financial markets and growth the last five years have witnessed a resurgence of interest in the relationship between financial intermediation and economic growth this issue had been extensively studied nearly two decades earlier by goldsmith 1969 mckinnon 1973 shaw 1973 and others who produced considerable evidence that financial development correlates with growth but their work though insightful lacked analytical foundations in traditional growth theory financial intermediation could be related to the level of the capital stock per worker or to the level of productivity but not to their respective growth rates the latter were ascribed to exogenous technical progress the recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of endogenous growth models which have shown that there can be self sustaining growth without exogenous technical progress and that the growth rate can be related to preferences technology income distribution and institutional arrangements this provides the theoretical underpinning that early contributors lacked tinancial intermediation can be shown to have not only level effects but also growth effects the resulting models have offered important insights into the effect of financial development on growth and vice versa they have also provided new impetus to empirical research on these issues this paper reviews the ground covered so far on the theoretical and empirical front and points to some still unresolved issues

on the role of government in a stochastically growing open economy abstract the relationship between the size of government economic growth and volatility in a small open economy is analyzed first we characterize the stochastic equilibrium for a centrally planned economy contrasting it with a closed economy the role of government consumption expenditure both as a stabilizing and a destabilizing factor is discussed the optimal size of government is derived and we find that an open economy will have a larger government if and only if it is a net creditor second the stochastic equilibrium in a decentralized economy is characterized and the optimal tax structure derived finally the role of government production expenditure and its impact on risk is briefly discussed

the quality effect does financial liberalization improve the allocation of capital abstract we document evidence of a quality effect of financial liberalization on allocative efficiency as measured by dispersion in tobin s q across firms we predict that financial liberalization by equalizing access to credit is associated with reduced variation in expected marginal returns we test this prediction using a new financial liberalization index and firm level data for five emerging markets india jordan korea malaysia and thailand we find robust evidence that financial liberalization rather than financial deepening is associated with improved allocative efficiency

robust stochastic discount factors when the market is incomplete a new non redundant derivative security cannot be priced by no arbitrage arguments alone moreover there will be a multiplicity of stochastic discount factors and each of them may give a different price for the new derivative security this paper develops an approach to the selection of a stochastic discount factor for pricing a new derivative security the approach is based on the idea that the price of a derivative security should not vary too much when the payoff of the primitive security is slightly perturbed i e the price of the derivative should be robust to model misspecification the paper develops two metrics of robustness the first is based on robustness in expectation the second is based on robustness in probability and draws on tools from the theory of large deviations we show that in a stochastic volatility model the two metrics yield analytically tractable bounds for the derivative price as the underlying stochastic volatility model is perturbed the bounds can be readily used for numerical examination of the sensitivity of the price of the derivative to model misspecification

global diversification growth and welfare with imperfectly integrated markets for goods in this article we examine the effect of the imperfect mobility of goods on international risk sharing and through that on the investment in risky projects welfare and growth our main result is that the welfare gain from integration of financial markets is not greatly reduced by the presence of goods market imperfections modeled as a cost of transferring goods from one country to the other we also find that the gain is nonmonotonic with respect to investors risk aversion and the aggregate volatility of output growth the policy implication to be drawn is that financial market integration is a worthwhile goal to pursue even when full goods mobility has not been achieved article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

military spending and stochastic growth abstract this study examines capital accumulation military spending arms accumulation and output growth in a stochastic endogenous growth model the analysis shows that higher lower growth in foreign military spending leads to faster slower economic growth in the home country if the home country s intertemporal substitution elasticity in consumption is smaller larger but more volatility in foreign military spending can lead to higher economic growth in the home country when its intertemporal substitution elasticity is large in addition shocks to output production may stimulate economic growth

the impact of globalisation on different social groups competitiveness social cohesion and spatial segregation in istanbul the main objective of this paper is to explore relations between competitiveness and social cohesion in istanbul it mainly questions whether it is possible to expect a positive change in socio spatial inequalities if increasing competitiveness generates not only international business and high level services but also traditional low cost production activities the findings show that competition in different types of activities has generated large numbers of jobs but has not been able to overcome existing income disparities the increasing income differences however do not mean an increase in socio spatial segmentation since the non market processes and policies related to education gender and the urban land and housing markets have played important roles in the redistribution of different social groups within urban space in addition to the endogenous dynamics of labour markets

