nep-mac New Economics Papers
on Macroeconomics
Issue of 2007‒11‒24
48 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Inertia in Taylor Rules By Driffill, John; Rotondi, Zeno
  2. The timeless perspective vs. discretion : theory and monetary policy implications for an open economy By Guender, Alfred V.
  3. Unconditionally Optimal Monetary Policy By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  4. Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico By Konstantinos Angelopoulos; George Economides; Vangelis Vassilatos
  5. Forecasting the South African Economy: A DSGE-VAR Approach By Samrat Goswami; Rangan Gupta; Eric Scaling
  6. Liability Dollarization and Fear of Floating By Quoc Hung Nguyen
  7. Inflation and Financial Development: Evidence from Brazil By Manoel Bittencourt
  8. Chaos and Sector-specific Externalities By David R. Stockman
  9. Macroeconomic Performance and Inequality: Brazil 1983-1994 By Manoel Bittencourt
  10. Measurement Error in Monetary Aggregates: A Markov Switching Factor Approach By Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
  11. Examining the bond premium puzzle with a DSGE model By Glenn D. Rudebusch; Eric T. Swanson
  12. Empirical Significance of Learning in a New Keynesian Model with Firm-Specific Capital By James Murray
  13. Resurrecting Keynes to Revamp the International Monetary System By Pietro Alessandrini; Michele Fratianni
  14. The timing and magnitude of exchange rate overshooting By Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J.
  15. Financial Intermediation in Developed Countries: Heterogeneity, Lengthening and Risk Transfer By Michel Boutillier; Nathalie Lévy; Valérie Oheix
  16. Multiple paper monies in Sweden, 1789-1903: Substitution or complementarity? By Engdahl, Torbjörn; Ögren, Anders
  17. Why Are Saving Rates of Urban Households in China Rising? By Marcos Chamon; Eswar Prasad
  18. Do Increased Private Saving Rates Spur Economic Growth? By Kazimierz Laski
  19. Financial Development and Inequality: Brazil 1985-1994 By Manoel Bittencourt
  20. Information and Communication Technologies, Market Rigidities and Growth: Implications for EU Policies By Barrios, Salvador; Burgelman, Jean-Claude
  21. Terá a política monetária do Banco Central Europeu sido adequada para Portugal (1999-2007)? By Manuel Mota Freitas Martins
  22. Communicating Policy Options at the Zero Bound By Burkhart, Lucas; Fischer, Andreas M
  23. The Ottawa Group after Ten Meetings: Future Priorities By Diewert, Erwin
  24. Fiscal Reform, Growth and Current Account Dynamics By Creina Day; Garth Day
  25. Fiscal rules, public investment, and growth By Serven, Luis
  26. Information processing with recursive utility: some intriguing results By Frode Brevik; Stefano d'Addona
  27. Dezessete Anos de Política Fiscal no Brasil: 1991-2007 By Fabio Giambiagi
  28. Employment Protection, Firm Selection, and Growth By Markus Poschke
  29. The Euro, a blessing for Africa? Consequences of the peg of the African Franc CFA to the Euro By Kohnert, Dirk
  30. Counterfeiting as private money in mechanism design By Ricardo Cavalcanti; Ed Nosal
  31. Using a New Open Economy Macroeconomics model to make real nominal exchange rate forecasts By Sellin, Peter
  32. The growing role of the euro in emerging market finance By Masson, Paul R.
  33. The Dynamics of Sectoral Labour Adjustment By Stephen Tapp
  34. Imperfect monitoring and the discounting of inside money By David C. Mills, Jr.
  35. GDP per capita or Real Wages? Making sense of coflicting views on pre-industrial Europe By Luis Angeles
  36. Lost in Transition: The Costs and Consequences of Sectoral Labour Adjustment By Stephen Tapp
  37. The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach By Agar Brugiavini; Erich Battistin,; Enrico Rettore; Guglielmo Weber
  38. Housing supply in the Netherlands By Wouter Vermeulen; Jan Rouwendal
  39. Nonparametric Regression Density Estimation Using Smoothly Varying Normal Mixtures By Villani, Mattias; Kohn, Robert; Giordani, Paolo
  40. Price Dynamics in Japan (1981-2001): A Structural Analysis of Mechanisms in the Goods and Labor Markets By Nicolas Canry; Julien Fouquau; Sebastien Lechevalier
  41. Fear of appreciation By Sturzenegger, Federico; Levy-Yeyati, Eduardo
  42. Regional Unemployment and Human Capital in Transition Economies By Stepán Jurajda; Katherine Terrell
  43. Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make By Pedro S. Martins
  44. Measuring Productivity in the System of National Accounts By Diewert, Erwin
  45. Macroeconomic Volatility and Stock Market Volatility,World-Wide By Francis X. Diebold; Kamil Yýlmaz
  46. The Thai Currency Crisis: Fracture in a Fixed Exchange Rate Regime By Hartogh, Matthew
  47. CAUSES OF BANKRUPTCY IN EUROPE AND CROATIA By Novak, Branko; Sajter, Domagoj
  48. Foreign Capital and Economic Growth By Eswar S. Prasad; Raghuram G. Rajan; Arvind Subramanian

  1. By: Driffill, John; Rotondi, Zeno
    Abstract: The inertia found in econometric estimates of interest rate rules is a continuing puzzle. Many reasons for it have been offered, though unsatisfactorily, and the issue remains open. In the empirical literature on interest rate rules, inertia in setting interest rates is typically modelled by specifying a Taylor rule with the lagged policy rate on the right hand side. We argue that inertia in the policy rule may simply reflect the inertia in the economy itself, since optimal rules typically inherit the inertia present in the model of the economy. Our hypothesis receives some support from US data. Hence we agree with Rudebusch (2002) that monetary inertia is, at least partly, an illusion, but for different reasons.
