does economic recession reduce material use empirical evidence based on 157 economies worldwide abstract the research on economic recession has been more focused on the interactions between macroeconomic and financial variables however whether material use has been affected during the recession period has remained under explored in order to fill up this gap this study investigates the relationship between material use and economic recession as well as other socio economic drivers by using the material flow analysis and the system generalized method of moments for 157 economies worldwide during 1980 2011 results show that economic recession poses significant and negative impact on domestic material consumption at 1 level illustrating its role as a determinant factor on material mitigation by dividing the research sample into extractive and non extractive economies as well as high mid and low income groups we again confirmed the significant negative correlations as expected no significant sign is found between recession and physical trade balance besides other drivers such as population gross domestic production gdp per capita and technological variables also exert marked effects at different situations this research work provides an empirical study on how recession and other factors affect material use at various scenarios which have essential implications for understanding material flow dynamics in different economic cycles

some evidence on herding behavior of u s banks the authors examine the international lending decisions of u s commercial banks of different sizes from 1977 to 1982 for evidence ofthe ex istence of herding behavior granger sims causality tests for the loans gran ted by the top nine the next fifteen and the remaining u s banks provide no c lear evidence of herding between the top nine and the next fifteen banks there is however evidence that the remaining banks mostly small ones herded behind the top twenty four banks overall the analysis presented here points to a very weak herding behavior copyright 1987 by ohio state university press

the choice of a monetary instrument in a small open economy the case of korea abstract using a small macroeconometric model of korea this paper evaluates the correct choice of a monetary instrument either the money stock or the interest rate the optimal multiperiod policy and the value of current information on some monetary varialbles

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

international portfolio choice and political instability risk a multi objective approach abstract the benefits derived from international portfolio diversification into foreign nations including the less developed countries are well documented yet this practice is discouraged due to market imperfections such as political instability in practice nations may be differentiated further by many aspects such as border controls or political and social trends which constrain private transactions and financial decisions this paper attempts to examine 1 whether the home asset bias in a portfolio holding is associated with higher political instability risk and 2 to what extent international diversification among stocks in the presence of such risk outperforms domestic stock portfolios using alternative instability risk proxies in the context of a discrete time version of mean variance framework we corroborate the impact of this type of risk on international portfolio investment decisions

the speculative attack on the peso and the real exchange rate argentina 1979 1981 abstract this article applies a speculative attack model to argentina during its pre announced exchange rate system from january 1 1979 to june 30 1981 the model attempts to verify a rule whereby if domestic credit growth exceeds the rate of currency depreciation two things occur first the domestic price of non traded goods rises relative to the price of traded goods second foreign reserves decline until a point when a sudden speculative attack depletes remaining reserves causes a precipitous fall in the relative price of non tradables and forces the country onto a floating exchange rate regime in some important respects the model captures the argentinian experience yet in other respects if fails to do so

crises and exchange rate regimes time to break down the bipolar view we revisit the link between crises and exchange rate regimes err using a panel of 90 developed and developing countries over the period 1980 2009 we find that corner err are not more prone to crises compared to intermediate err this finding holds for different types of crises banking currency and debt and is robust to a wide set of alternative specifications consequently we clearly break down the traditional bipolar view countries that aim at preventing crisis episodes should focus less on the choice of the err and instead implement sound structural macroeconomic policies

capital controls capital flow contractions and macroeconomic vulnerability abstract in this paper i analyze whether restrictions to capital mobility reduce vulnerability to external shocks more specifically i ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows i use three new indexes on the degree of international financial integration and a large multi country data set for 1970 2004 to estimate a series of random effect probit equations i find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant but very small having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction the benefits of flexible rates increase as the degree of capital mobility increases a higher current account deficit increases the probability of a capital flow contraction while a higher ratio of fdi to gdp reduces that probability

currency misalignments and growth a new look using nonlinear panel data methods the aim of this article is to investigate the link between currency misalignments and economic growth relying on panel cointegration techniques we calculate real exchange rate rer misalignments as deviations of actual rers from their equilibrium values for a set of advanced and emerging economies estimating panel smooth transition regression pstr models we show that rer misalignments have a differentiated impact on economic growth depending on their sign whereas overvaluations negatively affect economic growth rer undervaluations significantly enhance it this result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth

what do twins share a joint probit estimation of banking and currency crises we study the determinants of twin crises and investigate the direction of causality between banking and currency crises in emerging markets we model banking and currency crises as dynamic events correlated over time and jointly estimate their probability using panel data simulation techniques we show that banking and currency crises are closely intertwined and are driven by common fundamentals banking crises exhibit strong state dependence suggesting that countries that have experienced a banking crisis in the past are more prone to experience another crisis finally we find evidence of unobserved heterogeneity and autocorrelation in the error term structure

combination monetary policies to stabilize price and output under rational expectations sargent and wallace 1 1 12 conclude that in a model with a lucas type supply curve and the assumption of rational expectations there is no sense in which the monetary authority has the option to conduct countercyclical policy 12 p 177 sargent and wallace confine their analysis to pure money stock or interest rate policies woglom 14 drawing on the earlier work of poole 10 leroy 5 and leroy and waud 6 examines the effectiveness of combination policies within a model where expectations are formed rationally and with a lucas type supply schedule within the poole or woglom models a combination policy amounts to setting a deterministic relationship between the money stock and the interest rate leroy and leroy and waud make clear that the ability to execute such combination policies depends on the current observability to the monetary authority of the interest rate and money stock or level of reserves in the leroywaud framework since the monetary authority s policy setting is conditioned on such current information while in woglom s framework private agents expectations are conditioned only on past information systematic policy actions the parameters of the combination policy will affect the distribution of real output the sargent wallace