planning policy and retail property markets measuring the dimensions of planning intervention there is considerable case study based evidence that changes in the public policy environment have profoundly altered the structure and operation of retail property markets in england despite this however few studies of property market performance consider the influence of retail planning policies this paper seeks to fill the gap the empirical part of the paper uses data derived from a survey of local planning authorities to construct a range of measures of planning policy stance the indicators demonstrate that the role of policy is complex and multidimensional the paper then explores the relationship between planning policies and measures of property market performance the results show that while proactive policies do not guarantee a vibrant market they can play an important part in stimulating occupier and investor demand even where there are poor economic fundamentals

cities regions and competitiveness turok i 2004 cities regions and competitiveness regional studies38 1061 1075 competitiveness is a complex concept used in a variety of ways and contexts the paper reviews some of the main ideas particularly as they apply to cities and regions its definition should include the relative position of a region s firms in external markets the productivity of local resources and the extent to which they are used competition takes both an institutionalized form local public agencies competing overtly for investment and other resources and more importantly a less organized form involving firms trading in wider markets there are two contrasting perspectives on the competitive advantages of city regions one emphasizes the benefits of scale and diversity that flow from concentrations of economic activity the other stresses the quality of the interactions between firms and supporting institutions recent studies suggest that the significance of localized business networks or clusters might be exagge

who is discouraged from applying for credit abstract this paper distinguishes between households who are discouraged from applying for credit from certain lenders and those who are not using data for the period 1990 1995 it is found that certain minorities are discouraged from applying for credit to certain lenders

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

on arbitrage free pricing of interest rate contingent claims unlike most interest rate claim models the ho lee model utilizes full information on the current term structure unfortunately the model has a major deficiency in that negative interest rates can occur this article modifies the model such that interest rates are well behaved

innovation in europe a tale of networks knowledge and trade in five cities this paper identifies four groups of theory that seek to explain the relationships between innovation and space these are traditional agglomeration theory networking learning and new competitiveness theory evidence on the last three most recent theories is sought by analysing the results of comparable surveys of innovative firms in amsterdam london milan paris and stuttgart the empirical results show that differences occur in the external relationships between firms and the global economy with respect to specific innovation projects broadly speaking the main differences identified show that in regional cities such as stuttgart and milan innovative activities are more linked to their regional and national economies than they are in the international world cities such as paris and london this suggests that attempts to generalize the network paradigm on industrial production are premature at least as far as innovation is concerned conversely the data demonstrate the significance of trading syste

non linearity between finance and growth abstract we present a simple model which establishes a non linear and possibly non monotonic relationship between financial development and economic growth applying a threshold regression model to king and levine s q j econ 109 1993 83 data set we find evidence consistent with the theoretical model

a dynamic programming approach for pricing options embedded in bonds abstract we propose a dynamic programming dp approach for pricing options embedded in bonds the focus being on call and put options with advance notice an efficient procedure is developed for the cases where the interest rate process follows the vasicek cox ingersoll ross cir or generalized vasicek models our dp methodology uses the exact joint distribution of the interest rate and integrated interest rate at a future date conditional on the current value of the interest rate we provide numerical illustrations for the vasicek and cir models comparing our dp method with finite difference methods our procedure compares quite favorably in terms of both efficiency and accuracy an important advantage of the our dp approach is that it can be applied to more general models calibrated to capture the term structure of interest rates e g the generalized vasicek model

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

a closed form solution for a model of precautionary saving this paper analyses life cycle consumption plans and distinguishes between temporal risk aversion and intertemporal substitution the results assume that felicity functions are quadratic and that income follows a linear model with normally distributed errors stochastic dynamic programming then yields closed loop linear decision rules certainty equivalence no longer holds but instead households play a min max strategy against nature one finds a rationale for precautionary saving and a larger sensitivity of changes in consumption to income innovations

the pension costs from a defined benefit to individual pension accounts do they cost more in the case of taiwan this article develops a market based liability valuation model to price individual pension costs of a defined benefit db pension plan the purpose is to compare them with the new labour pension plan individual pension accounts ipas in the case of taiwan the results based on the numerical approach show that the new ipas cost a company more than the old db plan except if the average wage growth relative to the risk free interest rate is high enough

