the birth of a new industry entry by start ups and the drivers of firm growth the case of encryption software the paper analyses the birth of the encryption software industry esi a new niche in the software industry using a chandlerian perspective this work reports the main facts about fir entry and growth with a particular focus on start up strategies and actions since scale economies do not play a major role in esi the paper investigates the different sources of fir competitive advantages this work shows that innovation and product differentiation along with investments in co specialised assets are variables strongly correlated to young fir probability to survive and grow in doing so we have collected highly detailed information on product introduction us patents granted worldwide alliances and biographical data of fir founders 2004 elsevier b v all rights reserved jel classificatio m13 l86 o32

submarkets and the evolution of market structure we construct a model of industry evolution in which the central force for change is the creation and destruction of submarkets firms expand when they are able to exploit new opportunities that arrive in the form of submarkets they contract and ultimately exit when the submarkets in which they operate are destroyed this simple framework can transparently explain a wide range of well known regularities about industry dynamics most notably the subtle relationships between size age growth and survival data on the laser industry where submarkets are prominent further illustrate the ability of the model to explain distinctive patterns in the evolution of industries and firms

speculative attacks and the information role of the interest rate this paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market clearing interest rate besides affecting speculators payoffs this interest rate also provides an endogenous public signal for a plausible type of investment strategies the dual role of the interest rate allows the model to explain abrupt and intense speculative attacks solely via economic fundamentals without resorting to sunspot variables this result underlies a novel policy implication an official intervention in the foreign exchange market may reinforce a currency peg by influencing the precision of public information jel d82 d84 f31

fixed exchange rates credibility flexibility and multiplicity abstract this paper surveys recent work on the sustainability of fixed exchange rates it considers a dynamic version the barro gordon framework in which the level of a state variable in this case debt determines the pay offs available to the government at each point in time multiple equilibria and self fulfilling runs are possible but only at certain levels of debt a surprise devaluation can either increase or decrease future expected devaluation relative to a no devaluation situation

industrial evolution through complementary convergence the case of it security the article addresses the dynamics through which product markets become derailed from early product life cycle plc tracks and engaged in complementary convergence with other product markets or industries we compare and contrast the theories that can explain respectively the plc and the derailing of this cycle into a process of complementary convergence the article challenges the standard industry conception and proposes a distinction between the emergent industrial sector the emergent product market or niche and the industry as a more well established entity based on empirical evidence from the it security sector two trajectories of complementary convergence are identified lower order integration the integration of different product markets in a sectoral context and higher end integration the integration of product markets into the offerings of established industries while young ventures dominate lower order integration incumbents in established industries dominate higher order integration for both trajectories mergers and acquisitions represent a central means for realizing convergence copyright 2011 the author 2011 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

the industrial dynamics of open innovation evidence from the transformation of consumer electronics abstract this paper addresses how the open innovation concept as recently coined by henry chesbrough can be analyzed from an industrial dynamics perspective the main proposition of the paper is that the specific modes in which different companies manage open innovation in regard to an emerging technology reflect their differential position within the innovation system in question the nature and stage of maturity of the technological regime and the particular value proposition pursued by companies the proposition is analyzed through an in depth study of the current transformation of sound amplification from linear solid state technology to switched or digital technology within the consumer electronics system of innovation the analysis especially addresses the complex interplay between technology entrepreneurs and incumbents and demonstrates that open innovation sometimes has to be conducted under conditions of high transaction costs

capital markets and the exchange rate with special reference to the dollarization debate in latin america the paper reviews the main challenges faced by policymakers in emerging market economies em in light of recent financial crises and taking into account salient factors like the existence of partial dollarization imperfect credibility weak financial systems and contagion the standard theory of optimal currency areas is discussed and criticized for omitting the above factors when these factors are taken into account an extreme foreign exchange regime like dollarization is shown to become much more attractive the paper discusses the pros and cons of dollarization and among other things shows that the lack of a lender of last resort is not necessarily a major drawback in em the paper also discusses inflation targeting it in a formal model it is shown that it could be subject to credibility problems similar to those found in exchange rate based stabilization programs

