explaining business cycles in small open economies abstract this paper analyzes the role of world price shocks fluctuations in the prices of capital intermediate and primary goods and in the world real interest rate in the generation and propagation of business cycles in small open developing countries i construct a stochastic dynamic multi sector small open economy model the model is a variant of the specific factors model and reflects the major structural characteristics of developing economies i utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks the results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries

returns to regionalism the past decade has witnessed a renewed interest in regional trade agreements with many policymakers and academics seeming to believe that these provide more than the traditional gains from trade this article examines several possible benefits that regional trade agreements may confer on their partners including credibility signaling bargaining power insurance and coordination it assesses the necessary conditions for each possible channel to work gives stylized examples of specific types of policy where the benefit might be applicable examines cases where the explanation might be relevant and discusses their overall plausibility it concludes by examining the north american free trade agreement and the europe agreements

volatility in the small and in the large the lack of diversification in international trade abstract how does international trade affect the risk exposure of firms and countries trade induces specialization thus increasing economies exposure to idiosyncratic supply shocks but greater geographic diversification in trade destinations offers natural hedging properties against demand shocks in this paper we offer an integrated economic and econometric view of the impact of trade on firms and countries volatility exporters volatility is shown to directly depend on the lack of diversification in their portfolio of clients indeed most exporters including the largest have one or two main clients that dwarf the others this structure of trade networks implies that individual exporters are strongly exposed to microeconomic demand shocks the concentration of trade flows further implies that such risk does not wash out across firms thus contributing to aggregate fluctuations

europe vs america institutional hysteresis in a simple normative model we show how the differences in us and european institutions can arise in a normative model the paper focuses on the labor market and the government s decision to set unemployment benefits in response to an unemployment shock the government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse incentive effects whereby benefits increase unemployment it is found that when an adverse shock occurs benefits should be increased most when the adverse incentive effects of benefits are largest adjustment costs of changing benefits introduce hysteresis and can help explain why post oil shock benefits remained high in europe but not in the us desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple requires the third derivative of the utility function to be non negative and self correcting empirical evidence concerning the role of corporatism is discussed

asset growth anomaly in europe do profits and losses matter abstract this paper investigates whether the well documented asset growth effect on stock returns exists across both profit and loss firms in european capital markets we find that the asset growth anomaly is more pronounced across loss firms and is significantly dampened by the inclusion of profit firms in the sample the raw and abnormal returns earned from a hedge strategy on balance sheet growth for loss firms are almost two times higher than the respective returns for profit firms our evidence casts doubt on a risk based explanation thereby lending credence to the suggestion that the asset growth effect is attributable to mispricing

returns to regionalism an analysis of nontraditional gains from regional trade agreements the past decade has witnessed a renewed interest in regional trade agreements with many policymakers and academics seeming to believe that these provide more than the traditional gains from trade this article examines several possible benefits that regional trade agreements may confer on their partners including credibility signaling bargaining power insurance and coordination it assesses the necessary conditions for each possible channel to work gives stylized examples of specific types of policy where the benefit might be applicable examines cases where the explanation might be relevant and discusses their overall plausibility it concludes by examining the north american free trade agreement and the europe agreements

trading relations is the roadmap from lome to cotonou correct one of the reasons behind the re negotiation of the lome convention resulting in the cotonou agreement was the alleged inability of the trade provisions of lome to increase the african caribbean and pacific acp countries market share of the european union eu market the cotonou agreement may lead to the more advanced acps being granted future market access to the eu under a generalized system of preferences gsp in conformity with world trade organization wto rules to this end this paper makes a comparative analysis of the effects of the eu s lome convention and gsp on exports of developing countries using a gravity type of model the results indicate positive and statistically significant export effects of the both the lome convention and the gsp the export effects are greater in case of the lome convention throughout the study period running from 1973 to 1992 in addition the paper illustrates the eu country distribution of the export effects and shows that belgium and the netherlands ar

do remittances dampen the effect of natural disasters on output growth volatility in developing countries this article examines whether or not remittance inflows help mitigate the effects of natural disasters on the volatility of the real output per capita growth rate using a large sample of developing countries and mobilizing a dynamic panel data framework it uncovers a diminishing macroeconomic destabilizing consequence of natural disasters as remittance inflows rise it appears that the effect of natural disasters disappears for a remittance ratio above 8 of the gross domestic product gdp however remittances aggravate the destabilizing effects of natural disasters when they exceed 17 of the gdp finally the article shows that current and lagged remittance inflows significantly reduce the number of people killed by natural disasters and the number of people affected respectively