an intertemporal model of international capital market segmentation this paper develops an intertemporal model of international capital market segmentation within the model under various forms of segmentation integration the equilibrium asset prices and allocations the risk free interest rate and the intertemporal consumption behavior and welfares of two countries are derived and compared it is shown that the equilibrium interest rate is increased on integration and that integrating markets may be significantly welfare decreasing for one of the countries conditions that may lead to a decrease in welfare are investigated the conclusions as to the effects of segmentation on asset prices in the mean variance model of the existing finance segmentation literature are also shown to break down in an intertemporal model

the precious bane abstract are natural resources harmful to growth we address this question using a two sector endogenous growth model in which human capital is the engine of growth by increasing the rewards to unskilled labor natural resources make schooling more expensive as long as the intertemporal elasticity of consumption substitution is not too high this slows down human capital accumulation and growth the presence of production spillovers from human capital however implies that a planner could react to a resource boom by increasing human capital accumulation even though the decentralized solution yields the exact opposite the paper also shows that as the production complementarity between natural resources and unskilled labor declines the growth effects of natural resources become increasingly sensitive to whether or not there is free trade in goods the empirical evidence lends support to the main channel natural resources to human capital to growth that is suggested in the paper

welfare gains from financial liberalization financial liberalization has been a controversial issue as empirical evidence for growth enhancing effects is mixed here we find sizable welfare gains from liberalization cost to repression though the gain in economic growth is ambiguous we take the view that financial liberalization is a government policy that alters the path of financial deepening while financial deepening is endogenously chosen by agents given a policy and occurs in transition towards a distant steady state this history dependent view necessitates the use of simulation analysis based on a growth model our application is a specific episode thailand from 1976 to 1996

personal bankruptcy and credit supply and demand this paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit while generous state level bankruptcy exemptions are probably viewed by most policy makers as benefiting less well off borrowers our results using data from the 1983 survey of consumer finances suggest that they increase the amount of credit held by high asset households and reduce the availability and amount of credit to low asset households conditioning on observable characteristics thus bankruptcy exemptions redistribute credit toward borrowers with high assets interest rates on automobile loans for low asset households also appear to be higher in high exemption states

exploring the significance of domestic investment for foreign direct investment in china a city network approach this article uses a network approach and a negative binomial regression model nbrm to shed light on the association between domestic investment di and foreign direct investment fdi in interli

portfolio choice with non expected utility in continuous time non expected utility preferences which can distinguish intertemporal substitution from attitudes towards risk are extended to continuous time the consumption savings and portfolio problem is solved for constant intertemporal elasticity of substitution and constant relative risk aversion

the effect of transaction size on off the run treasury prices this paper examines intra day trading data from the inter dealer broker market for u s treasury securities and measures the degree of price pressure in the off the run treasury market as is well known securities that would appear to be very close substitutes i e on the run and off the run treasury bonds behave as if there is some degree of market segmentation this is the first systematic study of the off the run treasury note and bond market focused entirely on a price pressure effect using intra day data the paper analyzes price pressure through matched pairs of securities that differ only in liquidity

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

on real interest rate dynamics and regime switching abstract we find evidence of regime switching dynamics in the usa and the uk real interest rates over the period 1881 2003 for the uk there is a regime in which the real interest rate displays a relatively stronger mean reversion and a regime in which it displays a relatively weaker mean reversion the former regime is characterized by a relatively larger error in the estimation of the reversion parameter and higher volatility for the usa the two regimes differ in volatility the probability of transition from one regime to another is found to be significantly related to the inflation rate regime and to the political regime the results highlight the importance of regime switching in the dynamics of the real interest rate as well as the role of inflation and political regimes in explaining this switching

directed credit financial development and financial structure theory and evidence the recent initiative of the rbi in reviving the policy of directed credit allocation in a period dominated by the neoliberal philosophy necessitates reconsideration of the role of policy directed

