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

a faith based initiative meets the evidence does a flexible exchange rate regime really facilitate current account adjustment it is often asserted that a flexible exchange rate regime would facilitate current account adjustment using data on over 170 countries over the 1971 2005 period we examine this assertion systematically we find no strong robust or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion even after accounting for the degree of economic development and trade and capital account openness this finding presents a challenge to the friedman 1953 hypothesis and a popular policy recommendation by international financial institutions

estimating the impact of currency unions on trade solving the glick and rose puzzle does leaving a currency union reduce international trade this paper uses a historical approach to re examine the puzzling large apparent impact of currency unions on trade i find that the early time series estimates were driven by the gradual decaying of colonial trade ties and other major geopolitical factors including warfare communist takeovers and ethnic cleansing episodes my methodology which carries lessons for other uses of gravity equations in policy analysis yields point estimates of currency unions on trade that are not statistically distinct from zero

will business cycles in the euro area converge a critical survey of empirical research this survey of business cycle synchronization in the european monetary union focuses on two issues have business cycles become more similar and which factors drive business cycle synchronization we conclude that business cycles in the euro area have gone through periods of both convergence and divergence still there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased higher trade intensity is found to lead to more synchronization but the point estimates vary widely the evidence for other factors affecting business cycle synchronization is very mixed

international taxation and the direction and volume of cross border m as we show that the parent subsidiary structure of multinational firms created by cross border mergers and acquisitions is affected by the prospect of international double taxation specifically the likelihood of parent firm location in a country following a cross border takeover is reduced by high international double taxation of foreign source income at the same time countries with high international double taxation attract smaller numbers of parent firms a unilateral elimination of worldwide taxation by the united states is simulated to increase the proportion of parent firms locating in the united states following cross border mergers and acquisitions from 53 to 58

is the cfa franc zone an optimum currency area summary in this paper we explore the features of the cfa franc zone and compare them to those of the economic and monetary union emu by operationalizing the criteria for an optimum currency area a structural vector autoregression method is used in modeling national outputs as determined by global regional and country specific shocks we find that domestic outputs of the cfa franc zone countries are strongly influenced by country specific shocks while regional shocks are far more important in european countries that have joined the emu the results suggest that the cfa franc zone countries are structurally different from each other and thus are more likely to be subjected to asymmetric shocks they do not appear to form an optimum currency area and the monetary union may have been a costly arrangement for the member countries unless they are compensated with some other benefits

cooperation and competition in climate change policies mitigation and climate engineering when countries are asymmetric we study a dynamic game of climate policy design in terms of emissions and solar radiation management srm involving two heterogeneous countries or group of countries countries emit greenhouse gasses ghgs and can block incoming radiation by unilateral srm activities thus reducing global temperature heterogeneity is modelled in terms of the social cost of srm the environmental damages due to global warming the productivity of emissions in terms of generating private benefits the rate of impatience and the private cost of geoengineering we determine the impact of asymmetry on mitigation and srm activities concentration of ghgs and global temperature and we examine whether a tradeoff actually emerges between mitigation and srm our results could provide some insights into a currently emerging debate regarding mitigation and srm methods to control climate change especially since asymmetries seem to play an important role in affecting incentives for cooperation or unilateral actions

bilateral trade and the eurozone evidence from new member countries the question of whether and how much currency unions increase bilateral trade among their members has garnered much attention since rose s seminal article the answer is as pertinent now as ever for both the eurozone s existing and future members as the financial crisis shook the very foundations of the european monetary union emu and brought its shortcomings into the spotlight this paper analyses the issue using the gravity equation with country pair and time fixed effects for a sample of the four new members of the emu slovakia slovenia malta and cyprus which has to the author s knowledge not been studied thus far due to their recent joining and controls drawn from the european union this paper finds a positive relationship between joining the emu and trade with emu partners but not with non emu partners

monetary union price level convergence and inflation how close is europe to the usa abstract the pattern of price dispersion across european and us cities from 1990 to 2004 is documented there is a striking decline in dispersion for traded goods prices in europe most of which took place prior to the launch of the euro dispersion in the euro area is now quite close to that of the usa this evidence provides useful facts for future work assessing the importance of various developments in europe harmonization of tax rates convergence of incomes and labor costs liberalization of trade and factor markets and increased coherence of monetary policy

international portfolio reallocation diversification benefits and european monetary union abstract we investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross section of countries spanning over two sample periods 1997 2001 and 1997 2005 we find that the strongest drivers are the marginal diversification benefits arising from the pure asset component and the initial degree of underweight this evidence suggests that global portfolio reallocations over the asset boom and bust period were determined by optimal diversification considerations we also find that due to economic and monetary union emu the weight assigned by euro area investors to investment in euro area countries increased significantly in equity and fixed income portfolios with a trade diverting effect against the british bond market