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

reciprocated unilateralism in trade reforms with majority voting this paper shows how unilateral liberalization in one country can increase the voting support for reciprocal reduction in trade barriers in a partner country when trade policies are determined simultaneously in the two countries we show the possibility of multiple political equilibria one in which the countries are both protectionist and another in which they trade freely with each other starting with trade protection in both countries a unilateral reform in one country is shown to bring about a free trade equilibrium that obtains majority support in both countries

international migration capital mobility and transitional dynamics much of recent thinking on the problems of the central and east european countries ceecs centres on how long it will take them to catch up to oecd economies and how various policies will hasten or hinder the transition this paper using a highly stylized framework focuses on a quite different set of issues how the nature of the transition can effect the nature of the long run equilibrium the mechanism we focus on is factor mobility and factor complementarity excerpt

the value of trade agreements in the presence of political pressures an argument often heard in favor of trade agreements is that by committing to free trade a government can credibly distance itself from domestic lobbies but several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process we develop a small country model in which factors are sector specific in the short run but mobile in the long run we show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade and hence it may value a trade agreement

fiscal policy and regional output volatility evidence from russia eller m fidrmuc j and fungac ova z fiscal policy and regional output volatility evidence from russia regional studies this paper investigates the relationship between fiscal policy and output volatility in russian regions between 2000 and 2009 accounting for endogeneity between output volatility and fiscal developments by using system generalized method of moments gmm estimation techniques the results indicate that discretionary fiscal policy contributes to output volatility and induces macroeconomic instability at the regional level in russia this corroborates previous studies using cross country data to reduce business cycle fluctuations it would be necessary to curtail procyclical fiscal activism at the regional level e g via fiscal rules and sound institutions of fiscal federalism

dispersion in macroeconomic volatility between the core and periphery of the international trade network abstract at the country level macroeconomic volatility tends to correlate with trade openness although the direction of correlation is not stable across samples higher openness allows for greater diversification opportunities but provides lesser immunity from outside shocks here i consider trade network as a composite of all pairwise trade linkages to emphasize that different linkages contribute differently to the transmission or mitigation of shocks and show that volatility is inversely related to centrality a summary measure of strength of the linkages specific to a country i study a dynamic multi country multi sector model subject to idiosyncratic liquidity shocks and characterize volatility as an explicit function of centrality diversification and the herfindahl of the trade network in equilibrium with sufficient skewness in the trade linkages across countries similar shocks generate substantially different levels of repercussions across the network the conventional effect of diversification holds true that countries with better diversified trade portfolio fluctuate less centrality directly contributes to higher resilience to exogenous shocks thus reducing volatility combined effect of these two mechanisms dominates the opposite effect that a more central country is also more exposed to shocks which increases volatility the model calibrated to the eu generates and closely replicates the negative relationship between centrality and volatility the theoretical model is then extended to capture preference shocks and sparseness of the trade networks

remittances and household consumption instability in developing countries this paper analyzes the impact of remittances on household consumption instability in a large panel of developing countries there are four main results first remittances significantly reduce household consumption instability second remittances play an insurance role by dampening the effects of various sources of consumption instability in developing countries natural disasters agricultural shocks discretionary fiscal policy systemic financial and banking crises and exchange rate instability third the stabilizing role played by remittances is stronger in less financially developed countries fourth the overall stabilizing effect of remittances is mitigated when remittances exceed 6 of gdp

the economic significance of national border effects to address the economic significance of national border effects this paper provides evidence on two fundamental questions 1 do large border effects arise because of high perceived price wedges between foreign and domestic products or because imports and domestic goods are very close substitutes and 2 if price wedges are important do they reflect distortionary barriers to trade or do they arise from nondistortionary factors such as differences in transactions costs or product characteristics i conclude that while border effects may imply barriers welfare costs and a role for policy distortions are probably not as substantial as initial border results suggested jel f1

an econometric view on the estimation of gravity models and the calculation of trade potentials this paper presents an ar 1 model in the spirit of hausman and taylor zero differences between actual and in sample predicted trade flows large systematic differences between observed and in sample predicted trade flows only indicate model misspecification and econometric problems out of sample predictions make sense if countries of interest are in an early stage of the transformation process the gravity model remains an interesting tool for the calculation of counterfactuals e g the impact of catching up in gdp per capita in the ceec or of the reduction of trade costs via infrastructure investments or tariffs on bilateral trade etc for this line of research the difference between short term and long term influences could provide interesting insights

industrial output fluctuations in developing countries general equilibrium consequences of agricultural productivity shocks abstract this paper shows that a negative shock to agricultural productivity may increase food prices and labor and capital can move away from manufacturing into agriculture to meet the subsistence requirement for food this effect depends on income levels and openness to trade using annual manufacturing data and rainfall shocks as the instrument for crop yields proxy for agricultural productivity i find that an exogenous decline in yield decreases manufacturing output as well as employment and capital investment in manufacturing overall crop yield variation can explain up to 44 of industrial output fluctuations in developing countries rainfall shocks cause 31 of the fluctuations lastly this paper shows that such perverse phenomena in which resources move toward the sector with declining productivity can lead to a significant reduction in aggregate productivity