who is credit constrained in the u s economy an important assumption of the life cycle model of consumption is the postulate of perfect capital markets this hypothesis has recently been challenged by substantial empirical evidence hall and mishkin 1982 using the panel study of income dynamics estimate that 20 percent of united states families are liquidity constrained mariger 1986 derives a life cycle model with endogenous liquidity constraints and using a cross section estimates this fraction to be 19 4 percent hubbard and judd 1986 simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences 19 0 percent of united states consumers are liquidity constrained the emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life cycle model in addition hayashi 1985 and zeldes 1989 investigate the correlation among consumption wealth and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving the main limitation of these studies is that in their data sets constrained consumers are not observable and have to be identified via indirect evidence thus there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained this paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable and explicitly links their existence to credit market imperfections and personal characteristics the data drawn from the 1983 survey of consumer finances scf and described in section ii provide information on individuals whose request for credit has been rejected by financial intermediaries in section iii a model is developed in which consumers and lenders behavior jointly determines the probability that a consumer is rationed in the credit market this probability is then

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

a moving boundary approach to american option pricing this paper describes a method to solve the free boundary problem that arises in the pricing of american options most numerical methods for american option pricing exploit the representation of the option price as the expected pay off under the risk neutral measure and calculate the price for a given time to expiration and stock price they do not solve the related free boundary problem explicitly the advantage of solving the free boundary problem is that it provides the entire price function as well as the optimal exercise boundary explicitly our approach which we term the moving boundary approach is based on using a boundary guess and the value associated with the guess to construct an improved boundary it is also shown that on iteration the sequence of boundaries converge monotonically to the optimal exercise boundary examples illustrating the convergence behavior as well as discussions providing insight into the method are also presented finally we compare runtimes and speeds with other methods that solve the free boundary problem and compute the optimal boundaries explicitly like the front fixing method penalty method method based on the integral representations and the method by brennan and schwartz 1977 the valuation of american put options journal of finance 32 2 449 462

how big are potential welfare gains from international risksharing abstract there is extensive evidence that risksharing across countries is far from perfect some have attributed this to small benefits from risksharing gains from riskpooling that have been reported range from negligible to enormous this paper documents to what extent the results are sensitive to the parameterization of preferences the stochastic process of the endowment and its measurement we find that gains from risksharing are quite sizable for realistic assumptions about the underlying factors for oecd countries they are equivalent to a permanent increase in tradables consumption in the range of 1 1 to 3 5 for a 50 year horizon and 2 5 to 7 4 for a 100 year horizon

the implications of knowledge based growth for the optimality of open capital markets this paper re examines the view that opening capital markets must have long run benefits the analysis shows that the desirability of opening a country s capital markets depends on the nature of the technology assumed models of knowledge based growth predict that changes that alter the economy s level of production will also affect the economy s growth rate and hence the welfare of future generations standard neoclassical growth models imply no such effects on growth or welfare if production does involve an important element of learning by doing inference from the standard models may be seriously misleading in particular opening capital markets does not necessarily improve welfare for the nation or for the world as a whole

securities markets diffusion state processes and arbitrage free shadow prices this paper develops the parametric restrictions imposed on diffusion state processes by the requirement of arbitrage free asset pricing using the equivalent martingale measure as a starting point the diffusion property is exploited to specify the shadow pricing func tion which takes conditional state variable probabilities under the reference measure into arbitrage free contingent claim prices the main results of the paper provide differential equations associated with the shadow price function that are used to identify restrictions on the parameters of assumed diffusion processes the paper concludes with an application to the cir model where the state variable the instantaneous interest rate is assumed to follow a square root process calculations are also provided for the parametric restrictions imposed on the brownian bridge and ou state variable processes

growth and risk sharing with private information abstract we examine the impact of incomplete risk sharing on growth and welfare the source of market incompleteness in our economy is private information a household s idiosyncratic productivity shock is not observable by others risk sharing between households occurs through long term contracts with intermediaries we find that incomplete risk sharing tends to reduce the rate of growth relative to the complete risk sharing benchmark numerical examples indicate that the welfare cost and the growth effect of private information are small

