common trends the government s budget constraint and revenue smoothing abstract the requirement that the government s budget be balanced in present value terms is shown to be equivalent to the condition that government expenditures inclusive of interest tax receipts and seignorage be cointegrated the condition is in fact stronger requiring that the deficit inclusive of interest be stationary stationarity of the net of interest deficit is neither necessary nor sufficient for intertemporal budget balance however it does have implications for barro s tax smoothing hypothesis data for the period 1890 1986 are consistent with intertemporal budget balance but not with tax smoothing

rational ponzi games when can a government run a rational ponzi game i e issue debt and never pay back any interest or principal the transversalit y condition of each individual implies that such schemes require an i nfinity of lenders given this horizons are unimportant ponzi games cannot be ruled out by assuming that agents have infinite horizons the authors point out both the basic similarity of and some key diff erences between rational ponzi games and asset price bubbles or fiat money regarding international debt the analysis implies that what matters for the feasibility of rational ponzi games are conditions in the lenders not the borrowers economy copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

export growth slowdown and currency crisis the malaysian experience a slowdown in export growth occurred in all east asian economies that were affected by the asian currency crisis misaligned exchange rates have been widely cited as a cause of the slowdown in the malaysian context at least a vulnerability to the downturn in the electronic cycle could also be a major factor leading to poor export performance using the us yen dollar rate as a proxy for exchange rate misalignment and us total new orders for electronics as a proxy for global electronics demand cointegration analysis was used to establish the likely causes of a slowdown in malaysia s export performance empirical results suggest that a unique long run relationship exists between all three variables the policy implications of these results including exchange rate monitoring and export diversification are discussed in the conclusion

an empirical study of tax audits in china on international transfer pricing abstract this research studies how chinese tax authorities implement international transfer pricing legislation the analysis indicates that tax audits on transfer pricing are confined mainly to medium and small sized foreign investments lower technology companies and transfer of tangible goods and tend to focus on certain nationality and forms of foreign investment persistent losses low profitability and lack of local partners in joint venture management most often trigger tax audits the authorities focus on profit results rather than prices and often use comparable profit method to adjust income tax differentials do not appear to be the most important inducement to transfer pricing manipulations

the sustainability of government deficits implications of the present value borrowing constraint this paper introduces a new methodology for evaluating the sustainability of fiscal policy the new methodology is distinguished from most existing tests in two important respects first it allows for stochastic real interest rates and second it is both necessary and sufficient results from the application of the new test suggest that recent fiscal policy in the united states has not been sustainable the paper contrasts its findings with those of james d hamilton and marjorie a flavin 1986 copyright 1989 by ohio state university press

assessing long term fiscal developments a new approach abstract we use a new approach to assess long term fiscal developments by analyzing the time varying behaviour of the two components of government spending and revenue responsiveness and persistence a feature not captured by automatic stabilisers we are able to infer about the sources of fiscal deterioration improvement drawing on quarterly data we estimate recursively these components within a system of government revenue and spending equations using a three stage least square method for eight european union countries plus the us the results suggest that significant changes in the fiscal stance including those related to the current crisis are reflected in the estimates of persistence and responsiveness

bubble finance and debt sustainability a test of the government s intertemporal budget constraint this paper tests whether the government s budget is intertemporally balanced in a number of ec countries by applying a method first developed to detect speculative bubbles in financial markets the test aims to establish whether the government can engage in buble finance and is based on a comparison between two sets of estimates the first is obtained directly by regressing the stock of outstanding debt on a distributed lag of the primary surplus the second is obtained indirectly from a pair of equations one relating the current debt stock to next period s primary surplus and debt stock the other specifying an ar process for the primary surplus in the presence of a bubble only the first set of estimates is inconsistent and hence the two sets differ it is found that the null of no bubble can be rejected in the cases of italy germany denmark and greece implying that the government is not intertemporally solvent in these countries the other ec member states appear to be on a sustainable path

the role of intergovernmental aid in defining fiscal sustainability at the sub national level the concept of fiscal sustainability has become increasingly used over the last 20 years however much of the literature on fiscal sustainability at the sub national level ignores the role of intergovernmental fiscal relations to address this gap this paper discusses a sufficient condition for sub national fiscal sustainability and examines the importance of intergovernmental aid in determining that sustainability using panel data of counties and municipalities in the us and using unit root and cointegration analytic techniques this paper finds different levels of fiscal sustainability between counties and municipalities we also find that intergovernmental aid plays an important role for fiscal sustainability for both counties and municipalities