the aftermath of financial crises a look on human and social wellbeing summary alongside its detrimental macroeconomics impacts financial crises can have substantial negative consequences on human and social wellbeing employing a cross country dataset on more than 100 banking and or currency crises during 1981 2007 this work examines the effects of financial crises on indicators of human and social wellbeing through employing an event study analysis the findings of this analysis suggest that the aftermaths of financial crises are characterized by increases in the growth rates of suicide rates crime rates and income inequality rates relative to their pre crisis trajectories additionally declines in the growth rates of health and educational expenditures government welfare expenditures and food quality and quantity intakes are common during periods immediately following financial crises such deteriorations are observed across different countries with income levels and also for crises that are and are not accompanied by recessions on average though human and social indicators are hit harder during financial crisis events accompanied by recessions this is especially true for crises in low and middle income economies in comparison to those in high income countries as a result not only are financial crises directly responsible for more rapid increases in income inequality within countries they may also be responsible for increasing inequalities of income security health nutrition and educational outcomes between richer and poorer countries needless to say deteriorations in many of these fronts are often associated with persistent or permanent losses in human and social wellbeing and cannot be assumed to be simply and immediately reversed with an economic recovery therefore the paper calls on the need for more concerted effort on the part of the policymakers to actively protect human and social outcomes during financial crises rather than trying to address such losses in the aftermath of crises because some of these losses are simply not recoverable

the time pattern of hedging and the volatility of futures prices the paper proposes a multi period model of hedging which allows for a futures position to be revised within the cash market holding period within this framework we assess the robustness of the two period theory of hedging when generalized to many periods we characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts mark to market daily finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices in the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting an agent commits himself now to a future purchase or sale of a good whose cash price later is uncertain this risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized in the present paper we formulate a multi period model of hedging which allows for the futures position to be revised within the cash market holding period the resulting analysis captures an important institutional reality that is absent in a two trade date model namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held this is due to the requirement that futures accounts mark to market daily within this framework we address a number of issues first we assess the robustness of the two period theory of hedging when generalized to many periods second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger finally we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices while the literature on asset demand in a multiperiod setting is large futures markets are specifically treated in a limited number of studies grauer and litzenberger 1976 are concerned principally with characterizing the relation of spot and futures prices in a market for a storable periodically produced commodity they offer a rationale for positive stock holding in markets where spot price exceeds the futures price richard and sundaresan 1980 are also concerned primarily with characterizing price behaviour since they posit identical consumers in equilibrium individual holdings of futures are zero there is no hedging activity in the sense that we understand it breeden 1980b analyzes the optimal futures position sizes in a multiperiod setting his framework is more general than ours in that his is a multi good multi asset model where preferences

a developing country view of the current global crisis what should not be forgotten and what should be done macroeconomic theory will surely be affected by the current global crisis there are signs that some old theories and insights will have a comeback this paper argues that among them economists should not forget the lessons that have been learnt from three decades of several financial crises in developing countries we emphasise two important lessons first preventing crises in developing countries requires not only the regulation of domestic financial systems but also a consistent set of macroeconomic policies in particular we stress the need for consistency between the exchange rate rule the capital account regime and the domestic financial market regulations second financial crises in developing countries tend to worsen both the balance of payments and the fiscal balance traditional adjustment policies tend to exacerbate the recessive trends in output and employment this is just the opposite of what is required and what governments in developed countries are able to do developing countries should push for an agenda that helps them deal with these problems

can leading indicators assess country vulnerability evidence from the 2008 09 global financial crisis abstract we investigate whether leading indicators can help explain the cross country incidence of the 2008 09 financial crisis rather than looking for indicators with specific relevance to the recent crisis the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators our motivation is to address suspicions that indicators found to be useful predictors in one round of crises are typically not useful to predict the next round the review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and episodes in the past for the 2008 09 crisis we use six different variables to measure crisis incidence drops in gdp and industrial production currency depreciation stock market performance reserve losses and participation in an imf program we find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008 09 crisis in line with the conclusions of the pre 2008 literature in addition to reserves recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis we define the period of the global financial shock as running from late 2008 to early 2009 which probably explains why we find stronger results than earlier papers such as obstfeld et al 2009 2010 and rose and spiegel 2009a b 2010 2011 which use annual data

application of games with incomplete information for pricing electricity in deregulated power pools the authors present a game theory approach to the problem of pricing electricity in deregulated marketplaces they assume that an independent operator receives bids by pool participants and defines transactions among participants by looking for the minimum price that satisfies the demand in the pool the competition among pool participants is modeled as a noncooperative game with incomplete information they assume that each pool participant knows its own operation costs but does not know his opponents operation costs the game with incomplete information is transformed into a game with complete but imperfect information and solved using the nash equilibrium idea the approach presented in this paper is geared towards providing support for pricing electricity in deregulated pools

a new approach to modeling early warning systems for currency crises can a machine learning fuzzy expert system predict the currency crises effectively abstract this paper presents a hybrid causal model for predicting the occurrence of currency crises by using the neuro fuzzy modeling approach the model integrates the learning ability of the neural network with the inference mechanism of fuzzy logic the empirical results show that the proposed neuro fuzzy model leads to a better prediction of crisis significantly the model can also construct a reliable causal relationship among the variables through the obtained knowledge base compared to neural network and the traditionally used techniques such as logit the proposed model can thus lead to a somewhat more prescriptive modeling approach based on determinate causal mechanisms towards finding ways to prevent currency crises

