the international transmission of real business cycles the authors present a stochastic model of two barter economies with production linked by free trade in goods and securities which generates pareto efficient international transmissions of business cycle disturbances each country is inhabi ted by an infinitely lived representative firm and consumer worker and is subject to country specific production shocks the internation al capital market effects perfect pooling of country specific risk c onsumption and output volatility may be higher in trade than under au tarchy as agents can be induced to undertake additional risk in exchange for a higher expected utility copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

reprint of price and quantity collars for stabilizing emission allowance prices laboratory experiments on the eu ets market stability reserve abstract we report on laboratory experiments with financially motivated participants comparing alternative proposals for managing the time path of emission allowance prices in the face of random firm specific and market level structural shocks market outcome measures such as social surplus and price variability are improved by the use of a price collar auction reserve price and soft price cap comparable performance enhancements are not observed with the implementation of a quantity collar that adjusts auction quantities in response to privately held inventories of unused allowances in some specifications the quantity collar performed worse than no stabilization policy at all the experiment implemented a specific set of structural elements and extrapolation to other settings should be done with caution nevertheless an examination of the observed behavioral patterns and deviations from optimal behavior suggests that a price collar has an important although perhaps not exclusive role to play in constructing an effective market stability policy

international fiscal policy transmission the paper examines international transmission of stochastic fiscal policy disturbances in a two country general equilibrium framework with possible excess supply equilibria with underutilization o

evidence on the cross country transmission of monetary shocks the international transmission of monetary shocks between the us and canada is explored focusing on real variables such as consumption investment employment and the bilateral trade balance along with measures of us and canadian money the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries the long run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run the short run analysis provides strong evidence that us monetary shocks affect real activity in both the usa and canada the analysis also indicates that canadian monetary disturbances affect canadian and us real activity and that many of these effects are similar in magnitude to the effects of us monetary shocks the importance of the nominal exchange rate

does joint modelling of the world economy pay off evaluating global forecasts from a bayesian gvar we analyze how modeling international dependencies improves forecasts for the global economy based on a bayesian gvar with ssvs prior and stochastic volatility to analyze the source of performance gains we decompose the predictive joint density into its marginals and a copula term capturing the dependence structure across countries the gvar outperforms forecasts based on country specific models this performance is solely driven by superior predictions for the dependence structure across countries whereas the gvar does not yield better predictive marginal densities the relative performance gains of the gvar model are particularly pronounced during volatile periods and for emerging economies

market based empirical research in accounting a review interpretation and extension a decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here it is the search into the relationship between publicly disclosed accounting information and the consequences of the use of this information by the major group of usersequity investors as such consequences are reflected in characteristics of common stocks traded in major exchanges this research effort known as market based accounting research mbar obtained its impetus from major developments in finance theory during the late 1950s and early 1960s these were the portfolio selection theory and its offspring the capital asset pricing model capm and the concept of informationally efficient capital markets ecm subsequent developments in information economics agency theory and optimal incentive signaling models were quickly incorporated into mbar while the impetus to this line of research came from other disciplines accounting was not only a beneficiary but also to a modest extent a benefactor mbar is relevant to the study of capital market efficiency the capm information economics and regulation this contribution distinguishes mbar from most accounting areas whose contributions to other disciplines are negligible in

empirical evidence on the insulation properties of fixed and flexible exchange rates abstract this paper investigates whether japanese output stability since the mid 1970s is attributable to the change in exchange rate regime or to the changing nature of underlying disturbances we decompose foreign and domestic influences on output movements using restrictions on the long run dynamics to identify the disturbances we find that the flexible exchange rate regime is more effective in insulating the economy from foreign disturbances than is the fixed rate regime however in the case of japan it is primarily the changing nature of the fundamental disturbances to the economy that is responsible for greater output stability since the mid 1970s

theory experiment and the federal communications commission spectrum auctions abstract the fcc uses the simultaneous multi round auction sma to assign spectrum licenses congress mandated that the sma be compared to an auction that allows combinatorial bids we review the theoretical and experimental evidence relevant to the sma procedures and their inherent defects results from experiments evaluating the sma in comparison to a combinatorial auction designed by charles river and associates show that several of the sma rules hinder efficiency and create a trade off between efficiency and auction length the combinatorial auction outperforms the sma when license values are superadditive but requires more time to complete and is not robust

capital mobility and international sharing of cyclical risk this paper investigates whether the international globalization of financial markets allows for significant cross country risk sharing at the business cycle frequency we find that cross country risk sharing is still limited and this is unlikely to be the result of financial frictions that limit state contingent contracts part of the limited international risk sharing could be the consequence of frictions that de facto reduce the short term mobility of financial capital but even with these frictions we find significant divergence between model predictions and the data

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

horizontal product differentiation in auctions and multilateral negotiations we experimentally compare first price auctions and multilateral negotiations after introducing horizontal product differentiation into a standard procurement setting both institutions yield identical surplus for the buyer a difference from prior findings with homogeneous products that results from differentiation s influence on sellers pricing behaviour the data are consistent with this finding being driven by concessions from low cost sellers in response to differentiation reducing their likelihood of being the buyer s surplus maximizing trading partner further analysis shows that introducing product differentiation increases the intensity of price competition among sellers which contrasts with the conventional wisdom that product differentiation softens competition

income effects on the trade balance this paper investigates the income effects on the trade balance with particular attention to the distinction between permanent and transitory disturbances for the united states japan germany and the united kingdom in all four countries movements in the trade balance have mostly been associated with transitory changes in income the latter also are negatively associated with the trade balance in marked contrast permanent changes in income have little to do with the trade balance these results are examined in light of intertemporal models and real business cycle models copyright 1996 by mit press

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

discussion of disclosure risk and price drift following the seminal work of ball and brown 1968 there is now a voluminous literature that documents and studies the post earnings announcement drift the drift phenomenon refers to the tendency of stock prices and returns to continue drifting in the direction of an earnings surprise for many months subsequent to the public announcement of earnings such a drift seems inconsistent with the hypothesis of an efficient market in which stock prices would adjust rapidly to any new information contained in public announcements the argument is that any slow adjustment process would yield predictable abnormal returns that would quickly be arbitraged away in an efficient market lev and ohlson 1982 characterize the drift as the most damaging evidence to the naive and unwavering belief in market efficiency some of the important documented regularities associated with the drift are as follows

world business cycles under fixed and flexible exchange rates this paper studies the behavior of monthly industrial production indices during the recent periods of fixed and flexible exchange rate s the central conclusions are as follows industrial production indices are subject to stochastic trend growth the variances of the monthly growth rates are higher in the flexible exchange rate period than in the fixed exchange rate period and are related to the degree of openness and to national income more open economies tend to experience more variability while richer more diversified economies experience less and output movements have been correlated across countries under both exchange rate regimes and there is evidence of a world business cycle copyright 1988 by ohio state university press

does trade integration cause convergence abstract using a business cycle model we analyse the conditions for trade integration to produce economic convergence we find large stable economies with integrated structures are likely to diverge but smaller more volatile or less well integrated economies will converge the symmetry of shocks is unimportant

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

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

international transmission of monetary and fiscal policy abstract this paper analyzes the effects of monetary and fiscal expansion on the multiple economies in a dornbusch model and a yaari blanchard model unlike previous literature the paper incorporates union and explicitly solves the n country models the effects of monetary and fiscal expansion outside the union are quite similar to the previous results based on the two country models however the effects of expansion inside the union induce a different dynamic path after the policy changes furthermore the number of union members changes the fluctuations of various endogenous variables

trade and business cycle synchronization in oecd countries a re examination this paper re examines the relationship between trade intensity and business cycle synchronization for 21 oecd countries in the period 1970 2003 instead of using instrumental variables we estimate a multivariate model including variables capturing specialization and similarity of economic policies we confirm that trade intensity affects synchronization but the effect is much smaller than previously reported other factors like specialization and convergence in monetary and fiscal policies have a similar impact on business cycle synchronization as trade intensity the effect of trade on synchronization is not driven by outliers however the impact of trade on synchronization is not robust across deciles c 2007 elsevier b v all rights reserved

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

speculation and demand reduction in english clock auctions with resale many auctions are followed by a resale market which occurs when the winner of the auction resells the item won to one of the participants from the original auction the existence of such transactions may initially appear counter intuitive however this paper will show that active inter bidder resale results from payoff maximizing decisions in the auction that take into account the incentives of a resale opportunity specifically i examine how the existence of an inter bidder resale opportunity impacts bidder behavior in an english clock auction and to what extent altering the bargaining power of the final buyer and reseller in the resale market determines the strategies followed in the initial auction in an attempt to understand the existence of these inter bidder transactions theoretical and behavioral analysis is used to develop hypotheses of speculation bidding above value and demand reduction bidding below value which are directly tested in a controlled experimental setting while value bidding is a dominant strategy in a standard english clock auction without resale when resale is allowed this theoretical claim is weaker demand reduction is observed when the bargaining power is shifted to the final buyer in resale and when the bargaining power is shifted toward the reseller speculation is observed the revenue achieved in the initial auction depends on the behavior observed in the auction regardless of bargaining power revenue is shown to decrease below what would have been earned in an english auction without resale due to demand reduction when the reseller has the bargaining power and speculation is observed this loss in revenue is somewhat mitigated by increased speculation

can government enforcement permanently alter fertility the case of china i introduction in developing countries per capita output growth objectives are often stymied by high birth rates 1 traditional values ignorance of birth control technology and labor intensive farming are all factors which contribute to high fertility rates for those reasons many developing countries experiencing high birth rates adopt population control policies while most programs combine educational efforts with some form of persuasion many also provide strong economic disincentives to high fertility 2 of particular interest from this vantage point is the experience of the people s republic of china which stands alone in its use of quotas on child bearing decisions 3 china s population control policy began with a massive campaign in 1953 reversing an earlier pro natalist stance however that campaign was curtailed by the political turmoil arising from the great leap forward and the cultural revolution population control programs resumed in 1970 with the issuance and enforcement of three reproductive norms late marriage longer spacing between births and fewer children in 1979 the authorities went even further allowing each household to have only one child interest in china s experience arises not only from the severity of the restrictions but also due to the government s ability to enforce them the feasibility of enforcing these restrictions is a result of the deep penetration of the communist party into most aspects of an individual s life including its control over housing employment and salaries 4 however despite the government s extensive involvement in birth planning those who study chinese demography have debated the extent to which government policies are responsible for the large fertility decline in the 1970s 5 this paper uses recent advances in economic theory and econometrics to quantitatively assess the main sources of fertility fluctuations in china specifically we employ a model with endogenous fertility choice which modifies the framework of razin and ben zion 1975 and barro and becker 1989 6 in contrast to other papers we focus on the relationship between government enforcement of population control policies and fertility outcomes we also allow the fertility rate to be affected by 1 household preferences including alterations in taste as well as in education health care and the changing role of women and 2 production technology which mostly captures changes in agricultural output or income we perform simple comparative static analysis to examine long cycles in fertility and output and characterize the transitional dynamics which govern short cycles easterlin 1968 and lee and loschky 1987 provide nice discussions of long fertility cycles the long run steady state predictions will be used to identify the empirical structural vector autoregression var system as well as interpret the underlying structural disturbances additionally the transitional dynamics results can be compared to the estimated dynamic structure finally we employ a structural var as in blanchard and quah 1989 and ahmed ickes wang and yoo 1993 to econometrically disentangle the relative contributions of policy and economic development factors to changes in fertility growth the structural disturbances include a change in the government s enforcement power a technological advance in agricultural production and a preference shift toward a higher fertility rate all of which are capable of generating both short and long cycles in fertility and output we find that government enforcement power has a significant negative effect on fertility accounting for about one third of the variance of the forecast error for fertility growth after the first year an expansion in agricultural output on the other hand yields a short run positive impact on fertility growth and is responsible for almost one fifth of fertility growth variations furthermore while theoretically all shocks have the potential to generate long cycles only preference shifts have statistically significant long run effects

seller beware supply and demand reduction and price manipulation in multiple unit uniform price auctions we experimentally compare under revelation of supply and demand across alternative variations of ascending and descending two sided price clock auctions we find that buyers reduce demand more when the price is ascending but sellers behavior is consistent across clock directions as a result the clock price rule has empirical effects on efficiency even though it is theoretically neutral

tradeable carbon permit auctions how and why to auction not grandfather abstract an auction of carbon permits is the best way to achieve domestic carbon caps designed to limit global climate change to minimize administrative costs permits would be required at the level of oil refineries natural gas pipe lines natural gas liquid sellers and coal processing plants to maximize liquidity in secondary markets permits would be fully tradable and bankable the government would conduct quarterly auctions a standard ascending clock auction in which price is gradually raised until there is no excess demand would provide reliable price discovery an auction is preferred to grandfathering giving companies permits based on historical output or emissions because it allows reduced tax distortions provides more flexibility in distribution of costs provides greater incentives for innovation and reduces the need for politically contentious arguments over the allocation of rents

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

mode locking and international business cycle transmission abstract we investigate international business cycle synchronization business cycles in many countries have a tendency to synchronize with one another in what appears to be a world business cycle yet researchers find that trade and capital linkages are not strong enough for one country to drive business cycles in another country how is this world business cycle formed this study suggests that the world business cycle results from a mode locking phenomenon a nonlinear process by which weak coupling between oscillating systems tends to synchronize oscillations in the systems simulations and econometric analyses are performed to attempt to verify this hypothesis

innovation accounting for the impact of fluctuations in u s variables on the canadian economy innovation accounting is conducted on a nine variable vector autoregression estimated using u s and canadian monthly data for january 1971 to december 1983 this reveals inter alia a positive impact of the u s interest rate on the canadian rate with the role the exchange rate plays in cushioning this impact being clearly apparent a positive effect of the u s money supply on both u s and canadian interest rates a positive albeit muted response of canadian production to a shock in u s production and a persistent influence of u s prices on production negatively and prices positively in canada are also detected l impact des fluctuations dans les variables americaines sur l eonomie canadienne une analyse utilisant la technique d innovation accounting les auteurs utilisent la technique d innovation accounting dans le cadre d un systeme a neuf variables estime comme autoregression vectorielle a l aide de donnees mensuelles canadiennes et americaines couvrant la periode de janvier 1971 a decembre 1983 cette analyse revl un effet positif de la masse monetaire americaine a la fois sur les taux d interet canadiens et americains une reaction positive mais en sourdine du niveau de production au canada a un choc dans le niveau de production americaine et une influence persistence des niveaux de prix americains sur le niveau de production au canada influence negative ainsi que sur les niveaux de prix canadiens influence positive we should like to thank gordon anderson douglas clarke john kennan john kuszczak angelo melino and stanely winer for a number of helpful discussions earlier versions of the paper were presented at the meetings of the canadian economics association in vancouver in june 1983 at the winter meetings of the econometric society in san francisco in december 1983 and in a session of invited papers at the meetings of the canadian economics association in guelph in june 1984 our discussants jacques raynauld in vancouver thomas doan and stephen king in san francisco and allan gregory in guelph offered many useful comments as too did the members of the money macro workshop at the university of western ontario alan harrison also thanks the economics department at the university of warwick for its hospitality and the social science and humanities research council of canada for financial support canadian journal of economics revue canadienne d economique xviii no 4 november novembre 1985 printed in canada imprime au canada 0008 4085 85 784 98 1 50 canadian economics association this content downloaded from 40 77 167 14 on fri 16 sep 2016 06 02 12 utc all use subject to http about jstor org terms impact of fluctuations in us variables 785

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

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

auction institutional design theory and behavior of simultaneous multiple unit generalizations of the dutch and english auctions historically english and dutch auctions have been used for the exchange of single objects such as works of art or single lots of a good such as produce fish or cut flowers where these institutions have been used for the exchange of multiple units such as the australian wool auction using english rules successive lots of the good are sometimes sold sequentially at auction in some but not all instances this is because the goods are not identical even though the various lots may be close substitutes see penny burns 1985 where the goods are accepted universally as being homogeneous as in the securities markets multiple units are often commonly auctioned simultaneously in the securities industry orders are batched for simultaneous execution in multiple unit auctions in what are referred to as call markets that is the security is called for auction at a particular point in time this type of market is used on the stock exchanges of austria belgium france germany and israel some of these are verbal and some are sealed bid auctions although the u s organized exchanges are predominantly continuous rather than call markets except that call markets are used each day to open trading in each listed security there is a growing number of exceptions such as the proliferation since 1984 of auction preferred stock goldman sachs and co october 1984 and money market preferred stock lehman brothers july 1984 we now have dutch auction rate transferable securities called darts stated rate auction preferred stock or straps and many more after the initial subscription offering of this type of security the market is called every 49 days to reset the preferred dividend rate using a multiple unit auction the exchange of shares and the dividend determination is based on the array of stated dividend rates at which existing holders and potential new holders are willing to sell and or buy corresponding quantities the dividend rate and exchange of shares every 49 days is executed using the uniform price or competitive sealed bid mechanism vernon l smith et al 1980 the discussion to follow will be confined to this sealed bid form of the call market call markets provide temporal consolidation of trade orders or other forms of expressing the desire to buy and sell by comparison with continuous trading call markets offer both advantages and disadvantages robert a schwartz 1988 pp 442 6 the cited advantages include low cost of operating the exchange information aggregation and presumed pricing efficiency price stability individual trades which are thought to have a small impact on price reduced price uncertainty and finally nondiscriminatory pricing however there are offsetting disadvantages 1 the market is inaccessible except at the time of call 2 no bid offer contract or price information is available until the results of the call are announced and 3 there is transaction uncertainty because a submitted bid offer may be too low high to execute inside the supply demand cross these conditions are only partially alleviated if there is a secondary market between calls these disadvantages may be significant in september 1988 the wall street journal published an article on the failure of a call market for the auction rate preferred stock economic science laboratory university of arizona tucson arizona this material is based upon work supported by the national science foundation under grant no ses 8320121

auction format and auction sequence in multi item multi unit auctions an experimental study we experimentally study the effect of auction format sealed bid versus closed clock versus open clock and auction sequence simultaneous versus sequential on bidding behaviour and auction outcomes in auctions of multiple related multi unit items prominent field applications are the sale of emission permits fishing rights and electricity we find that when auctioning simultaneously clock auctions outperform sealed bid auctions in terms of efficiency and revenues this advantage disappears when the items are auctioned sequentially in addition auctioning sequentially has positive effects on total revenues across all auction formats resulting from fiercer competition on the item auctioned first

excess capacity monopolistic competition and international transmission of monetary disturbances analyzes the excess capacity monopolistic competition and international transmission of monetary policy disturbances in the united states sheds light on the international impact of monetary policy emphasis on the spillover effects of monetary disturbances similarity of framework used with open economy macroeconomics

the design testing and implementation of virginia s nox allowance auction we report on the design and testing of three auction mechanisms to maximize revenue and efficiency in the sale of two vintages of nitrous oxide emission allowances by the commonwealth of virginia in 2004 the three mechanisms considered were a combinatorial sealed bid csb auction a sequential english clock sec auction and a combinatorial english clock cec auction we find the sec and cec mechanisms to be superior the csb when demand is relatively elastic 2008 elsevier b v all rights reserved

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

discussion of accounting information disclosure and the cost of capital llv motivate their study in two ways first they suggest that it would be helpful to better understand the link between accounting information and the cost of equity capital because institutions such as the sec and fasb that regulate financial reporting take into account or at least are concerned about the capital market consequences of new or existing accounting standards second they suggest that it would be helpful to clarify the role of accounting information in large economies where only certain types of risks are priced because investors likely demand the types of accounting information that help them better assess those risks since the capm provides a time honored theory for the pricing of risk llv begin their analysis by recasting the capm into a form that explicitly highlights the role of public information that is they express means variances and covariances that define the capm in their conditional form conditional on public information they then show that under some simplifying assumptions a firm s expected return or cost of equity capital can be expressed as

international interdependence and business cycle transmission between turkey and the european union 1 introduction because of globalization and the asian financial crisis interest in the international linkages and economic comovements between different regions of the world has recently heightened one economic relationship of particular interest is the relationship between turkey and its european neighbors this relationship is important because of turkey s european orientation and because of turkey s long held ambition of joining the european union eu in view of this situation we examine the linkages and comovements of outputs prices interest rates and money supplies between turkey and europe the main question we address here is do the turkish and european economies move together through time that is are their business cycles synchronized three related questions are how or why does this synchronization or comovement take place is there any evidence of business cycle transmission between the european economies and turkey have these comovement relationships changed over time to address these questions we gathered statistics on macroeconomic variables trade linkages capital flows and historical economic events for most of the analysis germany turkey s largest trading partner is used as a proxy for the eu nations because of the limited period of availability of the quarterly data we examine the relationship using both annual and quarterly data using annual data for 1956 1998 and quarterly data for a shorter period from the first quarter of 1981 through the fourth quarter of 1998 we calculate correlations between macroeconomic variables for turkey and germany and perform principal components analysis tests of cointegration and granger causality and a structured vector autoregression svar impulse response analysis using the method of bernanke 1986 and sims 1986 the synchronization issue is investigated through the use of the graphs correlations and principal components analysis the transmission issue is investigated through the use of the granger causality tests and svar impulse response analysis our results show that the business cycle patterns of turkey and europe are quite different indeed in some cases they appear to be almost 180 out of phase in many cases the correlations between the real growth rate of turkey and those of the eu countries are statistically insignificant principal components analysis reveals a large difference between fluctuations in turkey and those in the eu countries associated regressions also show a surprisingly insignificant relationship between the real gdp growth rates for turkey and the eu and between those for turkey and germany however the svar impulse response analysis reveals a modest positive transmission from germany to turkey our conclusion is that although turkey and europe will obviously both benefit from participation in a free trade relationship with each other see harrison rutherford and tarr 1997 because of the absence of synchronization between turkey and the eu it appears that turkey would incur serious stabilization costs if it were to participate in the european monetary union in addition to the transaction benefits of participating in an optimal currency area there are economic stability losses incurred by a country joining an optimal currency area economic costs arise because a country joining an optimal currency area loses its ability to implement an independent exchange rate and monetary policy for income and unemployment stabilization see krugman and obstfeld 2000 hence countries out of sync with the rest of the countries in the group will be continuously affected by inappropriate monetary policy turkish business cycle fluctuations do not display the similarity with european business fluctuations that would make it beneficial for turkey to be a part of the european monetary union at this time 1 on the other hand dissimilarity in business cycles might make it profitable for european investors to invest in turkey for purposes of diversification

has the euro changed the business cycle abstract in contrast to the notion that the exchange rate regime is non neutral there is little evidence that emu has systematically changed the european business cycle in fact we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the euro exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross country correlations to account for this finding we develop a two country business cycle model which is able to replicate key features of european data in particular the model correctly predicts a limited effect of emu on standard business cycles statistics however further analysis reveals that the euro has changed the nature of the cycle through its impact on the transmission mechanism cross country spillovers have become relatively more domestic shocks relatively less important in accounting for economic fluctuations under emu this explains why there is little change in unconditional volatilities