inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

on corporate borrowing credit spreads and economic activity in emerging economies an empirical investigation abstract we document a considerable increase in foreign financing by the corporate sector in emerging economies emes since the early 2000s mainly in the form of bond issuance and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several emes using micro level data on spreads of bonds issued by emes corporations in foreign capital markets three salient features characterize such a negative relationship first the financial indicator has considerable predictive power on future economic activity in these economies even after controlling for other potential drivers of business cycles such as movements in sovereign spreads and global financial risk among others second on average an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies and up to 14 of its forecast error variance is associated to this shock lastly fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets thereby implying that changes in corporate spreads also serve as a powerful propagating mechanism of the effect of changes in global investors risk appetite in emerging markets

international financial integration and crisis contagion international financial integration helps to diversify risk but also may spread crises across countries we provide a quantitative analysis of this trade off in a two country general equilibrium model with collateral constrained borrowing using a global solution method borrowing constraints bind occasionally depending upon the state of the economy and levels of inherited debt we examine different degrees of international financial integration moving from financial autarky to bond and equity market integration financial integration leads to a significant increase in global leverage substantially escalates the probability of crises for any one country and dramatically increases the degree of contagion across countries outside of crises the impact of financial integration on macroeconomic aggregates is relatively small but the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky thus a trade off emerges between the probability of crises and the severity of crises using a large cross country database of financial crises in developing and developed economies over a forty year period we find evidence in support of the model

private sector risk and financial crises in emerging markets investment necessary for growth is risky and often requires external financing we present a model in which capital market imperfections separate countries into a safe credit club of industrial countries with low interest rates and steady credit access and a risky club of emerging markets with high interest rates and volatile access in an emerging market a large negative productivity shock interacts with credit market imperfections to trigger a severe contraction in external lending domestic agents react with widespread default we calibrate to south korean parameters and argue that the 1998 financial crisis could have been the downside of risky investment financed in imperfect capital markets

boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

international credit supply shocks abstract house prices and exchange rates can potentially amplify the expansionary effect of capital inflows we first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase in this environment we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral we then document empirically in a panel var model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012 that an increase in the leverage of us broker dealers also leads to an increase in cross border credit flows a house price and consumption boom a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model finally we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan to value ratio and the share of foreign currency denominated credit

does this sound like a fair deal antecedents and consequences of fairness expectations in the individual s decision to participate in firm innovation the internet has given rise to new organizational forms of integrating users into firm innovation companies willing to make use of external resources can now outsource innovation related tasks to huge crowds outside the company the extant literature on participation motives assumes a symbiotic relationship between the firm and external contributors in which both parties have largely complementary motives and are only interested in their own utility in two experimental simulations we show that this understanding has to be amended potential contributors not only want a good deal they also want a fair deal fairness expectations with regard to the distribution of value between the firm and contributors distributive fairness and the fairness of the procedures leading to this distribution procedural fairness impact the likelihood of participation beyond considerations of self interest fairness expectations are formed on the basis of the terms and conditions of the crowdsourcing system and the ex ante level of identification with the firm organizing it in turn they impact the individuals transaction specific reactions and also inform their future identification with the firm these findings contribute not only to research on open and user innovation but also to theories on organizational fairness by enhancing our understanding of the emergent field of fairness expectations

financial crises and liquidity shocks a bank run perspective abstract in contrast with the financial multiplier literature this note explores a case in which the shock triggering a financial crisis stems from the financial sector itself it is not a shock stemming from the real sector which gets amplified by say agency problems the basic intuition is provided by the bank run literature of the diamond and dybvig 1983 variety financial development is modeled as a mechanism that endows real assets e g land and capital with liquidity however liquidity can be impaired by shocks that are equivalent to a bank run liquidity creation enhances real asset prices while a liquidity crunch generates asset price collapse this bubble looking episode is not driven by standard fundamentals although it is fully in line with rationality in this context devoid of other frictions like price stickiness the note examines the effect of monetary policy in the absence of nominal rigidities it shows that preventing price deflation is not enough to offset relative to output asset price meltdown but lower policy interest rates increase relative asset prices and steady state output moreover in the neighborhood of a first best capital allocation an increase in the liquidity of capital may lower the welfare of the representative individual even if the higher liquidity of capital is sustainable and hence not destroyed by future crash illustrating the possibility of excessive financial innovation an extension of the basic model supports the conjecture that low policy interest rates may have given further incentives to the development of shadow banking

lending booms latin america and the world recent theories of crisis put lending booms at the root of financial collapses yet lending booms may be a natural consequence of economic development and fluctuations so are lending booms dangerous in this paper we investigate empirically this question using a broad sample of lending boom episodes over 40 years with a special eye for latin america our results indicate that 1 lending booms are often associated with i a domestic investment boom ii an increase in domestic interest rates iii a worsening of the current account iv a declines in reserves v a real appreciation vi a decline in output growth 2 typical lending booms do not increase substantially the vulnerability of the banking sector or the balance of payments comparing latin america and the rest of the world we find that latin america lending booms make the economy considerably more volatile and vulnerable to financial and balance of payment crisis

does speed kill lending booms and their consequences in croatia abstract recent research connects lending booms with increased risks of banking and currency crisis another strand of literature connects financial deepening with long term growth together these findings pose dilemmas for policymakers in the case of croatia we find that rapid loan growth increased the probability of credit quality deterioration and stimulated current account and foreign debt problems conventional monetary tightening was not very effective due to capital inflows unconventional measures such as capital controls also had limited effectiveness we propose limiting negative impacts by pro active monetary policy more restrictive fiscal policy and increased capital requirements for fast growing banks rather than measures to prevent lending booms ex ante

