bluuebunny/crossref_metadata_2025 huggingface dataset:
Financial Concentration and Development: An Empirical Analysis of the Venezuelan Case
Authors: Marquez Jaime R. , Shack-Marquez Janice
Published: August 2019

Knowledge of whether the fains from development are evenly distributed is central to the theory and practive of development economics. In this regard, a number of investigators have noted that in the process of economic development, inequalities in the distribution of income first grow and then decline, giving rise to what is generally known as the U-hypothesis (or the inverted U). This paper tests whether this hypothesis holds for the destribution of financial wealth in Venezuela.
The Out-of-Sample Forecasting Performance of Exchange Rate Models when Coefficients are Allowed to Change
Authors: Schinasi Garry J. , Swamy P. A. V. B.
Published: August 2019

This study examines the out-of-sample forecasting performance of models of exchange rate determination without imposing the restriction that coefficients are fixed over time. Both fixed and variable coefficient versions of conventional structural models are considered, with and without a lagged dependent variable. While our results on fixed coefficient models support most of the Meese and Rogoff conclusions, we find that when coefficients are allowed to change, an important subset of conventional models of the dollar-pound, the dollar-deutsche mark, and the dollar-yen exchange rates can outperform forecasts of a random walk model. The structural models considered are the flexible-price (Frenkel-Bilson) and sticky-price (Dornbusch-Frankel) monetary models, and a sticky-price model which includes the current account (Hooper-Morton). We also find that the variable coefficient version of the Dornbusch-Frankel model with a lagged dependent variable generally predicts better than the other models considered including the random walk model.
Realignment of the Yen-Dollar Exchange Rate: Aspects of the Adjustment Process in Japan
Authors: Loopesko Bonnie E. , Johnson Robert A.
Published: August 2019

The paper first surveys recent estimates of the appropriate yen dollar exchange rate that have been proposed in the literature. Most of the more careful estimates suggest that the yen was substantially undervalued against the dollar in early 1985 when it began its steep ascent and some of the estimates suggest that further appreciation from today's strong level is warranted.We then turn to the adjustment process. First, we present evidence that a narrowing of Japan's record trade surplus has already started to occur, particularly in real terms. Next, we show that external adjustment has been slower than would have been predicted by a simple econometric model, if Japanese trade. We then explore several possible explanations for this predictive failure in the recent period, including the slower pass-through of exchange rate changes to Japanese export prices than in the past, and the slow pass-through of terms-of-trade gains to consumer prices. Evidence is also presented that Japanese exporters adjust prices asymmetrically in response to yen depreciations and appreciations.Next, we use a simple model to analyze the oft-stated claim that too much yen appreciation in a short period of time may actually be counter-productive. The model shows that this outcome is possible, but we argue that for an economy with Japan's structure it is unlikely.Finally, we analyze what role fiscal policy can play in the adjustment process. MCM simulation results suggest that a Japanese fiscal expansion would be much less effective in fostering a reduction in both the U.S. and Japanese trade imbalances than would a U.S. fiscal contraction. However, a Japanese fiscal expansion could have an important impact on domestic demand in Japan and on trade with the developing countries.
The U.S. External Deficit: Its Causes and Persistence
Authors: Hooper Peter , Mann Catherine L.
Published: August 2019

This paper presents an empirical analysis of the macroeconomic and microeconomic factors underlying the causes and persistence of the U.S. external deficit in the 1980s. The paper begins with a review of the extensive literature on this subject, and then outlines an analytical framework that synthesizes several different approaches taken in previous studies. The proximate causes of the deficit are assessed using a partial-equilibrium model of the U.S. current account. We find that the decline in U.S. price competitiveness associated with the appreciation of the dollar over the first half of the decade was the dominant factor, while the excess of U.S. growth over growth abroad also contributed significantly. At a more fundamental level, drawing on average policy multipliers from a group of international macro models, the rise in the dollar and the growth gap that led to the deficit can be explained by the combination of a relatively restrictive U.S. monetary policy and expansive U.S. fiscal policy, along with fiscal contraction abroad. While the initial widening of the deficit can be adequately explained by macroeconomic factors, the deficit has adjusted substantially more slowly (particularly in real terms) to the fall in the dollar since early 1985 than conventional macro trade equations would predict. Analysis of the pricing behavior of foreign exporters, both in the aggregate and for a number of narrowly defined commodities, suggests that foreign profit margins have been squeezed more in response to the fall in the dollar than previously. Moreover, some foreign producers have benefited from significant reductions in production costs. Finally, quantitative restraints on U.S. trade appear to have slowed the adjustment of the trade balance to the decline in the dollar.
Devaluation, Exchange Controls, and Black Markets for Foreign Exchange in Developing Countries
Authors: Kamin Steven
Published: August 2019