resistance to reform status quo bias in the presence of individual specific uncertainty comment why do governments so often fail to adopt policies which economists consider to be efficiency enhancing our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform we show that there is a bias towards the status quo and hence against efficiency enhancing reforms whenever some of the individual gainers and losers from reform cannot be identified beforehand there are reforms which once adopted will receive adequate political support but would have failed to carry the day ex ante the argument does not rely on risk aversion irrationality or hysteresis due to sunk costs jel d72 f13 why do governments so often fail to adopt policies that economists consider to be efficiency enhancing this is one of the fundamental questions of political economy the answer usually relies on what may be

from riches to rags and back institutional change financial development and economic growth in argentina since 1890 abstractargentina is the only country in the world that in 1900 was developed and in 2000 was developing although economic historians have identified and explored various possible explanations chiefly institutions political instability financial development inflation trade openness and international financial integration no study so far has attempted a comprehensive quantitative assessment of their relative importance this article tries to fill this gap using the power arch framework and annual data since 1896 to study the effects of these factors in terms of both growth and growth volatility the results highlight two main factors to understand the remarkable growth trajectory of argentina over the very long run financial development and institutions formal and informal political instability and stress the importance of differences in their short vis a vis long run behaviour

deep financial integration and volatility we investigate the relationship between foreign direct ownership of firms and firm and region level output volatility using a novel panel data set for european countries we document a positive highly robust relationship between firm level foreign ownership and volatility of value added this relationship holds cross sectionally and in panels with firm fixed effects where the relationship captures within firm variation over time considering domestic firms with assets in foreign countries we document that it is international diversification rather than the nationality of the owner that explains this positive correlation our results can also be found at the aggregate level where we show that region level volatility is correlated positively with foreign investment in the region we show that this positive relation between aggregate volatility and foreign investment can be explained by the granularity of the firm size distribution and the fact that foreign ownership is concentrated among the largest firms

opening up international trade with eastern europe trade with eastern europe carl b hamilton and l alan winters previous economic policy in the soviet union and eastern europe sought to restrict international trade with market economies hence liberalization and reform should now lead to a huge increase in such trade this will have a major impact both on the reforming economies and on their new trade partners first we develop an empirical model of trade flows between existing market economies and use this to forecast long run trade flows as the former soviet union and eastern europe are reabsorbed into the world economy second we provide a more detailed analysis of one key sector agricultural trade we compare and contrast three regime changes reform in the east admission of the east to the ec cap and worldwide success on agricultural liberalization in the gatt third we adduce evidence of high quality human capital in eastern europe and argue that this will tend to confer a comparative advantage in quite sophisticated products we conclude by stressing that since trade cannot be permanently and profoundly unbalanced western market economies can enjoy potential gains from trade only if they allow market access to emergent producers from the former soviet union and eastern europe

credit constraints equity market liberalization and growth rate asymmetry abstract this paper provides evidence that financial openness is an important determinant of growth rate asymmetry in emerging markets i exploit exogenous shocks to financial flows and examine the impact of equity market liberalization on the skewness of output growth for 93 countries during the 1973 2009 period i show that opening the economy to foreign portfolio investment results in a substantially higher negative skewness of output growth this result obtains with equal strength in the aggregate data and in the sectoral data and it is disproportionately stronger in sectors that require more external finance the skewness effect of financial openness is stronger in countries which experienced a banking crisis after liberalization

output value risk for commodity producers the uncertain benefits of diversification summary commodity price volatility has long been recognized as a main risk for commodity producers welfare and has led to diversification efforts less noticed has been the importance of commodity correlations and their increase after 2006 in the risk faced by producers to assess their impact we perform an empirical analysis of the market value of commodity producers output in a sample of 56 countries producing 26 commodities we find that diversification and correlations strongly explain output value volatility during 1987 2006 producers effectively specialized in a single commodity had an average output value volatility of 27 0 while producers of three or more commodities had a 12 7 volatility in this period average correlation was 8 and diversification was very effective in the 2007 12 period correlations averaged 26 and output volatilities for specialized and diversified commodities were 30 4 and 19 5 respectively thus reducing the benefit of diversification at a time of macroeconomic distress in 2013 16 output volatilities reverted to levels close to those in 1987 2006 as commodities decorrelated again our findings should be relevant to policy makers embarking in diversification efforts and in the analysis of macroeconomic risk of commodity producers

openness specialization and the external vulnerability of developing countries deepening real and financial integration of developing countries into the world economy has prompted renewed interest in the contribution of external shocks to their macroeconomic fluctuations this paper revisits the issue using four decades of annual data for a large sample of developing countries the paper implements a conditionally homogeneous panel vector autoregression with exogenous variables to model gdp fluctuations in these countries it uses sign restrictions to identify four external structural shocks demand supply monetary and commodity shocks and analyzes how their impact on growth is shaped by countries policy and structural framework external shocks are found to account for a small share of the forecast error variance of gdp especially at short horizons however their contribution has been on the rise in recent decades further global monetary shocks have become the leading external source of gdp volatility in developing countries the paper presents a quantitative assessment of the effects of real and financial opening up as well as those of commodity specialization on the impact of external shocks on gdp the results suggest that increasing openness can account for the increasing trend in the volatility attributable to external shocks as well as the changing roles of different shocks moreover commodity intensive developing countries are found to be more vulnerable than the rest to all types of external shocks not just commodity shocks

