Showing papers by "Central Economics and Mathematics Institute published in 2011"

Money Unmade: Barter and the Fate of Russian Capitalism

Abstract: Review of the book by David Woodruff on proliferation of barter, non-payments and money substitutes in Russia in the 1990s.

Applied qualimetry: its origins, errors and misconceptions

Abstract: Purpose – The purpose of this paper is to provide the reader, who may have little or no knowledge of qualimetry, with first, an outline of the history and development of this relatively new scientific discipline, which deals with the methodology of and problems in the integral quantitative assessment of the quality of objects of any nature: things and processes, products of labour and products of nature, whether material or ideal, animate or inanimate, simple or complex, natural or man‐made, etc.; and second, the most common errors that occur in the design and application of quality assessment techniques, which result in the depreciation of findings obtained by these techniques, and methods for eliminating such errors.Design/methodology/approach – The methodology used to obtain the results described in the paper is based on a deductive‐axiomatic approach and, occasionally, on expert judgements.Findings – The findings presented in the paper can raise the research community's awareness of the great opportun...

Extended dynamic spin-fluctuation theory of metallic magnetism.

Abstract: A dynamic spin-fluctuation theory that directly takes into account nonlocality of thermal spin fluctuations and their mode-mode interactions is developed. The Gaussian approximation in the theory is improved by a self-consistent renormalization of the mean field and spin susceptibility due to the third-and fourth-order terms of the free energy, respectively. This eliminates the fictitious first-order phase transition, which is typical for the Gaussian approximation, and yields a proper second-order phase transition. The effect of nonlocal spin correlations is enhanced by taking into account uniform fluctuations in the single-site mean Green function. Explicit computational formulae for basic magnetic characteristics are obtained. The extended theory is applied to the calculation of magnetic properties of Fe-Ni Invar. Almost full agreement with experiment is achieved for the magnetization, Curie temperature, and local and effective magnetic moments.

Models for Moody’s Bank Ratings

Abstract: The paper presents an econometric study of the two bank ratings assigned by Moody's Investors Service. According to Moody’s methodology, foreign currency long-term deposit ratings are assigned on the basis of Bank Financial Strength Ratings (BFSR), taking into account “external bank support factors” (joint-default analysis, JDA). Models for the (unobserved) external support are presented, and we find that models based solely on public information can approximate the ratings reasonably well. It appears that the observed rating degradation can be explained by the growth of the banking system as a whole. Moody’s has a special approach for banks in developing countries in general and for Russia in particular. The models help reveal the factors that are important for external bank support.

Lessons from the Transition Economies Putting the Success Stories of the Postcommunist World into a Broader Perspective

Abstract: Why many transition economies succeeded by pursuing policies that are so different from the radical economic liberalization (shock therapy) that is normally credited for the economic success of central European countries? First, optimal policies are context dependent, they are specific for each stage of development and what worked in Slovenia cannot be expected to work in Mongolia. Second, even for countries at the same level of development, reforms needed to stimulate growth are different; they depend on the previous history and on the path chosen. The reduction of government expenditure as a share of GDP did not undermine significantly the institutional capacity of the state in China, but in Russia and other CIS states it turned out to be ruinous. It is the growth diagnostics that should reveal the missing ingredient for economic growth. Finally, and most important, introducing this ‘missing ingredient’ should not result in the destruction of other preconditions for growth. The art of the policymaker is to create markets without causing the government failure, as happened in many CIS countries.

System Resource of Economy

Abstract: The results of development of the new economic systems theory are applied to the problem of investigating resources of economy. It is shown that under the traditional approach to an economic resource as a totality of labor, capital, natural resource and entrepreneurial activity the forces, which connect these resources in systems capable to productive economic activities, are often left outside the analysis. That is why the concept of a system resource of economy as a totality of working and potential economic systems uniting traditional factors of production is introduced and investigated. The natural structure of a system resource is determined; its division into four kinds is grounded depending on features of economic systems comprising it. Requirements to system management as to management of a system resource of economy are formulated.