financial contagion and international portfolio flows financial contagion is an issue of interest to policymakers and portfolio managers in the presence of contagion the benefits of geographical diversification may be overstated contagion is defined independently of changes in macroeconomic fundamentals it corresponds to a situation in which shocks in one country spread to another country in a significantly more pronounced manner than during quiet times in the study reported here i attempted to measure contagion from daily cross border portfolio flows using data from state street bank and trust company i constructed three indexes for 1996 through 2000 i found little statistical evidence of contagion but the weighted index that measured the contagiousness of flows reached its four year low in august 1998 suggesting that the russian crisis was characterized by both contagion and large aggregate outflows i also found that contagion appears to be regional and that the developed countries seem to be sheltered from contagion

crisis in the eye of the beholder economic crisis and partisan politics in latin american and east european international monetary fund programs this article analyzes the interaction between economic crises and partisan politics during international monetary fund program initiation in latin america in the 1980s and eastern europe in the 1990s the author argues that economic crises are at least in part in the eye of the beholder and therefore policy responses reflect the interaction between crisis intensity and the government s partisan interpretation of the crisis which in turn depends on the nature of the economic crisis and its broader regional and international environment using cross country statistical evidence from the two regions the article shows that certain types of crises such as liquidity shortfalls elicit similar responses across the ideological spectrum and regional contexts by contrast debt repayment and domestic crises are more prone to divergent ideological interpretations but the extent of partisan divergence is context sensitive in that it occurred during the latin american debt crisis but not in the post communist tra

monetary and fiscal policies under two alternative types of rules abstract this paper considers the relative advantage of two types of monetary and fiscal feedback rules when the private agents have full current information the appropriate combination of monetary and fiscal feedback on past disturbances dominates the contemporaneous feedback in stabilizing the real output and the price level this dominancy however disappears when the exchange rate stability is included in the objective function or when the currently observable variables are limited in general there exist some tradeoffs among feedback parameters some of the policy coefficients can be set arbitrarily enabling the optimal policy rules to be specified in many equivalent ways

causality between export growth and industrial development empirical evidence from the nics a comment abstract in a recent article chow 1987 argued that his empirical evidence supports the hypothesis that export growth causes industrial development in this comment i point out several serious shortcomings of chow s analysis

false prophet or genuine savior assessing the effects of economic openness on sustainable development 1980 99 while many herald globalization the increasing interconnectedness of national economies to be associated with rising standards of living across the globe others fear its effects on sustainability antiglobalization forces and environ mentalists view these developments as a threat to the welfare of future generations because of profligate and excessive current consumption this study is the first to estimate the effects of dependence on trade foreign direct investment fdi and an index of economic freedom on the world bank s measure of sustainability the gen uine savings rate which measures the rate at which investment in the total stock of manufactured human and natural capital exceeds its depreciation contrary to pessi mists fears our indicators of economic openness show positive effects on sustain ability results that are robust to sample size testing procedure and several alternative specifications the results support those who suggest that distorted economies tend to be both inefficient and damaging to future generations if increasing trade fdi and economic freedom are hallmarks of globalization then worries about its effects on future well being are misplaced

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

a balanced budget constraint in modern stochastic macromodels currently september 1985 a constitutional balanced budget amendment is pending in the u s senate thirty two states have passed resolutions calling for a constitutional convention to enact such an amendment in 1963 senator harry byrd sr asked budget director kermit gordon what balancing the budget would do for the country gordon replied that it probably would add about 2 5 million people to the rolls of the unemployed delay the recovery about four years and knock 10 percent off u s output 16 284 the keynesian conventional wisdom of the 1960s was that fiscal and monetary policy should focus on the benefit cost tradeoffs between inflation and unemployment stabilization along with tradeoffs implicit in resource allocation and the distribution of income given these objectives there should be no independent consideration of the budget deficit of the federal government 24 as abba lerner argued in his early statement of keynesian principles of functional finance the instruments to prevent unemployment and inflation are not available until it is recognized that the size of the national debt is relatively unimportant 17 302 as outlined by walter heller 15 and others the stabilization role of fiscal policy together with monetary policy in the 1960s was to provide the appropriate degree of stimulus or restraint to achieve a target level of real output since the mid 1960s such a role for fiscal policy has been challenged first by the friedman phelps 14 27 accelerationist hypothesis and then by the lucas sargent 19 29 policy ineffectiveness proposition the accelerationist or natural rate theory especially as advanced by milton friedman argues that stabilization policy should be geared toward rules and control of nominal variables such as the inflation rate friedman s analysis also implies the futility of using aggregate demand policy to achieve fixed output targets friedman s analysis suggests the possibility that with monetary policy geared to price stabilization and with sustainable real output gains not attainable via aggregate demand policy fiscal policy instruments may be adjusted to achieve a balanced budget without cost buchanan and wagner 7 rely on friedman s analysis to support their call for a constitutional balanced budget amendment

auction form preferences of risk averse bid takers we analyze the preferences of a risk averse seller over the class of standard auctions with symmetric and risk neutral bidders assuming that buyers private signals are independently distributed we find that a sealed bid first price auction with an appropriately set reserve price is preferred by all risk averse sellers to any other standard auction in first and second price auctions the more risk averse a seller the lower the seller s optimal reserve price given two first price auctions with reserve prices and entry fees such that both have the same screening level all risk averse sellers prefer the auction with the lower entry fee

