Showing papers in "International Review of Economics in 2009"

Did efficiency of Indian public sector banks converge with banking reforms

Abstract: This paper examines the issue of convergence of efficiency levels among Indian public sector banks (PSBs) during the post-reforms period spanning from 1992/1993 to 2005/2006. The empirical results indicate that the majority of PSBs have observed an ascent in technical efficiency during the post-reforms years. Further, the inefficient PSBs have been noted to be catching up with the efficient ones. That is, the banks with low level of efficiency at the beginning of the period are growing more rapidly than the highly efficient banks. In sum, the study confirms a presence of convergence phenomenon in the Indian public sector banking industry.

Population and economic growth with human and physical capital investments

Abstract: We present a two-sector endogenous growth model with human and physical capital accumulation to analyze the long-run relationship between population growth and real per capita income growth. Formal education and investment in physical capital are assumed to be two separate components of human capital production. Along the balanced growth path equilibrium, population change may have a positive, negative, or else neutral effect on economic growth depending on whether physical and human capital are complementary/substitutes for each other in the formation of new human capital and on their degree of complementarity.

Economists in the PITS

Abstract: Academic economists today are caught in a “Publication Impossibility Theorem System” or PITS. In order to further their careers, they are required to publish in A-journals, but for the vast majority this is impossible because there are few slots open for them in such journals. Such academic competition maybe useful to generate hard work; however, there may be serious negative consequences: the wrong output may be produced in an inefficient way, the wrong people may be selected, and losers may react in a harmful way. This article suggests several ways to remedy this situation.

Is the monetary policy rule responsive to exchange rate changes? The case of Indonesia, Malaysia, the Philippines, and Thailand

Abstract: Extending Obstfeld and Rogoff (J Econ Perspect 9:73–96, 1995), Ball (Monetary policy rules, University of Chicago Press, pp. 127–144, 1999), Svensson (J Int Econ 50: 155–183, 2000), Taylor (Am Econ Rev 91: 263–267, 2001), Gali and Gertler (J Econ Perspect 21:25–46, 2007), and others, this paper finds that central banks in the Philippines and Thailand respond negatively to the current real exchange rate and positively to the lagged real exchange rate whereas central banks in Indonesia and Malaysia do not react to the current or lagged real exchange rate. For the Philippines and Thailand, the null hypothesis that the sum of the coefficients of the current and lagged real exchange rates is zero cannot be rejected at the 5% level. Central banks in these four countries respond positively to the inflation rate and the output gap, suggesting that the concept of a simple or an extended Taylor rule would apply to these countries. Monetary policy reaction functions for Indonesia and Thailand are steeper than those for Malaysia and the Philippines and would be more responsive to a change in the inflation rate.

Sovereign-Wealth Funds: the institutional dimension

Abstract: In the recent past, the operations of the capital-rich Sovereign-Wealth Funds (SWFs) went on increasing in the global capital markets. As the global economic crisis that started in 2007 deepened, SWF operations dramatically spurted, leading to further progressive increase in their significance for the global capital markets. For all appearances they are going to be important financial players in the foreseeable future. This article focuses on the basic concept of SWFs, their structure and operations. It attempts to analyze and elucidate on them. Notwithstanding the fact that SWFs are an instrument of enhancing liquidity and financial resource allocation in the international capital market, they managed to become a source of controversies. Consequently they became a source of escalation in financial protectionism in several advanced industrial economies, in particular the USA. The article concludes that this was unwarranted. Recently SWFs have attempted to device an array of best practices to improve the transparency of their global financial operations. These measures are expected to enhance the acceptance of SWFs as well as global recognition of their operations. They would also help in dispelling the negative image that SWFs have held in several advanced industrial economies.