international financial contagion in currency crises abstract this paper examines the role of financial linkages especially through a common creditor in the propagation of emerging market crises during the 1990s using panel probit regressions on 41 emerging market countries it finds that financial linkages played a significant role in the spread of the mexican asian and russian crises the significance of financial linkages emerges after controlling for the role of domestic and external fundamentals trade spillovers and financial weaknesses in the affected countries a strong financial linkage to the crisis country of origin not only substantially raises the probability of contagion but also helps to explain the observed regional concentration of currency crises

are chinese trade flows different abstract we find that chinese trade flows respond to economic activity and relative prices as represented by a trade weighted exchange rate but the relationships are not always precisely or robustly estimated chinese exports are generally well behaved rising with foreign gdp and decreasing as the chinese renminbi rmb appreciates however the estimated income elasticity is sensitive to the treatment of time trends estimates of aggregate imports are more problematic in many cases chinese aggregate imports actually rise in response to an rmb depreciation and decline with chinese gdp this is true even after accounting for the fact a substantial share of imports are subsequently incorporated into chinese exports we find that some of these counter intuitive results are mitigated when we disaggregate the trade flows by customs type commodity type and the type of firm undertaking the transactions however for imports we only obtain more reasonable estimates of elasticities when we allow for different import intensities for different components of aggregate demand specifically consumption vs investment or when we include a relative productivity variable

booms and busts in the uk housing market the often volatile behaviour of uk house prices between 1957 and 1994 is analysed in an annual econometric model theory suggests that financial liberalisation of mortgage markets in the 1980s should have led to notable shifts in house price behaviour the evidence supports the predictions of theory suggesting shifts took place in wealth effects as in the consumption function and that real interest rates and income expectations became more important the presence of transactions costs suggests important nonlinearities in house price dynamics the paper also contains an explicit econometric treatment of expectations demography supply spillovers from the rented sector and of composition biases in the official house price index

are the heavily indebted countries solvent tests of intertemporal borrowing constraints abstract this paper investigates whether the heavily indebted countries hics in consideration of their external debt repayments remain solvent direct tests of the solvency condition derived from the usual intertemporal budget constraints shed light on the sustainability of their current policies the findings are twofold first the hics seem to have a debt overhang problem second in east and southeast asian countries except philippines the solvency conditions are satisfied these results give a rationale for the debt reduction plan a k a the brady plan and the empirical support of the debt overhang hypothesis

was china the first domino revisiting the asian currency crisis abstract the link of baht devaluation to crisis identifies thailand as the first domino in the asian crisis others assign responsibility to the 1994 chinese devaluation establishing first domino needs further academic scrutiny we find chinese devaluation presaging the crisis through export slow down from her asian partners

intertemporal budget constraint and public debt sustainability the case of italy the theory of intertemporal budget constraint is applied to test italian public debt sustainability with the finding that current fiscal policy has not been following a sustainable path in the 1980s in particular we find that i while primary surplus is stationary public debt is not ii permanent shocks explain about 90 of forecast error variance of public debt while playing a minor role in primary surplus and iii debt is not sustainable even if stochastic discount rates are accounted for

a markov switching analysis of contagion in the ems abstract this paper applies the multivariate version of the forbes and rigobon 2002 contagion test as proposed by dungey et al 2005a to detect contagion effects in the exchange rate mechanism erm of the european monetary system ems crisis and non crisis observations are determined endogenously via a markov switching vector autoregression msvar we show that the msvar is suitable for this purpose as it does particularly well in identifying the 11 realignments of the erm we examine whether denmark s rejection of the maastricht treaty and italy s competitiveness problems affected other ems participants and find evidence for contagion

sustainability of the deficit process with structural shifts this article discusses the condition for deficit sustainability and searches for shifts in the structure of u s deficit policy i show that contrary to the current literature cointegration between revenues and expenditures inclusive of debt payment is not a necessary but a sufficient condition for a strict interpretation of deficit sustainability the necessary condition requires that debt grow slower than the borrowing rate for tests on structural shifts i use a test for structural change that searches for shifts in the rank of the cointegrating matrix i find that there is a shift in deficit policy in the early 80s so that cointegration between revenue and expenditure inclusive of interest payments holds only up to 1980 i show however that the deficit process is still sustainable despite the failure of cointegration in the 80s the finding of shifts in the deficit process is more uncertain when i normalize by gross national product or population but the deficit is shown to be sustainable regard

