Showing papers by "Kiel Institute for the World Economy published in 2013"

The Greek Debt Restructuring: An Autopsy

Abstract: The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief – over 50 per cent of 2012 GDP – with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents – particularly in its very generous treatment of holdout creditors – that are likely to make future debt restructurings in Europe more difficult.

Climate change impacts on global agriculture

Abstract: Based on predicted changes in the magnitude and distribution of global precipitation, temperature and river flow under the IPCC SRES A1B and A2 scenarios, this study assesses the potential impacts of climate change and CO2 fertilization on global agriculture. The analysis uses the new version of the GTAP-W model, which distinguishes between rainfed and irrigated agriculture and implements water as an explicit factor of production for irrigated agriculture. Future climate change is likely to modify regional water endowments and soil moisture. As a consequence, the distribution of harvested land will change, modifying production and international trade patterns. The results suggest that a partial analysis of the main factors through which climate change will affect agricultural productivity provide a false appreciation of the nature of changes likely to occur. Our results show that global food production, welfare and GDP fall in the two time periods and SRES scenarios. Higher food prices are expected. No matter which SRES scenario is preferred, we find that the expected losses in welfare are significant. These losses are slightly larger under the SRES A2 scenario for the 2020s and under the SRES A1B scenario for the 2050s. The results show that national welfare is influenced both by regional climate change and climate-induced changes in competitiveness.

Monetary Policy and Risk Taking

Abstract: We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel — monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.

China's Development Finance to Africa: A Media-Based Approach to Data Collection

Abstract: How big is China’s aid to Africa? Does it complement or undermine the efforts of traditional donors? China releases little information, and outside estimates of the size and nature of Chinese aid vary widely. In an effort to overcome this problem, AidData, based at the College of William and Mary, has compiled a database of thousands of media reports on Chinese-backed projects in Africa from 2000 to 2011. The database includes information on 1,673 projects in 51 African countries and on $75 billion in commitments of official finance. This paper describes the new database methodology, key findings, and possible applications of the data, which is being made publicly available for the first time. The paper and database offer a new tool set for researchers, policymakers, journalists, and civil-society organizations working to understand China’s growing role in Africa. The paper also discusses the challenges of quantifying Chinese development activities, introduces AidData’s Media-Based Data Collection (MBDC) methodology, provides an overview of Chinese development finance in Africa as tracked by this new database, and discusses the potential and limitations of MBDC as a resource for tracking development finance.This working paper accompanies the release of AidData’s Chinese Official Finance to Africa Dataset, Version 1.0.

Overconfidence, experience, and professionalism: An experimental study

Abstract: This paper presents an online-experiment on overconfidence in the context of financial markets. Our subject pool consists of institutional investors, investment advisors and individual investors, all of them being registered users of a large online platform for market sentiment data. Due to their registration, several socioeconomic characteristics of participants can be controlled for in our analysis. It turns out that there are stable differences in overconfidence between the three investor groups. Moreover, investment experience and age have a significant impact on the degree of overconfidence which goes surprisingly in opposite direction. We argue that these results have important implications for studies analyzing the impact of experience on behavior in (financial) markets.

Do trade and investment agreements lead to more FDI? Accounting for key provisions inside the black box

Abstract: The previous literature provides a highly ambiguous picture on the impact of trade and investment agreements on FDI. Most empirical studies ignore the actual content of BITs and RTAs, treating them as “black boxes”, despite the diversity of investment provisions constituting the essence of these agreements. We overcome this serious limitation by analyzing the impact of modalities on the admission of FDI and dispute settlement mechanisms in both RTAs and BITs on bilateral FDI flows between 1978 and 2004. We find that FDI reacts positively to RTAs only if they offer liberal admission rules. Dispute settlement provisions play a minor role. While RTAs without strong investment provisions may even discourage FDI, the reactions to BITs are less discriminate with foreign investors responding favourably to the mere existence of BITs.

The Effect of Labor Migration on the Diffusion of Democracy: Evidence from a Former Soviet Republic

Abstract: Migration contributes to the circulation of goods, knowledge, and ideas. Using community and individual-level data from Moldova, we show that the emigration wave that started in the late 1990s strongly affected electoral outcomes and political preferences in Moldova during the following decade and was eventually instrumental in bringing down the last ruling Communist government in Europe. Our results are suggestive of information transmission and cultural diffusion channels. Identification relies on the quasi-experimental context studied and on the differential effects arising from the fact that emigration was directed both to more democratic Western Europe and to less democratic Russia.

The Economic Integration of Forced Migrants: Evidence for Post‐War Germany

Abstract: The flight and expulsion of Germans from Eastern Europe after World War II constitutes one of the largest forced population movements in history. We analyse the economic integration of these migrants and their offspring in West Germany. A quarter century after displacement, first-generation migrants still tend to fare worse economically. Displaced agricultural workers, however, exhibit higher incomes than comparable natives, as displacement caused large-scale transitions out of low-paid agriculture. Differences in economic outcomes of second-generation migrants resemble those of the first generation.