This paper considers how exchange controls, black markets, and forward-looking expectations condition the impact of exchange rate devaluations in developing countries. A model incorporating these features is developed to analyze the response of key external balance indicators to anticipated devaluations. The model is driven by the movements of black market exchange rates in perfect foresight equilibrium, which in turn force changes in export under-invoicing and official trade statistics. The predicted movements in all measurable variables, both before and after devaluation, closely mirror those historically associated with devaluation episodes. The analysis is then extended to the case of 'devaluation cycles' to examine the paths of the black market rate and official trade statistics in the face of persistent inflation which over-values the real exchange rate and motivates periodic devaluations. Statistical analysis of a multi-devaluation data set strongly supports some of the most important predictions of the model: black market exchange rates typically depreciate in response to official devaluation, and all else equal, increases in the black market rate reduce official measures of dollar value exports.
Adequacy of International Transactions and Position Data for Policy Coordination
Authors: Stekler Lois E.
Published: August 2019

This paper examines the adequacy of data on current account positions and international indebtedness as indicators of the need for policy adjustments and coordination. Doubts about the adequacy of these data have been raised by the growth of the global current account discrepancy and the statistical discrepancy in the U.S. international transactions accounts. The paper includes a brief review of the conclusions of the IMF working party on the world current account discrepancy and a detailed examination of the data on U.S. international transactions and net investment position. Both investigations support the Conclusion that large shifts in reported data on current accounts and investment positions are likely to reflect real changes.However, even if data were completely accurate, a given current account or investment position may not clearly indicate the magnitude of necessary policy changes because of lags in the adjustment process or underlying trends. This point is illustrated by the tendency of U.S. net investment income to grow as a result of the continued expansion of both claims and liabilities combined with a higher average rate of return on claims. This underlying tendency is likely to counteract, in part, the negative impact on future net investment income of growing U.S. net indebtedness to foreigners.
Approaches to Managing External Equilibria: Where We Are, Where We Might Be Headed, and How We Might Get There
Authors: Truman Edwin M.
Published: August 2019

This paper examines the issue of the U.S. external deficit in a global context. First, the paper considers certain aspects of the current economic situation that have contributed to the U.S. deficit and the progress that has been made to date in laying the basis for its narrowing. Second, the paper raises some questions about the international economic implications of a substantial reduction in the U.S. fiscal deficit, about the need for additional impetus to bring about further adjustment in the U.S. current account deficit, and about the preparedness of other industrial countries to absorb the elimination of the U.S. external deficit. Finally, the paper sketches a few scenarios for the U. S. external adjustment process and comments briefly on them as alternatives.
Macroeconomic Policies, Competitiveness, and U.S. External Adjustment
Authors: Hooper Peter
Published: August 2019

This paper presents an empirical analysis of the relationships among the U.S. external balance, exchange rates, macroeconomic policies, and longer-term trends in relative labor productivity. Movements in the U.S. external balance over the past two decades have been determined to a substantial degree by shifts in U.S. international price and cost competitiveness. Movements in price and cost competitiveness, in turn, have been dominated by swings in nominal exchange rates, which can be explained to a large extent by shifts in fiscal and monetary policies at home and abroad. A longer-term downward trend in the dollar may have been associated with secular decline in U.S. relative to foreign productivity in manufacturing. The downtrend in relative productivity has leveled off in recent years, however. The likelihood of a resumption of the downtrend in relative productivity may be reduced, at current level of exchange rates, by a shift in manufacturing investment towards.
Policy Rules, Information, and Fiscal Effects in a "Ricardian" Model
Authors: Leeper Eric Michael
Published: August 2019

According to conventional wisdom, if deficits are inflationary then current deficits should predict subsequent movements in money growth. This paper USES a general equilibrium model fit to data to: (1) explore the policy behavior underlying this accepted viewpoint; (2) examine alternative equiÂ­librium deficit policies ranging from an exclusive reliance on direct lump-sum taxes to a mix of direct and inflation taxes; and (3) evaluate the empirical trade-offs implied by the various financing schemes. The results suggest that reduced-form analyses of whether "deficits matter" can lead to seriously misleading conclusions by mistakenly attributing fiscal effects to monetary policy.I demonstrate that simple monetary and tax policy rules and plausible assumptions about when private agents learn of fiscal actions can produce a classical economy whose nominal equilibrium depends on the process for lumpÂ­sum taxes and whose time series contradict the view that monetized deficits predict inflation. I assess the fit of versions of the model to U.S. data and reinterpret existing reduced-form studies in light of the results.
Stock Markets, Growth, and Policy
Authors: Levine Ross
Published: August 2019

