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

to float or to fix evidence on the impact of exchange rate regimes on growth we study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post bretton woods period using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables in contrast with previous studies we find that for developing countries less flexible exchange rate regimes are associated with slower growth as well as with greater output volatility for industrial countries regimes do not appear to have any significant impact on growth the results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature

what drives deregulation economics and politics of the relaxation of bank branching restrictions this paper investigates private interest public interest and political institutional theories of regulatory change to analyze state level deregulation of bank branching restrictions using a hazard model we find that interest group factors related to the relative strength of potential winners large banks and small bank dependent firms and losers small banks and the rival insurance firms can explain the timing of branching deregulation across states during the last quarter century the same factors also explain congressional voting on interstate branching deregulation while we find some support for each theory the private interest approach provides the most compelling overall explanation of our results

induced innovation evolutionary theory and path dependence sources of technical change the i960s to the i98os were very productive of new theory and empirical insights into the sources of technical change in the i96os and i970s major attention focused on the implications of changes in demand and relative factor prices on the rate and direction of technical change in the late i 970s and early i980s attention shifted to evolutionary models inspired by a revival of interest in schumpeter s insights into the process of economic development since the early i98os these have been complemented by the development of historically grounded path dependent models of technical change each of these models has contributed substantial insight into the sources of technical change this paper was motivated by a perception that each of the three research agendas is approaching a dead end the three models induced evolutionary and path dependent represent elements of a more general theory that has not yet been invented ruttan 1996 a in a closing comment i suggest some steps toward the development of a more general theory of the sources of technical change

german dominance in the ems evidence from interest rates abstract the paper presents an empirical analysis of german dominance and asymmetries in the ems based on a dynamic system of equations explaining national money market interest rates the hypothesis of strict german dominance of the ems is rejected however there are some noticeable asymmetries in the ems germany is a relatively strong player and has been the least dependent country in the early phase of the system since 1983 german independence has diminished in contrast france throughout and italy in the early phase of the ems have been relatively weak players in the system

the dynamics of international differentiation a multi country evolutionary model the paper presents some admittedly preliminary results on evolutionary modeling of open economies interactions the dynamics is microfounded in a multiplicity of boundedly rational agents who imperfectly learn how to innovate in environments characterized by notionally unlimited opportunities micro discoveries is shown can generate persistent system level effects despite the absence in the model of any institutional specificity of individual countries processes of innovative exploration and imitation yield international divergence less often convergence catching up and falling bebind

inequality and violent crime abstract we investigate the robustness and causality of the link between income inequality and violent crime across countries first we study the correlation between the gini index and homicide and robbery rates within and between countries second we examine the partial correlation by considering other crime determinants third we control for the endogeneity of inequality by isolating its exogenous impact on these crime rates fourth we control for measurement error in crime rates by modeling it as both unobserved country effects and random noise finally we examine the robustness of this partial correlation to alternative measures of inequality the panel data consist of nonoverlapping 5 year averages for 39 countries during 1965 95 for homicides and 37 countries during 1970 94 for robberies crime rates and inequality are positively correlated within countries and particularly between countries and this correlation reflects causation from inequality to crime rates even after controlling for ot

endogenous trade policy through majority voting an empirical investigation abstract the median voter approach to trade policy determination within a heckscher ohlin framework as in mayer am econ rev 74 5 1984 970 predicts that an increase in inequality holding constant the economy s overall relative endowments raises trade barriers in capital abundant economies and lowers them in capital scarce economies we find support for this prediction using cross country data on inequality capital abundance and diverse measures of protection we perform certain robustness checks that include controlling for the effects of political rights and schooling as well as using alternative datasets on factor endowments

exchange rate behaviour under the ems regime was there any systematic change abstract most empirical studies fail to detect any systematic effects of the ems regime on the economic performance of member countries this reveals the difficulty of constructing controlled experiments which can distinguish what is due to the ems from that due to common external pressures we argue that the crucial step is to examine the exchange rates distribution since no performance improvements will appear if exchange rate behaviour does not change within the ems we find that there are changes in the third and fourth moments which imply that ems currencies have become more fragile and susceptible to shocks particularly negative shocks relative to non ems currencies