Cost-effectiveness of One- and Two-step Incomplete and Complete Excavations

Abstract: The treatment of deep caries lesions carries significant risks for the integrity of the pulp and often initiates a cascade of re-interventions. Incomplete caries removal may reduce these risks and avoid or delay re-treatment. The present study analyzed the cost-effectiveness of one- and two-step incomplete as well as complete excavations. We used Markov models to simulate treatment of a molar tooth with a deep caries lesion in a 15-year-old patient. Retention of the tooth and its vitality as effectiveness measures as well as accruing costs were analyzed over the patient's lifetime. The model adopted a public-private-payer perspective within German health care. Transition probabilities were calculated based on literature reviews. Monte-Carlo microsimulations were performed with 6-month cycles. One-step incomplete excavation resulted in lower long-term costs and in longer-retained teeth and their vitality (means: 53.5 and 41.0 yrs) compared with two-step incomplete (52.5 and 37.5 yrs) and complete excavations (49.5 and 31.0 yrs), and dominated the other strategies in 70% to 100% of simulations. Regardless of the assumed willingness-to-pay ceiling value, one-step incomplete excavation had the highest probability of being cost-effective. Despite limited evidence levels of input data, we expect one-step incomplete excavation to reduce costs while retaining deeply carious teeth and their vitality for longer.

Forecasting and Policy Making

Abstract: Policymakers use forecasts to project the consequences of particular policy decisions for certain policy targets This chapter investigates the use of economic forecasting in policy making by discussing practical examples, providing new empirical evidence and computing forecasts using different macroeconomic models First, a theoretical framework is presented to differentiate the role of forecasts in simple feedback rules, optimal control policies, and forecast targeting Then, we review institutional details of the forecasting process at fiscal authorities and central banks We provide empirical evidence that central bank policy rate decisions in the United States and the Euro area are well described by interest rate rules responding to forecasts of inflation and economic activity rather than recent outcomes Next, we provide a detailed exposition of methods for producing forecasts We review forecasting models and provide practical applications In particular, we illustrate how to use economic structure in interpreting forecasts and how to implement different conditioning assumptions regarding certain planned policy initiatives Finally, we evaluate the accuracy of central bank and expert forecasts and investigate the interaction between forecasting and policy making by evaluating the performance and robustness of forecast-based policy rules under model uncertainty

Network analysis of the e-MID overnight money market: the informational value of different aggregation levels for intrinsic dynamic processes

Abstract: In this paper, we analyze the network properties of the Italian e-MID data based on overnight loans during the period 1999–2010. We show that the networks appear to be random at the daily level, but contain significant non-random structure for longer aggregation periods. In this sense, the daily networks cannot be considered as being representative for the underlying ‘latent’ network. Rather, the development of various network statistics under time aggregation points toward strong non-random determinants of link formation. We also identify the global financial crisis as a significant structural break for many network measures.

The Impact of Trade and Economic Growth on the Environment: Revisiting the Cross-Country Evidence

Abstract: This paper explores the interrelations between economic growth, international trade and environmental degradation both theoretically and empirically. Panel data from developed and developing countries for the period of 1980 to 2003 is used and previous critique, especially on the econometric specification, is embedded. In particular, it is not assumed that there is a single link for all countries. Several environmental factors and one sustainability indicator are analyzed for the full sample, regions and income groups. The results indicate that there is an Environmental Kuznets Curve (EKC) for most pollutants, but with several reservations. None of the various hypotheses that concern the link between trade and environmental degradation can be entirely confirmed. If anything, there is modest support for the Pollution Haven Hypothesis (PHH). In addition, there are signs that trade liberalization might be beneficial to sustainable development for rich countries, but harmful to poor ones. However, a sustainable development path is particularly important for developing countries, as the poor are most exposed and vulnerable to the health and productivity losses associated with a degraded environment. Given that developing countries do not usually have the institutional capacities to set up the appropriate environmental policies, it is on developed countries to take the lead in addressing environmental degradation issues and assisting developing countries.

Offshoring, domestic outsourcing and productivity: evidence for a number of European countries

Abstract: The growth in offshoring and its economic effects have been subject to extensive empirical analysis Yet, many studies have not distinguished accurately between offshoring, domestic outsourcing, and supplier changes The present study provides stylized facts on offshoring in Europe between 1995 and 2008 taking into account this distinction This study shows that service activities have been systematically offshored and outsourced domestically during this period, whereas manufacturing activities have been systematically offshored or moved from domestic to foreign suppliers Overall the share of internal production has gone down by 45 percentage points, which raises the question whether firms have achieved productivity gains through this specialisation effort Combining industry-level data on offshoring and domestic outsourcing with a firm panel, this study finds that service offshoring and offshoring of non-core manufacturing activities have contributed to an increase in productivity, whereas no statistically significant link is found for offshoring of core manufacturing activities and domestic outsourcing The estimated productivity gains are found to be driven in particular by the gains of multinational firms

Donor coordination and specialization: did the Paris Declaration make a difference?