In a model that emphasizes technological progress and human capital creator as essential features of economic development, this paper establishes a theoretical link between the financial system and per capita output growth. More specifically, it demonstrates that stock markets--by facilitating the ability to trade ownership of firms without disrupting the productive processes occurring within firms--naturally encourage technological innovation and economic growth. Along with recent studies of the role played by financial institutions other than stock markets in promoting growth, this paper contributes to a theoretical foundation upon which financial policy recommendations may more confidently rest.The paper finds that direct and indirect taxes associated with stock market transactions slow real per capita output growth. Thus, given different policies toward financial markets, this paper helps to explain simultaneously the observed differences in growth rates across countries, the inability of measured factor inputs to explain these differences, and the close empirical association between the size of financial markets and the rate of economic growth.
Mercantilism as Strategic Trade Policy: The Anglo-Dutch Rivalry for the East India Trade
Authors: Irwin Douglas A.
Published: August 2019

This paper provides a reinterpretation of seventeenth-century mercantilist trade doctrine and policy in light of recent theories of strategic trade policy. Mercantilist economic thought, like strategic export-promotion theories, emphasized the use of government policy to capture rents that arise from imperfect competition in international trade. The economic structure of the Anglo-Dutch rivalry for the East India trade provides an excellent illustration of an environment in which the profit-shifting motive for strategic trade policies exists. Using data from the seventeenth-century East India trade, I find that the scope for strategic trade policies was clearly present, although the gains from such policies were probably quite small and are highly sensitive to assumptions about demand.
Financial Structure and Economic Development
Authors: Levine Ross
Published: August 2019

An important challenge to economists is to explain how financial contracts and institutions affect economic growth while simultaneously explaining how economic development elicits the creation and modification of an economy's financial structure. This paper addresses one side of this inherently two-sided issue. The paper shows how risk, transactions costs, and economies of scale in information gathering and resource coordination create incentives for the emergence of commonly observed financial institutions and contracts and how the resulting financial structure influences the steady state growth rate of per capita output. Policy can affect growth directly by altering investment incentives and indirectly by changing the incentives underlying the creation of financial structures.
International Capital Mobility: Direct Evidence from Long-Term Currency Swaps
Authors: Popper Helen
Published: August 2019

This paper provides direct measures of the international mobility of long-term financial capital using interest arbitrage conditions previously applied only to short-term assets. Long-term arbitrage conditions are constructed using a now well-developed mechanism for hedging long-term currency positions, the currency swap. Asset returns are compared in the Euromarkets and in the onshore markets of Canada, Japan, Germany, Switzerland, the United Kingdom, and the United States. The evidence, discussed below, indicates that long-term financial capital is as mobile across these markets as is short-term capital. This appears to be the case both within the Euromarkets and across political jurisdictions.
Free Trade at Risk? An Historical Perspective
Authors: Irwin Douglas A.
Published: August 2019

The recent theoretical literature on strategic trade policy suggests that government intervention in international trade has the potential to be welfare-improving, thus bringing into question the traditional economic case for free trade. Economists in the nineteenth century also argued about whether theoretical justifications for tariffs compromised the case for free trade. This paper discusses two older debates somewhat related to the current focus on strategic industries and reciprocity, and concludes with an observation about how developments in economic theory affect economists' view of policy.
Expected and Predicted Realignments: The FF/DM Exchange Rated During the EMS
Authors: Rose Andrew K. , Svensson Lars E.O.
Published: August 2019

An empirical model of time-varying realignment risk in an exchange rate target zone is developed. Expected rates of devaluation are estimated as the difference between interest rate differentials and estimated expected rates of depreciation within the exchange rate band, using French Franc/Deutsche Mark data during the European Monetary System. The behavior of estimated expected rates of depreciation accord well with the theoretical model of Bertola-Svensson (1990). We are also able to predict actual realignments with some success.
Anticipations of Foreign Exchange Volatility and Bid-Ask Spreads
Authors: Wei Shang-Jin
Published: August 2019

The paper studies the effect of the market's perceived exchange rate volatility on bid-ask spreads. The anticipated volatility is extracted from currency options data. An increase in the perceived volatility is found to widen bid-ask spreads. The direction of the effect is consistent with an option model of the spread, but the magnitude is smaller. An increase in trading volume of spot exchange rates also widens the spread. The omission of the trading volume, however, does not bias the estimate of the effect of the volatility on the spreads. Although the spread-volatility relations implied by the option model of the spread is close to linear, some form of nonlinearity can still be detected from the data.
Comments on the Evaluation of Policy Models
Authors: Granger C. W. J. , Deutsch Melinda
Published: August 2019