choosing a monetary instrument the case of supply side shocks abstract this paper examines the monetary instrument choice problem in models with an explicit supply sector and endogenous prices and price expectations we use the popular linear quadratic certainty equivalence framework to obtain analytic solutions the results indicate that interest rate policies generally are better able to insulate the real sector from unanticipated supply shocks we also show that at this level of abstraction the optimal choice of an instrument is independent of the specification of expectations e g rational vs adaptive price expectations the paper then reports empirical evidence from two experiments on the large nonlinear mit penn ssrc econometric model the evidence is consistent with the hypothesis that interest rate policies are preferable if the supply sector is the major source of uncertainty

the role of foreign currency debt in financial crises 1880 1913 versus 1972 1997 abstract we show that exposure to foreign currency debt does not necessarily increase the risk of having a financial crisis some countries do not suffer from financial fragility despite original sin before 1913 british offshoots and scandinavia afflicted with it avoided financial meltdowns today many advanced countries have original sin but few have had crises in both periods aggregate balance sheet mismatches are associated with a greater likelihood of a crisis the evidence suggests that foreign currency debt is dangerous when mis managed this is part of the difference between developed countries and emerging markets both of which borrow in foreign currency

herd behaviour by japanese banks after financial deregulation this paper investigates whether japanese banks followed herd behaviour during the 1980s and 1990s the results indicate the existence of herding during the sample period while the inefficiency of herding is concentrated in the early to mid 1980s the period immediately after financial deregulation began evidence for the inefficient herding is observed in the behaviour of banks that made loans to new borrowers and in the behaviour of banks that followed the type of banks that were more informed on lending to new borrowers on the other hand inefficient herd behaviour is rarely observed in the 1990s

volatility of the capital flows and structural breaks in latin american and the caribbean espanolen este trabajo se estudia la presencia de quiebres estructurales en los flujos de capitales de 16 economias de latinoamerica usando el test de raiz unitaria de zivot y andrews 1992 para complementar el analisis se utiliza el test de quiebres estructurales de bai perron 1998 luego se procede a analizar la posibilidad de contemporaneidad entre los quiebres encontrados y las crisis que tales paises sufrieron en los ultimos 40 anos dichas crisis pueden ser de moneda bancarias domesticas o de deuda externa se encontraron muchos casos de contemporaneidad especialmente con las crisis que ocurrieron al final de los 90 englishthis paper studies the presence of structural breaks in the capital flows of sixteen economies of latin america using the unit root test by zivot and andrews 1992 it is complemented by the structural break test by bai perron 1998 afterwards an analysis of the likelihood of contemporaneity between the breaks found and the crises the countries had suffered in the last forty years is presented these crises were either of currency banking domestic and external debt type many cases of contemporaneity were found especially with the crises that occurred at the end of the 90s

impact of financial crises on poverty in developing world an empirical approach in this paper we adopt a cross country perspective to analyze the short term effects of currency banking and debt crises on poverty we employ multivariate fixed effects panel data analysis in order to examine whether and to what extent different types of financial crises impact the poverty headcount ratio and the poverty gap as measured by the world bank our findings suggest that out of the three categories of financial crises we identify it is currency crises that most significantly exacerbate both the incidence and depth of poverty in the short run we find evidence that banking crises are associated with an increase in the depth of poverty but not the incidence however this effect tends to be short lived while our analysis shows no direct effect of sovereign debt crises on short term poverty

who recovers first banking crises resolution in developing countries this article evaluates conditions that facilitate banking crises resolution using data from 67 developing countries from 1980 to 1995 in particular the author examines explanatory variables under three categories external macroeconomic constraints the role of the international monetary fund imf and domestic political conditions the principal results of the analyses are twofold first imf credits decrease the probability of resolving banking crises this result holds controlling for potentially confounding variables and in a test for endogeneity second the decisiveness of a political regime significantly influences the probability of emerging from systemic distress specifically in cases of moderate banking distress decisiveness facilitates resolution of crisis but during periods of severe crises less decisive governments i e governments constrained by accountability groups are likely to recover more quickly than are those with less constrained executives

information contagion and bank herding we show that the likelihood of information contagion induces profit maximizing bank owners to herd with other banks when bank loan returns have a common systematic factor the cost of borrowing for a bank increases when there is adverse news on other banks since such news conveys adverse information about the common factor the increase in a bank s cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality in addition to the systematic risk factor hence banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing competitive effects such as superior margins from lending in different industries mitigate herding incentives

technology and hedging behavior a proof of hicks conjecture technical conditions give the entrepreneur a much freer hand about the acquisition of inputs which are largely needed to start a new process than about the completion of outputs whose process of production in the ordinary business sense may be already begun if forward markets consisted entirely of hedgers there would always be a tendency for a planned weakness on the demand side a smaller proportion of planned purchases than of planned sales would be covered by forward contracts 1946 p 137

the international financial market and us interest rates abstract this paper examines the linkages between the eurodollar and us domestic financial markets it is shown that using weekly data allows the isolation of significant fluctuations being transmitted between markets in both directions in particular financial markets in the us are affected significantly by foreign events it is impossible to reach precise conclusions about the causes of historical variation in the rates however this paper provides evidence that at most 40 of the variation in eurodollar interest rates over the 1975 1978 period can be traced to domestic us sources and that between about one fifth and two thirds of the variation in domestic rates can be traced to foreign sources

optimal bank interest margin and default risk in equity returns under the return to domestic retail with structural breaks a retrenchment in crossborder credit is under way the product of both market forces and political pressure on international banks to lend at home economist 2009 in addition banks particularly the largest have also dramatically expanded their retail banking operations over the past few years hirtle and stiroh 2007 our goal in this article is to study the effects of default risk on equity returns through bank interest margin management under a renewed focus on domestic retail banking a trend often attributed to the stability of banking activities specifically this article explores the determinants of optimal bank interest margins based on an option based firm theoretical model with multiple sources of structural breaks due to political pressure the model demonstrates how capital regulation and political pressure on foreign lending return and risk conditions jointly determine the optimal bank interest margin decision we show that a more stringent capital requirement is linked with lower eq