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

high public debt the italian experience introduction is there a public debt problem in italy luigi spaventa the end of large public debts alberto alesina monetary and fiscal policy coordination with a high public debt guido tabellini the management of public debt and financial markets marco pagano capital controls and public finance the experience in italy alberto giovannini public debt and households demand for monetary assets in italy andrea bollino and nicola rossi

why the microbrewery movement organizational dynamics of resource partitioning in the u s brewing industry1 the number of small specialty brewers in the u s beer brewing industry has increased dramatically in recent decades even as the market for beer became increasingly dominated by mass production brewing companies using the resource partitioning model of organizational ecology this article shows that these two apparently contradictory trends are fundamentally interrelated hypotheses developed here refine the way scale competition among generalist organizations is modeled and improve the theoretical development of the sociological bases for the appeal of specialist organizations products especially those related to organizational identity evidence drawn from qualitative and quantitative research provides strong support for the theory the article offers a brief discussion of the theoretical and substantive issues involved in application of the model to other industries and to other cultures

the instability of fixed exchange rate systems when raising the nominal interest rate is costly abstract this paper points to a vicious circle which may arise when a government tries to defend its currency by raising the nominal interest rate in a fixed exchange rate system we present a stylised model in which raising the nominal interest rate helps to maintain the parity but is costly for the government the speculators are aware that this cost gives incentives for the government to stop defending the parity which in turn reinforces the speculation against the currency we show that this mechanism can generate self fulfilling currency crises the outcome of which depends on the level of sacrifice that the government is ready to endure and the evolution of domestic economic conditions we provide some informal evidence showing that this model explains some features of the 1992 93 ems crisis

conversation information and herd behavior experimental evidence shows that an important reason why people tend to imitate others to exhibit herd behavior is that they assume that the others have information that justifies their actions the information cascade models of banerjee 1992 and bikhchandani et al 1992 are significant developments in showing some general equilibrium and welfare effects of such rational imitative behavior but these models as specified may be of limited applicability since they assert that differences across groups in herd behavior can be attributed to the random decisions of first movers differences across groups in herd behavior might be explained more often in terms of different modes of interpersonal information transmission patterns of human conversation imply great selectivity to the kinds of information transmitted within groups this abstract was borrowed from another version of this item

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

credibility of policies versus credibility of policymakers standard models of policy credibility defined as the expectation that an announced policy will be carried out emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility whether a policy is carried out however will also reflect the state of the economy we present a model in which a policymaker maintains a fixed parity in good times but devalues if the unemployment rate gets too high our main conclusion is that if there is persistence in unemployment observing a tough policy in a given period may lower rather than raise the credibility of a no devaluation pledge in subsequent periods we test this implication on ems interest rates and find support for our hypothesis

on the impact of fundamentals liquidity and coordination on market stability complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with co ordination games we propose a flexible framework to estimate such a model and use the efficient method of moments as estimation proce dure we illustrate the model by using exchange rates from the yen dollar carry trade induced uncertainty in 1998 interest rate spreads and global market volatility the model fits the data well with ev idence of low information disparities the market is generally very deep where global volatility is more important than fundamental un certainty in the determination of liquidity there is clear evidence of asymmetry between the buy and sell sides of the market

coordination cooperation contagion and currency crises we analyze the effect of trade competition international coordination and cooperation on currency crises to do this we present a micro founded model where governments have an incentive to devalue to increase the national market share in a monopolistically competitive sector currency crises generated by self fulfilling expectations are possible because private agents demand high wages when they expect a devaluation this decreases the competitiveness and profits of national firms and induces the government to devalue we show that the more important trade competition the more likely self fulfilling speculative crises are and the larger the set of multiple equilibria coordination decreases the possibility of simultaneous self fulfilling speculative crises in the region and reduces the set of multiple equilibria however regional coordination even though welfare improving makes countries more dependent on other countries fundamentals so that it may induce more contagion cooperation further reduces the set of multiple equilibria with currency crises

financial globalisation and crisis institutional transformation and equity this paper comprises the long introduction to the symposium of five papers on financial globalisation published in the cambridge journal of economics volume 34 no 2 the paper discusses the impact of financial globalisation in a variety of spheres and shows how the five papers link together to provide a coherent view of the current economic and financial crisis in this paper we also examine the globalisation of finance more broadly both in historical terms as well as in relation to the current widespread failure in the financial markets we take up the policy question of how the interests of the poor in particular and developing countries in general could be safeguarded from the vagaries of financial globalisation questioning how much choice communities and countries have and what can the international community do to extend these choices

seigniorage revenue deficits and self fulfilling currency crises abstract this paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis the government has an informational advantage and can decide when it is optimal to invoke an escape clause i e to drop the peg and float speculators must guess when the crisis will happen based on their assessment of the probability of collapse and this makes pegged exchange rate equilibria unstable

