an empirical growth model for major oil exporters this paper develops a long run output relation for a major oil exporting economy where the oil income to output ratio remains su ciently high over a prolonged period it extends the stochastic growth model developed in binder and pesaran 1999 by including oil exports as an additional factor in the capital accumulation process the paper distinguishes between the two cases where the growth of oil income g 0 is less than the natural growth rate the sum of the population growth n and the growth of

labor taxation and foreign direct investment in this paper we analyze the implications of the effective taxation of labor for profits and hence the decisions made by multinational enterprises concerning the location of their headquarters if a higher employee borne tax burden reduces manager effort it should also negatively affect firm profits and the location of the headquarters we compile data on personal income tax profiles for 52 economies and the year 2002 at different moments of the distribution of gross wages our findings suggest that higher employee borne labor taxes are less conducive to the location of headquarters and foreign direct investment stocks in a given host economy

contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

global factors and emerging market spreads this paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite as reflected in the spread of high yield corporate bonds in developed markets global liquidity measured by the international interest rates and contagion from systemic events like the russian default this link has remained relatively stable over the history of the emerging market class is robust to the inclusion of country specific factors and helps provide accurate long run predictions overall the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies

two part models are robust to endogenous selection abstract this note shows that the two part model tpm can be used to estimate conditional and population averaged effects of exogenous covariates when there is endogenous selection between the two parts much like estimating an average treatment effect on the treated the tpm estimator only needs estimates of parameters that are recoverable from the observable data to estimate covariate effects the tpm estimator is consistent for the counter factual of interest when selection between the parts is endogenous because the unobservable parameter is multiplied by zero

longitude matters time zones and the location of foreign direct investment abstract using bilateral foreign direct investment fdi data we find that differences in time zones have a negative and significant effect on the location of fdi we show that this finding is robust across different specifications estimation methods and proxies for time zone differences time zones also have a negative effect on trade but this effect is smaller than that on fdi finally the impact of the time zone effect has increased over time suggesting that it is not likely to vanish with the introduction of new information technologies

trend fundamentals and exchange rate dynamics we estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the us dollar the empirical model is based on the assumption that both countries monetary policy strategies may be well described by taylor rules with a time varying inflation target a time varying natural rate of unemployment and interest rate smoothing the estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered the model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment authors abstract

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the debt equity choice when firms adjust their capital structures they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt in contrast to previous empirical work out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio and that the target ratio may change over time as the firm s profitability and stock price change a separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision

international risk cycles abstract recent work in international finance suggests that exchange rate puzzles can be accounted for if 1 aggregate uncertainty is time varying and 2 countries have heterogeneous exposures to a world aggregate shock we embed these features in a standard two country real business cycle framework and calibrate the model to equity risk premia in low and high interest rates countries unlike traditional real business cycle models our model generates volatile exchange rates a large currency forward premium excess comovement of asset prices relative to quantities and an imperfect correlation between relative consumption growth and exchange rates our model implies however that high interest rate countries have smoother quantities equity returns and interest rates than low interest rate countries contrary to the data

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

is it punishment sovereign defaults and the decline in trade sovereign defaults are associated with declines in defaulting countries trade are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest we devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines bilateral trade with creditor countries should fall more than trade with other countries we find that this is not the case the analysis does not yield much evidence of broader punishment strategies including a league of major creditors either these results contradict the predictions of the trade sanctions theory of sovereign borrowing

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

measuring the agency cost of debt we adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and thereby to measure the agency costs of debt an underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen we identify the change in operating policy created by leverage and value this change the model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt the optimal capital structure for a firm is now widely regarded to be determined by a broad range of factors including a mix of tax effects the various agency problems associated with different securities and the various costs of issuing securities including the costs created by adverse selection while the existence of a theoretical optimum has been demonstrated in a variety of papers a less explored area has been the construction of detailed models that enable us to measure each of the relevant factors for a particular company and thereby to determine the actual optimal mix for that firm this gap in our understanding is particularly glaring in the case of agency costs in order to allow a careful modelling of strategic relations the parameters of most agency models are either so simplified that it is impossible to associate them with measurable parameters of a real world case or else the models simply abstract from certain critical factors such as a robust measure of price risk that must be incorporated into any real application for example although we now understand that sinking funds dividend restrictions and other bond covenants help to resolve the conflict of interest between bondholders and equity we do not yet have much in the way of models with which to determine the optimal parameters of these very covenants contingent claims models can provide a consistent framework for multiperiod valuation that properly accounts for risk but they usually abstract from the agency factors entering capital structure decisions when using a contingent claims model to value a firm s securities it is common to take the value of the firm itself as governed by an exogenously defined stochastic process the value of the firm s securities are then derived from this underlying value and as merton 1974 points out in his paper on the pricing of risky debt the modigliani miller theorem obtains so that the value of the firm is independent of the value and the type of debt in order to apply the contingent claims techniques to a setting in which agency problems are central some adaptation is necessary in this paper we