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

currency crashes in emerging markets an empirical treatment we use a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes we define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation we examine the composition of the debt as well as its level and a variety of other macroeconomic factors external and foreign crashes tend to occur when output growth is low the growth of domestic credit is high and the level of foreign interest rates are high a low ratio of fdi to debt is consistently associated with a high likelihood of a crash

achieving external and internal targets with exchange rate and interest rate intervention abstract this paper analyses how exchange rate and interest rate intervention rules can be computed so as to stabilize price and output and real exchange rate in the face of a variety of random shocks the major finding is that there exist a unique optimal intervention rule for both internal and external targets in the face of all random disturbances except for lm and foreign interest rate disturbances

export diversification and international debt under terms of trade uncertainty abstract this paper proposes an intertemporal approach to export diversification in developing countries facing uncertain terms of trade by incorporating international debt by far the predominant source of ldc external financing today the model provides a richer and more realistic framework than static models with no financial markets or models emphasizing international trade in equities the approach is applied to a small developing country with a comparative advantage in a risky commodity to illustrate explicitly the relation between intertemporal substitution in consumption and diversification in production

north south the implications for multinational banking abstract international finance should be of great value to developing countries because their potential growth paths are out of step with the world economy and because the gambles they must take to develop are much more diversifiable in the context of the world economy than locally however the actual benefits of north south finance have been limited by an overreliance on non specific bank credit with the inherent limitations and by errors in judgement by both borrowers and lenders in fact the current crisis threatens to reverse many of the earlier gains while the current crisis is primarily the result of the world recession the severity of its effects on lenders and borrowers reflects three key aspects of bank credits 1 its perverse real repayment patterns 2 its specific nature which implies that risks are transferred only through generalized non performance with its attendant deadweight costs and 3 its concentration in a small but critical segment of capital markets these characteristics would be serious even with ideal behavior by lenders and borrowers but they also can lend to inappropriate and possibly erratic behavior specific suggestion for restructuring the system of north south finance are given including 1 smoothing repayment patterns 2 increasing repayment flexibility 3 increasing risk bearing non specific finance 4 increasing non recourse financing and 5 increasing project specific risk capital

international lending patterns of u s commercial banks the international lending behavior of the u s commercial banks depends upon economic links between countries much of the difference between the international loan portfolios of u s banks and those of the non u s banks may be explained by the patterns of trade flows and investments by nonfinancial corporations these trade flows and investment patterns explain most of the variations in the bank lending patterns for 70 80 percent of the countries the analysis points to an increasing influence of economic ties on the lending process over time

comment choosing a monetary instrument the case of supply side shocks abstract in a recent paper craine and havenner 1981 claim that an additional advantage of the linear quadratic framework which is not well known is that the basic forces affecting the instrument choice decision can be analyzed without an explicit specification for price expectations since the distribution of the error terms in a linear model is independent of the predetermined variables p 219 the aim of this note is to demonstrate that craine and havenner s claim does not generalize to models with expectations of future variables conditioned on present information such as turnovsky s 1980 model

financial contracts and international lending abstract this paper examines alternative financial contracts for international lending i demonstrate that conventional loans can be pareto dominated by financial contracts explicitly incorporating characteristics of the borrower s product market i provide conditions under which commodity linked debt is desirable and determine when more complicated revenue linked loans are optimal i also demonstrate that the type of lending contract has important real effects on production decisions one result of this research is to demonstrate why equity based lending arrangements may have limited applicability

export specialisation and local economic growth this paper aims to provide empirical evidence on whether export specialization or diversification is better for local economic growth using export data from 354 magisterial districts of south africa for 1996 and 2001 we estimate spatial growth regressions that include measures of the degree of export specialization and diversification overall exporting regions outperform other less or non exporting regions also we find that export specialisation rather than export diversification has been associated with local economic growth with specialization in mining and agriculture being especially beneficial our results support the view that specialization in a locality s area of comparative advantage is good for local economic development we also find that localities with higher initial levels of human capital and higher subsequent population growth performed better this is consistent with the belief that policies aimed at strengthening human capital and improving agglomeration economies will enhance local economic development

currency crises capital account liberalization and selection bias are countries with unregulated capital flows more vulnerable to currency crises efforts to answer this question properly must control for self selection bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises we employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries our results suggest that after controlling for sample selection bias countries with liberalized capital accounts experience a lower likelihood of currency crises that is when two countries have the same likelihood of allowing free movement of capital based on historical evidence and a very similar set of economic and political characteristics and one country imposes controls and the other does not the country without controls has a lower likelihood of experiencing a currency crisis this result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial

contagion effects of sovereign credit rating revisions on the real economy is it trade or finance we analyse the contagion effects of sovereign credit rating revisions on the real economy with particular emphasis on the intensity of trade and finance channels our findings show that event coun