the global credit boom challenges for macroeconomics and policy the recent financial crisis has put the spotlight on the rapid rise in credit which preceded it in this paper we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed we find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place we show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that while the global savings glut may account for the cycle s initial phase other factors such as the conduct of monetary policy and perceptions of declining macroeconomic risk were more important from the mid 2000s onwards we conclude by identifying some of the challenges now facing macroeconomics and policy

the political economy of the ecuadorian financial crisis this paper takes the unusual step of exploring economic hypotheses through interviews with key economic agents it focuses on the causes of ecuador s 1999 banking collapse within an eclectic framework with minskian elements broad support is found for endogenous explanations of financial crises and little backing for explanations such as accidents or policy mistakes interviewees argued that after the stabilisation programme of 1992 agents became euphoric and accumulated debt to finance imprudent levels of expansion that incentives for moral hazard led to financial corruption and excessive risk taking and that weak regulation after

the international transmission of credit bubbles theory and policy we live in a new world economy characterized by nancial globalization and historically low interest rates this environment is conducive to countries experiencing credit bubbles that have large macroeconomic eects at home and are quickly propagated abroad in previous work we built on the theory of rational bubbles to develop a framework to think about the origins and domestic eects of these credit bubbles this paper extends that framework to include many countries and general preferences and uses it to study how nancial integration aects the properties of credit bubbles how the latter are transmitted across countries and the role of international policy coordination

managing credit bubbles we study a dynamic economy where credit is limited by insu cient collateral and as a result investment and output are too low in this environment changes in investor sentiment or market expectations can give rise to credit bubbles that is expansions in credit that are backed not by expectations of future pro ts i e fundamental collateral but instead by expectations of future credit i e bubbly collateral credit bubbles raise the availability of credit for entrepreneurs this

do surges in international capital inflows influence the likelihood of banking crises this article asks whether capital inflows bonanzas increase the probability of banking crises and whether this occurs through a lending boom mechanism results indicate that bonanzas more than triple the odds of a crisis raising its probability to 14 from an unconditional probability of 4 this effect exists in the absence of a lending boom and is found in both net and gross inflows bonanzas this effect is driven by portfolio equity and debt flows while the effect of debt is channelled through excessive lending the effect of portfolio equity flows is present even in the absence of a lending boom

early birds late risers and sleeping beauties bank credit growth to the private sector in central and eastern europe and in the balkans abstract following a period of privatization and restructuring commercial banks in central and eastern europe and more recently in the balkans have expanded rapidly their lending to the private sector this paper studies whether these developments are consistent with a process of convergence and structural financial deepening by estimating an equilibrium level of the bank credit to gdp ratio it concluded that while there is no clear evidence that the recent increases in bank credit ratios is inconsistent with financial deepening policy makers will have to evaluate carefully its implications for macroeconomic developments and financial stability

equilibrium credit the reference point for macroprudential supervisors equilibrium credit is an important concept because it helps identify excessive credit provision this paper proposes a two stage approach to determine equilibrium credit it uses two stages to study changes in the demand for credit due to varying levels of economic financial and institutional development of a country using a panel of high and middle income countries over the period 1980 2010 this paper provides empirical evidence that the credit to gdp ratio is inappropriate to measure equilibrium credit the reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development the main drivers of this heterogeneity are financial depth access to financial services use of capital markets efficiency and funding of domestic banks central bank independence the degree of supervisory integration and experience of a financial crisis countries in europe and central asia show a slower adjustment of credit to its long run equilibrium compared with other regions of the world

external shocks financial volatility and reserve requirements in an open economy abstract the performance of a simple countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions imperfect capital mobility a managed float regime and sterilized foreign exchange market intervention bank funding sources domestic and foreign are imperfect substitutes the model is calibrated and used to study the effects of a temporary drop in the world risk free interest rate consistent with stylized facts the shock triggers an expansion in domestic credit and activity asset price pressures and a real appreciation an optimal credit based reserve requirement rule based on minimizing a composite loss function helps to mitigate both macroeconomic and financial volatility with the latter defined both in terms of a narrow measure based on the credit to output ratio the ratio of capital flows to output and interest rate spreads and a broader measure that includes real asset prices as well greater reliance on sterilization implies a less aggressive optimal reserve requirements rule implying that the two instruments are partial substitutes

financial development financial fragility and growth the authors study the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity on the one hand the empirical growth literature finds a positive effect of financial depth as measured by for instance private domestic credit and liquid liabilities for example levine loayza and beck 2000 on the other hand the banking and currency crisis literature finds that monetary aggregates such as domestic credit are among the best predictors of crises and their related economic downturns for example kaminski and reinhart 1999 the authors account for these contrasting effects based on the distinction between the short and long run impacts of financial intermediation working with a panel of cross country and time series observations they estimate an encompassing model of short and long run effects using the pooled mean group estimator developed by pesaran shin and smith 1999 their conclusion from this analysis is that a positive long run relationship between financial intermediation and output growth coexists with a mostly negative short run relationship the authors further develop an explanation for these contrasting effects by relating them to recent theoretical models by linking the estimated short run effects to measures of financial fragility namely banking crises and financial volatility and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions

sudden stops and the mexican wave currency crises capital flow reversals and output loss in emerging markets sudden stops are the simultaneous occurrence of a currency balance of payments crisis with a reversal in capital flows we investigate whether sudden stop crises are a unique phenomenon and whether they entail an especially large and abrupt pattern of output collapse a bmexican waveq using a panel data set over 1975 1997 and covering 24 emerging market economies we distinguish between the output effects of currency crises capital inflow reversals and sudden stop crises sudden stop crises have a large negative but short lived impact on output growth over and above that found with currency crises a currency crisis typically reduces output by about 2 3 while a sudden stop reduces output by an additional 6 8 in the year of the crisis the cumulative output loss of a sudden stop is even larger around 13 15 over a 3 year period our model estimates correspond closely to the output dynamics of the dmexican wavet such as seen in mexico in 1995 turkey in 1994 and elsewhere and out of sample predictions of the model explain well the sudden and seemingly unexpected collapse in output associated with the 1997 1998 asian crisis d 2005 elsevier b v all rights reserved

why develop open source software the role of non pecuniary benefits monetary rewards and open source licence type a review of the basic theory of optimal open source software contributions points to three key factors affecting the decision to contribute to the open source development process non pecuniary benefits future expected monetary returns and open source licence type this paper argues that existing large scale software developer surveys are inadequate for measuring the relative importance of these three factors previous econometric studies that collect their own unique datasets also fall short because they generally measure the importance of only one supply factor in isolation to fill the gap i specify an estimable dynamic programming model of joint labour supply and open source participation decisions that can provide empirical estimates of relative importance within a single unified framework of optimal decision making

openness open source and the veil of ignorance author s scotchmer suzanne abstract the open source movement evolved in the one industrial context where openness is not required by intellectual property law 1 nevertheless openness itself cannot be the driving force behind the open source movement this is because openness can be achieved in many ways other than the gpl for example with proprietary licenses or licenses that are even more permissive than the gpl such as the bsd license early commentators explained this new development model by focussing on the motives of the programmer such as to demonstrate skills see the survey by stephen m maurer and suzanne scotchmer 2006 but firms also participate in open source collaborations sometimes contributing significant resources joachim henkel 2006 dirk riehle 2009 doing so can be profitable even if the contributors are rivals in the market the quality improvements or cost reductions provided by a rival s open source contributions may outweigh the deleterious effect of empowering the rival to be a better competitor

is there a wage premium for volunteer oss engagement signalling learning and noise abstractvolunteer based open source production has become a significant new model for the organization of software development economics often pictures this phenomenon as a case of signalling individuals engage in the volunteer programming of open source software oss as a labour market signal resulting in a wage premium yet this explanation could so far not be empirically tested this article fills this gap by estimating an upper bound composite wage premium of voluntary oss contributions and by separating the potential signalling effect of oss engagement from other effects although some 70 of oss contributors believe that oss involvement benefits their careers we find no actual labour market premium for oss engagement the presence of other motives such as fun of play or altruism renders oss contributions too noisy to function as a signal

employer learning statistical discrimination and occupational attainment statistical discrimination plays a prominent role in theoretical discussions of the return to education as well as race and gender differences building on some earlier work by henry farber and robert gibbons 1996 hereafter fg and others on employer learning in the labor market altonji and pierret 2001 hereafter ap provide a test for statistical discrimination in an environment in which firms are learning about characteristics of workers over time however that model assumes that the rate at which employers learn about a given worker is independent of the type of job that he or she is in consequently the ap framework cannot readily be used to study statistical discrimination in hiring or how statistical discrimination and employer learning influence the skill level of the initial occupation and progression over a career in this paper i extend the ap analysis in three key respects first as in robert gibbons et al 2004 the sensitivity of output to worker skill is assumed to depend on the skill level of the job second the rate at which employers learn about the worker s skill is assumed to depend on the skill level of the job finally the probability of being hired into a given job depends on expected productivity relative to the wage i show that statistical discrimination influences initial employment rates wage levels and job type and that employers initial estimate of productivity influences wage growth even in an environment in which access to training is not an issue the implication is that the market may be slow to learn that a worker is highly skilled if the worker s best early job opportunity given the information available to employers is a low skill level job that reveals little about the worker s talent i close with a brief discussion of directions for empirical work suggested by the analysis

when micro prudence increases macro risk the destabilizing effects of financial innovation leverage and diversification by exploiting basic common practice accounting and risk management rules we propose a simple analytical dynamical model to investigate the effects of microprudential changes on macroprudential outcomes specifically we study the consequence of the introduction of a financial innovation that allows reducing the cost of portfolio diversification in a financial system populated by financial institutions having capital requirements in the form of value at risk var constraint and following standard mark to market and risk management rules we provide a full analytical quantification of the multivariate feedback effects between investment prices and bank behavior induced by portfolio rebalancing in presence of asset illiquidity and show how changes in the constraints of the bank portfolio optimization endogenously drive the dynamics of the balance sheet aggregate of financial institutions and thereby the availability of bank liquidity to the economic system and systemic risk the model shows that when fin

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

credit booms financial fragility and banking crises using a new country level panel database we explore effect of capital inflow surges credit booms and financial fragility on the probability of banking crises we find that booms increase the probability of a crisis only in relatively fragile financial systems

capital flows and destabilizing policy in latin america motivated by the excessive macroeconomic volatility experienced in latin america we examine the possible contribution of monetary and fiscal policies to this outcome in contrast with previous literature we consider the possible simultaneity between policy and gdp growth by using gmm var econometric techniques additionally we explore the direct impact international capital inflows have on these policies our evidence suggests that for the group of countries we consider most practice destabilizing fiscal and monetary policy and capital inflow consistently influences policy in a pro cyclical direction