    Keywords: expectations hypothesis; Interest Rate Rules; Interest Rate Smoothing; Monetary Policy; Monetary Policy Inertia; Predictability of interest rates; Taylor rule; term structure
    JEL: E52 E58
    Date: 2007–11
  2. By: Guender, Alfred V.
    Abstract: This paper proposes an open-economy Phillips Curve that features a real exchange rate channel. The resulting target rule under optimal policy from a timeless perspective (TP) involves additional history dependence in the form of lagged inflation. The target rule also depends on the discount factor as well as IS and Phillips Curve parameters. This is in sharp contrast to a closed economy where the target rule depends only on the change in the output gap, the current rate of inflation and the structural parameter in the Phillips Curve. Because of the additional history dependence in an open economy, price level targeting is no longer consistent with optimal policy. If a real exchange rate channel does not exist in the Phillips Curve, monetary policy eases in the wake of a positive cost-push disturbance under policy from a TP and is thus diametrically opposed to same under discretion. Maximum gains accrue from commitment relative to discretion in an open economy where the real exchange rate is absent from the Phillips Curve and the policymaker places strong emphasis on maintaining price stability.
    Keywords: Timeless Perspective, Discretion, Price Level Targeting, Exchange Rate Channel
    JEL: E52 F41
    Date: 2007
  3. By: Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: We develop a simple and intuitive approach for analytically deriving unconditionally optimal (UO) policies, a topic of enduring interest in optimal monetary policy analysis. The approach can be employed to both general linear-quadratic problems and to the underlying non-linear environments. We provide a detailed example using a canonical New Keynesian framework.
    Keywords: Unconditional expectations, optimal monetary policy.
    JEL: E20 E32 F32 F41
    Date: 2007–10
  4. By: Konstantinos Angelopoulos; George Economides; Vangelis Vassilatos
    Abstract: This paper shows that the dependence of the standard real business cycle (RBC) model on unobservable technology shocks can be reduced once we allow for weak property rights. This is motivated by the empirical observation that changes in institutions in emerging markets are related to the evolution of the main macroeconomic variables. We thus incorporate weak property rights in the baseline RBC model and use the ICRG dataset to obtain a proxy for the persistence and standard deviation of the degree of protection of property rights in Mexico. We find that this model does not need to rely on unobservable technology shocks, as innovations to the degree of protection of property rights only (i.e. without a technology shock) can predict the second moments of the main economic variables quite well.
    Keywords: Property rights, institutions, business cycles
    JEL: D7 E62 E32
    Date: 2007–09
  5. By: Samrat Goswami (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Eric Scaling (Department of Economics, University of Pretoria)
    Abstract: This paper develops an estimable hybrid model that combines the theoretical rigor of a micro-founded DSGE model with the flexibility of an atheoretical VAR model. The model is estimated via maximum likelihood technique based on quarterly data on real Gross National Product (GNP), consumption, investment and hours worked, for the South African economy, over the period of 1970:1 to 2000:4. Based on a recursive estimation using the Kalman filter algorithm, the out-of-sample forecasts from the hybrid model are then compared with the forecasts generated from the Classical and Bayesian variants of the VAR for the period 2001:1-2005:4. The results indicate that, in general, the estimated hybrid DSGE model outperforms the Classical VAR, but not the Bayesian VARs in terms of out-of-sample forecasting performances.
    Keywords: DSGE Model, VAR and BVAR Model, New-Keynesian-Macroeconomic Model, Forecast Accuracy, DSGE Forecasts, VAR Forecasts, BVAR Forecasts.
    JEL: E17 E27 E32 E37 E47
    Date: 2007–07
  6. By: Quoc Hung Nguyen (University of British Columbia)
    Abstract: This paper addresses the question of whether "fear of floating" in developing countries can be justified as optimal discretionary monetary policy in a dollarized economy with Bernanke-type credit constraints in the import sector and nominal rigidities. Balance sheet effects magnify the macroeconomic consequences of the economy that experiences external and techolonogy shocks. It can be shown that the fixed exchange rate regime dominates the inflation targeting regime in both the role of cushioning shocks and in welfare terms.
    Keywords: Liability Dollarizaion, Fear of Floating, Imported Goods
    JEL: F0 F4
    Date: 2007–10
  7. By: Manoel Bittencourt (School of Economics, University of Cape Town / South Africa)
    Abstract: We examine the impact of inflation on financial development in Brazil and the data available permit us to cover the period between 1985 and 2002. The results–based initially on time-series and then on panel time-series data and analysis, and robust for different estimators and financial development measures–suggest that inflation presented deleterious effects on financial development at the time. The main implication of the results is that poor macroeconomic performance, exemplified in Brazil by high rates of inflation, have detrimental effects to financial development, a variable that is important for affecting, e.g. economic growth and income inequality. Therefore, low and stable inflation, and all that it encompasses, is a necessary first step to achieve a deeper and more active financial sector with all its attached benefits.
    Keywords: Financial development, inflation, Brazil
    JEL: E31 E44 O11 O54
    Date: 2007–10–10
  8. By: David R. Stockman (Department of Economics,University of Delaware)
    Abstract: Benhabib and Farmer (1996) explore the possibility of local indeterminacy in a twosector model with sector-speci c externalities. They nd that very small sector-specific externalities are su cient for local indeterminacy. In this case, it is possible to construct sunspot equilibria where extrinsic uncertainty matters. In this paper, I provide a global analysis of their model revealing the existence of Euler equation branching. This branching allows for regime switching equilibria with cycles and chaotic behavior. These equilibria occur whether the \local dynamics" are determinate or indeterminate.
    Keywords: two-sector model, regime switching, global indeterminacy, cycles and chaos
    JEL: E13 E32 E62
  9. By: Manoel Bittencourt (School of Economics, University of Cape Town / South Africa)
    Abstract: We examine how macroeconomic performance, mainly in the role of high rates of inflation, affected earnings inequality in the 1980s and early 1990s in Brazil. The results–based initially on national timeseries, and then on the relatively novel sub-national panel time-series T N data and analysis–show that the extreme inflation, combined with the incomplete indexation coverage seen at the time, had a regressive and significant impact on inequality. Thus, sound macroeconomic policies, which keep inflation low and stable in the long run, are to be a necessary first step of any policy package implemented to alleviate inequality in Brazil.
