measuring the pricing error of the arbitrage pricing theory this article provides an exact bayesian frame work for analyzing the arbitrage pricing the ory apt based on the gibbs sampler we show how to obtain the exact posterior distributions for functions of interest in the factor model in particular we propose a measure of the apt pricing deviations and obtain its exact posterior distribution using monthly portfolio returns grouped by industry and market capitalization we find that there is little improvement in reduc ing the pricing errors by including more factors beyond the first one as an important extension of the asset pricing model of sharpe 1964 and lintner 196 5 ross 1976 1977 derived the arbitrage pricing theory apt which addresses a fundamental problem in finance to char acterize the expected return on a security the apt implies that the expected return is approximately a

the dynamics of international capital flows results from a dynamic hierarchical factor model abstract the present paper examines the degree of comovement of gross capital inflows which is a highly sensitive issue for policy makers we estimate a dynamic hierarchical factor model that is able to decompose inflows in a sample of 47 economies into i a global factor common to all types of flows and all recipient countries ii a factor specific to a given type of capital inflows iii a regional factor and iv a country specific component we find that the latter explains by far the largest fraction of fluctuations in capital inflows followed by regional factors which are particularly important for emerging markets fdi and portfolio inflows as well as bank lending to emerging europe the global factor however explains only a small share of the overall variation we also employ dynamic panel and time series regressions to explain the determinants of the estimated components the global factor is shown to reflect u s financial conditions

macroprudential policies capital flows and the structure of the banking sector abstract using a large sample of advanced and emerging market economies over the period 1999 2012 we examine the effectiveness of macroprudential policies mpps in managing cross border bank flows conditioning on the structure of the banking sector in the mpp implementing country we find that higher regulatory quality and a higher credit to deposit ratio increase the effectiveness of mpps while a higher cost to income ratio has the opposite effect if all three financial variables are evaluated at the median the marginal effect of our preferred mpp measure leads to a reduction of international bank inflows in percent of gdp by around half a percentage point and is only marginally significant however when the more enhanced 25th 10th percentiles of their respective distributions are considered we observe as a response to the same mpp measure a reduction of bank inflows by 3 44 5 39 percentage points that is highly statistically and economically significant additionally we find that the structure of the domestic banking sector determines spillovers from mpps across asset classes while spillovers from mpps across countries are a function of banking sector conditions both at home and abroad

how important are global factors for understanding the dynamics of international capital flows abstract we propose a dynamic factor model with time varying parameters and stochastic volatility to analyze the relationship between global factors and country specific capital flow dynamics studying a global sample of 43 countries from 1994 until 2015 we show that global co movement of macroeconomic financial and capital flow variables can explain a major share of country specific capital flow volatility and that the impact of these variables has become even more important in the aftermath of the 2008 2009 global financial crisis our results indicate that country specific changes in capital flows are strongly affected by fluctuations in global financial cycles and to some extent by global real business cycles we provide also some evidence that the exchange rate regime the stock of reserves prudent fiscal policy and more developed stock markets can insulate economies at least partially from the global financial cycle

real time density forecasts from bayesian vector autoregressions with stochastic volatility central banks and other forecasters are increasingly interested in various aspects of density forecasts however recent sharp changes in macroeconomic volatility including the great moderation and the more recent sharp rise in volatility associated with increased variation in energy prices and the deep global recession pose significant challenges to density forecasting accordingly this paper examines with real time data density forecasts of u s gdp growth unemployment inflation and the federal funds rate from bayesian vector autoregression bvar models with stochastic volatility the results indicate that adding stochastic volatility to bvars materially improves the real time accuracy of density forecasts this article has supplementary material online