are bond financed deficits inflationary a ricardian analysis this paper considers the possible theoretical validity of the following monetarist hypothesis that a constant positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money the question is studied in a discrete time perfect foresight version of the competitive equilibrium model of sidrauski modified by the inclusion of government bonds as a third asset it is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments but that it is valid under the conventional definition it is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth provided that the difference is less than the rate of time preference these formal conclusions do not take account of possible limitations on taxing capacity arising from default incentives that tend to grow with the stock of bonds

on the limitations of government borrowing a framework for empiricaltesting this paper seeks to distinguish empirically between two views on the limitations of government borrowing according to one view nothing precludes the government from running a permanent budget deficit paying interest due on the growing debt load simply by issuing new debt an alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms we show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals empirical tests which have been developed for this economic question lead us to conclude that postwar u s deficits are largely consistent with the proposition that the government budget must be balanced in present value terms this abstract was borrowed from another version of this item

us deficit sustainability revisited a multiple structural change approach in this article we re examine the long run sustainability of us budget deficits using bai and perron s multiple structural change approach while the deficit would have been weakly sustainable over the full sample 1947 1 2005 3 strong sustainability would appear only between january 1982 and february 1996

investment effects of departures from governmental present value budget balance the paper investigates whether departures from government borrowing constraints affect the relationship between fiscal policy innovations and changes in the investment level break points or apparent departures from present value budget balance are then identified next the investment deficit relationship is examined prior to and following identified break points in an effort to detect potential changes in behaviour the investment deficit relationship is quantified by examining posterior coverage bounds of impulse response functions britain appears to undergo such a break around 1973 data from this country suggest that significantly more crowding out occurred following the identified breaks in contrast data from other comparison countries that do not appear to have experienced breaks indicate stable investment deficit relationships

long run limits on the us federal debt abstract this letter distinguishes three nested long run constraints on the u s federal debt tests and rejects the strongest of the three and illustrates how hazardous it is to base inference regarding unit roots on misspecified test regressions

was china the first domino assessing links between china and other asian economies abstract several commentators have suggested that competition from china in particular its 1994 devaluation and strong export performance during 1994 95 may have contributed to the asian crisis of 1997 98 we provide evidence against this view we show that the devaluation was not important in economic terms and china s strong export performance in 1994 95 was matched by other asian economies we also show that the period 1993 and 1996 was marked by relative stability in the export shares of china and other asian economies in various geographical regions and industries the paper concludes by outlining channels through which the asian crisis could affect china

cointegration and government borrowing constraints evidence for the united states testable implications are derived in a present value borrowing constraint model for the u s federal government critical values for unit root and cointegration tests are calculated with monte carlo studies cointegration techniques are employed to determine whether the government has been involved in perpetual debt financing in recent years the data reject this assertion

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

empirical evidence on the strength of the monetary transmission mechanism in canada an aggregate approach abstract this paper examines the transmission of monetary policy in canada it emphasizes the transmission through interest rates and the exchange rate rather than through changes in monetary aggregates and provides empirical evidence on the strength of these channels using a highly aggregated structural model implications of these structural equations for the dynamic effects of monetary policy are explored through a simulation analysis

the stochastic implications of rent maximization an application to stumpage rates for timber in british columbia we construct a model of rent maximizing behaviour by a single seller of timber in the absence of a formal market deriving the stochastic implications of rent maximization for timber prices stumpage rates when other input and output lumber prices are random subsequently we examine the model s ability to describe monthly time series stumpage rate data from british columbia canada between january 1979 and october 1999 deviations of stumpage rates from their long run trend are also structured by an error correction model which suggests that between 13 and 20 of period to period changes in stumpage rates can be explained by an equilibrium adjustment term copyright 2004 john wiley sons ltd

the overvaluation of renminbi undervaluation we evaluate whether the renminbi rmb is misaligned relying upon conventional statistical methods of inference a framework built around the relationship between relative price and relative output levels is used we find that once sampling uncertainty and serial correlation are accounted for there is little statistical evidence that the rmb is undervalued even though the point estimates usually indicate economically significant misalignment the result is robust to various choices of country samples and sample periods as well as to the inclusion of control variables

