china s macroeconomic imbalances causes and consequences in recent years china has experienced two forms of extreme macroeconomic imbalance an expenditure imbalance in the sense of very high investment and very low consumption giving rise to rapid capital accumulation and an imbalance between expenditure and production producing external imbalance i e a huge surplus on the current account of the balance of payments both imbalances imply a low rate of time discount by both government and society consumption in the present is forgone in favour of consumption in the future the paper examines how these imbalances came about and goes on to consider whether they can be sustained and how they might be redressed there is no evidence that the rapid capital accumulation has reduced the rate of profit on capital and thus the incentive to invest however persistent external imbalance poses a threat to investment if it generates excess liquidity and asset bubbles the current account surplus rose remarkably in the years 2004 07 this was associated with exogenous increases in competiveness and in saving both attributable to the economic reform policies on current policies the surplus is likely to rise again once the world economy recovers from its recession this poses three sorts of problems each of which is examined in turn difficulties for macroeconomic stabilisation policies risk of capital loss on the foreign exchange holdings and the threat of retaliation by china s trading partners a combination of internal and external policies will be required to redress the imbalance

learning and time varying macroeconomic volatility abstract this paper presents a dsge model in which agents learning about the economy can endogenously generate time varying macroeconomic volatility economic agents use simple models to form expectations and need to learn the relevant parameters their gain coefficient is endogenous and is adjusted according to past forecast errors the model is estimated using likelihood based bayesian methods the endogenous gain is jointly estimated with the structural parameters of the system the estimation results show that private agents appear to have often switched to constant gain learning with a high constant gain during most of the 1970s and until the early 1980s while reverting to a decreasing gain later on as a result the model can generate a pattern of volatility which is increasing in the 1970s and falling in the second half of the sample with a decline that can roughly match the magnitude of the so called great moderation in the 1984 2007 period the paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time varying volatility in the exogenous shocks even when these have constant variance by construction

assessing china s exchange rate regime the imf articles of agreement forbid a country from manipulating its currency for unfair advantage the us treasury has been legally required since 1988 to report to congress biannually regarding whether individual trading partners are guilty of manipulation one part of this paper tests econometrically two competing sets of hypothesized determinants of the treasury decisions 1 legitimate economic variables consistent with the imf definition of manipulation the partners overall current account gdp its reserve changes and the real overvaluation of its currency and 2 variables suggestive of domestic american political expediency the bilateral trade balance us unemployment and an election year dummy the econometric results suggest that the treasury verdicts are driven heavily by the us bilateral deficit though other variables also turn out to be quite important in 2005 china announced a switch to a new exchange rate regime the exchange rate would be set with reference to a basket of other currencies with numerical weights unannounced allowing a movement of up to 0 3 within any given day although this step was originally accepted at face value in public policy circles scepticism is in order the second econometric part of the paper evaluates what exchange rate regime china has actually been following we use the technique introduced by frankel and wei 1994 1 one regresses changes in the value of the local currency in this case the rmb against changes in the values of the dollar euro yen and other currencies that may be in the basket we find that within 2005 the de facto regime remained a peg to a basket that put virtually all weight on the dollar subsequently there has been a modest but steady increase in flexibility with some weight shifted to a few non dollar currencies but not those one might expect in any case the weight on the dollar was still fairly heavy in 2006 the paper tests whether the decline in the implicit weight on the dollar is related to the pressure from us officials it also considers whether the increase in flexibility that we have seen small though it is has been gradually accelerating at a rate that would suggest the likelihood of some genuine flexibility in the not so distant future jeffrey a frankel and shang jin wei 1 ref 18

portfolio choice and liquidity constraints we study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle we show why the puzzle is robust to several model variations and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution we find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because for a plausible range of parameter values households can achieve desired consumption smoothing with small or zero holdings of stocks such costs could arise from informational considerations sign up fees and investor inertia