the impact of monetary union on macroeconomic integration evidence from west africa data from 19 african nations is used to investigate the hypothesis that monetary union represented in this case by the cfa franc zone augments the extent of macroeconomic integration the paper covers two key dimensions of integration the volume of bilateral trade and the magnitude of cross country business cycle correlation restricting our attention to a part of the world in which for historical reasons monetary union membership is exogenous to economic characteristics we can test whether the large single currency effects claimed by a rose apply within a sample of less developed countries

budget constraint prices as preference changing parameters of generalized fechner thurstone direct utility functions let v x be any direct utility function characterizing consumer preferences that are reflexive transitive and complete and whose parameters are fixed relative to the usual linear budget constraint p x m here x designates the vector x1 x and is confined to the positive n orthant xi designates quantity of the ith commodity p is the vector p pn of positive commodity prices and m designates total expenditure let x p m designate the system of demand functions derived from v x subject to px m which possess the properties of zero degree homogeneity symmetry and semidefinite negativity let w x 0 designate a direct utility function with a parameter vector 0 dependent on the price vector p that appears in the budget constraint and b that rationalizes the same system of demand functions as v x namely x p m probably many economists who have considered price dependent preferences would conjecture that every such price dependent utility function w x p satisfying a and b is of the rather restricted form

friedman redux external adjustment and exchange rate flexibility milton friedman argued that flexible exchange rates facilitate external adjustment recent studies find surprisingly little robust evidence that they do we argue that this is because they use composite multilateral exchange rate regime classifications which often mask heterogeneous bilateral relationships between countries constructing a novel bilateral exchange rate regimes data set for 181 countries over 1980 2011 we find a statistically strong relationship between exchange rate flexibility and the speed of external adjustment our results are supported by several natural experiments of exogenous changes in bilateral exchange rate regimes and by monte carlo simulations which show that tests based on standard multilateral regime classifications tend to have low statistical power

honey the currency union effect on trade hasn t blown up as the value of real bilateral trade between countries i and j at time t cu is a dummy variable which is unity if i and j sharethe same currency at time t z is a vector of controls given by an augmentedgravity model c are the associate nuisance coefficients and is a hopefully well behaved residual my chief finding was that was large and robust mypoint estimate was 1 2 implying that currency union is associated with atripling since exp 1 2 3 of trade in his paper in this issue volker nitsch provides three pieces of value added first he finds and corrects a number of data errors in my original data set second he shows that adding extra controls to my empirical setup disaggregating bycurrency unions and adjusting for missing data affects the results he concludesthat the effect of currency union on trade is smaller than my original estimates has not been reliably estimated and may be zero

the role of expenditure switching in the global imbalance adjustment abstract in theory nominal exchange rate movements can lead to expenditure switching when they generate changes in the relative prices of goods across countries this paper explores whether the expenditure switching role of exchange rates has changed in the current episode of significant global imbalances we develop a multi sector two country model for the united states and the g6 countries with the rest of the world captured by exogenous price and demand shocks and estimate the model over two sub samples which cover the periods before and after the early 1990s our results indicate that both u s imports and exports have become much less responsive to exchange rate movements in recent years mainly due to changes in firms pricing behavior and global trade pattern these findings suggest that the exchange rate would have to move by a much larger amount now than in the 1970s and 1980s to reduce the u s trade deficit by a given amount

financial integration gdp correlation and the endogeneity of optimum currency areas the paper analyses the relationship between trade financial integration and business cycle synchronization in the euro area the introduction of the euro has had a noticeable impact on european financial markets evidence that capital market integration exerts a positive effect on output correlation has two major implications first it corroborates the hypothesis of the endogeneity of optimum currency areas whereby after joining a monetary union countries better meet standard oca criteria second it provides european policy makers with yet another reason to pursue financial integration in the euro area and in prospective members as well

energy balance climate models and general equilibrium optimal mitigation policies in a general equilibrium model of the world economy we develop a two dimensional energy balance climate model featuring heat diffusion and anthropogenic forcing driven by global fossil fuel use across the sphere of the earth this introduces an endogenous location dependent temperature function driving spatial characteristics in terms of location dependent damages resulting from local temperature anomalies into the standard climate economy framework we solve the social planner s problem and characterize the competitive equilibrium for two polar cases differentiated by the degree of market integration we define optimal taxes on fossil fuel use and how they may implement the planning solution our results suggest that if the implementation of international transfers across latitudes is not possible then optimal taxes are in general spatially non homogeneous and may be lower at poorer latitudes the degree of spatial differentiation of optimal taxes depends on heat transportation by employing the properties of the spatial model we show by numerical simulations how the impact of thermal transport across latitudes on welfare can be studied