emerging stock markets portfolio capital flows and long term economie growth micro and macroeconomic perspectives abstract the paper examines two major components of financial liberalization stock market development and portfolio capital flows in the context of less developed countries the paper considers microeconomic and macroeconomic perspectives on their implications for long term development and economic growth it concentrates on 1 a the role of stock markets in financing corporate growth 2 b the implications of stock market volatility for resource allocation and productive efficiency and 3 c the interactions between the foreign exchange and stock markets in the context of economic shocks its policy recommendations are that ldcs should promote bank based systems influence the scale and composition of capital inflows and prevent a market for corporate control from emerging

the long run relationship between trade and population health evidence from five decades in recent years the increase in international trade has sparked a debate about the impact of international trade on population health to date however there has been very little econometric research on the relationship between these two variables this paper examines the long run relationship between trade openness and population health for a sample of 74 countries over five decades from 1960 to 2010 using panel time series techniques it is shown that international trade in general has a robust positive long run effect on health as measured by life expectancy and infant mortality this effect tends to be greater in countries with lower development levels higher taxes on income profits and capital gains and less restrictive business and labour market regulations

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

inequality credit and financial crises in the three decades leading up to the financial crisis of 2008 09 income inequality rose across much of the developed world this has led to a vigorous debate as to whether widening inequality was somehow to blame for the crisis by driving private sector credit booms despite growing interest empirical evidence on an inequality fragility relationship is limited based on a panel analysis of 18 oecd organisation for economic co operation and development countries for the years 1970 2007 this study provides evidence of a positive relationship between income concentration and private sector indebtedness once other traditional drivers are controlled for if confirmed the implications of this result are as follows i the view that the distribution of income is irrelevant to macroeconomic stability as implicit in mainstream approaches needs further investigation and ii in order to make the financial system more robust policy makers should cast the net wider than monetary policy and regulatory reforms and consider the effects of changes to distributive patterns

international overborrowing a decomposition of credit and currency risks summary the severity of the financial crises enveloping the tiger economies of southeast asia in 1997 came as a surprise to many observers this paper uses a simple fisherian model of the overborrowing syndrome to compare the asian crises of 1997 with earlier overborrowing episodes in mexico and chile while important similarities exist the crises in southeast asia have been exacerbated by the unhedged foreign exchange positions of asian banks these open currency positions not only imposed significant additional losses on the banks following devaluation they also magnified the scale of overborrowing during the cycle s initial boom phase failure to limit the exposure of banks to foreign exchange risk therefore increased the magnitude of the boom bust overborrowing cycle both ex ante and ex post the paper highlights the importance of effective regulation and supervision of capital markets with a focus on limiting the speculative currency positions of banks especially those that form the core of the domestic payments system and therefore enjoy a possibly implicit public guarantee improving the institutional infrastructure of financial supervision is the only effective way of mitigating the macroeconomic costs of overborrowing

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

do real exchange rate appreciations matter for growth the impact of exchange rate changes on growth a long standing key issue in international macroeconomics has received renewed attention in recent years owing to weaker growth rates and the debate on currency wars the connection between real exchange rates and growth remains however an unsettled question in the academic literature we fill this gap by providing an empirical assessment based on a broad sample of emerging and advanced economies we assess the impact of appreciations productivity booms and capital inflows surges using a propensity score matching approach to address causality issues appreciations associated with higher productivity have a larger impact on growth than those associated with capital inflows furthermore appreciations per se tend to have a negative impact on growth we provide a simple theoretical model that delivers a contrasted growth appreciation pattern depending on the underlying shock the model also implies adverse effects of shocks to international capital flows so concerns about an appreciation are not inconsistent with concerns about a depreciation while the presence of an externality through firms destruction leads to inefficient allocations addressing the inefficiency does not dampen exchange rate movements

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

extremal analysis of currency crises in taiwan we employ extreme value theory to identify currency crises in taiwan the new approach is able to identify severe currency crises and at the same time avoid the crisis misclassification problem of markov switching models signal accounting indicates that currency crises in taiwan are preceded by rapid expansion of domestic credit and other monetary aggregates implying that financial excesses stressed by the third generation crisis model are the main causes of these currency crises

overreaction in capital flows to emerging markets booms and sudden stops this paper applies the overreaction hypothesis of de bont and thaler de bont w thaler r 1985 does stock market overreact journal of finance 40 3 793 805 developed for stock price behavior to capital flows to emerging markets we find that a surge in capital flows or what we call a capital boom can predict future sharp contractions in capital flows or sudden stops we use a large list of possible economic fundamentals as control variables and the results show that the best predictor of a sudden stop is a preceding capital boom moreover the probability of a country undergoing a sudden stop increases considerably with the length of the boom this probability more than doubles when the boom is three years old and rises by three to four times when the boom lasts for four years these results are interesting for two reasons in the first place they contradict previous studies that emphasize worsening fundamentals as the ultimate cause of a sudden stop second they are of policy interest because of the enormous negative impacts that sudden stops have on the real economy

does compulsory school attendance affect schooling and earnings we establish that season of birth is related to educational attainment because of school start age policy and compulsory school attendance laws individuals born in the beginning of the year start school at an older age and can therefore drop out after completing less schooling than individuals born near the end of the year roughly 25 percent of potential dropouts remain in school because of compulsory schooling laws we estimate the impact of compulsory schooling on earnings by using quarter of birth as an instrument for education the instrumental variables estimate of the return to education is close to the ordinary least squares estimate suggesting that there is little bias in conventional estimates every developed country in the world has a compulsory schooling requirement yet little is known about the effect these laws have on educational attainment and earnings 1 this paper exploits an unusual natural experiment to estimate the impact of compulsory schooling laws in the united states the experiment stems from the fact that children born in different months of the year start school at different ages while compulsory schooling laws generally require students to remain in school until their sixteenth or seventeenth birthday in effect the interaction of school entry requirements and compulsory schooling laws compel students born