    Keywords: Brazil, inequality, inflation, indexation
    JEL: D31 E31 O11 O54
    Date: 2007–10–10
  10. By: Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R.
    Abstract: This paper compares the different dynamics of simple sum monetary aggregates and the Divisia indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although the traditional comparison of the series may suggest that they share similar dynamics, there are important differences during certain times and around turning points that can not be evaluated by their average behavior. We use a factor model with regime switching that offers several ways in which these differences can be analyzed. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each one series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors represent exactly where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We also find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginning and end of economic recessions, and during some high interest rate phases.
    Keywords: Measurement Error; Divisia Index; Aggregation; State Space; Markov Switching; Monetary Policy
    JEL: E4
    Date: 2007–06
  11. By: Glenn D. Rudebusch; Eric T. Swanson
    Abstract: The basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the "bond premium puzzle." We show that the term premium on long-term bonds in the canonical dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to the data. We find that introducing long-memory habits in consumption as well as labor market frictions can help fit the term premium, but only by seriously distorting the DSGE model's ability to fit other macroeconomic variables, such as the real wage; therefore, the bond premium puzzle remains.
    Keywords: Interest rates ; Econometric models
    Date: 2007
  12. By: James Murray (Indiana University Bloomington)
    Abstract: This paper examines the empirical significance of learning, a type of adaptive, boundedly rational expectations, in the U.S. economy within the framework of the New Keynesian model. Two popular specifications of the model are estimated: the standard three equation model that does not include capital, and an extended model that allows for endogenous capital accumulation. Estimation results for learning models can be sensitive to the choice for the initial conditions for agents expectations, so four different methods for choosing initial conditions are examined, including jointly estimating the initial conditions with the other parameters of the model. Maximum likelihood results show that learning under all methods for initial conditions lead to very similar predictions as rational expectations, and do not significantly improve the fit the model. The evolution of forecast errors show that the learning models do not out perform the rational expectations model during the run-up of inflation in the 1970s and the subsequent decline in the 1980s, a period of U.S. history which others have suggested learning may play a role. Despite the failure of learning models to better explain the data, analysis of the paths of expectations and structural shocks during the sample show that allowing for learning in the models can lead to different explanations for the data.
    Keywords: Learning, firm-specific capital, New Keynesian model, maximum likelihood
    JEL: C13 E22 E31 E50
    Date: 2007–11
  13. By: Pietro Alessandrini (Department of Economics, Università Politecnica delle Marche, Ancona); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: There is a broad consensus that the current, large U.S. current-account deficits financed with foreign capital inflows at low interest rates cannot continue forever; there is much less consensus on when the system is likely to end and how badly it will end. The paper resurrects the basic principles of the plan Keynes wrote for the Bretton Woods Conference to propose an alternative to the current international monetary system. We argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union. The new international money would be created against domestic earning assets of the Fed and the ECB. In addition to recording credit and debit entries of the supranational bank money, the new agency would determine the size of quotas, the size and time length of overdrafts, and the coordination of monetary policies. The substitution of supranational bank money for dollars would harden the external constraint of the United States and resolve the n-1 redundancy problem.
    Keywords: Keynes Plan, external imbalances, exchange rates, international monetary system, key currency, supranational bank money
    JEL: E42 E52 F33 F36
    Date: 2007–11
  14. By: Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J.
    Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy's sensitivity to exchange rate dynamic affect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting Phenomenon.
    Keywords: Exchange rate overshooting, Partial information, Learning
    JEL: E31 F31 F41
    Date: 2007
  15. By: Michel Boutillier; Nathalie Lévy; Valérie Oheix
    Abstract: We built an original database of flow of funds financial accounts in order to assess the final destination of households' financial wealth. Our method based on matrix calculation stepwise makes all financial intermediaries transparent. We reject the usual dichotomy between bankand market-based systems. The diversity of monetary and non-monetary financial intermediaries' roles includes various ways of interpenetration - consolidation in Europe, credit risk transfer techniques in the U.S. - and the lengthening of the intermediation chain. Based on the same function of transformation of indirect debt securities, it reinforces the Gurley and Shaw's unifying definition of financial intermediation.
    Keywords: Financial intermediation, risk management, input-output matrix, households’ wealth, bank-based systems, market-based systems, cross-sectoral activities
    JEL: C67 E01 E21 G2 G32 L16
    Date: 2007
  16. By: Engdahl, Torbjörn (Department of Economic History Stockholm University); Ögren, Anders (EHFF - Institute for Economic and Business History at the Stockholm School of Economics and HTE EconomiX (UMR 7166) CNRS Université de Paris X - Nanterre)
    Abstract: Complementarity of money mean that two or more kinds of monies together fulfil the demand of the users better than they would without the existence of the other(-s). In this paper we study complementarity between paper monies in Sweden. We address four questions: 1) What was used as money on a macro level (money supply) and on a micro level (monetary remittances)? 2) What was the relative value of different monies in parallel circulation? 3) Was there seasonal variations in use and/or value? 4) Was there geographical variations in use and value? What we find is that the complementarity helped to solve the problem of providing sufficient liquidity domestically over time and space and thus and to keep a stable value of the currency.
