Showing papers in "International Economics and Economic Policy in 2011"

Channels of international risk-sharing: capital gains versus income flows

Abstract: Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative) when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening.

The resource drag

Abstract: Between 1995 and 2001, Jeffrey Sachs and Andrew Warner published a series of influential empirical studies examining mining and energy’s role in economic growth. Their principal finding was that economies heavily dependent on extractive activity in 1971 grew more slowly than comparable non-extractive economies over the next 19 years. This result has been deemed ‘the resource curse’. The result is generally robust across differing country samples and across extended sample periods. Many have sought to explain the phenomenon, but without unified success. Sachs and Warner suggest that crowding out of a sector or activity with production externalities is the most likely explanation. This paper demonstrates that the relatively slower growth in mineral and energy economies may simply reflect a resource drag whereby optimally managed per capita resource production does not grow substantially over time and hence introduces a drag on the measured growth of per capita economic output. If the resource curse is indeed only a resource drag, this has implications for trade and industrial policies implemented on the presumption that there are growth-reducing market failures associated with mineral and energy production.

Oil shocks and endogenous markups: results from an estimated euro area DSGE model

Abstract: This paper estimates a linearised DSGE model for the euro area. The model is New Keynesian and allows for a role for oil usage and endogenous price markups. The importance of shocks to monetary policy and oil prices is estimated to have declined in the post-1990 period, in line with the higher predictability of policy and the fall in the persistence and—to a lesser extent—variability of oil disturbances. Counterfactual exercises show that oil efficiency gains would alleviate the inflationary and contractionary consequences of oil shocks, while higher wage flexibility would help ease the impact on real output at the expense of larger inflationary pressures. While we report evidence of “countercyclical” price markups, the rise in markups induced by an oil disturbance is not found to considerably amplify the inflationary and contractionary effects of the shock. The paper discusses the policy implications of our empirical results for the euro area economy.

Negative Nominal Interest Rates: History and Current Proposals

Abstract: Given the renewed interest in negative interest rates on base money—or equivalently ‘taxing money’—as a means for overcoming the zero bound on short-term nominal interest rates, this article reviews the history of negative nominal interest rates starting from the ‘taxing money’ proposal of Silvio Gesell up to current proposals that received popular attention in the wake of the financial crisis of 2007/2008. It is demonstrated that ‘taxing money’ proposals have a long intellectual history and that instead of being the conjecture of a monetary crank, they are a serious policy proposal. In a second step, the article points out that besides the more popular debate on a Gesell tax as a means to remove the zero bound on nominal interest rates, there is a class of neoclassical search models that advocates a negative tax on money as efficiency enhancing. This strand of the literature has so far been largely ignored by the policy debate on negative interest rates.

Fiscal policy and Dutch disease

Abstract: In this paper we revisit the Dutch disease paying particular attention to the role of specific factors of production and capital stock dynamics. The main insight is that if the natural resource rich windfall is substantial but not large enough for the country to become a rentier, capital goods must be produced at home and adjustment to natural resource windfall takes time. It takes time to build this home-grown capital. Specific factors are crucial to explain the dynamic responses of the real exchange rate, capital intensities and wages in response to a natural resource windfall. If a country is small and the windfall is large, it may be able to import capital and migrant labour in which case the Dutch disease can be avoided.

The 2010 euro crisis stand-off between France and Germany: leadership styles and political culture

Abstract: In this paper, we argue that the severity of the 2010 euro crisis was caused by and reveals differences in leadership styles and political culture between European countries, especially between France and Germany. We trace these differences to differences in underlying values: culture. There is a historic pattern, visible especially during the European integration process. Cultural differences explain differences in attitude towards leadership and IMF involvement, lead to a stand-off and, thereby, dramatically increase the uncertainty about the commitment of the eurozone and the EU towards Greece.