empirical studies of financial innovation lots of talk little action this paper reviews the extant empirical studies of financial innovation adopting broad criteria we could find only somewhat more than two dozen studies and since some financial innovations are examined by more than one study they cover only seventeen phenomena especially striking is the fact that only two studies offer tests of the broad hypotheses concerning the environmental conditions spurring financial innovation e g regulation taxes unstable macroeconomic conditions and ripe technologies that have been advanced in descriptive articles we offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare among our suggested culprits is an absence of accessible data we urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

capital controls and balance of payments crises abstract the theory of balance of payments crises shows that under perfect foresight a system of fixed exchange rate is not sustainable in the presence of diverging economic policies in this paper it is shown how and why capital controls succeed in maintaining the principle of a fixed but adjustable parity both cases of a devaluation and a revaluation are considered and a condition for a parity change to be credible is presented

the determinants of technology adoption the case of the banking firm using data on the adoption of automatic teller machines by firms in the banking industry this study examines the relationship between the decision to adopt new technology and its determinants since banking firms differ considerably in terms of the competitive environments in which they operate focusing on this one innovation in this industry allows a stronger test of the relationship between market structure and the adoption of new technology than has been previously conducted using a failure time estimation procedure we find that larger banks and banks operating in more concentrated local banking markets register a higher conditional probability of adopting this new technology all else equal we also find that other results are consistent with the underlying model and that the bank s regulatory environment shapes its adoption decision in plausible ways

what accounts for the decline in crime in this article we analyze recent trends in aggregate property crime rates in the united states we propose a dynamic equilibrium model that guides our quantitative investigation of the major determinants of observed patterns of crime our main findings can be summarized as follows first the model is capable of reproducing the drop in crime between 1980 and 1996 second the most important factors that account for the observed decline in property crime are the higher apprehension probability the stronger economy and the aging of the population third the effect of unemployment on crime is negligible fourth the increased inequality prevented an even larger decline in crime overall our analysis can account for the behavior of the time series of property crime rates over the past quarter century

international commodity prices growth and the outbreak of civil war in sub saharan africa to learn more about the effect of economic conditions on civil war we examine whether sub saharan civil wars are more likely to start following downturns in the international price of countries main export commodities the data show a robust effect of commodity price downturns on the outbreak of civil wars we also find that sub saharan countries are more likely to see civil wars following economic downturns in their main oecd export destinations

credibility and disinflation in the european monetary system analysis of interest differentials in the european monetary system has suggested a widespread lack of credibility of the exchange rate mechanism in the sense that in most countries the implicit expected rate of devaluation was significant and not far short of inflation differentials vis a vis the deutschmark we present and test a model in which prices reflect expectations of exchange rate behaviour the results provide mixed evidence that price setting in countries which participated in the erm was influenced by the exchange rate discipline

institutional markets financial marketing and financial innovation firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations because of these agency theoretic relations institu tional behavior in financial markets is not a simple reflection of the preference structures of individuals institutional preferences give rise to a demand for new financial instru ments and innovations even when the returns on these instruments are spanned in the sense of complete pricing the innovations can be thought of as solving moral hazard problems an agency theoretic example serves to illustrate the demand supply and financial marketing of stripped securities in short institutions matter the past two decades have witnessed an explosion of financial innovations the changes are too varied and diffuse to permit an easy taxonomy but broadly they seem to fall into two classes first there are the new securities and their markets beginning with puts and calls we have moved on to euromarkets mortgage pass throughs and cmo s strips straps and swaps putable converti bles primes and scores and s p futures and all of the other instruments that inhibit the financial zoo second there are the dynamic trading strategies that make heavy use of the new instruments basket and program trading the asset pricing theories that now characterize different types of money management and the various incarnations of portfolio insurance have changed financial decision making as dramatically as the available array of instruments has changed along with these changes has come an enormous increase in the demand for the services of financial economists we are called upon not only to value the new instruments and the new strategies but to design them as well like engineers

traders cops and robbers abstract we propose a simple model of trade outside the law preyed on by robbers and possibly protected by private cops we establish the conditions for trade collapse secure trade and insecure trade endogenous predation and enforcement can explain both puzzling failures of commonly observed state policies against illegal trade and puzzlingly large trade responses to liberalization in licit goods

incentive plans for productive efficiency innovation and learning in many industries where production or sales is delegated to a number of subunits the central management faces the classical problem how to induce continuous efficiency improvements organizational learning and transfer of knowledge with a minimum of control exercised this paper draws on recent results regarding regulatory frameworks to construct simple yet powerful incentive schemes for decentralized production under asymmetric information the theoretical foundation is based on principal agent theory cf laffont and tirole econometrica 56 1986 614 641 and extensions to production theory by bogetoft management science 40 1994 959 968 the proposed incentive system is operational and makes use of available information to provide positive incentives for participation in the dynamic development of the entire organization