Eichnerian megacorp and investment behaviour of Russian corporations

Abstract: Despite the prolonged economic recovery in 1999–2008, investment by Russian corporations in productive capacity was low and deficient in quality. Eichner’s model of megacorp gives an insight into investment behaviour of Russian corporations due to its emphasis on indivisibility of investment decision, pricing and distribution of income between profits and wages. The typical Russian corporation is characterised by inseparability of ownership and management due to largely informal control of big insiders over enterprises. The groups, dominating over Russian corporations, seek to maximise the short-term rent. Along with a number of intra-firm conflicts this undermines both the supply of and the demand for investment funds.

Optimal production control of a failure-prone machine

Abstract: We consider a problem of optimal production control of a single unreliable machine. The objective is to minimize a discounted convex inventory/backlog cost over an infinite horizon. Using the variational analysis methodology, we develop the necessary conditions of optimality in terms of the co-state dynamics. We show that an inventory-threshold control policy is optimal when the work and repair times are exponentially distributed, and demonstrate how to find the value of the threshold in this case. We consider also a class of distributions concentrated on finite intervals and prove properties of the optimal trajectories, as well as properties of an optimal inventory threshold that is time dependent in this case.

Developing New Measurements of State Institutional Capacity

Abstract: According to a narrow definition, institutional capacity of the state is the ability of the government to enforce laws and regulations. There are a lot of subjective indices (control over corruption, rule of law, government effectiveness, etc.) that are designed to measure the state institutional capacity and are based on experts’ estimates. The logical objective measures of the state institutional capacity are the murder rate – non-compliance with the state’s monopoly on violence, and the shadow economy – non compliance with the economic regulations. It appears that political regime (democratic or authoritarian) matters for the subjective ranking. It could be shown, for instance, that out of two countries with the same murder rate, government effectiveness is higher in countries that were more democratic in the past (1970s-1990s on average) and in the year (2002) when government effectiveness was measured. This result holds for all other five World Bank subjective indices of institutional capacity – rule of law, control over corruption, voice and accountability, political stability and regulation quality. And they hold also for the share of shadow economy: out of two countries with the same share of shadow economy, government effectiveness is higher in a more democratic one.

Consistent Price Systems and Arbitrage Opportunities of the Second Kind in Models with Transaction Costs

Abstract: In contrast with the classical models of frictionless financial markets, market models with proportional transaction costs, even satisfying usual no-arbitrage properties, may admit arbitrage opportunities of the second kind. This means that there are self-financing portfolios with initial endowments laying outside the solvency region but ending inside. Such a phenomenon was discovered by M. R´asonyi in the discrete-time framework. In this note we consider a rather abstract continuous-time setting and prove necessary and sufficient conditions for the property which we call No Free Lunch of the 2nd Kind, NFL2. We provide a number of equivalent conditions elucidating, in particular, the financial meaning of the property B which appeared as an indispensable “technical” hypothesis in previous papers on hedging (super-replication) of contingent claims under transaction costs. We show that it is equivalent to another condition on the “richness” of the set of consistent price systems, close to the condition PCE introduced by R´asonyi. In the last section we deduce the R´asonyi theorem from our general result using specific features of discrete-time models.

To Devaluate or Not to Devalue? How East European Countries Responded to the Outflow of Capital in 1997-99 and in 2008-09

Abstract: If there is a negative terms of trade or financial shock leading to the deterioration in the balance of payments, there are two basic options for a country that has limited foreign exchange reserves. First, a country can maintain a fixed exchange rate (or even a currency board) and wait until the reduction of foreign exchange reserves leads to the reduction of money supply: this will drive domestic prices down and stimulate exports, raise interest rates and stimulate the inflow of capital, and finally will correct the balance of payments. Second, the country can allow the devaluation of national currency – flexible exchange rate will automatically bring the balance of payments back into the equilibrium. Because national prices are less flexible than exchange rates, the first type of adjustment is associated with the greater reduction of output.The empirical evidence on East European countries and other transition economies for 1998-99 period (outflow of capital after the 1997 Asian and 1998 Russian currency crises and slowdown of output growth rates) suggests that the second type of policy response (devaluation) was associated with smaller loss of output than the first type (monetary contraction). 2008-09 developments provide additional evidence for this hypothesis.