games of monetary and fiscal interactions in the emu abstract this paper constructs various models of the emu and ecb when member countries have different objectives voting in pursuit of national interest can yield moderate and stable inflation the metaphor of walsh type contracts implements a monetary policy rule that averages the member countries most preferred rules in a repeated relationship where a country suffering a large adverse shock can use political bargaining to subvert the ecb s commitment the optimal rule should incorporate some flexibility to forestall that finally freedom of national fiscal policies undermines the ecb s monetary commitment this may justify fiscal constraints like the stability and growth pact

out in the cold iceland s trade performance outside the european union and european monetary union although entering currency and customs unions involve both costs and benefits an increasing body of research is finding that the benefits in terms of international trade creation are remarkably large focusing simply on the european monetary union emu rather than the broad range of currency unions studied by other authors we find that the trade impact of emu is smaller but still substantial our findings suggest that the iceland s trade could increase by about 60 and that the trade to gdp ratio could rise by 12 percentage points should iceland join the european union and emu copyright 2006 oxford university press

international pollution control cooperative versus noncooperative strategies abstract international pollution control involving two neighboring countries is modeled as a simple two player dynamic game each country produces a good that is consumed by domestic households production of each consumption good results in emissions of pollutants households in each country derive utility from the consumption of the domestically produced good but incur costs through the total stock of pollution stock externality in this setting we characterize cooperative as well as noncooperative pollution control strategies of the governments of the two countries that maximize the discounted stream of net benefits of a representative consumer it turns out that when the governments are restricted to use linear strategies noncooperative behavior results in overall losses for both countries if on the contrary governments use nonlinear markov perfect strategies and the discount rate is small enough a pareto efficient steady state pollution stock can be supported as a differentiable subgame perfect equilibrium thus the emergence of first best solutions cooperative outcomes does not require any institutional arrangements threats retaliation etc but can be brought about through the use of nonlinear markov perfect equilibrium strategies

measuring welfare effects of product contamination with consumer uncertainty abstract a methodology is developed for measuring consumer welfare loss from market demand due to contamination when information is imperfect comparison of behavior before and after awareness permits calculation of the cost of ignorance which occurs when news of contamination is withheld or undiscovered for a time as well as when excessive reporting and exaggeration cause overreaction avoidance costs are also calculated for consumers who consume less than they would with perfect information due to risk aversion the methodology is applied to analyzing the heptachlor crisis which reduced milk consumption in hawaii by over 80

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

are crop yields normally distributed the evidence for nonnormality of crop yields is reassessed three methodological problems are identified in typical yield distribution analyses i misspecification of the nonrandom components of yield distributions ii missreporting of statistical significance and iii use of aggregate timeseries ats data to represent farm level yield distributions one or more of these problems infect virtually all evidence against normality to date the positive contribution of the article is a set of principles that must be followed in any valid investigation of yield normality

trade integration and business cycle convergence is the relation robust across time and space in this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959 2003 most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country pair specific effects our estimates using both fixed and random effects methodologies suggest that trade intensity and the business cycle correlation are positively related to one another however detailed investigation shows that this relationship exists mainly for the european countries

an optimum currency area odyssey abstract the theory of optimum currency areas was conceived and developed in three highly influential papers written by mundell 1961 mckinnon 1963 and kenen 1969 those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally tailored monetary policy and the adjustment of an exchange rate of a national currency we trace the development of optimum currency area theory which after a flurry of research into the subject in the 1960s was relegated to intellectual purgatory for about 20 years we then discuss factors that led to a renewed interest into the subject beginning in the early 1990s milton friedman plays a pivotal role in our narrative friedman s work on monetary integration in the early 1950s presaged subsequent optimum currency area contributions mundell s classic formulation of an optimal currency area was aimed in part at refuting friedman s strong case for floating exchange rates and friedman s work on the role of monetary policy had the effect of helping to revive interest in optimum currency area analysis the paper concludes with a discussion of recent analytical work using new keynesian models which has the promise of fulfilling the unfinished agenda set out by the original contributors to the optimum currency area literature that is providing a consistent framework in which a country s characteristics can be used to determine its optimal exchange rate regime

endogenous oca analysis and the early euro experience some have argued that the endogenous responses to the formation of a currency area are so strong that one need not worry about optimum currency area conditions ex ante we argue that this is much too strong a conclusion we draw on a number of recent studies to evaluate the endogeneity experiences of the eurozone in three major areas trade flows business cycle synchronisation and structural reforms to improve labour and product market flexibility simple before and after comparisons are insufficient for analysis of endogeneity the experiences of non euro western european economies suggest that broader trends also had considerable influence on trade and business cycle patterns while trade rose substantially within the eurozone it also rose with and among other european economies we argue that political economy considerations tend to dampen the magnitude of endogeneity efforts on structural reforms and that meeting conditions for entry may be a more powerful mechanism in this than are subsequent endogenous responses we also discuss a number of areas for further research