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

the intercountry agricultural production function another view factor productivity in agriculture is estimated from repeated observations on a sample of fifty eight countries under the assumption that all countries have access to the same technology technology is viewed as a collection of techniques each technique is represented by a production function the choice of the implemented techniques is determined by the state variables which represent the physical and economic environment within which the firms operate the statistical model is that of varying coefficients and it is estimated by a method which utilizes principal components and multiple comparisons

delegation in a general equilibrium model of customs unions abstract a difference in the objectives of members of a customs union may be a unifying rather than a divisive force if countries outside the union behave strategically one union member may want to delegate to its partner the ability to set the common external tariff we demonstrate these results in the context of a pure exchange general equilibrium trade model we show that if tariffs are strategic substitutes the union country which is relatively less well endowed in the exported good may be willing to delegate to its partner which behaves more aggressively in setting the union s policy the delegation decision is reversed if tariffs are strategic complements the model extends the standard results on the appropriate level of the union policy by adding another dimension that of the optimal decision making agent

strict dollarization and economic performance an empirical investigation in this paper we analyze the macroeconomic record of strictly dollarized economies in particular we investigate whether dollarized countries have historically exhibited faster growth and lower volatility than countries with a domestic currency we analyze this issue by using a treatment regression analysis that estimates jointly the probability of being a dollarized country and outcome equations our analysis indicates that the probability of being a dollarized country depends on regional geographical political and structural variables our results also suggest that gdp per capita growth has not been statistically different in dollarized and in non dollarized countries we also find that volatility has been significantly higher in dollarized than in non dollarized economies these results are robust to the estimation technique and to the sample used

development crime and punishment accounting for the international differences in crime rates abstract this paper analyzes the determinants of the heterogeneity in crime rates across countries focusing on reporting rates and development the behavior of the reporting rate is studied by comparing data from victimization surveys to official records reporting rates are strongly correlated with development richer countries report a higher fraction of crimes the positive relation between development and crime found in previous studies is shown to result from this correlation once the presence of the reporting error is accounted for development does not affect crime reductions in inequality and increases in growth and education are associated with reductions in crime rates

crime and victimization an economic perspective the recent upward trend in crime rates of developing countries has spurred widespread public concern about personal and proprietary insecurity in some countries the questions of crime violence and victimization are attracting more attention from academics and policy makers than traditional economic problems the objective of this paper is to examine the main issues related to crime and victimization from an economic perspective for this purpose the paper combines a review of the main results established in the literature with original research on the causes of crime and the risk factors of victimization the first section provides a review of the estimates of the costs of crime the main theoretical and empirical research on its causes and the relative advantages of official and survey data on crime the second section presents original work on the main causes of violent crime from a cross country perspective the empirical work starts with a basic model of the economic determinants of homicide and robbery rates in turn this empirical model is extended along five dimensions 1 deterrence factors 2 illegal drug related activities 3 demographic issues 4 income and ethnic polarization and 5 social capital the third section reviews recent case studies of latin american cities that rely on survey data to assess the empirical determinants of the probability of victimization these studies focus on three types of risk factors 1 individual characteristics 2 household characteristics and 3 community characteristics the main conclusions from the previous sections are summarized in section four

r d appropriability opportunity and market structure new evidence on some schumpeterian hypotheses one of the largest bodies of literature in the field of industrial organization is devoted to the interpretation and testing of several hypotheses advanced by joseph schumpeter 1950 concerning innovation and industrial market structure one set of hypotheses focuses on the role of firm size as a determinant of r d spending and the rate of technological advance another set focuses on the effect of market concentration on r d and technological advance in this paper we reexamine the latter set of hypotheses at the industry level using new data on r d appropriability and technological opportunity collected by levin et al 1984 in a survey of r d executives in 130 industries

exchange rate regime durability and performance in developing versus advanced economies abstract drawing on new data and advances in exchange rate regimes classification we find that countries appear to benefit by having increasingly flexible exchange rate systems as they become richer and more financially developed for developing countries with little exposure to international capital markets pegs are notable for their durability and relatively low inflation in contrast for advanced economies floats are distinctly more durable and also appear to be associated with higher growth for emerging markets our results parallel the baxter and stockman classic exchange regime neutrality result though pegs are the least durable and expose countries to higher risk of crisis

