Showing papers in "PSL Quarterly Review in 2006"

Optimum currency areas: a policy view

Abstract: Since the mid-1990s new developments in the theory of optimum currency areas have set forth an equilibrium approach that, in contrast with the traditional view stemming from Robert Mundell's seminal paper, considers the optimality criteria as the product of equilibrium forces and therefore endogenous. Notwithstanding their different characteristics, however, these alternative approaches are both useful to tackle different policy issues relating to the transition stage and the long-run operation of monetary unions. JEL Codes: F33

The future of Post Keynesian economics

Abstract: This paper assesses the current state of Post Keynesian economics and attempts to outline a strategy for its future development. It is argued that Post Keynesianeconomists have concentrated in recent years on the important pre-analytical task of searching for a sound methodological foundation upon which to develop analytical contributions to the development of economic theory and practice. It is then suggested that the future of Post Keynesian economics lies in the substantive task of constructing more general, encompassing understandings of economic behaviour that extend the applicability of existing economic theory to non-allocative modes of behaviour. JEL Codes: B22, E12

Basel II: panacea or a missed opportunity?

Abstract: At end-June 2004, the Basel Committee on Banking Supervision finally issued the "New Capital Accord" ("Basel II"), following endorsement by G10 bank supervisors. The Accord replaces the original accord agreed in July 1988 and implemented by most major international banks since 1993. Publication followed years of exhausting work by the Committee to improve upon the original in the light of market developments, advances in risk management and revealed deficiencies in the operation of the current scheme. This article traces the evolution of Basel II, focussing on the post-2000 period. The Impact of the three rounds of consultation on the final shape of the Accord is explored, as is the role played by the Quantitative Impact Studies (particularly, "QIS3"). Finally, Basel II is assessed from a "cost-benefit" standpoint, and outstanding concerns are identified. JEL Codes: G21, G28 Keywords: Bank, Banking

On floating exchange rates, currency depreciation and effective demand

Abstract: This paper discusses the relative advantages of floating exchange rates vis-a-vis a pegged exchange rate regime, with special emphasis on the implications foreffective demand. More particularly, it explores whether a currency depreciationhas a beneficial effect on aggregate demand and hence on employment. The authors argue that this issue is central to the whole principle of effective demand, and that the idea of a currency depreciation being able to stabilize effective demand is to a large extent analogous to the claim that (downward) flexibility of nominal (and real) wages can ensure full employment. Accordingly, the relationship between downward wage flexibility and effective demand is analysed and the hypothesis that exchangerate flexibility can have stabilizing properties when exogenous shocks of various kinds are taken into account is critically assessed both theoretically and empirically. The paper concludes that while exchange rate flexibility can be a useful instruments, it may have some side effects that should be taken into account. JEL Codes: E24, F33

European dominant position and American monopolization: a unifying approach from basic game theory

Abstract: In this paper I use basic game theory tools to explore the logical consequences of some fundamental legal definitions of European and American antitrust. In a competition game, in which there is a true monopolistic/dominant firm (MDF) and competition law is respected, thus limiting the legitimate set of choices of the MDF, I state in a formal theorem that an MDF has a strictly independent dominant strategy, so its choices should never be a source of ex post regret. Other players in the competition game, anticipating implementation of the dominant strategy, will optimize their behaviour taking it into account and thus be more able to select an optimal solution among all possible outcomes. This definition has some practical value: the 'surprise' choice of a non-dominant strategy becomes a hint of an illegal abuse of dominant position or monopolisation offence; also this idea is formalized in a theorem. JEL Codes: K21, L11, L25, L40 Keywords: Competition, Firm, Firms, Law

The equilibrium approach to optimum currency areas

Abstract: This paper contrasts the received view of optimum currency areas with the modern equilibrium approach. Setting Mundell's work against earlier analyses of monetary unions exposes the peculiarities of his theory, embedded in the static Keynesian paradigm. Mundell's hypothesis, constructed on the assumption of interregional factor immobility with regions spanning the country borders, leads to exogenous optimality criteria, which characterized the research program of the following decades (section 1). From the late 1990s, however, several papers emphasized the endogeneity of optimum currency area criteria on the basis of the new classical macroeconomics, overturning the traditional approach. Highlighting the implications of the Lucas critique, these contributions point at an alternative view of optimality, bringing the subject again into the realm of equilibrium theory (section 2). JEL Codes: F33

