nep-mac New Economics Papers
on Macroeconomics
Issue of 2006‒05‒13
thirty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. When does an interest rate path “look good”? Criteria for an appropriate future interest rate path By Jan F. Qvigstad
  2. Monetary Regimes, Labour Mobility and Equilibrium Employment By Larsson, Anna
  3. Macroeconomic Integration in Asia Pacific: Common Stochastic Trends and Business Cycle Coherence By Enzo Weber
  4. Measuring Monetary Policy for A Small Open Economy : Turkey By Hakan Berument
  5. Did inflation really soar after the euro cash changeover? Indirect evidence from ATM withdrawals By Paolo Angelini; Francesco Lippi
  6. Forecasting interest rate swap spreads using domestic and international risk factors: Evidence from linear and non-linear models By Costas Milas; Ilias Lekkos; Theodore Panagiotidis
  7. Inflation Uncertainty and Interest Rates : Is The Fisher Relation Universal? By Hakan Berument; Hasan Olgun; Baþak Ceylan
  8. Price and Prejudice. The statics and dynamics of money-wage flexibility. By Annamaria Simonazzi; Fernando Vianello
  9. The Stability and Growth Pact: A European Answer to the Political Budget Cycle? By Thierry Warin; Kenneth Donahue
  10. Sosiaalietuuksien rahoituksen hinta- ja hyvinvointivaikutukset kotitaloussektorissa. By Olavi Rantala
  11. Non-neutrality of economic policy: An application of the Tinbergen-Theil's approach to a strategic context. By Nicola Acocella; Giovanni Di Bartolomeo
  12. Is There a Unit Root in East-Asian Short-Term Interest Rates? By Chew Lian Chua; Sandy Suardi
  13. Hviler Dansk Økonomi på en Cobb-Douglas teknologi? By Harck, Søren
  14. Business Cycles in Turkey and European Union Countries: A Perspective to the Membership By Hakan Berument; M. Eray Yücel; Zübeyir Kilinç
  15. ICT and Productivity Resurgence: a growth model for the Information Age By Francesco VENTURINI
  16. Approximate Solutions to Dynamic Models – Linear Methods By Harald Uhlig
  17. Vicious and Virtuous Circles: The Political Economy of Unemployment By Ruthira Naraidoo; Patrick Minford
  18. One World Money, Then and Now By Michael Bordo; Harold James
  19. Risk-Adjusted Forecasts of Oil Prices By Patrizio Pagano; Massimiliano Pisani
  20. Links between Labor Supply and Unemployment: Theory and Empirics By Étienne Wasmer
  21. Pork Barrel Cycles By Allan Drazen; Marcela Eslava
  22. Stabilization of Effective Exchange Rates Under Common Currency Basket Systems By Eiji Ogawa; Junko Shimizu
  23. On the Distributional Effects of Income in an Aggregate Consumption Relation By Manisha Chakrabarty; Anke Schmalenbach; Jeffrey Racine
  24. Alongamento dos títulos de renda fixa no Brasil By Márcio Gomes Pinto Garcia; Juliana Salomão
  25. Thailand ' s growth path : from recovery to prosperity By Richter, Kaspar
  26. AD-AS på dansk By Harck, Søren
  27. Sequencing fiscal decentralization By Martinez-Vazquez, Jorge; Bahl, Roy
  28. Debt Relief By Serkan Arslanalp; Peter Blair Henry
  29. Firm-Specific Information and the Efficiency of Investment By Anusha Chari; Peter Blair Henry
  30. Ineffective controls on capital inflows under sophisticated financial markets: Brazil in the nineties By Márcio Gomes Pinto Garcia; Bernando S. de M. Carvalho
  31. Revisiting Budget and Trade Deficits in Lebanon: A Critique By Marashdeh, Hazem; Saleh, Ali Salman
  32. Do Politicians Free-ride? - an empirical test of the common pool model By Tyrefors, Björn

  1. By: Jan F. Qvigstad (Norges Bank (Central Bank of Norway))
    Abstract: Svensson (2004) suggested that a monetary policy committee of a central bank (MPC) should “find an instrument-rate path such that projections of inflation and output gap ‘look good’.” Academic literature on monetary policy gives guidance as to what the words “look good” means. However, there is a need for a translation of the theoretical framework into concrete criteria when an MPC shall evaluate interest rate paths in practice. Six criteria for an appropri-ate interest rate path are presented. In the November 2005 Inflation Report, Norges Bank presented for the first time an optimal interest rate path including a fan chart illustrating the uncertainty of the forecast using these criteria. Ex-amples used in explaining the criteria are drawn from Norwegian experiences.