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

has federal budget deficit policy changed in recent years this paper applies new tests for parameter instability in cointegrated regression models to the u s federal government s intertemporal budget constraint in order to detect whether there has been a regime change in spending and taxing policies some researchers have argued that fiscal policy under presidents reagan and bush moved the u s deficit onto an unsustainable path my results suggest that government deficit policy in the 1980s was not significantly different from policies during the three earlier decades however a diverging debt gnp ratio suggests that the government will run into problems marketing its debt if current policy continues

u s federal indebtedness and the conduct of fiscal policy abstract this paper examines whether the conduct of u s fiscal policy since the 1920s has been influenced by constraints on the accumulated stock of outstanding federal debt the evidence is affirmative during most of the inter and post war period policy in effect stabilized the federal debt relative to gnp but after 1981 large debt and debt service costs failed to produce deficit reductions consistent with the pattern of previous decades

the market value of government of canada debt a comment on the importance of correct valuation of non marketable debt previous attempts to provide market value estimates for both u s and canadian government debt have included nonmarketable debt items specifically savings bonds as part of total marketable debt inclusion of nonmarketable debt items as part of marketable debt presents a significant valuation problem this article demonstrates that previous studies on the market value of canadian government debt used valuation methodologies that significantly underestimated the value of nonmarketable debt a more accurate valuation methodology is provided

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

the market value and maturity structure of government of canada debt 1967 83 the market value and maturity structure of outstanding government of canada debt are calculated at monthly frequency for the 1967 to 1983 period the data are disaggregated into general public chartered bank and government holdings the time series behaviour of market value and par value measures are examined to determine whether par value is a reasonable approximation for market value market value data are also used to construct an alternative measure of the deficit flow which is compared with conventional measures of the deficit la valeur au marche et la structure d echeances de la dette du gouvernement du canada 1967 83 la valeur au marche et la structure d echeances de la dette du gouvernement du canada sont calculees par les auteurs pour chaque mois au cours de la periode de 1967 a 1983 on a ventile les resultats en portions detenues par le grand public par les banques a charte et par le gouvernement les auteurs examinent ensuite la chronique des mesures de valeurs au march6 et de valeurs au pair afin de determiner si la valeur au pair est une bonne approximation de la valeur au marche on se sert alors des donnees precisant la valeur au marche pour construire un indicateur de rechange du d6ficit qu on peut alors comparer aux mesures conventionnelles du deficit

an investigation of ricardian equivalence in a common trends model abstract to empirically discriminate between ricardian and non ricardian behaviour we have to use a method that distinguishes between expected and unexpected as well as permanent and transitory changes in taxes and government consumption one method that provides these distinctions between different types of changes is the common trends framework used in this paper which is a var model with cointegrating constraints in the empirical study of us data there is some support for the ricardian hypothesis but there are also some deviations from its predictions however the differences do not lend support to a keynesian view of budget deficits but rather to the view of expansionary fiscal contractions this can be motivated theoretically by uncertainty about future taxes in combination with prudent households

seasonal cycles in a model of the housing market the us housing market exhibits seasonal boom and bust cycles where prices and the speed of trade turnover rate rise in summers and fall in winters we present a search model that analytically generates the observed cycles the proposed mechanism is based on swings in market thickness rather than market tightness the leading explanation in the literature

towards a new early warning system of financial crises abstract this paper develops a new early warning system ews model based on a multinomial logit model for predicting financial crises it is shown that commonly used ews approaches which use binomial discrete dependent variable models are subject to what we call a post crisis bias this bias arises when no distinction is made between tranquil periods when economic fundamentals are largely sound and sustainable and crisis post crisis periods when economic variables go through an adjustment process before reaching a more sustainable level or growth path we show that applying a multinomial logit model which allows distinguishing between more than two states is a valid way of solving this problem and constitutes a substantial improvement in the ability to forecast financial crises the empirical results reveal that for a set of 20 open emerging markets for the period 1993 2001 the model would have correctly predicted a large majority of crises in emerging markets