crime and social interactions the high variance of crime rates across time and space is one of the oldest puzzles in the social sciences this variance appears too high to be explained by changes in the exogenous costs and benefits of crime we present a model where social interactions create enough covariance across individuals to explain the high cross city variance of crime rates this model provides an index of social interactions which suggests that the amount of social interactions is highest in petty crimes moderate in more serious crimes and almost negligible in murder and rape

technological change in large u s commercial banks this article examines technological change its relationship to firm size and its impact on the efficient scale of output and product mix for large u s commercial banks the results suggest that technological change lowered real costs by about one percent per year increased the cost minimizing scale of outputs and affected product mix the authors do not find support for the galbraith schumpeter hypothesis this suggests that the largest banks cannot use innovation alone to outpace smaller banks the major implications are that public policies allowing freer banking combinations do not necessarily run counter to the public interest copyright 1991 by university of chicago press

seigniorage and the case for national money in countries with high rates of inflation there is typically movement away from the use of the local currency the paper analyzes the costs and benefits of using a local currency with emphasis on the seigniorage foregone by using a foreign money even if it should be desirable for a country to fix its exchange rate it still loses seigniorage if it does not use its own money the case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply alternative methods of imposing discipline are discussed estimates of the amount of seigniorage raised by different governments are presented seigniorage amounts in some cases to about 10 percent of government revenue estimates are also presented of both the annual flow and one time stock costs of giving up use of domestic currencies and instead using the dollar the flow cost is typically about 1 percent of gnp and the stock cost is around 10 percent of gnp

credibility and exchange rate management in developing countries abstract the paper discusses the role of credibility factors in the conduct of exchange rate policy in developing countries the analysis is based on a simple framework in which policymakers are concerned about inflation and external competitiveness price setters in the nontradable sector of the economy engage in a strategic game against the authorities the model generates a devaluation bias which undermines the credibility of a fixed exchange rate the role of reputational factors signaling considerations and joining a currency union as possible solutions to this bias is examined

does globalisation affect crime theory and evidence globalization skeptics argue that trade liberalization has high social costs including an increase in expropriative behavior such as civil conflict coercion of labor and crime we show that a theoretical relationship between trade and expropriation exists but the sign differs for developed and developing economies we verify this empirically using data on crime rates specifically we find trade liberalization as measured by both higher openness and lower import duty rates tends to increase burglaries and theft in very labor abundant countries for other countries however we find that trade liberalization has either a small negative effect on crime or no effect depending on the country s capital abundance

anarchy and autarky endogenous predation as a barrier to trade this article presents a general equilibrium two country ricardian trade model with endogenous transactions costs that arise from individual utility maximizing allocation of labor to production and piracy in the absence of institutions for risk sharing and coordination of defense autarky obtains over most of the parameter space when both trade and predation are supported in equilibrium terms of trade effects can make security immiserizing in that case paradoxically predation creates trade

banking scope and financial innovation we explore the implications of financial system design for financial innovation we begin with assumptions about the investment opportunities of firms their observable attributes and the roles of commercial banks investment banks and the financial market we examine the borrower s choice between bank and financial market funding the commercial bank s choice of monitoring capacity and the investment bank s choice of whether to invest in financial innovation our main result is that financial innovation in a universal banking system is stochastically lower than innovation in a financial system in which commercial and investment banks are functionally separated article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the panzar rosse revenue test and market power in banking abstract the panzar rosse h statistic is a commonly used measure of market power in banking it is widely believed that h 0 is inconsistent with significant market power this study rigorously disproves that perception instead the possibility of h 0 under conditions of substantial market power turns out robust to the timing of banks actions relative costs choice of strategic variable degree of product differentiation strategy static or dynamic and degree of heterogeneity in banks conduct collusive versus fringe and hence may be common in practice

inflation targeting in latin america toward a monetary union this paper examines how monetary policy decisions in brazil regarding short term interest rates have affected the term structure of interest rates we apply an event study methodology in two distinct periods between january 2000 and august 2003 right after the implementation of the inflation targeting in brazil and between september 2003 and july 2008 the main results are 1 the surprise effects have decreased 2 the explanation power has increased in the second period indicating enhancement of monetary policy 3 market participants adjust their expectations with greater advance 4 the surprise effects of decisions on short term rates on the term structure of interest rates are now close to those found in the usa and germany but higher to those found in the uk and italy therefore the results indicate that fixed income market expectations are better adjusted to the central bank anti inflationary policy