    Keywords: Forecasts, flexible inflation targeting, optimal monetary policy
    JEL: E42 E52 E58
    Date: 2006–05–09
  2. By: Larsson, Anna (Institute for International Economic Studies, Stockholm University)
    Abstract: This paper analyses the impact of the monetary regime on labour markets in a small open economy, by considering the game between large wage setters and an independent central bank in a two-sector model with potential labour mobility between sectors. Two monetary regimes are considered: membership in a monetary union and an inflation target combined with a flexible exchange rate. A key result is that when there is perfect labour mobility between sectors, the monetary regime does not matter for real wages, employment or profits. Moreover, introducing labour mobility substantially reduces wages and increases employment. Other findings are that when labour is immobile between sectors: (i) the real wage in the tradables sector is higher under inflation targeting than in a monetary union, while the reverse applies to the non-tradables sector; (ii) inflation targeting generates higher employment and profits than membership in a monetary union; and (iii) both workers and firms in the two sectors in general prefer inflation targeting to membership in a monetary union.
    Keywords: Inflation Targeting; Monetary Union; Equilibrium Employment; Labour Mobility
    JEL: E24 J50
    Date: 2006–05–02
  3. By: Enzo Weber
    Abstract: This paper addresses the question of macroeconomic integration in the Asian Pacific region. Economically, the analysis is based on the notions of stochastic long-run convergence and business cycle coherence. The econometric procedure consists of tests for cointegration, the examination of vector error correction models, several variants of common cycle tests and forecast error variance decompositions. Results in favour of cyclical synchrony can be partly established, and are even exceeded by the broad evidence for equilibrium relations. In these domains, several leading countries are identified.
    Keywords: Real Convergence, Cointegration, Common Cycles, Asia Pacific
    JEL: E32 F15 C32
    Date: 2006–05
  4. By: Hakan Berument
    Date: 2005
  5. By: Paolo Angelini (Bank of Italy, Economic Research Department); Francesco Lippi (Bank of Italy, Economic Research Department)
    Abstract: The introduction of the euro notes and coins in the first two months of 2002 was followed by a lively debate on the alleged inflationary effects of the new currency. In Italy, as in the rest of the euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In this paper we gather indirect evidence on the behavior of prices from the analysis of cash withdrawals from ATM and their determinants. Since these data do not rely on official inflation statistics, they provide an independent check for the latter. We present a model in which the relationship between aggregate ATM withdrawals and aggregate expenditure is not homogenous of degree one in the price level, a prediction which is strongly supported by the data. This feature allows us to test the hypothesis that, after the introduction of the euro notes and coins, consumer prices underwent an increase not recorded by official inflation statistics. We do not find evidence in support of this hypothesis.
    Keywords: banknotes, currency, euro, inflation.
    JEL: E41 E31 E51
    Date: 2006–03
  6. By: Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies); Ilias Lekkos (Research Department, Eurobank Ergasias, Greece); Theodore Panagiotidis (Department of Economics, Loughborough University, UK)
    Abstract: This paper explores the ability of factor models to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models.We find some evidence that the non-linear models predict better than the linear ones. At short horizons, the nearest-neighbours (NN) model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. At long horizons, the STVAR model increases its forecasting ability over the linear models, whereas the NN model does not outperform the rest of the models.