financial crises lessons from history for today making use of the propensity score matching method we match earlier crises pre 2007 with currently ongoing crises post 2007 the old and new crises are matched in three dimensions the global setting in which they occurred the structure of the economy and the domestic vulnerabilities in the pre crisis period our findings suggest that the euro periphery crises share sufficient commonalities with earlier crises in their pre crisis domestic vulnerabilities the study points to two important conclusions first the euro periphery crises are composed of unique country experiences hence it will not be easily resolved with a one size fits all set of economic policies secondly while each banking crisis has its inherent uniqueness each crisis also shares sufficient commonalities with one or more of the asian 5 1996 97 crises the nordic banking crisis of the early 1990s or the japanese banking crisis of the 1990s thus the extensive knowledge accumulated through these former banking crises can help in designing recovery policies selin sayek and fatma taskin

good booms bad booms credit booms usually precede financial crises however some credit booms end in a crisis bad booms and others do not good booms we document that while all booms start with an increase of total factor productivity tfp and labor productivity lp such growth falls much faster subsequently for bad booms we then develop a simple framework to explain this firms finance investment opportunities with short term collateralized debt if agents do not produce information about the collateral quality a credit boom develops accommodatingfirms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral eventually triggering a crisis when the average quality of investment opportunities also grows the credit boom may not end in a crisis because the gradual adoption of low quality projects is not strong enough to induce information about collateral finally we also test the main predictions of the model

the dynamics of capital flow episodes nous proposons une methodologie nouvelle pour reperer les episodes de flux importants de capitaux cette methode repose sur un modele de markov a changement de regime le grand avantage de ce type de modeles sur les approches retenues dans la litterature est qu il permet de classifier les mouvements de capitaux en differents regimes sans qu il soit necessaire de formuler des hypotheses specifiques au contexte ou a l echantillon choisi

do banking crises improve democracy we study the relationship between banking crises and the level of democracy we use an event study method on a sample of up to 129 countries over the period 1975 2010 featuring 94 systemic banking crises we find that banking crises are followed by an improvement in democracy and report evidence suggesting that the relation may be causal the bulk of the improvement takes place between 3 and 10 years after the banking crisis the impact of a banking crisis is greater in non democratic countries and when the banking crisis is severe we explain this finding by the fact that banking crises create windows of opportunity to contest autocratic regimes

ride the wild surf an investigation of the drivers of surges in capital inflows over the past 15 years gross inflows to industrial and developing countries have enjoyed a wild ride after reaching record highs in the run up to the global financial crisis they collapsed dramatically in 2008 09 as signs of global recovery reappeared capital inflows resumed although at different speeds the recovery in flows was faster and sharper in developing countries this paper aims at understanding the domestic and external drivers of these surges in gross inflows using quarterly data for 67 countries from 1975 to 2010 it finds that domestic and external factors have significant explanatory power in driving surges of inflows this finding holds for the sample of industrial countries whereas domestic factors play a significantly larger role in explaining surges to developing countries zooming into the findings shows that a financial booms tend to attract massive capital inflows b surges to either industrial or developing countries are driven by regional contagion and c strong growth and natural resource abundance are keys to attract inflows of foreign capital into developing countries

capital inflow surges in emerging economies how worried should latin america and the caribbean be in the years leading up to the global economic crisis latin america and the caribbean received large capital inflows nonetheless the region survived the albeit short lived dramatic events of 2007 09 reasonably well with no financial crisis in any of the larger economies after the crisis capital inflows rose again in 2010 gross inflows to seven latin american countries argentina brazil chile colombia mexico peru and venezuela amounted to more than 6 percent of gross domestic product gdp and net inflows exceeded 3 percent of gdp more recently following the may 2013 speech of then chairman of the u s federal reserve ben bernanke there has been concern regarding the potential effects of tapering asset purchases by the u s federal reserve system and rising interest rates possibly spelling the end of large capital inflows to the latin american and caribbean region the literature on capital inflows suggests that while these flows represent an opportunity to spur investment and growth they may also increase vulnerability to financial crises macroeconomic instability and ultimately recession a relevant question then is whether the region can declare victory in being able to manage large capital inflows successfully or whether risks remain that justify strong measures our starting point is that the region has enjoyed strong surges in capital inflows we therefore decided to condition the analysis on surges occurring we do not seek to explain the reasons for such a surge one justification for this decision is that capital flows appear to be driven as much if not more by push rather than pull factors more specifically we seek to understand what determines whether such surges end in either a banking crisis or a recession while there is a substantial literature on the determinants of capital inflows their potential impacts have received much less attention the contribution of this paper is to analyze when inflow surges may end in severe economic problems including financial or macroeconomic instability rather than to identify the determinants of those surges we must first tackle the question of how to define a capital inflow surge we are helped in this regard by a small but growing literature however the current definitions of inflow surges in the literature may be injudicious we propose a new definition which considers the total size of the inflow episode across countries we also employ a more traditional definition based on yearby year inflows relative to a country specific threshold we contrast relevant statistics on the identified episodes using these two definitions and compare our episodes with others found in the literature we also consider whether the analysis should be conducted using gross or net inflows we take the view that employing net flows may discard useful information and that gross flows are relevant where financial instability is a potential concern even if net flows are zero a domestic financial system may intermediate large gross inflows when domestic residents purchase assets abroad we choose to focus on gross inflows but we include gross outflows as a potential explanatory variable so as not to lose information 1the empirical analysis in this paper develops a set of parsimonious models that discriminate reasonably well between the different economic outcomes we then analyze the case of a typical country from the region with a recent capital inflow surge providing a set of simulations to illustrate the economic magnitude of our results we simulate the changes in the estimated probabilities of negative outcomes given changes in certain critical variables we suggest that depending on the country inflow characteristics different policy measures may then be justified however a caveat is that emerging economies in general and latin america and the caribbean in particular have been experimenting with new policy measures and we are not able to evaluate their potential effectiveness in this paper