Abstract: We assess whether bilateral and multilateral donors of foreign aid specialized and coordinated their activities with other donors as agreed in the Paris Declaration of 2005. We account for donor heterogeneity, varying aid priorities and recipient characteristics in order to isolate changes in donor behaviour over time. Recent shifts in aid priorities, such as the rising importance of general budget support, have reduced the fragmentation of aid. Nevertheless, our results reveal that aid fragmentation persisted after the Paris Declaration and coordination among donors has even weakened.

The impact of plant size and location on profitability of biogas plants in Germany under consideration of processing digestates

Abstract: The production of bioenergy is considered to be a promising energy source for a sustainable energy mix and it is politically promoted in many countries. With the exception of Brazilian ethanol, bioenergy is not competitive with fossil energy sources, and therefore needs to be subsidised. Several types of bioenergy are based on bulky raw biomass with high per unit transport costs, importantly impacting on the plant's production costs and profitability. In addition, considerable quantities of digestates are released, causing disposal costs. Various studies in the past aimed primarily at analysing transport costs of inputs. In this paper we focus on disposal costs of fermentation digestates from biogas production in Germany and analyse different processing techniques and their impact on profitability for three plant size in three case study areas. Our results show that especially in regions with only a small amount of agricultural land and a large heterogeneity in its agricultural area, processing of digestates increases the profitability of biogas production. The same accounts for regions with high livestock density, where the area needed for disposal is comparatively large. The cost efficiency is enforced by a high share of animal excrements on input and the biogas plant size.

Services offshoring and wages: evidence from micro data

Abstract: This paper investigates the effects of services offshoring on wages using individual-level data combined with industry information on offshoring for the United Kingdom. Our results show that services offshoring affects the real wage of low- and medium-skilled individuals negatively. By contrast, skilled workers may benefit from services offshoring in terms of higher real wages. Hence, offshoring has contributed to a widening of the wage gap between skilled and less skilled workers. This result is obtained while controlling for individual and sectoral observed and unobserved heterogeneity. In particular, our empirical model also controls for the impact of technological change and offshoring of materials.

Does Foreign Aid Reduce Energy and Carbon Intensities in Developing Countries

Abstract: Advanced OECD countries are widely held responsible to contain global carbon emissions by providing financial and technical support to developing economies, where emissions are increasing most rapidly. It is open to question, however, whether more generous official development assistance would help fight climate change effectively. Empirical evidence on the effects of foreign aid on energy and emission intensities in recipient countries hardly exists. We contribute to closing this gap by considering energy use and carbon emissions as dependent climate-related variables, and the volume and structure of aid as possible determinants. In particular, we assess the impact of aid that donors classify to be specifically related to energy issues. In addition to OLS estimations, we perform dynamic panel GMM and LSDVC (corrected least squared dummy variables) estimations. We find that aid tends to be effective in reducing the energy intensity of GDP in recipient countries. All the same, the carbon intensity of energy use is hardly affected. Scaling up aid efforts would thus be insufficient to fight climate change beyond improving energy efficiency.

Inward and outward FDI and income inequality: evidence from Europe

Abstract: This paper examines the effects of inward and outward FDI on income inequality in Europe using panel cointegration techniques and unbalanced panel regressions. Our main result is that both inward FDI and outward FDI have, on average, a negative long-run effect on income inequality. This result is robust to employing alternative estimation methods, controlling for potential outliers, using different measures of FDI and inequality, and changing the period and sample selection. Other findings are: (i) while the long-run effect of inward and outward FDI on income inequality is clearly negative, their short-run effect appears to be positive. (ii) Long-run causality runs in both directions, suggesting that an increase in inward and outward FDI reduces income inequality in the long run, and that, in turn, a reduction in inequality leads to an increase in inward and outward FDI. (iii) There are large cross-country differences in the long-run effects of inward and outward FDI on income inequality; for some countries the long-run effects on income inequality are positive.

The Home Bias in Sovereign Ratings

Abstract: Credit rating agencies are frequently criticized for producing sovereign ratings that do not accurately reflect the economic and political fundamentals of rated countries This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and culture Using data from nine agencies based in six countries, we investigate empirically if there is systematic evidence for a home bias in sovereign ratings Specifically, we use dyadic panel data to test whether, all else being equal, agencies assign better ratings to their home countries, as well as to countries economically, politically and culturally aligned with them While most of the variation in ratings is explained by the fundamentals of rated countries, our results provide empirical support for the existence of a home bias in sovereign ratings We find that the bias becomes more accentuated following the onset of the Global Financial Crisis and appears to be driven by economic and cultural ties, not geopolitics