New Economics Papers
on Financial Markets
Issue of 2005‒08‒13
93 papers chosen by

  1. The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar By Michael R. King; Rasmus Fatum
  2. Merger without Cost Advantages By Steffen Huck; Kai A. Konrad; Wieland Müller
  3. A Trade Model with an Optimal Exchange Rate Motivated by Current Discussion of a Chinese Renminbi Float By Hui Huang; Yi Wang; Yiming Wang; John Whalley; Shunming Zhang
  4. The Start-Up and Growth Stages in Enterprise Formation: The New View of Dividend Taxation Reconsidered By Vesa Kanniainen; Seppo Kari; Jouko Ylä-Liedenpohja
  5. What if the UK had Joined the Euro in 1999? An Empirical Evaluation Using a Global VAR By M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
  6. Uncertainty, Wage Setting and Decision Making in a Monetary Union By Carsten Hefeker
  7. Fiscal Policy in New EU Member States – Go East, Prudent Man! By Ondrej Schneider; Jan Zápal
  8. Does Germany Collect Revenue from Taxing Capital Income? By Johannes Becker; Clemens Fuest
  9. Actuarial Neutrality across Generations Applied to Public Pensions under Population Ageing: Effects on Government Finances and National Saving By Heikki Oksanen
  10. Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road towards a Honeymoon - Some Evidence from the ERM, ERM2 and Selected New EU Member States By Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
  11. Nominal Exchange Rate Flexibility and Real Exchange Rate Adjustment: Evidence from Dual Exchange Rates in Developing Countries By Yin-Wong Cheung; Kon S. Lai
  12. Money Supply and the Implementation of Interest Rate Targets By Schabert, Andreas
  13. Lending Booms and Lending Standards By Dell'Ariccia, Giovanni; Marquez, Robert
  14. Monetary Policy in the Euro Area: Lessons from Five Years of ECB and Implications for Turkey By Canova, Fabio; Favero, Carlo A
  15. The Savings Behaviour of Temporary and Permanent Migrants in Germany By Bauer, Thomas; Sinning, Mathias
  16. Endowment Versus Finance: A Wooden Barrel Theory of International Trade By Ju, Jiandong; Wei, Shang-Jin
  17. Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns By Favero, Carlo A
  18. Home Bias and International Risk Sharing: Twin Puzzles Separated at Birth By Sorensen, Bent E; Wu, Yi-Tsung; Yosha, Oved; Zhu, Yu
  19. Using Copulas to Construct Bivariate Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index By Hurd, Matthew; Salmon, Mark; Schleicher, Christoph
  20. Wealth Transfers, Contagion and Portfolio Constraints By Pavlova, Anna; Rigobon, Roberto
  21. Optimal Privatization Using Qualifying Auctions By Boone, Jan; Goeree, Jacob K.
  22. CEO-Firm Match and Principal-Agent Problem By Li, Fei; Ueda, Masako
  23. Is There a Diversification Discount in Financial Conglomerates? By Laeven, Luc; Levine, Ross
  24. Liquidity Risk in Securities Settlement By Devriese, Johan; Mitchell, Janet
  25. The Ties that Divide. A Network Analysis of the International Monetary System By Flandreau, Marc; Jobst, Clemens
  26. How to Exit from Fixed Exchange Rate Regimes By Asici, Ahmet Atil; Ivanova, Nadezhda; Wyplosz, Charles
  27. How Inefficient is the 1/N Asset-Allocation Strategy? By DeMiguel, Victor; Garlappi, Lorenzo; Uppal, Raman
  28. The Impact of Changing Demographics and Pensions on The Demand for Housing and Financial Assets By Cerny, Ales; Miles, David K; Schmidt, Lubomir
  29. Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions By Schmitz, Patrick W.
  30. Portfolio Selection with Parameter and Model Uncertainty: A Multi-Prior Approach By Garlappi, Lorenzo; Uppal, Raman; Wang, Tan
  31. Long-Run Determinants of Inflation Differentials in a Monetary Union By Altissimo, Filippo; Benigno, Pierpaolo; Rodriguez Palenzuela, Diego
  32. Does External Trade Promote Financial Development? By Huang, Yongfu; Temple, Jonathan
  33. Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets By Giannetti, Mariassunta; Ongena, Steven
  34. Cash-in-the-Market Pricing and Optimal Bank Bailout Policy By Acharya, Viral V; Yorulmazer, Tanju
  35. Voting Transparency in a Monetary Union By Gersbach, Hans; Hahn, Volker
  36. The Dot-Com Bubble, the Bush Deficits, and the US Current Account By Kraay, Aart; Ventura, Jaume
  37. Reforming The UK Retirement System: Privatization Plus A Safety Net By Steven A. Sass
  38. A Small Monetary System for the Euro Area Based on German Data By Ralf Brueggemann; Helmut Luetkepohl
  39. Consumption and Debt Dynamics with (Rarely Binding) Borrowing Constraints By Alexis Anagnostopoulos
  40. Potential Welfare Losses from Financial Autarky and Trade Sanctions By Alexis Anagnostopoulos
  41. Mergers and Acquisitions Waves in the U.K.: a Markov-Switching Approach By Marcelo Resende
  42. Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe By Ralf Brueggemann; Helmut Luetkepohl
  43. Monte Carlo Simulations for Real Estate Valuation By Martin Hoesli; Elion Jani; André Bender
  44. Suggested vs. Actual Institutional Allocattion to Real Estate in Europe: A Matter of Size By Martin Hoesli; Jon Lekander
  45. Debt Equity Choice in Europe By Philippe Gaud; Martin HOesli; André Bender
  46. Value Through Diversity: Microfinance and Islamic Finance and Global Banking By Nicoletta Ferro
  47. Asset price declines and real estate market illiquidity: evidence from Japanese land values By John Krainer; Mark Spiegel; Nobuyoshi Yamori
  48. Modeling bond yields in finance and macroeconomics By Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
  49. Offshore financial centers: parasites or symbionts? By Andrew K. Rose; Mark M. Spiegel
  50. Alternative measures of the Federal Reserve banks’ cost of equity capital By Michelle L. Barnes; Jose Lopez
  51. Exchange rate overshooting and the costs of floating By Michele Cavallo; Kate Kisselev; Fabrizio Perri; Nouriel Roubini
  52. Comparing the Stock Market and Iowa Land Values: A Question of Timing By Duffy, Michael
  53. Systematic monetary policy and persistence By Luca Bindelli
  54. Alice Through the Looking Glass: Monetary and Fiscal Policy Interaction in a Liquidity Trap By Sanjit Dhami; Ali al-Nowaihi
  55. Bank Supervision and Corruption in Lending By Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
  56. Is There a Diversification Discount in Financial Conglomerates? By Luc Laeven; Ross Levine
  57. Bank Concentration and Fragility: Impact and Mechanics By Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
  58. Futures Prices in a Production Economy with Investment Constraints By Leonid Kogan; Dmitry Livdan; Amir Yaron
  59. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency? By Menzie Chinn; Jeffrey Frankel
  60. Savings Gluts and Interest Rates: The Missing Link to Europe By Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
  61. A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation By Menzie D. Chinn
  62. Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models By Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
  63. Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns By Andrea Frazzini; Owen A. Lamont
  64. Relationships between International Investment Agreements By Marie-France Houde; Katia Yannaca-Small
  65. ODA and Investment for Development: What Guidance Can Be Drawn from Investment Climate Scoreboards? By Hans Christiansen
  66. Financing Global and Regional Public Goods Through Oda: Analysis and Evidence from the OECD Creditor Reporting System By Helmut Reisen; Marcelo Soto; Thomas Weithöner
  67. Extending Insurance? Funeral Associations in Ethiopia and Tanzania By Tessa Bold; Joachim De Weerdt; Stefan Dercon; Alula Pankhurst
  68. Factors Driving Risk Premia By Mike Kennedy; Torsten Sløk
  69. Channels for Narrowing the US Current Account Deficit and Implications for Other Economies By Anne-Marie Brook; Patrice Ollivaud; Franck Sédillot
  70. The Impact of Exchange Rate Regimes on Real Exchange Rates in South America, 1990-2002 By Anne-Laure Baldi; Nanno Mulder
  71. One Money, One Cycle? Making Monetary Union a Smoother Ride By Christine de la Maisonneuve; Claude Giorno; Peter Hoeller
  72. The Slovak Health Insurance System and The Potential Role for Private Health Insurance: Policy Challenges By Francesca Colombo; Nicole Tapay
  73. Private Health Insurance in France By Thomas C. Buchmueller; Agnes Couffinhal
  74. Private Health Insurance in OECD Countries: The Benefits and Costs for Individuals and Health Systems By Francesca Colombo; Nicole Tapay
  75. Institutional Investor Activism: Does the Portfolio Management Skill Matter? By Carlos F. alves; Victor Mendes
  76. Financial Market Analysis Can Go Mad (in the search for irrational behaviour during the South Sea Bubble) By Gary S. Shea
  77. Asymmetric Risk and International Portfolio Choice By Susan Thorp; George Milunovich
  78. An Analysis of the Profitability, Risk and Growth Indicators of Banks Operating In Malta By Silvio John Camilleri
  79. Market Efficiency and the Euro: The case of the Athens Stock Exchange By Theodore Panagiotidis
  81. The economics of Information Technologies Standards & By Eric Thivant; Laid Bouzidi
  82. Do Stockholders Share Risk More Effectively Than Non- stockholders? By Fatih Guvenen
  83. Trade rules for uncleared markets By Özgür Kýbrýs; Serkan Küçükþenel
  85. Comparatif des finances cantonales et communales / Comparison of Cantonal and Municipal Finances By Nils Soguel; Simon Iogna-Prat; Toni Beutler
  86. Finance, Technology and Inequality in Economic Development By Ryo Horii; Ryoji Ohdoi; Kazuhiro Yamamoto
  87. Trade and Foreign Exchange Liberalization, Investment Climate and FDI in the MENA By Khalid Sekkat; Marie-Ange Veganzones-Varoudakis
  88. Can Mergers in Europe Help Banks Hedge Against Macroeconomic Risk? By Pierre-Guillaume Méon; Laurent Weill
  89. Why do central banks intervene secretly? Preliminary evidence from the Bank of Japan By Michel Beine; Oscar Bernal
  90. Controlling Firms through the Majority Voting Rule By Ariane Chapelle; Ariane Szafarz
  91. Risk Premia in Forward Foreign Exchange Markets: A Comparison of Signal Extraction and Regression Methods By Prasad V. Bidarkota
  92. The Impact of Fat Tails on Equilibrium Rates of Return and Term Premia By Prasad V. Bidarkota; Brice V. Dupoyet
  93. No Predictable Components in G7 Stock Returns By Prasad Bidarkota; Khurshid M. Kiani

  1. By: Michael R. King; Rasmus Fatum
    Abstract: The Bank of Canada is one of very few central banks that has made records of the intraday timing of its intervention operations available to researchers. The authors investigate the effectiveness of sterilized intervention in the Canadian dollar exchange rate market over the period January 1995 to September 1998. They employ an event study methodology and different criteria for success, and use both daily data and high-frequency (intraday) intervention and exchange rate data. The time period covers two distinct intervention regimes, characterized by mechanistic and discretionary intervention, respectively. Furthermore, the authors address the issue of currency comovements by carrying out the analysis using both the readily observable Canadian dollar/U.S. dollar exchange rate and the Canadian dollar/U.S. dollar exchange rate adjusted for general currency co-movements against the U.S. dollar. When they analyze the high-frequency data, the authors find evidence that intervention systematically affects movements in the Canadian dollar/U.S. dollar exchange rate and in the desired direction, along with some evidence that intervention is associated with a reduction of exchange rate volatility. When investigating exchange rate movements around intervention events using daily data, the authors find some evidence supportive of effectiveness. These effects, however, are weakened when adjusting for currency comovements against the U.S. dollar.