    Keywords: Complementarity; Liquidity; Money Supply; Money Remittances; Paper Money; Parallel Circulation of Money; Variations in Money Demand
    JEL: E50 G21 N13 N23
    Date: 2007–11–12
  17. By: Marcos Chamon (International Monetary Fund); Eswar Prasad (Cornell University and IZA)
    Abstract: From 1995 to 2005, the average urban household saving rate in China rose by 8 percentage points, to about one quarter of disposable income. We use household-level data to explain why households are postponing consumption despite rapid income growth. Tracing cohorts over time indicates a virtual absence of consumption smoothing over the life cycle. The age profile of savings has an unusual U-shaped pattern, with saving rates being the highest among the youngest and oldest households. We find that financial underdevelopment, as reflected in constraints on borrowing and low returns on financial assets, partially accounts for this pattern. Moreover, overall saving rates have increased across all demographic groups. We argue that this can be explained by the rising private burden of expenditures on housing, education, and health care.
    Keywords: household savings, age and cohort profiles of savings, borrowing constraints, precautionary savings, financial development, demographics
    JEL: D12 E21 O16
    Date: 2007–11
  18. By: Kazimierz Laski (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Growth of aggregate demand at any given private saving rate depends on growth of private investment, export surplus and budget deficit. Slower growth of private investment in the mid-1970s has triggered stagnation trends in Europe’s developed economies, caused mainly by inadequate aggregate demand. The relation between aggregate demand and the propensity to save is analysed in the present paper using the model of ‘stunted growth’ of Josef Steindl. The decreased utilization of capacity characteristic of stagnation can be counteracted by a reduction of the propensity to save. The most important factors determining the saving rate are distribution of incomes and the progressivity of the tax system. In many countries and periods, an inverse relation between the growth of GDP and of the private saving rate has been found and presented in the study.
    Keywords: aggregate demand, aggregate supply, ‘stunted growth‘ model, private saving rate, GDP growth
    JEL: E12 E21 H31 H32
    Date: 2007–09
  19. By: Manoel Bittencourt (School of Economics, University of Cape Town / South Africa)
    Abstract: We examine the impact of financial development on earnings inequality in Brazil in the 1980s and first half of the 1990s. The evidence– based on panel-time series data and analysis–shows that financial development had a significant and robust effect in reducing inequality during the period. We suggest that this is not only because the poorer can invest the acquired credit in either short or long-term productive activities, but also because those with access to financial markets can insulate themselves against recurrent poor macroeconomic performance, which is exemplified by high rates of inflation. The main implication of the results is that a deeper and more active financial sector, alleviates the high inequality seen in Brazil without distorting economic efficiency.
    Keywords: Financial development, inequality, Brazil
    JEL: D31 E44 O11 O54
    Date: 2007–10–10
  20. By: Barrios, Salvador; Burgelman, Jean-Claude
    Abstract: The renewed Lisbon strategy puts special emphasis on the potential role that Information and Communication Technologies can play in meeting the challenges of boosting growth, competitiveness and cohesion throughout the EU. There is also a general understanding among policy makers that investment of this kind and its related economic benefits can only materialize if labour, capital, product and service markets are flexible enough to facilitate ICT investment and the re-organisation of economic activities. This paper provides evidence of the influence of market rigidities on the propensity to invest in ICT and on the economic return of ICT investment in a number of EU countries, and in the US and Japan. We provide evidence that indicates that market rigidities deter ICT investment and lower the impact of ICT on GDP growth by considering a number of indicators reflecting barriers to business creation and the degree of market regulation in labour and capital markets. These results are invariant, even when other potential determinants of ICT investments and ICT contribution to GDP growth such as the degree of specialisation in ICT-producing industries, past ICT investment, business cycles conditions and a measure of trade openness are controlled for. The paper provides a number of policy implications, most notably, regarding the role played by structural reforms in promoting both ICT adoption and setting the best framework conditions for ICT impact on GDP growth. While the renewed EU Lisbon strategy of economic reforms is badly needed to increase EU growth potential, we show here that this strategy is also needed to promote technological change in the EU economy.
    Keywords: Information and Communication Technologies; ICT; Growth; European Union; Lisbon Strategy
    JEL: E22 O33 E01
    Date: 2007–11–20
  21. By: Manuel Mota Freitas Martins (CEMPRE, Faculdade de Economia, Universidade do Porto)
    Abstract: Este artigo pretende aferir se a política monetária do BCE em 1999:I-2007:II foi consistente com a que resultaria da aplicação das respectivas preferências à situação macroeconómica de Portugal. Começa-se por estimar os parâmetros da função-objectivo do BCE, com dados da Zona Euro 1999:I-2007:II, assumindo uma política discricionária óptima sujeita a uma estrutura macroeconómica AS-AD dinâmica simples. Em seguida, especifica-se um modelo análogo para a estrutura económica portuguesa aumentado para reflectir a sua natureza pequena e aberta e, com dados para Portugal 1999:I-2007:II, estima-se esse modelo em simultâneo com a condição de que a política monetária teria sido conduzida sob a função-objectivo do BCE. Simula-se, finalmente, a política monetária que resultaria desse modelo e compara-se o caminho simulado para a taxa de juro de curto prazo com o observado em 1999:I-2007:II. Em resumo, conclui-se que a política monetária adequada a Portugal teria envolvido taxas de juro substancialmente superiores às observadas — cerca de 1.6 pontos percentuais em média por trimestre — especialmente a partir de 2003. A diminuição da inflação induziria uma estabilização da taxa de câmbio efectiva real, o que parcialmente explica o redobrado vigor restritivo da política monetária óptima após 2003. Os custos reais da convergência nominal simulada não parecem substanciais.
    Keywords: Banco Central Europeu; Zona Euro; Portugal; Política monetária óptima.
    JEL: E58 E52 C32
    Date: 2007–11
  22. By: Burkhart, Lucas; Fischer, Andreas M
    Abstract: This paper examines a special episode in communication practices of the Swiss National Bank (SNB) when short-term interest rates reached the zero bound. A particular feature of SNB communication policy at the time was to talk openly about alternative policy instruments despite the fact that they were never implemented. Non-sterilized FX interventions were frequently mentioned as a potential instrument. We ask how did financial markets respond to the SNB's repeated references of non-sterilized interventions? The empirical results with high frequency data provide strong evidence that SNB intervention references depreciated the domestic currency for several hours. The case study supports the view that communication is an effective tool for monetary policy.