when do governments improve fiscal institutions lessons from financial crisis and fiscal reform in latin america do crises really lead to more institutional reforms this paper explores the connection between financial crises and one type of reform frequently advocated during the recent global financial crisis namely fiscal institutional reforms some authors expect that crises lead to reforms but we demonstrate that the relationship is not so straightforward using a data set of latin american countries that experienced several crises and also several periods of reform in the period from 1990 to 2005 we find that the type of crisis and its duration matter we argue that reforms are less likely during a banking crisis whereas fiscal crises are most likely to lead to fiscal reforms this means that the type of economic crisis is important for explaining the likelihood of reforms we explore other possible explanations for reform such as the partisanship of the president and whether a country is under an imf program and do not find confirming evidence for alternative explanations

temporary controls on capital inflows abstract during the past decade a number of countries imposed capital controls that had two distinguishing features they were asymmetric in that they were designed principally to discourage capital inflows and they were temporary this paper studies formally the consequences of these policies calibrates their potential effectiveness and assesses their welfare implications in an environment in which the level of capital inflows can be sub optimal in addition motivated by the fact that these types of controls have often been left in place after the dissipation of the shock that lead to the controls being implemented the paper evaluates the welfare cost of procrastination in removing these types of controls

returns to acquirers of privatizing financial services firms an international examination abstract while the literature reports improved performance for privatizing firms banking markets are different many privatizing financial services firms face unique problems such as an overhang of problem loans and weak credit cultures and legal systems we investigate the returns to successful bidders in privatization acquisitions of financial services firms examine short horizon performance and test whether such acquisitions result in a change in risk for the bidding firm our results show that the cumulative abnormal returns to shareholders of bidding firms are positive perhaps reflecting initial optimism that the foreign firm acquiring the privatizing firm would share in the success associated with privatization bidders also experience an increase in their total risk following the acquisition

external market conditions competitiveness diversification and ldcs exports ldcs trade policies in the post war period have been influenced greatly by trade pessimism theory increasingly however the assumptions underlying the pessimists analysis and the wisdom of their policy prescriptions have been challenged this paper attempts to construct a model which may be used to investigate the determinants of export performance for individual developing countries and the determinants of relative performance across the sample of twenty seven countries the results obtained both for individual countries and across the sample tend to support the emphasis placed by the opponents of trade pessimism on the importance of supply side factors

together or apart the relationship between currency and banking crises abstract the purpose of this study is to provide empirical evidence on the links between currency and banking crises panel data probit and bivariate probit models are estimated to a sample of 21 developed and developing countries having monthly observations between the years 1985 and 2010 the findings indicate that banking crises precede currency crises and vice versa currency crises also indirectly influence future banking crises probability through external shocks liberalized financial markets or highly leveraged banking sectors the study also finds evidence of contemporaneous correlation between the two crises the results not only confirm the theoretical links between banking and currency crises but also underline the importance of higher frequency data in analyzing the relationship between various financial crises

currency crises are they all the same abstract the plethora of currency crises around the world has fueled many theories on the causes of speculative attacks the first generation models focus on fiscal problems while the second generation models emphasize countercyclical policies and self fulfilling crises in the 1990s models pinpoint to financial excesses with the crisis of argentina in 2001 models of sovereign default have become popular again while the theoretical literature has emphasized variety the empirical literature has supported the one size fits all models this paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties

fiscal policy and the duration of financial crises financial systems across the world have all come under pressure due to the on going financial crisis one of the most often asked questions during a collapse is how long and how deep will the decline be as well as what policy initiatives can be employed to shorten the recession this study estimates a model of the duration of financial crises in an attempt to identify whether fiscal policy can reduce the time to recovery the results suggest that fiscal shocks which could provoke an overreaction on the part of markets tend to lengthen crisis duration significant nonlinear effects of government spending are also reported in relation to trade openness and financial openness

consumption liquidity constraints and asset accumulation in the presence of random income fluctuations recent empirical research flavin 1981 hagashi 1982 has rejected the certainty equivalent formulation of permanent income hypothesis hall 1978 these findings are often attributed to households inability to borrow completely against expected future labor income this paper is a theoretical investigation of optimal consumption behavior under risk aversion random income fluctuations and borrowing restrictions our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions this abstract was borrowed from another version of this item

commodity bonds and consumption risks this paper analyzes the economic role of commodity bonds by examining the nature of the demand for these securities i show that while commodity bonds protect against relative price changes they do so by introducing variability into the future real income stream this variability limits the desirability of using commodity bonds to provide price insurance for future consumption however this variability may allow commodity bonds to hedge risks to consumption caused by stochastic changes in income the analysis also suggests that it is this income insurance rather than price insurance that is important in hedging risks to future consumption in 1863 the confederate states of america csa took the unusual step of issuing bonds payable in bales of cotton in 1980 the sunshine mining company took the unusual step of issuing bonds payable in ounces of silver although the csa commodity bond offering proved to be of an isolated and rather shortlived nature recent developments suggest that commodity bond offerings like that of sunshine mining may become more commonplace for example both mexico and the british oil and gas corporation have issued petroleum bonds and the reagan administration has proposed issuing oil indexed bonds to finance the strategic oil reserve france has experimented with gold bonds as have several private companies commodity indexed debt also has appeared outside of organized bond markets shared appreciation mortgages for example represent a debt indexed to the price of housing even bank loans can be indexed to underlying commodities as evidenced by the oil indexed loans between japanese banks and the soviet union 2 such developments suggest that debts linked to a wide variety of commodity indices are certainly feasible this paper analyzes the economic role of commodity bonds by considering the nature of the demand for these securities because commodity bonds can hedge graduate school of management cornell university this paper has benefitted greatly from discussions with david easley seymour smidt and piet sercu i would also like to acknowledge the extremely valuable comments of an anomymous referee 1 for discussion of the reagan petroleum bond plan see a new plan to finance oil reserve new york times january 15 1981 devious device to trim a budget new york times february 6 1981 and building an oil reserve the thrifty way new york times february 16 1981 britain s oil bonds are discussed in oil bonds may not bring riches world business weekly october 27 1980 gold bonds are featured in gold indexed bond is costly for france new york times june 30 1980 hot seller bonds indexed to oil and gold business week august 3 1979 and sale of gold bonds in europe planned new york times january 28 1981 2 numerous articles on such indexed loans have appeared in the wall street journal see for example wsj february 15 1979 p 33 june 11 1979 p 18 august 15 1979 p 29 april 7 1980 p 7 april 8 1980 p 35 and may 14 1981 p 31