Generous actors, selfish actions: markets with other-regarding preferences

Abstract: This paper points out that classical competitive outcomes arise in two different market environments even if agents have non-classical preferences. Consumers with separable, other-regarding preferences behave as if they have classical preferences in competitive equilibrium. These outcomes need not be efficient, but under plausible conditions will be efficient following a redistribution of income. In simple double-auction environments competitive outcomes arise under a wide range of assumptions on preferences even without assuming separability. I discuss the importance of the domain of definition of preferences and how the preferences present in the economy influence the performance of the trading institution.

The lesson and warning of a crisis foretold: a political economy approach

Abstract: The financial crisis, which began in summer 2007 in the USA and then spread contagiously throughout the rest of the world, is systemic in nature. Indeed, it is not a local or regional crisis. It is the inevitable starting point of a process which for more than 30 years has changed at its very roots the financial way of being and doing, thus undermining the very bases of that liberal social order which is at the core of Western civilization. The nature of the causes of the crisis is twofold: those immediate, which speak of the specific characteristics adopted in recent times by the financial markets, and those remote, which blame aspects of the cultural matrix which accompanied the transition from industrial to financial capitalism. From the moment that epoch-making phenomenon which we call globalization began to take shape, finance not only constantly increased its quota of activity in the economic sphere, but it has also progressively contributed to transform both people’s cognitive maps and their value systems. It is to this latter that one refers today in speaking of the financialization of society. The article mainly deals with the remote causes of the crisis with the aim of showing the consequences of the misleading ideology diffused by mainstream economics, from which have drunk market agents, government political authorities and controlling agencies.

Financial innovation: theoretical issues and empirical evidence in Italy and in the UK

Abstract: In the first part of the paper, we try to clearly identify financial innovations and draw a general framework Despite the relevance of financial innovations, a unique definition is difficult to find We then provide empirical evidence of such innovations on a sample of Italian and UK listed banks over the period 2005–2007 using financial account data First, the absence of any mention of a specific organizational unit in charge of research and development (R&D) is highlighted However, the existence of a research and developmental function involving different organizational units cannot be excluded Second, innovation seems to be mainly concentrated in the product area, both in Italy and in the UK This could be accounted for by the difference in the “life cycles” of innovations and by the different operational conditions of banks in both systems Third, larger banks seem more innovative, both in Italy and in the UK No clear relation between innovation and cost reduction/revenue increase seems to exist, at least in Italy In the light of the above considerations, policy implication comes to light on whether the choice of not establishing a specific organizational unit dedicated to R&D could turn out effective in the medium-long term

Economies of scale and scope in the European banking sector

Abstract: In this article, using the data of 2008, we try to describe the impact of scale and product differentiation in 282 European banks. While evidence of the economies of scale is less clear, the results obtained using a translogarithmic function system show that significant economies of scope do exist even for new banking products like derivatives.

Productivity and profitability analysis of large Italian companies: 1998-2002

Abstract: The determinants of profitability and productivity for large Italian companies operating in industrial sectors are investigated in this paper. Data were taken from one of the most important Italian business surveys, and furthermore two cross-section surveys for the years 1998 and 2002 are compared. The results highlight the importance of financial management and organisational complexity in order to explain the development of profitability and productivity ranking during 1998–2002. This paper identifies the important enterprise behaviour in terms of the variables considered. Large Italian companies remain competitive in the more traditional sectors (e.g. mechanics, textiles, etc.). In general, the Italian enterprises are not dynamic enough to compete in the most technological and innovative sectors. Moreover, there is the necessity for greater investments in order to foster the national economy.

How does monetary policy transmission mechanism work in Fiji

Abstract: The study aims to examine the impact of changes in policy variables namely, monetary aggregate (M1), exchange rate and interest rate on two monetary goal variables, namely output and price level in Fiji from 1970 to 2006 by applying the procedures of variance decomposition and impulse response functions. We conclude that the money channel is the most effective channel of transmission mechanism among the three channels.