the financial repression liberalization debate taking stock looking for a synthesis financial repression and liberalization became the object of fierce debates between academics and policy makers since the early 1970s as of the late 1980s financial liberalization became also part of the structural adjustment programs sponsored by the international monetary fund and the world bank however the literature on financial repression and liberalization remains controversial on its theoretical conclusions and policy implications given its importance for both the theory and policy of economic development and growth this paper looks for a possible synthesis after reviewing the theoretical contributions and empirical studies under the headings of the mckinnon shaw and new structuralists models the survey concludes that a new synthesis might be found in the post keynesian attempt to take an institutional perspective within a globalised financial and economic environment

financial development and the instability of open economies this paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies our basic model is a dynamic open economy model with a tradeable good produced with capital and a country specific factor we also assume that firms face credit constraints with the constraint being tighter at a lower level of financial development a basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies this is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles thus countries that are going through a phase of financial development may become more unstable in the short run similarly full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development phases of growth with capital inflows are followed by collapse with capital outflows on the other hand foreign direct investment does not destabilize

are windfalls a curse abstract a puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits furthermore those countries that ran current account deficits failed to attain greater post boom growth rates indicating the deficits were consumed or invested in low quality projects the point we make is that the structure of the fiscal process is critical in determining outcomes if fiscal control is unitary then the consumption smoothing effect is operative and representative agent models of the current account have predictive power however if control is divided among several fiscal claimants a voracity effect appears which counteracts the consumption smoothing effect leading to a deterioration of the current account in response to a positive temporary shock we model the interaction among fiscal claimants as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself this results in a deterioration of the current account we also show that all the windfall is dissipated with the country experiencing no increase in welfare 1998 elsevier science b v

currency crises are they all the same abstract the plethora of currency crises around the world has fueled many theories on the causes of speculative attacks the first generation models focus on fiscal problems while the second generation models emphasize countercyclical policies and self fulfilling crises in the 1990s models pinpoint to financial excesses with the crisis of argentina in 2001 models of sovereign default have become popular again while the theoretical literature has emphasized variety the empirical literature has supported the one size fits all models this paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

does education raise productivity or just reflect it education has an important effect on wages but it not clear whether this is because education raises productivity or because education is simply a signal of ability we implement a number of existing tests for discriminating between these two explanations and find that they do not support the signalling hypothesis however we have severe reservations about these results and we propose an alternative test based on changes in education incentives caused by changes in the minimum school leaving age in the 1970s using this idea we find that uk data appear to strongly support the human capital explanation an important issue in the economics of education is that an individual s education has an effect on wages paid in the labour market for example blundell et al 2003 uses detailed education and subsequent earnings information for a cohort of male individuals born in 1958 to estimate that the returns to a uk degree typically of 3 year duration relative to graduating from high school at 18 with 2 a level qualifications a necessary but not sufficient condition for admission to university is a 24 wage premium human capital explanations pioneered by becker 1962 and schultz 1963 suggest that the correlation between education and wages is due to education enhancing productivity however earnings may rise in response to education not because of any effect on productivity but simply because education may act as a signal of productivity employers believing that education is correlated with productivity will screen workers for their education and pay higher wages to the more educated the employers beliefs will be confirmed by their experience if it is the case that high productivity individuals signal this by choosing high levels of education it will be optimal for individuals to behave in this way if the cost of acquiring education is less for high productivity individuals than it is for low productivity individuals thus under reasonable conditions the market will be characterised by a separating equilibrium where higher productivity individuals choose higher levels of education than lower productivity workers and earn correspondingly higher wages the theory is largely due to spence 1973 1979 and the subsequent empirical literature was reviewed by groot and oosterbeek 1994 riley 2001 provides an excellent modern survey chevalier harmon and walker are fellows of iza in bonn and are affiliated with the institute for the study of social change issc in dublin this paper is part of the issc policy evaluation programme chevalier and walker are also affiliated with the centre for the economics of education at the london school of economics lse the support of all of these bodies for facilitating our collaboration is acknowledged harmon is grateful to university college london for their hospitality during his nuffield foundation new career development fellowship in the social sciences comments from steve machin and three anonymous referees greatly improved the exposition of this paper we are also grateful to richard blundell and to seminar participants at the lse and the tinbergen institute in amsterdam for their comments and to vincent o sullivan for excellent research assistance the usual disclaimer applies

the effect of bank bail outs in the eu abstract the financial crisis renewed the debate on the bail out of financial institutions questioning the effectiveness of such an intervention in restoring normal economic conditions this paper analyzes the effect on the real economy of state financial support to distressed banks using a panel approach that covers all countries in the eu throughout the financial crisis results show that state financial support was able to enhance economic conditions by restoring trust in financial markets state support boosted the ongoing substitution between securities and bank lending as the main financing channel of non financial firms

political booms financial crises political booms measured by the rise in governments popularity predict financial crises above and beyond better known early warning indicators such as credit booms this predictive power howev

work characteristics firm size and wages a positive wage firm size relationship is well documented in the empirical literature in industrial organization and labor economics firm size seems to proxy various unobserved determinants such as job satisfaction monitoring costs more complex technologies and worker participation in monopoly profits it is generally argued that the greater the possibility of controlling for these latent factors the less likely that a significant size effect will appear this paper attempts to distinguish firm size from other wage determinants for a rich data source for west germany and demonstrates the persistence of the size premium