    Keywords: Central Bank Communication; Exchange Rate; zero bound
    JEL: E58 F31
    Date: 2007–11
  23. By: Diewert, Erwin
    Abstract: The paper briefly reviews the accomplishments of the Ottawa Group on the occasion of its tenth meeting and then goes on to list ten problem areas in price measurement that have not been completely resolved and hence should be a focus of future meetings. The ten problem areas are: (1) the construction of elementary indexes when price and quantity data are available; (2) the construction of user costs for capital inputs; (3) the quality adjustment of prices; (4) the construction of price indexes for owner occupied housing; (5) problems associated with difficult to measure services; (6) the treatment of prices associated with household production; (7) the measurement of export and import prices in the production accounts of the System of National Accounts; (8) the treatment of seasonal products; (9) the measurement of core inflation and (10) the treatment of new goods.
    JEL: C43 C81 E31
    Date: 2007–11–16
  24. By: Creina Day; Garth Day
    Abstract: This paper examines the dynamic and long run effects of a shift from income taxes to consumption taxes in a growing small open economy. We extend the small open economy Solow-Swan model by introducing a government sector that maintains both a balanced budget and expenditure at a constant proportion of domestic income. Switching to lower income taxes promotes economic growth and improves the current account balance, despite an instantaneous drop.
    JEL: E62 F41 F43 H20 H60 O41
    Date: 2007–09
  25. By: Serven, Luis
    Abstract: Solvency is an intertemporal concept, relating to the present value of revenues and expenditures, and encompassing both assets and liabilities. But the standard practice among policy makers, financial market participants and international financial institutions is to assess the strength of the fiscal accounts solely on the basis of the cash deficit. Short-term cash flows matter, but a preponderant focus on them can encourage governments to invest too little, especially during episodes of fiscal tightening. This has potentially adverse consequences for growth and, paradoxically, even for fiscal solvency itself. The paper offers an overview of the links between fiscal targets, public investment, and public sector solvency. After reviewing the international experience with public investment under fiscal adjustment, the paper lays out an analytical framework to illustrate the consequences of using the public deficit as a guide to solvency. The paper then discusses some alternatives to conventional cash deficit rules and their implications for investment and fiscal solvency.
    Keywords: Debt Markets,Public Sector Expenditure Analysis & Management,Access to Finance,,Public Sector Economics & Finance
    Date: 2007–11–01
  26. By: Frode Brevik; Stefano d'Addona
    Abstract: We study information processing in a simple endowment economy where the mean consumption growth rate are governed by a hidden state variable and agents have recursive preferences. We show that for typical parameter values, there is a strong incentive to commit to ignoring future information on the state of the economy, but that such commitment raises time-inconsistency problems. We estimate the model on postwar US data and find that the representative consumer can achieve a utility gain equivalent to a 20% increase in lifetime consumption simply by not paying attention to the state of the economy.
    Keywords: Recursive preferences, Epstein-Zin preferences, Uncertainty aversion,Information processing, Time inconsistency
    JEL: D83 D84 E32
    Date: 2007–10
  27. By: Fabio Giambiagi
    Abstract: The purpose of this paper is to allow a precise knowledge about the Brazilian public sector fiscal accounts. The article shows the trajectory of the Brazilian fiscal policy since the beginning of the ?above the line? indicators, developed to follow the evolution of revenues and expenditures, in 1991. In this period of almost 20 years, the primary expenditures of the Central Government increased from 14% of GDP in 1991, to an estimation of 22% of GDP in 2007. In the same period, revenues of Central Government escalated from 15% to 24% of GDP and the tax burden from 24% to around 35% of GDP. In spite of this, public investment has been lower than in the 80s. The article presents a set of fiscal indicators, with the purpose of register a period of important transformations; deeply analyzes the detailed evolution of the variables; syntetizes the most relevant trends of the period; and presents a diagnosis of the changes occurred and the problems that should be faced in the next years. The conclusion is that the public expenditures that leaded the growth in the 1991-2007 period were that considered as ?social expenditures?. Another important conclusion is that the thesis regarding the irrelevancy of new reforms, and also the one that we can see a next big fiscal crisis, could both be wrong, if the economy has a yearly growth rate of around 4%.
    Date: 2007–11
  28. By: Markus Poschke (McGill University, EUI and IZA)
    Abstract: This paper analyzes the effect of firing costs on aggregate productivity growth. For this purpose, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms, and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth - by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for welfare and growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU-U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here. A brief empirical analysis of the impact of firing costs on the size of exiting firms supports the model’s conclusions.
    Keywords: endogenous growth theory, firm dynamics, labor market regulation, firing costs, entry and exit, firm selection
    JEL: E24 J63 J65 L11 L16 O40
    Date: 2007–11
  29. By: Kohnert, Dirk
    Abstract: About five decades the Franc CFA-Zone in Western and Central Africa was praised as incarnation of economic and political stability in Africa, backed by France. But free convertibility and fixed parity, guaranteed by the French Treasury, mainly served the interest of a small elite of the Messieurs Afrique, both in France and in Africa. Generations of French entrepreneurs and of their African counterparts maintained a profitable self-service shop on expense of the African poor and the French taxpayer. In the aftermath of the devaluation of the Franc CFA in 1994, and of the peg of the currency to the Euro in 1998, the socio-economic divide between rich and poor, urban and rural regions, the formal and the informal sector even widened. However, the perpetuation of the established monetary structure of the CFA-Zone became increasingly anachronistic. As far as the political stability, previously guaranteed by the neo-colonial French Africa policy, becomes obsolete, the base for economic stability of the traditional arrangement of the currency union is threatened as well. The more so, as the CFA-Zone never fulfilled the most crucial preconditions of an optimal currency area. The peg to the EMU, orientated at the interests of highly industrialized European countries, led to an overvaluation of the real exchange rate of the CFA, and will increasingly constitute an obstacle to sustainable indigenous development in francophone Africa.