the asset growth effect insights from international equity markets abstract firms with higher asset growth rates subsequently experience lower stock returns in international equity markets consistent with the u s evidence this negative effect of asset growth on returns is stronger in more developed capital markets and markets where stocks are more efficiently priced but is unrelated to country characteristics representing limits to arbitrage investor protection and accounting quality the evidence suggests that the cross sectional relation between asset growth and stock return is more likely due to an optimal investment effect than due to overinvestment market timing or other forms of mispricing

time intensive r d and unbalanced trade abstract this paper highlights a novel mechanism that generates global imbalances it develops a general equilibrium trade model with one of two countries having a comparative advantage in a sector whose production is characterized by i rapid anticipated demand growth and ii large up front r d costs international funding of the accruing r d costs generates capital inflows in the r d stage which are balanced by subsequent outflows importantly sector level growth does not generate growth differentials between countries typically regarded as rationales of global imbalances additionally it is shown that a trade surplus can coincide with appreciations of the real exchange rate i argue that switzerland s trade surplus which was driven to record heights during 2010 2014 by pharmaceutical exports exemplifies this mechanism calibrating the model to swiss trade flows underpins this argument

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

privatization market liberalization and learning in transition economies privatization and market liberalization are widely considered to be complementary reforms in transition economies this article challenges this view and the closely related big bang approach when pursued too vigorously privatization may impede the transition process following liberalization our result is based on an explicit model of market learning compared to a mature market a market in transition is characterized by greater uncertainty regarding market conditions including equilibrium prices and quanti ties economic actors must learn about these conditions through their participation in the market process less than full privatization is optimal if the costs of learning are sufficiently important

government size and business cycle volatility how important are credit constraints in this paper we analyse how the availability of credit influences the relationship between government size as a proxy for fiscal stabilization policy and the amplitude of business cycle fluctuations in a sample of advanced oecd countries interpreting relatively low loan to value ratios as an indication of tight credit constraints we find that government size exerts a stabilizing effect on output and consumption growth fluctuations only when credit constraints are relatively tight our results provide support for the hypothesis that credit market frictions play a crucial role in the transmission of fiscal policy

towards an equilibrium level of market reform how politics affects the dynamics of policy change in this article we examine the dynamics of economic reforms that are implemented by incumbent policy makers interested in maintaining their political power we use a sample of 86 countries over a time period going from 1980 to 2001 and find that the achievement of an equilibrium level of market liberalization is highly costly our results are robust to endogenity and model specification

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

trade and the geographic spread of the great recession abstract i study the role of trade between u s states in the regional propagation of local consumer demand shocks during the great recession to identify the trade channel empirically i make use of heterogeneity in the direction of trade flows across industries in the same state industries that depended relatively more on final demand from states with housing boom bust cycles grew by more before the crisis and declined faster from 2007 to 09 a one standard deviation difference in the exposure to demand shocks during the recession explains a 2 9 percentage point difference in employment growth

does the size of islamic banking matter for industry growth international evidence islamic banking which has witnessed unprecedented growth in the last quarter of the century is hypothesized to be able to contribute to the development of the financial sector and thus to economic

momentum in global equity markets in times of troubles does the economic state matter this paper investigates the profitability of momentum based trading strategies pursued during the most recent economic downturns in global equity markets in contrast to previous studies it reveals that such strategies generated statistically significant negative returns during the most recent recessions these momentum crashes happen during market reversals following exceptionally large market declines as occurred in march and april 2009

can openness mitigate the effects of weather shocks evidence from india s famine era transformation of countries throughout history rural citizens in developing countries today however remain highly exposed to fluctua tions in the weather this exposure affects the incomes these citizens earn and the prices of the foods they eat recent work has documented the significant mortality stress that rural house holds face in times of adverse weather robin burgess olivier deschenes dave donaldson and michael greenstone 2009 masayuki kudamatsu torsten persson and david stromberg 2009 famines times of acutely low nominal agricultural income and acutely high food prices are an extreme manifestation of this mapping from weather to death lilian c a knowles 1924 describes these events as agricultural lockouts where both food sup plies and agricultural employment on which the bulk of the rural population depends plummet the result is catastrophic with widespread hun ger and loss of life though now confined to the world s poor est countries food shortages and famines were features of most preindustrial societies over time there has been intense debate over what role openness to trade in food might play in

stages of diversification this paper studies the evolution of sectoral concentration in relation to the level of per capita income we show that various measures of sectoral concentration follow a u shaped pattern across a wide variety of data sources countries first diversify in the sense that economic activity is spread more equally across sectors but there exists relatively late in the development process a point at which they start specializing again we discuss this finding in light of existing theories of trade and growth which generally predict a monotonic relationship between income and diversification