Mind the gap—German motherhood risks in figures and game theory issues

Abstract: After childbirth, while parents are delighted at public cash transfers like the German ‘Elterngeld’ (parental leave benefit), the decline in mothers’ earnings capacity is an awkward issue that tends to hover in the background. This paper aims firstly to make a contribution to quantifying West German mothers’ foregone gross earnings that stem from intermittent labor market participation, due to the birth of their first child. Secondly, it discusses behavioral outcomes of the resulting implicit child costs in a dynamic bargaining model of household decisions. The regression results of a Mincer-type wage equation, with German Socio-Economic Panel Data (West) for the period 1984–2005 and correcting for sample selection (Two-step Heckman), indicate considerable wage penalties due to birth-related employment withdrawal. On the closure of the fecund window, mothers suffer gross hourly wage cuts of up to 25%, compared to their equally educated, non-stop full-time employed counterparts, and the total of annualized losses amounts to as much as 201,000 Euros. Although foregone earnings do not matter as much in stable partnerships, they turn out to be a veritable asymmetric specialization risk that can prevent women from having children, if divorce seems sufficiently probable.

Dutch disease revisited. Oil discoveries and movements of the real exchange rate when manufacturing is resource-intensive

Abstract: We study how natural resource booms affect the real exchange rate in a situation where there are input–output linkages between the manufacturing sector and the natural resource sector. An increase in revenues from natural resources could de-industrialize an economy by raising the real exchange rate, rendering the manufacturing sector less competitive. This tendency towards de-industrialization has been called “Dutch disease”. We build a theoretical model showing that a country experiencing discoveries of natural resources, such as oil, is not necessarily bound to experience the Dutch disease. The appreciation of the real exchange rate can be escaped if patterns of specialization shift towards the manufacturing industries that use oil more intensively. In the second part of the paper, we test the model and find support for the claim that Dutch disease effect associated with discoveries of natural resources (namely oil) are dampened in countries that specialize in resource-intensive manufacturing industries.

Is there a link between home ownership and unemployment levels? Evidence from German regional data

Abstract: Using German regional data for 1998, 2002 and 2006, this study examines the Oswald hypothesis, the conjecture that high levels of homeownership are linked to inferior outcomes in the labor market. Applying a set of control variables, three different econometric models are specified and estimated: a cross-sectional model, a pooled data model, and a model taking into account unobserved regional heterogeneity. Once unobserved regional effects are accounted for, the findings are consistent with Oswald’s hypothesis. The economic significance of the relationship is at best marginal, however.

From the transatlantic banking crisis to the euro crisis

Abstract: The Transatlantic Banking Crisis has strongly raised debt-GDP ratios in many OECD countries and this is undermining the economic recovery. As regards the euro zone there are special problems which are partly related to lack of fiscal discipline in Greece and to the Irish economic crisis which—largely unknown—basically reflects total failure of prudential supervision to apply EU directives and legislation, respectively. In this context the issue is raised whether or not there are structural problems with the Euro and monetary integration. Moreover, the debt dynamics of governments are analyzed and specifically the issue of whether there is a need for restructuring the debt of Greece. Taking a closer look at the figures for government assets in Greece, it seems possible to strongly reduce the debt-GDP ratio mainly by privatization. As regards Ireland, one may propose that the European Commission or the European Parliament take the country before the European Court of Justice. Finally, a new approach for determining the optimum debt-GDP ratio is presented.

A disaggregated analysis of the export performance of some industrial and emerging countries

Abstract: The paper describes the evolution of export shares and quantifies the contribution of geographical and sectoral specialization as well as that of “competitiveness” of some industrial and emerging market economies between 1985 and 2003. While the strong growth of emerging countries as world competitors has lowered the market shares of all industrial countries, the results of a constant-market-share analysis indicate that the latter have benefited from positive specialization effects. Specifically, industrial countries gained from being specialized in fast-growing sectors (high-tech) or destinations (Asia). The magnitude of these effects, however, has been quite diversified across the main countries. Among the emerging economies, the striking export growth of China was determined by a strong rise in competitiveness that allowed the country to gain market shares across all sectors and destinations.

