financial dollarization short run determinants in transition economies this paper examines the determinants of financial dollarization in transition economies from a short run perspective using aggregate monthly data of deposit and loan dollarization we study the drivers of short term fluctuations in dollarization and test their importance at different levels of dollarization the results provide evidence that a the positive negative short run effects of depreciation monetary expansion on deposit dollarization are exacerbated in high dollarization countries b short run loan dollarization is mainly driven by banks matching of domestic loans and deposits currency matching of assets and liabilities international financial integration and institutional quality and c both types of short run dollarization are affected by interest rate differentials and deviations from desired dollarization

financial dollarization the role of foreign owned banks and interest rates abstract why in many economies households and firms borrow and make deposits in foreign currency expanding on the existing literature our framework addresses this question allowing for interest rate differentials and access to foreign funds to play a role in explaining this process of asset substitution or financial dollarization using a newly compiled data set on transition economies and employing a standard panel as well as a panel var methodology we find that increasing access to foreign funds leads to higher credit dollarization while it decreases deposit dollarization interest rate differentials matter for the dollarization of both loans and deposits

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

inflation regimes and the sources of inflation uncertainty this paper develops new time series measures of inflation uncertainty in the united states in the postwar period that account for the prospect of changing inflation regimes the measures are constructed from estimates of a markov switching model for inflation importantly we show that rational forecasts derived from the markov model are consistent with survey measures of inflation expectations our markov model allows us to decompose uncertainty about future inflation into two components a certainty equivalent component that ignores uncertainty about future inflation regimes and a regime uncertainty component that reflects this uncertainty survey measures of inflation uncertainty based on the dispersion of forecasts appear more closely associated to the regime uncertainty component than the certainty equivalent component of inflation uncertainty the regime uncertainty component also appears to have significant explanatory power in forecasting unemployment while the certainty equivalent component does not copyright 1993 by ohio state university press

characterising deindustrialisation an analysis of changes in manufacturing employment and output internationally deindustrialisation is typically conceptualised as a decline in manufacturing as a share of total employment from a kaldorian perspective deindustrialisation could have negative implications for long run growth given the special growth pulling properties of manufacturing however defining deindustrialisation purely in terms of employment share is conceptually limiting given that some of the kaldorian processes operate primarily through output rather than employment as well as blunting empirical analysis by not focussing enough on changes in manufacturing share of gross domestic product gdp this study develops a new method using decomposition techniques to analyse changes in manufacturing employment levels and shares in 48 countries over periods of deindustrialisation the analysis separates out changes in the levels and shares of employment manufacturing into components associated with changes in the share of manufacturing in gdp the growth of manufacturing value added the labour intensity of manufacturing production and economic growth the results indicate that in most cases the decline in manufacturing employment is associated primarily with falling labour intensity of manufacturing rather than an overall decline in the size or share of the manufacturing sector we suggest that deindustrialisation should appropriately be defined in terms of a sustained decline in both the share of manufacturing in total employment and the share of manufacturing in gdp copyright the author 2008 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

kaldor s laws and spatial dependence evidence for the european regions pons novell j and viladecans marsal e 1999 kaldor s laws and spatial dependence evidence for the european regions reg studies 33 443 451 in this paper we provide an outline of kaldor s growth model and test its relevance to the economic experience of european regions during the period 1984 92 kaldor s first law asserts that manufacturing is the engine of economic growth his second proposition also known as verdoorn s law states that there is a strong positive relation between manufacturing productivity growth and manufacturing output growth kaldor s third law holds that overall productivity growth is positively related to manufacturing output growth and negatively related to employment in non manufacturing sectors the empirical results corrected for the presence of spatial autocorrelation indicate that kaldor s second and third laws are compatible with the economic growth of european regions during the period 1984 92 pons novell j et viladecans marsal e 1999 les lois de kaldor et la

secession with natural resources we look at the formation of new indian states in 2001 to uncover the effects of political secession on the comparative economic performance of natural resource rich and natural resource poor areas resource rich constituencies fared comparatively worse within new states that inherited a relatively larger proportion of natural resources we argue that these patterns reflect how political reorganisation affected the quality of state governance of natural resources we describe a model of collusion between state politicians and resource rent recipients that can account for the relationships we see in the data between natural resource abundance and post breakup local outcomes

bankruptcy costs liability dollarization and vulnerability to sudden stops abstract countries with intermediate levels of institutional quality suffer larger output contractions following sudden stops of capital inflows than less developed nations however countries with strong institutions seldom experience significant falls in output after capital flow reversals we reconcile these two observations using a calibrated dsge model that extends the financial accelerator framework developed in bernanke gertler and gilchrist 1999 the model captures financial market institutional quality with creditors ability to recover assets from bankrupt firms bankruptcy costs affect vulnerability to sudden stops directly but also indirectly by affecting the degree of liability dollarization simulations reveal an inverted u shaped relationship between bankruptcy costs and the output loss following sudden stops

pass through in dollarized countries should ecuador abandon the us dollar in this article we examine the convenience of dollarization for ecuador today as ecuador is strongly integrated financially and commercially with the united states the exchange rate pass through should be zero however we sustain that rising rates of imports from trade partners other than the united states and subsequent real effective exchange rate depreciations are causing the pass through to move away from zero here in the framework of the vector error correction model we analyse the impulse response function and variance decomposition of the inflation variable we show that the developing economy of ecuador is importing inflation from its main trading partners most of them emerging countries with appreciated currencies we argue that if ecuador recovered both its monetary and exchange rate instruments it would be able to fight against inflation we believe such an analysis could be extended to other countries with pegged exchange rate regimes

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

volatility in productivity and the impact on unemployment volatility and the uncertainty it creates has long been recognized as a factor in economic decision making since hiring occurs before shocks to productivity are realized firms investment in ne

hysteresis in a simple model of currency substitution abstract a cash in advance model in which the cost of buying goods with a foreign currency is decreasing in the economy s accumulated experience in transacting in the foreign currency is shown to display hysteresis in money velocity that is a temporary increase in expected inflation can cause a permanent increase in velocity in addition the model implies that the domestic currency does not have to dominate the foreign currency in rate of return to induce agents to stop using the foreign currency finally inflation rates that trigger currency substitution need not be associated with steady states in which the domestic currency disappears from circulation

sudden stops are global and local investors alike the main goal of this paper is to characterize the determinants of sudden stops caused by domestic vis a vis foreign residents are the decisions of domestic investors to invest abroad or of foreign investors to cut off funds from the domestic economy governed by the same set of determinants given the distribution of different types of sudden stop episodes over time and its different macroeconomic consequences the authors argue that the determinants may not be alike using an effective sample of 82 countries with annual information over the period 1970 2007 the analysis finds that global investors are less likely to stop bringing their capital when their economy is growing and the world interest rate is lower domestic agents are more willing to invest abroad if the macroeconomic performance of the domestic economy is poor high inflation the financial system is weak and there are high external savings current account surpluses increasing financial openness makes the domestic country more vulnerable to sudden stops caused by either local or global investors finally countries with higher shares of foreign direct investment are less prone to inflow driven sudden stops whereas the opposite holds for outflow driven sudden stops

hedging and financial fragility in fixed exchange rate regimes currency crises that coincide with banking crises tend to share at least three elements first banks have a currency mismatch between their assets and liabilities second banks do not completely hedge the associated exchange rate risk third there are implicit government guarantees to banks and their foreign creditors this paper argues that the first two features arise from banks optimal response to government guarantees we show that guarantees completely eliminate banks incentives to hedge the risk of a devaluation our model also articulates one reason why governments might be tempted to provide guarantees to bank creditors guarantees lower the domestic interest rate and lead to a boom in economic activity but this boom comes at the cost of a more fragile banking system in the event of a devaluation banks renege on foreign debts and declare bankruptcy

night lights in economics sources and uses1 night lights as detected by satellites are increasingly used by economists typically as a proxy for economic activity the growing popularity of these data reflects either the absence or the presumed inaccuracy of more conventional economic statistics like national or regional gdp further growth in use of night lights is likely as they have been included in the aiddata geo query tool for providing sub national data and in geographic data that the demographic and health survey links to anonymised survey enumeration areas yet this ease of obtaining night lights data may lead to inappropriate use if users fail to recognize that most of the satellites providing these data were not designed to assist economists and have features that may threaten validity of analyses based on these data especially for temporal comparisons and for small and rural areas in this paper we review sources of satellite data on night lights discuss issues with these data and survey some of their uses in economics

institutions and financial dollarization indirect effects based on a policy experiment we provide evidence that institutional improvements lead to lower levels of financial dollarization through previously unidentified channels these indirect channels operate in addition to the direct impact identified in the literature and further illustrate the importance of institutions for the extent of banking dollarization

inflation volatile public spending and endogenously sustained growth i construct a model of an economy whose government finances volatile public spending via money creation the model jointly accounts for the emergence of some well known empirical observations specifically it predicts a negative correlation between output growth and policy volatility furthermore given that both the mean and the variance of the inflation rate are elevated by fluctuations in public spending the model provides a novel theoretical justification for the simultaneous negative correlation of long run growth with both average inflation and inflation variability the model also supports the view that policy volatility reduces social welfare

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

another perspective on the effects of inflation uncertainty this paper examines the effects of inflation uncertainty on real economic activity by utilizing a flexible dynamic multivariate framework that accommodates possible interaction between the conditional means and variances the empirical model is based on a familiar identified vector autoregressive framework modified to accommodate multivariate generalized autoregressive conditional heteroskedasticity our empirical model is preferred to the baseline var by likelihood based information criteria and it retains the important dynamics of the underlying var we find that an average shock to inflation uncertainty has tended to reduce output growth over three months by about 22 basis points

analysing inflation by the fractionally integrated arfima garch model this paper considers the application of long memory processes to describing inflation for ten countries we implement a new procedure to obtain approximate maximum likelihood estimates of an arfima garch process which is fractionally integrated i d with a superimposed stationary arma component in its conditional mean additionally this long memory process is allowed to have garch type conditional heteroscedasticity on analysing monthly post world war ii cpi inflation for ten different countries we find strong evidence of long memory with mean reverting behaviour for all countries except japan which appears stationary for three high inflation economies there is evidence that the mean and volatility of inflation interact in a way that is consistent with the friedman hypothesis

the fischer black hypothesis some time series evidence we estimate an arch m model to analyze the relationship between the conditional standard deviation of real gross national product gnp and its growth rate for the period 1871 1993 we find that variability significantly increases output growth rates in addition impulse response functions show that the effect of variability on growth rates is dynamic these results provide evidence in favor of black s 1987 business cycle hypothesis

macroeconomic uncertainty and performance in the european union abstract we use a very general bivariate garch m model and monthly data on eu countries covering the 1962 2003 period to test for the impact of real output growth and nominal inflation macroeconomic uncertainty on inflation and output growth our evidence supports a number of important conclusions first in the majority of countries uncertainty regarding the output growth rate is related to the average growth rate and the effect in several countries is negative second in half of the cases there is no significant relationship between inflation uncertainty and output growth performance third inflation and output uncertainty have a mixed effect on inflation nevertheless considerable evidence for the cukierman meltzer hypothesis is obtained our conclusions are based on adopting both a structural and a reduced form bivariate garch model finally we also find statistically significant evidence of regime switching for both inflation and output growth volatility throughout the sample

a note on foreign bank ownership and monitoring an international comparison abstract this paper empirically analyzes the relation between foreign bank ownership and the three pillars of the new basel capital accord i e capital regulatory oversight supervisory oversight and market discipline using a new database covering 153 countries we find that countries with greater market discipline have a lower presence of foreign banks operating in their economy furthermore our evidence indicates that capital regulatory oversight and supervisory oversight are not significantly related to foreign bank ownership

on inflation and inflation uncertainty in the g7 countries abstract the relationship between inflation and inflation uncertainty is investigated in the g7 countries from 1948 to 1993 garch models are used to generate a measure of inflation uncertainty and then granger methods are employed to test the causality between average inflation and inflation uncertainty in all g7 countries inflation significantly raises inflation uncertainty as predicted by friedman and ball weaker evidence is found that inflation uncertainty granger causes inflation in three countries us uk and germany increased inflation uncertainty lowers inflation while in two countries japan and france increased inflation uncertainty raises inflation

long dark shadows or innovative spirits the effects of smoothing business cycles on economic growth a survey of the literature abstract it is argued that fiscal policy can play a part in preventing a possible downward spiral or be instrumental in achieving a higher long term path of growth never before has this argument been advanced as frequently as in the current economic crisis however the economic literature an overview of which is given here does not provide an unambiguous answer either theoretically or empirically to the question of the relationship between the smoothing of cyclical fluctuations and long term growth in this context two main contrasting explanatory paradigms can be identified schumpeter s concept of creative destruction and the learning by doing hypothesis even if it were possible to identify the relationship more clearly on this basis it is important not to lose sight of the problems associated with the real time assessment of the current economic situation time lags and political economic incentives even in difficult times

foreign banks and foreign currency lending in emerging europe based on survey data from 193 banks in 20 countries we provide the first bank level analysis of the relationship between bank ownership bank funding and foreign currency fx lending across emerging europe our results contradict the widespread view that foreign banks have been driving fx lending to retail clients as a result of easier access to foreign wholesale funding our cross sectional analysis shows that foreign banks do lend more in fx to corporate clients but not to households moreover we find no evidence that wholesale funding had a strong causal effect on fx lending for either foreign or domestic banks panel estimations show that the foreign acquisition of a domestic bank does lead to faster growth in fx lending to households however this is driven by faster growth in household lending in general not by a shift towards fx lending

an application of a kaldorian export led model of growth to the united states a kaldorian export led model of growth is analysed using post second world war united states data the structural parameter restrictions of the model are confirmed by the estimates kaldor s model which was originally conceived to be illuminating for describing a region or a small open economy is able to describe the annual fluctuations in the growth rate of a large open economy like that of the united states with only minor adjustments

bank funding securitization and loan terms evidence from foreign currency lending we examine how bank funding structure and securitization activities affect the currency denomination of business loans we analyze a unique data set that includes information on the requested and granted loan currency for 99 490 loans granted to 57 464 firms by a bulgarian bank our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities our results also show that loan currency as well as loan amount and maturity are adjusted to make loans eligible for securitization

inflation output and uncertainty in the era of inflation targeting a multi economy view on causal linkages abstract this study provides cross country robust evidence on interdependencies among inflation output growth and respective uncertainties for the current era of low inflation policies we attribute the extant empirical disagreement on these relations to the fact that long sampling periods and single economies are typically considered for analysis in this study varx mgarch m models are estimated for 34 developed and emerging economies and the time period of 1990 2010 we study average granger causal effects by aggregating parameter estimates over economies the cross sectional variation of estimates serves as a means to assess the robustness of empirical findings over the entire cross section we find that both inflation and inflation uncertainty significantly reduce output growth economies with low inflation rates are particularly at risk to incur output losses from increasing inflation we also find spillover effects among uncertainty variables where the causal impact if present seems to point from the uncertainty in output to inflation uncertainty

manufacturing and economic growth in the united states kaldor s growth laws are applied to the post world war ii united states each variable employed in the time series analysis is smoothed with a moving average this procedure successfully mitigates the effects of short term cyclical changes and emphasizes long term economic growth indicate that kaldor s laws are compatible with the economic growth of united states

market sentiment and macroeconomic fluctuations under pegged exchange rates this paper models changes in market sentiment as a temporary increase in the premium faced by domestic private borrowers on world capital markets the effects of this shock are studied in an intertemporal optimizing framework of a fixed exchange rate economy where firms demand for working capital is financed by bank credit depending on the perceived length of this shock the model is capable of predicting a rise in domestic interest rates capital outflows and a drop in official reserves a reduction in bank deposits and the supply of credit a fall in private consumption a contraction in output and an increase in unemployment these predictions are consistent with observed facts associated with several recent episodes of turbulence on international financial markets

euroization what factors drive its persistence household data evidence for croatia slovenia and slovakia the question asked in this article is why people continue to use foreign currencies even after their economies have stabilized survey data for croatia slovenia and slovakia are employed to provide an answer the results confirm the role of network effects and of remittances furthermore the extent of currency substitution is found to be positively associated with the level of income and education an important aspect of euroization seems to be age older people are more likely to hold foreign currencies in contrast neither expectations about inflation rates nor about exchange rates do seem to affect the degree of euroization in a systematic and predictable way trust in the banking system is found to affect the choice between foreign currency cash and foreign currency deposits overall the results support the view that the persistence in the use of foreign currencies is driven to a large extent by factors that are related to the past

a bright idea for measuring economic growth most readers of this article are already familiar with images of the earth at night which are really montages showing satellite views of visible lights 1 looking at such images it is easy to see that the brightness of visible lights is strongly related to both population density and income per capita the effect of population density shows up in the visibility of urban agglomerations coastlines river valleys and even the higher density of population along the paths of highways and railroads similarly the northeastern united states is far brighter than the mountain west even though they have similarly levels of income the effect of income is similarly easy to see sharp economic boundaries such as the inter korean border show up plainly india with a population density slightly higher than japan is significantly dimmer the observation that income per capita is one of the determinants of visible light suggests that one might potentially use visible light to help measure income in this paper we explore the usefulness of these night lights data to economists studying issues related to economic growth and the national or local level in particular we ask the extent to which lights data can augment or entirely replace data on gross domestic product 2 there are a number of obstacles to using lights visible from space to measure income broadly falling into two categories first the relationship between economic activity and the true amount of light emanating from the earth s surface is not constant across time and space light visible from space is a byproduct of consumption and production activities but light is hardly produced in a fixed ratio to output some productive activities such as steelmaking produce a lot of light others such as software design produce very little countries or regions may differ in the fraction of their economic activity that takes place after dark for example las vegas vs salt lake city patterns of settlement for example whether people live in multi storey buildings the availability of hydropower etc may all affect how much light is visible from space for a given level of income and population second true light is imperfectly measured by the satellites humidity reflectivity and time periods excluded from coverage because of sunlight moonlight and cloud cover contamination all differ across the globe sensor scale for recording lights in practice varies across satellites and as satellites age over time if one is measuring economic growth some of the location specific factors are differenced out the rest we treat as measurement error in the relationship between gdp growth and light growth we note that while we focus on measuring total income growth of regions one might be also interested in growth in income per capita we don t pursue that here although we have explored the issue by using population growth numbers to supplement lights growth population is both conceptually and practically easier to measure than is income so it is also feasible to alternatively focus on income growth per capita despite problems the night lights data have several advantages the first has to do with the nature of measurement error in lights data a number of studies have recently reminded economists that much of the data on gdp growth in developing countries is plagued by serious measurement error for example johnson et al 2009 study revisions in the penn world tables a standard measure of gdp they find that comparing version 6 1 of that data released in 2002 with version 6 2 released in 2006 the standard deviation of the change in countries average growth over the period 1970 1999 was 1 1 per year which is very large relative to the average growth rate of 1 56 per year this indicates that at least one of the measures and presumably both contained a great deal of error we do not claim that the measurement error in the night lights data is smaller than that in conventional data but we do think that the two forms of measurement error are poorly or not correlated it is well know that combing two problematic measures can produce a composite with smaller measurement error than either of them a second advantage of the night lights data is that they are available for regions for which standard gdp measures are not these include sub national units such as cities and regions as well as entities that cross national borders like biomes economic analysis of growth and of the impacts of policies and events on cities and regions of many countries is hindered by a complete absence of any regular measure of local economic activity much of the interesting variation in economic growth takes place within rather than between countries however for the vast majority of economics research empirical analysis of growth has become synonymous with use of national accounts data the night lights data offer a tool that allows the researcher to set aside this limitation the rest of this paper is organized as follows in section i we briefly discuss the night lights data section ii outlines our statistical approach to combining data from lights with conventional measures of gdp and presents results of an exercise applying our technique to a set of low and middle income countries section iii discusses an application beyond the measurement of national income we refer the reader to our companion paper henderson storeygard and weil 2009 for more detailed discussion of many of the technical and statistical issues raised here

a positive theory of inflation and inflation variance a positive theory of inflation and inflation variance empirically inflation and the variance of inflation are positively associated this paper develops a model that provides a potential explanation for this relationship in terms of the incentives facing the policymaker in a discretionary equilibrium the model can also account for an empirical association between inflation and measures of real output instability there is however no direct causal link whatever from the average rate of inflation to either the variance of inflation or that of real output i introduction the debate over the use rules or discretion in monetary policy has been central to macroeconomics for many years e g simons 1963 lucas 1980 buiter 1980 recently kydland and prescott 1977 and barro and gordon 1983a b have identified discretion as the absence of policy commitment in a game between policymakers and the public they argued that discretionary policymaking will lead governments to create excessive inflation a policy of low inflation is not consistent with incentives facing governments and thus will not be believed by the private sector barro and gordon 1983a argue that this positive theory of monetary policy can help to explain many features of the trend rate of inflation in modern economies high and persistent rates of inflation a positive relationship between inflation and unemployment and the observed countercyclical behaviour of monetary authorities among others these models are based on the premise that there are significant costs to a high but fully anticipated rate of inflation another feature of inflation in modern economics however is the well documented fact that inflation and the variability of inflation are positively associated this phenomenon has been widely observed over different countries at different times 1 this has led researchers to question the feasibility of a steady and predictable positive rate of inflation the finding suggests that high rates of inflation may reduce the ability to forecast future inflation rates a high average inflation rate may add an unnecessary degree of uncertainty to individual decision making and lead to a misallocation of resources friedman 1977 suggests that this may cause output instability and possibly raise the average unemployed rate a related paper by logue and sweeney 1981 establishes that there is a positive relationship between inflation and the variability of economic growth for industrial countries given this perspective the welfare costs associated with inflation might be considerably higher than the traditional costs of anticipated inflation this paper extends the barro and gordon 1983a model of discretionary monetary policy to take account of the relationship between inflation and measures of inflation and output variability the extension focussed on is to model an endogenous wage indexing scheme in the labor market in the discretionary equilibrium wage setters not only form rational expectations of the future price level but also choose an optimal degree of wage indexation this extension to the basic model has the following properties of a discretionary equilibrium 1 there is a positive association between the mean rate of inflation and the magnitude of real disturbances in the economy as well as between the mean inflation rate and the degree of output instability in the economy 2 in an economy where real disturbances are relatively important there is a positive association between the mean rate of inflation and the variance of inflation the explanation behind these results is as follows the lower is the degree of wage indexation the greater is the incentive for monetary authorities to cause surprise inflation and hence the higher is the mean rate of inflation in a discretionary equilibrium but the degree of wage indexation is negatively related to the variance of real disturbances in an economy which is subject to both real and nominal disturbances

the effect of money shocks on interest rates in the presence of conditional heteroskedasticity most current empirical work finds no evidence that money shocks lower interest rates we show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates autoregressive conditional heteroskedasticity arch models find a significant liquidity effect where ordinary least squares ols models do not the existence of a liquidity effect is found using different models and sample periods when arch models are used in estimation but never when ols is employed

are empirical measures of macroeconomic uncertainty alike there is a plethora of time series measures of uncertainty for inflation and real output growth in empirical studies but little is known whether they are comparable to the uncertainty measure reported by individual forecasters in the survey of professional forecasters are these two measures of uncertainty inherently distinct this paper shows that compared with many uncertainty proxies produced by time series models the use of real time data with fixed sample recursive estimation of an asymmetric bivariate generalized autoregressive conditional heteroskedasticity model yields inflation uncertainty estimates which resemble the survey measure there is however overwhelming evidence that many of the time series measures of growth uncertainty exceed the level of uncertainty obtained from survey measure our results highlight the relative merits of using different methods in modelling macroeconomic uncertainty which are useful for empirical researchers

fiscal sustainability and dollarization the case of ecuador abstractthis article tries to disentangle the dynamic relationships between fiscal variables and economic activity in a small emerging economy characterized by full dollarization namely ecuador we find that fiscal policy in ecuador seems to be sustainable explained by its policy of debt payment through oil revenues rather than by a fiscal discipline that dollarization is supposed to encourage the non oil tax revenues variable is a purely adjusting variable this result suggests that in a dollarized country that cannot benefit from the seignorage revenues the reliance on volatile oil revenues and on smoothing tax revenues leaves the economy s fiscal sustainability vulnerable

financial dollarization and systemic risks new empirical evidence abstract this paper explores the persistence of financial dollarization in a group of 79 economies with different levels of development our main hypothesis is that a high level of domestic debt combined with default risk explains this persistence even after a decline in inflation rates using the generalized method of moments gmm in a panel data analysis our results show that inflation risks caused by increasing probability of default account for financial dollarization more than inflation rate itself after the decrease in inflation rates the foreign currency denominated deposits remain large because of the high debt to gdp ratios particularly in speculative grade economies high public indebtedness leads to expectations of default dollarization is a rational response to the future inflation associated with investors expectations of default observed in highly indebted economies

dollarization of bank deposits causes and consequences abstract this paper assesses the benefits and risks associated with dollarization of bank deposits we provide novel empirical evidence on the determinants of deposit dollarization its role in promoting financial development and on whether dollarization is associated with financial instability we find that a the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross country variations in dollarization b dollarization is likely to promote financial deepening only in a high inflation environment and c financial instability is likely higher in dollarized economies the implications of these findings for financial sector and monetary policies are briefly discussed

time varying international stock market interaction and the identification of volatility signals abstract this paper investigates the dependency of international stock market interaction on financial volatility we show in a stylized economic model that volatility dependent cross market spillovers can be interpreted in two different ways as indicating information flow or uncertainty if higher volatility in one market leads to higher lower reactions in another market volatility reflects information uncertainty we apply a simultaneous time varying coefficient model where structural arch type variances serve two purposes governing the time variation of spillovers and ensuring statistical identification we analyze data of us and further stock markets indeed we find strong nonlinear volatility dependent spillovers

reason for reserve reserve requirements and credit this paper considers the impact of a regulatory policy action on bank credit and traces its incidence across banks i make use of a reserve requirement increase in lebanon that was considerably greater on foreign currency deposits than on domestic currency deposits all banks cut lending as they scrambled to adjust portfolios but the policy shock disproportionately affected banks with a greater reliance on dollar funding and with low buffers of dollar liquid assets exposed domestic owned banks also adjusted more slowly than similar foreign owned banks that obtained outside funding descriptive firm bank matching evidence reveals a disproportionate impact on small firms

foreign currency borrowing by small firms in emerging markets when domestic banks intermediate dollars this paper investigates what induces small firms in an emerging market economy to borrow dollar credit from domestic banks our data are from a unique survey of firms in lebanon the findings complement studies of large firms with foreign currency loans from foreign lenders exporters naturally hedged against currency risk are more likely to incur dollar debt firms also partly hedge themselves by passing currency risk to customers and suppliers less opaque firms with easily verifiable collateral and higher net worth are more likely to access dollar credit firms reliant on formal financing banks and supplier credit are more likely to contract dollar debt than firms reliant on informal financing family friends and moneylenders bank relationships however do not increase the dollar debt likelihood and finally profitable firms are less likely to have dollar debt information frictions and limited collateral therefore constrain dollar credit even when it is intermediated domestically

households foreign currency borrowing in central and eastern europe abstract foreign currency loans represent an important feature of recent financial developments in ceecs this might pose a serious challenge for macroeconomic stability against this background we study the determinants of foreign currency loans of households using data on the behavior of households in nine ceecs our results reveal that foreign currency loans are driven by households lack of trust in the stability of the local currency and in domestic financial institutions moreover special factors including remittances and expectations of euro adoption play an important role in selected regions the financial crisis reduced foreign currency borrowing but there is some indication this effect might be only temporary

the euroization of bank deposits in eastern europe in central eastern and southeastern europe a substantial share of bank deposits are denominated in foreign currency deposit euroization poses key challenges for monetary policy and financial sector supervision on the one hand it limits the effectiveness of monetary policy interventions on the other hand it increases financial sector fragility by exposing banks to currency risk or currency induced credit risk policymakers disagree on whether countries in the region should tackle deposit euroization with dedollarization policies or should rather strive to adopt the euro as their legal tender assessing the potential effectiveness of dedollarization policies requires a clear understanding of which households hold foreign currency deposits and why they do so on the basis of survey data covering 16 375 households in ten countries in 2011 and 2012 we provide a comprehensive household level analysis of deposit euroization in central eastern and southeastern europe we examine how households preferences for and holding of foreign currency deposits are related to individual expectations about monetary conditions and network effects we also examine to what extent monetary expectations and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region our findings suggest that deposit euroization in central eastern and southeastern europe can be partly tackled by prudent monetary and economic decisions by today s policymakers the preferences of households for euro deposits are partly driven by their distrust in the stability of their domestic currency which in turn is related to their assessment of current policies and institutions however our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region first we confirm that the holding of foreign currency deposits has become a habit in the region second we find that deposit euroization is still strongly influenced by households experiences of financial crises in the 1990s our findings question the effectiveness of supply side interventions e g bank regulation or demand side interventions e g local currency capital market development in de euroizing household savings first we show that deposit euroization is largely demand driven second we show that households already have access to a broad range of savings products in local currency

kaldorian approach to greek economic growth in the last 30 years greece has experienced a rapid rate of economic growth which has transformed the economy and enabled it to become a member of the eec specifically greece transformed itself from an agricultural economy with virtually no industrial base to an economy with a significant industrial sector and consequently a relatively high income per capita one can explain this on the lines of a kaldorian framework in this paper we provide an outline of kaldor s growth model and test its relevance to the economic experience of greece during the 1967 1988 period the empirical results suggest that the model can adequately explain the developments in the economy to a considerable degree

a model of crises in emerging markets this paper presents a perfect foresight model of speculative attacks on emerging markets credit constrained governments are assumed to have two objectives to accumulate liquid assets in order to self insure against shocks to national consumption and to insure poorly regulated domestic financial markets this policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities the model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks the model suggests that a common shock generated capital inflows to emerging markets in asia and latin america after 1989

on the origins of the state stationary bandits and taxation in eastern congo a positive demand shock for coltan a mineral whose bulky output cannot be concealed leads armed actors to create illicit customs and provide protection at coltan mines where they settle as stat

indexation and the effect of inflation uncertainty on real gnp this article examines the combined effects of inflation uncertainty and indexation on the growth rate of real gross national product gn p the evidence suggests that greater indexation partially reduces t he adverse effect of inflation uncertainty on real gnp growth over time it also indicates that in contrast to earlier findings regarding th e effect of inflation uncertainty on employment the overall effect of inflation uncertainty on real gnp growth may be permanent a preliminary assessment of whether the discrepancy is the result of in flation uncertainty permanently affecting the growth rate of the capi tal stock is inconclusive copyright 1988 by the university of chicago

carbon emissions from the commercial building sector the role of climate quality and incentives commercial buildings play a major role in determining u s greenhouse gas emissions yet surprisingly little is known about the environmental performance of different buildings at a point in time or how the same buildings perform over time by exploiting a unique panel of commercial buildings from a major electric utility we study the association between a building s electricity consumption and the physical attributes of buildings lease incentive terms indicators of human capital and climatic conditions we find that buildings that are newer and of higher quality consume more electricity contrasting evidence for the residential sector however using our panel data set we document that newer buildings are most resilient when exposed to hotter weather those buildings that have a building manager on site and whose tenants face a positive marginal cost for electricity also demonstrate a better environmental performance

impact of internal migration on labor market outcomes of native males in thailand abstractwe investigate the impact of internal migration on local labor markets in thailand using an instrumental variables approach based on weather and distance we construct an exogenous measure of the net migration inflow into each region our econometric results show that instrumenting for the possible endogeneity of net inward migration is crucial to the analysis the results suggest substantial adjustments in hours worked and weekly wages in response to short term changes in labor supply for low skilled males

what drives credit dollarization in transition economies abstract this paper provides an in depth analysis of the use of foreign currencies in the lending activities of banks in transition economies the impact of bank and firm variables on credit dollarization is studied in an optimal portfolio allocation model and estimated using new aggregate data for 21 transition economies for the period 1990 2003 empirical results provide evidence that credit dollarization is the combined outcome of domestic deposit dollarization and banks desire for currency matched portfolios beyond regulatory requirements the effects of international financial factors and natural hedges are less robust across alternative specifications the paper further discusses the role of regulations in affecting the impact of these factors on credit dollarization and calls for more developed domestic forward foreign exchange markets

the effects of real and nominal uncertainty on inflation and output growth some garch m evidence in this paper we use garch m methods to test four hypotheses about the effects of real and nominal uncertainty on average inflation and output growth in the united states from 1948 to 1996 we find no evidence that higher inflation uncertainty or higher output growth uncertainty raises the average inflation rate we also find no support for the idea that more risky output growth is associated with a higher average real growth rate our key result is that in a variety of models and sample periods inflation uncertainty significantly lowers real output growth copyright 2000 john wiley sons ltd

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

consensus and uncertainty in economic prediction we define consensus as the degree of agreement among point predictions aimed at the same target by different individuals and uncertainty as the diffuseness of the corresponding probability distributions this distinction is made operational with the aid of the nber asa survey data on matched point and probabilistic forecasts of inflation and the rate of change in gross national product the means of the two sets of forecasts agree closely standard deviations of point forecasts tend to understate uncertainty as measured by standard deviations of the predictive probability distributions however these measures of consensus and uncertainty are on the whole positively correlated there is evidence that expectations of higher inflation generate greater uncertainty about inflation tests also favor the hypothesis that a rise in inflation uncertainty has adverse effects on real growth

does one size fit all a reexamination of the finance and growth relationship abstract recent research has found a strong positive effect of a country s financial development on economic growth we propose that this relationship may vary according to the level of financial development divided in three regions in the low region countries with very low levels of financial development additional improvements in financial markets have an uncertain effect on growth in the intermediate region financial development has a large positive effect on growth finally in the high region the effect is positive but smaller we examine a panel of 74 countries using generalized method of moments gmm dynamic panel techniques and find support for the different regions

a kaldorian approach to regional economic growth in china kaldor s engine of growth hypothesis is examined in the case of the chinese economy china has in the last decade experienced a rapid industrialization and very strong economic growth using regional data of this growth process the three kaldorian laws of economic growth are tested the empirical results support the hypothesis there seems to be an especially strong relation between productivity and industrial growth

the link between macroeconomic performance and variability in the uk abstract this paper examines the link between inflation output growth and their respective variabilities we employ a bivariate garch model which incorporates mean and level effects to investigate in a unified empirical framework all the possible interactions between the four variables we show that not only does variability affect performance but the latter influences the former as well specifically inflation has a positive impact on both variabilities

dollarization exchange rate regimes and government quality abstract the dollarization of the domestic banking system represents a source of vulnerability for emerging market countries and a debate has emerged over whether the exchange rate regime has an impact on dollarization this paper argues that the regime is far less important than the literature has previously claimed unofficial dollarization results from a lack of faith in the domestic currency which ultimately stems from the belief that the government will not follow policies that promote long run currency stability empirical results indicate that improved government quality reduces unofficial dollarization while the exchange rate regime plays no direct role in promoting dollarization