    Keywords: Monetary Union; regional integration; Optimum Currency Areas; Franc CFA-Zone; Francophone Africa; Euro; EMU
    JEL: F15 F35 E42 E52 F33 F31 F54 F36
    Date: 1998
  30. By: Ricardo Cavalcanti; Ed Nosal
    Abstract: We describe counterfeiting activity as the issuance of private money, one which is difficult to monitor. Our approach, which amends the basic random-matching model of money in mechanism design, allows a tractable welfare analysis of currency competition. We show that it is not efficient to eliminate counterfeiting activity completely. We do not appeal to lottery devices, and we argue that this is consistent with imperfect monitoring.
    Keywords: Counterfeits and counterfeiting ; Money
    Date: 2007
  31. By: Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.
    Keywords: New Open Economy Macroeconomics; real exchange rate; nominal exchange rate; forecasting
    JEL: C52 C53 F31
    Date: 2007–10–01
  32. By: Masson, Paul R.
    Abstract: More than eight years after the introduction of the euro, impacts on developing countries have been relatively modest. Overall, the euro has become much more important in debt issuance than in official foreign exchange reserve holdings. The former has benefited from the creation of a large set of investors for which the euro is the home currency, while demand for euro reserves has been held back by the dominance of the dollar as a vehicle and intervention currency, and the greater liquidity of the market for US treasury securities. Fears of further dollar decline may fuel some shifts out of dollars into euros, however, with the potential for a period of financial instability.
    Keywords: Debt Markets,Emerging Markets,Fiscal & Monetary Policy,Currencies and Exchange Rates,
    Date: 2007–11–01
  33. By: Stephen Tapp (Queen's University)
    Abstract: This paper develops an equilibrium search and matching model to jointly study the aggregate, sectoral, and distributional impacts of labour adjustment. The model extends Pissarides (2000) to include multisector production and search and "innovation" from investments that can potentially improve a match's productivity. These extensions deliver two mechanisms for inter-sectoral and intra-sectoral labour reallocation after shocks. First, because workers search simultaneously in multiple sectors, changes in labour market conditions in one sector propagate to impact wages and hiring in the rest of the economy through a reservation wage effect. Second, a positive productivity shock causes firms to invest more resources in innovation. This innovation effect shifts production towards high-skill jobs and amplifies the impact of productivity shocks relative to the baseline model. I show that the model is useful for analyzing labour adjustments caused by a diverse set of factors including: technological change; persistent energy price and exchange rate shocks; and trade liberalization. Finally, because the transition dynamics between steady-states are tractable, the model can be readily applied to the data to study particular labour adjustment episodes.
    Keywords: Sectoral Labour Reallocation, Search and Matching, Wage Spillovers, Transition Dynamics
    JEL: E2 J6 J21
    Date: 2007–11
  34. By: David C. Mills, Jr.
    Abstract: One of the fundamental questions concerning inside money is whether its issuers should be regulated and how. This paper evaluates the efficiency of one prevalent regulatory recommendation -- a requirement that private issuers redeem inside money on demand at par -- in a random-matching model of money where the issuers of inside money are only imperfectly monitored. I find that for sufficiently imperfect monitoring, a par redemption requirement leads to lower social welfare than if private money were redeemed at a discount. A central message of the paper is that if inside money and outside money are not perfect substitutes for one another, as is the case if there is sufficiently imperfect monitoring, a par redemption requirement may not be socially optimal because such a requirement effectively binds them to circulate as if they are. Such an outcome is a version of Gresham's law that bad money drives out good money.
    Date: 2007
  35. By: Luis Angeles
    Abstract: This paper studies the apparent inconsistency between the evolution of GDP per capita and real wages in pre-industrial Europe. We show that these two measures will diverge when any of the three following factors are present: changes in income distribution, changes in labour supply per capita and changes in relative prices. We propose a methodology for measuring the e¤ects of these three factors and apply it to the case of 18th century England. For this particular episode the gap between the growth of GDP per capita and real wages can be successfully explained and the main explanatory factor is changes in labour supply per capita. Some further conclusions are drawn from the experience of England during the 19th century and Europe during the early modern period.
    Date: 2007–06
  36. By: Stephen Tapp (Queen's University)
    Abstract: This paper demonstrates that factors which impede labour market adjustments can have first-order impacts on aggregate output and social welfare. While several studies find that individual workers can face large and persistent sectoral reallocation costs, this paper shows that these costs are important at the aggregate level. I use a search and matching model to isolate and quantify two factors that contribute to the costly and time-consuming adjustment process: search frictions and an inability to transfer match-specific skills to new jobs. I apply the model to examine Canada's sectoral labour adjustment after a global increase in commodity prices and associated exchange rate appreciation. These developments reorganized production to the resource sector and away from manufacturing. The model quantitatively captures both the sectoral employment and wage effects and the response of unemployment to changes in unemployment benefits. The model estimates that the costs of adjustment are economically important, accounting for up to three percent of output during the transition. These costs arise mainly in the first three years after the shock and are due largely to non-transferable skills. Finally, the analysis reveals important policy implications. Because changes to unemployment benefits affect sectors differently, these changes impact the economy's sectoral composition and aggregate productivity.