Natural resources and non-cooperative trade policy

Abstract: When looking at the conditions of trade in natural resources the world appears upside down: tariff protection in natural resources sectors is generally lower than for overall merchandise trade, while export restrictions are twice as likely as in other sectors. On the other hand, tariff escalation is significant in natural resources sectors, where materials in their raw state face, on average, lower duties than in their processed form. In this paper, we discuss how export taxes and tariff escalation may be the result of an uncooperative trade policy. Specifically, tariff escalation and export taxes can be “beggar-thy-neighbor” policies because governments may be tempted to use them to alter the relative price of exports to their advantage (terms-of-trade effect) or to expand the domestic processing industry at the expenses of foreign production (production relocation effect). In equilibrium, these policies offset each other in a Prisoners’ Dilemma situation, where trade is inefficiently low.

Stable and enforceable: a new fiscal framework for the Euro area

Abstract: Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from being undermined by undisciplined governments, there is a need for a framework capable of imposing fiscal discipline. This paper considers an intertemporal assignment, where fiscal policy focuses on long-term objectives and monetary policy on short-term stabilisation. We argue for public sector debt targets as a practical way to achieve such a set up, and an excess debt protocol is constructed to give enforceable form to those targets. The ideas of “fiscal space” and optimal debt levels are used to provide a mechanism for identifying a stable region within which the debt targeting regime should operate. Making these factors explicit would both improve the credibility of planned fiscal policies and reduce risk premia on borrowing costs. We finally show how Europe’s competitiveness pact, and debt restructuring operations, can be used to maximise the available fiscal space.

Internal devaluation in a monetary union

Abstract: Reversing significant cumulative losses in competitiveness has emerged as a core challenge in some Eurozone countries. This brief note takes a closer look at one episode of successful internal devaluation, the experience of the new states following German reunification. The case suggests that substantial cumulative competitiveness gains are possible but require significant time. The case further points to relative productivity gains—and hence to structural reforms—as an important aspect of the adjustment process.

An evolutionary algorithm for the estimation of threshold vector error correction models

Abstract: We develop an evolutionary algorithm to estimate Threshold Vector Error Correction models (TVECM) with more than two cointegrated variables. Since disregarding a threshold in cointegration models renders standard approaches to the estimation of the cointegration vectors inefficient, TVECM necessitate a simultaneous estimation of the cointegration vector(s) and the threshold. As far as two cointegrated variables are considered this is commonly achieved by a grid search. However, grid search quickly becomes computationally unfeasible if more than two variables are cointegrated. Therefore, the likelihood function has to be maximized using heuristic approaches. Depending on the precise problem structure the evolutionary approach developed in the present paper for this purpose saves 90 to 99 per cent of the computation time of a grid search.

The euro crisis and crisis management: big lessons from a small island

Abstract: Following an overview of the economics of the current financial crisis, and the phenomenon of the Irish ‘Celtic Tiger’, this article argues that the current Irish-crisis and purported Euro-crisis are specific examples of the failure of banks internationally to exercise appropriate prudential care when making loans to both individuals and governments. The policy issue is thus one of banking supervision rather than the exclusion, or otherwise, of crisis nations from the Euro-zone. Thus international banks which uncritically purchased bonds from reckless banks and profligate governments must share the adjustment costs associated with the current crisis.

The choice of exchange rate regimes in the MENA countries: a probit analysis

Abstract: This paper analyses empirically the determinants of exchange rate regime choice in 17 MENA countries. For this purpose, we use both de jure and de facto regime classifications test and estimate a series of binomial and multinomial probit models. Regressions results highlight the important influence of two factors: trade openness and oil export capacity.

Corporate financing and macroeconomic volatility in the European union

Abstract: This paper investigates the impact of corporate financing patterns in the European Union (EU) on macroeconomic volatility We examine macroeconomic data for eight EU countries We find that during the period 1990 through 2005 bank financing was positively associated with volatility in GDP, consumption and investment On the other hand, macroeconomic volatility declined with increased dependence on market-based financing from the equity and bond markets during this period