    Keywords: Interest rate swap spreads, term structure of interest rates, factor models, regime switching, smooth transition models, nearest-neighbours, forecasting.
    JEL: C51 C52 C53 E43
    Date: 2006–04
  7. By: Hakan Berument; Hasan Olgun; Baþak Ceylan
    Date: 2006
  8. By: Annamaria Simonazzi; Fernando Vianello
    Abstract: Keynes’s dynamic, open-end approach to money-wage flexibility is contrasted with the subsequent rehabilitation of the static analysis of the problem, which has led to the ‘closure’ of the Keynesian system and the vindication of the economy’s capacity for selfadjustment. Not even in static analysis, it is further maintained, can money-wage flexibility be counted on to bring about a rise in aggregate demand and employment. For the flaws in the logical basis of the decreasing relationship between the demand for capital and the rate of interest undermine the ‘Keynes effect,’ so that the AD curve . predominantly governed by the deflation-induced redistribution of real wealth from debtors to creditors . assumes an upward-sloping shape at all price levels. As against the claim that after a sufficiently long period of time the ‘Pigou,’ or ‘real balance’ effect, will prevail over the above redistribution (or ‘reverse Pigou’) effect, it is contended that long-lasting excess capacity and unemployment will cause both the productive capacity installed to shrink and ‘discouraged’ workers to leave the labour market. Unemployment may thus disappear through an entirely different road than those envisaged by believers in the self-adjusting properties of the economic system.
    Keywords: deflation, money-wage flexibility, statics and dynamics, AD curve.
    JEL: B20 E12 E31
    Date: 2005–08
  9. By: Thierry Warin; Kenneth Donahue
    Abstract: The existing literature on political budget cycles looks at the temptation for incumbent governments to run a greater deficit before an election by considering the characteristics of the incumbent. We propose here to look at the signals the incumbent receives from the voters. For this purpose, we consider the votes from the previous national elections and see whether they may influence the incumbent government to run a sound fiscal policy or an expansionary fiscal policy. However, since 1993 Europe has been equipped with two fiscal rules: a deficit and a debt ceiling. In this context, can we find evidence of a “political budget cycle” before 1993, and did the fiscal rules prevent the existence of a “political budget cycle” afterwards? To address these questions, we use a cross-sectional time series analysis of European countries from 1979 to 2005.
    Keywords: Stability and Growth Pact, Political Business Cycle, Political budget Cycle, Partisan Theory
    JEL: E6 F4 P43
    Date: 2006–06
  10. By: Olavi Rantala
    Keywords: Producer prices, consumer prices, consumption structure
    JEL: D12 D57 E31
    Date: 2006–05–05
  11. By: Nicola Acocella; Giovanni Di Bartolomeo
    Abstract: Issues of policy effectiveness and neutrality are widespread in the economic literature. They have been increasingly raised in specific contexts within the class of LQ (linear-quadratic) policy games in the last 20 years, notably with reference to monetary policy. The more general conditions ensuring nonneutrality in a strategic environment remain however to be inquired. We fill this gap by applying the classical theory of economic policy to a strategic context. This is also useful to highlight some existence conditions for policy game solutions. We restrict ourselves to the common LQ-games in a static perfect information framework, but our simple logic can be extended to other more general situations.
    Keywords: LQ-policy games, policy ineffectiveness, controllability.
    JEL: C72 E52 E61
    Date: 2005–07
  12. By: Chew Lian Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sandy Suardi (School of Economics, The University of Queensland)
    Abstract: This paper tests for the presence of nonlinear dynamics in selected Asian short rates and employs a regime varying unit root test to detect non-stationarity for distinct regimes. Nonlinearities in the form of Markov-switching dynamics are found in all short rates sample. The mean-reverting behaviour of interest rates is dependent on both the level and volatility of interest rates. The occasional random walk and mean-reverting dynamics of short rates are attributed to the macroeconomic fundamentals, exchange rate regimes and monetary policy objectives in these economies.
    Date: 2005–09
  13. By: Harck, Søren (Department of Economics, Aarhus School of Business)
    Abstract: Prisdannelsen og faktorefterspørgslen i Det økonomiske Råds sekretariats SMEC-model af dansk <p> økonomi har siden 1998 været teoretisk begrundet i en underliggende Cobb-Douglas teknologi (i <p> kombination med en antagelse om omkostningsminimering). I SMEC-forgængeren SMEC 94 var det <p> derimod markup-pricing, der blev påberåbt som det teoretiske rationale. Denne artikel giver for det <p> første en stiliseret fremstilling af, hvordan DØRS forestiller sig Cobb-Douglas set-up’et bestemme <p> BFI- deflatoren og prisen på indenlandsk produktion. Mere væsentligt demonstrerer artiklen for det <p> andet, at det anførte teoretiske rationale er hult: at prisrelationerne og faktorefterspørgslen i bund og <p> grund er tautologier, og at prisdannelsen i SMEC 99 trods det ydre skin er uden egentlig teoretisk <p> forankring
    Keywords: No keywords;
    JEL: E10 E24 E25 E31 E60
    Date: 2005–12–07
  14. By: Hakan Berument; M. Eray Yücel; Zübeyir Kilinç
    Date: 2005
  15. By: Francesco VENTURINI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: By the mid-1990s, the extraordinary advances in semiconductors enhanced the embodied nature of information technology, fuelling the efficiency growth in computers and communication equipment industries. The consequent fall in prices enabled the rapid diffusion of these new technologies, which have thus reached the critic threshold to foster productivity growth.;In light of the recent growth pattern of the United States, this paper presents a model where the endogenous engine of development is the learningby-doing process stemming from the usage of ICT for investment and consumption.;Relying upon a two-sector framework (a' la Whelan) that distinguishes between ICT-producers and -users, our model provides a sound representation of the stylized facts of the Information Age.
    Keywords: ICT, learning-by-doing, productivity resurgence
    JEL: E21 E22 O41
    Date: 2006–05
  16. By: Harald Uhlig
    Abstract: Linear Methods are often used to compute approximate solutions to dynamic models, as these models often cannot be solved analytically. Linear methods are very popular, as they can easily be implemented. Also, they provide a useful starting point for understanding more elaborate numerical methods. It shall be described here first for the example of a simple real business cycle model, including how to easily generate the log-linearized equations needed before solving the linear system. For a general framework, formulas are provided for calculating the recursive law of motion. The algorithm described here is implemented with the "toolkit" programs available per "" .
    Keywords: numerical methods, linear solution method, loglinearization, dynamic stochastic general equilibrium methods, recursive law of motion
    JEL: C60 C61 C63 E32
    Date: 2006–04
  17. By: Ruthira Naraidoo (Keele University, Centre for Economic Research and School of Economic and Management Studies); Patrick Minford (Cardiff Business School, Aberconway Building, Cardiff University)
    Abstract: We develop a theoretical nonlinear model of equilibrium unemployment and test its policy implications for a number of OECD countries. The theory here sees the natural rate and the associated equilibrium path of unemployment as endogenous, pushed by the interaction of shocks and the institutional structure of the economy; the channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate of unemployment react to shocks by demanding more or less social protection. The reduced form results from a dozen OECD economies give support to the model and further evidence is obtained by structural estimates for the UK.