This paper examines the evaluation of models claimed to be relevant for policy making purposes. A number of tests are proposed to determine the usefulness of such models in the policy making process. These tests are applied to three empirical examples.
The Usefulness of P* Measures for Japan and Germany
Authors: Kole Linda Sue , Leahy Michael P.
Published: August 2019

This paper develops measures of long-run equilibrium price levels (P*) for Japan and Germany following the approach used for the United States by Hallman, Porter, and Small [1991]. Under this approach, P* is detemined by potential output, equilibrium velocity, and the amount of money in the economy. Constructing P* for these foreign countries is more complicated than in the U.S. case because the velocities of the broad monetary aggregates (M2+CDs in Japan and M3 in Germany) exhibit clear downward trends in contrast to the relatively flat trend of U.S. M2 velocity. We utilize dynamic specifications of money demand to construct measures of equilibrium velocity and P for Japan and Germany. We then assess the explanatory power of deviations of actual prices from P* in predicting the amount of inflationary potential in the Japanese and German economies. In general, we find that the P* approach is useful in the analysis of German inflation, but that it is less promising for Japan than it has been for the United States.
German Unification and the European Monetary System: A Quantitative Analysis
Authors: Adams Gwyn , Alexander Lewis S. , Gagnon Joseph E.
Published: August 2019

This paper uses a macroeconomic model with rational expectations to analyze issues related to German unification. A principal focus of the paper is the effect of unification on member countries of the European Monetary System. Under certain conditions, German unification has a contractionary effect on other EMS countries. We explore the implications for EMS and other countries of alternative German fiscal and monetary policies.
Import Demand and Supply with Relatively few Theoretical or Empirical Puzzles
Authors: Warner Andrew M.
Published: August 2019

This paper documents that a textbook, supply and demand, simultaneous equations model of import prices and quantities can explain many aspects of import price and quantity behavior over the past 25 years, appears to forecast better than standard trade equations, and the instruments we use appear to be valid instruments. On the negative side, although the demand equation and the two reduced form equations satisfy nominal homogeneity restrictions, the supply equation does not. One possible explanation for this is that foreign suppliers do not believe that exchange rate shocks have the same permanence as price or wage shocks. Overall, however, the findings reported in this paper show that a classical simultaneous equations model can explain the behavior of non-oil import prices and quantities fairly successfully.
Global Versus Country-Specific Productivity Shocks and the Current Account
Authors: Rogoff Kenneth S. , Glick Reuven
Published: August 2019

For G-7 countries over the period 1961-1990, there appears to be a strong and stable negative correlation between annual changes in the current account and investment. Here we explore this correlation using a highly tractable empirical model that distinguishes between global and country-specific shocks. This distinction turns out to be quite important empirically, as global shocks account for roughly fifty percent of the overall variance of productivity. An apparent puzzle, however, is that the current account seems to respond by much less than investment to country-specific productivity shocks. Given the near random walk behavior of these shocks, this observation would appear to contradict a central cross-equation inequality restriction implied by the intertemporal approach. We show analytically, however, that the theoretically-predicted current account response can be extremely sensitive to small changes in the degree of mean reversion in country-specific productivity; in general, the current account response is more sensitive than is the investment response. Our results thus support the view that there is a significant convergent component to country-specific productivity shocks.
Market Share and Exchange Rate Pass-Through in World Automobile Trade
Authors: Feenstra Robert C. , Gagnon Joseph E. , Knetter Michael M.
Published: August 2019

This paper explores the relationship between exchange rate pass-through and market share for monopolistically competitive exporters. Under fairly general assumptions we show that pass-through should be high for exporters based in a country with a very large share of total destination market sales. For source countries with small and intermediate market shares, the theoretical relationship is potentially nonlinear and sensitive to assumptions about the nature of consumer demand and firm interactions. The model is estimated using a panel data set of automobile exports from France, Germany, Sweden, and the United States to a variety of destinations over the period 1970-88. The empirical relationship between pass-through and market share is significantly nonlinear: pass-through is lowest when the source country's market share is around 45 percent and it is highest when the source country's share approaches 100 percent.
Exchange Rates, Prices, and External Adjustment in the United States and Japan
Authors: Hooper Peter , Marquez Jaime R.
Published: August 2019