growth volatility and financial liberalization we examine the effects of both equity market liberalization and capital account openness on real consumption growth variability we show that financial liberalization is mostly associated with lower consumption growth volatility our results are robust surviving controls for business cycle effects economic and financial development the quality of institutions and other variables countries that have more open capital accounts experience a greater reduction in consumption growth volatility after equity market openings we also find that financial liberalizations are associated with declines in the ratio of consumption growth volatility to gdp growth volatility suggesting improved risk sharing our results are weaker for liberalizing emerging markets but we never observe a significant increase in real volatility moreover we demonstrate significant differences in the volatility response depending on the size of the banking and government sectors and certain institutional factors

a new database on the structure and development of the financial sector this article introduces a new database of indicators of financial structure and financial development across countries and over time the database is unique in that it combines a wide variety of indicators that measure the size activity and efficiency of financial intermediaries and markets it improves on previous efforts by presenting data on the public share of commercial banks introducing indicators of the size and activity of nonbank financial institutions and constructing measures of the size of bond and primary equity markets this article introduces a new database the first to provide comprehensive measures of the development structure and performance of the financial sector this database is the first to define and construct indicators of the size and activity of nonbank financial intermediaries such as insurance companies pension funds and non deposit money banks it is also the first to include indicators of the size of primary equity markets and primary and secondary bond markets in constructing the database authors carefully deflate measures and match stock and flow variables

unemployment labour markets and structural change in eastern europe labour markets in eastern europe michael burda unemployment is a major concern in the transforming economies of central and eastern europe the modern flow approach to labour markets suggests both that unemployment is an important component of the transformation process and that the labour market institutions adopted will influence the rate of unemployment in the long run to date eastern european countries exhibit considerable divergences in several of these institutions especially in unemployment benefit systems collective bargaining structures and active labour market policies an aggregate matching function is successfully estimated for data from czech and slovak employment offices emerging labour markets in the east function not so differently from those in the west the implied dynamics make both big bang and benign neglect unattractive strategies for transformation a mixed bang is more appropriate quantitative evidence about the effects on unemployment of different labour market institutions in oecd countries is used to make long term projections of equilibrium rates of unemployment in central and eastern europe given the labour market institutions now in place there with the possible exception of the czech republic high unemployment is likely to be pervasive and persistent

inflation targeting is it to blame for banking system instability abstract in light of the financial crisis the practice of inflation targeting it has been blamed for authorities failure to respond to the increase in financial systemic risk and to the development of asset bubbles however utilizing a rich database containing nearly 5500 commercial banks from 70 countries among which 22 are it for the period 1998 2012 this paper argues that on average inflation targeting national banking systems i are more stable ii possess sounder systemically important banks and iii are less distressed than or at least as distressed as other banks during periods of global liquidity shortages our results are robust to a series of tests such as when we compare countries with the same legal origins or control for the delegation of bank supervision responsibility to bodies other than the central bank overall we conclude that it cannot be blamed for contributing to financial fragility

rain emotions and voting for the status quo abstract do emotions affect the decision between change and the status quo we exploit exogenous variation in emotions caused by rain and analyze data on more than 870 000 municipal vote outcomes in switzerland to address this question the empirical tests are based on administrative ballot outcomes and individual postvote survey data we find that rain decreases the share of votes for political change our robustness checks suggest that this finding is not driven by changes in the composition of the electorate and changes in information acquisition in addition we provide evidence that rain might have altered the outcome of several high stake votes we discuss the psychological mechanism and document that rain reduces the willingness to take risks a pattern that is consistent with the observed reduction in the support for change

coordination failures and government policy a model with applications to east asia and eastern europe abstract poor countries must specialize in standardized labor intensive commodities middle income countries may have a richer menu of options if their labor force is reasonably well educated and skilled the multiplicity of equilibria is due to a coordination problem inherent in activities that require specialized inputs if no intermediate inputs are presently produced there may be little incentive for any single firm to do so on its own the economy may get stuck in a low wage low tech equilibrium an investment subsidy or a minimum wage policy can enhance welfare by moving the economy to a superior equilibrium

determinants of business cycle comovement a robust analysis abstract this paper investigates the determinants of business cycle comovement between countries our dataset includes over 100 countries both developed and developing we search for variables that are robust in explaining comovement using the approach of leamer amer econom rev 73 1983 31 variables considered are i bilateral trade between countries ii total trade in each country iii sectoral structure iv similarity in export and import baskets v factor endowments and vi gravity variables we find that bilateral trade is robust however two variables that the literature has argued are important for business cycles industrial structure and currency unions are found not to be robust