    Keywords: Equilibrium unemployment, political economy, vicious and virtuous circles, bootstrapping
    JEL: C15 C22 E24
    Date: 2006–03
  18. By: Michael Bordo; Harold James
    Abstract: The case for monetary simplification and unification has been made since the middle of the nineteenth century. It rests on four principal arguments ;reduced transaction costs; establishing credibility; preventing bad policy in other states; political integration via money. In this paper we argue that the case for monetary integration is becoming increasingly less persuasive. In making our case we posit a different concept of money to the one that underlay the nineteenth century discussions which we term "Newtonian" since it was based on the assumption of a single reference external to the state reflected in the definition of value in terms of precious metals. In the twentieth century, views of money have shifted to a more " Einsteinian" or relativistic conception. Measures of value that move relative to each other are helpful in terms of dealing with large shifts in relative prices that affect different countries very differently. In the current age of globalization, "Einsteinian" money is capable of accommodating shifts that were politically destructive in the " Newtonian" world.
    JEL: N20 F33 E42
    Date: 2006–05
  19. By: Patrizio Pagano (Bank of Italy, Economic Research Department); Massimiliano Pisani (Bank of Italy, Economic Research Department)
    Abstract: This paper documents the existence of a significant forecast error on crude oil futures, particularly evident since the mid-1990s, which is negative on average and displays a non-trivial cyclical component (risk premium). We show that the forecast error on oil futures could have been explained in part by means of real-time US business cycle indicators, such as the degree of utilized capacity in manufacturing. An out-of-the-sample prediction exercise reveals that futures which are adjusted to take into account this time-varying component produce significantly better forecasts than those of the unadjusted futures and random walk, particularly at horizons of more than 6 months.
    Keywords: Oil, Forecasting, Futures
    JEL: E37 E44 G13 Q4
    Date: 2006–03
  20. By: Étienne Wasmer
    Abstract: This paper discusses the various causal relations between unemployment and participation to the labor market, notably for groups with elastic labor supply such as women. A flow model of labor market participation is used to describe how various exogenous variations jointly affect unemployment and participation. Empirical tests based on time-series of OECD countries are proposed. Notably, the model is used to determine short-run identification restrictions of a structural VAR. It concludes that, in some countries, fast rising female participation may have had a moderate short and medium run impact on unemployment rates. A variance decomposition exercise indicates that, in Continental Europe, participation is driven in the short run by unemployment shocks, while in the US, it is driven by participation shocks, interpreted as demography or immigration. Unemployment in Europe is driven in the short run by participation shocks while in the US, it is driven by unemployment shocks.
    Keywords: Unemployment, Labor market participation, Female participation
    JEL: J1 J6 E24
    Date: 2006
  21. By: Allan Drazen; Marcela Eslava
    Abstract: We present a model of political budget cycles in which incumbents influence voters by targeting government spending to specific groups of voters at the expense of other voters or other expenditures. Each voter faces a signal extraction problem: being targeted with expenditure before the election may reflect opportunistic manipulation, but may also reflect a sincere preference of the incumbent for the types of spending that voter prefers. We show the existence of a political equilibrium in which rational voters support an incumbent who targets them with spending before the election even though they know it may be electorally motivated. In equilibrium voters in the more "swing" regions are targeted at the expense of types of spending not favored by these voters. This will be true even if they know they live in swing regions. However, the responsiveness of these voters to electoral manipulation depends on whether they face some degree of uncertainty about the electoral importance of the group they are in. Use of targeted spending also implies voters can be influenced without election-year deficits, consistent with recent findings for established democracies.
    JEL: D72 E62 D78
    Date: 2006–05
  22. By: Eiji Ogawa; Junko Shimizu
    Abstract: We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries (Williamson (2005)). We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates as more countries applied the AMU peg system in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G-3 currency basket peg system for four (Indonesia, the Philippines, South Korea and Thailand) of the seven countries. The results suggest that the AMU basket peg would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others.