taking credit redistribution and borrowing in an age of economic polarization several recent studies link rising income inequality in the united states to the global financial crisis arguing that us politicians did not respond to growing inequality with fiscal redistribution instead americans saved less and borrowed more to maintain relative consumption in the face of widening economic disparities this article proposes a theory in which fiscal redistribution dampens the willingness of citizens to borrow to fund current consumption a key implication is that pretax inequality will be more tightly linked with credit in less redistributive countries the long run partisan composition of government is in turn a key determinant of redistributive effort examining a panel of eighteen oecd democracies the authors find that countries with limited histories of left wing participation in government are significantly more likely see credit expansion as prefisc inequality grows compared to those in which the political left has been more influential

the collapse of the mexican peso what have we learned the collapse of the mexican peso what have we learned in the first quarter of 1995 mexico found itself in the grip of an intense financial panic foreign investors fled the country despite very high interest rates an undervalued currency and financial indicators that pointed to long term solvency the fundamental conditions of the mexican economy cannot account for the extent of the crisis the crisis was not the result of irresponsible fiscal behaviour the crisis was due to unexpected shocks that occurred in 1994 the inadequate policy response to those shocks the increased vulnerability to panic and finally panic itself in the aftermath of the march assassination the exchange rate experienced a nominal devaluation of around 10 and interest rates increased by 7 percentage points however capital outflows continued the policy response was to maintain the exchange rate rule and to prevent further increases in interest rates interest rates were held down by expanding domestic credit and by converting short term peso denominated government liabilities cetes falling due into dollar denominated bonds tesobonos a fall in international reserves and an increase in short term dollar denominated debt resulted the government simply ended up illiquid and therefore financially vulnerable illiquidity exposed mexico to a self fulfilling panic jeffrey sachs aaron tornell and andres velasco

the risk of financial crises is there a role for income inequality abstract could macroeconomic factors such as income inequality be the real root cause of financial crises we explore a broad variety of financial and macroeconomic variables and employ a general to specific model selection process to find the most reliable predictors of financial crises in developed countries over a period of more than 100 years our in sample results indicate that income inequality has predictive power beyond loan growth and several other financial variables out of sample forecasts for individual predictors show that their predictive power tends to vary considerably over time but income inequality has predictive power in each forecasting period

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

human capital vs signalling explanations of wages increases wages by directly increasing the worker s productivity this learning explanation is usually associated with human capital theory however it seems unlikely that learning explains all the wage differences associated with schooling and work history better educated workers are not a random sample of workers they have lower propensities to quit or to be absent are less likely to smoke drink or use illicit drugs and are generally healthier it is unlikely that employers make full use of differences in propensities to quit or to be absent or sick when hiring workers these characteristics are often not directly observed and the americans with disabilities act precludes firms from using either poor health or the likelihood of future sickness as a hiring criterion unless it is directly related to job performance however if low levels of education are associated with these unfavorable employee characteristics and employers are allowed to take education into account when hiring workers we would expect employers to favor better educated workers as a means of reducing their costs of sickness and job turnover in turn students will take these hiring criteria into account when deciding how long to stay in school students will choose a length of schooling to signal their ability to employers and employers will demand a minimum level of schooling

credit booms monetary integration and the new neoclassical synthesis abstract credit to the private sector has risen rapidly in many new central and eastern european eu member states nms in recent years the lending boom has recently been particularly strong in the segment of loans to households primarily mortgage based housing loans and in those countries that operate currency boards or other forms of hard pegs the main aim of this paper is to propose a conceptual framework to analyze the observed developments with a view to exploring some policy implications at a stage in which these countries are preparing for their prospective integration with the euro area to achieve this we first use a stylized new neoclassical synthesis nns framework which has recently been advanced by goodfriend goodfriend m 2002 monetary policy in the new neoclassical synthesis a primer federal reserve bank of richmond july and goodfriend and king goodfriend m king r 2001 the case for price stability nber working paper 8423 we then discuss the implications of the nns model for credit dynamics and ensuing monetary policy challenges specifically we emphasize consumption smoothing as an important channel of the observed credit expansion and we show how it is related to and how it affects the monetary policy making in ms in doing so we place our discussion in the context of the monetary integration process in general and the nominal convergence process in particular

monetary trends in the united states and the united kingdom a review from the perspective of new developments in monetary economics milton friedman and anna schwartz monetary trends reports a great many findings 53 are enumerated in the introduction but paramount is the stability of the demand for money in the us and britain over the past century the money stock controls money income this proposition more than anything else is the point of their painstaking investigation friedman and schwartz argue against what might neutrally be called the early post war view of the macroeconomic role of money velocity will move easily to reconcile any level of nominal income to any money stock the demand for money in this view is a will o the wisp as the authors put it monetary policy has little influence over real activity stabilization policy necessarily relies on fiscal instruments the volume is completely convincing in disposing of this idea today s reader is likely to be puzzled why so much space is devoted to a view that has no serious adherents among professional economists friedman and schwartz are generals fighting an earlier war a situation accentuated by the long lags in putting this volume into print though the opposing armies fighting for the early postwar view have withdrawn in total rout a new front has opened up and the quantity theory is fighting for its life once again worse yet the new armies are fighting under the banner of free market economics and are led by former colleagues and students of milton friedman the midwest once the stronghold of the quantity theory is now largely occupied by the enemy the new monetary economics views the quantity theory as nothing more than an artifact of government regulation an economy organized along free market principles could function without money at all fischer black 1970 it is true that the kinds of monetary regulations imposed by the american and british governments of the past century create a more or less stable relation between a certain class of assets called money and nominal spending eugene fama 1980 but different regulations would alter that relation even the real bills doctrine anathema to quantity theorists because it invites unlimited expansion of the money supply has advocates in the new school thomas sargent and neil wallace 1981 a monetary system where the government is unconcerned about the money stock has been advocated by a university of chicago economist while visiting the hoover institution john bilson 1981 restoring the intrinsic value of money not limiting its quantity has been found to be the key to successful disinflation by one member of this group sargent 1982 a critical summary titled a laissez faire approach to monetary stability written see p 1528 above for publication information

what can we learn about commodity and credit cycles evidence from african commodity exporting countries abstract this study analyzes the relationship between commodity prices and credit to the private sector in commodity exporting developing countries particularly three nations in sub saharan africa in this regard we extend the findings of non empirical studies dealing with this issue for the case of african countries and complement the literature on the methodological side by investigating this relationship using wavelet analysis this frequency approach is appropriate as it takes into account investor heterogeneity and the time variant characteristic of the studied relationship further it explains the lead lag relationship between the studied series first we observe that credit and commodities are strongly related over long timescales suggesting that the credit market reacts strongly to long term change in commodity markets and thus tends to be sensitive to persistent commodity shocks second for medium and short timescales the interaction is high and significant only during periods of turmoil in terms of the lead lag relationship our results also show that the commodity market causes fluctuations in the credit market

the impact of surges in net private capital inflows on manufacturing investment and unemployment abstract we use local projection methods to examine the dynamic response of surges in net private capital inflows on the output and employment shares of manufacturing the investment output ratio and the unemployment rate high income countries are studied separately from emerging economies both from asia and latin america our sample covers the years from 1970 to 2010 we find that surges in high income countries do not magnify the trend toward deindustrialization however the persistent decline in the investment to gdp ratio and the rise in the overall unemployment rate suggest that surges may negatively affect longer run growth prospects and employment opportunities in these countries in middle income asian countries surges tend to induce deindustrialization in both output and employment in the medium run but they do not lower the investment to gdp ratio in middle income latin america surges speed up deindustrialization lower investment and raise economy wide unemployment

external sector and income inequality in interdependent economies using a dynamic panel data approach abstract by using a panel of countries for 1960 1995 we show that the intensity of capital controls the exchange rate the type of exports and the volume of trade appear to affect the long run distribution of income

credit booms and macrofinancial stability this paper explores several questions about credit booms and busts when do credit booms occur when do they end up in busts and when do they not what are the implications for different policies if curbing credit growth and or mitigating the associated risks is an objective we find that credit booms are often associated with financial reform and economic growth they also tend to be more frequent in fixed exchange rate regimes only one in three credit boom episodes are followed by a financial crisis these booms tend to be larger and last longer macroprudential tools have at times proven effective in containing booms and more often in limiting the consequences of busts due to the buffers they helped to build

explaining international and intertemporal variations in income inequality this paper explores the propositions that income inequality is relatively stable within countries and that it varies significantly among countries a new and expanded data set provides broad support for both propositions drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality the empirical analysis shows that the predicted variables associated with the first argument a measure of civil liberties and the initial level of secondary schooling and the second argument a measure of financial depth and the initial distribution of land are indeed important determinants of inequality this paper explores two propositions regarding income inequality they are first income inequality is relatively stable within countries and second it varies significantly across countries to illustrate note that the gini coefficient in india remained almost constant for forty years 1951 92 with mean 32 6 and standard deviation 2 0 2 in contrast the variation in gini coefficients across countries is large 61 9 in honduras in 1968 compared with 17 8 in bulgaria in 1976 if substantiated these propositions have potentially significant implications for poverty the significance of the first is obvious barring any fundamental socio political change poverty reduction will depend crucially on the rate of economic growth given this the significance of the second is that in inegalitarian economies the poor will enjoy a smaller share of any national increment in income than in more egalitarian ones drawing on a new and expanded data set on inequality deininger and squire 1996a the first of the paper s three sections conducts standard statistical tests of the two propositions the sample comprises 573 observations on the most common measure of inequality the gini coefficient for 49 developed and developing countries covering the period 1947 94 the results broadly confirm our two propositions specifically analysis of variance anova shows that about 90 of the total variance in the gini coefficients

financial integration productivity and capital accumulation understanding the mechanism through which nancial globalization aects eco nomic performance is crucial for evaluating the costs and bene ts of opening nancial markets this paper is a rst attempt at disentangling the eects of nancial inte gration on the two main determinants of economic performance productivity tfp and investment i provide empirical evidence from a sample of 70 countries observed between 1975 and 1999 the results for both de jure and de facto indicators suggest that nancial integration has a positive direct eect on productivity while it does not directly aect capital accumulation i also control for indirect eects of nancial globalization through nancial development and banking and currency crises while nancial integration does not systematically increase domestic nancial depth it may raise the likelyhood of banking crises though only to a minor extent yet the overall eect of nancial liberalization remains positive for productivity and negligible for investment

financial liberalization and banking crises in emerging economies abstract financial liberalization often leads to financial crises this link has usually been attributed to poorly designed banking systems an explanation that is largely static in this paper we develop a dynamic explanation by modelling the evolution of a newly liberalized bank s opportunities and incentives to take on risk over time the model reveals that even if a banking system is well designed in the sense of having good long run properties many countries will enjoy an initial period of rapid low risk growth and then enter a period with an elevated risk of banking crisis this transition emerges because of the way in which the degree of foreign competition the marginal product of capital and the bank s own net worth simultaneously evolve