Development Theories and Development Experience: Half a Century Journey

Abstract: This paper examines the impact that development theories have had on development policies, and the inverse impact of actual successes and failures in the global South on development thinking. It is argued that development thinking is at the cross-roads. Development theories in postwar period went through a full circle – from Big Push and ISI to neo-liberal Washington consensus to the understanding that neither the former, nor the later really works in engineering successful catch-up development. Meanwhile, economic miracles were manufactured in East Asia without much reliance on development thinking and theoretical background – just by experimentation of the strong hand politicians.

Problems of Science and Its Effectiveness

Abstract: The article considers current problems of Russia’s science. Special attention is paid to external factors that negatively influence its effectiveness including considerable lag in public management sector. The issues of opposing higher education sector to the Russian Academy of Sciences (RAS) are also discussed. A number of indicators of the Russian science and its academic sector effectiveness are presented. The expediency of comparing scientific results with R&D expenditures is shown. The problems connected with using bibliometric methods are discussed. Special attention is paid to the necessity of preserving and further developing Russian science including RAS.

Optimal Constrained Investment in the Cramer-Lundberg model

Abstract: We consider an insurance company whose surplus is represented by the classical Cramer-Lundberg process. The company can invest its surplus in a risk free asset and in a risky asset, governed by the Black-Scholes equation. There is a constraint that the insurance company can only invest in the risky asset at a limited leveraging level; more precisely, when purchasing, the ratio of the investment amount in the risky asset to the surplus level is no more than a; and when shortselling, the proportion of the proceeds from the short-selling to the surplus level is no more than b. The objective is to find an optimal investment policy that minimizes the probability of ruin. The minimal ruin probability as a function of the initial surplus is characterized by a classical solution to the corresponding Hamilton-Jacobi-Bellman (HJB) equation. We study the optimal control policy and its properties. The interrelation between the parameters of the model plays a crucial role in the qualitative behavior of the optimal policy. E.g., for some ratios between a and b, quite unusual and at first ostensibly counterintuitive policies may appear, like short-selling a stock with a higher rate of return to earn lower interest, or borrowing at a higher rate to invest in a stock with lower rate of return. This is in sharp contrast with the unrestricted case, first studied in Hipp and Plum (2000), or with the case of no shortselling and no borrowing studied in Azcue and Muler (2009).

Do We Need to Protect Intellectual Property Rights

Abstract: Strict protection of IPR can have a negative effect on economic development. Regression of economic growth on these indices produces conventional results (positive effect of stricter protection of IPR on growth) only if indices of institutional capacity (government effectiveness, control over corruption) are not included into the right hand side. If they are included, they kill the effect of IPR protection (because they are very much correlated with the IPR protection indices), so it is hardly possible to separate the effects of stricter IPR protection from the impact of the general strength of institutions.The same procedure was used to evaluate the impact of the IPR protection regime on the average share of R&D expenditure in GDP and the results were largely the same: without control for the institutional capacity, IPR protection seems to stimulate R&D, but after controlling for the institutional indices the effect disappears.There is also a strong negative effect of stricter regime of protection of IPR on the proliferation of the most crucial technology of recent decades – computers. The increase in the total number of PCs in 1995-2005, after controlling for the level of development, the size of the country and the institutional index, is negatively correlated with the IPR protection index.If piracy of intellectual products allows to overcome the negative impact of IPR protection on the dissemination of new technologies, it is reasonable to talk not about costs of piracy, but about the benefits of piracy and the costs of stricter IPR protection.

Mortality Crisis in Russia Revisited: Evidence from Cross-Regional Comparison

Abstract: This paper provides evidence from cross-regional comparisons that the Russian mortality crisis (mortality rate increased from 1.0% to 1.6% in 1989-94 and stayed at a level of 1.4-1.6% thereafter) was caused mostly by stress factors (increased unemployment, labor turnover, migration, divorces, income inequalities), and by the increase in unnatural deaths (murders, suicides, accidents), but not so much by the increase in alcohol consumption (even though it also increased due to the same stress factors). Health infrastructure of a region had a positive impact on life expectancy only in regions with high income inequalities (large share of highest income group).