    JEL: E6 F3 F4
    Date: 2006–05
  23. By: Manisha Chakrabarty (Keele University, Department of Economics); Anke Schmalenbach (Department of Economics, University of Bonn); Jeffrey Racine (Department of Economics, Syracuse University)
    Abstract: In this paper we analyze the relevance of characteristics of the income distribution in an aggregate consumption relation. In particular, we use a statistical distributional approach toward aggregation in order to model the aggregate consumption relation of a heterogeneous population, and apply it to UK-Family Expenditure Survey data for the years 1974-1993. We consider a nonparametric estimation methodology, which accounts for the presence of continuous and discrete variables, and, for comparison purposes, a linear parametric method. A bootstrap test on the nonparametrically estimated parameters suggests that, in addition to the mean, the dispersion of income is also relevant. Additionally, the time-invariance of the parameters of the aggregate relation is rejected. These findings have important implications for constructing empirically sound models of aggregate consumption expenditure.
    Keywords: Aggregate Consumption, Heterogeneity, Dispersion, Local Linear Regression, Average Derivative
    JEL: C12 C14 D12 E21
    Date: 2004–11
  24. By: Márcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Juliana Salomão
    Abstract: More than eleven years after the end of hyperinflation in Brazil, domestic bond markets have been unable to lengthen the average maturity of both public and private bonds. This paper shows that the lengthening is theoretically and practically (we analyzed the experiences of Israel, Mexico and Poland), a consequence of persistent stabilization programs that successfully reduced systemic risk. Therefore, it is pointless to try to achieve the lengthening as an objective in isolation. It is necessary to improve the economic fundamentals that maintain a high level of systemic risk. Only in this context, measures that aim at lengthening bonds’ maturity will indeed produce positive results.
    JEL: E43 E44 F34 H63 G15
    Date: 2006–03
  25. By: Richter, Kaspar
    Abstract: Thailand is one of the most successful developing countries. After decades of rapid growth, the economy rebounded quickly from the 1997-98 Asian crisis and is set to continue its expansion into the future. Nevertheless, there are doubts about the resilience of the Thai economy. The country appears to be on a lower growth projectory now than before the crisis. What growth can Thailand realistically expect? And what can the government do to sustain such growth into the future? Using a new methodology for identifying binding constraints to growth (Rodrik 2004 and Hausmann and others 2005), the author argues that Thailand ' s challenge is to maintain growth levels of 4 to 5 percent over the medium term. To achieve this goal, Thailand needs to continue its efforts of improving business infrastructure, trade integration, and skills, as well as intensifying its governance reforms.
    Keywords: Economic Theory & Research,Economic Growth,Pro-Poor Growth and Inequality,Investment and Investment Climate,Inequality
    Date: 2006–05–01
  26. By: Harck, Søren (Department of Economics, Aarhus School of Business)
    Abstract: No abstract
    Keywords: No keyword;
    JEL: E00
    Date: 2005–11–01
  27. By: Martinez-Vazquez, Jorge; Bahl, Roy
    Abstract: While there is extensive knowledge about how to design fiscal decentralization policies, considerably less is understood about how a decentralization program should be sequenced and implemented. Countries embarking on decentralization often struggle with decisions about the essential components of decentralization, including the order of an introduction of decentralization policies, the number of years necessary to bring a full program on line, and the components of the transition strategy. The authors argue that the sequencing of decentralization policies is an important determinant of its success. The consequences of a poorly sequenced decentralization program can range from minor delays and complications to ineffectiveness and subsequent failing support of decentralization efforts, macroeconomic instability, and fundamental failure in public sector delivery. At a minimum, the strategy of " making it up as we go " will not lead to the same structure of decentralization as will a planned strategy. The paper raises two questions: First, is there an optimal sequencing for decentralization policies and implementation? The answer is that there is, and that following these sequencing rules can reduce the costs and risks of implementing fiscal decentralization. Second, to what extent do countries follow these optimal sequencing rules? The answer is, in general, they do not. The gap between theory and practice is a result of the complexity of sequencing design, which discourages fiscal planners from implementing the full process. In addition, sequencing requires a sustained discipline and vision for its implementation, as well as overcoming pressures from political actors, especially in developing countries.