capital flows and gdp in emerging economies and the role of global spillovers abstract this paper provides a global analysis of capital flow impacts on gdp for selected emerging economies as additional control variables we also include currency reserves and effective exchange rates in our analysis we distinguish between gross and net capital flows and also assess the impact of both fdi and portfolio flows accounting for the fact that common factors have been the main drivers of capital flows while country specific determinants pull factors drive the response to such shocks we analyze shocks to country groups but consider country specific responses based on a bayesian time varying panel var framework in the spirit of canova and ciccarelli 2009 based on a sample of 24 economies our results show a robust positive effect of capital flows on gdp except for korea both gross and net capital flows display a positive impact for around two quarters the impact of effective exchange rates on gdp hardly offers an explanation for a possible transmission of capital flow effects with effective depreciations both positively and negatively linked to gdp we also find that the effect of net portfolio flows is even more positive compared to net fdi flows for emerging economies finally we provide evidence that the importance of global factors increases in times of crises

international monetary relations taking finance seriously in our book global capital markets integration crisis and growth we traced out the evolution of the international monetary system using the framework of the international monetary trilemma countries can enjoy at most two from the set exchange rate stability open capital markets and domestic monetary autonomy the events of the past decade or more highlight the further complications for this framework posed by financial stability issues here we update and qualify our prior analysis drawing on recent experience and research under the classical gold standard scant attention was paid to macro management either to stabilize output and employment or to ensure financial stability the interwar years highlighted the changing demands for modern central bank interventions in the economy financial instability followed by wwii left a world with sharply constricted financial markets and little private cross border capital mobility due to this historical accident the bretton woods system agreed in 1944 focused not at all on financial stability and focused on issues like adjustment exchange rate misalignment and international liquidity defined in terms of official not private capital account transactions post 1970s floating rates permitted but did not require liberalization of the capital account but the political equilibrium had shifted in favor of financial interests signaled by the push toward european integration and the later reform process in emerging markets starting in the 1990s this development however opened the door once again to domestic financial crises and their international transmission countries now become more susceptible to a new species of capital account crises fueled by bank and bond lending and its sudden withdrawal these developments in fact made evident a different financial trilemma countries can pick at most two from financial stability open capital markets and autonomy over domestic financial policy we distill the main lessons as to the interactions between the monetary and financial trilemmas and policies that could best address the resulting weaknesses

gift giving and the evolution of cooperation gift giving is a practice common to many societies in an evolutionary model the social custom of giving gifts at the beginning of a relationship can lead to trust and cooperation the evolutionary approach makes predictions about the character of the goods that can be used as gifts for example gift goods may have little use value even at low levels of consumption although the gifts themselves are useless the institution is not

taming the global financial cycle what role for the global financial safety net abstract an ongoing active debate considers the role of the global financial cycle gfc in driving international capital flows especially in emerging economies as well as the policy options available to absorb their impact we make two contributions to the debate first we rely on a structural measure of the gfc developed in a companion paper to identify episodes of large capital flows and currency crises driven by global conditions second using both ols and instrumental variables we evaluate whether the availability and actual use of elements of the global financial safety net gfsn can help emerging markets cushion the impact of these episodes we find some evidence that potential access to imf support can help countries we also find that the use of imf support and reserves cushions the impact of global shocks on gdp growth this effect is quite heterogeneous across types of crises and across time as it is mostly present during currency crises and the benefits only occur with a delay

the great moderation in international capital flows a global phenomenon abstract this paper highlights a recent great moderation in global capital flows characterised by smaller volumes and lower volatility of cross border transactions however there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005 06 immediately prior to the onset of the global financial crisis to the post crisis period of 2013 14 when global flows arguably settled at a new normal we find that since the pre crisis period gross capital inflows recovered more for economies with smaller pre crisis external and internal imbalances lower per capita income improving growth expectations a less severe impact of the global financial crisis and less stringent macroprudential policy on the asset side countries with a more accommodative monetary policy a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post crisis period

cooperation punishment and immigration abstract we study the incentive to cooperate in a society comprised of citizens and immigrants the level of cooperation is governed by a steady state under population dynamics along with the behavior of individual citizens and immigrants we provide an equilibrium characterization exhibiting a uniquely determined positive level of cooperation in society we then use this framework to study the impact of government programs aimed at punishing immigrants who defect when agents produce offspring we show that a consequence of such punishment is that while the incentive for immigrants to defect decreases there is an equilibrium substitution effect whereby citizens realize an increased incentive to defect