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

equity markets and growth cross country evidence on timing and outcomes 1980 1995 abstract the rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries this paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980 1995 after describing recent theories on the role of stock markets in growth and considering a pure cross sectional empirical approach our panel vars show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output the findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy

output growth the real wage and employment fluctuations this paper is an attempt to contribute to the integration of business cycle analysis with long term growth a real business cycle model with endogenous growth is developed and estimated with u s data in the present framework wage movements do not have to be transitory to generate fluctuations in labor effort the reduced form is a constrained bivariate output hours or real wage hours vector autoregressive process the bivariate setup provides a useful framework for analyzing the persistence of output fluctuations given that the theory implies that hours of work contain information about future output movement copyright 1991 by american economic association

pricing weather derivatives this article presents a general method for pricing weather derivatives specification tests find that a temperature series for fresno ca follows a mean reverting brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors based on this process we define an equilibrium pricing model for cooling degree day weather options comparing option prices estimated with three methods a traditional burn rate approach a black scholes merton approximation and an equilibrium monte carlo simulation reveals significant differences equilibrium prices are preferred on theoretical grounds so are used to demonstrate the usefulness of weather derivatives as risk management tools for california specialty crop growers

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

financial integration and growth in a risky world abstract we revisit the debate on the benefits of financial integration in a two country neoclassical growth model with aggregate uncertainty the framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing together with their interaction global numerical methods allow for meaningful welfare comparisons gains from integration are quantitatively small even for riskier and capital scarce emerging economies these countries import capital for efficiency reasons before exporting it for self insurance leading to capital flows and growth reversals along the transition this opens the door to richer empirical implications than previously considered in the literature

a simple nonnegative process for equilibrium models abstract this paper presents a general specification for dynamic equilibrium models where nonnegative variables follow the autoregressive gamma process in jasiak and gourieroux 2006 the model solution implies linear dynamics for endogenous variables and provides conditional and unconditional moments in closed form finding the solution is computationally inexpensive requiring only to solve linear and quadratic equations the specification can be applied to a wide variety of models in finance and economics two applications are presented first a time varying volatility premium in a long run risks asset pricing model second time varying volatility in policy shocks in a simple new keynesian model accuracy in these models solutions is high and not significantly affected by time varying volatility

habit persistence and welfare gains from international asset trade we introduce habit formation in a model that studies the link between international trade in financial assets economic growth and welfare as with time separable preferences asset trade increases the mean growth rate but it also increases growth volatility we demonstrate that the welfare gain from asset trade is lower with habit persistence in consumption this reflects that the habit forming households perceive the higher growth volatility as a higher cost to obtain increased average growth calibrating the model to data for north america and western europe we find that habit persistence lowers welfare gains of financial integration by about 40 50

intertemporal substitution risk aversion and economic performance in a stochastically growing open economy abstract the constant elasticity utility function implies that the intertemporal elasticity of substitution is the inverse of the coefficient of relative risk aversion with empirical evidence suggesting that this relationship may or may not hold studies of risk and growth should decouple these two parameters this paper provides an analytical characterization and numerical simulations of the equilibrium of a stochastically growing small open economy under general recursive preferences we show that errors committed by using the constant elasticity utility function even for small violations of the compatibility condition can be substantial our results suggest that the constant elasticity utility function should be employed with caution

network governance for competitiveness the role of policy networks in the economic performance of settlements in the izmir region some cities and regions grow faster than others and they increase their relative shares in the global economy the literature offers a wide list of factors of competitiveness most of which define individual capacities of cities recently however there has been an increasing focus on the importance of network governance and the policy networks formed between different cities this paper examines the importance of policy networks compared with other widely recognised factors of competitiveness to the economic performance of settlements in the izmir region and investigates the importance of classical competitiveness indicators and network relations on their economic performance with the use of econometric methods in conclusion it discusses the importance of policy networks in administrative reform processes and economic development policies

human capital risk and economic growth this paper develops a tractable incomplete markets model of economic growth in which households invest in risk free physical capital and risky human capital the paper shows that a reduction in uninsurable idiosyncratic labor income risk decreases physical capital investment but increases human capital investment growth and welfare a quantitative analysis based on a calibrated version of the model reveals that these effects are substantial and of the same order of magnitude as the effects of distortionary income taxation the analysis further suggests that government sponsored severance payments to displaced workers increase growth and welfare even if these payments have to be e nanced through distortionary income taxation

