Showing papers in "Research Papers in Economics in 1996"

The twin crises: the causes of banking and balance-of-payments problems

Abstract: In the wake of the ERM and Mexican currency crises, the subject of balance-of-payments crises has come to the forefront of academic and policy discussions. This paper focuses on the potential links between banking and balance-of-payments crises. We examine these episodes for a large number of countries and find that knowing that there are banking problems helps in predicting balance-of-payments crises, but the converse is not true; financial liberalization usually predates banking crises, indeed, it helps predict them. Rather than a causal relationship from banking to balance-of-payments crises, the macroeconomic "stylized facts" that characterize these episodes point to common causes.

Stock markets, banks, and economic growth

Abstract: Using data on 49 countries from 1976 to 1993, the authors investigate whether measures of stock market liquidity, size, volatility, and integration in world capital markets predict future rates of economic growth, capital accumulation, productivity improvements, and private savings. They find that stock market liquidity-as measured by stock trading relative to the size of the market and economy - is positivelyand significantly correlated with current and future rates of economic growth, capital accumulation, productivity growth, even after controlling for economic and political factors. Stock market size, volatility, and integration are not robustly linked with growth. Nor are financial indicators closely associated with private savings rates. Significantly, banking development -as measured by bank loans to private enterprises divided by GDP -when combined with stock market liquidity predicts future rates of growth, capital accumulation, and productivity growth when entered together in regressions. The authors determine that these results are consistent with views that (1)financial markets and institutions provide important services for long-run growth, and (2)stock markets and banks provide different financial services.

A New Data Set Measuring Income Inequality

Abstract: This article presents a new data set on inequality in the distribution of income. The authors explain the criteria they applied in selecting data on Gini coefficients and on individual quintile groups' income shares. Comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage, although differences in the definition of the underlying data might still affect intertemporal and international comparability. Based on this new data set, the authors do not find a systematic link between growth and changes in aggregate inequality. They do find a strong positive relationship between growth and reduction of poverty.

Why Do More Open Economies Have Bigger Governments

Abstract: This paper demonstrates that there is a robust empirical association between the extent to which an economy is exposed to trade and the size of its government sector. This association holds for a large cross-section of countries, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. The explanation appears to be that government consumption plays a risk-reducing role in economies exposed to a significant amount of external risk. When openness is interacted with explicit measures of external risk, such as terms-of-trade uncertainty and product concentration of exports, it is the interaction terms that enter significantly, and the openness term that loses significance (or turns negative). The paper also demonstrates that government consumption is the ‘safe’ activity, in the empirically relevant sense, in the vast majority of countries.

Are Investors Reluctant to Realize Their Losses

Abstract: I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-motivated selling is most evident in December. Copyright The American Finance Association 1998. (This abstract was borrowed from another version of this item.)

Networks versus Markets in International Trade

Abstract: I propose a network/search view of international trade in differentiated products. I present evidence that supports the view that proximity and common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers, and that search barriers to trade are higher for differentiated than for homogeneous products. I also discuss alternative explanations for the findings.

Endogenously Chosen Boards of Directors and Their Monitoring of the CEO

Abstract: This paper develops a model in which the effectiveness of the board's monitoring of the CEO depends on the board's independence. The independence of new directors is determined through negotiations (implicit or explicit) between the existing directors and the CEO. The CEO's bargaining position, and thus his influence over the board-selection process, depends on an updated estimate of the CEO's ability based on his prior performance. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model. We also explore the implications of this model for proposed regulations of corporate governance structures.

Is "learning-by-exporting" important? Micro-dynamic evidence from Colombia, Mexico and Morocco

Abstract: Is there any empirical evidence that firms become more efficient after becoming exporters? Do firms that become exporters generate positive spillovers for domestically-oriented producers? In this paper we analyze the causal links between exporting and productivity using firm-level panel data from three semi-industrialized countries Representing export market" participation and production costs as jointly dependent autoregressive processes, we look for evidence that firms' stochastic cost processes shift when they break into foreign markets We find that relatively efficient firms become exporters, but firms' unit costs are not affected by previous export market participation So the well-known efficiency gap between exporters and non-exporters is due to self-selection of the more efficient firms into the export market, rather than learning by exporting Further, we find some evidence that exporters reduce the costs of breaking into foreign markets for domestically oriented producers, but they do not appear to help these producers become more efficient

Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration

Abstract: This paper employs response surface regressions based on simulation experments to calculate asymptotic distribution functions for the likelihood ratio tests for cointegration proposed by Johansen The paper provides tables of critical values that are very much more accurate than those available previously However the principal contributions of the paper are a set of data les that contain estimated asymptotic quantiles obtained from response surface estimation and a computer program for utilizing them This program which is freely available via the Internet can easily be used to calculate asymptotic critical values and P values Graphs of some of the tabulated distribution functions are also provided An empirical example motivated by the European Economic and Monetary Union proposed in the Maastricht Treaty suggests that not all the countries of the European Union may qualify initially for participation in the EMU.

Foundations of International Macroeconomics

Abstract: Foundations of International Macroeconomics is an innovative text that offers the first integrative modern treatment of the core issues in open economy macroeconomics and finance. With its clear and accessible style, it is suitable for first-year graduate macroeconomics courses as well as graduate courses in international macroeconomics and finance. Each chapter incorporates an extensive and eclectic array of empirical evidence. For the beginning student, these examples provide motivation and aid in understanding the practical value of the economic models developed. For advanced researchers, they highlight key insights and conundrums in the field. Topic coverage includes intertemporal consumption and investment theory, government spending and budget deficits, finance theory and asset pricing, the implications of (and problems inherent in) international capital market integration, growth, inflation and seignorage, policy credibility, real and nominal exchange rate determination, and many interesting special topics such as speculative attacks, target exchange rate zones, and parallels between immigration and capital mobility. Most main results are derived both for the small country and world economy cases. The first seven chapters cover models of the real economy, while the final three chapters incorporate the economy's monetary side, including an innovative approach to bridging the usual chasm between real and monetary models.

Income Distribution, Political Instability, and Investment

Abstract: This paper successfully tests on a sample of 71 countries for the period 1960–85 the following hypotheses. Income inequality, by fuelling social discontent, increases sociopolitical instability. The latter, by creating uncertainty in the politico-economic environment, reduces investment. As a consequence, income inequality and investment are inversely related. Since investment is a primary engine of growth, this paper identifies a channel for an inverse relationship between income inequality and growth. We measure socio-political instability with indices which capture the occurrence of more or less violent phenomena of political unrest and we test our hypotheses by estimating a two-equation model in which the endogenous variables are investment and an index of socio-political instability. Our results are robust to sensitivity analysis on the specification of the model and the measure of political instability, and are unchanged when the model is estimated using robust regression techniques.

Evidence on the Characteristics of Cross Sectional Variation in Stock Returns

Abstract: Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

Risk Taking by Mutual Funds as a Response to Incentives

Abstract: This paper examines the agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk-adjusted fund returns. A fund company, however, in its desire to maximize its value as a concern has an incentive to take actions which increase the flow of investment.

Law and Finance

Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common†law countries generally have the strongest, and french civil law countries the weakest, legal protections of investors, with German†-and Scandinavian†-civil†law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified share†holders are unlikely to be important in countries that fail to protect their rights.

Gibrat's legacy

Abstract: This paper traces the time series (?Growth of Firms?) tradition in the study of market structure and looks at how recent studies on entry and the size distribution of firms have modified thinking in this area.

Growing Artificial Societies: Social Science from the Bottom Up

Abstract: How do social structures and group behaviors arise from the interaction of individuals? Growing Artificial Societies approaches this question with cutting-edge computer simulation techniques. Fundamental collective behaviors such as group formation, cultural transmission, combat, and trade are seen to "emerge" from the interaction of individual agents following a few simple rules. In their program, named Sugarscape, Epstein and Axtell begin the development of a "bottom up" social science that is capturing the attention of researchers and commentators alike. The study is part of the 2050 Project, a joint venture of the Santa Fe Institute, the World Resources Institute, and the Brookings Institution. The project is an international effort to identify conditions for a sustainable global system in the next century and to design policies to help achieve such a system.

Political Instability and Economic Growth

Abstract: This paper investigates the relationship between political instability and per capita GDP growth in a sample of 113 countries for the period 1950 through 1982. We define political instability as the propensity of a government collapse, and we estimate a model in which such a measure of political instability and economic growth are jointly determined. The main result of this paper is that in countries and time periods with a high propensity of government collapse, growth is significantly lower than otherwise. We also discuss the effects of different types of government changes on growth.