    Keywords: Sectoral Labour Reallocation, Adjustment Costs, Search and Matching, Skills and Training, Unemployment
    JEL: E2 J6 J08 J21 J24 Q43
    Date: 2007–11
  37. By: Agar Brugiavini (Department of Economics, University Of Venice Cà Foscari); Erich Battistin, (University of Padova); Enrico Rettore (University of Padova); Guglielmo Weber (University of Padova)
    Abstract: In this paper we investigate the size of the consumption drop at retirement in Italy. We use micro data on food and total non-durable household spending covering the period 1993-2004, and evaluate the change in consumption that accompanies retirement by exploiting the exogenous variability in pension eligibility to correct for the endogenous nature of the retirement decision. We take a regression discontinuity design approach, and make the identifying assumption that consumption would be the same around the threshold for pension eligibility if individuals would not retire. We check in our data that a non-negligible fraction of individuals retire as soon as they become eligible, and estimate at 9.8% the part of the non-durable consumption drop that is associated with retirement induced by eligibility. We show that such fall is not driven by liquidity problems for the less well off in the population, and can be accounted for by drops in goods that are work-related expenses or leisure substitutes. However, we also show that retirement induces a significant drop in the number of grown children living with their parents, and this can account for most of the retirement consumption drop.
    Keywords: Consumption, Regression Discontinuity Design, Retirement
    JEL: D9 E2
    Date: 2005
  38. By: Wouter Vermeulen; Jan Rouwendal
    Abstract: In spite of a growing recognition of the importance of supply conditions for the level and volatility of house prices, empirical work on housing supply outside the US is scarce. This paper considers various measures of housing supply in the Netherlands, where real house prices have roughly tripled since 1970. Besides the volume of investment in residential structures and new housing construction in units, we derive time series of structure and location quality in a hedonic analysis. Each of these variables appears to be almost fully inelastic with respect to house prices in at least the short to medium long run. Further analysis of the quality of location index shows that conventional models of competitive land and housing markets cannot account for these findings. However, they may be well explained in terms of the rather extensive body of interventions by the Dutch government.
    Keywords: Housing supply; residential investment; housing markets; land use regulation
    JEL: E22 R31 R52
    Date: 2007–09
  39. By: Villani, Mattias (Research Department, Central Bank of Sweden); Kohn, Robert (Faculty of Business, University of New South Wales); Giordani, Paolo (Research Department, Central Bank of Sweden)
    Abstract: We model a regression density nonparametrically so that at each value of the covariates the density is a mixture of normals with the means, variances and mixture probabilities of the com- ponents changing smoothly as a function of the covariates. The model extends existing models in two important ways. First, the components are allowed to be heteroscedastic regressions as the standard model with homoscedastic regressions can give a poor fit to heteroscedastic data, especially when the number of covariates is large. Furthermore, we typically need a lot fewer heteroscedastic components, which makes it easier to interpret the model and speeds up the computation. The second main extension is to introduce a novel variable selection prior into all the components of the model. The variable selection prior acts as a self-adjusting mech- anism that prevents overfitting and makes it feasible to fit high-dimensional nonparametric surfaces. We use Bayesian inference and Markov Chain Monte Carlo methods to estimate the model. Simulated and real examples are used to show that the full generality of our model is required to fit a large class of densities.
    Keywords: Bayesian inference; Markov Chain Monte Carlo; Mixture of Experts; Predictive inference; Splines; Value-at-Risk; Variable selection
    JEL: E50
    Date: 2007–09–01
  40. By: Nicolas Canry; Julien Fouquau; Sebastien Lechevalier
    Abstract: This paper aims to provide an alternative framework to previous studies of deflation in Japan. We focus on the real dimension of the price dynamics and propose an imperfect competition model, which describes a rent economy, where the formation of prices can be separated into the markup (level of the rent in the goods market) and the unit labor cost (distribution of the rent in the labor market). We use a panel industry dataset to analyze the impact of institutional and structural factors on the heterogeneous price dynamics of 10 manufacturing sectors. Although the evolution of unit labor costs seems to be the driving force of price dynamics in the manufacturing industry, our structural analysis leads to consider the importance of the increasingly competitive environment, as captured by rising import penetration. Along with the decline of bargaining power of the workforce, this is at the origin of the deflationary pressures that characterized the Japanese economy during the Lost Decade.
    Keywords: Deflation, Japanese Economy, Wage Bargaining, Markup, Deregulation, Panel Threshold Regression
    JEL: E31 C23
    Date: 2007–03
  41. By: Sturzenegger, Federico; Levy-Yeyati, Eduardo
    Abstract: In recent years the term " fear of floating " has been used to describe exchange rate regimes that, while officially flexible, in practice intervene heavily to avoid sudden or large depreciations. However, the data reveals that in most cases (and increasingly so in the 2000s) intervention has been aimed at limiting appreciations rather than depreciations, often motivated by the neo-mercantilist view of a depreciated real exchange rate as protection for domestic industries. As a first step to address the broader question of whether this view delivers on its promise, the authors examine whether this " fear of appreciation " has a positive impact on growth performance in developing economies. The authors show that depreciated exchange rates appear to induce higher growth, but that the effect, rather than through import substitution or export booms as argued by the mercantilist view, works largely through the deepening of domestic savings and capital accumulation.
    Keywords: Currencies and Exchange Rates,Emerging Markets,Debt Markets,Economic Theory & Research,Macroeconomic Management
    Date: 2007–11–01
  42. By: Stepán Jurajda (CERGE-EI, CEPR and IZA); Katherine Terrell (University of Michigan, CEPR and IZA)
    Abstract: Differences in regional unemployment in post-communist economies are large and persistent. We show that inherited variation in human-capital endowment across the regions of four such economies explains the bulk of regional unemployment variation there and we explore potential explanations for this outcome through related capital and labor mobility patterns. The evidence suggests that regions with high inherited skill endowments attract skilled workers as well as FDI. This mobility pattern, which helps explain the lack of convergence in regional unemployment rates, is consistent with the presence of complementarities in skill and capital. Nevertheless, we find no supporting evidence of human capital wage spillovers implied by the complementarities story. Unemployment of the least-skilled workers appears lower in areas with a higher share of college-educated labor and future research is needed to see if this finding as well as the observed migration pattern arise from different adjustments to regional shocks by education level brought about in part by Central European labor-market institutions, such as guaranteed welfare income raising effective minimum wages.