workers of the world unite franchise extensions and the threat of revolution in europe 1820 1938 abstract we test the hypothesis that the extension of the voting franchise in europe was related to the threat of revolution we contend that international diffusion of regime contention and information about revolutionary events happening in neighboring countries generate the necessary variation in the perceived threat of revolution using two samples of european countries covering the period from 1820 to 1938 we find robust evidence which is consistent with the threat of revolution hypothesis we also find some evidence that war triggered suffrage reform

trade creation and diversion revisited accounting for model uncertainty and natural trading partner effects summary the effect of preferential trade agreements ptas on trade flows is subject to model uncertainty stemming from the diverse and even contradictory effects suggested by the theoretical pta literature the existing empirical literature has produced remarkably disparate results and the wide variety of empirical approaches reflects the uncertainty about the correct set of explanatory variables that ought to be included in the analysis to account for the model uncertainty that surrounds the validity of the competing pta theories we introduce bayesian model averaging bma to the pta literature statistical theory shows that bma successfully incorporates model uncertainty in linear regression analysis by minimizing the mean squared error and by generating predictive distributions with optimal predictive performance once model uncertainty is addressed as part of the empirical strategy we find strong evidence of trade creation trade diversion and open bloc effects our results are robust to a range of alternative empirical specifications proposed by the recent pta literature copyright 2010 john wiley sons ltd

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

hard or soft pegs choice of exchange rate regime and trade in africa summary this paper revisits the link between fixed exchange rate regimes and trade in the context of africa s exchange rate arrangements differentiating the effects of hard pegs currency unions from conventional soft pegs using a novel dataset of exchange rate regime classification the paper augments the gravity model of bilateral trade flows with measures of currency unions and conventional pegged arrangements and benchmarks africa s experience against the rest of the world we find that in both samples currency unions and pegs increase trade vis a vis more flexible exchange rate arrangements through channels in addition to reduced exchange rate volatility however the effect is almost twice as large for africa in addition the trade generating effect of pegs is at least as large for africa as that of currency unions suggesting that pegs could present a viable option perhaps an alternative to currency unions to promote trade in the region

global output growth and volatility spillovers this article examines discernable patterns of real gross domestic product gdp growth co movements across 29 countries using consistent time series data 1912 2008 of these countries only 12 are found to form three statistically significant groupings i e g6 six organization for economic co operation and development oecd european countries g4 four anglo saxon countries and g2 two major asian countries one may then conclude that inter alia geographical proximity cultural ties and the level of socio economic and financial ties among countries determine the global systematic co movements of growth rates our results indicate that any recession in the us initially engulfs other anglo saxon countries as well as g6 and g2 countries before exerting its adverse knock on effects to the rest of the world a multivariate generalized autoregressive conditional heteroscedasticity mgarch model is also used to examine the transmission of gdp growth across these three groups and their corresponding vol

long run growth and volatility which source really matters the aim of the article is to analyse the relationship between long run growth and business cycle volatility in particular the main purpose of this article is to identify which source of volatility is most detrimental to growth using cross country data from 1970 to 2000 and several indicators of volatility such as inflation exchange rate government expenditure output and investment volatility this article shows that although all these measures of volatility are remarkably harmful for growth business cycle investment volatility is the main source that hampers long run growth this relation is robust to different measures of business cycle and to different sub samples of countries

north south and distance in the gravity model abstract it is generally assumed that distance in the gravity model strictly reflects frictions impeding bilateral trade however distances north south could also reflect differences in factor endowment that provide opportunities for profitable trade this paper investigates the hypothesis that if we control for distance in the ordinary sense differences north south promote international trade the hypothesis receives ample support moreover the significance of differences north south survives a battery of robustness tests concerning period distinctions between differences in latitude north north north south and south south and controls for other measures of differences in factor endowment such as differences in per capita output and differences in average temperature rainfall and seasonal range in temperature the impact of differences north south on bilateral trade has also been falling this decline in turn might be partly responsible for the weakening of the influence of distance that has been occurring since world war ii this last hypothesis receives confirmation as well finally the paper examines the impact of internal distance and remoteness on trade since both variables are country specific this is done by studying their impact on the country fixed effects themselves in the earlier estimates internal distance turns out to have a far greater impact than remoteness by an order of 10

the effects of exchange rate volatility on agricultural trade i extend cho sheldon and mccorriston s 2002 analysis of the effect of exchange rate volatility on agricultural trade among the g 10 countries to a broad sample of developed and developing nations i replicate their original finding that exchange rate volatility has a large negative impact on agricultural trade between g 10 members after controlling for agricultural export subsidies which are correlated with exchange rate volatility i show that the original impact declines by half using the extended sample i find that the effect of exchange rate volatility is much larger for developing country exporters than for developed exporters copyright 2008 oxford university press