This paper studies the responsiveness of external balances--trade volumes and prices--to changes in exchange rates. Our objectives are twofold: to provide an analytical review of the literature in this area and to assess the influence of exchange rate movements on external adjustment in the two countries whose external imbalances have dominated all others over the past decade, the United States and Japan.We find that the conventional partial-equilibrium model of the trade balance has performed generally quite well in predicting the path of the U.S. and Japanese external balance over the past decade. Second, in a partial-equilibrium setting, exchange-rate changes have a significant and substantial influence on movements in external balances. This view is supported by a massive empirical literature focusing on the estimation of price elasticities in trade, by casual inspection of the data, and by our own econometric estimates of trade elasticities. Third, Japanese real trade flows appear to be considerably less responsive to exchange-rate changes than U.S. real trade flows. This asymmetry can be traced only in part to evidence that Japanese exporter and U.S. exporters differ in the extent to which they pass-through exchange-rate changes to the foreign-currency prices of their exports. Finally, Japanese exporters tend to pass-through significantly less of any given percentage exchange rate change than U.S. exporters. Part of that difference is attributable to the greater sensitivity of Japanese production costs to exchange rate changes--Japanese export prices fall when the yen appreciates, partly because the prices of petroleum and other imported raw materials in Japan tend to fall in proportion to the appreciation of the yen.
Fluctuating Confidence and Stock-Market Returns
Authors: David Alexander
Published: August 2019

The drift of two different diffusion processes (asset returns) is determined by a state variable which can take on two values. It jumps between the two according to Poisson increments (this is called a 'regime-switch'). For any given position of the state variable the drift of one process is high and the other is low. I find that the posterior probability that the 1st asset has higher average returns, conditional on observing the path (returns) of each process, follows a diffusion process and calculate its infinitesimal parameters. I also derive analytical expressions for its stationary density and for some of its path properties. I compare the filtering problem to the Kalman Filtering problem and find that even though the dynamics of the mean of the distribution are very similar, the dynamics of the variance are subject to stochastic fluctuations. The model is parsimonious in that the conditional mean and variance are functions of a single variable.I characterize the interest-rate and total-returns processes in a Cox-Ingersoll-Ross[1985] style model where the productivities of assets are unobserved, but inferred as above. I find that this model is capable of reproducing three stylized facts of stock-market returns and interest-rates. These are the skewness and kurtosis of returns and the 'Predictive-Asymmetry' of returns: excess-returns and future changes in volatility are negatively correlated. Further negative returns cause reactions of larger magnitude. The success of the model in generating these features depends on the speed of learning about the regime switches. Parameter values which lead to faster learning, are consistent with large negative skewness of returns and the Predictive Asymmetry property. The slower learning version leads to greater kurtosis of returns. I show that a model based on the same fundamentals but with observed 'regime-shifts' is not reconcilable with these features. My analysis suggests that learning about the productivities of assets of the kind introduced here may be an important determinant of portfolio choices and observed asset returns.
Inflation, Inflation Risk, and Stock Returns
Authors: Ammer John
Published: August 2019

This paper investigates the empirical relation between inflation and stock returns in ten industrialized countries, with a focus on the implications for links between inflation and the macroeconomy. The stock return decomposition of Campbell and Shiller (1988) is used to determine the extent to which the negative contemporaneous stock return associated with a positive inflation surprise is due to (a) lower future real dividends and (b) higher future required real equity returns. The empirical results suggest that generally higher inflation is associated with both lower real dividends and lower required real equity returns in the future. The evidences favors corporate tax-related theories (e.g. Feldstein (1980))--in which distortions in the tax system cause an increase in inflation to raise the firm's effective cost of capital relative to the return earned by investors in the firm--relative to the "risk premium story" that has been credited to Tobin (1958). However, for the United States and the United Kingdom, estimates of the arbitrage pricing theory (APT) model with a conditionally heteroscedastic inflation risk factor suggest that inflation may have increased the average real cost of equity capital by as much as fifty basis points.
Fiscal Policy Coordination and Flexibility Under European Monetary Union: Implications for Macroeconomic Stabilization
Authors: Bryson Jay H.
Published: August 2019

Some writers have proposed that under European Monetary Union fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. The paper shows that, in theory, fiscal policy coordination may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the Multi-Country Model of the Federal Reserve Board. The results suggest that fiscal policy coordination under EMU may require more fiscal activism rather than less. The results also show that, regardless of the shock, fiscal policy coordination among EMU members provides more macroeconomic stabilization to the United States. However, due to the small spillovers between the EC and the United States, the magnitude of this increased stabilization is relatively trivial.
International Dimension of European Monetary Union: Implications for the Dollar
Authors: Johnson Karen
Published: August 2019