    Keywords: Decentralization,Subnational Regional Economics,Economic Theory & Research,Teaching and Learning,Regional Rural Development
    Date: 2006–05–01
  28. By: Serkan Arslanalp; Peter Blair Henry
    Abstract: The G-8 Multilateral Debt Relief Initiative (MDRI) is the next step of the Highly Indebted Poor Countries Initiative (HIPC). There are two reasons why MDRI is unlikely to help poor countries. First, the amount of money at stake is trivial. The roughly $2 billion of annual debt payments to be relieved under MDRI amounts to roughly 0.01 percent of the GDP of the OECD countries—a mere one-seventieth (1/70) of the quantity of official development assistance agreed to by world leaders on at least three separate occasions (1970, 1992, 2002). Second, the existence of debt overhang is a necessary condition for debt relief to generate economic gains. Since the world's poorest countries do not suffer from debt overhang, debt relief is unlikely to stimulate their investment and growth. The principal obstacle to investment and growth in the world’s poorest countries is the fundamental inadequacy in these countries of the basic institutions that provide the foundation for profitable economic activity. In light of these facts, the MDRI may amount to a Pyrrhic victory: A symbolic win for advocates of debt relief that clears the conscience of the rich countries but leaves the real problems of the poor countries unaddressed.
    JEL: E F O
    Date: 2006–05
  29. By: Anusha Chari; Peter Blair Henry
    Abstract: We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firm's expected future sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment.
    JEL: E F G
    Date: 2006–05
  30. By: Márcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Bernando S. de M. Carvalho (Gávea Investimentos)
    Abstract: We analyze the Brazilian experience in the 1990s to access the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) lead us to conclude that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. We then conducted interviews with market players in order to provide several examples of the financial strategies that were used in this period to invest in the Brazilian fixed income market while bypassing capital controls. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets. Therefore, policy-makers should avoid spending the scarce resources of bank supervision trying to implement them and focus more in improving economic policy.
    JEL: E44 F32 F34 F36 G15
    Date: 2006–03
  31. By: Marashdeh, Hazem (University of Wollongong); Saleh, Ali Salman (Monash University Malaysia)
    Abstract: This study re-examines the relationship between the budget deficit and the trade deficit in Lebanon. In contrast to earlier studies, we start by testing for a unit root in the presence of structural change using the Innovational Outlier (IO) model. This study also utilizes the newly proposed autoregressive distributed lag (ARDL) approach to examine such a relationship. The results show that the endogenously determined times of the breaks coincide with observed real events occurring during the years of Civil War in Lebanon and especially after the Israeli invasion of Beirut in 1982. This study finds, as well, that the trade deficit in Lebanon has a long run impact on the budget deficit.
    Keywords: Budget deficit, trade deficit, structural break, ARDL, Lebanon
    JEL: C13 C22 E6
    Date: 2006
  32. By: Tyrefors, Björn (Dept. of Economic Statistics, Stockholm School of Economics)
    Abstract: This paper uses a compulsory amalgamation reform of municipalities in Sweden to test for geographical opportunistic political behavior. The reform has favorable characteristics from an econometrical and causal point of view, since it was based on observables. The reform gives the local government incentives to increase borrowing before the amalgamation takes place, since the cost will be shared by all tax payers in the amalgam. The strength of the incentive to free ride will be determined by the population size, relative to the population size of the amalgam. The law of amalgamation was decided upon in 1969 and postulated that all amalgamations should be finalized by the beginning of 1974. We test if relative population size affects budget deficits in the years after the decision of the reform, but before the amalgamation takes place. We find a significant and sizeable free riding effect. The result is robust to various specifications and tests and corresponds to a common pool type of behavior as in Weingast, Shepsle and Johnsen (1981).
    Keywords: common pool; selection on observables; amalgamations
    JEL: D72 E62 H72 H74
    Date: 2006–04–26

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