capital flows to emerging economies minsky in the tropics capital inflows to emerging economies have a significant exogenous component they are very large when scaled to the size of the domestic financial sectors of recipients and they have large real macroeconomic effects they also sow the seeds for the ensuing sudden stops or capital flow reversals observed in financial crises in emerging markets this paper tests the implications of applying the kindleberger minsky model of financial crises to capital account reversals in emerging economies or sudden stops as they have been called in the recent literature it uses a panel probit framework with heterogeneous unobserved country effects the most important variables that account for sudden stops are preceding capital surges the share of flows other than foreign direct investment the size of the current account deficit contagion from sudden stops in other emerging markets and the ratio of external debt to exports the main policy conclusion is that emerging economies need specific policies to deal with capital surges in addition macroeconomic policies geared toward preserving sustainable macroeconomic balance may be necessary to avoid sudden stops but they are clearly insufficient copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

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

bayesian dynamic factor models and portfolio allocation we discuss the development of dynamic factor models for multivariate financial time series and the incorporation of stochastic volatility components for latent factor processes bayesian inference and computation is developed and explored in a study of the dynamic factor structure of daily spot exchange rates for a selection of international currencies the models are direct generalizations of univariate stochastic volatility models and represent specific varieties of models recently discussed in the growing multivariate stochastic volatility literature we discuss model fitting based on retrospective data and sequential analysis for forward filtering and short term forecasting analyses are compared with results from the much simpler method of dynamic variance matrix discounting that for over a decade has been a standard approach in applied financial econometrics we study these models in analysis forecasting and sequential portfolio allocation for a selected set of international exchange rate retur

when do capital inflow surges end in tears abstract we investigate in a sample of 53 emerging markets over 1980 2014 whether countries with open capital accounts are necessarily at the mercy of global events or are able to take policy acti

cooperation in community interaction without information flows we study cooperative behaviour in communities where the flow of information regarding past conduct is limited or missing players are initially randomly matched with no knowledge of each other s past actions they endogenously decide whether or not to continue the repeated relationship there is incomplete information regarding player types a subset of the population is myopic while the remainder have discount factors that permit cooperation in principle we define social equilibrium in such communities such equilibria are characterized by an initial testing phase followed by cooperation if the test is successful it is precisely the presence of myopic types that permit cooperation by raising barriers to entry into new relationships we examine the implications of increased patience which takes two forms an increase in the number of non myopic types and an increase in the discount factor of non myopic types these two notions turn out to have strikingly different implications for the degree of cooperation that can be sustained

macroeconomic forecasting performance under alternative specifications of time varying volatility summary this paper compares alternative models of time varying volatility on the basis of the accuracy of real time point and density forecasts of key macroeconomic time series for the usa we consider bayesian autoregressive and vector autoregressive models that incorporate some form of time varying volatility precisely random walk stochastic volatility stochastic volatility following a stationary ar process stochastic volatility coupled with fat tails garch and mixture of innovation models the results show that the ar and var specifications with conventional stochastic volatility dominate other volatility specifications in terms of point forecasting to some degree and density forecasting to a greater degree copyright 2014 john wiley sons ltd

price discrimination adjusted concavity and output changes under conditions of constant elasticity the economic consequences of third degree price discrimination have been extensively investigated beginning with joan robinson s classic discussion in the economics of imperfect competition a focal point has been the analysis of the effects of price discrimination on output considerable discussion in the literature has been devoted to the case of linear demand the most recent example of which is schmalensee i98i as has been well known since the early i9oos in this case discrimination does not change output under conditions of non linear demand the effect of third degree price discrimination is much less certain and far more complicated despite increasing analytical sophistication and effort no new conclusions on output changes have been forthcoming since the work of edwards i950 in this paper we investigate an important class of non linear functions and present a definitive analysis of the output effects of third degree price discrimination under constant elasticity conditions in the general non linear case the effect of discrimination on output may be either positive or negative 2 joan robinson i933 developed the local adjusted concavity criterion to determine the output effects of discrimination for two sub markets with non linear demands edwards i950 raised the possibility that robinson s criterion could lead to erroneous conclusions when the local assumption was relaxed and proposed sufficient global restrictions on the curvature of the demand functions under which the adjusted concavity criterion is correct greenhut and ohta 1976 confirmed edwards suspicion about the fallibility of the adjusted concavity criterion by presenting a counterexample consisting of two constant elasticity demand schedules 3 samuelson i947 lofgren i977 finn i974 and silberberg i970 employing lagrangean techniques suggested by leontief i940 verify edwards global restrictions showing that if the more elastic curve is concave convex and the less elastic curve is convex concave third degree price discrimination will increase decrease output 4

voluntarily separable repeated prisoner s dilemma ordinary repeated games do not apply to real societies where one can cheat and run away from partners we formulate a model of endogenous relationships which one can unilaterally end and start with a randomly assigned new partner with no information flow focusing on two person two action prisoner s dilemma we show that the endogenous duration of partnerships gives rise to a significantly dierent evolutionary stability structure from the ordinary evolutionary games monomorphic equilibria require initial trust building while a polymorphic equilibrium includes early cooperators than any strategy in monomorphic equilibria and is thus more ecient this

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

returns to food and agricultural r d investments in sub saharan africa 1975 2014 research enabled growth in agricultural productivity is pivotal to sub saharan africa s overall economic growth prospects yet investments in research and development rd median 38 0 py around 78 5 of the evaluations relate to the commodity specific consequences of agricultural research while 5 5 report on the returns to an all agriculture aggregate the weight of commodity specific evaluation evidence is not especially congruent with the composition of agricultural production throughout africa nor to the best that can be determined the commodity orientation of public african agricultural r d

gresham s law or gresham s fallacy gresham s law often takes two forms the rule that bad money drives out good money and a qualified version of that rule that requires a fixed exchange rate between the two monies yet history contr

building african scientific capacity for agricultural development abstract during africa s first two decades of independence from 1960 to 1980 priority was given to increasing the size of national extension services because it was assumed that technology could be imported from industrial countries and the international agricultural research centers over the past decade donors have turned their attention to assisting national agricultural research systems nars but many nars are performing poorly and are faced with a high turnover of scientific staff and inadequate operating budgets moreover the present donor financed project by project and country by country approach to building african scientific capacity is seriously flawed this paper examines africa s agricultural research history over the past six decades and draws lessons for strengthening national and regional agricultural research systems over the coming 30 years

the place of agricultural research in the development of sub saharan africa abstract outside sub saharan africa ssa agricultural research ar yields excellent returns why does ssa get so little from its major ar effort why do its ar scientists cost more yet produce less smallness of countries and research stations dispersion and high turnover make it hard to attain a critical mass of national ar scientists to remedy this they could concentrate on a few problems and crops yet they have neglected many of the most important e g cassava and overstressed export crops in other ways too european biases have distorted african ar socioeconomists moreover have entered research design too little and too late above all current domestic funds have been too scanty and unreliable to adequately support international and capital account ar efforts this lack of steady commitment illustrates ar s need for direction from clearer agricultural policy based on radically improved information and recognizing ssa s dramatic rise in labor land ratios guidelines for such policy are indicated within these a formalized and poverty oriented ar design system is suggested

industry equilibrium with uncertainty and labor managed firms abstract this paper characterizes long run industry equilibrium composed of labor managed firms under demand uncertainty moreover it is demonstrated how the number and size of firms in the industry respond to a change in uncertainty

on the theory of international trade between capitalist and labour managed countries abstract this paper attempts to establish a model of international trade between capitalist and labour managed countries and to reexamine whether or not the basic theorems of the traditional trade theory carry over to environments characterized by the coexistence of capitalist and labour managed countries

information and capital flows the determinants of transactions in financial assets abstract we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions our results support the hypothesis that informational asymmetries are responsible for the strong negative relationship between asset trade and distance this result is very important for theories of asset trade portfolio adjustments and home bias we strengthen it by investigating the roles of explicit informational variables as well as distance in explaining separately cross border trade in corporate equities corporate bonds and government bonds

leave and let leave a sufficient condition to explain the evolutionary emergence of cooperation the option to leave your current partner in response to his behavior also known as conditional dissociation is a mechanism that has been shown to promote the emergence and stability of cooperation in many social interactions this mechanism nevertheless has always been studied in combination with other factors that are known to support cooperation by themselves in this paper we isolate the effect of conditional dissociation on the evolution of cooperation and show that this mechanism is enough to sustain a significant level of cooperation if the expected lifetime of individuals is sufficiently long 2014 elsevier b v all rights reserved

evolutionary stability with equilibrium entrants abstract the strategy that upsets a potential evolutionarily stable strategy may in itself be very unstable or may differ from the candidate strategy only in irrelevant ways this paper develops a solution concept addressing these difficulties we lood for a set of nash equilibria such that small groups of entrants whose members are satisfied with their entry cannot take the population out of the set such a set is robust to the iterated removal of weakly dominated strategies depends only on the reduced normal form and has the never a weak best response property for generic two person extensive form games such sets generate payoffs consistent with proper equilibria

the great retrenchment international capital flows during the global financial crisis the current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization we identify the stylized facts and main drivers of this development the retrenchment in international capital flows is a highly heterogeneous phenomenon first across time being especially dramatic in the wake of the lehman brothers failure secondly across types of flows with banking flows being the hardest hit due to their sensitivity of risk perception and thirdly across regions with emerging economies experiencing a shorter lived retrenchment than developed economies our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration its specific nature with countries relying on bank flows being the hardest hit as well as domestic macroeconomic conditions and their connection to world trade flows gian maria milesi ferretti and cedric tille

what drives international portfolio flows understanding what drives international portfolio flows has important policy implications for countries wishing to exert some control on the size direction and volatility of the flows this paper empirically assesses the relative contribution of common push and country specific pull factors to the variation of bond and equity flows from the us to 55 other countries using a bayesian dynamic latent factor model we find that more than 80 of the variation in bond and equity flows is due to push factors from the us to other countries hence global economic forces seem to prevail over domestic economic forces in explaining movements in international portfolio flows the dynamics of push and pull factors can be partially explained by us and foreign economic fundamentals

a unified theory of the behaviour of profit maximising labour managed and joint stock firms operating under uncertainty a comment in a recent paper of this journal hey i98i addressed the problem of a unified theory which treats three types of firms a profit maximising firm henceforth pmf a labour managed firm henceforth lmf and a joint stock firm henceforth jsf by one framework on the basis of his unified theory he concluded that with respect to the behaviour of the lmf and the jsf the results can be deduced from those of the pmf the purpose of this comment is to point out that his argument in the long run about the behaviour of these three firms does not hold if their production functions are homogeneous we use the same notation as hey to begin with the objective functions of the pmf the lmf and the jsf under certainty are defined respectively as follows

unconventional policies and exchange rate dynamics abstract we study exchange rate dynamics under cooperative and self oriented policies in a two country dsge model with unconventional monetary and exchange rate policies the cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments self oriented policies nash equilibrium however entail limited exchange rate movements and an aggressive use of unconventional policies in both countries our results suggest that sizable exchange rate depreciations are not always a symptom of beggar thy neighbor policies they could also reflect a desirable process of external adjustment that improves global welfare

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

innovation and imitation in an information age we study the behavior of imitation and innovation in a dynamic general equilibrium model that captures the salient features of an information age we study a world where innovations can be made but at a cost that reflects the type of goods after innovation takes place imitation is possible but again at some cost which reflects the nature of the good we show that the behavior of innovation and imitation are very different for high information content goods and low information content goods and this has important implications for the structure and evolution of industry jel o31 l16