openness and income the roles of trade and migration abstract this paper explores the relationship between openness to trade immigration and income per person across countries to address endogeneity concerns we extend the instrumental variables strategy introduced by frankel and romer 1999 we build predictors of openness to immigration and to trade for each country by using information on bilateral geographical and cultural distance while controlling for country size since geography may affect income through other channels we also control for climate disease environment natural resources and colonial origins most importantly we also account for the roles of institutions and early development our instrumental variables estimates provide evidence of a robust positive effect of openness to immigration on long run income per capita in contrast we are unable to establish an effect of trade openness on income we also show that the effect of migration operates through an increase in total factor productivity which appears to reflect increased diversity in productive skills and to some extent a higher rate of innovation

international trade risk taking and welfare this paper shows that the gains from opening up to international trade are smaller when firms do not fully internalize downward risk i develop a general equilibrium model with two key assumptions first when faced with adverse productivity shocks employers can lay off workers without fully paying the social costs of their layoff decisions a common feature of many institutions second when opening to international trade the elasticity of demand perceived by an industry increases in this setup i show that international trade induces firms to take more risk and i raises the equilibrium unemployment rate ii increases the volatility of sectoral sales and iii increases welfare proportionately less than in the absence of the externality inducing firms to internalize the costs of layoff blanchard and tirole 2003 therefore appears even more important in a globalized world

input output linkages and sectoral volatility why are some sectors more volatile than others this paper uncovers evidence of an empirical regularity in the us economy upstream sectors that are far removed from final consumers have higher levels of output volatility the relationship between volatility and upstreamness is not driven by sector size sector concentration trade openness or the level of aggregation at which sectors are defined rather the paper shows a stronger link between upstreamness and nominal output volatility than with indexes of real output volatility aggregate exports at the national level also reflect the empirical regularity of higher volatility with upstreamness export volatility is higher in economies with trade portfolios dominated by upstream sectors on average reducing the upstreamness of exports by 1 also reduces aggregate export volatility by about 10 the pattern of higher volatility for upstream sectors is explained with a model of demand shock transmission between sectors

trade openness and volatility abstract this paper examines the mechanisms through which output volatility is related to trade openness using an industry level panel data set of manufacturing production and trade the main results are threefold first sectors more open to international trade are more volatile second trade is accompanied by increased specialization these two forces imply increased aggregate volatility third sectors that are more open to trade are less correlated with the rest of the economy an effect that acts to reduce overall volatility the point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility added together they imply that the relationship between trade openness and overall volatility is positive and economically significant

trade creation and trade diversion in the eec the lafta and the cmea 1960 1994 in a simplified version of the gravity model appropriate dummy variables have been introduced to analyse the effects of both trade creation and trade diversion by three economic organizations the european economic community eec the latin american free trade association lafta and the council of mutual economic assistance cmea for the period 1960 94 five year intervals are the main subject of measurement the results show that both trade creation dummies and trade diversion dummies have statistically significant coefficients which show the appropriateness of this new approach the trade creation effect and trade diversion effect of each institution are proved to be generally weakening during the 1990s it is also observed that each organization has a distinctive international trade character for japanese trade a similar approach is used to analyse nonaligned trade by japan with particular interest in the effects of these three institutions on trade with japan the result is that there is no s

trade capital and the transition in central europe the potential for export oriented growth and the impact of official capital injections is assessed for five central european countries in the years 1990 2000 by means of a neoclassical simulation model export growth is essential for the transition to a market oriented economy and the recovery of central europe implying the need for trade liberalization by both the east and the west if this condition is being met satisfactory gdp growth rates appear possible even without external financial support

do all sectoral shocks lead to aggregate volatility empirics from a production network perspective abstract productive diversification has long been acknowledged as a volatility reducing strategy yet recent theoretical contributions have shown that in strongly diversified economies idiosyncratic shocks could translate into aggregate volatility via the network of inter industry linkages by exploiting exogenous cross country sector variations in demand shocks during the 2008 great recession we provide empirical evidence that the network properties of a sector affected by an individual shock determine its propensity to transmit volatility to the rest of the economy more precisely shocks to sectors that are located in denser parts of a production network fade out over a large number of alternative paths of propagation due to substitution effects whereas shocks to sectors that are more influential within the network generate aggregate fluctuations through contagion effects we also find that the impact of sectoral shocks on aggregate volatility 1 is not conditional on sector level differences in trade intensity and 2 is larger for developing countries because they tend to have more isolated influential sectors and larger structural holes in their production network our results thus help consolidate the two opposite views in the literature on the impact of productive diversification on aggregate volatility

the volatility effect of diaspora s location remittances can transmit volatility from host to home countries for some common patterns of diaspora s geographical distribution in a migration portfolio model the overall risk of volatility of any set of diaspora location is decomposed into a contagion and a concentration risks a diaspora located in more volatile destinations induces a higher contagion risk while a diaspora located in few destination countries increases the concentration risk a series of estimations on a large panel of developing countries over 1995 2015 provide evidence for these two risks estimation of a structural model confirms that the geography of diaspora has an indirect impact on the origin country s aggregate instability through remittances