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

persistent deficits and the market value of government debt summary this paper investigates whether postwar canadian public financial policy satisfies a borrowing constraint direct tests of the present value relation suggested by this constraint shed light on the sustainability of current policy we examine monthly data on canadian federal government finances using tests for cointegration the finding is that the joint behaviour of real debt and real surpluses is inconsistent with intertemporal budget balance for the government one interpretation of this finding is that the government is systematically paying real returns to bondholders by issuing further debt alternatively bondholders may expect the government to finance future interest payments from a source other than primary surpluses e g the sale of physical assets much empirical macroeconomics is concerned with the effects of public financial policies numerous studies have examined whether such policies affect interest rates inflation or national income and its components these examinations raise the question of the efficacy of government budget deficits they generally assume that a borrowing constraint holds in the public finances some positive theories of public debt creation also make this assumption examples include barro s 1979 history of us federal deficits and sargent s 1986 rationalizations of recent us budgetary policy lucas and stokey s 1983 discussion of optimal taxation also involves this assumption hansen roberds and sargent 1987 outline the testable implications of present value budget balance and hamilton and flavin 1986 investigate the feasibility of recurring deficits by directly testing the us federal government s borrowing constraint such tests seem natural given both the recent boom is testing more complicated first order difference equations in macroeconomics and the widespread discussion of current deficits this paper tests the present value borrowing constraint using recently constructed data on the market value of outstanding canadian federal government debt we use monthly rather than annual as in hamilton and flavin data and conduct tests of univariate integration and of bivariate cointegration to investigate the joint time series properties of debt and deficits one finding is that real debt and real surpluses are integrated processes evidence of their cointegration is mixed and point estimates of the cointegrating vector suggest that the expected real rate of return on debt is negative moreover the surplus measured to include interest payments as government spending is nonstationary these findings are inconsistent

hot and cold seasons in the housing market every year housing markets in the united kingdom and the united states experience systematic above trend increases in prices and transactions during the spring and summer hot season and below trend falls during the autumn and winter cold season house price seasonality poses a challenge to existing housing models we propose a search and matching model with thick market effects in thick markets the quality of matches increases rising buyers willingness to pay and sellers desire to transact a small deterministic driver of seasonality can be amplified and revealed as deterministic seasonality in transactions and prices quantitatively mimicking seasonal fluctuations in uk and us markets

exchange rate expectations and the pricing of chinese cross listed stocks abstract i show that the price discounts of chinese cross listed stocks american depositary receipts adrs and h shares to their underlying a shares indicate the expected yuan us dollar exchange rate the forecasting models reveal that adr and h share discounts predict exchange rate changes more accurately than the random walk and forward exchange rates particularly at long forecast horizons using panel estimations i find that adr and h share investors form their exchange rate expectations according to standard exchange rate theories such as the harrod balassa samuelson effect the risk of competitive devaluations relative purchasing power parity uncovered interest rate parity and the risk of currency crisis

trade causes of the asian crisis the malaysian experience prior to the onset of the asian financial crisis there was a deterioration in the external trade position of most countries that were affected by the asian currency crisis however little is known about why this occurred this paper aims to identify the causes of a slowdown in export growth in malaysia while misaligned exchange rates have been widely cited as a cause of the slowdown in east asia in the malaysian context at least a vulnerability to the downturn in the electronic cycle could also be a major factor leading to poor export performance using the us yen dollar rate as a proxy for exchange rate misalignment and us total new orders for electronics as a proxy for global electronics demand cointegration analysis was used to establish the likely causes of a slowdown in malaysia s export performance the empirical evidence suggests that the coincidence of exchange rate misalignment with a downturn in the global electronics demand cycle was responsible for the sharp deterioration in export performance

the pure effects of european integration on intra eu core and periphery trade this paper analyses the effects of eu integration on intra eu trade volumes with a special focus on the evolution of trade within and between the core and the periphery countries in the early phases of eu integration there have been sizable trade creation and diversion effects with respect to efta countries both the creation and the diversion effects of eu membership have declined as the eu and efta have integrated in all phases of eu integration both core periphery and intraperiphery growth of trade have experienced stronger positive effects than intracore trade hence the eu enlargements did not cause any kind of intra eu peripherality

panel cointegration tests of the sustainability hypothesis in rich oecd countries this study reexamines the sustainability hypothesis by testing whether government revenues and expenditures for eight rich oecd countries between 1977q1 and 2005q4 are cointegrated for this purpose a nonstationary panel data approach is adopted which is general enough to permit for cross country dependence as well as structural breaks representing major shifts in fiscal policy in contrast to many earlier studies the results reported in this study suggest that the sustainability hypothesis cannot be rejected