pollution control with uncertain stock dynamics when and how to be precautious abstract the precautionary principle pp applied to environmental policy stipulates that in the presence of uncertainty society must take robust preventive action to guard against worst case outcomes it follows that the higher the degree of uncertainty the more aggressive this preventive action should be this normative maxim is explored in the case of a stylized dynamic model of pollution control with uncertain in the knightian sense stock dynamics using the robust control framework of hansen and sargent 12 optimal investment in damage control is found to be increasing in the degree of uncertainty thus confirming the conventional pp wisdom optimal mitigation decisions however need not always comport with the pp in particular when damage control investment is both sufficiently cheap and sensitive to changes in uncertainty damage control investment and mitigation may act as substitutes and a pp with respect to the latter can be unambiguously irrational the theoretical results are applied to a calibrated linear quadratic model of climate change the analysis suggests that a reversal of the pp with respect to mitigation while theoretically possible is very unlikely

distance language religion and the law of one price evidence from canada and nigeria we examine the impact of physical distance language and religion on law of one price lop deviations across interwar canadian and modern nigerian cities the data comprise monthly average retail prices for narrowly defined goods collected by national statistical agencies we find that differences in the fraction of the city population sharing a common language and religion have a significant impact on lop deviations the impact of language differences is consistent with a recently developed theory in which both trade costs and differences in signal noise ratios contribute to lop deviations

adverse selection in crop insurance actuarial and asymmetric information incentives adverse selection is often blamed for crop insurance indemnities exceeding premiums plus subsidies however nationwide empirical evidence has been lacking or based on inadequate county level data this article uses nationwide farm level data on corn and soybeans to decompose incentives for participation in u s multiple peril crop insurance into a risk aversion incentive the conventional justification for insurance an actuarial or subsidy incentive reflecting government subsidization and an asymmetric information incentive which reflects farmers information advantage results show that the risk aversion incentive is small farmers participate in crop insurance primarily to receive the subsidy or because of adverse selection possibilities

is the exchange rate regime really irrelevant for external adjustment we argue that evidence on whether floating exchange rates facilitate external adjustment is contradictory because existing regime classifications do not adequately capture exchange rate flexibility relevant to external adjustment using a trade weighted bilateral exchange rate volatility measure we show that exchange rate flexibility indeed matters for current account dynamics

spatial climate economic models in the design of optimal climate policies across locations we couple a one dimensional energy balance climate model with heat transportation across latitudes with an economic growth model we derive temperature and damage distributions across locations and optimal taxes on fossil fuels which in contrast to zero dimensional integrated assessment models account for cross latitude externalities we analyze the impact of welfare weights on the spatial structure of optimal carbon taxes and identify conditions under which these taxes are spatially nonhomogeneous and are lower in latitudes with relatively lower per capita income populations we show the way that heat transportation affects local economic variables and taxes and locate sufficient conditions for optimal mitigation policies to have rapid ramp up initially and then decrease over time

exchange rate regimes and international trade evidence from the classical gold standard era in this paper we show that the spread of the classical gold standard in the late nineteenth century increased international trade flows this positive effect was compounded whenever a group of countries formed a monetary union applying the gravity model of trade to more than 1 100 country pairs during the 1870 1910 period we find that two countries on gold would trade 60 percent more with each other than with countries on a different monetary standard moreover a monetary union would more than double bilateral trade flows our findings are relevant for current discussions on alternative monetary arrangements for the twenty first century

the incidence of mandated maternity benefits i consider the labor market effects of mandates which raise the costs of employing a demographically identifiable group the efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group specific wages i study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans raising the relative cost of insuring women of childbearing age i find substantial shifting of the costs of these mandates to the wages of the targeted group correspondingly i find little effect on total labor input for that group jel 118 j32 h51 in an era of tight fiscal budget constraints mandating employer provision of workplace benefits to employees is an attractive means for a government to finance its policy agenda consequently in recent years there has been a growth of interest in mandated benefits as a tool of social policy for example the centerpiece of president bill clinton s health care proposal is mandated employer provision of health insurance and more than 20 states have man

the internationalization of inventive activity a gravity model using patent data this paper discusses the extent and the determinants of the internationalization of european inventive activity between 1990 and 2004 using an innovative method to treat the information contained in the european patent office s patstat database the observed level of internationalization of inventive activities while being rather low has steadily increased over time the amount of collaboration between actors residing in different countries is assessed by means of a gravity model as it is familiar in the literature on international trade the amount of bilateral collaboration is positively affected by the presence of a common language and a common border and by the common participation in the european union participation in the euro zone is also found to have a marginally negative effect international collaboration is negatively affected by distance with estimated elasticities that are significantly smaller than the ones that characterize international trade contrary to the rumors about the death of distance this effect has become stronger in recent years