    Keywords: Exchange rates; Financial markets
    JEL: E58 F31 G14 G15
    Date: 2005
  2. By: Steffen Huck; Kai A. Konrad; Wieland Müller
    Abstract: The seminal paper by Salant, Switzer and Reynolds (1983) showed that merger in a standard Cournot framework with linear demand and linear costs is not profitable unless a large majority of the firms are involved in the merger. However, many strategic aspects matter for firm competition such as the internal organization of the firm, the time structure of decision making, information aspects of competition, or the imbeddedness of firm competition in a strategic trade competition game between governments. This survey will reveal that the puzzle as in Salant, Switzer and Reynolds (1983) may be resolved without recurring to cost savings of merger. Firms interact with each other, with customers, suppliers, their owners, and with governments in many different ways, and inspection of these types of interaction reveals a multiplicity of reasons why merger can be profitable for the merging firms, even in Cournot markets with linear demand and cost.
    JEL: D43 G34 L11 L13 L22 L41
    Date: 2005
  3. By: Hui Huang; Yi Wang; Yiming Wang; John Whalley; Shunming Zhang
    Abstract: We combine a model of combined inter-spatial and inter-temporal trade between countries recently — used by Huang, Whalley and Zhang (2004) to analyze the merits of trade liberalization in services when goods trade is restricted — with a model of foreign exchange rationing due to Clarete and Whalley (1991) in which there is a fixed exchange rate with a surrender requirement for foreign exchange generated by exports. In this model, when services remain unliberalized there is an optimal trade intervention, even in the small open price-taking economy case. Given monetary policy and an endogenously determined premium value on foreign exchange, an optimal setting of the exchange rate can provide the optimal trade intervention. We suggest this model has relevance to the current situation in China where services remain unliberalized and tariff rates are bound in the WTO. Since there is an optimal exchange rate, a move to a free Renminbi float can be welfare worsening. We use numerical simulation methods to explore the properties of the model, since it has no closed form solution. Our analysis provides an intellectual counter argument to those presently advocating a free Renminbi float for China.
    JEL: F00 F11 F31 F40
    Date: 2005
  4. By: Vesa Kanniainen; Seppo Kari; Jouko Ylä-Liedenpohja
    Abstract: Early-stage uncertainty makes the initial cost of capital greater than the expansion-stage one. Tax effects on enterprise formation, entrepreneurial effort and quality, and on capital costs are derived. For an incorporated enterprise (i) the entrepreneur’s ability threshold rises with the tax rate of the corporate form, (ii) the initial cost of capital due to a dividend tax is above the old view double-tax one, (iii) the start-up investment is not affected by undervaluation, but the discouragement engendered by dividend taxation is compensated by realization-based capital gains tax, (iv) with undervaluation, the expansion-stage cost of capital corresponds to the Johansson-Samuelson tax which is lower than the new view suggests, (v) without undervaluation, the dividend tax boosts expansion investment.
    Keywords: taxation of start-up enterprises
    JEL: H25
    Date: 2005
  5. By: M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
    Abstract: This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry.
    Keywords: Global VAR (GVAR), counterfactual analysis, UK and Sweden entry to Euro
    JEL: C32 C35 E17 F15 F42
    Date: 2005
  6. By: Carsten Hefeker
    Abstract: The enlargement of the European Monetary Union is likely to lead to an increase in uncertainty regarding the transmission of monetary policy for the larger union. Adding new members to the central bank council will in addition imply that the policy reaction of the enlarged council will be uncertain in the initial period. The paper considers the influence of both types of uncertainty on wage-setting behavior in the larger monetary union and its effects on unemployment. In light of these effects, I also derive implications for the adequate structure of the central bank.
    Keywords: monetary policy uncertainty, wage setting, European Central Bank, Euro area, accession countries
    JEL: D72 E58
    Date: 2005
  7. By: Ondrej Schneider; Jan Zápal
    Abstract: The European Union (EU) accepted ten new member states (NMS) in 2004. These countries, mostly former socialist countries, have had to adjust their economic policies to the EU’s standards. Perhaps most difficult has proven to be fiscal policy whereby NMS must comply with the Stability and Growth Pact (SGP) rules. Indeed, six out of the ten NMS have breached the SGP limits and were put in Excessive Deficit Procedure (EDP). While the SGP is being modified, fiscal policy is set to remain on the agenda for all NMS in years to come. In this paper, we analyze fiscal policy in the NMS, focusing primarily on the time period that immediately preceded their EU accession. We analyse the structure and scale of these countries’ fiscal policy and identify main trends in revenues and expenditures of their public budgets. We then explore dynamics of fiscal policy in the new member states and isolate main factors of the dynamics. Namely, we show how much of the consolidations was due to the fiscal authorities’ effort and how much was caused by external factors. We also show that most NMS governments have run a rather inconsistent fiscal policy and have not consolidated their budgets appropriately by postponing politically difficult consolidation measures. However, we also identify a group of countries characterised by strong reform efforts and responsible fiscal policy-making, supported usually by strong economic growth. In this context, room is given to economic, as well as political economy factors.
    Keywords: fiscal policy, new member states, consolidations, Stability and Growth Pact, Excessive Deficit Procedure, growth accounting, probit analysis
    JEL: E60 E62 H20 H60 H87
    Date: 2005
  8. By: Johannes Becker; Clemens Fuest
    Abstract: A widespread objection to the introduction of consumption tax systems claims that this would lead to high tax revenue losses. This paper investigates the revenue effects of a consumption tax reform in Germany. Our results suggest that the revenue losses would be surprisingly low. We find a maximum revenue loss of 1.6 percent of annual GDP. In some years, we even find a tax revenue gain. This implies that the current tax system collects little revenue from taxing the normal return to capital. Based on these results, we calculate a macroeconomic measure of the effective tax rate on capital income.
    Keywords: cash flow tax, tax revenue effects, effective taxation of capital income
    JEL: H21 H25
    Date: 2005
  9. By: Heikki Oksanen
    Abstract: In welfare states, collective saving has declined to a persistently negative level, while reduced fertility and increasing longevity are leading to increasing pension liabilities. Actuarial neutrality across generations is presented as a benchmark for designing pension reforms to meet the challenges of population ageing. It is shown that this condition can be respected by a wide range of pension reforms, with very different consequences for public finance target setting. The rules for public pensions in national accounting are also discussed. Finally, the combined effects of population ageing and public pension rules on national saving are discussed.
    Keywords: pensions, actuarial neutrality, public debt, national accounts
    JEL: H10 H50 H60
    Date: 2005
  10. By: Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
    Abstract: This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of the variant of the target zone model proposed by Bartolini and Prati (1999) and Bessec (2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies.
    Keywords: target zone, ERM, non-linearity, SETAR
    JEL: F31 G15 O10
    Date: 2005
  11. By: Yin-Wong Cheung; Kon S. Lai
    Abstract: This study investigates whether exchange rate flexibility aids real exchange rate adjustment based on intra-period data on dual exchange rates from developing countries. Specifically, it analyzes whether the flexible parallel market rate produces faster or slower real exchange rate adjustment than the much less flexible official rate does. Half-life estimates of adjustment speeds are obtained using fractional time series analysis. We find no systematic evidence that greater exchange rate flexibility tends to produce faster or slower real exchange rate adjustment, albeit there is substantial heterogeneity in speed estimates across countries. With officially pegged exchange rates, developing countries often use parallel exchange markets as a back-door channel to facilitate real exchange rate adjustment, but the empirical evidence suggests that these parallel markets in most cases fail to help promote real rate adjustment.
    Keywords: real exchange rate, fractional time series, half life
    JEL: C22 F31
    Date: 2005
  12. By: Schabert, Andreas
    Abstract: In this paper, we analyze the relation between interest rate targets and money supply in a (bubble-free) rational expectation equilibrium of a standard cash-in-advance model. We examine contingent monetary injections aimed to implement interest rate sequences that satisfy interest rate target rules. An interest rate target with a positive inflation feedback in general corresponds to money growth rates rising with inflation. When prices are not completely flexible, this implies that a non-destabilizing money supply cannot implement a forward-looking and active interest rate rule. This principle also applies for an alternative model version with an interest elastic money demand. The implementation of a Taylor rule then requires a money supply that leads to explosive or oscillatory equilibrium sequences. In contrast, an inertial interest rate target can be implemented by a non-destabilizing money supply, even if the inflation feedback exceeds one, which is often found in interest rate rule regressions.
    Keywords: contingent money supply; interest rate inertia; interest rate rules; macroeconomic stability; policy equivalence
    JEL: E32 E41 E52
    Date: 2005–06
  13. By: Dell'Ariccia, Giovanni; Marquez, Robert
    Abstract: This paper examines how the informational structure of loan markets interacts with banks’ strategic behaviour in determining lending standards, lending volumes, and the aggregate allocation of credit. In a setting where banks obtain private information about their clients’ creditworthiness, we show that banks may loosen lending standards when information asymmetries vis à vis other banks are low. In equilibrium this reduction in standards leads to a deterioration of banks’ portfolios, a reduction in their profits, and an aggregate credit expansion. Furthermore, we show that although these low standards may increase aggregate surplus, they also increase the risk of financial instability. We therefore provide an explanation for the sequence of financial liberalization, lending booms, and banking crises that have occurred in many emerging markets.
    Keywords: asymmetric information; banking competition; lending standards
    JEL: D82 G21
    Date: 2005–06
  14. By: Canova, Fabio; Favero, Carlo A
    Abstract: We examine monetary policy in the euro area from both theoretical and empirical perspectives. We discuss what theory tells us the strategy of Central banks should be and contrasts it with the one employed by the ECB. We review accomplishments (and failures) of monetary policy in the euro area and suggest changes that would increase the correlation between words and actions; streamline the understanding that markets have of the policy process; and anchor expectation formation more strongly. We examine the transmission of monetary policy shocks in the euro area and in some potential member countries and try to infer the likely effects occurring when Turkey joins the EU first and the euro area later. Much of the analysis here warns against having too high expectations of the economic gains that membership to the EU and euro club will produce.
    Keywords: communication; EU newcomers; pillars; transmission
    JEL: C11 E12 E32 E62
    Date: 2005–06
  15. By: Bauer, Thomas; Sinning, Mathias
    Abstract: This paper examines the relative savings position of migrant households in West Germany, paying particular attention to differences between temporary and permanent migrants. Utilizing household level data from the German Socio-Economic Panel (GSOEP), our findings reveal significant differences in the savings rates between foreign-born and German-born individuals. These differences disappear, however, for temporary migrants, if their remittances are taken into account. Fixed effects estimations of the determinants of immigrants’ savings rates reveal that intended return migration does not only affect remittances, but also the savings rate of migrant households in the host country. The results of a decomposition analysis indicate that differences in the savings rate between Germans and foreigners can mainly be attributed to differences in observable characteristics. We do not find strong evidence for an adjustment of the savings rate between immigrants and natives over time, indicating deficits in the long-term integration of permanent migrants in Germany.
    Keywords: migration; savings
    JEL: C24 E21 F22
    Date: 2005–06
  16. By: Ju, Jiandong; Wei, Shang-Jin
    Abstract: This paper develops a theory of international trade in which financial development and factor endowment jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole to the Heckscher-Ohlin-Samuelson (HOS) framework. A key result is what we call the law of a wooden barrel: if the external finance constraint is binding, then augmenting capital stock would have no effect on output and returns. On the other hand, if the external finance constraint is not binding, the standard HOS predictions are resuscitated.
    Keywords: factor endowment; financial development; HOS model; wooden barrel
    JEL: F11 G20
    Date: 2005–06
  17. By: Favero, Carlo A
    Abstract: Consumption is striking back. Some recent evidence indicates that the well-known asset pricing puzzles generated by the difficulties of matching fluctuations in asset prices with high frequency fluctuations in consumption might be solved by considering consumption in the long-run. A first strand of the literature concentrates on multiperiod differences in log consumption, a second concentrates on the cointegrating relation for consumption. Interestingly, only the (multiperiod) Euler Equation for the consumer optimization problem is considered by the first strand of the literature, while the cointegration-based literature concentrates exclusively on the (linearized) intertemporal budget constraint. In this paper, we show that using the first order condition in the linearized budget constraint to derive an explicit long-run consumption function delivers an even more striking strike back.