the optimality of nominal income targeting when wages are indexed to price in the last decade there has been renewed interest in alternative monetary regimes institutions and policy procedures one policy proposal that has received increased attention is nominal income targeting this proposal has been suggested for instance by feldstein 9 gordon 13 hall 16 meade 21 and tobin 25 26 taylor 24 discusses this proposal in some detail and mccallum 20 presents a statistical analysis of a particular nominal income targeting rule in a variety of contexts bean 3 presents a theoretical analysis of nominal income targeting examining the properties of such a policy in a stochastic macro model in which rational agents sign nominal wage contracts given that the monetary authority s objective is to minimize the divergence of output from its full information level nominal income targeting is the optimal policy if labor supply is perfectly inelastic with an elastic labor supply however nominal income targeting provides the optimal response to demand side shocks but not to supply side shocks the problem of designing optimal policy in the face of both demand and supply side shocks is not new authors such as benavie and froyen 4 craine and havenner 8 parkin 22 and turnovsky 27 have stressed that pure policy rules such as a strict money rule or an interest rate peg are generally not the optimal policy response to both demand and supply shocks thus bean s result that nominal income targeting provides the optimal policy response to all shocks as long as labor supply is perfectly inelastic is rather impressive one avenue of research that attempts to provide a partial solution to the problem of suboptimal policy rules in the face of demand and supply shocks is the investigation of wage indexing work by gray 14 15 drew attention to the properties of nominal wage contracts indexed to the price level the relation between the monetary authority s choice of policy rule and the degree of indexing in the labor market has been investigated by fethke and policano 11 fethke and

collusion and the choice of auction auctions are used in many different markets including the leasing of a substantial fraction of the natural resources in the united states the procedures used in the auctions conducted by the federal government have been a continuing source of controversy one of the concerns has been the possibility of collusion among bidders this article shows that cartels are stable if the seller uses open ascending bid oral auctions but not if he uses sealed high bid auctions this may help to explain the frequent use of sealed high bid auctions

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

institutional uncertainty and the maturity of international loans abstract this paper shows that non economic uncertainty in foreign countries contributes to a bias toward short term maturity in international lending frequent government changes and weak institutions explain why some countries find it difficult to obtain long term financing debt maturity is also explained by the level of economic and financial development of a country the composition of loan portfolios in terms of the type of borrowers and debt restructuring programs among other variables the results are obtained using data on international lending by three groups of u s banks large medium sized and small small banks shorten the maturity of their international loans in response to uncertainty to a greater extent compared to large banks

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

investment in developed and less developed countries a number of studies have compared the investment risk of various industries and of various individual corporations in developed countries dcs the purpose of this paper is to compare investment risk in dcs with less developed countries ldcs the variance of returns to investment in common stocks provides a natural measure of investment risk and will be used in this study studies in ldcs include work of levy and sarnat 12 13 errunza 3 4 and lessard 11 levy and sarnat and errunza found low economy wide investment risk on an average for ldcs relative to dcs with stock indices being used as surrogates for economy wide risk these results are not unambiguous however because there are probable difficulties due to infrequent trading and averaging in the broad market indices used in the above studies hence we use a sample of the largest corporations that suffer little if at all from thin trading and or averaging

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

the impact of financial crises and tolerance for uncertainty abstract financial crises can have severe negative effects on investment one reason for this is that financial crises increase uncertainty increasing the real option value of delaying investment in this paper we show that the negative effect of crises on investment differs significantly across countries in countries with low tolerance for uncertainty the negative effect is strong the negative effect is absent in countries that are more tolerant of uncertainty these findings are similar across different types of financial crisis they vary as predicted across type of investor asset and industry and they are not driven by uncertainty averse countries adopting more rigid institutions