Anti-corruption Strategy for Business in Russia

Abstract: The article provides a new definition of corruption; it also classifies its types that both domestic and foreign businesses are facing in Russia. The main elements of anti-corruption strategy are presented, which are based on the analysis of sources of corruption and the ways of its penetration into businesses. Practical recommendations are provided on building anti-corruption strategy for Russian and foreign companies.

The Scientific Pedagogical Cadres of Russia: Quality of Life, Moods, and Expectations.

Abstract: Russian science is in need of serious reforms if it is to provide the research and development needed for economic health. Issues of increasing average age of scientific personnel, poor working conditions, low salaries, and relatively low social prestige need to be addressed.

General preferences and utility functions. An approach based on the dual Kantorovich problem

Abstract: In this paper, with help of a special dual Kantorov� ich mass transfer problem new existence conditions are obtained for utility functions of general (nontotal and nontransitive) preference relations Further, by a preference on a set X of alternatives we mean an arbitrary binary relation � (totality or transi� tivity in general is not required) If xy (in such a case, we will write also yx), then the alternative x is more preferable than the alternative y We connect withtwo binary relations: the strict preference � (xy means that xy holds but yx fails) and the equal worth relation ~ (x ~ y means that both xy and yx hold true) Alternatives x and y are incomparable if none of them is more preferable than other, ie none of relations xy and yx is satisfied A preference is called total if any two alternatives are comparable A preference with properties of reflexivity (xx ∀x ∈ X) and transitivity (∀x, y, z ∈ X: xy, yz ⇒ xz) is called a preorder (or quasiordering in other termi� nology)

Global Imbalances: Non-Conventional View

Abstract: Maintaining today’s global imbalances would help to overcome the major disproportion of our times – income gap between developed and developing countries. This gap was widening for 500 years and only now, in the recent 50 years, there are some signs that this gap is starting to decrease. The chances to close this gap sooner rather than later would be better, if the West would go into debt, allowing developing countries to have trade surpluses that would help them develop faster. Previously, in 16-20th century, it was the West that was developing faster, accumulating surpluses in trade with “the rest” and using these surpluses to buy assets in developing countries, while “the rest” were going into debt. Now it is time for “the rest” to accumulate assets and for the West to go into debt.

Is Chinese Variety of Capitalism Really Unique

Abstract: The formal comparison of similarities and differences of Chinese and Western economic models misses the most important point. The uniqueness of China is that it looks very much like a developed country today in terms of institutional capacity of the state, even though it is a developing country according to GDP per capita. Indeed, China should be compared with developing countries today or developed countries a hundred years ago, when their GDP was at the current Chinese level, and this comparison is very much in favour of China. Institutional capacity of the state, according to a narrow definition, is the ability of the government to enforce laws and regulations. While there are a lot of subjective indices (corruption, rule of law, government effectiveness, etc.) that are supposed to measure state institutional capacity, many researchers do not think they help to explain economic performance and instead consider them biased. The natural objective measures of state institutional capacity are the murder rate (noncompliance with the state’s monopoly on violence) and the shadow economy (non-compliance with the economic regulations). China is rather unique on both measures – one of the lowest indicators in the developing world comparable to developed countries.

Why transition economies did worse than others in 2008-09 recession?

Abstract: While developing countries as a group did better than developed countries in 2008-09 recession, transition economies – former communist countries – experienced the largest reduction of output. Out of 42 countries that experienced negative growth in 2007-09, 13 were transition economies. In fact, 4 out of 5 most affected economies were former communist countries (Latvia, Estonia, Ukraine, Lithuania). The hypothesis is that these transition countries (1) suffered more than the others from the sudden outflow of capital and (2) did not manage this outflow particularly well. The rule of thumb was that large outflows of capital, especially coupled with negative trade shocks, suppressed economic activity. But if the shocks were relatively small (up to 3% of GDP change in trade and capital account from Q2 2008 to an average of subsequent 3 quarters), it was possible to mitigate them through devaluation (not allowing foreign exchange reserves to drop by the same amount). If the shocks were large, even devaluation did not allow to avoid output fall.