    Keywords: cointegrating consumption function; elasticity of intertemporal substitution; long-run stock market returns
    JEL: E20 E44 G12
    Date: 2005–06
  18. By: Sorensen, Bent E; Wu, Yi-Tsung; Yosha, Oved; Zhu, Yu
    Abstract: We show that international home bias in bond and equity holdings declined during the late 1990s at the same time as international risk sharing increased. Also, countries with less home bias, on average, tended to obtain more risk sharing in international markets. Using panel data estimations, we demonstrate that less home bias is associated with more international risk sharing when both cross-sectional and time-series dimensions are taken into account. This indicates that lack of risk sharing and international home bias are closely related empirical phenomena.
    Keywords: consumption smoothing; income smoothing; international portfolio diversification
    JEL: F36
    Date: 2005–06
  19. By: Hurd, Matthew; Salmon, Mark; Schleicher, Christoph
    Abstract: We model the joint risk neutral distribution of the euro-sterling and the dollar-sterling exchange rates using option-implied marginal distributions that are connected via a copula function that satisfies the triangular no-arbitrage condition. We then derive a univariate distribution for a simplified sterling effective exchange rate index (ERI). Our results indicate that standard parametric copula functions, such as the commonly used Normal and Frank copulas, fail to capture the degree of asymmetry observed in the data. We overcome this problem by using a non-parametric dependence function in the form of a Bernstein copula, which is shown to produce a very close fit. We further give an example of how our approach can be used to price currency index options.
    Keywords: copulae; exchange rates; option implied pdfs; triangular arbitrage
    JEL: F31 G12
    Date: 2005–06
  20. By: Pavlova, Anna; Rigobon, Roberto
    Abstract: This paper examines the co-movement among stock market prices and exchange rates within a three-country Centre-Periphery dynamic equilibrium model in which agents in the Centre country face portfolio constraints. In our model, international transmission occurs through the terms of trade, through the common discount factor for cash flows, and, finally, through an additional channel reflecting the tightness of the portfolio constraints. Portfolio constraints are shown to generate endogenous wealth transfers to or from the Periphery countries. These implicit transfers are responsible for creating contagion among the terms of trade of the Periphery countries, as well as their stock market prices. Under a portfolio constraint limiting investment of the Centre country in the stock markets of the Periphery, stock prices also exhibit a flight to quality: a negative shock to one of the Periphery countries depresses stock prices throughout the Periphery, while boosting the stock market in the Centre.
    Keywords: asset pricing; contagion; international finance; portfolio constraints; terms of trade
    JEL: F31 F36 G12 G15
    Date: 2005–07
  21. By: Boone, Jan; Goeree, Jacob K.
    Abstract: This paper explores the use of auctions for privatizing public assets. In our model, a single ‘insider’ bidder (e.g. incumbent management of a government-owned firm) possesses information about the asset’s risky value. In addition, bidders are privately informed about their costs of exploiting the asset. Due to the insider’s presence, uninformed bidders face a strong winner’s curse in standard auctions with devastating consequences for revenues. We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation. The optimal mechanism can be implemented via a simple two-stage ‘qualifying auction.’ In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price.
    Keywords: information advantage; privatization; qualifying auction; winner's curse
    JEL: D44 D82 L33
    Date: 2005–07
  22. By: Li, Fei; Ueda, Masako
    Abstract: We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory.
    Keywords: Principal-Agent problem; sorting
    JEL: G39
    Date: 2005–07
  23. By: Laeven, Luc; Levine, Ross
    Abstract: This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates that engage in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.
    Keywords: agency costs; banking; corporate diversification; economies of scope
    JEL: G20 G30 L20
    Date: 2005–07
  24. By: Devriese, Johan; Mitchell, Janet
    Abstract: This paper studies the potential impact on securities settlement systems (SSSs) of a major market disruption, caused by the default of the largest player. A multi-period, multi-security model with intraday credit is used to simulate direct and second round settlement failures triggered by the default, as well as the dynamics of settlement failures, arising from a lag in settlement relative to the date of trades. The effects of the defaulter's net trade position, the numbers of securities and participants in the market, and participants' trading behaviour are also analysed. We show that in SSSs – contrary to payment systems – large and persistent settlement failures are possible even when ample liquidity is provided. Central bank liquidity support to SSSs thus cannot eliminate settlement failures due to major market disruptions. This is due to the fact that securities transactions involve a cash leg and a securities leg, and liquidity can affect only the cash side of a transaction. Whereas a broad program of securities borrowing and lending might help, it is precisely during periods of market disruption that participants will be least willing to lend securities. Interestingly, settlement failures continue to occur beyond the period corresponding to the lag in settlement. This is due to the fact that, upon observation of a default, market participants must form expectations about the impact of the default, and these expectations affect current trading behaviour. If, ex post, fewer of the previous trades settle than expected, new settlement failures will occur. This result has interesting implications for financial stability. On the one hand, conservative reactions by market participants to a default - for example by limiting the volume of trades – can result in a more rapid return of the settlement system to a normal level of efficiency. On the other hand, limitation of trading by market participants can reduce market liquidity, which may have a negative impact on financial stability.
    Keywords: contagion; liquidity risk; securities clearing and settlement; systemic risk
    JEL: C60 D80 G20
    Date: 2005–07
  25. By: Flandreau, Marc; Jobst, Clemens
    Abstract: This paper provides a new methodology to map international monetary relations in the 19th century. We identify an index of international liquidity and, applying techniques borrowed from formal network analysis (in particular, blockmodelling) we produce a formal ranking of currencies according to their degree of international circulation. The resulting indices are powerful tools to study the logic of the emergence of international currencies, as well as useful controls for cross-section regressions.
    Keywords: international monetary system; key currency; networks; pound sterling
    JEL: F31 N32
    Date: 2005–07
  26. By: Asici, Ahmet Atil; Ivanova, Nadezhda; Wyplosz, Charles
    Abstract: This paper improves upon the recently developed literature on exits from fixed exchange rate regimes in three ways: 1) It allows for two indicators for post-exit macroeconomic conditions, the change in the exchange rate and the change in the output gap; 2) it tests whether the distinction between orderly and disorderly exit is statistically justified, and concludes that it is not; 3) it deals with the sample selection problem. The results, subject to extensive sensitivity analysis, suggest that post-exits are better when de-pegging occur in good macroeconomic conditions – an unnatural move for most policy-makers – when world interest rates decline and in the presence of capital controls. Importantly, ‘good’ macroeconomic policies do not seem to help with post-exit performance.
    Keywords: exchange rate regimes; macroeconomic policy
    JEL: C14 C34 F30 F31 F41
    Date: 2005–07
  27. By: DeMiguel, Victor; Garlappi, Lorenzo; Uppal, Raman
    Abstract: In this paper, we compare the out-of-sample performance of the rule allocating 1/N to each of the N available assets to several static and dynamic models of optimal asset-allocation for ten datasets. We devote particular attention to models the literature has proposed to account for estimation and model error. We find that the 1/N asset-allocation rule typically has a higher out-of-sample Sharpe ratio, a higher certainty-equivalent return, and a lower turnover than optimal asset allocation policies. The intuition for the poor performance of the policies from the optimizing models is that the gain from optimal diversification relative to naïve diversification under the 1/N rule is typically smaller than the loss arising from having to use as inputs for the optimizing models parameters that are estimated with error rather than known precisely. Simulations show that the performance of optimal strategies relative to the 1/N rule improves with the length of the estimation window, which reduces estimation error. For instance, for the case where wealth can be allocated across four risky assets with an average cross-sectional annual idiosyncratic volatility of 20%, it takes an estimation window of 50 years in order for the classical mean-variance policy implemented using maximum-likelihood estimates of the moments to outperform 1/N. But if the average idiosyncratic volatility drops to 10%, the length of the required estimation window increases to 500 years; and, when the number of assets increases to 100 while average idiosyncratic volatility is 20%, the length of the required estimation window is more than 1,000 years.
    Keywords: asset allocation; investment management; portfolio choice
    JEL: G11
    Date: 2005–07
  28. By: Cerny, Ales; Miles, David K; Schmidt, Lubomir
    Abstract: Using a calibrated OLG model with several sources of uncertainty we find that the impact of ageing and of reform of social security upon the demand for housing and the level of owner occupation is substantial. The overall structure of household asset holdings – in particular the split between real and financial assets – is sensitive to demographics and to the generosity of state run, pay-as-you-go pensions. The interaction between social security reform and housing market conditions is significant and suggests that any changes in pension rules will have substantial knock on effects on the housing market.
    Keywords: housing; OLG model; pension reform; portfolio allocation
    JEL: C61 G11 H31 H55
    Date: 2005–07
  29. By: Schmitz, Patrick W.
    Abstract: This paper discusses the optimal organization of sequential agency problems with contractible control actions under limited liability. In each of two stages, a risk-neutral agent can choose an unobservable effort level. A success in the first stage makes effort in the second stage more effective. Should one agent be in control in both stages (integration), or should different agents be in charge of the two actions (separation)? Both modes of organization can be explained on the basis of incentive considerations due to moral hazard, without resorting to commitment problems or ad hoc restrictions on the class of feasible contracts.
    Keywords: contract theory; hidden action; limited liability; moral hazard
    JEL: D23 L23 O32
    Date: 2005–07
  30. By: Garlappi, Lorenzo; Uppal, Raman; Wang, Tan
    Abstract: In this paper, we show how an investor can incorporate uncertainty about expected returns when choosing a mean-variance optimal portfolio. In contrast to the Bayesian approach to estimation error, where there is only a single prior and the investor is neutral to uncertainty, we consider the case where the investor has multiple priors and is averse to uncertainty. We characterize the multiple priors with a confidence interval around the estimated value of expected returns and we model aversion to uncertainty via a minimization over the set of priors. The multi-prior model has several attractive features: One, just like the Bayesian model, it is firmly grounded in decision theory. Two, it is flexible enough to allow for different degrees of uncertainty about expected returns for different subsets of assets, and also about the underlying asset-pricing model generating returns. Three, for several formulations of the multi-prior model we obtain closed-form expressions for the optimal portfolio, and in one special case we prove that the portfolio from the multi-prior model is equivalent to a ‘shrinkage’ portfolio based on the mean-variance and minimum-variance portfolios, which allows for a transparent comparison with Bayesian portfolios. Finally, we illustrate how to implement the multi-prior model for a fund manager allocating wealth across eight international equity indices; our empirical analysis suggests that allowing for parameter and model uncertainty reduces the fluctuation of portfolio weights over time and improves the out-of sample performance relative to the mean-variance and Bayesian models.
    Keywords: ambiguity; asset allocation; estimation error; portfolio choice; robustness; uncertainty
    JEL: D81 G11
    Date: 2005–07
  31. By: Altissimo, Filippo; Benigno, Pierpaolo; Rodriguez Palenzuela, Diego
    Abstract: This paper analyses the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU’s harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analysed. Our model departs in several respects from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level.
    Keywords: currency area; PPP; Real Exchange Rate
    JEL: E31 F41
    Date: 2005–07
  32. By: Huang, Yongfu; Temple, Jonathan
    Abstract: Several recent papers have argued that trade and financial development may be linked, either for political economy reasons, or because foreign competition and exposure to shocks lead to changes in the demand for external finance. In this paper we use the cross-country and time-series variation in openness to study the relationship between trade and finance in more detail. Our results suggest that increases in goods market openness are typically followed by sustained increases in financial depth.
    Keywords: financial development; openness; trade
    JEL: F13 O16
    Date: 2005–07
  33. By: Giannetti, Mariassunta; Ongena, Steven
    Abstract: An extensive empirical literature has documented the positive growth effects of equity market liberalization. However, this line of research ignores the impact of financial integration on a category of firms crucial for economic development, i.e. the small entrepreneurial firms. This paper aims to fill this void. We employ a large panel containing almost 60,000 firm–year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and leverage, but the effect is dampened for small firms. We also find that the most connected businesses benefit least from foreign bank entry. This finding suggests that foreign banks can help mitigate connected lending problems and improve capital allocation.