the quantitative importance of news shocks in estimated dsge models we estimate a dynamic stochastic general equilibrium dsge model with several frictions and both unanticipated and news shocks using quarterly u s data from 1954 to 2004 and bayesian methods we find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output consumption and investment growth interest rate and the relative price of investment the unanticipated shock to the marginal efficiency of investment is the dominant shock accounting for over 45 of the variance in output growth news shocks account for less than 15 of the variance in output growth within the set of news shocks nontechnology sources of news dominate technology news with wage markup news shocks accounting for about 60 of the variance share of both hours and inflation we find that in the estimated dsge model i the presence of endogenous countercyclical price and wage markups due to nominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions and ii while there is little change in the estimated contributions of technology news when we restrict wealth effects on labor supply the contributions of nontechnology news shocks are relatively more sensitive

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

euro currency risk and the geography of debt flows to peripheral emu abstract the pattern of debt flows to peripheral european monetary union members seems puzzling they are mostly indirect and channeled through the large countries of the emu we examine to what extent the introduction of the euro and the elimination of the intra area currency risk can explain this puzzle we develop a three country dsge framework with endogenous portfolio choice and two currencies in the equilibrium the core members of the emu emerge as the main group of lenders to the peripheral emu outside lenders are pushed out of the periphery debt markets because of currency risk the model generates a pattern of debt flows consistent with the data despite the absence of any exogenous frictions or market segmentations

declining volatility in the u s automobile industry dramatic changes in the volatility of output occurred in the u s auto industry in the early 1980s namely output volatility declined the covariance of inventory investment and sales grew more negative and adjustments to production schedules which in earlier decades stemmed primarily from plants hiring and laying off workers were more often accomplished with changes in average hours per worker after the mid 1980s using a linear quadratic inventory model with intensive and extensive labor adjustments we show how all of these changes could have stemmed from one underlying factor a decline in the persistence of motor vehicle sales jel g31 l25 l62 m11

macroeconomic volatility and external imbalances abstract does macroeconomic volatility uncertainty affects accumulation of net foreign assets in oecd economies over the period 1970 2012 changes in country specific aggregate volatility are after controlling for a wide array of factors significantly positively associated with net foreign asset position a standard open economy model with time varying macroeconomic uncertainty can quantitatively account for this relationship the key mechanism is precautionary motive more uncertainty induces residents to save more and higher savings are in part channeled into foreign assets data and theory suggest that volatility is an important determinant of the medium long run evolution of external imbalances in developed countries

households saving in china china in recent years the world s largest and fastest growing economy also has national saving rates that are among the highest in the world this article considers a variety of statistical issues that cloud the measurement of aggregate and household saving in china it also provides new empirical evidence on the importance of intertemporal considerations in explaining the variation in household saving across china s provinces given china s size and its high saving rates it is not surprising that in recent year s considerable theoretical and empirical effort has been devoted to understanding its saving behavior this research can be divided into two broad strands the first emphasizes the relevance for china of traditional equilibrium theories of saving ranging from simple keynesian consumption saving functions to variants of the life cycle and permanent income hypotheses the second argues that equilibrium theories of saving are unlikely to be relevant in an economy in transition from plan to market instead disequilibrium factors especially shortages and rationing in goods and credit markets explain china s saving experience more broadly china s saving rate remains unusually high relative to international experience even after controlling for some of the determinants of saving

distributional and efficiency impacts of increased us gasoline taxes we examine the impacts of increased us gasoline taxes in a model that links the markets for new used and scrapped vehicles and recognizes the consider able heterogeneity among households and cars household choice parameters derive from an estimation procedure that integrates individual choices for car ownership and miles traveled we find that each cent per gallon increase in the price of gasoline reduces the equilibrium gasoline consumption by about 0 2

capital market imperfections and the theory of optimum currency areas this paper studies how within and cross country capital market imperfections affect the welfare effects of forming a currency union the analysis considers a bank only world where intermediaries compete in cournot fashion and monitoring and state verification are costly the first part determines the credit market equilibrium and the optimal number of banks prior to joining the union the second part discusses the benefits from joining a currency union a competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country through an argument akin to the brander krugman reciprocal dumping model of bilateral trade however in our framework whether joining a union raises welfare of the home country is ambiguous it depends on the relative strength of investment creation and intermediation diversion effects