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

strategic implications of counter geoengineering clash or cooperation abstract solar geoengineering has received increasing attention as an option to temporarily stabilize global temperatures a key concern is that heterogeneous preferences over the optimal amount of cooling combined with low deployment costs may allow the country with the strongest incentive for cooling the so called free driver to impose a substantial externality on the rest of the world we analyze whether the threat of counter geoengineering technologies capable of negating the climatic effects of solar geoengineering can overcome the free driver problem and tilt the game in favour of international cooperation our game theoretical model of countries with asymmetric preferences allows for a rigorous analysis of the strategic interaction surrounding solar geoengineering and counter geoengineering we find that counter geoengineering prevents the free driver outcome but not always with benign effects the presence of counter geoengineering leads to either a climate clash where countries engage in a non cooperative escalation of opposing climate interventions negative welfare effect a moratorium treaty where countries commit to abstain from either type of climate intervention indeterminate welfare effect or cooperative deployment of solar geoengineering positive welfare effect we show that the outcome depends crucially on the degree of asymmetry in temperature preferences between countries

diminishing marginal utility of wealth and calibration of risk in agriculture expected utility theory eut has dominated the agricultural economics literature on behavior under risk particularly since the late 1970s in eut risk preferences are completely defined by the curvature of the utility function an expected utility maximizer with a concave utility curve would avoid choices that represent a greater wealth risk estimates of risk aversion coefficients based on assumed utility functional forms have been valued in predicting producers responses to proposed policy see saha shumway and talpaz for a review yet these estimates are biased if there are omitted variables such as knowledge understanding and managerial expertise that are related to the probability distribution of profit if the production function is jointly estimated with the utility function then the riskincreasing or risk reducing properties of production inputs may also wrongly be ascribed to the concavity of the utility function since allais substantial evidence has been accumulated to suggest systematic flaws in eut mostly in experimental settings with small stakes applied economists have regarded these violations as exceptions due to the special circumstances surrounding their observation recently rabin showed that attributing all risk behavior in small gambles solely to diminishing marginal utility of wealth leads to improbable levels of risk aversion his calibration theorem based on dichotomous choices suggests that a person who turns down a lottery with a 0 5 probability of winning 125 and 0 5 probability of losing 100 will always turn down any bet with a 0 5 chance of losing 600 no matter how large of a gain may be had with the remaining 0 5 probability we generalize rabin s work to continuous payoff distributions and continuous choice problems to show that his criticism extends to realistic risky situations the concavity problem is not limited to small money risks rather when risky choices have similar average payouts utility functions must display ridiculous levels of concavity to predict individual choices below we present our general calibration problem and apply the results to an empirical risk study in agricultural economics to illustrate the unintended consequences of using eut to explain risk response

evaluation of currency regimes the unique role of sudden stops this paper tackles two established puzzles in international macroeconomics literature the first is the lack of systematic differences in the macroeconomic performance across exchange rate regimes the second is the absence of a clear empirical relationship between macroeconomic performance and capital account liberalization we suggest that these negative findings may be due to empirical methods that fail to account for a latent economic crisis state influenced by exchange rate and capital account regimes and to allow that latent variable to influence the growth effects of policy regimes in practice we model and estimate the latent state of the economy as a crisis probability our proposed framework of analysis allows exchange rate and capital market liberalization regimes to have both a direct effect on short term growth and an indirect effect on growth that is channelled through their effects on the crisis probability the empirical decomposition of the total effect into two conflicting effects helps resolve the puzzles assaf razin and yona rubinstein

the euro and corporate valuations in this paper we study the changes in corporate valuations induced by the adoption of the euro as the common currency in europe we use corporate level data from seventeen european countries of which eleven adopted the euro we show that the introduction of the euro has increased tobin s q ratios by 17 1 in the euro area countries that previously had weak currencies part of the increase in corporate valuations is explained by the decrease in interest rates and by the decrease in the cost of equity the increases in tobin s q are larger for firms that would be harmed by currency devaluations the author 2008 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

the nonlinear impact of currency unions on bilateral trade abstract most gravity model specifications assume that a currency union varies the level of bilateral trade between members by a constant proportion we demonstrate that a common currency also alters the slope of the relationship between bilateral trade and member country gdps

the mirage of exchange rate regimes for emerging market countries this paper argues that much of the debate on choosing an exchange rate regime misses the boat it begins by discussing the standard theory of choice between exchange rate regimes and then explores the weaknesses in this theory especially when it is applied to emerging market economies it then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits the conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal financial and monetary institutions in producing macroeconomic success in emerging market countries this suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable and more on these deeper institutional arrangements a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years

climate engineering under deep uncertainty abstract climate engineering and in particular solar radiation management srm is attracting increasing attention as a climate policy option however its potentially strategic nature and unforeseen side effects provide major policy and scientific challenges we study the role of srm in a two country model with the notable feature of deep uncertainty modeled as model misspecification of srm side effects we find that deep uncertainty leads to a reduction in srm deployment under both global cooperation and strategic nash behavior and that the effect is larger if countries act strategically furthermore we demonstrate that if countries have different model confidence about srm impacts then the more confident country will engage more strongly in using srm leading this country to free drive