    Keywords: unemployment, human capital, regional labor markets, transition economies, labor mobility, complementarities, spillovers, Czech Republic, Hungary, Romania, Ukraine
    JEL: E24 J0 J61
    Date: 2007–11
  43. By: Pedro S. Martins (Queen Mary, University of London, CEG-IST Lisbon and IZA)
    Abstract: This paper provides evidence about the effects of dismissals-for-cause requirements, a specific component of employment protection legislation that has received little attention despite its potential relevance. We study a quasi-natural experiment generated by a law introduced in Portugal in 1989: out of the 12 paragraphs in the law that dictated the costly procedure required for dismissals for cause, eight did not apply to firms employing 20 or fewer workers. Using detailed matched employer-employee longitudinal data and differencein- differences matching methods, we examine the impact of that differentiated change in firing costs upon several variables, measured from 1991 to 1999. Unlike predicted by theory, we do not find robust evidence of effects on worker flows. However, firm performance improves considerably while wages fall. Overall, the results suggest that firing costs of the type studied here decrease workers’ effort and increase their bargaining power.
    Keywords: employment protection legislation, worker flows, wages, firm performance
    JEL: E24 J64 J65
    Date: 2007–10
  44. By: Diewert, Erwin
    Abstract: The paper reviews some of the measurement problems that are associated with measuring sectoral Total Factor Productivity growth rates. The paper notes that the production accounts in the present System of National Accounts (SNA) need to be extended somewhat in order to be suitable as a data base for measuring sectoral productivity growth rates. In particular, the treatment of exports, imports and indirect taxes is not completely adequate for productivity measurement purposes in the present SNA. Finally, the paper considers some of the problems that are associated with the measurement of banking sector outputs and the System of National Accounts FISIM (Financial Intermediation Services Indirectly Measured) imputations.
    JEL: C43 C67 C82 D24 D57 D92 E22 F11
    Date: 2007–11–16
  45. By: Francis X. Diebold (University of Pennsylvania and NBER); Kamil Yýlmaz
    Abstract: Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets.
    Keywords: Financial market, equity market, asset return, risk, variance, asset pricing
    JEL: G1 E0
    Date: 2004–03
  46. By: Hartogh, Matthew
    Abstract: Abstract If the financial press had been paying attention to some crucial barometers of currency instability in Thailand last year, the ensuing crisis in Asia would perhaps not have been so much of a surprise. On July 2,1997, the Thai government allowed the Baht to float against the Dollar for the first time in a decade. As we all now know, this effective devaluation set of a train of events which would shock all of the Asian economies which had hitherto enjoyed unqualified growth and prosperity for the last several years.
    Keywords: Exchange Rates Currency Baht
    JEL: E42
    Date: 2007–01–01
  47. By: Novak, Branko; Sajter, Domagoj
    Abstract: Bankruptcy is an interesting object of research, being habitually perceived as a shocking and scandalous event, tarnishing management reputation, stigmatizing its owners, and regularly leading to a dishonourable death of the company, leaving outstanding debts in legacy. Its interdisciplinary character makes it even more challenging and extends the reasons for researching it in depth. Apart from these motives, recently a number of researchers significantly contributed to this field, and some of them will be presented in this paper. On its way to becoming a member of the EU, the Croatian economy (and society in general) extensively compares its characteristics with the existing members. Since Croatian bankruptcy law is for the most part transferred from the corresponding German Insolvenzordnung (Insolvency law), German experiences in this field are especially interesting for Croatian bankruptcy researchers. Even though being a part of the EU, the United Kingdom’s Anglo-Saxon legislative theory and practice is relatively different from those of mainland Europe, therefore making it attractive for comparison. This triangle of country-specific bankruptcy features, where Germany and the United Kingdom embody rich diversity of the European Union, and Croatia symbolizes new member states (although not yet being a constituent) with their particular transition traits, is fit into Ooghe and Waeyaert’s (2004) universal, conceptual failure model. Thus, first presented will be a general bankruptcy cause model. Ooghe and De Prijcker (2006) presented four main types of failure processes. Their findings of bankruptcy causes are based on a case study of bankrupt Belgian companies but can be generalized as universal bankruptcy causes. They are examined in the second section. According to this model country-specific (the United Kingdom, Germany and Croatia) insolvency causes will be studied. Euler Hermes Kreditversicherung and the Center for Insolvency and Reorganization at the University of Mannheim published in November 2006 a comprehensive study of bankruptcy causes. This research and its results are exhibited in the third section, as well as an overview of the less recent Wieselhuber & Partner (2003) study of the insolvency causes and success factors of reorganization from the insolvency. At the same time the Euler Hermes and the Center for Insolvency and Reorganization study was being finalized, unacquainted with it, a somewhat similar research was being conducted in Croatia. Our research of bankruptcy causes in Croatia is presented in the fourth section. Finally, the concluding remarks will summarize the main findings of this paper.
    Keywords: Bankruptcy; insolvency; cause; Croatia; Europe
    JEL: E69 K29 P21 G32 K42 O52 E61 P52
    Date: 2007–08–01
  48. By: Eswar S. Prasad (Cornell University and IZA); Raghuram G. Rajan (University of Chicago); Arvind Subramanian (Peterson Institute for International Economics)
    Abstract: We document the recent phenomenon of "uphill" flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital. Surprisingly, we find that there is a positive correlation between current account balances and growth among nonindustrial countries, implying that a reduced reliance on foreign capital is associated with higher growth. This result is weaker when we use panel data rather than cross-sectional averages over long periods of time, but in no case do we find any evidence that an increase in foreign capital inflows directly boosts growth. What explains these results, which are contrary to the predictions of conventional theoretical models? We provide some evidence that even successful developing countries have limited absorptive capacity for foreign resources, either because their financial markets are underdeveloped, or because their economies are prone to overvaluation caused by rapid capital inflows.
    Keywords: North-South capital flows, financial globalization
    JEL: F3 F4 E2 O4
    Date: 2007–11

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