    Keywords: competition; emerging markets; foreign bank lending; lending relationships
    JEL: G21 L11 L14
    Date: 2005–07
  34. By: Acharya, Viral V; Yorulmazer, Tanju
    Abstract: As the number of bank failures increases, the set of assets available for acquisition by the surviving banks enlarges but the total amount of available liquidity within the surviving banks falls. This results in ‘cash-in-the-market’ pricing for liquidation of banking assets. At a sufficiently large number of bank failures, and in turn, at a sufficiently low level of asset prices, there are too many banks to liquidate and inefficient users of assets who are liquidity-endowed may end up owning the liquidated assets. In order to avoid this allocation inefficiency, it may be ex post optimal for the regulator to bail out some failed banks. Ex ante, this gives banks an incentive to herd by investing in correlated assets, thereby making aggregate banking crises more likely. These effects are robust to allowing the surviving banks to issue equity and allowing the regulator to price-discriminate against outsiders in the market for bank sales.
    Keywords: bank regulation; banking crises; herding; systemic risk; time inconsistency; too many to fail
    JEL: D62 E58 G21 G28 G38
    Date: 2005–07
  35. By: Gersbach, Hans; Hahn, Volker
    Abstract: We examine whether the central bank council of a monetary union should publish its voting records when members are appointed by national politicians. We show that the publication of voting records lowers overall welfare if the private benefits of holding office are sufficiently low. High private benefits of central bankers lower overall welfare under opacity, as they induce European central bankers to care more about being re-appointed than about beneficial policy outcomes. We show that opacity and low private benefits jointly guarantee the optimal welfare level. Moreover, we suggest that non-renewable terms for national central bankers and delegating the appointment of all council members to a European agency would be desirable.
    Keywords: central banks; transparency voting
    JEL: D70 E58
    Date: 2005–07
  36. By: Kraay, Aart; Ventura, Jaume
    Abstract: Over the past decade the US has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fuelled by foreign investment in a booming US stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing US government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. We challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the ‘dot-com’ bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the ‘Bush’ deficits). The 'benevolent' view holds that a change in investor sentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The ‘cynical’ view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. We discuss the implications of each of these views for the future evolution of the US economy and, in particular, its net foreign asset position.
    Keywords: budget deficits; current account; net foreign assets; stock market bubbles
    JEL: F21 F32 F36
    Date: 2005–07
  37. By: Steven A. Sass (Center for Retirement Research at Boston College)
    Abstract: The British retirement income system is perhaps more dependent on private programs than any in the industrialized world. The government provides a modest and uniform "Basic Pension" to career workers, and now to carers and the disabled. But as benefits are indexed to prices, not wages, the Basic Pension is projected to replace a steadily declining share of earnings. The government also has a second tier earnings-related plan. But as most workers "contract out," they will rely on employer and/or individual "personal pensions" to maintain pre-retirement living standards. Reform efforts had three objectives: 1) limit public expenditures on the elderly; 2) enlarge and strengthen private plans; and 3) assure an adequate retirement income for all. The reforms succeeded in controlling expenditures. Public programs for the elderly are projected to cost just 5 to 6 percent of GDP for the foreseeable future. Private plans, however, have neither been enlarged nor strengthened. Damaging scandals hit both employer plans and personal pensions in the 1990s, and the response to those scandals has not been especially effective. Employers of late have also been exiting defined benefit pension plans at a rapid rate. The risks, low level of contributions, and generally inadequate financial management of personal pensions also raise serious questions about their ability to maintain living standards in retirement. Initiatives to assure an adequate retirement income transformed both the government's earnings related pension program and means-tested assistance for the elderly. The government transformed its second tier pension into essentially a flat benefit program for lower wage workers that will cushion the erosion of Basic Pension allowances. In its means-tested program, the government also replaced its £-for-£ reduction in benefits with a 40 pence reduction for income above the threshold amount. This change will affect incentives to work and save in different ways for different groups. For those individuals currently receiving means-tested allowances, the less draconian reduction in benefits will improve work and saving incentives. However, expanding the phase-out range for means-tested benefits will make the great majority of elderly British households eligible for such assistance. This newly-eligible group will face a disincentive to work and save, because each additional £ of income will reduce their benefits by 40 pence. Going forward, Britain's retirement income system will increasingly rely on individual accounts and means-tested assistance. The individual accounts are not well funded and carry significant risk. The disincentive to work or save created by the expanded means-tested program across a broad range of households further clouds the system's prospects. As a result, observers generally expect an increase in public expenditures on the elderly and further reforms to the system.
    Date: 2004–08–13
  38. By: Ralf Brueggemann; Helmut Luetkepohl
    Abstract: Previous euro area money demand studies have used aggregated national time series data from the countries participating in the European Monetary Union (EMU). However, aggregation may be problematic because macroeconomic convergence processes have taken place in the countries of interest. Therefore, in this study, quarterly German data until 1998 are combined with data from the euro area from 1999 until 2002 and these series are used for getting a small vector error correction model for the monetary sector of the EMU. A stable long-run money demand relation is found for the full sample period. Moreover, impulse responses do not change much when the sample period is extended by the EMU period provided the break in the extended data series is captured by a simple dummy variable.
    JEL: C32
    Date: 2004
  39. By: Alexis Anagnostopoulos
    Abstract: This paper examines consumption and savings dynamics in a standard model of incomplete markets. Existence of equilibrium requires the imposition of exogenous debt limits but these are often ignored because of the computational difficulties that arise in models with occasionally binding constraints. I claim that borrowing constraints have a significant qualitative and quantitative effect on equilibrium allocations even if they rarely bind. Contrary to standard results in the literature, debt exhibits mean reversion, consumption responds strongly to idiosyncratic income shocks and interest rates respond to both aggregate and idiosyncratic innovations in income. The implication is that market incompleteness can generate much lower consumption correlations than was previously thought.
    Keywords: Incomplete markets, consumption/savings dynamics, non-linear dynamic methods
    JEL: C63 E21 E32
    Date: 2004
  40. By: Alexis Anagnostopoulos
    Abstract: This paper investigates frictions in the international financial and goods markets and assesses the welfare implications these frictions have. It is found that the reduction in goods trading, which results from the presence of trade costs, significantly reduces consumer welfare compared to the first best where trade is free and costless. By contrast, a complete prohibition of international financial asset trade has a small effect on welfare. This result has important implications for the policies on debt repayment and sovereign default. It implies that an exclusion from international financial markets might not be a sufficient threat to ensure sovereign debt repayment. Instead, a much more potent instrument of enforcement might be a threat of trade sanctions such as tariffs or even a trade embargo.
    Keywords: welfare, financial autarky, trade sanctions, business cycles
    JEL: F41 F34
    Date: 2004
  41. By: Marcelo Resende
    Abstract: This paper further investigated wave behaviours for mergers and acquisitions-M&A in the U.K. during the 1969Q1/2004Q1 period by means of Markov-Switching models. Previous analysis had focused on traditional models that incorporate the potentially limiting assumption of constant transition probabilities across regimes. The consideration of more general models with time-varying transition probabilities across regimes along the lines of Diebold et al (1994) provide a useful route for assessing to which extent M&A waves are driven by economic variables usually considered in the related literature. The empirical implementation considered lagged conditioning variables referring to real output growth, real growth in money supply and real stock market returns. The evidence indicated that one should reject the constant transition probability model in favour of the time-varying transition probability model and therefore the usual aggregate variables considered in the empirical literature on M&A appear indeed to play some role in determining the wave behaviour of M&A in the U.K., though the effects are asymmetric across the different regimes.
    JEL: C32 L12
    Date: 2005
  42. By: Ralf Brueggemann; Helmut Luetkepohl
    Abstract: A system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.
    Keywords: Unit Roots, Multiple Frequency I(1) Process, Nonrational Transfer Function, Cointegration, VARMA Process, Information Criteria
    JEL: C32
    Date: 2005
  43. By: Martin Hoesli; Elion Jani; André Bender
    Abstract: We use the Adjusted Present Value (APV) method with Monte Carlo simulations for real estate valuation purposes. Monte Carlo simulations make it possible to incorporate the uncertainty of valuation parameters, in particular of future cash flows, of discount rates and of terminal values. We use empirical data to extract information about the probability distributions of the various parameters and suggest a simple model to compute the discount rate. We forecast the term structure of interest rates using a Cox et al. (1985) model, and then add a premium that is related to both the real estate market and selected property-specific characteristics. Our empirical results suggest that the central values of our simulations are in most cases slightly less than the hedonic values. The confidence intervals are found to be most sensitive to the long-term equilibrium interest rate being used and to the expected growth rate of the terminal value.
    Keywords: Real estate valuation; Monte Carlo simulations; Adjusted Present Value (APV)
    JEL: R32 G12 G23
    Date: 2005–06
  44. By: Martin Hoesli; Jon Lekander
    Abstract: The allocation to real estate by institutional investors has increased in recent years and as a result the gap between suggested and actual allocations has narrowed. The increased inflow of capital to the real estate market is suggested to be a function of two factors: An increased focus on absolute return target investments amongst institutional investors and an increased target allocation to real estate. We argue that the increased target allocation is made possible mainly by the development of new investment vehicles, in particular of private real estate funds, but also of the growing integration of economic regions and of other factors such as the development of investment benchmarks. The flows needed for the actual allocation by European institutional investors to match the suggested allocation constitute at least 31% of the real estate equity universe held by owner occupiers. We estimate that seven years would be needed to reach the target allocation, but it is unlikely that sufficient investment opportunities will arise unless the willingness of owner occupiers to outsource their real estate assets increases.
    Keywords: real estate allocation; market transparency; private real estate; flows
    JEL: R33 G23
    Date: 2005–06
  45. By: Philippe Gaud; Martin HOesli; André Bender
    Abstract: Using a sample of over 5,000 European firms, we document the driving factors of capital structure policies in Europe. Controlling for dynamic patterns and national environments, we show how these policies cannot be reduced to a simple trade-off or pecking order model. Both corporate governance and market timing impact upon capital structure. European firms limit themselves to an upper barrier to leverage, but not to a lower one. Debt constrains managers to payout cash, and equity may become cheap during windows of opportunity. Internal financing, when available, is preferred over external financing, but companies limit future excess of slack as it constitutes a potential source of conflict.
    Keywords: dynamic capital structure; debt-equity choice; trade-off; agency; pecking order
    JEL: G32
    Date: 2005–06
  46. By: Nicoletta Ferro (Fondazione Eni Enrico Mattei)
    Abstract: Internet resources, extended media coverage and international organizations’ reports recently witness the increasing interest of western banks in new models of finance, particularly Islamic finance and microfinance. This new trend is not only channeled through the frame of corporate social responsibilities programs and policies or limited to ad hoc financial institutions (like microcredit banks or Islamic banks) as it is entering the financial offer of mainstream banks. The paper primarily outlines that many elements of microfinance could be considered consistent with the broader goals of Islamic banking. Apart from pure economic considerations which are not the aim of this analysis, the paper supports the thesis that by addressing new markets and embracing unconventional financial proposals, the global banking sector can contribute to the quest for diversity-oriented policies posed by an increasingly globalised scenario. The consequences this new trend is likely to have on inner banking structures are still unknown and are likely to interest the issue of wealth distribution. Moreover, from a more general point of view, by showing that even different moral ethos deep rooted in different cultural paradigms can be as profitable and available as western capitalistic ones, the banking sector can play a potential role in disseminating awareness on specific cultural and religious issues, resulting in increased integration of Muslim communities and low income investors in the long run and supporting commercial banks the close relation between economy and culture.
    Keywords: Microfinance, Islamic finance, Diversity, Multiculturalism, Global banking
    JEL: G21 I31 Z12 Z13 G24
    Date: 2005–06
  47. By: John Krainer; Mark Spiegel; Nobuyoshi Yamori
    Abstract: We develop an overlapping generations model of the real estate market in which search frictions and a debt overhang combine to generate price persistence and illiquidity. Illiquidity stems from heterogeneity in agent real estate valuations. The variance of agent valuations determines how quickly prices adjust following a shock to fundamentals. We examine the predictions of the model by studying price depreciation in Japanese land values subsequent to the 1990 stock market crash. Commercial land values fell much more quickly than residential land values. As we would posit that the variance of buyer valuations would be greater for residential real estate than for commercial real estate, this model matches the Japanese experience.
    Keywords: Real property ; Prices ; Japan
    Date: 2005
  48. By: Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
    Abstract: From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models.
    Keywords: Bonds ; Macroeconomics ; Finance ; Econometric models
    Date: 2005
  49. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper analyzes the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth.
    Keywords: Banks and banking, International ; Competition ; Bank supervision
    Date: 2005
  50. By: Michelle L. Barnes; Jose Lopez
    Abstract: The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the CAPM model and compare them using econometric and materiality criteria. Our results suggests that the benchmark CAPM model applied to a large peer group of competing firms provides a COE estimate that is not clearly improved upon by using a narrow peer group, introducing additional factors into the model, or taking account of additional firm-level data, such as leverage and line-of-business concentration. Thus, a standard implementation of the benchmark CAPM model provides a reasonable COE estimate, which is needed to impute costs and set prices for the Reserve Banks’ payments business.
    Keywords: Financial services industry ; Federal Reserve banks - Service charges ; Federal Reserve banks - Costs
    Date: 2005
  51. By: Michele Cavallo; Kate Kisselev; Fabrizio Perri; Nouriel Roubini
    Abstract: Currency crises are usually associated with large nominal and real depreciations. In some countries depreciations are perceived to be very costly (“fear of floating”). In this paper we try to understand the reasons behind this fear. We first look at episodes of currency crises in the 1990s and establish that countries entering a crisis with high levels of foreign debt tend to experience large real exchange rate overshooting (devaluation in excess of the long-run equilibrium level) and large output contractions. We then develop a model of a small open economy that helps to explain this evidence. The key element of the model is the presence of a margin constraint on the domestic country. Real devaluations, by reducing the value of domestic assets relative to international liabilities, make countries with high foreign debt more likely to hit the constraint. When countries hit the constraint they are forced to sell domestic assets, and this causes a further devaluation of the currency (overshooting) and a reduction of their stock prices (overreaction). This fire sale can have a significant negative wealth effect. The model highlights a key tradeoff when considering fixed versus flexible exchange rate regimes; a fixed exchange regime can, by avoiding exchange rate overshooting, mitigate the negative wealth effect but at the cost of additional distortions and output drops in the short run. There are plausible parameter values under which fixed exchange rates dominate flexible exchange rates from a welfare perspective.
    Keywords: Foreign exchange rates ; Financial crises
    Date: 2005
  52. By: Duffy, Michael
    Abstract: Recent increases in Iowa farmland values and the turbulence in the stock market have resurrected a perennial question. Which is a better investment—the stock market or farmland?
    Date: 2005–07–25
  53. By: Luca Bindelli
    Abstract: Woodford (1999 and 2003) has raised the theoretical possibility that in a standard, forward looking sticky price model, an independent channel of inertia might arise as a result of policy behavior. We analyze this assertion empirically, and estimate a standard model, in which the monetary authority is assumed to commit to an optimal rule. We contribute to the existing literature by identifying the purely policy induced persistence present in the model. We also analyze the role of the structural parameters reflecting policy preferences and price flexibility in altering the policy induced, as well as the overall persistence properties of the model. We find that such a model is able to replicate most of the data's moments. In constrast to previous empirical literature, lagged terms in both modelled Phillips and IS curves are found to be either insignificant or very small. Commitment policy alone can explain a substantial part of output persistence. While the pricing mechanism at the heart of this model helps transfer output persistence into inflation persistence, commitment policy manages to undo this link by undershooting the inflation target following a positive 'cost push' shock so that inflation persistence is slightly reduced compared to the discretionary policy case.
    Keywords: persistence; optimal monetary policy; supply shock; Kalman filter
    JEL: E52 E58
    Date: 2005–05
  54. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: In a liquidity trap the nominal interest rate hits its zero floor. Hence, to reduce the real interest rate, and affect an economic recovery, inflationary expectations must increase. If the economy turns out not to be liquidity trapped, the Treasury has an incentive to renege on its promise of high inflation because inflation is costly. Hence, under discretion, a rational private sector keeps its inflation expectations low and the real interest rate remains too high. We suggest an institutional solution that has two main components. First, an inflation target given to an independent Central Bank who has sole control over monetary policy. This provides a commitment to the ‘necessary’ inflation level when the economy is not in a liquidity trap. Second, the Treasury, who retains control of fiscal policy, is given something like a ‘Taylor rule’, which penalizes deviations of output from an output target and inflation from the inflation target. This ensures that fiscal policy is ‘appropriately’ expansionary in a liquidity trap. Overall, this type of delegation keeps inflationary expectations ‘suffi- ciently’ high and achieves the optimal mix of monetary and fiscal policy. We prove that this arrangement achieves the optimal rational expectations (precommitment) solution. It is tempting to conclude that the huge welfare losses associated with the Japanese experience might have been mitigated by the institutional setup suggested here.
    Keywords: liquidity trap; monetary-fiscal coordination; optimal inflation and output targets; the Japanese experience
    JEL: E63 E52 E58 E61
    Date: 2005–07
  55. By: Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
    Abstract: Which commercial bank supervisory policies ease or intensify the degree to which bank corruption is an obstacle to firms raising external finance? Based on new data from more than 2,500 firms across 37 countries, this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms’ financing obstacles. We find that the traditional approach to bank supervision, which involves empowering official supervisory agencies to directly monitor, discipline, and influence banks, does not improve the integrity of bank lending. Rather, we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance. In extensions, we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions.
    JEL: G3 G28 L51 O16
    Date: 2005–08
  56. By: Luc Laeven; Ross Levine
    Abstract: This paper investigates whether the diversity of activities conducted by financial institutions influences their market valuations. We find that there is a diversification discount: The market values financial conglomerates that engage in multiple activities, e.g., lending and non-lending financial services, lower than if those financial conglomerates were broken into financial intermediaries that specialize in the individual activities. While difficult to identify a single causal factor, the results are consistent with theories that stress intensified agency problems in financial conglomerates that engage in multiple activities and indicate that economies of scope are not sufficiently large to produce a diversification premium.
    JEL: G2 G3 L2
    Date: 2005–08
  57. By: Thorsten Beck; Asli Demirgüç-Kunt; Ross Levine
    Abstract: Public policy debates and theoretical disputes motivate this paper’s examination of (i) the relationship between bank concentration and banking system fragility and (ii) the mechanisms underlying this relationship. We find no support for the view that concentration increases the fragility of banks. Rather, banking system concentration is associated with a lower probability that the country suffers a systemic banking crisis. In terms of policies, we find that (i) regulations and institutions that facilitate competition in banking are associated with less not more -- banking system fragility and (ii) including these policy indicators does not change the results on concentration. This suggests that concentration is a proxy for something else besides the competitive environment. Also, we do not find that official capital regulations, reserve requirements, or official prudential regulations lower crises probabilities. Finally, we present suggestive evidence that concentrated banking systems tend to have larger, better-diversified banks, which may help account for the positive link between concentration and stability.
    JEL: G21 G28 L16
    Date: 2005–08
  58. By: Leonid Kogan; Dmitry Livdan; Amir Yaron
    Abstract: We document a new stylized fact regarding the term-structure of futures volatility. We show that the relation between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a “V-shape”'. This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying supply-elasticity. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints affect firms' investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the supply-elasticity of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply-elasticity results in time-varying volatility of futures prices. Calibrating this model, we show it is quantitatively consistent with the aforementioned “V-shape” relation between the volatility of futures prices and the slope of the term-structure.
    JEL: G12 G13
    Date: 2005–08
  59. By: Menzie Chinn; Jeffrey Frankel
    Abstract: Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? Unlike ten years ago, there now exists a credible competitor: the euro. This paper econometrically estimates determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant home financial center (as measured by the turnover in its foreign exchange market). We have not found that net international debt position is an important determinant. Network externality theories would predict a tipping phenomenon. Indeed we find that the relationship between currency shares and their determinants is nonlinear (which we try to capture with a logistic function, or else with a dummy “leader” variable for the largest country). But changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The advent of the euro interrupts the continuity of the historical data set. So we estimate parameters on pre-1999 data, and then use them to forecast the EMU era. The equation correctly predicts a (small) narrowing in the gap between the dollar and euro over the period 1999-2004. Whether the euro might in the future rival or surpass the dollar as the world’s leading international reserve currency appears to depend on two things: (1) do the United Kingdom and enough other EU members join euroland so that it becomes larger than the US economy, and (2) does US macroeconomic policy eventually undermine confidence in the value of the dollar, in the form of inflation and depreciation. What we learn about functional form and parameter values helps us forecast, contingent on these two developments, how quickly the euro might rise to challenge the dollar. Under two important scenarios the remaining EU members, including the UK, join EMU by 2020 or else the recent depreciation trend of the dollar persists into the future the euro may surpass the dollar as leading international reserve currency by 2022.
    JEL: F02 F31 F33
    Date: 2005–08
  60. By: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
    Abstract: Data for world savings rates do not suggest that an aggregate glut of world savings has depressed US and international interest rates in recent years. Unusual but offsetting changes in savings rates have been limited to three regions: sharp declines in the US have been matched by sharp increases for developing Asia and the Middle East. The world saving rate has increased very little. There are two important features of this change in regional savings behavior. First, three-quarters of the increase in Asian and Middle Eastern savings has been placed in international reserves. Second, all these additional savings have been absorbed by the United States. Even if reserves are mostly placed initially in the US, we would not expect all the savings exported from these high savings regions to remain in the United States. A collapse of expected profits outside the US seems to us a compelling explanation for the US current account deficit and depressed international interest rates.
    JEL: F2 F32 F33
    Date: 2005–08
  61. By: Menzie D. Chinn
    Abstract: Several alternative measures of "effective" exchange rates are discussed in the context of their theoretical underpinnings and actual construction. Focusing on contemporary indices and recently developed econometric methods, the empirical characteristics of these differing series are examined, including the exchange rates for the U.S., the euro area and several East Asian countries. The issues that confront the applied economist or policymaker in using the measures of real effective exchange rates available are illustrated in several case studies from current interest: (i) evaluating exchange rate misalignment, (ii) testing the Balassa-Samuelson effect, (iii) estimating the price responsiveness of trade flows, and (iv) assessing the potential impact of competitive devaluations.
    JEL: F31 F41
    Date: 2005–08
  62. By: Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
    Abstract: We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data, and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination.
    JEL: C11 C22 E31 E52 E61 E63
    Date: 2005–08
  63. By: Andrea Frazzini; Owen A. Lamont
    Abstract: We use mutual fund flows as a measure for individual investor sentiment for different stocks, and find that high sentiment predicts low future returns at long horizons. Fund flows are dumb money  by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is strongly related to the value effect. High sentiment also is associated high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.
    JEL: G14 G23 G32
    Date: 2005–08
  64. By: Marie-France Houde; Katia Yannaca-Small
    Abstract: <P>International, bilateral and regional agreements have proliferated in the last ten years to twenty years and new ones are still being negotiated. It is thus virtually certain that for some more time to come international investment disciplines will continue to co-exist side by side with different terms and sets of parties, and various degrees of overlap. It is therefore important to understand how these agreements would continue to interact and how their overlaps and differences could be managed in a harmonious way.</P><P>The present study, with due regard to the complexity of the issues, seeks to increase the level of understanding of the relationships between international investment disciplines, drawing on an analysis of key international investment agreements (IIAs) and OECD’s experience with the relationship between its own instruments and other relevant agreements.1 </P><P>The study is organised as follows. Section 1 broadly states the issues being addressed in the paper ...</P>
    Date: 2004–05
  65. By: Hans Christiansen
    Abstract: <P>The present paper was prepared in the context of a joint project between the OECD Investment Committee (IC) and Development Assistance Committee (DAC) on Official Development Assistance and Investment for Development. It responds to discussions at the IC-DAC Workshop on Synergies between ODA and Foreign Direct Investment on 11 March 2004, during which participants opined that development agencies lack information about the quality of the investment climate in developing countries and the likely repercussions for direct investment.</P><P>The purpose of the present paper is threefold. First, it provides an overview of a variety of scoreboards for the investment climate that have been established by a number of actors, including the World Bank, UNCTAD and several private “think tanks”. Second, it documents their similarities and discrepancies in assessing the investment climates of developing, emerging and transition economies (henceforth jointly referred to as “developing countries”) ...</P>
    Date: 2004–11
  66. By: Helmut Reisen; Marcelo Soto; Thomas Weithöner
    Abstract: <P>The present level of ODA falls short of the amount needed to finance the <I>Millennium Development Goals</I> (MDGs). The figure of additional $50 billion per year, roughly the present total of ODA spent by DAC donors, is often quoted (e.g. by the Zedillo Report); it results from the sum of the fight against communicable diseases ($ 7-10 billion), primary schooling ($10 billion), infant and maternal mortality ($12 billion) and halving world poverty ($20 billion). The scarcity of public resources raises the importance of investing in international public goods as the cost of lifting one person out of income poverty, for example through agricultural research and global trade expansion, is estimated to be much lower than the cost of the same impact through traditional aid to poor countries. This raises important issues for donor strategies, in particular principles of aid allocation, which this paper aims to address. First, should aid be partly earmarked towards international public goods? ...</P> <P>Le niveau actuel de l’APD est bien inférieur aux sommes nécessaires pour financer les Objectifs de développement du millénaire. Le chiffre de 50 milliards de dollars supplémentaires par an — soit à peu près le montant total de l’APD mobilisée par les donateurs du CAD — est souvent avancé (par ex. dans le rapport Zedillo). Il correspond à l’addition des besoins de financement évalués pour lutter contre les maladies transmissibles (7 à 10 milliards de dollars) et la mortalité maternelle et infantile (12 milliards), pour promouvoir l’école primaire (10 milliards) et pour réduire de moitié la pauvreté dans le monde (20 milliards). Du fait de cette rareté des financements publics, il apparaît encore plus important d’investir dans les biens publics mondiaux : en effet, on estime qu’il est moins coûteux de sortir une personne de la pauvreté via la recherché agronomique et l’expansion du commerce mondial que par les mécanismes traditionnels de l’aide aux pays pauvres. Cela soulève des ...</P>
    Date: 2004–01
  67. By: Tessa Bold; Joachim De Weerdt; Stefan Dercon; Alula Pankhurst
    Abstract: <P>This paper studies the development of indigenous insurance institutions set up to help cover the high costs of funerals, using evidence from rural areas in Tanzania and Ethiopia. Many of these institutions tend to co-exist within the same community and are based on well-defined rules and regulations, often offering premium-based insurance for funeral expenses, as well as, in many cases, other forms of insurance and credit to help address hardship. The paper argues that the characteristics and inclusiveness of these institutions make them well placed as models to broaden insurance provision and other development activities in these communities. In Ethiopia, there is some encouraging experience with using these institutions, as reviewed in this paper. However, the paper argues that their fragility as institutions is well illustrated by current pressures related to HIV/AIDS, as well as by their apparent resistance to engage more broadly with NGOs and government agencies. As a ...</P> <P>A partir de données recueillies dans des zones rurales d’Éthiopie et de Tanzanie, ce document s’intéresse aux organismes locaux d’assurance qui ont fait leur apparition pour aider les familles à assumer les frais d’obsèques, souvent très lourds. Reposant sur une réglementation bien établie, la plupart d’entre eux coexistent au sein d’une même communauté. Ils proposent souvent une assurance « frais d’obsèques » fondée sur les primes ainsi que, dans de nombreux cas, d’autres produits d’assurance et de crédit permettant de faire face à d’éventuels revers. Les caractéristiques et l’ouverture totale de ces établissements en font des modèles intéressants pour la mise en place, dans ces communautés, d’autres services d’assurance ou d’autres activités de développement. En Éthiopie, leur utilisation a donné lieu à plusieurs expériences prometteuses dont ce document rend compte. Pour autant, les pressions exercées aujourd’hui par l’épidémie de sida et l’apparente réticence de ces ...</P>
    Date: 2004–12
  68. By: Mike Kennedy; Torsten Sløk
    Abstract: <P>This paper assesses the extent to which the fall in risk premia of a number of financial assets, which occurred throughout 2003, was due to improvements in factors specific to individual markets at that time or to general economic fundamentals coupled with OECD-wide abundant liquidity. Regarding the latter two factors, principal component analysis was used here to identify a common trend in risk premia in equity, corporate bond and emerging markets since early 1998. The analysis finds that both economic fundamentals and liquidity have played a statistically significant role in driving the common factor. It also finds that liquidity (measured as the GDP weighted average of M3 of the three major economies less its trend) performs better than similarly weighted short-term interest rates. By spring 2004, the common factor in different risk premia had fallen below what could be explained by economic fundamentals and liquidity ...</P> <P>Les déterminants des primes de risque <P>Ce document examine dans quelle mesure la chute des primes de risque de certains placements financiers au cours de 2003 peut être attribuée à l’amélioration de facteurs spécifiques à certains marchés durant cette période, ou aux fondamentaux associés à l’abondante liquidité dans les pays de l’OCDE. En ce qui concerne ces deux derniers facteurs, une analyse en composantes principales est appliquée afin d’identifier une tendance commune aux primes de risque dans les marchés boursiers, obligataires et les marches émergents depuis le début de 1998. Cette analyse montre qu’aussi bien les fondamentaux que la liquidité ont joué un rôle statistiquement significatif concernant le facteur commun. De plus, la liquidité (évaluée comme la moyenne du M3 dans les trois principales économies pondérée par le PIB, moins la tendance) s’avère comporter un meilleur pouvoir explicatif que les taux d’intérêts à court terme (pondérés de manière similaire). Au printemps 2004, le facteur commun aux ...</P>
    Keywords: Risk premia, factor analysis, principal components, fundamentals, liquidity, Primes de risqué, analyse factorielle, analyse en composantes principales, fondamentaux, liquidité
    JEL: C22 E44 G15
    Date: 2004–04–29
  69. By: Anne-Marie Brook; Patrice Ollivaud; Franck Sédillot
    Abstract: <P>In this paper the OECD’s interlink model is used to explore several possible channels through which a narrowing of the US current account deficit could occur. The shocks considered include dollar depreciation, fiscal consolidation, and an improvement in the non-price competitiveness of US producers. A key conclusion is that shocks would have to be very large in order to materially reduce the US external deficit. In part, this is because second-round effects, including domestic policy responses, tend to offset the shocks’ initial impact. In addition, it is clear that each of the channels for narrowing the deficit involves risks to growth in the rest of the world, particularly in Japan where the authorities have limited room to use monetary or fiscal policy to offset any contractionary pressures. The exchange rate simulations highlight the fact that more exchange rate flexibility in Asia would spread the burden of adjustment more evenly across US trading partners. Attention is also ...</P> <P>Des canaux permettant de réduire le déficit de la balance courante américaine et leurs implications pour les autres économies <P>Dans cette étude, le model Interlink de l’OCDE est utilisé pour étudier quelques moyens permettant de réduire le déficit courant américain. Les chocs considérés inclus une dépréciation du dollar, une consolidation fiscale et une amélioration de la compétitivité hors-prix des producteurs américains. Un des principaux enseignements de cette étude est que les chocs doivent être suffisamment importants pour diminuer de façon significative le déficit courant des États-Unis. Ceci est dû en partie au fait que les effets de second tour, incluant politiques économiques nationales, tendent à compenser l’impact du choc initial. En plus, chacun des chocs étudiés se traduit par des risques sur la croissance des autres régions du monde, particulièrement au Japon ou la marge de manoeuvre des autorités monétaire et budgétaire pour contrebalancer les pressions récéssionistes est limitée. Les simulations du taux de change soulignent qu’une plus grande flexibilité du taux de change en Asie ...</P>
    Keywords: simulations, simulations, international transmission, current account adjustment, ajustement du compte courant, transmission internationale
    JEL: F32 F42 F47
    Date: 2004–05–18
  70. By: Anne-Laure Baldi; Nanno Mulder
    Abstract: <P>This paper analyses the impact of exchange rate regimes on real exchange rates, as defined by the relative price of nontradables to tradables in Argentina, Brazil, Chile (ABC) and Mexico from 1990 to 2002. The real exchange rate is determined in the long-run by the Balassa-Samuelson effect, but in the medium run also by government expenditure and terms of trade. Another determinant is fixed exchange rate regimes, which force exporters to adjust their local price of tradables. Moreover, fixed regimes attract portfolio inflows that increase demand and prices for nontradables. The econometric results of the paper confirm the impact of exchange rate regimes on relative prices in all countries except Chile, which maintained exchange rate flexibly and adopted capital controls ...</P> <P>L'impact des régimes de change sur le taux de change réel en Amérique latine, 1990-2002 <P>Cet article analyse l'impact des régimes de change sur le taux de change réel- défini comme le prix relatif des biens du secteur abrité et des biens du secteur exposé- en Argentine, Brésil, Chili (ABC) et au Mexique de 1990 à 2002. Le taux de change réel est déterminé dans le long terme par l'effet Balassa- Samuelson et à moyen terme par les dépenses du gouvernement et les termes de l'échange. Les régimes de change fixes peuvent constituer un nouveau déterminant car ils forcent les exportateurs à geler le prix local des biens échangeables. Simultanément ils attirent des flux de portefeuille qui exercent une pression à la hausse sur la demande et donc les prix des biens abrités. Les résultats économétriques de l'article confirment l'impact des régimes de change sur les prix relatifs de tous les pays sauf le Chili qui a aintenu une flexibilité de change et imposé des contrôles de capitaux ...</P>
    Keywords: exchange rate policy, real exchange rates, Latin America, politique de change, taux de change reels, Amérique latine
    JEL: E52 N16
    Date: 2004–06–30
  71. By: Christine de la Maisonneuve; Claude Giorno; Peter Hoeller
    Abstract: <P>In recent years the euro area has shown less resilience to the negative and largely OECD-wide common shocks than the English-speaking countries, but most of the smaller euro area countries have fared better than the large ones. This paper reviews policy issues that are important in fostering a speedy adjustment to shocks. We argue that the small countries are well placed to adjust swiftly to asymmetric shocks, because they are well integrated with the rest of the area. An activist fiscal policy is not needed and also not powerful enough to smooth the cycle. However, asset bubbles are a cause of concern as their limited weight means that the common monetary policy is more likely to be out of line with their cyclical position. Large countries are less well placed to cope with shocks and sluggish adjustment can be expected. Reforms should focus on raising trade linkages via the completion of the single market, on improving wage and price flexibility and on making their housing markets ...</P> <P>Même monnaie, même cycle ? Rendre plus souple le fonctionnement de l'union monétaire <P>Au cours des dernières années, la zone euro a fait preuve d'une moindre résistance que les pays nglo-saxons aux chocs négatifs qui ont affecté dans une large mesure l'OCDE dans son ensemble; mais la lupart des plus petits pays de la zone ont mieux tirer leur épingle du jeux que les grands. Cet article passe n revue les questions de politique économique qui sont importantes afin de favoriser un ajustement rapide ux chocs. Nous défendons l'idée que les petits pays sont mieux armés pour s'ajuster promptement à des hocs asymétriques du fait de leur bonne intégration avec le reste de la zone. Une politique budgétaire ctiviste n'est pas nécessaire ni suffisamment puissante pour amortir le cycle. Néanmoins, l'apparition de ulles spéculatives est une source de préoccupation dans leur cas en raison de leur poids limité, lequel mplique que la politique monétaire commune est susceptible d'être plus fréquemment incohérente avec eur position cyclique. Les grands pays sont moins bien armés pour ...</P>
    Keywords: taxation, fiscalité, fiscal policy, politique budgétaire, Business cycles, cycles économiques, Economic and Monetary Union, Union Économique et Monétaire
    JEL: E3 E6 H2 H6
    Date: 2004–09–16
  72. By: Francesca Colombo; Nicole Tapay
    Abstract: <P><OL><LI>This paper analyses the Slovak health insurance system and the policy challenges it faces. It describes the structure of health coverage and health sector reforms being implemented by the Slovak government. It provides a preliminary assessment of the possible impact of such reforms, with a focus on the health insurance system and the possible introduction of private health insurance (PHI). It assesses how private health insurance would impact upon the health system, particularly equity, efficiency incentives facing providers and insurers, and responsiveness.</LI></OL></P><P><OL><LI>The Slovak health system is based upon a mandatory Bismarck-style social health insurance system. Contributions are shared between employers and employees and the state contributes for the inactive population. Five non-profit and non-competing insurers operate nationwide, one of which covers two-thirds of the population. Individuals can freely enrol with any of the insurance companies and a risk equalisation system ...</LI></OL></P> <P><OL><LI>Ce document présente une analyse du système d’assurance de santé Slovaque et les défis politiques que celui-ci engendre. Une description de la structure de couverture santé et des réformes mises en oeuvre par le gouvernement Slovaque y est présentée ainsi qu’une évaluation préliminaire de l’impact possible de telles réformes. L’accent est porté sur le système d’assurance-maladie et l’introduction possible d’une assurance maladie privée (AMP). Y figure également une évaluation de la manière dont une AMP aura des répercussions sur le système de santé lui-même et plus particulièrement en ce qui concerne l’équité et les incitations à l’efficience auxquelles sont confrontés les fournisseurs de services et les assureurs et la réactivité du système de santé face aux besoins des utilisateurs.</LI></OL></P><P><OL><LI>Le système de santé Slovaque et basé sur un système d’assurance maladie sociale obligatoire du style Bismarck. Les contributions sont partagées entre les employeurs et les employés avec une ...</LI></OL></P>
    JEL: I11 I18 I19
    Date: 2004–03–05
  73. By: Thomas C. Buchmueller; Agnes Couffinhal
    Abstract: <P><OL><LI>While France has a universal public health insurance system, the coverage it provides is incomplete and the vast majority the French population has private complementary health insurance. Among OECD countries, the share of health care financed by private insurance is third highest behind the US and the Netherlands, two countries where private coverage is the primary source of payment for a large percentage of the population.</LI> <LI>France’s high rate of private insurance coverage is partly explained by historical factors and partly by the preferential tax treatment of employer-sponsored coverage. Because of the high rate of employerprovision – roughly half of all contracts are obtained through the workplace – coverage tends to vary with activity and industry classification. Historically, coverage was also positively related with income. In 2000, the French government introduced a new program, the <I>Couverture Maladie Universelle</I> (CMU), which extended eligibility for publicly funded ...</LI></OL></P> <P><OL><LI>Si la France a un système d'assurance maladie publique universel, la couverture qu'il propose n'est pas complète et la majorité de la population française a une assurance complémentaire privée. La France est le troisième pays de l'OCDE en ce qui concerne la part des dépenses de santé financée par l'assurance privée, après les Etats-Unis et les Pays-Bas, deux pays où l'assurance privée représente la seule source de couverture pour une grande partie de la population.</LI> <LI>L'importance de l'assurance privée en France s'explique pour partie par des facteurs historiques mais aussi par le traitement fiscal préférentiel dont bénéficient les assurances de groupe. Etant donnée qu'environ la moitié des contrats sont obtenus par le biais de l'emploi, la couverture est très liée à la participation au marché du travail et au secteur d'activité. Historiquement, le taux couverture de la population augmentait avec le revenu. En 2000, le gouvernement a mis en place un nouveau programme public, la ...</LI></OL></P>
    JEL: I11 I18 I19
    Date: 2004–03–11
  74. By: Francesca Colombo; Nicole Tapay
    Abstract: <P><OL><LI>Governments often look to private health insurance (PHI) as a possible means of addressing some health system challenges. For example, they may consider enhancing its role as an alternative source of health financing and a way to increase system capacity, or promoting it as a tool to further additional health policy goals, such as enhanced individual responsibility. In some countries policy makers regard PHI as a key element of their health coverage systems</LI></OL></P><P><OL><LI>While private health insurance represents, on average, only a small share of total health funding across the OECD area, it plays a significant role in health financing in some OECD countries and it covers at least 30% of the population in a third of the OECD members. It also plays a variety of roles, ranging from primary coverage for particular population groups to a supporting role for public systems.</LI></OL></P><P><OL><LI>This paper assesses evidence on the effects of PHI in different national contexts and draws conclusions about its ...</LI></OL></P> <P><OL><LI>Certains gouvernements voient dans l’assurance maladie privée un moyen de relever quelquesuns des défis liés aux systèmes de santé. Par exemple, certains envisagent de promouvoir son rôle de source de financement de substitution, de l’utiliser pour accroître les capacités du système, ou encore de la faire contribuer à la réalisation d’autres objectifs de la politique de santé, tels que le renforcement de la responsabilité individuelle. Dans certains pays, les décideurs considèrent l’assurance maladie privée comme un élément fondamental du système de couverture maladie.</LI></OL></P><P><OL><LI>Bien que l’assurance maladie privée ne représente en moyenne qu’une petite fraction du financement total des dépenses de santé dans la zone OCDE, elle constitue dans quelques pays Membres un mode de financement important des soins et couvre au moins 30 pour cent de la population dans un tiers des pays de l’OCDE. Elle joue par ailleurs des rôles multiples, allant de l’octroi d’une couverture primaire à des ...</LI></OL></P>
    Date: 2004
  75. By: Carlos F. alves (CEMPRE, Faculdade de Economia, Universidade do Porto); Victor Mendes (CMVM – Comissão do Mercado de Valores Mobiliários)
    Abstract: Institutional investors are often seen as potential solutions for corporate governance problems and are requested to have a more active role in the monitoring and control of listed companies. In this paper we develop a model that, within a universal banking framework, allows one to conclude that, the greater the capacity of a financial group to generate capital inflows that react to the performance of mutual funds, the more the said attitude is likely to succeed. The paper also concludes that the efforts of supervisory authorities should be directed in particular to the relations between universal financial groups and companies in which these financial groups do not have a relevant stake.
    Keywords: Corporate Governance, Institutional Investor Activism, Universal Banking
    JEL: G10 G21 G28 G30 L20
    Date: 2005–07
  76. By: Gary S. Shea
    Abstract: An investigation into the legal and political history of South Sea Company subscription finance shows that the subscription contracts had default options built into them, as was typically the case in eighteenth-century subscription financing. Company records and contemporary pamphlet literature show that people understood the subscription finance mechanics that were stated in law. A fair presentation of South Sea share value data also supports this view. Thus we conclude that the analyses published in this Review by Dale, Johnson and Tang were irretrievably flawed and could only be supported by a counterfactual presentation of history.
    Keywords: South Sea Company, Royal African Company, Financial Revolution, Bubble Act, subscription shares, options markets.
    JEL: G13 N23
    Date: 2005–07
  77. By: Susan Thorp (School of Finance and Economics, University of Technology, Sydney); George Milunovich (Division of Economic and Financial Studies, Macquarie University)
    Abstract: Empirical research shows that stock volatilities and correlations between markets rise more after negative shocks than after positive returns shocks of the same size. We measure the importance of these asymmetric e¤ects for mean-variance investors holding portfolios of international equities who use dynamic conditional covariance forecasts to reweight their portfolios. Portfolio weights are computed using ex ante predictions from symmetric GARCH DCC and asymmetric GJR ADCC models, and a spectrum of expected returns. Data are weekly returns to equity price indices for the USA, Japan, UK and Australia. We ?nd that the majority of realised portfolio standard deviations are less when we reweight using the asymmetric covariance model. Reductions in portfolio risk are signi?cant according to Diebold-Mariano tests. Investors who are moderately risk averse and have longer rebalancing horizons bene?t more from the asymmetric model than less risk averse, shorter-horizon investors, and would be prepared to pay up to 107 basis points annually to use it instead of the symmetric model. Bene?ts are greater for investors holding US equities.
    Date: 2005–07–01
  78. By: Silvio John Camilleri (Banking & Finance Department - FEMA, University of Malta)
    Abstract: The paper consolidates the summarised financial statements of the main banks operating in Malta during the year 2002, to form a Typical Large Bank and a Typical Small Bank. The rofitability, risk and growth prospects of the two institutions are analysed through Return on Equity decomposition and the use of other financial ratios. Various differences between large and small institutions emerge. In particular, larger institutions realised higher profitability and cost control; they were more capitalised in absolute terms and relied relatively less on interest income. Smaller institutions generated comparatively more revenue; they were more capitalised in relative terms, were relatively more provisioned against loan losses and held a higher proportion of liquid assets.
    Keywords: Return on Equity Model, Banks, Malta, Indicators
    JEL: G20 G21
    Date: 2005–07–29
  79. By: Theodore Panagiotidis (Loughborough University)
    Abstract: The behaviour of an emerging market, the Athens Stock Exchange (ASE), after the introduction of the euro is investigated. The underlying assumption is that stock prices would be more transparent; their performance easier to compare; the exchange rate risk eliminated and as a result we expect the new currency to strengthen the argument, in favour of the EMH. The General ASE Composite Index and the FTSE/ASE 20, which consists of “high capitalisation” companies, are used. Five statistical tests are employed to test the residuals of the random walk model: the BDS, McLeod-Li, Engle LM, Tsay and Bicovariance test. Bootstrap and asymptotic values of these tests are estimated. Alternative models from the GARCH family (GARCH, EGARCH and TGARCH) are also presented in order to investigate the behaviour of the series. Lastly, linear, asymmetric and non-linear error correction models are estimated and compared.
    Keywords: Non-Linearity, Market Efficiency, Random Walk, GARCH, non- linear error correction
    JEL: C22 C52 G10
    Date: 2005–07–29
  80. By: J.Ramon Martinez-Resano (Bank of Spain)
    Abstract: This paper deals with the economics of secondary markets for government bonds. Ultimately, the analysis is shaped by a public policy goal: assessing the elements of a regulatory framework for these markets. In that regard, the decisive role of market structure leads to a critical review of microstructure conclusions relevant specifically for government debt markets. It is argued that the nature of information asymmetries and matching costs in government debt markets determines a bias towards a fragmented microstructure at odds both with exchange-like arrangements and with ordinary regulatory approaches. Hence, a generic conclusion highlights the risks of blindly transposing regulatory principles from the equity markets area without due regard to the specifics of the bond market. As a specific application of this idea, the paper critically reviews electronic trading platforms that emulate exchange-like order execution solutions. More specifically, the paper opposes the hybrid microstructure (pure limit order book plus affirmative quoting obligation) faced by European primary dealers and the arbitrage-based approach to market-making found in US inter-dealer markets. The Citigroup disruptive trade in August 2004 is analyzed from this perspective. Government bond regulation is argued to necessarily depart from ordinary approaches also because it captures the diverse interests of various governmental agencies. As an application of this principle, the paper discusses repo and short-selling regulation in government bond markets. The atypical market structure and the multi- agency endeavour around government bond markets raise the chances of regulatory failures. Nevertheless, it is argued that a reliance on competition, integrative infrastructure and basic systemic protections as over-arching principles for regulation is consistent with recommendations from relevant economic theory. Finally, political economy issues arising in implementation of transparency, disclosure or retail investor protection will be addressed in the context of selected country cases.
    Keywords: government bonds, microstructure, regulation
    JEL: D40 G28 K22
    Date: 2005–08–05
  81. By: Eric Thivant (University Jean Moulin Lyon 3 - Centre de Recherche de l'IAE - Equipe de Recherche SICOMOR); Laid Bouzidi (University Jean Moulin Lyon 3 - Centre de Recherche de l'IAE - Equipe de Recherche SICOMOR)
    Abstract: This research investigates the problem of Information Technologies Standards or Recommendations from an economical point of view. In our competitive economy, most enterprises adopted standardization’s processes, following recommendations of specialized Organisations such as ISO (International Organisation for Standardization), W3C (World Wide Web Consortium) and ISOC (Internet Society) in order to reassure their customers. But with the development of new and open internet standards, different enterprises from the same sector fields, decided to develop their own IT standards for their activities. So we will hypothesis that the development of a professional IT standard required a network of enterprises but also a financial support, a particular organizational form and a precise activity to describe. In order to demonstrate this hypothesis and understand how professional organise themselves for developing and financing IT standards, we will take the Financial IT Standards as an example. So after a short and general presentation of IT Standards for the financial market, based on XML technologies, we will describe how professional IT standards could be created (nearly 10 professional norms or recommendations appear in the beginning of this century). We will see why these standards are developed outside the classical circles of standardisation organisations, and what could be the “key factors of success” for the best IT standards in Finance. We will use a descriptive and analytical method, in order to evaluate the financial support and to understand these actors’ strategies and the various economical models described behind. Then, we will understand why and how these standards have emerged and been developed. We will conclude this paper with a prospective view on future development of standards and recommendations.
    Keywords: information technologies, financial standards, development of standards, evaluation of the economical costs of standards
    JEL: L
    Date: 2005–07–27
  82. By: Fatih Guvenen (University of Rochester)
    Abstract: This paper analyzes the extent of risk-sharing among stockholders and among nonstockholders. Wealthy households play a crucial role in many economic problems due to the substantial concentration of asset holdings in the U.S. data. Hence, to evaluate the empirical importance of market incompleteness, it is essential to determine if idiosyncratic shocks are important for the wealthy, who have access to better insurance opportunities, but also face different risks, than the average household. We study a model where each period households decide whether to participate in the stock market by paying a fixed cost. Due to this endogenous entry decision, the testable implications of perfect risk- sharing take the form of a sample selection model, which we estimate and test using a semi-parametric GMM estimator proposed by Kyriazidou (2001). Using data from PSID we strongly reject perfect risk-sharing among stockholders, but perhaps surprisingly, do not find evidence against it among non-stockholders. These results appear to be robust to several extensions we considered. These findings indicate that market incompleteness may be more important for the wealthy, and suggest further focus on risk factors that primarily affect this group, such as entrepreneurial income risk.
    Keywords: Perfect risk-sharing, incomplete markets, semiparametric estimation, Generalized Method of Moments, limited stock market participation.
    JEL: C33 G11 E52
    Date: 2005–08–06
  83. By: Özgür Kýbrýs (Sabancý University); Serkan Küçükþenel (California Institute of Technology)
    Abstract: We analyze markets in which the price of a traded commodity is such that the supply and the demand are unequal. Under standard assumptions, the agents then have single peaked preferences on their consumption or production choices. For such markets, we propose a class of Uniform Trade rules each of which determines the volume of trade as the median of total demand, total supply, and an exogenous constant. Then these rules allocate this volume 'uniformly' on either side of the market. We evaluate these 'trade rules' on the basis of some standard axioms in the literature. We show that they uniquely satisfy Pareto optimality, strategy proofness, no-envy, and an informational simplicity axiom that we introduce. We also analyze the implications of anonymity, renegotiation proofness, and voluntary trade on this domain.
    Keywords: market disequilibrium, trade rule, efficiency, strategy proofness, anonymity, no-envy, renegotiation proofness, voluntary trade
    JEL: D5 D6 D7
    Date: 2005–08–04
  84. By: Bernard Paranque (Euromed Marseille Ecole de Management); Marcelline Grondin (GATE)
    Abstract: Une importante littérature empirique est dévolue à la question du lien entre les facteurs financiers et les performances économiques des firmes. Dérivées du rejet de l’hypothèse classique de non incidence de la structure financière sur la dépense ou inscrites plutôt dans une logique de repérage des canaux de transmission de la politique monétaire, ces études s’intéressent pour la plupart, à travers l’analyse du cash flow, au rôle de la position financière de la firme dans la dépense. Leurs résultats attestent tous de la validité statistique et quantitative des influences financières. Les interprétations diffèrent cependant et un grand débat demeure quant à l’imputation de ces empreintes. Peut-on en effet les attribuer à l’offre de financement ou sont-elles plutôt issues du comportement des firmes ? Dans cette étude, où nous nous intéressons à un échantillon d’entreprises industrielles françaises adhérentes à la Centrale des Bilans, nous proposons d’élargir la gamme des variables qui peuvent entrer dans la définition de la position financière et patrimoniale de la firme afin d’explorer la manière dont elles expliquent les comportements réels de celle-ci. Dans l’analyse des déterminants des composantes de la demande, nous tentons de tenir compte, en plus des variables réelles conformément aux modèles théoriques sous-jacents, de l’ensemble des ressources et réserves internes détenues par la firme. Nous considérons également la capacité de la firme à recourir aux financements offerts par les partenaires extérieurs et apprécions en cela les liens qu’elle entretient avec ses fournisseurs de capitaux à travers la considération des différentes formes de financement externe. En plus de l’investissement productif souvent analysé dans les travaux empiriques, nous proposons dans cette étude de tenir compte également de l’activité courante de gestion de la firme à travers l’analyse de son comportement de stockage. Les analyses sont effectuées en premier lieu sur les années 87 d’une part et 93 d’autre part, ce qui correspond à deux périodes de crise bien typées du point de vue du cycle économique et monétaire. Des analyses de données sont ensuite menées sur des années de reprise économique sur l’ensemble de la période 1986-1995 et nous permettent d’apprécier comparativement les premiers résultats.
    Keywords: accumulation, stockage, investissement, flexibilité financière, autonomie, découvert, régime de financement
    JEL: D1 D2 D3 D4
    Date: 2005–08–04
  85. By: Nils Soguel (Swiss School of Public Administration-IDHEAP); Simon Iogna-Prat (Swiss School of Public Administration-IDHEAP); Toni Beutler (Swiss School of Public Administration-IDHEAP)
    Abstract: The IDHEAP has published its Comparison of Cantonal and Municipal Finances every year since 1999. The aim is to shed light on the fiscal condition of the Swiss public authorities. The comparison covers all institutional levels: the Confederation, the 26 cantons and a dozen cantonal capitals which rank among Switzerland's largest cities. The comparison is based on eight indicators. The result for each indicator is graded between 6 (excellent) and 1 (poor). This makes it possible to merge the indicators while weighting them on the basis of their significance. Thus, it is possible to judge the financial health of the canton, on the one hand, and the quality of its financial management, on the other hand, and, finally, to summarize its overall situation. To compare the situation of your local public authority visit the IDHEAP website.
    JEL: D6 D7 H
    Date: 2005–07–27
  86. By: Ryo Horii (Graduate School of Economics, Osaka University); Ryoji Ohdoi (Graduate School of Economics, Osaka University); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: This paper presents an overlapping generations model with technology choice and credit market imperfections, in order to investigate a possible source of underdevelopment. The model shows that a better financial infrastructure that provides stronger enforcement of contracts facilitates the development of financial markets, which, in turn, enables firms to switch to more productive and capital-intensive technologies, thereby promoting economic development. In the presence of credit rationing, however, this technological switch widens inequality. Therefore, risk-averse agents would not be willing to improve the financial infrastructure to the level at which the technological switch occurs, resulting in a development trap. A remedy is to facilitate small firmsf adoption of the currently used technology rather than the new one.
    Keywords: Enforcement; Technological Switch; Income Distribution; Credit Rationing; Development Trap; Institutions.
    JEL: O14 O16
    Date: 2005–04
  87. By: Khalid Sekkat (DULBEA, Université libre de Bruxelles, Brussels); Marie-Ange Veganzones-Varoudakis (CERDI and World Bank)
    Abstract: The paper assesses the relative importance of trade and foreign exchange liberalization, infrastructure availability and economic and political stability in increasing Middle East and North African (MENA) countries attractiveness with respect to FDI. The analysis is conducted for total FDI and for FDI in manufacturing. The results show that trade and foreign exchange liberalization, infrastructure availability and sound economic and political conditions increase FDI inflows. Their effects are much higher for FDI in the manufacturing sector than for total FDI. This result is robust to alternative indicators of trade and foreign exchange liberalization, and to change in the specification. The message to MENA’s policy makers is twofold. First, efforts toward trade and foreign exchange liberalization should be initiated or further increased in order to make the region attractive to foreign investors. Second improvements in other aspects of the investment climate are important complements to liberalization and result in additional and sensitive increase of FDI inflows.
    Keywords: Reforms, MENA, FDI.
    JEL: F21 F15 K42
    Date: 2005–02
  88. By: Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels); Laurent Weill (LARGE, Université Robert Schuman, Strasbourg)
    Abstract: This paper investigates the motive of geographic risk diversification in the lending activity for bank mergers in the EU on a sample of large banking groups. Geographic diversification should allow banks to reduce their risk. We observe that the loan portfolios of European banks are home-biased. We apply the portfolio approach to explore the risk-return efficiency of the locations of banks’ activities. We also study mergers between pairs of banks. We provide evidence of the sub-optimality of the loan portfolios of European banks in terms of geographic risk diversification, and of the existence of potential gains from inter-country pair mergers.
    Keywords: bank mergers, risk diversification, European integration
    JEL: F15 G11 G21 G34
    Date: 2005–02
  89. By: Michel Beine (DULBEA, Université libre de Bruxelles, Brussels); Oscar Bernal (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: This paper empirically investigates the main determinants of secret interventions in the foreign exchange (FX) market. Using the recent experience of the Bank of Japan, we estimate a model that explains the share of secret to reported interventions in the FX market. Two sets of determinants are clearly identified: the first is related to the probability of detection of the central bank orders by market participants; the second, to the central bank’s internal decision to opt for secrecy. Our estimations support the arguments of current microstructure theories that rationalize the use of secret interventions.
    Keywords: Central Bank Interventions, Exchange Rates Market, Secrecy Puzzle.
    JEL: E58 F31 G15
    Date: 2005–04
  90. By: Ariane Chapelle (Centre Emile Bernheim, Université libre de Bruxelles, Brussels); Ariane Szafarz (Centre Emile Bernheim and DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: Pyramids, cross-ownership, rings, and other complex features inducing control tunnelling are frequent in the European and Asian industrial world. Based on the matrix methodology, this paper offers a model for measuring integrated ownership and threshold-based control, applicable to any group of interrelated firms. In line with the theory on pyramidal control, the model avoids the double counting problem and sets the full-control threshold at the conservative - but incontestable - majority level of 50% of the voting shares. Any lower threshold leads to potential inconsistencies and leaves unexplained the observed high level of ownership of many dominant shareholders. Furthermore, the models leads to ultimate shareholders' control ratios consistent with the majority voting rule. Finally, it is applied to the Frère Group, a large European pyramidal holding company known for mastering control leverages.
    Keywords: Majority Voting Rule, Pyramidal Ownership, Corporate Control, Corporate Governance
    JEL: G32
    Date: 2005–02
  91. By: Prasad V. Bidarkota (Department of Economics, Florida International University)
    Abstract: We investigate time varying risk premia in forward dollar/pound monthly exchange rates over the last two decades. We study this issue using a signal plus noise model and separately using regression techniques. Our models account for time varying volatility and non-normalities in the observed series. Our signal plus noise model fails to isolate a statistically significant risk premium component whereas our regression model does. We attribute the discrepancy in the results from the two methods to the low power of the signal plus noise model in discriminating between a time varying risk premium component and a serially uncorrelated spot exchange rate expectational error. An important reason for the low power of the signal plus noise model is its failure to use information on current period forward rates in extracting the risk premium.
    Keywords: spot foreign exchange rates; forward foreign exchange rates; timevarying risk premium; signal extraction; non-normality; volatility persistence
    JEL: F31 C5 G12
    Date: 2005–01
  92. By: Prasad V. Bidarkota (Department of Economics, Florida International University); Brice V. Dupoyet (Department of Finance, Florida International University)
    Abstract: We investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption-based asset-pricing model with habit formation. Fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders. This renders model-implied mean equilibrium rates of return and equity and term premia finite. Comparison with a benchmark Gaussian process reveals that accounting for fat tails lowers the model-implied mean risk-free rate by 20 percent, raises the mean equity premium by 80 percent and the term premium by 20 percent, bringing the model implications closer to their empirically observed counterparts.
    Keywords: pricing model, habit formation, term premium, equity premium, fat tails, dampened power law
    JEL: G12 G13 E43
    Date: 2004–07
  93. By: Prasad Bidarkota (Department of Economics, Florida International University); Khurshid M. Kiani (Department of Economics, Wilfrid Laurier University)
    Abstract: We search for time-varying predictable components in monthly excess stock index returns over the risk free rates in the G7 countries. The predictable components provide an estimate of the expected excess returns. Our unobserved components model improves on Conrad and Kaul (1988) by taking into account fat tails widely documented in returns data. Statistical hypotheses tests fail to reveal any significant time-varying predictable components in excess returns for any of the countries, except Canada. Our results are in sharp contrast to Conrad and Kaul (1988), who do isolate time-varying expected returns in weekly sizeweighted portfolio returns using the same methodology but in a Gaussian setting.
    Keywords: stock return predictability, unobserved components, fat tails, stable distributions
    JEL: C22 C53 G14
    Date: 2004–10

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.