competition and innovation evidence from financial services abstract this paper presents new evidence on the relationship between competition and innovation by extending previous literature from manufacturing to financial services we introduce a new measure of overall innovation by estimating and enveloping annual minimum cost frontiers to create a global frontier the distance to the global frontier constitutes each bank s technology gap which decreases if the bank manages to innovate our innovation measure enables us to derive and estimate the model of aghion et al 2005b at the firm level for the us banking industry based on individual bank call report data for the period 1984 2004 consistent with theoretical and empirical work by aghion et al we find evidence of an inverted u relationship between competition and innovation that is robust over several different specifications further evidence on major structural changes in the us banking industry indicates that banks moved beyond their optimal innovation level and that interstate banking deregulation resulted in lower bank innovation policy implications to financial reform and prudential regulation are discussed also

on the political economy of income redistribution and crime this article analyzes a general equilibrium model in which agents choose to specialize in either legitimate or criminal activities expenditures on police to apprehend criminals as well as income redistribution are determined endogenously through majority voting we investigate how crime redistribution and police expenditures depend on characteristics of the underlying distribution of income earning abilities and on the apprehension technology our model accounts for the positive correlation between inequality and crime the positive correlation between expenditures on police and redistribution and the lack of correlation between crime and redistribution observed in u s data

loss of monetary discretion in a simple dynamic policy game abstract we analyze a simple policy game featuring monetary credibility problems and argue that loss of monetary discretion is not advantageous two elements form the basis of our analysis firstly we endogenize the source of credibility problems and secondly we consider a dynamic framework where credibility problems are not time invariant by doing this we are able to demonstrate that credibility problems are temporary and in steady state the government has removed these through sound policies a binding policy rule will only serve as an obstacle towards this steady state

the limits of independence and the policy of the ecb it is argued that the european central bank s independence is not as secure as it seems and that as a result it has appreciable institutional incentives to protect and enhance its position it follows that its behaviour should not be understood as being solely determined by the pursuit of price stability one consequence is that certain points on which it has been criticised on the basis that its approach makes for ineffective monetary policy might be better understood as often effective attempts to protect its position another is that making a central bank or any other institution completely independent may be much harder than it seems and failed attempts which come close are not necessarily to be preferred even by the advocates of independence to less ambitious designs

does the exchange rate regime matter for real shocks evidence from windstorms and earthquakes abstract does the choice of exchange rate regime affect an economy s adjustment to real shocks exploiting the unpredictability and economic exogeniety of windstorms hurricanes and typhoons and earthquakes this paper assesses the often contrasting answers found in the theoretical literature there is robust evidence that exchange rate flexibility helps an economy better adjust to real shocks and consistent with the channels emphasized in the classic literature on exchange rates and shocks differences in the behavior of the export sector help explain the different reactions between the two regimes

inflationary finance under discrepion and rules inflationary finance involves first the tax on cash balances from expected inflation and second a capital levy from unexpected inflation from the standpoint of minimizing distortions these capital levies are attractive ex post to the policymaker in a full equilibrium two conditions hold 1 the monetary authority optimizes subject to people s expectations mechanisms and 2 people form expectations rationally given their knowledge of the policymaker s objectives the outcomes under discretionary policy are contrasted with those generated under rules in a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices under an enforced rule it becomes possible to make some guarantees hence the links between monetary actions and inflationary expectations can be internalized there is a distinction between fully contingent rules and rules of simple form a simple rule allows the internalization of some connections between policy act ion and inflationary expectations but discretion permits some desirable flexibility of monetary growth this abstract was borrowed from another version of this item

competition and growth with step by step innovation an example this paper develops a simple example to analyse the relationship between product market competition and growth in a model with step by step innovations where laggards can never leapfrog the current industry leaders but instead must first catch up with the leaders before battling for technological leadership in the future unlike in existing schumpeterian models of growth more intense product market competition and or imitations may be growth enhancing