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

did china diversify its foreign reserves summary this paper takes a novel approach to detect the latent currency portfolio of chinese foreign exchange reserves and the underlying portfolio management strategies during 2000 and 2007 based on a portfolio accounting identity and the budget constraint of the chinese central bank s holding of foreign assets the monthly growth rate of reserves can be decomposed into monthly rate of return valuation effects of exchange rates and monthly net purchase rate the valuation effect reveals the value share of each currency bayesian inference is adopted to estimate the state space model with a mixture of gaussian distributions the results show that china significantly and dramatically diversified its reserves out of the us dollar in 2002 both the euro s value and quantity shares increased from 5 to more than 20 by the end of 2007 china held about at most 67 3 of its reserves in the us dollar 22 in the euro 2 5 in the japanese yen 4 7 in the australian dollar and 3 5 in the british pound the average annual rate of return was about 3 copyright 2011 john wiley sons ltd

the savings multiplier we develop a theory of macroeconomic development based on the novel concept of savings multiplier capital accumulation changes relative prices and income shares between generations creating further incentives to accumulate and thereby rising saving rates as the economy develops the savings multiplier hinges on two mechanisms first accumulation raises wages and leads to redistribution from the consuming old to the saving young second higher wages raise the price of services consumed by the old and the anticipation of such price rise prompts the young to increase their savings our theory captures important aspects of china s development and suggests new channels through which the one child policy and the dismantling of cradle to grave social benefits have fuelled china s savings and accumulation rates

long run risks in the term structure of interest rates estimation summary this paper estimates a model in which persistent fluctuations in expected consumption growth expected inflation and their time varying volatility determine asset price variation the model features epstein zin recursive preferences which determine the market price of macro risk factors analysis of the us nominal term structure data from 1953 to 2006 shows that agents dislike high uncertainty and demand compensation for volatility risks also the time variation of the term premium is driven by the compensation for inflation volatility risk which is distinct from consumption volatility risk the central role of inflation volatility risk in explaining the time varying term premium is consistent with other empirical evidence including survey data in contrast the existing long run risks literature emphasizes consumption volatility risk and ignores inflation specific time varying volatility the estimation results of this paper suggest that inflation specific volatility risk is essential for fitting the time series of the us nominal term structure data copyright 2012 john wiley sons ltd

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

weak instrument robust tests in gmm and the new keynesian phillips curve we discuss weak instrument robust statistics in gmm for testing hypotheses on the full parameter vector or on subsets of the parameters we use these test procedures to reexamine the evidence on the new keynesian phillips curve model we find that u s postwar data are consistent with the view that inflation dynamics are predominantly forward looking but we cannot rule out the presence of considerable backward looking dynamics moreover the phillips curve has become flatter recently and this is an important factor contributing to its weak identification

labor market outcomes and reforms in china over the past few decades of economic reform china s labor markets have been transformed to an increasingly market driven system china has two segregated economies the rural and urban understanding the shifting nature of this divide is probably the key to understanding the most important labor market reform issues of the last decades and the decades ahead from 1949 the chinese economy allowed virtually no labor mobility between the rural and urban sectors rural urban segregation was enforced by a household registration system called hukou individuals born in rural areas receive agriculture hukou while those born in cities are designated as nonagricultural hukou in the countryside employment and income were linked to the commune based production system collectively owned communes provided very basic coverage for health education and pensions in cities state assigned life time employment centrally determined wages and a cradle to grave social welfare system were implemented in the late 1970s china s economic reforms began but the timing and pattern of the changes were quite different across rural and urban labor markets this paper focuses on employment and wages in the urban labor markets the interaction between the urban and rural labor markets through migration and future labor market challenges despite the remarkable changes that have occurred inherited institutional impediments still play an important role in the allocation of labor the hukou system remains in place and 72 percent of china s population is still identified as rural hukou holders china must continue to ease its restrictions on rural urban migration and must adopt policies to close the widening rural urban gap in education or it risks suffering both a shortage of workers in the growing urban areas and a deepening urban rural economic divide