The risk of falling house prices in Italy

Abstract: This paper shows that Italian house market is less exposed to price shocks than the American one. Variations in the house price index in real terms have been studied along with the affordability ratio and the relation between house prices and rent levels for the period 1995–2004 in Italian provinces. Comparison with US data reveals greater overpricing in the US during the expansion phase (2000–2004). Although a speculative bubble in all US metropolitan areas considered does not emerge, US financial and economic structural factors make the US real estate sector more exposed to price shocks. To test the compatibility of Italian house prices with fundamentals an econometric model is designed to analyze the provincial house prices from 1995 to 2003.

The rise and fall of monopolistic competition revolution

Abstract: The widespread idea among economists is that monopolistic or imperfect competition is a set of realistic models that were invented in the 1930s and their purpose was to fill the gap between the polar and, at the same time, hypothetical models of perfect competition and pure monopoly. The main argument of this paper is that the monopolistic competition revolution set in motion a reaction—partly driven by methodological considerations, partly ideological—that ultimately led to the restoration of perfect competition, as the benchmark for evaluating market outcomes. In the end, monopolistic competition eclipsed, and perfect competition from the fridges of economic analysis that was up until the 1920s was placed to the very core of microeconomic model-building.

Trade liberalization, intra-industry trade and the environment: competition mode and the order of firms’ moves

Abstract: This paper explores the implications of trade liberalization by extending the intra-industry trade framework a la Fung and Maechler (J Int Trade Econ Dev 16(1):53–69, 2007) to the case of sequential move and taking the mode of firms’ competition into consideration as well. It is shown that the existing results obtained for the case of simultaneous price competition are robust in quantity competition and sequential move cases. Moreover, it studies the likelihood that the environmental effects of trade liberalization occur.

The value of rents and the likelihood of conflicts

Abstract: This paper extends the prey–predator model of Grossman and Kim (J Political Econ 103:1275–1288, 1995) to analyze the relation between the value of a contested rent and the emergence of conflict. We show that an increase in the value of the rent makes a conflict equilibrium more likely. We also analyze the case where the valuation of the rent is different for the two players. We find, for example, that a conflict equilibrium may occur even though the predator has an important disadvantage in warfare. That is when his valuation of the rent is sufficiently high compared to that of the prey.

On the origin and the literal meaning of monopsony: a note

Abstract: An examination of the history and etymology of monopsony as a market structure reveals that in the original sense monopsony means a single buyer of food supplies in general, rather than a single buyer of fish as it has been previously asserted. Thus, the proposed interpretation of monopsony deprives it from any derogatory implications, restoring the term to its original meaning.

A hybrid production structure in trade: theory and implications

Abstract: In models of pure theory of international trade, no unique production structure is dominant. By grafting a specific factor structure onto a Heckscher–Ohlin framework, in a hybrid general equilibrium production model, this paper presents theoretical results with implications such as: (a) the relative price increase of a traded goods sector might have expansionary or contractionary output effect depending on factor intensities; (b) uniform primary-factor augmenting technical progress in the intermediate inputs sector might lead to a decline in the output of one of the sectors; (c) favorable relative price effect in one sector will lead to a drop in the return to the specific capital type depending on the grafted production structure. The proposed framework is useful for explaining stylized facts related to wage inequality, deindustrialization and export-processing, which have a great policy relevance for trade and development.

International crises, instability periods and contagion: the case of the ERM

Abstract: In this article we propose a two step procedure for modeling the propagation of financial shocks. The first step consists in the estimation, by means of SWARCH models, of the conditional probability of being in a period of high volatility, while in the second step such indicators are included in a structural simultaneous equations models for interdependences among different countries. The results show that episodes of financial crisis effectively happened during periods of high volatility and that such measures of instability are important in explaining the propagation of devaluation expectations between six European Countries during the ERM period.