the role of portfolio constraints in the international propagation of shocks we study the comovement among stock prices and exchange rates in a three good three country centre periphery dynamic equilibrium model in which the centre s agents face portfolio constraints we characterize equilibrium in closed form for a broad class of portfolio constraints solving for stock prices terms of trade and portfolio holdings we show that portfolio constraints generate wealth transfers between the periphery countries and the centre which increase the comovement of the stock prices across the periphery we associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion the model generates predictions consistent with other important empirical results such as amplification and flight to quality effects copyright 2008 wiley blackwell

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

sovereign defaults by currency denomination abstract this paper explores the drivers of sovereign default in 100 countries over the period 1996 2012 we build a new data set of sovereign defaults and find that default events for local and foreign currency bonds are equally likely however governments default under different economic and financial conditions depending on the currency in which bonds are issued the explained variation in default probability rises from 43 to 62 when we account for differences in currency denomination we also provide evidence that global factors and market sentiment which are known to drive sovereign spreads do not help explain the probability of sovereign default hence these factors appear to affect the price of sovereign credit risk although not the risk itself

volatility dependence and contagion in emerging equity markets abstract in this paper we use weekly stock market data for a group of latin american countries to analyze the behavior of volatility through time we are particularly interested in understanding whether periods of high volatility are correlated across countries the analysis uses both on univariate and bivariate switching volatility models our results do not rely on the correlation coefficients but on the co dependence of volatility regimes the results indicate that high volatility episodes are in general short lived lasting from 2 to 12 weeks we find strong evidence of volatility co movements across countries especially among the mercosur countries

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

asset prices and exchange rates in this paper we study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model trade in goods gives rise to an additional channel of international propagation through the terms of trade absent in traditional single good asset pricing models the inclusion of demand shocks helps overturn many unrealistic implications of existing international flnance models in which productivity shocks are the sole source of uncertainty our model generates a rich set of implications on how stock bond and foreign exchange markets co move we solve the model in closed form which yields a system of equations that can be readily estimated empirically our estimation validates the main predictions of the theory

foreign currency debt financial crises and economic growth a long run view what are the costs of hard currency liabilities after being implicated in the global financial instability of the late 1990s the costs are widely believed to be large and as a result many emerging markets have pushed to minimize currency mismatches we study the growth effects of exposure to foreign currency debt using data from two periods of international financial integration 1880 1913 and 1973 2002 for over 45 countries hard currency debt is associated with increased risks of currency and debt crises in both periods especially when a country s macroeconomic financial fundamentals are weak we find the risk of financial crisis associated with hard currency debts translated into significantly diminished growth rates however we also find evidence that strong financial development and policy credibility attenuate the crisis risks associated with high exposure to hard currency debt which has implications for eastern european countries where large current account deficits and high levels of hard currency debt are believed to pose financial risks in this region some countries have adopted flexible exchange rates and avoided foreign currency debt several others have built up large net foreign currency liabilities and are exposed to a significant likelihood of a financial crisis in the near future

firm specific information and the correlation between individual stocks and bonds abstract this paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm and finds that they are negatively and contemporaneously correlated this suggests that individual stocks and bonds are driven by firm specific information that is predominantly related to the mean rather than the variance of the firm s underlying assets furthermore i find that lagged stock returns have explanatory power for current bond yield changes while current stock returns are unrelated to lagged bond yield changes this shows that stocks lead bonds in reflecting firm specific information