does britain or the united states have the right gasoline tax this paper develops an analytical framework to assess the second best optimal level of gasoline taxation taking into account unpriced pollution congestion and accident externalities as well as interactions with the broader fiscal system we provide calculations of the optimal taxes for the us and the uk under a variety of parameter scenarios under our central parameter values the second best optimal gasoline tax is 1 01 gal for the us and 1 34 gal for the uk current tax rates are much lower than this in the us and higher in the uk the calculations are moderately sensitive to alternative parameter assumptions the congestion externality is the largest component in both nations revenue raising needs also play a significant role as do accident externalities and local air pollution potential welfare gains from reducing the current uk tax rate are estimated at nearly one fourth the production cost of all gasoline used in the uk even larger gains could be achieved by switching to a tax on vehicle miles with equal revenue yield for the us the welfare gains from optimizing the gasoline tax are smaller but those from switching to an optimal tax on vehicle miles are very large

trade openness and economic growth panel data evidence from sub saharan africa this paper uses an instrumental variables approach to estimate the relationship between trade openness and economic growth in sub saharan africa instrumental variables estimates show that economic growth has a significant negative contemporaneous effect on trade openness while trade openness has a significant positive effect on economic growth a 1 percentage point increase in the ratio of trade over gdp is associated with a short run increase in growth of approximately 0 5 in a given year the cumulative long run effect on the level of gdp per capita is larger reaching about 2

investment adjustment costs an empirical assessment we evaluate empirical evidence for costs that penalize changes in investment using us industry data in aggregate models such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena so far no attempt has been made to estimate these costs directly at a disaggregated level we consider an industry model with investment adjustment costs and estimate its parameters using generalized methods of moments the ndings indicate small costs associated with changing the ow of investment at the industry level the weighted average of the industry elasticities with respect to the shadow price of capital which depends inversely on the adjustment cost parameter is more than seven times larger than the largest estimate based on aggregate data we examine potential sources which may account for the large industry aggregate dierence overall our results suggest

distributional effects of alternative vehicle pollution control policies abstract previous work shows that policies that subsidize new vehicles and tax size miles or gasoline efficiently reduce pollution less is known about their distributional effects this paper examines distributional effects by estimating the joint demand for vehicles and miles using the consumer expenditure survey greater price responsiveness among low income households enhances progressivity of gas or miles taxes across lower incomes and mitigates regressivity across upper incomes taxes on engine size or subsidies to new vehicles are significantly more regressive than gas or miles taxes

the cost of reducing gasoline consumption high nominal gas prices new awareness of threats to national security and growing concern about global warming have reignited discussion of ways to reduce gasoline consumption in the united states debate centers on changing two policies already in place the federal gas tax and corporate average fuel economy cafe standards two influential recent reports find that increasing the gas tax would attain a given reduction in gas consumption at lower cost than would tightening cafe standards national research council 2002 congressional budget office 2003 the gas tax has this advantage because it encourages not just increases in fuel efficiency but also reductions in miles driven in contrast cafe standards actually encourage more driving because increases in fuel efficiency reduce the cost of gas per mile driven we also compare the costs of the gas tax and cafe standard but take into account interactions with preexisting tax distortions many papers examine the effects of these tax interactions in other contexts but to our knowledge none of them considers the cafe standard see e g lars bovenberg and ruud de mooij 1994 ian parry 1995 lawrence goulder 1995 bovenberg and goulder 1996 parry et al 1999 don fullerton and gilbert metcalf 2001 these interactions reduce the cost of the gas tax but increase the cost of cafe thus expanding the cost advantage enjoyed by the gas tax this difference does not arise because the gas tax raises revenue while the cafe standard does not rather this result is similar to that in west and williams 2004a which showed that since gasoline and leisure are relative complements raising the gas tax will increase labor supply generating additional efficiency gains in this paper we estimate a consumer demand system using data from the consumer expenditure survey and the california air resources board and find that miles driven and leisure are relative complements thus the gas tax encourages labor supply by raising the cost per mile driven producing an additional efficiency gain conversely because cafe reduces the cost per mile it discourages labor supply and yields an additional efficiency loss while the induced changes in labor supply are tiny relative to the labor market they are still substantial relative to the gas market and thus have a dramatic effect on the relative costs of the two policies our point estimates imply that they reduce the social marginal cost of the gas tax starting from the status quo gas tax rate and ignoring the benefits of reduced gas consumption by almost 30 percent while increasing the marginal cost of cafe by nearly 60 percent this result implies that the case for raising the gas tax rather than tightening the cafe standard is far stronger than previous studies suggest indeed it strongly suggests that any tightening at all of the cafe standard would lower welfare unless the benefits of reduced gas consumption have been seriously underestimated