international trade and unemployment theory and cross national evidence abstract we present a model of trade and search induced unemployment where trade results from heckscher ohlin h o and or ricardian comparative advantage using cross country data on trade policy unemployment and various controls and controlling for endogeneity and measurement error problems we find fairly strong and robust evidence for the ricardian prediction that unemployment and trade openness are negatively related this effect dominates the positive h o effect of trade openness on unemployment for capital abundant countries which turns negative for labor abundant countries using panel data we find an unemployment increasing short run impact of trade liberalization followed by an unemployment reducing effect leading to the new steady state

stuck on gold real exchange rate volatility and the rise and fall of the gold standard 1875 1939 abstract did the gold standard diminish macroeconomic volatility supporters thought so critics thought not and theory offers ambiguous messages hard regimes like the gold standard limit monetary shocks by tying policymakers hands but exchange rate inflexibility compromises shock absorption in a world of real disturbances and nominal stickiness a model shows how lack of flexibility affects the transmission of terms of trade shocks evidence from the late nineteenth and early twentieth century exposes a dramatic change the classical gold standard did absorb shocks but the interwar gold standard did not supporting the view that the interwar gold standard was a poor regime choice

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

the internet and financial market structure financial markets are markets for information as such they are directly influenced by advances in information dissemination storage and processing associated with the commercial development of the internet on the other hand given the long standing centrality of information in financial markets the consequences of the internet for financial markets can be understood as evolutionary rather than revolutionary this article provides a framework for understanding how the historical interplay between information technology and human capital has influenced financial market structure in doing so it sheds light on the recent reorganization of financial markets the daring reader might infer implications for reorganization of product markets where the impact of the internet is more abrupt copyright 2001 oxford university press

workers warriors and criminals social conflict in general equilibrium we incorporate appropriation activities social conflict into canonical models of trade and study how economic shocks and policies affect the intensity of conflict we show that not all shocks that could make society richer reduce conflict positive shocks to labor intensive industries diminish conflict while positive shocks to capital intensive industries increase it the key requirement is that conflict activities be more labor intensive than the economy as this determines how shocks affect the returns and costs of conflict our theory is consistent with several observed patterns of conflict and implies that empirical work should take into account the relative factor intensities of the productive and conflict sectors in each country incorporating appropriation into a canonic general equilibrium model affects what policies may be deemed desirable in order to reduce conflict and generate pareto improvements policy must be distortionary while reforms that appear efficiency enhancing under the unrealistic assumption of perfect property rights may backfire this offers one explanation for why reforms based on traditional models without appropriation may be delayed and become unpopular when implemented and why societies may sympathize with seemingly inefficient redistribution

does capital punishment deter white collar crimes this paper examines whether capital punishment either directly or via a spillover effect has a deterrent effect on white collar crimes using data on nearly 150 nations and various dimensions of capital punishment including capital punishment for non violent crimes we consider two widely prevalent white collar crimes corruption and the shadow economy nesting the empirical analysis in the broader literature on determinants of corruption and the shadow economy we find that capital punishment in general reduced both corruption and the shadow economy and the deterrent effect on the shadow economy was relatively more prevalent adding some empirical insights to the theoretical arguments surrounding the desirability of maximal punishments results show some trade off between the quantity and quality of punishment

the meta production function approach to technological change in world agriculture abstract an alternative meta production function for agriculture is estimated with the cross section data for 43 countries and three years 1960 1970 and 1980 constructed and used by kawagoe hayami and ruttan and hayami and ruttan in their studies by allowing for country specific efficiency factors and using a flexible functional form the transcendental logarithmic production function strikingly different results from those of kawagoe hayami and ruttan are obtained in particular it is found that elasticity of output with respect to machinery is variable and the degree of local returns to scale is not constant and increases with the usage of machinery

growth and productivity a model of cumulative growth and catching up individually neither the cumulative growth approach of the post keynesian tradition nor the catching up theory of neoclassical derivation are able to account for the chief stylized facts of comparative economic growth a pooled cross section econometric model that integrates these two approaches is developed and tested by the authors over the period 1950 88 for a group of nine oecd countries for a group of nine latin american countries and for a group of seven east asian countries purchasing power parities for 1985 are employed to measure productivity levels the growth record of the oecd countries is satisfactorily assessed by the model the catching up effect is found to be relevant in explaining productivity growth in the oecd area and in east asia but not in latin america this differential outcome finds explanation in terms of the relative strength of dynamic increasing returns copyright 1997 by oxford university press

exchange rate regimes and inflation only hard pegs make a difference abstract using data from a large sample of developing countries from 1985 to 2001 we confirm that hard pegs currency boards or a shared currency reduce inflation and money growth there is no evidence that soft pegs confer any monetary discipline after other factors are controlled for inflation triggers regime switches under hard pegs monetary growth is unaffected by fiscal deficits or by inflation shocks under soft pegs as under floats increased fiscal deficits and positive inflation shocks are associated with higher monetary growth the apparently slower per capita output growth under hard pegs is explained by their geographical distribution jel classification f41