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

china s emergence in the world economy and business cycles in latin america the international business cycle is very important for latin america s economic performance as the recent global crisis vividly illustrated this paper investigates how changes in trade linkages between china latin america and the rest of the world have altered the transmission mechanism of international business cycles to latin america

growth in the shadow of expropriation we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions the political economy frictions involve a preference for immediate spending while the contracting friction is a lack of commitment regarding foreign debt and expropriation we show that the political economy frictions slow an economy s convergence to the steady state due to the endogenous evolution of capital taxation the model rationalizes why openness has different implications for growth depending on the political environment why institutions such as the treatment of capital income evolve over time why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities and why foreign aid may not affect growth

sovereign debt booms in monetary unions leveraging the higher ination credibility of other countries via a currency union we show that an increase in ination credibility delivers an invitation to borrow raising the maximum borrowing limit of the country and reducing any incentive to save conditional on a nominal interest rate the government has an ex post incentive to inate away the real value of its bonds however creditors anticipate this temptation ex ante pricing the ex post ination into the nominal interest rate the country therefore bears the cost of high ination with no reduction of debt in real terms including the costs associated with ex post ination a

model uncertainty in panel vector autoregressive models we develop methods for bayesian model averaging bma or selection bms in panel vector autoregressions pvars our approach allows us to select between or average over all possible combinations of restricted pvars where the restrictions involve interdependencies between and heterogeneities across cross sectional units the resulting bma framework can find a parsimonious pvar specification thus dealing with overparameterization concerns we use these methods in an application involving the euro area sovereign debt crisis and show that our methods perform better than alternatives our findings contradict a simple view of the sovereign debt crisis which divides the euro zone into groups of core and peripheral countries and worries about financial contagion within the latter group

equilibrium asset prices and exchange rates abstract in a two country two good world we construct an intertemporal international general equilibrium for two logarithmic representative agents financial markets are fully integrated and independently incomplete the equilibrium expected rate of change of the exchange rate increases with the differential of interest rates and the volatility of the domestic equity markets and decreases with the covariance between domestic and foreign equity markets the equilibrium volatility of the exchange rate is the sum of the volatilities due to idiosyncratic factors in the financial markets and a term that represents the difference of weights in the common international factor

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

evolution of bilateral capital flows to developing countries at intensive and extensive margins motivated by the rise in capital flows to low income countries lics we examine the nature of these flows and the factors affecting foreign investors decision recognizing the presence of fixed investment costs we analyze capital flows at both intensive and extensive margins to fix ideas we resort to the gravity literature for the estimating relationships which we embed into a two tier econometric framework with cross sectional dependence our main finding is that market entry costs are statistically and economically very detrimental to lics we also obtain the gravity type relationship for the destination income unconditionally but not after conditioning on relevant variables as well as establish labor productivity as a robust attractor of capital inflows

forecasting with medium and large bayesian vars this paper is motivated by the recent interest in the use of bayesian vars for forecasting even in cases where the number of dependent variables is large in such cases factor methods have been traditionally used but recent work using a particular prior suggests that bayesian var methods can forecast better in this paper we consider a range of alternative priors which have been used with small vars discuss the issues which arise when they are used with medium and large vars and examine their forecast performance using a us macroeconomic dataset containing 168 variables we find that bayesian vars do tend to forecast better than factor methods and provide an extensive comparison of the strengths and weaknesses of various approaches typically we find that the simple minnesota prior forecasts well in medium and large vars which makes this prior attractive relative to computationally more demanding alternatives our empirical results show the importance of using forecast metrics based on the entire predictive density instead of relying solely on those based on point forecasts

horses and rabbits trade off theory and optimal capital structure this paper examines optimal capital structure choice using a dynamic capital structure model that is calibrated to reflect actual firm characteristics the model uses contingent claim methods to value interest tax shields allows for reorganization in bankruptcy and maintains a long run target debt to total capital ratio by refinancing maturing debt using this model we calculate optimal capital structures in a realistic representation of the tra ditional trade off model in contrast to previous research the calculated optimal capital structures do not imply that firms tend to use too little leverage in practice we also esti mate the costs borne by a firm whose capital structure deviates from its optimal target debt to total capital ratio the costs of moderate deviations are relatively small suggesting that a policy of adjusting leverage infrequently is likely to be reasonable for many firms

sovereign credit spreads under good bad governance abstract this paper explores how sovereign credit spreads vary with the level of governance an analysis of 74 countries over the 2001 2016 period shows that sovereign credit default swap cds spreads decrease with government effectiveness particularly in countries exhibiting severe default risk high indebtedness and poor economic conditions we formulate a theoretical explanation for these findings using a structural model in which governments adjust default and debt policies based on their abilities to collect and use fiscal revenues the theory posits that more effective governments have less incentive to default and thus benefit from narrower credit spreads although they may choose higher indebtedness levels