International economics and natural resources: from theory to policy

Abstract: In the last two centuries, international trade and technical progress have been crucial drivers of economic development. However, the functioning of modern economies still hinges on the use of natural resources like fossil fuels and minerals. Since the supplies of these resources are very unevenly distributed among countries, resource trade has become an important part of globalization. In particular, many industrialized economies heavily depend on imports from resource-rich countries. The dominance of natural resource extraction in certain national economies creates specific risks and opportunities for development and competitiveness. Many resources are exhaustible, which is a reason why their prices are generally highly volatile and expected to further rise in the future. Price volatility and trends will have a major impact on the trade positions and the terms of trade of resource-exporting and -importing economies. Another aspect of natural resources is the pollution of the environment associated with their use. In principle, appropriate environmental policies can correct for the market failure of negative externalities. But in open economies, governments tend to choose sub-optimal policies because they fear a loss of competitiveness of domestic industries. The issue of natural resource scarcity in a globalized world raises several fundamental issues for economic research. It is important to know how resource dependence affects trade patterns and the relative economic performance of both resource-rich and resource-poor economies. Therefore, the analysis should not only cover long-run equilibria but also the adjustment processes, for example after new resource discoveries. Specifically, we should

Challenges for economic policy

Abstract: Before the financial crisis hit the world economy in the aftermath of the Lehman bankruptcy in the summer of 2008, the prevailing economic policy doctrine had been mainly one of market efficiency by deregulation. In fact, the refusal of the American Government to rescue Lehman can be interpreted as a last ditch attempt to enforce market discipline—with disastrous results. However, it would fall too short to blame neoliberalism alone for the crisis. After all, many mistakes had been made before through public intervention, including the artificial creation of a homeowner society in US and the flooding of markets with idle money, not only by the FED, but also by the ECB. It is also telling that, in Germany, the federal state banks were much more involved in the accumulation of toxic assets than the private banks. Thus, policy failure has played a substantial role in generating the recent financial crisis. However, it has also given a wake-up call to economists around the globe to reconsider the relevance of their theories to reality. After all, economics is not only a theoretical, but also an applied science. Accordingly, it takes more than academic brainstorming and empirical bean counting for an economist to be able to give sound policy advice. Not least, some knowledge of both economic history and the history of economics could be particularly helpful, because the recent crisis was not exactly the first ever. Financial crises such as the Dutch tulip mania or John Law’s paper money disaster emerged before economic liberalism was even thought of. In fact, the emergence of new forms of financing such as credit, stocks or SPV’s seem to periodically overcharge both market players and regulating institutions alike. Consequently, there are reasons enough to confront our theories not only with empirical evidence from today, but also with historical experience and the explanations which provided by economists of the past, including those that may have been undeservedly forgotten. Int Econ Econ Policy (2011) 8:337–339 DOI 10.1007/s10368-011-0185-0

Lobbying paradox of strategic export policy in a differentiated duopoly

Abstract: This paper presents an analysis of lobbying based on imperfect competition by using three-stage game. It seeks to explain why lobbying efforts might be influenced by a home government’s viewpoint. Endogenously determined lobbying may distort the outcomes of strategic export policy, so that the results would differ from that generated by exogenously set lobbying. The lobbying paradox results in the domestic firm being worse off than if it could credibly commit to not engage in lobbying. Moreover, in the presence of foreign firm lobbying, the desired tax level is as the same as that of the benchmark case without lobbying.

International trade and net investment: theory and evidence

Abstract: The theory of welfare accounting shows that comprehensive measures of net investment can be used to test whether an economy is following unsustainable paths of consumption. However, the notion of net investment used in most applied studies rules out technological progress and terms-of-trade gains from international trade. This paper considers an augmented expression of net investment derived from a dynamic growth model featuring international trade in different types of resource inputs, exogenous productivity growth in final sectors, and cost-reducing progress in resource extraction. Calculating augmented net investment for the world’s top twenty oil producers, we show that the difference with standard non-augmented measures can be large and may even revert some established conclusions regarding sustainability: prospects are more favorable than previously thought in oil-exporting countries endowed with large reserves like Angola, Azerbaijan, Kuwait, Saudi Arabia and Venezuela. In oil-importing economies, future consumption possibilities are limited by the lack of expected rental incomes from future resource exports.