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

the benefits and costs of monetary union in southern africa a critical survey of the literature with the 14 members of the southern african development community sadc having set the objective of adopting a common currency for the year 2018 an expanding empirical literature has emerged evaluating the benefits and costs of a common currency area in southern africa this paper reviews that literature focusing on two categories of studies 1 those that assume that a country s characteristics are invariant to the adoption of a common currency and 2 those that assume that a monetary union alters an economy s structure resulting in trade creation and credibility gains the literature reviewed suggests that a relatively small group of countries typically including south africa satisfies the criteria necessary for monetary unification the literature also suggests that in a monetary union comprising all sadc countries and a regional central bank that sets monetary policy to reflect the average economic conditions e g fiscal balances in the region the potential losses i e higher inflation from giving up an existing credible national central bank a relevant consideration for south africa could outweigh any potential benefits of trade creation resulting from a common currency

dollarization does promote trade abstract this study re evaluates the treatment effect of dollarization on trade while explicitly controlling for self selection of policy adoption employing a variety of propensity score matching methods we show that dollarization not only increases bilateral us trade with dollarized countries but promotes a dollarizer s bilateral trade with other dollar zone countries as well

transparency reputation and credibility under floating and pegged exchange rates this paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg under which credibility is higher and inflation is lower than under a float this holds true although devaluations of the pegged rate are assumed to be costless the reason is that as realized inflation is not perfectly controllable planned inflation under a float is private information in contrast since the exchange rate can be perfectly controlled pegging resolves the private information problem is more transparent and makes reputation more effective

optimal regime switching under risk aversion and uncertainty abstract technology adoption is key for corporate strategy often determining the success or failure of a company as a whole however risk aversion often raises the reluctance to make a timely technology switch particularly when this entails the abandonment of an existing market regime and entry in a new one consequently which strategy is most suitable and the optimal timing of regime switch depends not only on market factors such as the definition of the market regimes as well as economic and technological uncertainty but also on attitudes towards risk therefore we develop a utility based regime switching framework for evaluating different technology adoption strategies under price and technological uncertainty we assume that a decisionmaker may invest in each technology that becomes available compulsive or delay investment until a new technology arrives and then invest in either the older laggard or the newer technology leapfrog our results indicate that if market regimes are asymmetric then greater risk aversion and price uncertainty in a new regime may accelerate regime switching in addition the feasibility of a laggard strategy decreases increases as price uncertainty in an existing new regime increases finally although risk aversion typically favours a compulsive and a laggard strategy a leapfrog strategy may be feasible under risk aversion provided that the output price and the rate of innovation are sufficiently high

competition imitation and growth with step by step innovation is more intense product market competition and imitation good or bad for growth this question is addressed in the context of an endogenous growth model with step by step innovations in which technological laggards must first catch up with the leading edge technology before battling for technological leadership in the future in contrast to earlier schumpeterian models in which innovations are always made by outsider firms who earn no rents if they fail to innovate and become monopolies if they do innovate here we find first that the usual schumpeterian effect of more intense product market competition pmc is almost always outweighed by the increased incentive for firms to innovate in order to escape competition so that pmc has a positive effect on growth second that a little imitation is almost always growth enhancing as it promotes more frequent neck and neck competition but too much imitation is unambiguously growth reducing the model thus points to complementary roles for competition anti trust policy and patent policy

is there a single frontier in a single european banking market abstract this paper attempts to estimate comparable efficiency scores for european banks operating in the single market in the eu using a data set of more than 5000 large commercial banks from all major european banking markets over the period 1993 2004 the application of meta frontiers enables us to assess the existence of a single and integrated european banking market we find evidence in favor of a single european banking market characterized by cost and profit meta frontiers however compared to the meta frontier estimations pooled frontier estimations tend to underestimate efficiency levels and correlate poorly with country specific frontier efficiency ranks