The Proper Scope of Government: Theory and an Application to Prisons

Abstract: When should a government provide a service inhouse and when should it contract out provision? We develop a model in which the provider can invest in improving the quality of service or reducing cost. If contracts are incomplete, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on non-contractible quality. The model is applied to understanding the costs and benefits of prison privatization.

Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis

Abstract: This paper argues that the typical household's saving is better described by a buffer-stock version than by the traditional version of the Life Cycle/Permanent Income Hypothesis (LC/PIH) model Buffer-stock behavior emerges if consumers with important income uncertainty are sufficiently impatient In the traditional model consumption growth is determined solely by tastes; in contract buffer-stock consumers set average consumption growth equal to average labor income growth regardless of tastes The model can explain three empirical puzzles: the consumption/income parallel of Carroll and Summers [1991]; the consumption/income divergence first documented in the 1930's; and the temporal stability of the household age/wealth profile despite the unpredictability of idiosyncratic wealth changes

Are Recessions Good For Your Health

Abstract: This study examines the relationship between economic conditions and health. Fixed-effect models are estimated using state level data for the 1972-1991 time period. Health is proxied by total and age- specific mortality rates, as well as by 10 particular causes of death. Total mortality and nine of the ten sources of fatalities exhibit a procyclical variation, with suicides representing the important exception. The fluctuations in mortality are larger for 20-44 year olds than for older individuals. The predicted relationship between personal incomes and health is quite weak and is sensitive to the choice of model specifications, time periods and dependent variables. These findings suggest the possible importance of cyclical variations in the time costs of medical care or healthy lifestyles and of negative health effects of job-holding.

Models of Currency Crises with Self-fulfilling Features

Abstract: The discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency-market equilibria. After describing an illustrative model in which high unemployment may cause an exchange rate crisis with self-fulfilling features, the paper reviews some other self-reinforcing mechanisms. Recent econometric evidence seems to support the practical importance of these mechanisms.

The Boundaryless Career: A New Employment Principle for a New Organizational Era

Abstract: Including contributions from leading scholars at Harvard Business School, Yale, and MIT's Sloan School of Management, this book explores the ways that careers have changed for workers as their firms reorganize to meet global competition. As firms re-engineer, downsize, enter into strategic alliances with other firms, and find other ways to reduce costs, they frequently lay off workers. Job security has been replaced by insecurity and workers have been forced to take charge of their own career development in ways they have never done before. The contributors to the book analyse the implications for these workers, who now have "boundaryless careers". While many find the challenge rewarding as they find new opportunities for growth, others are finding it difficult to adapt to new jobs in new locations. The book looks at policy issues that can provide safety nets for those who are not able to find a place in the new world of boundaryless careers.

Trade Credit: Theories and Evidence

Abstract: In addition to borrowing from financial institutions, firms may be financed by their suppliers. Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while short term trade credit may be routinely used to minimize transactions costs, medium term borrowing against trade credit is a form of financing of last resort. Suppliers lend to firms no one else lends to because they may have a comparative advantage in getting information about buyers cheaply, they have a better ability to liquidate goods, and they have a greater implicit equity stake in the firm's long term survival. We find some evidence consistent with the use of trade credit as a means of price discrimination. Finally, we find that firms with better access to credit from financial institutions offer more trade credit. This suggests that firms may intermediate between institutional creditors and other firms who have limited access to financial institutions.

The Swarm Simulation System: A Toolkit for Building Multi-Agent Simulations

Abstract: Swarm is a multi-agent software platform for the simulation of complex adaptive systems. In the Swarm system the basic unit of si8mulation is the swarm, a collection of agents executing a schedule of actions. Swarm supports hierarchical modeling approaches whereby agents can be composed of swarms of other agents in nested structures. Swarm provides object oriented libraries of reusable components for building models and analyzing, displaying, and controlling experiments on those models. Swarm is currently available as a beta version in full, free source code form. It requires the GNU C Compiler, Unix, and X Windows. More information about Swarm can be obtained from our web pages, [ Swarm ].

Managerial Incentives and Product Market Competition

Abstract: The paper shows that an increase in competition has two effects on managerial incentives: it increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm’s profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. The paper identifies natural circumstances where increased competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that – starting from a monopoly – managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

Inflows of capital to developing countries in the 1990s

Abstract: Half a decade has passed since the resurgence of international capital flows to many developing countries. The recent surge in capital inflows was initially attributed to domestic developments, such as the sound policies and stronger economic performance of a handful of countries. Eventually, it became clear that the phenomenon was widespread, affecting countries with very diverse characteristics. This pattern suggested that global factors, like cyclical movements in interest rates, were especially important. This paper discusses the principal facts, developments and policies that characterize the current episode of capital inflows to Asia and Latin America.

Private and Public Supply of Liquidity

Abstract: This paper addresses a basic, yet unresolved question : Do claims on private assets provide sufficient liquidity for an efficient functioning of the productive sector? Or does the State have a role in creating liquidity and regulating it either through adjustments in the stock of government securities or by other means?

Adaptive Dynamics: A Geometrical Study of the Consequences of Nearly Faithful Reproduction

Abstract: We set out to explore a class of stochastic processes, called "adaptive dynamics", which supposedly capture some of the essentials of the long-term biological evolution. These processes have a strong deterministic component. This allows a classification of their qualitative features which in many aspects is similar to classifications from the theory of deterministic dynamical systems. But they also display a good number of clear-cut novel dynamical phenomena. The sample functions of an adaptive dynamics are piece-wise constant function from R_+ to the finite subsets of some "trait" space X in R^k. Those subsets we call "adaptive conditions". Both the range and the jumps of a sample function are governed by a function s, called "fitness", mapping the present adaptive condition and the trait value of a potential "mutant" to R. Sign(s) tell us which subsets of X qualify as adaptive conditions, which mutants can potentially "invade", leading to a jump in the sample function, and which adaptive condition(s) can result from such invasion. Fitness supposedly satisfy certain constraints derived from their population/community dynamical origin, such as the fact that all mutants which are equal to some "residents", i.e., element of the present adaptive condition, have zero fitness. Apart from that, we suppose that s is as smooth as can be possibly condoned by its community dynamical origin. Moreover, we assume that a mutant can differ but little from its resident "progenitor". In sections 1 and 2 we describe the biological background of our mathematical framework. In section 1 we deal with the position of our framework relative to present and past evolutionary research. In section 2 we discuss the community dynamical origin of s, and the reasons for making a number of specific simplifications relative to the full complexity seen in nature. In sections 3 and 4 we consider some general, mathematical as well as biological, conclusions that can be drawn from our framework in its simplest guise, that is, when we assume that X is 1-dimensional, and that the cardinality of the adaptive conditions stays low. The main result is a classification of the adaptively singular points. These points comprise both the adaptive point attractors, as well as the points where the adaptive trajectory can branch, thus attaining its characteristic tree-like shape. In section 5 we discuss how adaptive dynamics relate through a limiting argument to stochastic models in which individual organisms are represented as separate entities. It is only through such a limiting procedure that any class of population or evolutionary models can eventually be justified. Our basic assumptions are (i) clonal reproduction, i.e., the resident individuals reproduce faithfully without any of the complications of sex or Mendelian genetics, except for the occasional occurrence of a mutant, (ii) a large system size and an even rarer occurrence of mutations per birth event, (iii) uniqueness and global attractiveness of any interior attractor of the community dynamics in the limit of the infinite system size. In section 6 we try to delineate, by a tentative listing of "axioms", the largest possible class of processes that can result from the kind of limiting considerations spelled out in section 5. And in section 7 we heuristically derive some very general predictions about macro-evolutionary patterns, based on those weak assumptions only. In the final section 8 we discuss (i) how the results from the preceding sections may fit into a more encompassing view of biological evolution, and (ii) some directions for further research.

Using Informational Labeling To Influence The Market For Quality In Food Products

Abstract: In the United States, the federal government is increasingly using requirements for informational labeling on food products to influence 1) consumers' knowledge and purchasing patterns and 2) manufacturers' product offerings and marketing practices. We discuss the economic rationale behind these regulations and issues related to judging their success or failure.

The Econometrics of Ultra-High Frequency Data

Abstract: Ultra-high frequency data are complete transactions data which inherently arrive at random times Marked point processes provide a theoretical framework for analysis of such data sets The ACD model developed by Engle and Russell (1995) is then applied to IBM transactions data to develop semi-parametric hazard estimates and measures of instantaneous conditional variances The variances are negatively influenced by surprisingly long durations as suggested by some of the market micro-structure literature