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

country portfolios in open economy macro models this paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models the method is widely applicable simple to implement and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset it can be used in models with any number of assets whether markets are complete or incomplete and can be applied to stochastic dynamic general equilibrium models of any dimension so long as the model is amenable to a solution using standard approximation methods we first illustrate the approach using a simple two asset endowment economy model and then show how the results extend to the case of any number of assets and general economic structure

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

long duration bonds and sovereign defaults abstract this paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long duration bonds this contrasts with previous studies which assume the government can borrow using bonds that mature after one quarter we show that when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one quarter bonds this narrows the gap between the predictions of the model and the data which indicates that the introduction of long duration bonds may be a useful tool for future research about emerging economies our analysis is also relevant for the study of other credit markets

stochastic risk premiums stochastic skewness in currency options and stochastic discount factors in international economies abstract we develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options we estimate the models using time series returns and option prices on three currency pairs that form a triangular relation estimation shows that the average risk premium in japan is larger than that in the us or the uk the global risk premium is more persistent and volatile than the country specific risk premiums and investors respond differently to different shocks we also identify high frequency jumps in each economy but find that only downside jumps are priced finally our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals

macroeconomic effects of corporate default crisis a long term perspective abstract using an extensive data set on corporate bond defaults in the us from 1866 to 2010 we study the macroeconomic effects of bond market crises and contrast them with those resulting from banking crises during the past 150 years the us has experienced many severe corporate default crises in which 20 50 of all corporate bonds defaulted although the total par amount of corporate bonds has at times rivaled the amount of bank loans outstanding we find that corporate default crises have far fewer real effects than do banking crises these results provide empirical support for current theories that emphasize the unique role that banks and the credit and collateral channels play in amplifying macroeconomic shocks

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

dynamic gravity endogenous country size and asset accumulation the gravity equation is the most successful and celebrated empirical model in international trade over the past decade numerous gravity applications have resorted to panel data econometric techniques in order to account for the intrinsically dynamic nature of trade data with the theory of gravity being so far only static these empirical estimations lack solid structural foundations as a consequence a consensus on a unied dynamic gravity estimation approach is yet to be reached the contribution of this paper is threefold first we build a theoretical foundation for the gravity model in a dynamic setting second we use our structural framework to provide clear empirical implications for gravity type estimations with panel data and we consider applications finally to better understand the eect of trade policy in this dynamic framework we calibrate and numerically simulate our general equilibrium model and we compare its properties to those of the standard static gravity model

a knowledge and physical capital model of international trade flows foreign direct investment and multinational enterprises abstract this paper addresses two important issues at the nexus of the literatures on international trade foreign direct investment fdi foreign affiliate sales fas and multinational enterprises mnes first the introduction of a third internationally mobile factor physical capital to the standard 2 2 2 knowledge capital model of mnes with skilled and unskilled labor allows us to resolve fairly readily the puzzle in the modern mne literature that foreign affiliate sales among two identical economies completely displace their international trade intra industry trade and intra industry fdi and fas can coexist for national and multinational firms with identical productivities in identical countries second the introduction also of a third country to the model suggests a formal n country theoretical rationale for estimating gravity equations of bilateral fdi flows and fas in a manner consistent with estimating gravity equations for bilateral trade flows

why doesn t capital flow from rich to poor countries an empirical investigation we examine the empirical role of difierent explanations for the lack of ows of capital from rich to poor countries the lucas paradox the theoretical explanations include difierences in fundamentals across countries and capital market imperfections we show that during 1970i2000 low institutional quality is the leading explanation for example improving peru s institutional quality to australia s level implies a quadrupling of foreign investment recent studies emphasize the role of institutions for achieving higher levels of income but remain silent on the speciflc mechanisms our results indicate that foreign investment might be a channel through which institutions afiect long run development

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration

out of sample exchange rate predictability with taylor rule fundamentals abstract an extensive literature that studied the performance of empirical exchange rate models following meese and rogoff s meese r a rogoff k 1983a empirical exchange rate models of the seventies do they fit out of sample journal of international economics 14 3 24 seminal paper has not convincingly found evidence of out of sample exchange rate predictability this paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate taylor rule fundamentals we find evidence of short term predictability for 11 out of 12 currencies vis a vis the u s dollar over the post bretton woods float with the strongest evidence coming from specifications that incorporate heterogeneous coefficients and interest rate smoothing the evidence of predictability is much stronger with taylor rule models than with conventional interest rate purchasing power parity or monetary models