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

nominal contracts in a bimetallic standard as its central feature a bimetallic standard grants nominal debtors an option to deliver either of two metals with results from the option pricing literature construction of a formula to evaluate the bimetallic option in debt instruments is straightforward with this formula one can compute the option value in a wide range of nineteenth century u s treasury securities posession of the option values permits an adjustment of the yields on u s securities to make them comparable to yields on nonmetallic european securities evaluating the option allows the estimation of transfers from debtors to creditors copyright 1986 by american economic association

a theory of disasters and long run growth abstract this paper develops a unified framework in which various types of catastrophic shocks can be simultaneously considered within a standard model of economic growth we first establish the basic existence and equivalence results we then apply the framework to an endogenous growth model to consider the influence of disasters on the long term equilibrium and the transition phase the result shows that while experiencing disasters may lower the average growth rate of the affected countries there exist various channels through which the risk of disasters and long term economic performance are positively correlated this finding reconciles the apparently contradictory evidence in recent empirical studies

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

international risk sharing and economic growth international risk sharing which diversifies away income risk will reduce saving with constant relative risk aversion if growth arises from the external effects of human capital accumulation then reducing saving will reduce growth welfare also may fall with risk sharing because endogenous growth with external effects of capital accumulation typically implies a competitive equilibrium growth rate already less than the optimal growth rate we demonstrate these results in a standard representative agent economy diversifying away rate of return risk also will reduce saving and growth rates if relative risk aversion exceeds one but this diversification always increases welfare this paper studies the effects of international risk sharing portfolio diversification in a world economy in which growth rates of income are endogenous growth is based upon the spillover effects of human capital accumulation as in lucas 1988 and romer 1986 there are positive economy wide spillovers of human capital intensity on individual labour productivity in section 2 we construct a multi country growth model with an infinitely lived representative agent in each country each country faces income risk but there is no aggregate uncertainty at the world level we focus on two market structures in the first structure there are no markets which allow for international diversification of country specific income risk in the second structure there are complete international markets for risksharing with no aggregate world uncertainty this completeness allows full diversification of country specific risk the paper has two central results first growth rates in all countries are lower in the equilibrium with full diversification second in this same structure welfare of each country may be lower than in an equilibrium without risk sharing the reasoning is as follows with external effects of capital accumulation the compet

capital market imperfections and financialization of real sectors in emerging markets private investment and cash flow relationship revisited summary the paper analyzes the impacts of cash flow from multiple investments in real and financial sectors on the new fixed investment spending of real sector firms the empirical results based on the euler equation approach and semi annual firm level data from two major emerging markets mexico and turkey suggest that profits and rates of returns from fixed and financial assets have differential effects on fixed investment spending of real sector firms accordingly increasing availability and accessibility of alternative investment opportunities in financial markets can become instrumental in channeling real sector savings to short term financial investments instead of long term fixed capital formation and thus lead to deindustrialization

beyond the post industrial city valuing and planning for industry in london this paper examines the challenges that planners face if industry is to survive and thrive in a growing post industrial city it examines london where the difference between the value of land for residential and industrial use and the pressure to address the housing crisis is leading to the rapid loss of industrial land and premises the paper first explores the role of industry in a high value city such as london arguing that trends in manufacturing in advanced economies are increasing the benefit for firms of an urban location whilst at the same time cities continue to need industry if they are to be economically and socially resilient sustainable and vibrant the paper then explores current approaches to planning for industry in london identifying impacts of a policy framework that anticipates and plans for its decline finally it focuses on the question of how to plan for a productive and inclusive city we explore the arguments in favour of integrating industry into the urban fabric as wel

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

single factor heath jarrow morton term structure models based on markov spot interest rate dynamics this paper considers the class of heath jarrow morton term structure models where the spot interest rate is markov and the term structure at time t is a function of time maturity and the spot interest rate at time t a representation for this class of models is derived and i show that the functional forms of the forward rate volatility structure and the initial forward rate curve cannot be arbitrarily chosen i provide necessary and sufficient conditions indicating which combinations of these functional forms are allowable i also derive a partial differential equation representation of the term structure dynamics that does not require explicit modeling of both the market price of risk and the drift term for the spot interest rate process using the analysis presented in this paper a class of intertemporal term structure models is derived