fiscal deficits exchange rate crises and inflation this paper extends earlier work on unsustainable monetary policies by endogenizing the regime switch that ultimately restores sustainability within this framework we analyse exchange rate based stabilization programmes and show how constraints on central bank borrowing during an exchange crisis influence timing and nature of the post collapse equilibrium such constraints introduce non neutralities more restrictive pre collapse credit policies increase the post collapse inflation rate external shocks can destroy consistency between fiscal programmes and inflation targets causing reserve losses exchange rate changes and higher inflation balance of payments crises are the mechanism through which fiscal imbalances translate into higher inflation rather than an alternative explanation of it this paper deals with inflation fiscal deficits and exchange rate policy in high inflation countries the experience of the past decade has presented a series of puzzles for example countries attempting to stabilize inflation through an exchange rate freeze often saw inflation accelerate after the collapse of the experiment to levels well above those observed before the programme was implemented another puzzle concerns the relation between inflation and balance of payments crises in many countries a bop crisis forcing a change in exchange rate policy often led to a persistent increase in inflation liviatan and piterman 1984 this has led to doubts about the relevance of fiscal deficits in explaining inflationary episodes leading many to see bop crises as an independent explanation of inflation but this apparent relation is a puzzle a bop crisis cum devaluation can at most explain a jump in the price level but not a sustained increase in inflation in this paper we demonstrate that these puzzles can be explained fully by drawing on the public finance approach to inflation initiated by phelps 1973 thus the fiscal versus bop controversy is not a real one our analysis shows that bop crises and exchange rate shifts are part of the mechanisms through which fiscal imbalances translate into higher inflation rather than alternative explanations to make these points we present a simple open economy model to analyse the transition to a fixed exchange rate regime discuss sustainability and demonstrate what happens when policy measures are inconsistent and the fixed regime unsustainable we also demonstrate how the constraints under which the central bank has to operate the exchange rate regime influence the timing of the attack the post collapse inflation rate and the effects of pre collapse fiscal policy on the post collapse equilibrium the analysis builds on the work of sargent and wallace 1982 and liviatan 1984 on unsustainable monetary policies cf buiter 1988 1989 and drazen and helpman 1987 for open economy variants contrary to this literature we link the timing of the regime switch towards sustainable policies to rational speculative behaviour rather than assuming it to be exogenous the introduction of rational speculators forcing a regime switch draws on the literature on speculative attacks on central bank reserves initiated by 8i

assessing target zone credibility mean reversion and devaluation expectations in the erm 1979 1992 abstract the paper presents estimates of devaluation expectations for six erm currencies relative to the deutsche mark for the period march 1979 april 1992 both the simplest test and the drift adjustment method are used the simplest test adjusts interest rate differentials for the maximum and minimum expected rate of depreciation within the exchange rate band the drift adjustment method adjusts interest rate differentials by the estimated expected rate of depreciation within the band the latter method gives more precise estimates especially for short horizons and allows statistical inference and hypothesis testing expected rates of devaluation have generally fallen during the period still some devaluation expectations relative to the deutsche mark remain in 1992 except for the belgian luxembourg franc and the netherlands guilder expected rates of devaluation have fluctuated more than interest rate differentials

does industrial composition matter for wages a test of search and bargaining theory does switching the composition of jobs between low paying and high paying industries have important effects on wages in other sectors in this paper we build on search and bargaining theory to clarify a key general equilibrium channel through which changes in industrial composition could have substantial effects on wages in all sectors in this class of models wage determination takes the form of a social interaction problem and we illustrate how the implied sectoral linkages can be empirically explored using u s census data we find that sector level wages interact as implied by the model and that the predicted general equilibrium effects are present and substantial we interpret our results as highlighting the relevance of search and bargaining theory for understanding the determination of wages and we argue that the results provide support for the view that industrial composition is important for understanding wage outcomes

time consistent fiscal policy and government cash flow abstract this short paper provides an interpretation and some extensions of lucas and stokey s results on optimal fiscal policy the discussion relies heavily on the concept of government cash flow which is related but not equal to the budget surplus time consistency of the optimal policy requires that a positive cash flow is used to buy up some debt of each maturity and contingency

do high interest rates defend currencies during speculative attacks new evidence kraay kraay a 2003 do high interest rates defend currencies during speculative attacks journal of international economics 59 297 321 documents the lack of any systematic association between monetary policy and the outcome of a speculative attack this paper revisits kraay s work and modifies it by introducing an improved measure of monetary policy and an additional country specific fundamental short term corporate debt to capture balance sheet vulnerabilities emphasized by the recent currency crises literature the results show that for low levels of short term corporate debt raising interest rates lowers the probability of a successful attack this effect decreases and eventually reverses for higher levels of debt these findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