This paper attempts to review the different elements of the international role of the dollar and, where possible, to provide quantitative information about the current scale of dollar use and how it may be changing, including in response to European monetary union. The paper considers the exchange value of the dollar, the dollar as reserve asset, the dollar as vehicle currency, and the macroeconomic implications for the United States of the fiscal actions likely to be required for the participating EU countries to meet the fiscal convergence criteria specified in the Maastricht Treaty. The paper finds that if Federal Reserve policy continues to contribute to confidence in the long-term value of the dollar and the process of change remains gradual, then European monetary union does not pose serious negative consequences for the international role of the dollar.
The Effect of Changes in Reserve Requirements on Investment and GNP
Authors: Loungani Prakash , Rush Mark
Published: August 2019

This paper provides evidence on the importance of the credit channel in the transmission of monetary policy. Changes in reserve requirements are used to measure "credit shocks." Reserve requirement changes are often made for regulatory reasons, and hence provide a more exogenous measure of credit shocks than the measures used in previous tests. To distinguish between the "money" and "credit" channels, the significance of the reserve requirements variable is studied in an empirical model that includes other monetary aggregates (either the monetary base or M1). We find that an increase in reserve requirements lowers aggregate investment, real GNP and commercial and industrial (C&amp;I;) loans made by banks.
International Capital Mobility in the 1990s
Authors: Obstfeld Maurice
Published: August 2019

This paper surveys the performance of international capital markets and the literature on measuring international capital mobility. Three main functions of a globally integrated and efficient world capital market provide focal points for the analysis. First, asset-price arbitrage ensures that people in different countries face identical prices for a given asset. Second, to the extent that the usual market failures allow, people in different countries can pool risks to their lifetime consumption profiles. Third, new saving, regardless of its country of origin, is allocated toward the world's most productive investment opportunities. The paper evaluates the international capital market's performance of these roles by studying data on international interest-rate differences, international consumption correlations, international portfolio diversification, and the relation between national saving and investment rates. The conclusion is that while international capital mobility has increased markedly over the last two decades, international capital movements remain less free than international movements, even among the industrial countries.
Finance and Growth: A Synthesis and Interpretation of the Evidence
Authors: Galetovic Alexander
Published: August 2019

Evidence is reviewed suggesting that: (a) in market economies financial systems develop and attain maturity during the early stages of industrialization; (b) frictions caused by asymmetric information and the incompleteness of contracts are important in credit markets, and intermediaries play an important role in overcoming them; (c) for a large cross-section of countries financial indicators correlate positively with growth. It is argued that financial intermediaries matter for growth because they moderate the negative effects of incentive frictions, thereby reducing the costs of financing the accumulation of intangible assets like commercial and technical knowledge.
The Debt Crisis: Lessons of the 1980s for the 1990s
Authors: Kaminsky Graciela Laura , Pereira Alfredo
Published: August 2019

One of the salient characteristics of the 1980s is the growth collapse of the Latin American debtor countries. The debt-overhang literature claims that the debt crisis is the main reason for the growth collapse. However, previous empirical work has failed to support this hypothesis. We reexamine this hypothesis further using simulation and econometric methods. We find that once we account for the effects of social inequality on government policy and consumption, the burden of servicing the debt becomes an important factor in explaining the collapse in investment and output growth in Latin America. We draw some conclusions for the 1990s.
Bank Positions and Forecasts of Exchange Rate Movements
Authors: Leahy Michael P.
Published: August 2019

Using data on the foreign exchange positions of five leading financial institutions, this paper attempts to determine whether the recent profitability of banks' foreign exchange trading is due to superior abilities to forecast exchange rate movements. Overall, the position data provide evidence that the performances of some financial institutions are 1) better than one might expect if their forecasts were purely random and 2) consistent with the possibility that they may possess information that would be valuable in forecasting changes in exchange rates. The conclusions are limited, however, by the possibility that there exists a time-varying risk premium which is correlated with the positions.
Conditional and Structural Error Correction Models
Authors: Ericsson Neil R.
Published: August 2019

A "structural" error correction model (in Boswijk's sense) is a representation of a conditional error correction model that satisfies certain restrictions. This paper examines the conditions under which such a structural error correction model exists and when the associated representation is of interest. To clarify the nature of such models, several analytical and empirical examples are considered, which violate those conditions. Structural error correction models are economically appealing, but their limitations imply that some care must be taken when applying them in practice.
On the Dynamic Properties of Asymmetric Models of Real GNP
Authors: Brunner Allan D.
Published: August 2019