Stress testing credit risk: experience from the italian FSAP

Abstract: In this paper we describe the methodologies that can be used for stress testing credit risk providing some applications to the Italian banking system.Within the FSAP for Italy, stress tests examined the impact of a variety of shocks on the nine major Italian banking groups. The tests were performed using both top-down and bottom-up approaches, which provided comparable results. For the sensitivity analysis, the size of the shocks to assess market risk, sovereign risk, interest rate rIsk in the banking book and liquidity risk was in line with those ap-plied in other FSAPs for euro area countries, while the credit risk shock exceeded the largest historical shock. In addition, the impact of various adverse macroeconomic scenarios has been assessed. Specifical-ly, an adverse macro scenario in which oil prices reach USD 85-90 per barrel causing a global slow down and global equity prices decrease by 30% has the largest impact. Overall, stress test results suggest that the Italian banking sector is resilient to shocks. Profits appear in most cas-es sufficient to cover 10sses arising from the shocks calibrated. Existing capitaI buffers remain comfortably above the minimum regulatory sol-vency ratios. The implementation of macroeconomic stress-testing pro-grammes such as those underlying the FSAPs has advanced the devel-opment of internally consistent stress testing procedures. However, the state of the art is still evolving and further work in this field will allow relaxing less realistic assumptions, further improving the methodologies and making results more reliable. JEL Codes: G11, G18, G21, G28 Keywords: credit

An economic Manifesto for the oil exporting countries of the Persian Gulf

Abstract: The oil-exporting countries of the Persian Gulf have failed economically and socially. It is time for a radical new approach to managing oil revenues while oil and gas reserves last. We propose an approach to cut the level of oil revenues available to governments to zero while incorporating a formal "Oil Fund for All Generations". Others have proposed and implemented oil funds but in our proposal the government would (in time) lose all access to oil revenues; by taking easy money away from governments and rulers, waste, corruption, military expenditures and wars will be reduced, there will be better chance of adopting and implementing rational economic policies, and equity across generations may be enhanced. Hope may be slowly restored to a region that has lost hope. JEL Codes: O11, O13, O53, Q32, Q33 Keywords: oil

Economic failure in the Middle East

Abstract: We show how human and economic development has generally remained low among Middle Eastern oil-exporters, despite over three trillion dollars in oil revenues. Islam and religion have not contributed to the region's failure. Extensive mismanagement of oil wealth has fueled corruption, decelerated economic growth, and reduced economic freedom in oil-producing countries. Government inefficiency and barriers to trade have discouraged foreign investment and have further undermined growth. We follow with an explanation of the relative economic costs and impact of conflicts in the region, and conclude with a brief assessment of each oil exporter's current economic state and potential for future growth. JEL Codes: O10, P40, P47 Keywords: Development

Spot and foward market intervention during the 1997 Korean currency crisis

Abstract: This study shows that, among the two crisis periods of 1997, January-March and September-November, the spot market interventions were effective in stabilizing the Korean currency in the first period, whereas there is no evidence that the forward market interventions were effective in either of these two periods. If anything, the forward market interventions resulted in a destabilization of the exchange rate. This result may be due to excessive use of forward market interven-tions from 20th October, when the forward premium tended to show amplifying movement. Although it was clear that the Korean won was no longer defendable by forward market interventions, the Korean monetary authorities intervened in vain to defend the Korean currency. The forward market intervention seemed to be heavily used because the BOK believed its efficacy of a bear squeeze and wanted to camouflage the drain in foreign reserves. However, wasting foreign reserves in this operation proved too costIy for the BOK and the Korean economy. The result of this study suggests that, only when forward premiums are maintained within some margin, forward market interventions may be an effective instrument for stabilizing the foreign exchange market; otherwise it can create unwanted results, precipitating only the collapse of the exchange rate and aggravating the drain of foreign reserves, especially in a crisis period. JEL Codes: E43, F31, G15 Keywords: Crisis, Currency Crisis

Common factors and balance sheet structure of major European banks

Abstract: This paper explores the relationship between listed European banks' fundamental characteristics and the riskiness of their stock returns. Banks' structural characteristics are measured through a number different balance sheet indicators which are then associated to the stock riskiness, as measured by the factor loadings on fundamental factors affecting the stock market at large. The results seem to indicate that, in the 1999-2002 period, in which the banks considered were traded in Euro, the factor loading against the market factor and against the default spread may be systematically related to banks' fundamental characteristics like asset quality indicators (especially reserves for bad loans over loans), to the composition of income (share of interest and commission revenue), and to a general indicator of bank efficiency such as the cost-income ratio. These results are broadly consistent with an option-based theory of bank valuation, which would predict more variability in the price of bank stocks whenbanks hold riskier assets and economic conditions are poor. JEL Codes: G10, G21, L25, M41 Keywords: Bank, Stock Market

Reality and response: unemployment 1970-2005 in two core journals

Abstract: The Seventies of last century saw a decisive break with the earlier tendencies of the 'golden age'. Particularly important was the return of persistent unemployment. The present paper gives an overview of the effects of this change on subsequent publications in the two core journals American Economic Review and Economic Journal. It turns out that both with regard to frequency and contents there had been a notable impact of real events and theoretical controversy. JEL Codes: A11, A14, E24 Keywords: Economics, Journals, Unemployment