The role of credibility in the cyclical properties of macroeconomic policies in emerging economies

Optimal stabilization policy is countercyclical, aiming at keeping output close to its potential. However it has been traditionally argued that emerging countries are unable to adopt countercyclical monetary and fiscal policies. Here we argue that the cyclical properties of macroeconomic policies depend critically on policy credibility. We test this proposition by making use of recent panel data for eleven emerging market economies and time series data for Chile. The evidence supports that countries with higher credibility, as reflected by lower country risk levels, are able to conduct countercyclical fiscal and monetary policies. Conversely, countries with less credible policies (and, therefore, with higher country risk spreads) contribute to larger cyclical fluctuations by applying procyclical policies. For Chile we find that both monetary and fiscal policies have been largely countercyclical after 1993. JEL no. E43, E52, E62     

Estimating the export and import demand for manufactured goods: The role of FDI

In this paper we estimate the demand for exports and imports of manufactured goods for a panel containing the majority of the EU countries as well as the United States and Japan. The model includes as explanatory factors both the traditional determinants of trade and also the stock of foreign direct investment (FDI). We apply panel unit root and cointegration tests allowing for heterogeneity. Whereas there is no evidence of cointegration when using just the traditional formulation, the results are favorable to the existence of long-run relationships linking the variables of the augmented model. Moreover, the results point mainly to a complementary relationship between trade and FDI.     

The color of money: The effects of foreign direct investment on economic growth in transition economies

During the initial phase of transformation to a market economy many of the Eastern European and Baltic countries experienced an initial decline of output. This paper explains, both theoretically and empirically, why they experienced negative growth initially, and how some of them started to get over and recorded positive growth recently. As a vehicle to transfer technology and managerial skills to the transition economies, as well as to increase capital work, foreign direct investment (FDI) is regarded important. Production function with a low elasticity of substitution between two inputs is employed to capture the dynamic short-run movement of these economies. Cross-sectional and panel data, are utilized to analyze the short-run dynamic movement of equilibrium paths of transformation to a market economy. The findings confirm that total factor productivity and GDP in the region grew together with the inflow of FDI, and the marginal contribution of FDI to growth is greater than that of domestic investment. JEL no. O50, P39, F21 This project is financially supproted by the ARC Small Grant, Department Research Grant, Department of Economics, UWA and Division Research Grant, Commerce, Division, Lincoln University.     

Currency substitution and the stability of the Italian demand for money before the entry into the monetary union, 1972–1998

A money demand function for M2 is estimated for Italy for the period 1972–1998 within an error correction framework. This period has been characterized by major structural changes in the Italian financial system and by major changes in monetary policy. This study takes these changes into account. Moreover, currency substitution, especially between Italy and Germany is incorporated into the model. By accounting for structural breaks and currency substitution a stable money demand function can be found.Financial support from the Deutsche Forschungsgemeinschaft, SFB 373, is gratefully acknowledged. We thank Uwe Hassler, Goethe Universität, Frankfurt, and Carsten Trenkler, SFB 373, Humboldt-Universität zu Berlin, for helpful comments. An earlier version has been presented at the ESEM 2001, Lausanne.     

Sovereign credit spreads and the composition of the government budget

This paper investigates the relationship between sovereign credit spreads and the composition of the government budget. The key result of this paper is that governments that invest more and spend less on consumption have significantly lower sovereign credit spreads. This finding is in accordance with the endogenous growth theory, which predicts a positive impact of government investment and a negative impact of government consumption on the long-term growth rate. Finally, a broader tax base significantly reduces sovereign credit spreads. A possible explanation may be that governments with more tax receipts are less likely to have liquidity problems to finance their debt charges.     

Intellectual property rights and foreign direct investment: A disaggregated analysis

This paper aims at overcoming several shortcomings of previous empirical studies on the relationship between IPR protection and FDI. First of all, we use sectorally disaggregated FDI data for a large sample of host countries. Second, we address the proposition that stronger IPR protection raises not only the quantity but also the quality of FDI. Third, we check to which extent the relationship between IPR protection and FDI is affected by applying alternative measures of IPR protection. Our empirical findings support the hypothesis that the threat of an unauthorized use of intellectual-property-related assets and, thus, FDI depends on industry as well as host-country characteristics. Furthermore, stronger IPR protection may help induce high-quality FDI. JEL no. F21, F23     

The dynamics of European industrial structure

Has the European integration process lead to increased specialization and what drives changes in countries’ specialization? To address these questions we apply a model that incorporates endowments, technology and increasing returns to scale. Analysis reveals that countries with high capital accumulation have become increasingly specialized in capital-intensive industries; this holds for both human and physical capital. No general tendency towards increased specialization is found with the exception of capital-intensive industries. Analysis indicates scale economies in R&;D at the firm level and that R&;D at the firm level drives productivity and competitiveness. JEL no. C29, F12, O33, O52     

Technology adoption and multiple growth paths: An intertemporal general equilibrium analysis of the catch-up process in Thailand

As opposed to the Veblen—Gerschenkron catching-up hypothesis, the recent literature allows for technological divergence in backward economies. We extend a nonlinear adoption function to include openness and interact with capital accumulation in an intertemporal general equilibrium framework. The threshold gap necessary to catch up is endogenously determined by the economy's absorptive capacity. The model generates multiple transition growth paths depending on whether technological catch-up is achieved, and due to the endogeneity of the threshold gap, endogenous switching between development paths might be observed. Our simulations of the Thailand experience show how lack of investment in education and protectionism generate loss of transition growth and technological divergence. The paper highlights the role of absorptive capacity, and especially its importance for economies on the balance between low growth and high growth paths. JEL no. O41, O53     

On the microstructure of the german export boom: Evidence from establishment panel data, 1995–2002

This paper uses an unbalanced panel data set for exporting firms from manufacturing industries in one German federal state, Lower Saxony, to investigate the microstructure of the recent export boom. Looking at data for 1995/96–2001/02 it is demonstrated that a considerable number of plants start and stop exporting in each year, but that most of the export dynamics is due to positive and negative changes of exports in plants that continue exporting. A small fraction made of 4–5 percent of all exporting plants is responsible for around 70 to 80 percent of the gross increase in exports. Firms with expanding and contracting exports are found simultaneously in all broad sectors, technology classes and firm size classes. Patterns of export behavior differ widely between the plants over the periods investigated. JEL no. F14, E32