funds abroad to avoid taxation yet virtually all countries do in fact tax the capital income earned by corporations and individuals located within their borders how can the theoretical forecast of no capital income taxation be reconciled with this simple observation it is difficult to use existing models with any confidence to analyze the implications of changes in capital income tax rates if these same models forecast that countries should never tax capital income

statistical arbitrage with default and collateral abstract this paper studies the implications of the absence of statistical arbitrage opportunities in a two period incomplete market economy where default is allowed but there are collateral requirements modified versions of the fundamental theorem of asset pricing are obtained

do countries compete over corporate tax rates this paper tests whether oecd countries compete with each other over corporate taxes in order to attract investment we develop two models with firm mobility countries compete only over the statutory tax rate or the effective average tax rate while with capital mobility countries compete only over the effective marginal tax rate we estimate the parameters of reaction functions using data from 21 countries between 1983 99 we find evidence that countries compete over all three measures but particularly over the statutory tax rate and the effective average tax rate this is consistent with a belief amongst governments that location choices by multinational firms are discrete we also find evidence of concave reaction functions consistent with the model outlined in the paper

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

collateral once again abstract this paper shows how collateral is used to prove the second part of the fundamental theorem of asset pricing in a collateral default setting which connects the concept of an arbitrage free price with the solution of the individual utility maximization problem

home production labor wedges and international business cycles non separabilities due to home production break the link between market consumption and its marginal utility and help explain several stylized facts of the open economy in an estimated two country model with complete asset markets in which home production generates a labor wedge that mimics its empirical counterpart output is more correlated than consumption across countries labor inputs and labor wedges are positively correlated across countries and relative market consumption is negatively related to the real exchange rate evidence from time use surveys corroborates some of the predictions of the model

does financial globalization promote risk sharing article i nfo in theory one of the main benefits of financial globalization is that it should allow for more efficient international risk sharing in this paper we provide an empirical evaluation of the patterns of risk sharing among different groups of countries and examine how international financial integration has affected the evolution of these patterns using a variety of empirical techniques we conclude that there is at best a modest degree of international risk sharing and certainly nowhere near the levels predicted by theory in addition only industrial countries have attained better risk sharing outcomes during the recent period of globalization developing countries have by and large been shut out of this benefit even emerging market economies many of which have reduced capital controls and all of which have witnessed large increases in cross border capital flows have seen little change in their ability to share risk we find that the composition of flows may help explain why emerging markets have not been able to realize this presumed benefi to f financial globalization in particular our results suggest that portfolio debt which had dominated the external liability stocks of most emerging markets until recently is not conducive to risk sharing

stationary equilibria in asset pricing models with incomplete markets and collateral we consider an infinite horizon exchange economy with incomplete markets and collateral constraints as in the two period model of geanakoplos and zame 2002 households can default on their liabilities at any time and financial securities are only traded if the promises associated with these securities are backed by collateral we examine an economy with a single perishable consumption good where the only collateral available consists of productive assets in this model competitive equilibria always exist and we show that under the assumption that all exogenous variables follow a markov chain there also exist stationary equilibria these equilibria can be characterized by a mapping from the exogenous shock and the current distribution of financial wealth to prices and portfolio choices we develop an algorithm to approximate this mapping numerically and discuss ways to implement the algorithm in practice a computational example demonstrates the performance of the algorithm and shows some quantitative features of equilibria in a model with collateral and default

beyond arbitrage good deal asset price bounds in incomplete markets one often wants to value a risky payoff by reference to prices of other assets rather than by exploiting full fledged economic models however this approach breaks down if one cannot find a perfect replicating portfolio we impose weak economic restriction to derive usefully tight bounds on asset prices in this situation the bounds assume that investors would want to buy assets with high sharpe ratios good deals as well as pure arbitrage opportunities we show how to calculate the price bounds in one period multiperiod and continuous time contexts we show that the multiperiod problem can be solved recursively as a sequence of one period problems we calculate bounds in option pricing examples including infrequent trading and an option written on a nontraded event and we use the bounds to explore the economic significance of option pricing predictions we find that much variation in s p 500 index option prices over time and across strike prices fits within the bounds

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association