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

trade integration and business cycle convergence is the relation robust across time and space in this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959 2003 most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country pair specific effects our estimates using both fixed and random effects methodologies suggest that trade intensity and the business cycle correlation are positively related to one another however detailed investigation shows that this relationship exists mainly for the european countries

speculative currency attacks and balance of payments crises abstract this paper reviews the recent theoretical literature on collapsing exchange rate regimes using a combination of technique intuition and realworld observation we discuss the literature s main insights point out some unresolved questions and offer suggestions for future research the survey should be of interest to both specialists and non specialists in the field of international macroeconomics

are currency crises self fulfilling abstract this paper studies the respective roles of the fundamentals and self fulfilling speculation in currency crises we first present a model of a fixed exchange rate system in which self fulfilling speculation can arise following a bifurcation in the fundamentals we then estimate the model in the case of the 1992 3 crisis of the french franc and find some evidence that self fulfilling speculation was at work

incumbent entry into new market niches the role of experience and managerial choice in the creation of dynamic capabilities increasingly technological innovation creates markets for new products and services to survive firms must respond to these new markets how do firms develop the capabilities necessary to succeed in such changing conditions some suggest that experience with previous entry builds such capabilities others suggest that capabilities arise from experience producing and selling to existing markets the role of managers is also debated some argue that experience with existing markets causes managers to miss entry opportunities others argue that managers enter new markets when their firm possesses the experience needed to compete effectively in this paper we explore these issues by investigating entry patterns in the disk drive industry we investigate the effect of experience in existing markets and experience with previous market entry we find that experience in previous markets increased the probability that a firm would enter a new market we show that this experience had greater value if the firm entered the new market we infer that managers chose to enter these markets to obtain this increase in value

mexico s balance of payments crisis a chronicle of a death foretold this paper claims that the roots of mexico s balance of payments crisis are found in the prevailing high degree of capital mobility and financial globalization under these circumstances shifts in foreign capital flows and anticipation of a banking system bailout may produce large imbalances between stocks of financial assets and foreign reserves threatening the sustainability of currency pegs econometric analysis suggests that half of mexico s reserve losses could be accounted for by these phenomena large financial imbalances are also fertile ground for self fulfilling prophesy crises which lead devaluations to produce deep recessions these difficulties can be partly remedied by appropriate policies

antitrust issues in schumpeterian industries a half century ago joseph schumpeter 1950 chapters 5 8 presented a vision of modern capitalism in which monopolies are common but frequently swept aside by a perennial gale of creative destruction p 84 this gale is driven not by price competition but by competition from the new commodity the new technology competition which strikes not at the margins of the profits of the existing firms but at their foundations and their very lives p 84 i focus here on the personal computer pc software hereafter simply software industry which resembles this vision i discuss some important issues this industry poses for antitrust policy and in the final section illustrate with examples from the microsoft case

terms of trade uncertainty and economic growth abstract this paper examines a stochastic endogenous growth model in which terms of trade uncertainty affects savings and growth the model explains the well known positive link between growth and the mean rate of change of terms of trade and predicts also that terms of trade variability affects growth increased terms of trade variability results in faster or slower growth depending on the degree of risk aversion but in either case it reduces social welfare these growth effects imply that welfare costs of macroeconomic uncertainty are much larger than first thought cross country panel regressions provide strong support for the model s key predictions

shadow rates and multiple equilibria in the theory of currency crises abstract this note generalizes to second generation models of currency crises the arbitrage based approach first applied by flood and garber to first generation models deriving policy switching rules based on the shadow exchange rate facilitates the comparative analysis of the literature using the shadow rate we provide and discuss an example of a common mechanism generating multiple equilibria in both first and second generation models

recent technological and economic change among industrialized countries insights from population growth cross country observations on the effects of population growth are used to show why differences in rates of growth in working age population may be a key to understanding differences in economic performance across industrialized countries over the period 1975 1997 versus 1960 1974 in particular we argue that countries with lower rates of adult population growth adopted new capital intensive technologies more quickly than their high population growth counterparts therefore allowing them to reduce their work time without deterioration of growth in output per adult

the myth of the biotech revolution an assessment of technological clinical and organisational change abstract this paper argues that despite being widely promoted by academics and consultants the empirical evidence does not support the existence of a biotech revolution nor does the data support the widely held expectations that biotechnology is having a revolutionary impact on healthcare or economic development the revolutionary model is therefore a misleading basis for policy making as it over estimates the speed and extent of any changes in productivity or the quality of therapeutics instead the evidence suggests biotechnology is following a well established incremental pattern of technological change and creative accumulation that builds upon rather than disrupts previous drug development heuristics

can exchange rate predictability be achieved without monetary convergence evidence from the ems abstract the evidence presented here suggests that the european monetary system has indeed coincided with more predictable exchange rates nominal and real between france germany and italy but if increased monetary policy coordination is the main explanation then it is surprising that the conditional variance of real interest differentials between these countries does not appear to have fallen unless the disturbances are mostly real in which case fixed rates are suboptimal high onshore offshore interest differentials for franc and lira assets and the very slow convergence of intra ems inflation rates suggest that capital controls have played a large role