There is now a substantial body of evidence that suggests business cycles are asymmetric. However, the evidence has been accumulated using a wide array of statistical techniques and, consequently, is based on various definitions of asymmetry. This paper examines several parametric models that have been used to study asymmetries in real GNP. Although these models capture asymmetries in very different ways, their dynamic properties are remarkably similar.
Government Budget Deficits and Trade Deficits: Are Present Value Constraints Satisfied in Long-Term Data?
Authors: Ahmed Shaghil , Rogers John Harold
Published: August 2019

We undertake tests of whether long term data from the U.S. and U.K. are consistent with the intertemporal government budget constraint and the intertemporal external borrowing constraint being satisfied in expected value terms, both individually and simultaneously. An historical perspective is appropriate for focusing on whether the present value constraints (PVCs) continue to hold in the face of unusual events, such as the outbreak of wars, that cause a structural break in the short-run dynamic behavior of the variables. This provides a very strong test of whether intertemporal budget constraints are satisfied. Our main results are: (i) the PVCs hold over the whole sample period; and (ii) the data are also consistent with the hypothesis that the PVCs continue to hold following events which cause a structural break in the short-run dynamics.
Saving-Investment Associations and Capital Mobility on the Evidence from Japanese Regional Data
Authors: Dekle Robert
Published: August 2019

We will examine the size of the Feldstein and Horioka (1980) "saving-retention coefficient" in a setting of near perfect capital mobility, Japanese regions. We first find that on total regional saving and investment rate data, inclusive of regional government saving and investment, the estimate of the coefficient is negative. This negative relationship in the total rates across Japanese regions appears to arise from the strong negative association in the government saving and investment rates.Second, on private regional investment and saving rate data, the "saving-retention coefficient" is insignificantly different from zero. This is evidence consistent with the Feldstein and Horioka hypothesis that in a financially integrated economy, the coefficient will be close to zero.Finally, we find that countries and regions differ in their saving and investment rate responses to demographics. This different response to demographics may be partly behind the divergence in the "saving-retention coefficient" reported in this paper and those found in cross-country regressions.
International Stock Price Spillovers and Market Liberalization: Evidence From Korea, Japan, and the United States
Authors: Kim Sang W. , Rogers John Harold
Published: August 2019

In August 1991 the Korean government announced that the stock exchange would undergo a significant liberalization in January 1992, by allowing foreigners to directly own shares in Korean stocks. This paper examines the repercussions on the relationship between the stock markets of Korea, Japan, and the United States. We estimate GARCH models to quantify the importance of "volatility spillovers" from Japan and the U.S. on the mean and variance of Korean returns. Such spillovers have increased since the announced opening, with most of the effect on the opening prices of the Korean stock market.
Political Competition, Casual Relationships Between Taxes and Spending, and Their Influence on Government Size: Evidence From State-Level Data
Authors: Rogers Diane Lim , Rogers John Harold
Published: August 2019

Theories of fiscal illusion and political competition have different implications for (i) the causal relationships between taxes and spending, and (ii) government size. These are tested using data from u.s. states from 1950 to 1990. We find evidence that greater political competition generally encourages bigger government, the Democratic Party is associated with bigger government, and state governments which "tax first, spend later" are more likely to be large. Other factors related to the fiscal illusion and political competition theories also appear to be important determinants of government size.
Supply-Side Economics in a Global Economy
Authors: Mendoza Enrique G. , Tesar Linda L.
Published: August 2019

Recent quantitative studies predict large welfare gains from reducing tax distortions in a closed economy, despite costly transitional dynamics to more efficient tax systems. This paper examines transitional dynamics and gains of tax reforms for countries in a global economy, and provides numerical solutions for international tax competition games. Tax reforms in a global economy cause cross-country externalities through capital flows in response to consumption-smoothing and debt-servicing effects, with taxes on world payments affecting the distribution of welfare gains. Within the class of time-invariant tax rates, the gains of replacing income taxes with consumption taxes are large and, in the absence of taxes on foreign assets, the monopoly distortion separating cooperative and noncooperative equilibria is negligible. The analysis starts from a benchmark reflecting current G-7 fiscal policies, and considers the effects of tax reforms on real exchange rates and interest differentials. Tax-distorted equilibrium dynamics are computed using a modified version of the King-Plosser-Rebelo algorithm augmented with shooting routines.
Capital Flight from the Countries in Transition: Some Theory and Empirical Evidence
Authors: Sheets D. Nathan
Published: August 2019