control of corruption international investment and economic growth evidence from panel data abstract in this paper we study the effects of corruption using an open economy version of the endogenous growth model with international capital mobility in particular the model predicts that corruption negatively affects the stock of international investment in the host country in addition the model predicts that growth should be impaired by the uncertainty caused by corruption bribes unlike taxes involve unpredictable distortion in the discretionary and uncertain use of the government power this results in additional costs to businesses and alongside with resources allocated to unproductive activities impose an extra burden on the economy we test empirically the predictions of the theory using a sample of 142 countries for the period 1994 2014 and gmm methods using indicators of control of corruption from the world bank the lack of corruption is found to have a positive and statistically significant effect on the growth rate of real per capital gdp and increased the investment ratio hence the empirical results suggest that corruption directly hinders economic growth by hampering investment the estimated effects are robust to changes in specifications and estimation methods thus it can be concluded that richer countries with better access to international financing should be growing faster and be less prone to the adverse effects of corruption than the emerging economies

capital control liberalization and stock market development the authors address two questions what happens to stock market size liquidity volatility and integration with world capital markets after capital controls are liberalized and what is the relationship between those indicators of stock market development and regulations about information disclosure accounting standards and investor protection an analysis of data on stock markets in 16 developing countries suggests the following a stock markets become larger more liquid more integrated internationally and more volatile after controls on capital and dividend flows are liberalized b easy access to information about firms is positively associated with the size and liquidity of stock markets and c countries that officially establish internationally accepted accounting standards and laws to protect investors do not have substantially better functioning stock markets than countries that do not adopt those official standards

an empirical investigation of asset pricing models using japanese stock market data abstract this article examines the empirical performance of the following asset pricing models i a time separable model ii abel s model with a consumption externality iii the time non separable model iv the consumption based recursive utility model and v the ad hoc factor pricing model the testing framework includes the hansen jagannathan volatility bounds test the hansen jagannathan specification error test and euler equation based generalized method of moments estimation the test evidence indicates that habit forming preferences are empirically supportable and provide a good characterization of the japanese security market data

capital account liberalisation and poverty how close is the link the literature on the theoretical and empirical aspects of the relationship between finance and economic growth is both substantial and extensive the same cannot be said on the relationship between financial development and poverty reduction an equally important aspect in this study we visit the theoretical arguments and conduct an empirical analysis of the relationship between the capital account dimension of financial liberalisation and poverty for developing countries for the period 1985 2005 in particular we employ the system gmm technique to test whether capital account liberalisation has helped alleviate poverty and also whether the extent to which capital account liberalisation affects poverty depends on the quality of institutions we also use ols and iv techniques to verify our findings our findings indicate that there is no statistically significant relationship between the degree of capital account liberalisation during the period and the poverty rate developing countries with higher institutional quality have lower poverty rates but the effect has low statistical significance a higher degree of capital account liberalisation is associated with a lower income share for the poor

cyclical uncertainty precautionary saving and economic growth this paper studies the interaction between cyclical uncertainty precautionary saving and economic growth in a stochastic endogenous growth model the analysis provides insight into the potential connection between technological uncertainty of the sort popularized in real business cycle models and the determinants of economic growth in a stochastic version of a popular model of endogenously determined economic growth the magnitude of the link between cyclical uncertainty and growth is quantified and found to be small in terms of its effect on the growth rate but possibly large in terms of its effect on levels of macroeconomic variables moreover the welfare costs of reduced cyclical uncertainty can be substantial owing to the lower historical rate of capital accumulation induced by a decrease in precautionary saving the chief implications of the model are found to be roughly consistent with the postwar experience of several countries although the predictions of the model with regard to growth rates are too small to explain much of the variation in growth rates across time or across countries

idiosyncratic production risk growth and the business cycle we introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets each agent is an entrepreneur operating her own technology with her own capital stock the general equilibrium is characterized by a closed form recursion in the cara normal case incomplete markets introduce a risk premium on private equity which reduces the demand for investment as compared to complete markets the steady state can thus have both a lower capital stock due to investment risk and a lower interest rate due to precautionary savings furthermore the anticipation of high real interest rates in the future feeds back into high risk premia and low investment in the present thus slowing down convergence to the steady state our results highlight the importance of private risk premia for capital accumulation and business cycles