can portfolio rebalancing explain the dynamics of equity returns equity flows and exchange rates we explore whether the pattern of international equity returns equity portfolio flows and exchange rate returns are consistent with the hypothesis that unhedged global investors rebalance their portfolio in order to limit their exchange rate exposure when there are 1 relative equity return and 2 exchange rate shocks we also explore whether 3 equity flow shocks influence the exchange rates and relative equity prices in the estimation of the var system we do not impose any causal ordering upon the primitive shocks but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables international data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics

productivity growth transparency and monetary policy abstract this study examines whether central bank transparency about views of future productivity growth contributes to stabilizing macroeconomic fluctuations in a standard new keynesian model the central bank and private agents make their subjective estimates on the persistence of productivity growth in this situation if private agents believe that the central bank s projections include forecast errors on future productivity growth these beliefs can destabilize private agents own expectations because the central bank s forecast errors may lead to policy mistakes in the future consequently central bank transparency does not necessarily stabilize the variations of the output gap and inflation rate the central bank should respond strongly to the inflation rate if the impact of transparency is uncertain

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

earnings quality evidence from the field abstract we provide insights into earnings quality from a survey of 169 cfos of public companies and in depth interviews of 12 cfos and two standard setters cfos believe that i above all high quality earnings are sustainable and repeatable specific characteristics include consistent reporting choices backing by actual cash flows and absence of one time items and long term estimates ii about 50 of earnings quality is driven by non discretionary factors such as industry and macro economic conditions iii in any given period about 20 of firms manage earnings to misrepresent economic performance and for such firms 10 of eps is typically managed iv earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags in addition cfos disagree with current standard setting on a number of issues including the sheer number of promulgated rules the top down approach to rule making the neglect of the matching principle and the emphasis on fair value accounting they indicate that a rules based culture makes the audit function centralized and mechanical and hinders the development of audit professionals a summary impression from our work is that cfos view earnings quality as more of a single and unconditional characteristic in contrast to current research where measures of earnings quality are strongly conditional on the decision setting this cfo view is related to their idea of one number a single earnings metric that shapes both their interactions with external stakeholders and internal decision making

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

how common are intentional gaap violations estimates from a dynamic model this paper uses data on detected misstatements earnings restatements and a dynamic model to estimate the extent of undetected misstatements that violate gaap the model features a ceo who can manipulate his firm s stock price by misstating earnings i find the ceo s expected cost of misleading investors is low the probability of detection over a five year horizon is 13 91 and the average misstatement if detected results in an 8 53 loss in the ceo s retirement wealth the low expected cost implies a high fraction of ceos who misstate earnings at least once at 60 with 2 22 of ceos starting to misstate earnings in each year 2003 2010 inflation in stock prices across ceos who misstate earnings at 2 02 and inflation in stock prices across all ceos at 0 77 wealthier ceos manipulate less and the average misstatement is larger in smaller firms this article is protected by copyright all rights reserved