The role of controls in the international financial crisis

Abstract: The impact of the great financial crisis that started in the United States with the implosion of “subprime” loans has drawn the public’s attention on one of the most innovative branches of financial market, the famous derivatives. The financial crisis and the involvement of major banking institutions thus call for some thinking about the concept of control in Italy and in a globalized world. In Italy, even though the scale of the risks connected with transactions in derivatives is limited, some banks may have damaged their reputations by pushing complex derivative products onto unwitting clients. Apart from reassurance and all kinds of justifications, and without arguing whether this was deliberate or not, the monetary authorities, Consob, and ABI have clearly reported the risk of a world financial crisis too late.

Managerial delegation and partial privatization in general equilibrium with sector-specific unemployment

Abstract: This paper explores the effects of managerial delegation in a general-equilibrium, oligopolistic competition model with sector-specific unemployment. It specifically examines the effects of managerial delegation on outputs, factor returns and the urban unemployment ratio. It is found that if the managerial firm is less profit-oriented, managerial delegation can lead to an increase in the urban output, a decrease in the rural output, an increase in the capital rental and a decrease in the rural wage. In particular, it worsens the urban unemployment ratio.

Financial markets and the post-crisis scenario

Abstract: Starting from August 2007, the FED intervened by injecting liquidity in the inter-banking market and reducing interest rates. Day after day, the financial markets register negative trends and rallies. This is not due to events which are particularly related to the market itself. This appeared in the days when there were government interventions, when everybody expected a positive sign in the financial market but a negative sign occurred. Sometimes, this is due to the intensity of actions taken by the governments. The markets always expect appropriate interventions (in terms of intensity). Looking at these market reactions (in unexpected signs) after each government action, we can suppose that policy makers underestimate the intensity of this crisis. The capacity of making enforcement on the system should avoid underlining the side of governance rules which will never be precise. Being able to count on an active control of the market dealers, broadly speaking is a way of giving active confidence to individual/institutional agents who decide the allocations of saving in the financial market. There is no such confidence at the moment, if one focuses only on the definitions of new rules. If one starts from existing rules and does continuous monitoring so that they are applied adequately at crucial moments, then one could reduce the possibility of facing new exceeding volatilities of banking securities in the stock market. This work is focused on understanding how governance as well as central banks’ policy impact on the crisis, as well as possible future scenarios.

Pitfalls in estimating β-convergence by means of panel data: an empirical test

Abstract: This article aims to test the conjecture advanced in a recent work by Bianchi and Menegatti (Appl Econ Lett 14:963–967, 2007) that usual β-convergence panel regressions may produce biased evidence, due to their inability to distinguish between actual catching-up across countries and decreasing growth rates over time within countries. The test considers different sub-groups in a dataset of 72 countries for the period 1970–2000 and introduces both human capital and proxies for technological differences into the analysis. The results confirm the conjecture that traditional evidence about β-convergence may be misleading; they also show that catching-up across countries is weaker than usually claimed and that this process occurred only in some sub-groups of countries.

Risk allocation and uncertainty: some unpleasant outcomes of financial innovation

Abstract: Financial innovation introduces the possibility of exchange on wider time-events sets. In this way, market incompleteness should be reduced with an overall advantage. The existence of this advantage also depends on other elements, like the degree of market competition, the level of information, and the presence of inefficiencies generated by moral hazard. One kind of behavior which has been widely common among banks consists in the reduction of risk taking in relation to credit activity. Credit risk tends to be covered through the packaging of credits into securities. This situation means that since the bank is not shouldering the risk, it does not invest in the acquisition of knowledge regarding the borrower, but only regarding his/her generic characteristics which are reflected in the evaluation of the assets in which the credits are packaged. Moreover, financial innovation was developed, in particular by investment banks, with non-standardized products, exchanged over-the-counter, and substantially lacking secondary markets. The greatest problems derive from the low liquidity of these products and from the uncertainty over their returns. This is why it would be good to stimulate the introduction of standardized products, whose risks are easy to determine, to be exchanged on organized markets, instead of complex products, which are substantially illiquid and exchanged over-the-counter.