an institutional approach to cross national distance cross national distance is a key concept in the field of management previous research has conceptualized and measured cross national differences mostly in terms of dyadic cultural distance and has used the euclidean approach to measuring it in contrast our goal is to disaggregate the construct of distance by proposing a set of multidimensional measures including economic financial political administrative cultural demographic knowledge and global connectedness as well as geographic distance we ground our analysis and choice of empirical dimensions on institutional theories of national business governance and innovation systems in order to overcome the methodological limitations of the euclidean approach we calculate dyadic distances using the mahalanobis method which is scale invariant and takes into consideration the variance covariance matrix we empirically analyze four different foreign expansion choices of us companies to illustrate the importance of disaggregating the distance construct and the usefulness of our distance calculations which we make freely available to managers and scholars

waves of international banking integration a tale of regional differences abstract we propose an original measure of international banking integration based on gravity equations and a spline function on a panel of 14 countries and their 186 partners between 1999 and 2012 contrary to the conventional wisdom we uncover that 1 the international banking integration outside the euro area has been tenaciously increasing since 1999 and has even strengthened after the crisis 2 in contrast the international banking integration of the euro area has been cyclical since 1999 with a peak in 2006 and a complete reversal since then 3 this decline is not a correction of previous overshooting but a marked disintegration 4 outside the euro area the level of income does not affect the shape of banking integration

from eea to eu economic consequences for the efta countries abstract the paper surveys and evaluates the economic consequences for austria finland norway and sweden of becoming members of the eu that are the least difficult to quantify namely transfers to and from the eu budget changes in agricultural policy and changes in trade barriers it concludes that the net effect of this subset of economic consequences is small or negligible for all candidate members

trade and exchange rate policies in formerly centrally planned economies this paper examines the international economic policies of the eastern european and soviet successes states in the early 1990s which provide one of those wide open windows of opportunity when powerful vested interests are not lobbying for retention of an existing tariff structure moreover the simultaneous abandonment of central planning by over two dozen countries provided a natural experiment in which a range of differing policies might have been pursued policymakers in transition economies have generally ended up pursuing liberal non discriminatory trade and foreign exchange policies there are exceptions and the majority may be wrong but the presumption is that perhaps after a learning or trial and error process decision makers have found the rules of thumb suggested by economists to be their best guide to international economic policy this paper notes that integration of transition economies into the global trading system has been surprisingly successful almost all the countries in transition from central planning have accepted the wto rule based system in principle even if there are variations in trade policies and performance and have generally pursued multilateral non discriminatory trade policies in particular the potential danger of regionalism proving more attractive than multilateralism has not eventuated the revealed behaviour of policymakers suggests that trade liberalisation is a good rule of thumb and regional groupings among transition economies have been insignificant despite a proliferation of new currencies varying exchange rate regimes and differing degrees of currency convertibility the general pattern has been to accept convertibility for current account transdactions and in many cases to extend this to a de jure commitment and to allow substantial capital account convertibility a general policy conclusion in favour of more open and non discriminatory trade and exchange policies have passed the test of acceptability by policymakers in over two dozen countries in this category

endogenous choice of trade policy instruments abstract recently developed theories of endogenous trade policy formation have attempted to explain tariffs as the result of economic interest seeking by individuals or groups this note demonstrates that tariffs will not emerge as a policy choice if income is redistributed solely through trade policy induced factor price changes a production tax cum subsidy will be adopted as both gainers and losers are better off than with a tariff

regionalism in a multilateral world recent regional initiatives have been addressed from a vinerian perspective of trade creation and trade diversion this is true of both policy oriented economists who tend to be critical of the initiatives and theorists who have added dynamic and gametheoretic elements to the vinerian structure this paper describes the stylized facts of much recent regional integration and develops an alternative model the analysis suggests that regional integration far from threatening multilateral liberalism may in fact be a direct consequence of the success of past multilateralism and an added guarantee for its survival

diversification through trade a widely held view is that openness to international trade leads to higher income volatility as trade increases specialization and hence exposure to sector specific shocks contrary to this common wisdom we argue that when country wide shocks are important openness to international trade can lower income volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries using a quantitative model of trade we assess the importance of the two mechanisms sectoral specialization and cross country diversification and show that in recent decades international trade has reduced economic volatility for most countries

big banks and macroeconomic outcomes theory and cross country evidence of granularity does the mere presence of big banks affect macroeconomic outcomes we develop a theory of granularity for the banking sector by modeling heterogeneous banks charging variable markups using data for a large set of countries we show that the banking sector is indeed granular as the right tail of the bank size distribution follows a power law we demonstrate empirically that the presence of big banks measured by a high degree of market concentration is associated with a positive and significant relationship between bank level credit growth and aggregate growth of credit or gdp