regime switching analysis for the impacts of exchange rate volatility on corporate values a taiwanese case a second moment regime switching model with not only a switching intercept and a switching slope but also a switching error variance is applied to examine the impacts of exchange rate volatility erv on corporate values cv for the 10 industries investigated in taiwan two different regimes categorized as strong impact and weak impact are identified the dominant power varies from one industry to another the wald statistics for the null of equality are ambiguous which show that if the markov switching ms model is plausible then the erv might not be one major factor but another factor that could switch the cv of taiwan s industries for the model s volatility influence the data of 8 out of 10 industries are shown to fit a two state model when the volatility is stimulated a two state first order ms model is appropriate for the goodness of fit analysis at the 10 significant level

do high interest rates deter speculative attacks evidence and some theory abstract this paper presents the first empirical evidence on the efficacy of raising interest rates ex ante as a deterrent to speculative attacks using a dataset that covers 54 countries from march 1964 through december 2005 we find strong evidence that raising interest rates in advance has significantly different impacts in different country groups it significantly reduces the probability of attacks in countries that have a de facto hard peg but increases it in de facto soft pegging countries this finding is robust to alternative measure of monetary policy and to different specifications and samples we then present a simple two stage signaling model to offer a theoretical explanation for our empirical findings

gaining and losing erm credibility the case of the united kingdom the model of this paper highlights two aspects of credibility signaling the type of government which is assumed not to be known and for any type the likelihood that if circumstances are sufficiently unfavorable a devaluation will be impossible to avoid since not to do so would go against the government s interests these two factors have opposite implications for the link between unemployment and interest differentials high unemployment signals a tough government but also makes it less likely that even a tough government will maintain an existing parity copyright 1995 by royal economic society

technological extinctions of industrial firms an inquiry into their nature and causes after a buildup in the number of firms new industries commonly experience a shakeout in which the number of firms declines sharply three theoretical perspectives on how technological change contributes to industry shakeouts are analyzed the theories are used to synthesize predictions concerning technological change and industry evolution the predictions inform an analysis of four us industries that experienced sharp shakeouts automobiles tires televisions and penicillin using data on firm participation and innovation from the commercial inception of the four products through their formative eras we uncover regularities in how the products evolved the regularities suggest that shakeouts are not triggered by particular technological innovations nor by dominant designs but by an evolutionary process in which technological innovation contributes to a mounting dominance by some early entering firms copyright 1997 by oxford university press

currency crises and monetary policy in an economy with credit constraints this paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities the possibility of multiple equilibria including a currency crisis equilibrium with low output and a depreciated domestic currency results from the following mechanism if nominal prices are sticky a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms and thus to a fall in their profits this reduces firms borrowing capacity and therefore investment and output in a credit constrained economy which in turn reduces the demand for the domestic currency and leads to a depreciation we examine the impact of various shocks including productivity fiscal or expectational shocks we then analyze the optimal monetary policy to prevent or solve currency crises we also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms

fiscal policy debt management and exchange rate credibility lessons from the recent italian experience abstract this paper explores some potential determinants of exchange rate credibility with reference to the italian experience of the 1990s the analysis relies on a nonlinear framework emphasizing shifts between credible and non credible states and assuming a significant degree of persistence in the above regimes almost all fiscal and debt management indicators display significant effects on devaluation expectations the main policy implications of the paper are that a restrictive fiscal stance a lengthening of average debt maturity and an increase in the share of foreign denominated debt are crucial to stabilize the lira exchange rate and to qualify italy in the former group of countries which will join emu

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

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

a year of living dangerously the management of the financial crisis in 2008 there are many reasons to regret the decision of u s financial authorities to insert the government into the resolution of the investment bank bear stearns in march 2008 the federal reserve s use of its discount window built up false hope of future rescues paying off the uninsured creditors of bear stearns overcompensated them at the time and invited speculative attacks on the equity of similarly situated firms i will argue that the market seizure after lehman brothers decision to seek the protection of bankruptcy was an echo of the prior official decision to protect bear stearns

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

do investors herd in emerging stock markets evidence from the taiwanese market abstract this paper has three main contributions to the literature on investor herds first it extends investor herding studies to an emerging yet relatively sophisticated taiwanese stock market at the sector level by using firm level data second it employs different methodologies designed to test the existence of investor herds to better understand the sources of herd behavior third it discusses the implications of different herding measures for investors exposed to systematic and unsystematic risks we find that the linear model based on the cross sectional standard deviation cssd testing methodology yields no significant evidence of herding however the non linear model proposed by chang et al 2000 and the state space based models of hwang and salmon 2004 lead to consistent results indicating strong evidence of herd formation in all sectors we also find that the herding effect is more prominent during periods of market losses our results suggest limited diversification opportunities for investors in this market especially during periods of market losses when diversification is most needed further research is necessary to see whether similar findings hold for other emerging markets

fixed exchange rates as a means to price stability what have we learned abstract the paper discusses what we have learned from last year s currency crises in erm and the nordic countries about fixed exchange rates as a means to achieve price stability after discussing the explanations for the crises the paper concludes that fixed exchange rates are not a shortcut to price stability monetary stability and credibility have to be built at home and cannot easily be imported from abroad fixed exchange rates are more fragile and difficult to maintain than previously thought they may even be in conflict with price stability by inducing a procyclical destabilizing monetary policy and by inducing an inflation bias building monetary credibility is even more important with flexible exchange rates

a currency crisis model with a misaligned central parity a stochastic analysis abstract the currency crisis model outlined in this paper assumes state contingent reserve dynamics which depend on the deviations of the exchange rate from a misaligned central parity the size of the misalignment is affected by an underlined fundamental which embodies money aggregates and a stochastic shock the main result in the presence of an irreversible switch of regime is that the size of the attack is amplified by the feedback effect from the composite fundamental to the exchange rate

innis lecture explorations in medium run macroeconomics medium run macroeconomics refers to aggregate economic phenomena that manifest over periods of 10 to 25 years this area of research has emerged over the last decade as a new and distinct field of enquiry in this paper i overview a set of personal attempts aimed at understanding certain medium run phenomena such as changes in the wage structure changes in the world distribution of income per capita and changes in growth patterns across oecd countries the goal of the paper is to extract general lessons from these experiences in particular i will discuss why models of endogenous technological choice may be a good starting point for studying medium run phenomena jel classification e00 o00 explorations du monde macroeconomique a moyen terme la macroeconomie a moyen terme s attache aux phenomenes economiques agreges qui se manifestent sur des periodes de 10 a 25 ans ce champ de recherche a emerge au cours de la derniere decennie en tant que chantier nouveau et distinct dans ce texte je fais le tour d un ensemble de tentatives personnelles pour comprendre certains phenomenes de moyen terme comme les changements dans les structures de salaires les changements dans la distribution des revenus per capita dans le monde et les changements dans les patterns de croissance a travers les pays de l ocde l objectif de ce memoire est d extraire certaines lecons generales de ces experiences en particulier on discute des raisons pour lesquelles les modeles de choix technologiques endogenes constituent un bon point de depart pour l etude des phenomenes de moyen terme

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

germany and the world economy a german view germany and the world economy a round table discussion led by gerhard fels and hans peter froehlich many countries most notably the us have called for a german expansion to date germany has not acceded to these requests and fels and froehlich set out the german position they argue that large budget deficits in 1980 82 and the consequent increase in the debt burden left little alternative to a strategy of fiscal consolidation any contractionary effect on demand may have been more than offset by the favourable effect on private sector expectations the result of this fiscal austerity coupled with a tight monetary policy has been a moderation of inflation and after an initial recession a period of sustained growth any german fiscal expansion would push world real interest rates even higher but would do little to improve the us current account further germany s strongly counterinflationary policies have been an important factor in the success of the ems some easing of the fiscal stance might occur were the us to come to grips with its own deficit problems a reduction of the tax burden and a removal of trade barriers remain the best policies to sustain medium term growth germany s critics remained unconvinced olivier blanchard argued that the german recovery falls well short of that required to restore full employment and that the fiscal contraction of 1982 85 was unwarranted by the existing levels of deficits and debt there was little evidence that the laws of economics had been repealed and that fiscal austerity had actually fostered expansion in germany from a european perspective marcus miller noted that german austerity had helped underpin the anti inflation policy of ems countries however the twin pressures of a tightening us fiscal policy and a falling and more competitive dollar would require a deliberate and concerted european policy expansion if yet higher unemployment was to be avoided in europe a german u turn was especially desirable at this particular juncture

demographics and recent productivity performance insights from cross country comparisons over the last few decades countries have experienced quite different patterns of productivity growth in this paper we emphasize the role of country level demographics in explaining these differences in particular looking over the period 1960 2002 we show that cross country data support the notion that starting in the late 1970s countries went through a period of technological transition that lasted at least until the mid 1990s for the fastest adjusting countries and is still proceeding for the slower adjusting countries the main claim of the paper is that the country level rate of labour growth was a key factor driving the speed of adjustment to the new technological paradigm implying that much of the cross country difference in economic performance over recent decades can be explained by demographic differences across countries as opposed to the many other factors emphasized in the literature jel classification o33 o41 demographie et productivite eclaircissements et conjectures derives de comparaisons entre pays au cours des quelques dernieres decennies divers pays ont fait l experience de patterns differents dans la croissance de la productivite dans ce memoire les auteurs presentent une interpretation des patterns recents de productivite du travail qui met l accent sur la demographie du pays comme facteur explicatif de ces differences en particulier pour la periode 1960 2002 on montre que les donnees comparatives entre pays supportent l hypothese que a partir de la fin des annees 1970 les pays ont vecu une periode de transition technologique qui a dure jusqu au milieu des annees 1990 pour les pays qui se sont ajustes le plus vite et qui est encore en cours pour ceux qui se sont ajustes plus lentement la proposition principale mise de l avant dans le memoire est que la croissance de la main d oeuvre d un pays a ete un facteur cle dans la definition de la vitesse d ajustement au nouveau paradigme technologique ceci suggere qu une bonne partie des differences de performance economique entre pays au cours des dernieres decennies est attribuable aux differences dans la demographie de ces pays plutot qu aux multiples facteurs mentionnes habituellement dans la litterature compte tenu du fait que la transition technologique met du temps a s accomplir 20 a 30 ans cette perspective suggere que qu il faut etre extremement prudent quand on se fonde sur des comparaisons de croissance de productivite entre pays et sur des periodes courtes de 5 a 10 ans pour tirer des conclusions quant aux politiques economiques a mettre en place

self fulfilling risk predictions an application to speculative attacks abstract we show that changing market beliefs about currency risk can generate a self fulfilling speculative attack on a fixed exchange rate the attack does not require a later change in policies to make it profitable we illustrate this point by introducing an endogenous risk premium into a first generation model of a speculative attack the model is further modified to take account of sterilization debt financed fiscal deficits and anticipatory price setting behavior we use the model to interpret the 1994 mexican peso crisis

policy delegation and fixed exchanges rates recent literature interpreting the european monetary system emphasizes credibility gains from delegating monetary policy to a low inflation country through fixed exchange rates this paper presents a model of an exchange rate system as a device for policy delegation in the context of a repeated monetary policy game in contrast to single shot games it generates credibility gains for the high inflation and low inflation countries in the system credibility gains neither require nor imply hegemony of the low inflation member stochastic realignments enable the members to adopt different inflation trends without destroying the credibility benefits from policy delegation copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

contagion in latin america definitions measurement and policy implications this paper analyzes bond and stock markets in latin america and uses these patterns to investigate whether contagion occurred in the 1990 s it defines shift contagion as a significant increase in cross market linkages after a shock to one country or region several coin toss examples and a simple model show that the standard tests for contagion are biased due to the presence of heteroscedasticity endogeneity and omitted variable bias recent empirical work which addresses these problems finds little evidence of shift contagion during a range of crisis periods instead this work argues that many countries are highly interdependent in all states of the world and the strong cross country linkages which exist after a crisis are not significantly different than those during more stable periods these findings have a number of implications for latin america

innovation and corporate growth in the evolution of the drug industry abstract this work studies the processes of growth of the worlds top 150 pharmaceutical firms on the grounds of an original database which also allows disaggregate analysis at the level of single therapeutical classes and chemical entities our findings show that the industry whose long term evolution is driven by innovation imitation and permanent creation of new markets displays i fat tails in the distribution of growth shocks present at all levels of aggregation with relatively rare big spurs of growth ii a significant autocorrelation of growth rates iii a fall of variance of growth rates with size entirely dependent on corporate diversification patterns in turn plausibly shaped by the competence scope of each firm and iv different lifecycles of diverse types of products and persistent forms of heterogeneity across firms in terms of innovative output which however do not not seem to affect comparative growth performances

two cases for sand in the wheels of international finance the incompatibility of pegged exchange rates international capital mobility and national monetary autonomy is a basic postulate of open economy macroeconomies in the present environment of high capital mobility and political uncertainty even the possibility that governments may utilize their policy autonomy can defeat efforts to peg the exchange rate this leaves two possibilities one is to fix the exchange rate irrevocably through monetary unification the other is to live with floating rates either way a case can be made for throwing sand in the wheels of international finance where monetary unification is not an option this is a may to make distinct national currencies tolerable and international money and capital markets compatible with modest national autonomy in monetary and macroeconomic policy for eu counties striving to create a monetary union it is the only politically and economically feasible way of completing the transition to stage iii of the maastricht process

an interest rate defense of a fixed exchange rate defending a government s exchange rate commitment with active interest rate policy is not an option in first generation models of speculative attacks in those models the interest rate is the passive reflection of currency depreciation expectations in this paper we show how to adapt the first generation framework to allow for an interest rate defense it is shown that increasing domestic currency interest rate before the attack makes domestic assets more attractive according to an asset substitution effect but weakens the domestic currency by increasing the government s fiscal liabilities as a result an interest rate defense can be successful only conditional on sound fiscal policy

monetary policy and the exchange rate during the asian crisis identification through heteroscedasticity abstract this paper examines whether a monetary policy tightening i e an increase in the domestic interest rate was successful in defending the exchange rate from speculative pressures during the asian financial crisis we estimate a bivariate vecm for four asian countries and improve upon existing studies in two important ways first by using a long data span we are able to compare the effects of an interest rate rise on the nominal exchange rate during tranquil and turbulent periods second we take into account the endogeneity of interest rates and identify the system by exploiting the heteroscedasticity properties of the relevant time series following rigobon identification through heteroscedasticity review of economics and statistics in press we find that while tight monetary policy helped to defend the exchange rate during tranquil periods it had the opposite effect during the asian crisis

technological competition and the structure of the computer industry we examine thirty years of computer industry market structure our analysis explains the persistence of dominant computer firms their recent decline and the changing success of competitive entry it emphasizes the importance of technological competition between computer platforms not firms this aspect of competition has changed little over time two things did change young platforms serving newly founded segments eventually challenged established platforms across segment boundaries through a process of indirect entry vertically disintegrated platforms have led to divided technical leadership in important segments the result is an industry with far more technological competition

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

self fulfilling currency crises and central bank independence we develop a model of a fixed exchange rate peg arrangement derived from the barro gordon model of rules versus discretion it is shown that the fixed peg is vulnerable to self fulfilling currency crises in which the unemployment rate increases the credibility of the rule decreases but paradoxically the reputation of the policy maker improves delegating monetary policy to an independent central banker does not prevent this type of crisis from arising and can even make it more costly

capital controls and foreign exchange market crises in the ems abstract it is widely held that capital controls are necessary to prevent foreign exchange market crises in a fixed but adjustable exchange rate system like the ems it was therefore argued that capital market liberalization which came in july 1990 might lead to recurrent crises in the ems events since july 1990 have shown that capital controls were not necessary for the stability of the ems this paper shows that even with capital controls the system might enter turbulent periods and might experience a self fulfilling balance of payments crisis if the authorities are perceived to dislike high domestic interest rates a crisis can then be triggered by any small shock if the authorities are not willing to raise domestic interest rates sufficiently to defend the exchange rate

do high interest rates defend currencies during speculative attacks abstract do high interest rates defend currencies during speculative attacks or do they have the perverse effect of increasing the probability of a devaluation of the currency under attack drawing on evidence from a large sample of speculative attacks in developed and developing economies this paper argues that the answer to both questions is no in particular this paper documents a striking lack of any systematic association whatsoever between interest rates and the outcome of speculative attacks the lack of clear empirical evidence on the effects of high interest rates during speculative attacks mirrors the theoretical ambiguities on this issue

the falsification of four popular hypotheses about the asian crisis various claims have been made about the causes of the asian crisis and its spread here we use data on the behaviour of capital flows during the crisis to test the strong forms of four such hypotheses that portfolio investors and hedge funds played a dominant role in initiating and or spreading the crisis that moral hazard kept efficient markets from predicting the crisis and finally the common lender hypothesis of kaminsky and reinhart in the process we also test implications of the calvo mendoza model of rational investor ignorance all are falsified as monocausal explanations for example portfolio investments that could not have been subject to substantial moral hazard continued to flow into asia until very shortly before the crisis likewise banks were a much larger source of capital outflows during the crisis than were portfolio investors while falsified in their strongest forms several of these hypotheses in less strong forms should play a role in a more nuanced analysis it is necessary to move past simple single factor approaches in order to produce a more complete synthetic explanation of this episode

the vanishing hand the changing dynamics of industrial capitalism alfred chandler s portrayal of the managerial revolution of the late nineteenth and early twentieth centuries does not extend well into the late twentieth century when widespread vertical disintegration began replacing the classical multi unit managerial enterprise this paper attempts to explain the new economy in a manner consistent with chandler by providing an enlarged theoretical account of industrial evolution in this account clusters of chandlerian firms appeared as a temporary episode within a larger smithian process of the division of labor

technological regimes and sectoral patterns of innovative activities this paper focuses on the relationships between observed patterns of innovative activities within a sector and the related context and underlying microeconomic processes that might account for them it claims that there are some invariant features with respect to relative prices and incentives mechanisms of learning and knowledge accumulation that greatly affect the rate and structure of innovative activity these features are different across sectors the paper proposes that the specific pattern of innovative activity of a sector can be explained as the outcome of different technological regimes that are implied by the nature of technology and knowledge the notion of technological regime provides a synthetic representation of some of the most important economic properties of technologies and of the characteristics of the learning processes that are involved in innovative activities copyright 1997 by oxford university press

disparate information and the probability of currency crises empirical evidence abstract this paper tests the impact of the distribution of information on the probability of currency crises within a markov switching framework less disparate information among domestic and foreign investors proxied by premia on country funds lowers the probability of a crisis