Great depression no. 2: finance and the real world

Abstract: The current crisis is triggering off a number of overdue reflections and interventions. The need for closer regulation of the financial system is widely perceived to be necessary. That is no doubt necessary, but probably insufficient. A careful overhaul of the functions of the banking and financial system is also needed. Our forefathers, at the time of the Great Depression, were perhaps less demurring to trim a bloated financial system.

Micro and macroeconomic effects of financial innovation in a domestic and international perspective

Abstract: This paper is focused on the rise and the fall of structured finance, derivatives, and asset-backed securities. Special focus is made on the attempts of the banking sector to improve the economic performance, particularly the ROE, by creating, acquiring, and selling derivatives. The possible outcome of public intervention to rescue the financial sector is finally discussed.

Symposium on “financial innovation: effects and perspectives”

Abstract: This folder contains a selection of the papers discussed during the Round Table that took place on 14 October 2009 at the Milan State University, organized by the Costantino Bresciani Turroni Foundation. One of the most important activities of the Foundation is to organize, every year, a Round Table to discuss topical monetary and financial issues, also promoted by the crucial input provided to the economic analysis by Costantino Bresciani Turroni. The turmoil that affected the German mark in the aftermath of the First World War can, obviously in a different historical context, provide a stimulus for the interpretation of the many troubles caused by the venturesome behaviour of certain financial and banking institutions. Equally important is the limited activity, particularly in the Anglo-Saxon world, of the institutional controllers that, once again, recognized only too late the abyss in which the financial system was falling, signs of which could already be perceived. Out of the spontaneous course of events rather than of the farsightedness of the organizers, the Round Table took place at a time when the crisis was already showing its main microand macro-economic implications. It was thus able to focus on some of the main causes for the world financial turmoil, as well as to predict a few consequences. On the other hand, it is a responsibility of a research foundation, like the one dedicated to Costantino Bresciani Turroni, to go through the pleasant and somewhat unpleasant aspects of economic events according to different perspectives, and to suggest measures to solve them, obviously within the framework of the different skills that Bresciani Turroni, an economist, economic columnist, and man of finance and of State, was able to respect with rigour, but without dogmatic constraints.

Some regulatory lessons to be drawn from the financial crisis

Abstract: The article briefly outlines how the two major structural causes of the financial crisis have been a massive underestimation of the negative externalities potentially arising from malfunctioning of financial markets, and the policy decision to assign the production of an eminently public good, financial stability, to private parties. Both ideas have been a tenet of the so-called Greenspan doctrine. The crisis also shows that all regulators tend to be captured in the end, and thus any new legislation should contain bright-line rules, that might look inefficient when assessed with reference to the market they regulate, but are socially efficient, because it would be politically costly to alter them. Criminal sanctions, which after all are a social form of regulation, should also be strengthened.

The decomposition of Greek real GDP (1858-1938)

Abstract: In the present article the time series of the decomposition of Greek real GDP are investigated for the presence of a unit root, allowing for a maximum of two breaks which take place at an unknown point in time. This methodology is preferred to the conventional Dickey and Fuller tests because the covered time horizon, namely from 1858 to 1938, is characterized by a number of very important events, the nature of which is either economic or historical.

Home market effect in the presence of multinational activities: location and nationality

Abstract: This study examines the phenomenon of home market effect (HME) through a framework where firms can serve a foreign market either via trade or via foreign direct investment (FDI). The results show that HME holds when determined through both location-based and nationality-based criteria. However, compared to the original measure of HME in the absence of FDI, the magnitude of the location-based HME is smaller whereas that of the nationality-based HME is larger. Comparative statics indicate that an increase in trade barriers reduces the magnitude of the location-based HME and that an increase in operative barriers facing foreign affiliates reduces the magnitude of the nationality-based HME. Also, larger restrictions on the foreign ownership of capital accentuate the location-based HME but attenuate the nationality-based HME.