households vulnerability from trade in vietnam abstract this paper assesses vulnerability from trade in vietnam by presenting an extended version of ligon and schechter s 2003 vulnerability as low expected utility veu measure it uses the vietnam household living standard surveys vhlss panel data covering the period 2002 06 the empirical results show that risk induced vulnerability and heterogeneity in trade exposure matter in determining household overall vulnerability and that this is not linked to the actual manifestation of shocks although it does not represent by any means an argument against free trade this work is relevant for policymaking since it contributes to deepen our knowledge on the subtle links between trade openness and vulnerability and informs us about suitable instruments to accompany it

on the welfare cost of economic fluctuations in developing countries macroeconomic fluctuations are much stronger in developing countries than in the united states yet while a large literature debates the welfare cost of economic fluctuations in the united states it remains an open question how large that cost is in developing countries using several models we provide such a measure we find that the welfare cost of consumption volatility per se is far from trivial and averages a substantial multiple of the corresponding u s estimate moreover in many poor countries the welfare gain from eliminating volatility may in fact exceed the welfare gain from an additional percentage point of growth forever

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association

the cost of business cycles under endogenous growth robert e lucas jr argued that the welfare gains from reducing aggregate consumption volatility are negligible subsequent work that revisited his calculation continued to find small welfare benefits further reinforcing the perception that business cycles do not matter this paper argues instead that fluctuations can affect welfare by affecting the growth rate of consumption i show that fluctuations can reduce growth starting from a given initial consumption which can imply substantial welfare effects as lucas himself observed empirical evidence suggests the welfare effects are likely to be substantial about two orders of magnitude greater than lucas original estimates

volatility and development why is gdp growth so much more volatile in poor countries than in rich ones we identify four possible reasons i poor countries specialize in more volatile sectors ii poor countries specialize in fewer sectors iii poor countries experience more frequent and more severe aggregate shocks e g from macroeconomic policy and iv poor countries macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in we show how to decompose volatility into these four sources quantify their contribution to aggregate volatility and study how they relate to the stage of development we document the following regularities first as countries develop their productive structure moves from more volatile to less volatile sectors second the level of specialization declines with development at early stages and slowly increases at later stages of development third the volatility of country specific macroeconomic shocks falls with development fourth the covariance between sector specific and country specific shocks does not vary systematically with the level of development we argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work

comparative advantage complexity and volatility abstract less developed countries tend to experience higher output volatility a fact that is in part explained by their specialization in more volatile sectors this paper proposes theoretical explanations for this pattern of specialization with the complexity of the goods playing a central role specifically less developed countries with lower institutional ability to enforce contracts or alternately with low levels of human capital will specialize in less complex goods which are also characterized by higher levels of output volatility we provide novel empirical evidence that less complex industries are indeed more volatile

is free trade passe abstract if there were an economist s creed it would surely contain the affirmations i understand the principle of comparative advantage and i advocate free trade yet the case for free trade is currently more in doubt than at any time since the 1817 publication of ricardo s principles of political economy and this is due to changes that have recently taken place in the theory of international trade while new developments in international trade theory may not yet be familiar to the profession at large they have been substantial and radical in the last ten years the traditional constant returns perfect competition models of international trade have been supplemented and to some extent supplanted by a new breed of models that emphasizes increasing returns and imperfect competition these new models call into doubt the extent to which actual trade can be explained by comparative advantage they also open the possibility that government intervention in trade via import restrictions export subsidies

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

risk sharing and industrial specialization regional and international evidence the authors provide empirical evidence that risk sharing enhances specialization in production to the best of their knowledge this well established and important theoretical proposition has not been tested before the empirical procedure is summarized as follows first the authors construct a measure of specialization in production and calculate an index of specialization for each of the european community ec and non ec oecd countries u s states canadian provinces japanese prefectures latin american countries and regions of italy spain and the united kingdom then they estimate the degree of capital market integration a measure of risk sharing within each of these groups of regions the ec countries the non ec oecd countries the united states canada japan italy spain and the united kingdom and rely on another author s estimate for latin america finally they perform a regression of the specialization index on the degree of risk sharing controlling for relevant economic variables they find a positive and significant relation between the degree of specialization of individual members of a group of countries provinces states or prefectures and the amount of risk that is shared within the group the authors perform regressions using variables such as shareholder rights and the size of the financial sector relative to gdp as instruments for the amount of inter regional risk sharing these regressions confirm that risk sharing facilitated by a favorable legal environment and a developed financial system is a direct causal determinant of industrial specialization this abstract was borrowed from another version of this item

trade reorientation and recovery in transition economies how do we define transition and when can we say that transition to a market economy is complete here we suggest that one way of addressing this issue is to analyse current economic data and ask whether in ignorance of the past we can identify countries in central and eastern europe as being somehow different from comparable western market economies in this paper we focus on international trade and argue that several indicators such as the geographical structure of trade and the undervaluation of the exchange rate cannot distinguish the more advanced countries in central and eastern europe we also seek to explain how the reorientation of trade towards the west has been achieved and in particular assess whether improvements on design and quality are a prerequisite for export expansion copyright 1997 by oxford university press