fixed exchange rates and trade abstract a classic argument for a fixed exchange rate is its promotion of trade empirical support for this however is mixed while one branch of research consistently shows a small negative effect of exchange rate volatility on trade another more recent branch presents evidence of a large positive impact of currency unions on trade this paper helps resolve this disconnect our results which use a new data based classification of fixed exchange rate regimes show a large significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it these results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates

currency unions and trade how large is the treatment effect currency unions and trade what can the data say the impact of a common currency on trade can be grossly mismeasured if countries that belong to currency unions are systematically different from those that do not and if the relationship between trade and its observable determinants is complex i argue that such complications are plausible and likely to distort the empirical results of a recent economic policy paper by andrew rose issue 30 2000 pp 7 45 using techniques designed to be robust in this situation i find that the effects of common currency on international trade are considerably less dramatic and much less precisely estimated torsten persson i have always maintained that the measured effect of a single currency on trade appears implausibly large but i am not convinced by torsten persson s diagnosis and proposed solution i apply a variety of estimation techniques to a new larger data set where many more instances of currency union creation and abandonment make it possible to rely on time series as well as cross sectional evidence the results are similar to my earlier ones the effect of a single currency on trade is large andrew rose

the effect of the euro on foreign direct investment abstract in this paper the recent effect of the european monetary union on inward fdi flows is examined using a difference in differences approach the estimated results show that the introduction of the euro raised inward fdi flows by approximately 16 within the euro area by approximately 11 to non members and weakly by around 8 from non member countries into the euro area moreover the geographical effects of the euro are explored the results show partial agglomeration tendencies for the euro area there are also some indications of increased importance of vertical specialization in the sample

trade costs 1870 2000 what has driven trade booms and trade busts in the past century and a half was it changes in global output or in the costs of international trade to address this question we derive a micro founded measure of aggregate bilateral trade costs based on a standard model of trade in differentiated goods these trade costs gauge the difference between observed bilateral trade and frictionless trade in terms of an implied markup on retail prices of foreign goods thus we are able to estimate the combined magnitude of tariffs transportation costs and all other macroeconomic frictions that impede interna tional trade but that are inherently difficult to observe we use this measure to examine the growth of global trade between 1870 and 1913 its retreat from 1921 to 1939 and its subsequent rise from 1950 to 2000 we find that trade cost declines explain roughly 55 percent of the pre world war i trade boom and 33 percent of the post world war ii trade boom while a precipi tous rise in trade costs explains the entire inter

the effect of competition on trade evidence from the collapse of international cartels how do changes in competitive intensity affect trade patterns some cartels may find it advantageous to eliminate cross hauling and divide markets geographically we exploit a quasi natural experiment associated with increased antitrust enforcement to determine if market division strategies were used in seven recently prosecuted international cartels since antitrust activity is unlikely to affect spatial patterns of demand and supply other than through its effect on the competitive environment enforcement induced changes are ideally suited to study the effect of competition on trade patterns analyzing the cartels individually and as a group we find no significant change in spatial patterns of trade following cartel breakup in particular there is no systematic change in the effect of distance on trade these results suggest that cross hauling is not uncommon under collusion and hence that the existence of cross hauling by itself does not provide evidence of effective competition

optimal institutional arrangements for transboundary pollutants in a second best world evidence from a differential game with asymmetric players abstract this paper uses a dynamic model with asymmetric players to explore the question in a second best world should environmental regulations for transboundary pollutants be carried out locally or centrally we find that combined payoffs are larger with decentralized control if payoffs are sufficiently heterogeneous and initial pollution stocks are sufficiently small this result is obtained because the central authority applies one shadow price to pollution i e it uses uniform standards whereas local authorities use different shadow prices and therefore different standards

regionalism in standards good or bad for trade regional agreements on standards have been largely ignored by economists and unconditionally blessed by multilateral trade rules the authors find theoretically and empirically that such agreements increase trade between participating countries but not necessarily with the rest of the world adopting a common standard in a region that is harmonization boosts exports of excluded industrial countries to the region but it reduces exports of excluded developing countries possibly because developing country firms are hurt more by an increase in the stringency of standards and benefit less from economies of scale in integrated markets mutual recognition agreements are more uniformly trade promoting unless they contain restrictive rules of origin in which case intra regional trade increases at the expense of trade with other especially developing countries the authors propose a modification of international trade rules to strike a better balance between the interests of integrating and excluded countries