estimating quadratic variation using realized variance this paper looks at some recent work on estimating quadratic variation using realised variance rv that is sums of m squared returns this econometrics has been motivated by the advent of the common availability of high frequency financial return data when the underlying process is a semimartingale we recall the fundamental result that rv is a consistent as m estimator of quadratic variation qv we express concern that without additional assumptions it seems difficult to give any measure of uncertainty of the rv in this context the position dramatically changes when we work with a rather general sv model which is a special case of the semimartingale model then qv is integrated variance and we can derive the asymptotic distribution of the rv and its rate of convergence these results do not require us to specify a model for either the drift or volatility functions although we have to impose some weak regularity assumptions we illustrate the use of the limit theory on some exchange rate data and some stock data we show that even with large values of m the rv is sometimes a quite noisy estimator of integrated variance

china s exchange rate policy its current account surplus and the global imbalances this article is stimulated by current criticisms of chinese exchange rate policy the concern is really about china s current account surplus the article discusses the factors that determine the surplus and the reasons why the surplus increased sharply from 2005 the international implications of china s surplus and growth are discussed and how it has affected the world real interest rate and through that the us current account deficit the surplus has had various international relative price effects which have produced both gainers and losers finally the surplus played only a small part in determining the world credit crisis

reviewing trade policy in china during the transition to balanced economic growth the paper reviews the world trade organization s analysis of developments in china s trade policy during 2012 14 the review overlaps with the continuing great recession and with china s determination to foster a sustainable rate of economic growth developments in the country s trade policy include the launching of the shanghai pilot free trade zone china faces a series of trade policy related challenges including the complex process necessary to internationalise the renminbi

credit constraints and growth in a global economy we show that in an open economy olg model the interaction between growth differentials and household credit constraints more severe in fast growing countries can explain three prominent global trends a divergence in private saving rates between advanced and emerging economies large net capital outflows from the latter and a sustained decline in the world interest rate micro level evidence on the evolution of age saving profiles in the u s and china corroborates our mechanism quantitatively our model explains about 40 percent of the divergence in aggregate saving rates and a significant portion of the variations in age saving profiles across countries and over time

market standards in financial contracting the euro s effect on debt securities abstract the introduction of the euro ushered in a rise to dominance of english contract law in european debt securities corporate issuers in the euro zone chose english law significantly more often than a control group from other european countries the euro effect on choice of law is particularly strong for debt securities in local markets that arguably were most affected by the euro the euro effect is not explained by differences in the suitability of english law compared to other laws a change in issuer composition or debt securities types and the greater market share of british and american underwriters we argue that increased standardization benefits network effects from a boost in cross border investment provide the best account of why english law conquered the european debt securities market

aggregate savings and external imbalances in china over the last decade the internal and external macroeconomic imbalances in china have risen to unprecedented levels in 2008 china s national savings rate soared to over 53 percent of its gdp whereas its current account surplus exceeded 9 percent of gdp this paper presents a unified framework for understanding the structural causes of these imbalances i argue that the imbalances are attributable to a set of policies and institutions embedded in the economy i propose a unified framework for understanding the joint causes of the high savings rate and external imbalances in china my explanations first focus on an array of factors that encouraged saving across the corporate government and household sectors such as policies that affected sectoral income distribution along with factors like incomplete social welfare reforms and population control policies i then turn to policies that limited investment in china thus preventing the high savings from being used domestically finally i will examine how trade policies such as export tax rebates special economic zones and exchange rate policies strongly promote exports moreover the accession of china to the world trade organization has dramatically amplified the effects of these structural distortions in conclusion i recommend some policy reforms for rebalancing the chinese economy

does finance alter the relation between inequality and growth this paper introduces a model in which greater inequality reduces growth in economies with low levels of financial development but that this effect is attenuated in economies with more developed systems the model also predicts that individuals in economies with developed financial markets have a higher tolerance to inequality using a panel dataset that covers a large number of countries this paper shows empirical evidence that is consistent with the main predictions of the model overall this paper s major findings highlight that some of the pernicious effects of inequality can be attenuated by improving access to credit jel d3 e6 p1 o4 i2