The first portion of this paper develops a simple framework that decomposes home demand for a domestic risky asset into a portfolio diversification incentive, a relative risk incentive, and a relative return incentive. It shows that capital flight may be caused by factors that increase the relative riskiness of the home asset or by structural distortions (such as financial sector inefficiency), which reduce the relative return of the domestic asset. The second portion of the paper provides empirical estimates of capital flight from Poland, Hungary, Czechoslovakia, and Russia for the 1988-93 period. The analysis concludes that the implementation of "shock therapy" reform programs has been accompanied by substantial capital flight. This has apparently occurred because such reform programs have initially generated increased economic and political uncertainty: prices have jumped toward world levels, property rights have been redistributed, and new institutions have been established. As these reform programs have progressed, however, the quantity of capital flight has declined. Hungary's experience is significantly different from that of the other three countries. Hungary pursued gradual reform and never experienced significant capital flight.
Economic Development and Intergenerational Economic Mobility
Authors: Iyigun Murat
Published: August 2019

This paper examines theoretically how economic growth affects intergenerational economic mobility. In the model developed in this paper, education is provided to the individuals free of cost, and admission to schools is competitive. The quantity of educational services available in any period depends on the total output of the economy in the same period. Individuals differ from each other in two respects. First, their innate mental abilities are determined by a stochastic process, and, second, their parents have different education levels. Individuals are admitted to schools based on their potential. An individual's potential is a function of her innate mental ability and her parent's education level.In this model, economic growth increases intergenerational economic mobility if and only if the effect of having an educated parent on an individual's potente­tial is not large. Moreover, if the effect of having an educated parent is not large, then there exists a unique steady state equilibrium and all economies will progress toward increased mobility. The model also shows that economic growth reduces the income difference between educated and uneducated labor if and only if the effect of having an educated parent on an individual's potential is not large. And, although population growth reduces intergenerational economic mobility, techno­logical progress increases it.
International Comparisons of the Levels of Unit Labor Costs in Manufacturing
Authors: Hooper Peter , Vrankovich Elizabeth
Published: August 2019

Comparing absolute levels of unit labor costs across countries entails translating labor compensation rates and productivity measured in national currencies into a common currency (e.g., U.S. dollars). Compensation rates are translated using market exchange rates and productivity is translated using relative output price levels. This paper focuses on the estimation of relative output price levels. Two approaches have been used, one based on relative unit values and the other on expenditure PPPs. We use primarily the latter approach and extend earlier work in this area by adjusting expenditure PPPs for biases introduced by indirect taxes, distribution margins, and trade prices. We compute for each of the G-7 industrial countries unit labor cost levels in U.S. dollars for total manufacturing and for various subsectors of manufacturing. Our estimates suggest that in 1995, U.S. unit labor costs were substantially below those in Japan and Germany, somewhat below those in France and the United Kingdom, and very similar to those in Canada and Italy. The cross-country differences we find are somewhat larger than--albeit qualitatively similar to--those obtained using the unit value approach.
The Risks and Implications of External Financial Shocks: Lessons from Mexico
Authors: Truman Edwin M.
Published: August 2019

The lessons from the 1994-95 Mexican peso crisis are examined from the perspective of creditors and their markets, countries that are recipients of large capital inflows, and the functioning of the international system as a whole. From each of these perspectives, recent changes in the financial world are sketched, lessons from the Mexican experience are derived, and implications for policies are considered.
Precautionary Portfolio Behavior from a Life-Cycle Perspective
Authors: Bertaut Carol C. , Haliassos Michael
Published: August 2019

The literature on asset accumulation by households draws a sharp distinction between "short-run" precautionary motives to buffer annual consumption from annual labor income shocks, and "long-run" life cycle considerations under labor income certainty. However, empirical estimates of the persistence of shocks to annual incomes imply that households are subject to considerable career uncertainty. We study long-run precautionary motives for life-cycle wealth accumulation and portfolio choice. We compute optimal portfolios under three sources of uncertainty (stock returns, incomes, and lifespan), and explore the separate contributions of several key factors for mean and median asset holdings, including education, risk aversion, household heterogeneity, utility from bequests, time preference, and variance and serial correlation of income shocks. Numerical solutions for households in three education groups are compared with data from the most recent and comprehensive source, the 1992 Survey
The Twin Crises: The Causes of Banking and Balance-of-Payments Problems
Authors: Kaminsky Graciela Laura , Reinhart Carmen M.
Published: August 2019

In the wake of the ERM and Mexican currency crises, the subject of balance-of-payments crises has come to the forefront of academic and policy discussions. This paper focuses on the potential links between banking and balance-of-payments crises. We examine these episodes for a large number of countries and find that knowing that there are banking problems helps in predicting balance-of-payments crises, but the converse is not true; financial liberalization usually predates banking crises, indeed, it helps predict them. Rather than a causal relationship from banking to balance-of-payments crises, the macroeconomic "stylized facts" that characterize these episodes point to common causes.