moment based estimation of stochastic volatility abstract this paper makes use of the distributional information contained in high frequency data to test for the specification of the functional form of the volatility process within the class of stochastic volatility models it s calculus is implemented in order to obtain the first and second conditional moment of the driving stochastic differential equation for the volatility process these analytical expressions are augmented by their lag and lag squared and are used to form the corresponding gmm estimator the base case stochastic volatility model is extended to allow for the leverage effect and jumps in returns empirical estimation confirms the presence of fast mean reversion in volatility and jumps in returns for the 5 min s p 500 stock market index further estimation results also seem to indicate the presence of jumps in the volatility process that are correlated to the jumps in returns

the welfare effect of international asset market integration under nominal rigidities abstract this paper assesses the impact of integrating international asset markets when segmented markets are not the only distortion using a two country general equilibrium model with nominal rigidities and monetary shocks we show that integration is not universally beneficial instead the welfare impact depends on the degree to which exchange rate fluctuations are passed through to consumer prices while the integration is welfare neutral in the polar cases of complete or zero pass through this is not the case when pass through is partial when shocks are equally volatile in both countries integration can be detrimental or beneficial depending on the degree of pass through when shocks are more volatile in one country it benefits from integration compared with the more stable country

the effect of borrowing constraints on consumer liabilities this paper explores the effects of liquidity constraints on consumer liabilities while much empirical evidence attests to the importance of liquidity constraints in the u s economy evidence about the effects of borrowing constraints on consumer balance sheets is scarce using the 1983 survey of consumer finances data we estimate desired borrowing for unconstrained households we then evaluate the gap between predicted and observed debt for the sample of liquidity constrained consumers predicted debt is 75 percent higher than actual debt in the liquidity constrained sample thus the effect of removing borrowing constraints has quantitatively important implications for the allocation of debt in the household portfolio the removal of borrowing constraints would raise aggregate household liabilities by 9 percent copyright 1993 by ohio state university press

investor protection optimal incentives and economic growth does investor protection foster economic growth to assess the widely held affirmative view we introduce investor protection into a standard overlapping generations model of capital accumulation better investor protection implies better risk sharing because of entrepreneurs risk aversion this results in a larger demand for capital this is the demand effect a second effect the supply effect follows from general equilibrium restrictions better protection i e higher demand increases the interest rate and lowers the income of entrepreneurs decreasing current savings and next period s supply of capital the supply effect is stronger the tighter are the restrictions on capital flows our model thus predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions cross country data provide support for this prediction as does the detailed examination of the growth experiences of south korea and india

uk industrial policy old tunes on new instruments this paper discusses the current labour government s industrial policy as most recently reflected in its document on manufacturing strategy in the context of industrial policy in the uk over the last 50 years and the form that it has taken elsewhere in europe it concludes that the thematic priorities for uk industrial policy in the 1960s international competitiveness innovation competition and skills continue to be the key themes of uk policy today the paper presents data that illustrate the gaps that exist in key indicators of performance between the uk and its main economic competitors the difference between the 1960s and the 2000s is that there are new instruments of policy two areas in particular are focused on competition policy and technology policy and an attempt is made to assess the likely effectiveness of these new instruments the paper concludes that the international evidence base for these new approaches is reasonably robust but that it is still too soon to tell if they are having the hoped for impact on the performance of the uk economy copyright 2002 oxford university press

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

financial markets in development and the development of financial markets what is the relationship between markets and development it is argued that markets promote growth and that growth in turn encourages the formation of markets two models with endogenous market formation are presented to analyze this issue the first examines the role that financial markets banks and stock markets play in allocating funds to the highest valued use in the economic system it is shown that intermediation will arise under weak conditions the second focuses on the role that markets play in supporting specialization in economic activity the consequences of perfect competition in market formation are highlighted

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

comparative dynamics of an equilibrium intertemporal asset pricing model this paper uses recursive competitive theory to develop a general equilibrium asset pricing model in this framework all prices and rates of return are endogenously determined thus enabling us to analyze the effects of changes in preferences technological uncertainty and expectations on the structure of security prices in particular we focus on how the market risk premium varies with changes in the underlying economic environment an issue which other asset pricing models have chosen not to address

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps