a generalized measure of riskiness this paper proposes a generalized measure of riskiness that nests the original measures pioneered by aumann and serrano aumann r j r serrano 2008 an economic index of riskiness j political econom 116 5 810 836 and foster and hart foster d p s hart 2009 an operational measure of riskiness j political econom 117 5 785 814 the paper introduces the generalized options implied measure of riskiness based on the risk neutral return distribution of financial securities it also provides asset allocation implications and shows that the forward looking measures of riskiness successfully predict the cross section of 1 3 6 and 12 month ahead risk adjusted returns of individual stocks the empirical results indicate that the generalized measure of riskiness is able to rank equity portfolios based on their expected returns per unit of risk and hence yields a more efficient strategy for maximizing expected return of the portfolio while minimizing its risk this paper was accepted by wei xiong finance

market triggered changes in capital structure equilibrium price dynamics we analyze the internal consistency of using the market price of a firm s equity to trigger a contractual change in the firm s capital structure given that the value of the equity itself depends on the firm s capital structure of particular interest is the case of contingent capital for banks in the form of debt that converts to equity when conversion is triggered by a decline in the bank s stock price we analyze the problem of existence and uniqueness of equilibrium values for a firm s liabilities in this context meaning values consistent with a market price trigger discrete time dynamics allow multiple equilibria in contrast we show that the possibility of multiple equilibria can largely be ruled out in continuous time where the price of the triggering security adjusts in anticipation of breaching the trigger our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed for the design of contingent capital with a stock price trigger this condition may be interpreted to mean that conversion should be disadvantageous to shareholders and it is satisfied by setting the trigger sufficiently high uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria we illustrate precise formulations of these conditions with a variety of applications

using genuine savings for climate policy evaluation with an integrated assessment model there has been a recent increase in efforts to develop broader models to assess the impact of climate change and climate change policies both in terms of impact measures beyond gdp and in terms of modelling complexity beyond dice rice models climate policies aimed at reducing co2 emissions can have impacts in multiple sectors of the economy and can change consumption levels over time we show how the sustainability indicator genuine savings can be endogenised within a general equilibrium model and used as a criterion for judging the impacts of such policies in terms of future well being differences in genuine savings rates between co2 emission reduction scenarios are discussed we show how a broader genuine savings based assessment of climate change can result in a re evaluation of the consequences and costs of inaction in terms of various climate change related policies and how multiple environmental and well being outcomes can be analysed within a unified modelling framework

option implied objective measures of market risk foster and hart 2009 introduce an objective measure of the riskiness of an asset that implies a bound on how much of one s wealth is safe to invest in the asset while a s guaranteeing no bankruptcy in the long run in this study we translate the foster hart measure from static and abstract gambles to dynamic and applied finance using nonparametric estimation of risk neutral densities from s p 500 call and put option prices covering 2003 to 2013 this exercise results in an option implied market view of objective riskiness the dynamics of the resulting option implied foster hart bound are analyzed and assessed in light of well known risk measures including value at risk expected shortfall and risk neutral volatility the new measure is shown to be a significant predictor of ahead return downturns furthermore it is able to grasp more characteristics of the risk neutral probability distributions than other measures furthermore exhibiting predictive consistency the robustness of the risk neutral density estimation method is analyzed via a bootstrap

comparing risks by acceptance and rejection stochastic dominance is a partial order on risky assets gambles that is based on the uniform preference of all decision makers in an appropriate class for one gamble over another we modify this requirement first by taking into account the status quo given by the current wealth and the possibility of rejecting gambles and second by comparing rejections that are substantive i e uniform over wealth levels or over utilities this yields two new stochastic orders wealth uniform dominance and utility uniform dominance unlike stochastic dominance these two orders are complete any two gambles can be compared moreover they are equivalent to the orders induced by respectively the aumann serrano index of riskiness and the foster hart measure of riskiness

testing genuine savings as a forward looking indicator of future well being over the very long run genuine savings gs have been much used in recent years as an indicator of a country s sustainability according to some theorists e g arrow et al 2012 under certain conditions a country with a positive level of gs should experience non declining future utility given the assumption of unlimited substitutability among all forms of capital sometimes called weak sustainability this paper reports the first very long run tests of gs also called comprehensive investment or adjusted net savings as a forward looking indicator of future well being we assemble data for british capital back to 1765 and construct several net investment measures which are used as indicators of two alternative measures of future well being consumption per capita and real wages an allowance for a value of time due to exogenous technological progress is included in some gs measures and we demonstrate the importance of this measure and the choice of discount rate over the very long run on the whole our results do not reject the postulated relationship between gs and future well being and show gs can be a forward looking indicator of future well being for periods of up to 100 years

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

can fat tail create the momentum and reversal we suggest that fat tail variations can cause both short term momentum and long term reversal simultaneously in both the time series and cross sectional returns of securities the fat tail of the

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

collusion and overlending i introduction for a long time have korean companies been engaged in unbridled expansionism financed through loans inefficient octopus style management and over and duplicate investment thus expediting the structural failure of the economy this failure to concentrate on profits consolidation and efficiency provided the fuse to the bankruptcy bombs that triggered the foreign exchange and economic crises the collusion between the conglomerates financial sector and politicians made this financial monopoly possible chosun ilbo december 26 1997 collusion and overlending in the korean financial sector may be best illustrated by the above editorial highlight of chosun ilbo the most read newspaper in korea its 1997 financial crisis is primarily triggered by continual bankruptcies of chaebols conglomerates which with assistance from politicians had borrowed heavily from financial institutions in financing their investment projects 1 unlike some other asian countries experiencing problems in their financial sector due to shifts in investment projects toward real estates such as japan hong kong and thailand chaebols in korea concentrated mostly on manufacturing activities 2 in this study we establish a tractable model of overlending with three key players namely chaebols financial institutions and politicians as highlighted in chosun ilbo the model is designed to achieve two primary goals that are crucial for matching some key observations during the korean turmoil first we illustrate how overlending can be an equilibrium outcome with collusion between chaebols and politicians when the economic environment is favorable this occurs despite that such a collusion distorts normal borrowing lending operation by causing a discernible shift in loan composition from more to less productive investment projects second we show that as the economic environment gradually deteriorates there can be a shift from a collusion to a no collusion equilibrium the combination of deterioration in fundamentals and expectations of an equilibrium shift can trigger economy wide financial crisis more specifically we construct a simple principal supervisor agent model of corruption and overlending the principal is the formal authority of loan decision making of a financial institution or in short the financial institution the supervisor is a politician who serves as the informational intermediary in the borrowing lending arrangement via his her connections and networking 3 the agent is a chaebol of an unknown type which seeks for external financing of a set of risky projects a politician s favorable signal about the borrowing chaebol s overall performance would grant the approval of the loan to finance an array of risky projects whose returns depend on idiosyncratic shocks that cannot be washed out in aggregation within the chaebol as an outside alternative to making the loan the financial institution can invest in the world capital market where a fixed rate of return is guaranteed this portfolio decision depends on a comparison of the expected average returns on the given set of risky projects with the safe returns on investments in the world capital market while both the chaebol s type and the state of nature are unobservable to the financial institution we for simplicity assume that politician s connections and networking can fully uncover the true type of the chaebol this valuable information possessed by the politician is one that the financial institution has an incentive to purchase but a low type chaebol has an incentive to conceal whether the politician ends up revealing truthfully this information depends on how much to obtain from the lender in terms of general support versus how much to gain from the borrower in terms of bribes or side payments when a low type chaebol has the politician on its side information is distorted and a collusion equilibrium arises

evaluating interval forecasts a complete theory for evaluating interval forecasts has not been worked out to date most of the literature implicitly assumes homoskedastic errors even when this is clearly violated and proceed by merely testing for correct unconditional coverage consequently i set out to build a consistent framework for conditional interval forecast evaluation which is crucial when higher order moment dynamics are present the new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management

climate change policy what do the models tell us very little a plethora of integrated assessment models iams have been constructed and used to estimate the social cost of carbon scc and evaluate alternative abatement policies these models have crucial flaws that make them close to useless as tools for policy analysis certain inputs e g the discount rate are arbitrary but have huge effects on the scc estimates the models produce the models descriptions of the impact of climate change are completely ad hoc with no theoretical or empirical foundation and the models can tell us nothing about the most important driver of the scc the possibility of a catastrophic climate outcome iam based analyses of climate policy create a perception of knowledge and precision but that perception is illusory and misleading jel c51 q54 q58

assets and liabilities and scottish independence scottish independence implies an economic future that is different from remaining in the united kingdom the economic debate largely comes down to whether this would leave scots better or worse off by most measures scotland s current economic standing is very similar to that of an average uk region output per head income and unemployment are almost all exactly the same as the average uk region this is not surprising given the economic and social integration and shared institutions and is consistent with the idea of conditional convergence this suggests that after controlling for differences in institutions and other characteristics so called initial conditions countries tend to converge to similar levels of income 1 however if scotland becomes an independent nation some of the shared uk assets liabilities and institutions would need to be divided up this would change the initial conditions for scotland and the rest of the uk and therefore we would be likely to see a different economic future for both regions see barro and sala i martin 1991

tempered stable and tempered infinitely divisible garch models abstract in this paper we introduce a new garch model with an infinitely divisible distributed innovation this model which we refer to as the rapidly decreasing tempered stable rdts garch model takes into account empirical facts that have been observed for stock and index returns such as volatility clustering non zero skewness and excess kurtosis for the residual distribution we review the classical tempered stable cts garch model which has similar statistical properties by considering a proper density transformation between infinitely divisible random variables we can find the risk neutral price process thereby allowing application to option pricing we propose algorithms to generate scenarios based on garch models with cts and rdts innovations to investigate the performance of these garch models we report parameter estimates for the dow jones industrial average index and stocks included in this index to demonstrate the advantages of the proposed model we calculate option prices based on the index

foster hart optimal portfolios we reinvestigate the classic portfolio optimization problem where the notion of portfolio risk is captured by the foster hart risk a new bankruptcy proof reserve based measure of risk extremely sensitive to left tail events foster and hart 2009 to include financial market frictions induced by market microstructure we employ a general ex ante transaction cost function with fixed linear and quadratic penalty terms in the objective function we represent the us equity market by the dow jones industrial average djia index and study the performance of the foster hart optimal djia portfolio in order to capture the skewed and leptokurtotic nature of real life stock returns we model the returns of the djia constituents as an arma garch process with multivariate normal tempered stable innovations we demonstrate that the foster hart optimal portfolio s performance is superior to those obtained under several techniques currently in use in academia and industry

a model of financial crises in emerging markets recent events in mexico asia russia and brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive not too long ago the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates but this first generation view pioneered by krugman 1979 has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent and as obstfeld 1994 has argued currency crises have sometimes occurred even though central banks had more than enough resources to prevent them witness much of europe in the early 1990s obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large this new perspective implied that crises could be driven by self fulfilling expectations since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained but obstfeld s emphasis on mounting unemployment and domestic recession while appropriate for the erm 1992 crisis was at odds with the facts in mexico in 1994 and east asia in 1997 asian

the politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

sustainability and technical progress a rigorous model connects together the following three basic concepts 1 sustainability meaning the generalized future power of an economy to consume over time 2 green nnp meaning a current measure of national income that subtracts off from gnp not just depreciation of capital but also more generally depletion of environmental assets evaluated at current efficiency prices 3 technological progress meaning a projection onto the future of the so called solow residual a simple general formula is derived some crude calculations suggest a possibly strong effect of the residual which hints that our best present estimates of long term sustainability may be largely driven by predictions of future technological progress

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

how substitutable is natural capital one of the recurring themes in the sustainability literature has been the extent to which a loss of natural capital can be made up for in welfare terms by an increase in other forms of capital this issue was raised early on in the debate on sustainability by pearce and has never really been resolved this paper is an empirical attempt to measure the degree of substitutability between different forms of capital a nested ces production function is used to allow flexibility in the estimated elasticities of substitution also within this specification natural resources and other inputs are combined in different levels of the function thus allowing for different levels of substitutability institutional and economic indicators are also incorporated in the production function estimated results show that the elasticities derived from functions involving land resources were generally around one or greater implying a fairly high degree of substitutability furthermore changes in trade openness and private sector investment have a statistically significant and direct relationship on the efficiency of production and hence on income generation no statistically significant relationship between income and any of the institutional indicators was found

macroeconomic regime switches and speculative attacks this paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated the paper develops a model of an open economy in which monetary policy starts active fiscal policy starts passive and in a particular state of nature monetary policy switches to passive and fiscal policy switches to active the probability of the regime switch is endogenous and changes over time together with the state of the economy the regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate the model predicts that currency composition of public debt affects dynamics of macroeconomic variables furthermore the model is consistent with evidence from recent currency crises in particular small seigniorage revenues

delaying the inevitable interest rate defense and balance of payments crises the classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle in practice however central banks typically defend pegs aggressively by raising short term interest rates this paper analyzes the feasibility and optimality of raising interest rates to delay a potential bop crisis interest rate policy works through two distinct channels by raising demand for domestic interest bearing liquid assets higher interest rates tend to delay the crisis higher interest rates however increase public debt service and imply higher future inflation which tends to bring forward the crisis we show that under certain conditions it is feasible to delay the crisis but raising interest rates beyond a certain point may actually hasten the crisis a similar nonmonotonic relationship emerges between welfare and the increase in interest rates it is thus optimal to engage in some active interest rate defense but only up to a certain point i

super exponential growth expectations and the global financial crisis we construct risk neutral return probability distributions from s p 500 options data over the decade 2003 2013 separable into pre crisis crisis and post crisis regimes the pre crisis period is characterized by increasing realized and especially option implied returns this translates into transient unsustainable price growth that may be identified as a bubble granger tests detect causality running from option implied returns to treasury bill yields in the pre crisis regime with a lag of a few days and the other way round during the post crisis regime with much longer lags 50 200 days this suggests a transition from an abnormal regime preceding the crisis to a new normal post crisis the difference between realized and option implied returns remains roughly constant prior to the crisis but diverges in the post crisis phase which may be interpreted as an increase of the representative investor s risk aversion

informational contagion of bank runs in a third generation crisis model abstract this paper highlights the international spread of bank runs in a third generation model of financial crises through an informational channel banks short term liabilities include loans granted by foreign creditors who have imperfect information about the liquidation costs of banks assets a bank panic in a country induces lenders to downgrade early liquidation yields in other countries and thus to require higher interest rates to enable their banks to roll over their maturing debt those banks become therefore more prone to self fulfilling depositors runs the paper then studies the effect on contagion of increased transparency and bailouts

one sided sustainability tests with amenities and changes in technology trade and population abstract if an economy with multiple consumption goods including environmental amenities uniquely maximises present value with constant discounting it is unsustainable at some time if either of two measures augmented net investment or the change in augmented green net national product are zero or negative then augmented denotes that time is treated as a productive stock which includes in each measure the value of future exogenous changes in technology or terms of trade adjustments are found to make each measure a test for individual sustainability when population grows exogenously the practical and philosophical rationale for testing sustainability in a present value maximising and therefore fully prescribed development path is discussed

collapsing exchange rate regimes in the presence of a parallel market this paper develops a model of an economy where the fixed exchange rate is overvalued and coexists with a parallel market for foreign currency such a situation persists because the parallel marker is used by the central authorities as an instrument to delay policy changes using the haitian experience this paper estimates a rationing parameter of foreign currency in the official market which translates the extent of tolerance of the parallel market the paper also produces estimates of onestep ahead probability of devaluation rationing has been severe and the probability of collapse has reached high levels during the period studied

sovereign default and the euro the introduction of the euro meant that countries with sovereign debt problems could not use monetization and devaluation as a way to prevent default the institutional structures of the euro were also widely thought to prevent a country in difficulties being bailed out by other euro members or having its sovereign debt purchased by the european central bank ecb despite these restrictions there was relatively little discussion about sovereign default in pre economic and monetary union debates among economists and financial markets priced in almost no default risk in the pre crisis years the crisis has seen bailouts and bond purchases by the ecb but there has also been a sovereign default inside the euro and further defaults seem likely the introduction of the euro was intended to bring greater stability by ending devaluations triggered by self fulfilling runs on a currency while this particular scenario can no longer happen this paper discusses mechanisms whereby expectations that a country may leave the euro can lead to this outcome occurring copyright 2013 oxford university press

international overborrowing a decomposition of credit and currency risks summary the severity of the financial crises enveloping the tiger economies of southeast asia in 1997 came as a surprise to many observers this paper uses a simple fisherian model of the overborrowing syndrome to compare the asian crises of 1997 with earlier overborrowing episodes in mexico and chile while important similarities exist the crises in southeast asia have been exacerbated by the unhedged foreign exchange positions of asian banks these open currency positions not only imposed significant additional losses on the banks following devaluation they also magnified the scale of overborrowing during the cycle s initial boom phase failure to limit the exposure of banks to foreign exchange risk therefore increased the magnitude of the boom bust overborrowing cycle both ex ante and ex post the paper highlights the importance of effective regulation and supervision of capital markets with a focus on limiting the speculative currency positions of banks especially those that form the core of the domestic payments system and therefore enjoy a possibly implicit public guarantee improving the institutional infrastructure of financial supervision is the only effective way of mitigating the macroeconomic costs of overborrowing

genuine savings and sustainability genuine savings gs has emerged as the leading economic indicator of sustainable economic development at the country level it derives from the literatures on weak sustainability wealth accounting and national income accounting we discuss the theoretical underpinnings of gs focusing on the relationship between changes in a nation s extended capital stock and the future path of consumption the indicator has entered widespread use propelled by the world bank s publications despite its varying performance as a predictor for future consumption notwithstanding the extensive body of literature reviewed promising future research avenues are identified

determinants and costs of current account reversals under heterogeneity and serial correlation using large panel data sets for analysis of determinants and costs of reversals asks for controls of latent heterogeneity among countries this article performs a bayesian analysis which allows for a parsimonious yet flexible handling of country specific heterogeneity via random coefficients and serially correlated errors consideration of persistence within the employed macroeconomic data is important to gauge the impact of explaining variables suggested by theory correctly bayesian specification tests provide evidence in favour of models incorporating heterogeneity and serial correlation the results suggest that costs of reversals are overestimated when country specific heterogeneity is neglected and stress the importance of external variables in explaining current account reversals results are checked for robustness against the underlying reversal definition

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

monetary valuation in life cycle assessment a review abstract monetary valuation is the practice of converting measures of social and biophysical impacts into monetary units and is used to determine the economic value of non market goods i e goods for which no market exists it is applied in cost benefit analysis to enable the cross comparison between different impacts and or with other economic costs and benefits for this reason monetary valuation has a great potential to be applied also in life cycle assessment lca especially in the weighting phase however several challenges limit its diffusion in the field which resulted in only a few applications so far the authors have performed a review of different monetary valuation methods for use in lca firstly monetary valuation approaches methods and lca applications were identified secondly key features and the strengths and weaknesses of each monetary valuation method were determined finally monetary valuation methods and lca applications were evaluated according to a comprehensive set of criteria ranging from scientific foundation to uncertainty and complexity it was found that observed and revealed preference methods and the abatement cost method have limited applicability in lca whereas the choice experiment method and the budget constraint method are the best options for monetary valuation in lca

time series analysis for financial market meltdowns abstract there appears to be a consensus that the recent instability in global financial markets may be attributable in part to the failure of financial modeling more specifically it is alleged that current risk models have failed to properly assess the risks associated with large adverse stock price behavior in this paper we first discuss the limitations of classical time series models for forecasting financial market meltdowns then we set forth a framework capable of forecasting both extreme events and highly volatile markets based on the empirical evidence presented in this paper our framework offers an improvement over prevailing models for evaluating stock market risk exposure during distressed market periods

asset prices and twin crises abstract emerging market crises have been characterized by two key features i banking crises generally precede currency crises and ii asset prices decline in advance of currency crises this paper argues that asset prices provide a key link between banking and currency crises it is shown that a prospective currency crisis due to an unanticipated increase in the public debt triggers an asset price decline banks exposure to asset prices in turn deteriorates their balance sheets and precipitates a banking crisis under the assumption of government bailout of banks it is shown that the twin crises are self fulfilling and their time line follows i and ii described above the timing of currency crisis is decreasing in the ratio of government s bailout to banks loss of capital

government finance in the wake of currency crises we address three questions i can classical models be reconciled with the fact that many crises are marked by high rates of depreciation and small increases in seignorage revenue ii what are the implications of different financing methods for post crisis rates of inflation and depreciation iii how do governments pay for the fiscal costs associated with currency crises to study these questions we use a general equilibrium model in which prospective government deficits trigger a currency crisis we then use our model in conjunction with fiscal data to interpret government financing in the wake of three recent currency crises korea 1997 mexico 1994 and turkey 2001

the welfare economic theory of green national accounts this paper takes a critical look at the literature on green national accounts the problem studied is to find a linear index of economic variables that responds to perturbations in the same direction as social well being the thesis of a large literature that net national product which is a flow is that index in closed economies is shown in some interpretations to be simply false and in others to suffer from deep estimation problems it is argued that capital depreciation using shadow prices should certainly be included in national accounts but that the right welfare index is a comprehensive measure of wealth defined as the shadow value of an economy s stock of all capital assets it is shown that comprehensive wealth is usable as a criterion for policy evaluation as well as for determining sustainable economic development

banks and macroeconomic disturbances under predetermined exchange rates abstract as the recent mexican crisis vividly illustrates latin american countries often go through boom bust cycles caused by both domestic policies and external shocks such cycles are typically magnified by weak banking systems which intermediate large capital inflows this paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks in particular we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit we also analyze the countercyclical use of reserve requirements econometric evidence for chile and mexico supports the main predictions of the model

comprehensive wealth and future consumption accounting for population growth economic theory predicts that the current change in national wealth broadly defined to include natural and human capital as well as produced capital genuine savings determines whether the present value of future changes in consumption is positive or negative theoretical research has focused on the effects of population growth on this relation but no rigorous empirical investigation has been conducted panel data for 64 developing countries during 1970 82 are used to test the effects of three adjustments for population growth including one that controls for omitted wealth although the adjustments have substantial impacts on estimates of genuine savings they lead to only limited improvements in the relation between those estimates and subsequent consumption changes even without adjustments for population growth adjustments for natural resource depletion improve the relation significantly policymakers and economists can interpret published estimates of genuine savings as signals of future consumption paths if and only if the estimates include adjustments for natural resource depletion but better estimates of capital stocks are needed before it can be confidently said that adjustments for population growth significantly improve the accuracy of those signals

towards a more inclusive and precautionary indicator of global sustainability abstract we construct a hybrid economic indicator of the sustainability of global well being which is more inclusive than existing indicators and incorporates an environmentally pessimistic physical constraint on global warming our methodology extends the world bank s adjusted net saving ans indicator to include the cost of population growth the benefit of technical progress and a much higher precautionary cost of current co 2 emissions future warming damage is so highly unknowable that valuing emissions directly is rather arbitrary so we use a novel inductive approach we modify damage and climate parameters in the deterministic dice climate economy model so it becomes economically optimal to control emissions in a way likely to limit warming to an agreed target here 2 c if future emissions are optimally controlled our ans then suggests that current global well being is sustainable but if emissions remain uncontrolled our base case ans is negative now and our corresponding modified dice model has an unsustained development path with well being peaking in 2065 current ans on an uncontrolled path may thus be a useful heuristic indicator of future unsustainability our inductive method might allow ans to include other very hard to value environmental threats to global sustainability like biodiversity loss and nitrogen pollution

gold monetization and gold discipline gold and its price have emerged as frequent topics of both academic and government debate 2 public attention focused on the gold market since gold s price began fluctuating violently in 1980 and 1981 has turned to gold as a possible means of removing some discretion inherent in the current fiat money system since lack of adherence to monetary rules can lead to problems of dynamic policy inconsistency academic economists have begun seriously to reconsider monetary standards based either on gold or on some other commodity as politically feasible methods of establishing rules 3

explaining the duration of exchange rate pegs abstract this paper is an empirical investigation of the duration of exchange rate pegs in 16 latin american countries and jamaica we identify factors that influence peg duration using logit analysis the real exchange rate and the level of international liquidity are significant determinants of the monthly likelihood of devaluation structural variables such as the openness of an economy and its geographical trade concentration and political variables such as changes in the executive also significantly affect the likelihood of a devaluation there is some evidence that the likelihood of a devaluation first rises and subsequently declines during the first year of a peg

reserve accumulation and financial crises from individual protection to systemic risk abstract this paper provides a new perspective on the relationship between countries international reserve holdings and financial crises while the local view holds that reserves may prevent domestic crises it overlooks that the accumulation of reserves relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre which is transmitted globally according to this global view reserve accumulation might destabilize the international financial system since the crisis affects all countries alike the accumulation of reserves imposes a negative externality on non accumulating countries we integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality the consideration of systemic risk lowers the demand for reserves moreover if a supranational authority determines the optimal level of reserves it internalizes the negative externality and accumulates fewer reserves a macroprudential tax on reserve hoardings might implement the socially optimal solution our calibration analysis shows that these considerations are economically significant they lower the optimal amount of reserves in the benchmark case by 45

the mexican peso crisis sudden death or death foretold abstract we argue that allowing for the possibility of a self fulfilling panic helps to understand several features of the recent mexican crisis self fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short term dollar debt we present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt but not for others lastly we argue that the imperfect credibility of mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994 our model formalizes the reasons why this is so

dicer a tool for analyzing climate policies abstract modeling the economy and the planet s climate involves a great number of variables and parameters some of them very uncertain given the current stage of knowledge regarding technology and the science of climate the dicer model or dice regional is a recently constructed integrated assessment model iam based on the structure of the dice family of models which was developed as an instrument for the analysis of uncertainties in climate policy this paper aims to describe the basic version of dicer on which future developments addressing uncertainty in climate policy analysis will be based our results suggest a few interesting conclusions when compared to other iams i under a plausible set of assumptions and parameters dicer indicates that an optimal global climate policy would imply higher costs of climate change in the short run but a faster and more expensive decarbonization process in all regions resulting in a faster stabilization of the climate ii lower peak temperatures that occur earlier in time iii considerable sensitivity of results to key parameters such as climate sensitivity but lower than expected sensitivity to the social discount rate

the importance of manufacturing in economic development has this changed summary manufacturing has traditionally played a key role in the economic development of developing countries in recent years it has been argued that the importance of manufacturing has diminished over the last 20 25 years resulting in premature deindustrialization or non industrialization in developing countries this study explores whether the low levels of industrialization in developing countries are attributable to long term changes in opportunities available to the sector around the globe the study s findings show that the manufacturing sector s value added and employment contribution to world gdp and employment respectively have not changed significantly since 1970 the declining manufacturing value added and manufacturing employment share in many developing countries has not been caused by changes in the sector s development potential but has instead resulted from a shift of manufacturing activities to a relatively small number of populous countries thus resulting in a concentration of manufacturing activities in specific developing countries as was the case in the last millennium industrialization has continued to play a key role in the growth of developing countries which have sustained rapid and long term growth for the last 25 years achieving economic development by following the path of industrialization will likely remain important for low income countries because they are able to take advantage of their backwardness relative to those countries which have already experienced rapid industrialization with a disproportionately large share of manufacturing activities and could soon enter a mature stage of industrialization

output costs currency crises and interest rate defence of a peg central banks typically raise short term interest rates to defend currency pegs higher interest rates however often lead to a credit crunch and an output contraction we model this trade off in an optimising first generation model in which the crisis may be delayed but is ultimately inevitable we show that higher interest rates may delay the crisis but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect the optimal interest rate defence involves setting high interest rates relative to the no defence case both before and at the moment of the crisis

buying greenhouse insurance the economic costs of carbon dioxide emission limits in recent years a growing concern that the increasing accumulation of greenhouse gases will lead to undesirable changes in global climate has resulted in a number of proposals both in the united states and internationally to set physical targets for reducing greenhouse gas emissions but what will these proposals cost based on the authors earlier ground breaking work buying greenhouse insurance outlines a way to think about greenhouse effect decisions under uncertainty it describes an insightful model for determining the economic costs of limiting carbon dioxide emissions produced by burning fossil fuels and provides a solid analytical base for rethinking public policy on the farreaching issue of global warming manne and richels present region by region estimates of the costs that would underlie an international agreement using a computer model known as global 2100 they analyze the economic impacts of limiting c02 emissions under alternative supply and conservation scenarios the results clearly indicate that a reduction in emissions is not the sole policy response to potential climate change following a summary of the greenhouse effect its likely causes and possible consequences manne and richels take up issues that concern the public at large they provide an overview of global 2100 look at how the u s energy sector is likely to evolve under businessas usual conditions and under carbon constraints and describe the concept of greenhouse insurance they consider possible global agreements including an estimate of benefits that might result from trading in an international market in emission rights they conclude with a technical description directed toward modeling specialists alan manne is professor of operations research at stanford university richard richels is director of the energy analysis and planning department at the electric power research institute

collapsing exchange rate regimes abstract the paper develops models of speculative runs and collapse of fixed exchange rate regimes which result from credit policies that are ultimately inconsistent with a fixed exchange rate while no substantially new results are offered the formulation itself is of interest in highlighting the important ideas that have emerged in this area we modify the flood garber model to make the analysis more comparable with the deterministic case specifically we assume that the money growth process is specified in terms of growth rates rather than absolute increments and as a uniform rather than exponential distribution the modified analysis lends itself to a simple geometric interpretation of the krugman and flood garber models highlighting the important difference between the deterministic and stochastic models in the former the speculative attack run is concentrated in the latter the transition to floating is diffuse reserve losses exceed increases in domestic credit because of a rising probability of transition and reserve depletion accelerates on the way to the regime change

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

the economic effects of climate change greenhouse gas emissions are fundamental both to the world s energy system and to its food production the production of co2 the predominant gas implicated in climate change is intrinsic to fossil fuel combustion specifically thermal energy is generated by breaking the chemical bonds in the carbohydrates oil coal and natural gas and oxidizing the components to co2 and h2o one cannot have cheap energy without carbon dioxide emissions similarly methane ch4 emissions an important greenhouse gas in its own right are necessary to prevent the build up of hydrogen in anaerobic digestion and decomposition one cannot have beef mutton dairy or rice without methane emissions climate change is the mother of all externalities larger more complex and more uncertain than any other environmental problem the sources of greenhouse gas emissions are more diffuse than any other environmental problem every company every farm every household emits some greenhouse gases the effects are similarly pervasive weather affects agriculture energy use health and many aspects of nature which in turn affects everything and everyone the causes and consequences of climate change are very diverse and those in low income countries who contribute least to climate change are most vulnerable to its effects climate change is also a long term problem some greenhouse gases have an atmospheric life time measured in tens of thousands of years the quantities of emissions involved are enormous in 2000 carbon dioxide emissions alone and excluding land use change were 24 billion metric tons of carbon dioxide tco2

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

speculative attack and the external constraint in a maximizing model of the balance of payments balance of payments models of speculative attack differ from non renewable resource models in that foreign exchange reserves may be borrowed from abroad this paper shows that in an idealized world where all private income is subject to lump sum taxation central bank reserves can become infinitely negative without violating the government s intertemporal budget constraint none the less a growth rate of domestic credit exceeding the world interest rate if maintained indefinitely leads to violation of the constraint in the paper s model given an assumed limit to official external borrowing the paper next analyses inevitable transitions between fixed and floating exchange rate regimes when individual preferences are explicitly specified in a discrete time deterministic model the collapse of a fixed rate may be characterized by two successive speculative attacks

currency crises with the threat of an interest rate defence while virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it this is seldom modelled explicitly we add the threat of an interest rate defence to the global game model of morris and shin american economic review 88 1998 with an endogenous defence actions of speculators may become strategic substitutes instead of the usual complements nevertheless our generalised model remains tractable and has a unique threshold equilibrium it provides additional insights for instance the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong

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

the international monetary system forty years after bretton woods review essay in may 1984 a distinguished group of central bankers and economists gathered for a conference at bretton woods to consider the evolution of the world monetary system that was born at that location forty years earlier this volume contains nine essays with accompanying discussion on issues of performance and reform of current international monetary arrangements these papers deal with problems facing the industrialized and the lessdeveloped countries and assess the institutions that have been set up to accommodate these problems the major accomplishments of the original bretton woods conference were of course the establishment of the system of payments based on fixed exchange rates and the organization of the world bank and the international monetary fund as the order developed in the late 40 s and early 50 s each central bank saw it as its duty to intervene in foreign exchange markets to ensure an essentially fixed parity of their currency with respect to the dollar the role of the u s was to guarantee the dollar price of gold at 35 an ounce the system has been called a dollar standard because the dollar played the role of a reserve currency one of the paradoxes of the system as robert triffin pointed out in the early 60 s is that in order to produce a continuing and rapid enough expansion of world reserves the u s had to run balance of payments deficits yet continued deficits by the u s threatened the convertibility of the dollar into gold as it happened the system of fixed parities broke down in the early 70 s not because of a lack of reserves but because a glut of dollars made the bretton woods dollar exchange rates untenable the system eventually evolved into one in which most of the industrialized countries currencies more or less are determined by the market while the currencies of most second and third world countries are pegged to a major currency the floating period has been

does the choice of performance measure influence the evaluation of hedge funds abstract the sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund hedge fund returns differ significantly from a normal distribution for this reason other performance measures for hedge fund returns have been proposed in both the academic and practice oriented literature in conducting an empirical study based on return data of 2763 hedge funds we compare the sharpe ratio with 12 other performance measures despite significant deviations of hedge fund returns from a normal distribution our comparison of the sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds

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

beyond sharpe ratio optimal asset allocation using different performance ratios abstract as the assumption of normality in return distributions is relaxed classic sharpe ratio and its descendants become questionable tools for constructing optimal portfolios in order to overcome the problem asymmetrical parameter dependent performance ratios have been recently proposed in the literature the aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios a multi period portfolio optimization up covering a fixed horizon is set up at first bootstrapping of asset return distributions is assessed to recover all ratios calculations at second optimal rebalanced weights are achieved at third optimal final wealth is simulated for each ratios eventually we make a robustness test on the best performance ratios empirical simulations confirm the weakness in forecasting of sharpe ratio whereas asymmetrical parameter dependent ratios such as the generalized rachev sortino satchell and farinelli tibiletti ratios show satisfactorily robustness

the lifetime of a unilateral target zone some extended results abstract in dumas and svensson journal of international economics 36 1994 467 the lifetime of a krugman quarterly journal of economics 106 1991 669 682 type target zone model is found to be extremely long this paper shows that the lifetime of the identical target zone regime can be much lower when real disturbances occur in particular the mean lifetime is found to be very low when real disturbances occur and the real exchange rate elasticity of the demand for domestic goods is very low it is also shown that allowing for monetary disturbances to have real effects has very little effect on the lifetime the results indicate the conditions under which real disturbances might trigger currency crises

bank firm relationships and contagious banking crises this paper argues that in an open economy a banking system with close bank firm relationships may be easily subject to contagious banking crises because it is difficult to distinguish between crony capitalism and good main bank relationships 1 show that if international investors cannot distinguish the bank type the distinction between crony capitalism and good main bank relationships becomes very fuzzy in particular the model can explain sequences of bank defaults within a country even if the insolvent banks are very few ex ante as well as sequences of banking crises among countries that are equally rated by international investors but indeed differ in the ex ante solvency of their banking system

on sustainability and social welfare abstract this paper proposes to define sustainability in terms of leaving it possible for future generations to sustain certain defined targets it is shown that variants of genuine savings and the ecological footprint can then serve as indicators of sustainability the link between sustainability and intergenerational welfare is examined and it is shown how to incorporate indicators of sustainability into a social welfare measure including risk in the analysis

a regional dynamic general equilibrium model of alternative climate change strategies outcomes and noncooperative equilibria this study finds that cooperative policies show much higher levels of emissions reductions than do noncooperative strategies that there are substantial differences in the levels of controls in both the cooperative and the noncooperative policies among different countries and that high income countries may be the major losers from cooperation jel h41 q4 q2 q20

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis

returns to investment in education a global update the author updates compilations of rate of return estimates to investment in education published since 1985 and discusses methodological issues surrounding those estimates some key patterns among the three main levels of education primary education continues to exhibit the highest social profitability in all world regions private returns are considerably higher than social returns because of the public subsidization of education the degree of public subsidy increases with the level of education which is regressive social and private returns at all levels generally decline by the level of a country s per capita income overall the returns to female education are higher than those to male education but at individual levels of education the pattern is more mixed the returns to the academic secondary school track are higher than the vocational track since unit cost of vocational education is much higher and the returns for those who work in the private competitive sector of the economy are higher than in the public noncompetitive sector and the returns in the self employment unregulated sector of the economy are higher than in the dependent employment sector controversies in the literature are discussed in the light of the new evidence the undisputable and universal positive correlation between education and earnings can be interpreted in many ways the causation issue on whether education really affects earnings can be answered only with experimental data generated by randomly exposing different people to various amounts of education given the fact that moral and pragmatic considerations prevent the generation of such pure data researchers have to make do with indirect inferences or natural experiments some have been attempted the author looks at the research on overeducation or surplus schooling the conclusions reinforce earlier patterns they confirm that primary education continues to be the number one investment priority in developing countries they also show that educating females is marginally more profitable than educating males that the academic secondary school curriculum is a better investment than the technical vocational tract and that the returns to education obey the same rules as investment in conventional capital that is they decline as investment is expanded