lose some save some obesity automobile demand and gasoline consumption abstract this paper examines the unexplored link between the prevalence of overweight and obesity and vehicle demand in the united states exploring annual sales data of new passenger vehicles at the model level in 48 u s counties from 1999 to 2005 we find that new vehicles demanded by consumers are less fuel efficient on average as a larger share of people become overweight or obese the ols results show that a 10 percentage point increase in obesity and overweight reduces the average mpg of new vehicles demanded by 1 4 percent an effect requiring a 12 cent increase in gasoline prices to counteract the 2sls results after controlling for possible endogeneity in overweight and obesity prevalence put those two numbers at 5 percent and 54 cent respectively these findings robust to a variety of specifications suggest that policies to reduce overweight and obesity can have additional benefits for energy security and the environment

money demand heterogeneity and the great moderation abstract a forward looking model of the demand for money based on heterogeneous and sluggish portfolio adjustment can simultaneously account for the low short run and high long run semi elasticities reported in the literature the parameter estimates from the model for the short run and long run interest semi elasticities are 1 04 and 13 16 respectively a simulated version of the model suggests that the great moderation can be partially attributed to financial innovations in the late 1970s when moving toward a more flexible portfolio the model can account for almost one third of the observed decline in the volatilities of output consumption and investment

international portfolio choice liquidity constraints and the home equity bias puzzle this paper solves for optimal international portfolio choice in the presence of liquidity constraints and undiversifiable labor income risk optimal portfolios are internationally diversified while positive correlation between domestic stock market returns and permanent labor income shocks can generate a complete portfolio specialization in foreign stocks nevertheless either small costs associated with investing abroad or a slightly positive domestic to foreign equity premium differential are sufficient to either deter households from participating in a foreign market or generate a substantial bias for home equities the benefits of international diversification are limited because consumption fluctuations can be smoothed with a small amount of buffer stock saving while exchange rate risk makes foreign investments less appealing to risk averse investors

the decline in u s output volatility explanations for the decline in u s output volatility since the mid 1980s include better policy good luck and technological change our multiple break estimates suggest that reductions in volatility since the mid 1980s extend not only to manufacturing inventories but also to sales this finding along with a concentration of the reduction in the volatility of inventories in materials and supplies and the lack of a significant break in the inventory sales covariance imply that new inventory technology cannot account for most of the decline in output volatility

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

a silver lining the connection between gasoline prices and obesity i find evidence of a negative association between gasoline prices and body weight using a fixed effects model with several robustness checks i also show that increases in gas prices are associated with additional walking and a reduction in the frequency with which people eat at restaurants explaining their effect on weight my estimates imply that 8 of the rise in obesity between 1979 and 2004 can be attributed to the concurrent drop in real gas prices and that a permanent 1 increase in gasoline prices would reduce overweight and obesity in the united states by 7 and 10

automobile externalities and policies this paper discusses the nature and magnitude of externalities associated with automobile use including local and global pollution oil dependence traffic congestion and traffic accidents it then discusses current federal policies affecting these externalities including fuel taxes fuel economy and emissions standards and alternative fuel policies summarizing insofar as possible the welfare effects of those policies finally we discuss emerging pricing policies including congestion tolls and insurance reform and summarize the appropriate combination of policies to address automobile externalities

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

the introduction of the euro and its effects on portfolio decisions abstract examining investment behavior related to the euro introduction we address the relevance of different investment determinants with the advent of the currency union two potential sources of portfolio reallocation can be distinguished first the diminishment of exchange rate risk and transaction costs within the emu second the increase of correlation of emu returns so that diversification benefits decreased we test for structural breaks in the holdings of german investors and estimate a market model to account for the two effects a significant decrease in national and an increase in emu and rest of the world investments can be observed comparing the observed holdings with benchmark portfolios we find that investment home bias has diminished since the euro introduction