can equilibrium models explain nominal exchange regime non neutrality evidence from the european monetary system abstract in a recent paper alan stockman argues that the finding that real exchange rate variability id higher under flexible nominal exchange rate systems than under fixed nominal exchange rate systems typically interpreted as evidencee of price stickiness is consistent with equilibriu models stockman s theory we argue predicts that the formation of the european monetary system should have had no effect on the real exchange rate variability of its members we test this prediction and interpret our findings as evidence in support of stockman s theory although not as evidence that equilibrium models can account for nominal exchange regime non neutrality jel f31

a general index of technical change this paper outlines a procedure for estimating a general index of technical change within the context of a quite general production technology specifically when panel data are available for firms in an industry time specific dummies can be combined in a nonlinear estimation procedure to yield a general index of technical change that may be both nonneutral and scale augmenting this approach offers numerous advantages over the traditional time trend representation of technical change for example the general index can serve as the basis for analysis of the determinants of technical change results for a sample of 30 electric utilities over the period 1951 78 show that the productivity decline of the 1970s can be attributed primarily to sulphur oxide restrictions and secularly declining capacity utilization due to rapidly increasing peak load demands

on the imperfect substitutability of policy regimes exchange rate targetting vs policy coordination abstract exchange rate targetting is always an imperfect substitute for explicit policy coordination but succeeds when economies are either structurally dissimilar with symmetric shocks or structurally symmetric with dissimilar shocks a joint commitment then generates economies of scale in interventions

diffusion of financial innovations the case of junk bonds and note issuance facilities financial systems have experienced dramatic changes over the last twenty years a sharp acceleration in the pace of innovation has significantly transformed both domestic and international financial systems securitization probably the most dominant trend prevailing in international financial markets during the 1980s and early 1990s has had the impact of shifting credit flows from bank lending to marketable instruments and has been largely reflected in the growth of off balance sheet activities obsas a number of recent studies have examined why banks engage in obsas l benveniste and berger 1986 1987 have argued that securitization enables banks to optimize the allocation of risk sharing by shifting risk from risk averse to riskneutral investors collateralization hypothesis banks can do so by securitizing their safest assets off balance sheet and retaining their risky assets on balance sheet this hypothesis predicts a positive relationship between securitization and bank risk because the pooling problem of mixing risky and safe assets on balance sheet is more acute in risky banks moreover benveniste and berger 1986 and thomas

client discretion switching costs and financial innovation we analyze the incentives of investment banks to develop innovative products we show that client characteristics and market structure affect these incentives significantly investment banks with larger market shares have greater incentives to innovate and smaller banks are likely to share their innovations with the largest bank innovation incentives increase in volatile environments and regulatory scrutiny actually encourages loophole exploitation activity our predictions are consistent with stylized facts and the analysis has broad testable implications for innovative activity in other markets similarly characterized by a lack of comprehensive protection for intellectual property rights for example the software industry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

fiscal rules and government borrowing costs international evidence we find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985 2010 we apply a variety of propensity score matching methods to address the self selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets the results are robust to changes in country sample and alternative estimation methodology and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the risk premium on government debt that compensates lenders for this possibility jel e43 g12 h60

crime and local inequality in south africa the authors examine the effects of local inequality on property and violent crime in south africa their findings are consistent with economic theories relating inequality to property crime and also with sociological theories that imply that inequality leads to crime in general burglary rates are 20 30 percent higher in police station jurisdictions that are the wealthiest among their neighbors suggesting that criminals travel to neighborhoods where the expected returns from burglary are highest the authors do not find evidence that inequality between racial groups fosters interpersonal conflict at the local level

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

fewer monies better monies in the aftermath of emerging market crises from russia to asia and latin america there is a quest for better monetary arrangements that are more crisis proof fixed rates are out flexible rates are in with a policy focus on inflation targeting but there is of course the alternative of abolishing exchange rates all together this paper revisits the issue of dollarization or currency boards to review what arguments in the debate stand up the case for flexible exchange rates emphasizes the need for a tool to accomplish relative price adjustment this paper argues that in an intertemporal perspective most shocks require financing in the capital market rather than adjustment moreover countries frequently do not use their flexible rate to play a cyclical role and as a result only a pay a premium for the option to depreciate but do not take advantage of the flexibility on the contrary they engineer systematic overvaluation in the context of inflation targeting

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