loan pushing and triadic relations this paper is an attempt to define and explore the phenomenon of loan pushing in international lending in the 1970s the earliest descriptions of loan pushing are anecdotal this paper surveys the various facets that emerge from these anecdotes and suggests a possible definition that serves as the basis for a theoretical model this model inspired by the confessions of a banker explores a triadic relationship between a corporation in the lender country the lender bank and a borrower in a developing country and suggests that a rational profit maximizing commercial bank could end up pushing loans on to the borrower changes in international commercial banking in the 1970s that facilitated this type of loan pushing are discussed next to the extent that the loan pushing doctrine is valid it implies that the commercial banks were at least as responsible for the massive lending boom of the 1970s as the borrowers and should have been made to bear the cost of adjustment as well the process of sovereign lending in the 1970s appears to consist of voluntary and mutually agreeable contracts between the transnational commercial banks and credit seeking developing countries the suggestion that there could be in this process an element of aggressiveness on the part of the commercial banks that actively and systematically pushed loans on to developing country borrowers may at first sight seem inconceivable if a borrower voluntarily enters into a loan contract he is obviously doing so because the contract is beneficial if such is the case then would it be correct to characterize the process as one of loan pushing also the commercial banks are supposed to be rational profit maximizers thus the amount of lending cannot be more than optimal what then is meant by loan pushing these are a few questions that immediately come to mind it has been argued that international credit can contribute to increasing donor exports see for instance winkler 1929 hyson and strout 1968 gwynne 1983 taylor 1985 darity and horn 1988 basu 1991 basu and deshpande 1995 this is indeed one of the arguments used to explain the phenomenon of loan pushing however not the only one the aim of this paper is to explore the idea of loan pushing a little more deeply by first trying to understand the concept along with a brief review of the literature in the area section 2 the confessions of a young banker gwynne 1983 provide the basis of the theoretical model section 3 which considers a triadic relationship between a commercial bank in a creditor country a debtor nation and a corporation in the creditor country and the compulsions of loan pushing arising

wealth effects of foreign expansion by u s banks abstract the effects of foreign expansion on the market values of u s banks usbs are examined in this study the results show that shareholders of usbs experience significant abnormal returns of 0 17 percent when banks announce foreign expansions abnormal returns are insignificant when the announced mode of expansion is through a representative office are significantly positive for announcements related to branches and are significantly negative when the announced mode of expansion is through formation of a joint venture or a subsidiary or through an acquisition abnormal returns are significantly negative when banks announce expansion into developed countries and are significantly positive when announcements relate to risky developing countries post announcement changes in the total variance of returns and in the unsystematic risk of usbs are inversely related with abnormal returns higher wealth effects are associated with higher levels of prior overseas experience

statistical distributions and the identification of currency crises abstract we use extreme value theory to identify periods of currency crisis for a broad cross section of asian european and latin american countries we argue that our methodology improves upon the more conventional methodology for defining currency crises because fewer parametric assumptions need to be satisfied we compare the incidence of currency crises using the conventional method with the incidence obtained using our method we conclude that identifying currency crises using extreme value theory is a good alternative to the conventional method

anomalies the winner s curse abstract next time that you find yourself a little short of cash for lunch try the following experiment in your class take a jar and fill it with coins noting the total value of the coins now a

developing an early warning system to predict currency crises abstract the purpose of this paper is to develop an early warning system to predict currency crises in this study a data set covering the period of january 1992 december 2011 of turkish economy is used and an early warning system is developed with artificial neural networks ann decision trees and logistic regression models financial pressure index fpi is an aggregated value composed of the percentage changes in dollar exchange rate gross foreign exchange reserves of the central bank and overnight interest rate in this study fpi is the dependent variable and thirty two macroeconomic indicators are the independent variables three models which are tested in turkish crisis cases have given clear signals that predicted the 1994 and 2001 crises 12 months earlier considering all three prediction model results turkey s economy is not expected to have a currency crisis ceteris paribus until the end of 2012 this study presents uniqueness in that decision support model developed in this study uses basic macroeconomic indicators to predict crises up to a year before they actually happened with an accuracy rate of approximately 95 it also ranks the leading factors of currency crisis with regard to their importance in predicting the crisis

bank systemic risk and macroeconomic shocks canadian and u s evidence abstract this paper investigates how banks as a group react to macroeconomic risk and uncertainty more specifically it examines the relationship between bank systemic risk and changes and disruptions in economic conditions adopting the methodology of beaudry et al 2001 we introduce a new estimation procedure based on egarch to refine the framework developed by baum et al 2002 baum et al 2004 baum et al 2009 and quagliariello 2007 quagliariello 2009 and we analyze the relationship in the current industry context i e in the context of market based banking our results confirm that banks tend to behave more homogeneously vis a vis macroeconomic uncertainty in particular we find that both the cross sectional dispersion of loans to assets and the cross sectional dispersion of non interest income share shrink during slow growth episodes and particularly during financial crises when the resilience of the banking system is at its lowest more importantly our main findings indicate that the cross sectional dispersion of loans to assets has increased in the last decade whereas the cross sectional dispersion of non interest income share appears to be more volatile and sensitive to macroeconomic shocks

capital controls and exchange rate instability in developing economies abstract a large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability this paper investigates whether legal restrictions on international capital flows are associated with greater currency stability we employ a comprehensive panel data set of 69 developing economies over the 1975 1997 period identifying 160 currency crises we control for macroeconomic political and institutional characteristics that influence the probability of a currency crisis employ alternative measures of restrictions on international payments and account for possible joint causality between the likelihood of a currency attack and the imposition of capital controls we find evidence that restrictions on capital flows do not effectively insulate economies from currency problems rather countries with less restrictive capital controls and more liberalized regimes appear to be less prone to speculative attacks

tariffs as insurance optimal commercial policy when domestic markets are incomplete free trade is not optimal for a small country that faces uncertain terms of trade if some factors are immobile ex post and markets for contingent claims are incomplete the government can improve social welfare by using commercial policy that serves as a partial substitute for missing insurance markets using a combination of analytical and simulation techniques we demonstrate that optimal policy for this purpose will often have an anti trade bias we also show that the usual preference by economists for factor or product taxes and subsidies over tariffs and export subsidies may not be justified in this context this abstract was borrowed from another version of this item