the thrift crisis mortgage credit intermediation and housing activity this paper evaluates the influence of periodic disruptions in the thrift industry on mortgage credit intermediation and housing activity results of the analysis indicate that disruptions in the thrift industry during the early 1980s imposed real costs on the economy by reducing the amount of mortgage credit intermediation estimation findings indicate a sizable mortgage interest rate premium stemming from the loss in thrift intermediation services during the early 1980s those higher mortgage rates served to dampen housing demand in turn exacerbating the cyclical decline in contrast empirical findings for the post recession period of the 1980s indicates a severing of the link between mortgage interest rates and thrift provision of mortgage credit copyright 1995 by ohio state university press

are duty drawbacks on exports worth the hassle many countries use duty drawbacks on exports yet there is no consensus whether countries should embrace or abandon them the answer depends on countries development priorities and economic conditions an increase in the drawback has a positive impact on export competitiveness but the welfare effect is ambiguous a welfare increase is more likely if the economy is small with high input tariffs low initial drawback low administrative costs and tariff leakages in china duty drawback removal after meeting its wto commitments improves welfare but hurts economic efficiency export competitiveness and real incomes further liberalization can mitigate these negative effects plusieurs pays utilisent ce genre de rabais de tarifs douaniers mais il n y a pas de consensus a savoir si on doit supporter ces mesures ou les abandonner la reponse depend des conditions economiques et des priorites de developpement des divers pays un accroissement de ces reductions a un effet positif sur la competitivite des exportations mais ses effets sur le niveau de bien etre sont ambigus un effet de bien etre positif est plus probable si l economie est petite et a des hauts tarifs sur les intrants de faibles rabais des couts administratifs faibles et peu de fuites en chine l elimination de ces rabais en accord avec les engagements exiges par l omc a ameliore le niveau de bien etre mais a eu un effet negatif sur l efficacite la competitive des exportations et les revenus reels une liberalisation accrue peut attenuer ces effets negatifs

combining var and dsge forecast densities a popular macroeconomic forecasting strategy utilizes many models to hedge against instabilities of unknown timing see among others stock and watson 2004 clark and mccracken 2010 and jore et al 2010 existing studies of this forecasting strategy exclude dynamic stochastic general equilibrium dsge models despite the widespread use of these models by monetary policymakers in this paper we use the linear opinion pool to combine inflation forecast densities from many vector autoregressions vars and a policymaking dsge model the dsge receives a substantial weight in the pool at short horizons provided the var components exclude structural breaks in this case the inflation forecast densities exhibit calibration failure allowing for structural breaks in the vars reduces the weight on the dsge considerably but produces well calibrated forecast densities for inflation

understanding the numbers game abstract two well known stylized facts on earnings management are that the earnings surprise distribution has a discontinuity at zero and that positive earnings surprises are associated with positive abnormal returns we link these two facts in a model of the earnings management decision in which the manager trades off the capital market benefits of meeting earnings benchmarks against the costs of manipulation we develop a new structural methodology to estimate the model and uncover the unobserved cost function the estimated model parameters yield the percentage of manipulating firms magnitude of manipulation noise in manipulation and sufficient statistics to evaluate proxies for identifying firms suspected of manipulation finally we use the sarbanes oxley act as a policy experiment and find that by increasing costs the act reduced equilibrium earnings management by 36 this reduction occurred despite an increase in benefits consistent with the market rationally becoming less skeptical of firms that just meet benchmarks

effects of transitory shocks to aggregate output on consumption in poor countries this paper provides instrumental variables estimates of the response of aggregate private consumption to transitory output shocks in poor countries to identify exogenous unanticipated idiosyncratic and transitory variations in national output we use year to year variations in rainfall as an instrumental variable in a panel of 39 sub saharan african countries during the period 1980 2009 our estimates yield a marginal propensity to consume out of transitory output of around 0 2 to explain this result we show using instrumental variables techniques that there is a significant negative effect of transitory output shocks on net current transfers and a significant positive and quantitatively large effect on the trade balance an important implication is that frictions to private financial flows do not necessarily imply large effects of transitory shocks to aggregate output on private consumption in poor countries