on the distribution of exchange rate regime treatment effects on international trade abstract this paper provides evidence of heterogeneous treatment effects on trade for six different types of exchange rate regime transitions utilizing data on 218 643 country pair year observations all together previous research mainly focused on the currency union effect on trade and widely assumed that country pairs with identical observable characteristics receive the same effect we test the hypothesis of a homogeneous treatment effect empirically and find substantive statistical support for the presence of effect heterogeneity moreover we characterize the probability distribution of effect heterogeneity among observationally equivalent country pairs by way of a random coefficients model we estimate selected features of the empirical distributions of the treatment effects for each of the six different types of exchange rate regime transitions under two different sets of assumptions about the probability distribution of effect heterogeneity our findings suggest that the immediate effects on trade from switching to an exchange rate regime different from the one in the outset have wide waists and exhibit large positive extreme values we estimate the probability of two countries to experience an immediate positive effect on the growth of bilateral trade due to the adoption of any new exchange rate regime tighter or not to be approximately one half

coherent arbitrariness stable demand curves without stable preferences economic theories of valuation generally assume that prices of commodities and assets are derived from underlying fundamental values for example in finance theory asset prices are believed to reflect the market estimate of the discounted present value of the asset s payoff stream in labor theory the supply of labor is established by the tradeoff between the desire for consumption and the displeasure of work finally and most importantly for this chapter consumer microeconomics assumes that the demand curves for consumer products chocolates cds movies vacations drugs and so forth can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products because it is difficult as a rule to measure fundamental values directly empirical tests of economic theory typically examine whether the effects of changes in circumstances on valuations are consistent with theoretical prediction for example whether labor supply responds appropriately to a change in the wage rate whether compensated demand curves for commodities are downward sloping or whether stock prices respond in the predicted way to share repurchases however such comparative static relationships are a necessary but not sufficient condition for fundamental valuation e g summers 1986 becker 1962 was perhaps the first to make this point explicitly when he observed that consumers choosing commodity bundles randomly from their budget set would nevertheless produce downward sloping demand curves

the impact of decoupled payments on farm choices conceptual and methodological challenges abstract in this paper we review the methodological framework for analysing decoupled payments in models of agricultural production market and technological uncertainty farm efficiency credit constraints farm household choices involving extra agricultural decisions policy uncertainty and long run impact of decoupling on investment and land values are the relevant issues that should be pursued by methodological and empirical analysis future research should refine the analysis of decoupled payments mainly trying to provide results that can be useful for policy simulation to bridge the gap between analysis at the individual level and sector policy models

real exchange rate adjustment in and out of the eurozone it is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates recently this has been seen as a key failure of the eurozone this paper presents evidence that throws doubt on this conclusion our evidence suggests that real exchange rate movement within the eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the eurozone this interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods

the myth of decoupling the decoupling hypothesis is the idea that business cycles in emerging market economies have become more independent from business cycles in advanced economies in recent years decoupling essentially amounts to a structural break in the degree of business cycle interdependence between the two groups of economies and it can be tested as such we develop an innovative measure of business cycle interdependence based on the euclidean distance available at the annual frequency which allows for a proper test for a structural break in a graphical setup we also make use of a standard econometric test both approaches point to the same conclusion there has been no decoupling in recent years if anything the degree of business cycle interdependence has become stronger

disaggregated trade and disaggregated currency unions a ranking of common currency effects andrew rose has long argued that a common currency has a large effect on increasing trade recently rose has called into question the reliability of this conclusion as new techniques have emerged for estimating gravity equations this article uses the sector specific gravity model developed by anderson and yotov 2010a to investigate if disaggregated trade can provide a reliable estimate of a common currency s effect disaggregating trade alone is insufficient to obtain a reliable estimate of a currency union regardless of econometric technique when the effect of a common currency on trade is uniform across all unions disaggregating the universe of currency unions with individual effects provides a reliable ranking of currency unions independent of estimation method by the effect that each union s currency has on increasing trade these rankings differ across sectors

the incredible economics of geoengineering the focus of climate policy so far has been on reducing the accumulation of greenhouse gases that approach however requires broad international cooperation and being expensive has been hindered by free riding so far little action has been taken an alternative approach is to counteract climate change by reducing the amount of solar radiation that strikes the earth geoengineering in contrast to emission reductions this approach is inexpensive and can be undertaken by a single country unilaterally but geoengineering also has worrying consequences it may harm some countries it would not address ocean acidification it would pose new risks the fundamental challenge posed by this new technology is not free riding but governance who should decide if and under what circumstances geoengineering should be used

on the mis use of wealth as a proxy for risk aversion tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion the intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion which are themselves assumed monotonic in wealth the effect of a change in wealth on contract choice is clearly identified we show that tests of risk sharing relying on wealth as a proxy for risk aversion are identified only insofar as the econometrician is willing to assume that a the principal is risk neutral or her preferences exhibit constant absolute risk aversion cara and b the agent is risk neutral

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