Automatic Fiscal Stabilisers in EMU: A Conflict between Efficiency and Stabilisation?

It is often claimed that tax and welfare reforms that aim atenhancing efficiency may come at the cost of cyclical stabilisation.Reducing the generosity of welfare systems and lowering taxesmay boost efficiency and output, and improve market adjustmentto shocks. But, by reducing the size of automatic stabilisers,it may also imply less cyclical smoothing. This would be unwelcomein EMU given the loss of national monetary autonomy and thewell-known pitfalls of active fiscal management. This paperargues that the alleged trade-off between efficiency/flexibilityand stabilisation may not exist. We show that, if the initiallevel of the tax burden is high, reducing it may lead to higheroutput stabilisation in the event of a supply shock and higherinflation stabilisation in the event of a demand shock. Simulationsshow that European countries - especially small ones - mighthave a tax burden close to or even higher than the thresholdlevel. (JEL E52, E61, F42)     

Openness, Investment Climate, and FDI in Developing Countries

The paper assesses the importance of openness, infrastructure availability, and sound economic and political conditions in increasing developing countries' attractiveness with respect to FDI. The results show that these factors are particularly important for South Asia, Africa, and the Middle East. The paper also shows a higher impact of these factors on FDI in the manufacturing sector than on total FDI. The message to developing countries' policymakers is twofold. First, efforts towards openness should be initiated or further increased in order to make their economies attractive to foreign investors. Second, improvements in other aspects of the investment climate are important complements to openness and result in additional and sensitive increases in FDI inflows.     

ASIAN REAL EXCHANGE RATES AND OIL PRICES: A COINTEGRATION ANALYSIS UNDER STRUCTURAL BREAKS

We examine the long‐run relationship between Asian real exchange rates and oil prices in the presence of structural breaks. The relevance of considering breaks is demonstrated by utilizing the Johansen et al. procedure that allows for up to two predetermined breaks. Using conventional tests that do not consider breaks reveals no evidence of cointegration. However, the Johansen et al. procedure clearly demonstrates the importance of considering breaks and provides strong support for a stable long‐run relationship in all but Japan and the Philippines. Moreover, the results suggest evidence of bi‐directional causality in Malaysia and Thailand, uni‐directional causality from exchange rates to oil prices in Korea, the Philippines, and Singapore, uni‐directional causality from oil prices to the exchange rate in Indonesia, and no evidence of causality in Japan.     

Financial development and governance: A panel data analysis incorporating cross-sectional dependence

This study investigates bidirectional causality between governance and financial development using panel data of 101 countries from 1984 to 2013. The financial development–governance nexus is explored using econometric methods robust to cross-sectional dependence, and the relationship between different levels of development and openness is analyzed. Long-run equation estimates show clear evidence that financial development positively affects governance, and this positive impact is found to be robust to three different measures of governance. Further analysis shows that improving governance quality has a positive effect on financial development, while Granger causality tests demonstrate bidirectional causality between financial development and the governance measures. Finally, the impact of financial development on governance is dependent on a country’s level of development and openness. These findings underscore the crucial role of financial development in bringing about good governance reforms and economic growth that, in turn, can further develop the financial sector. As such, a symbiotic and synergistic relationship can persist between good governance, growth, and financial development. The findings provide significant motivation for policymakers to encourage openness and financial sector development to lift the standard of living, especially in emerging economies.     

Predicting future financial performance of banks from management’s tone in the textual disclosures

Quality & Quantity - Predicting bank performance is important for investors and regulatory authorities. Previous research on non-financial firms has shown that augmenting the numeric...     

Contracts and Productive Information Gathering

We modify a standard Baron–Myerson model by assuming that, instead of knowing the state of nature, the agent has to incur a cost γ to learn it. Under these conditions, the principal will offer contracts that, depending on the value of γ, try to induce the agent to gather or not to gather information. We study the tradeoffs that are involved.Journal of Economic LiteratureClassification Numbers: D82, D83.     

Overflow effect of credit rating announcements on stock exchange based on event study

This study is aimed to identify the impact of credit rating announcements on the stock returns in stock markets and for this purpose, four different sectors of Pakistan stock exchange were selected and from each of these four sectors, different business organizations were selected, i.e. total 32 business organizations were selected. The credit rating announcement data were collected for these 32 business organizations belonging to four different sectors. Totally 101 credit rating announcements were selected and the time period for which the credit rating warnings were selected include last three years period, i.e. from 2014 to 2016. The collected data were analysed by calculating abnormal returns for each of the selected security and average abnormal returns, and cumulative average abnormal returns were calculated for four different sectors. Event study methodology was applied, and t-test and t-stats value were calculated and results were analysed on the basis of t-statistics. The results of analysis identified that credit rating announcements have a significant impact on stock prices and investors and other market participants are earning abnormal returns during two-day period after the announcements are made. In addition, these abnormal returns were either negative or positive, depending upon the nature of credit ratings announced. If the credit rating announced was upgraded, investors enjoyed positive abnormal returns while in case when credit rating announcements were downgraded, then investors bear negative abnormal returns. Finally, the findings of the study identified the applicability of random walk hypothesis on the Pakistan Stock Exchange and Pakistan Stock Exchange confirms the efficient market hypothesis with its semi-strong form of efficiency.     

A Study of Correlation Aspects in Probabilistic NPV Analysis

In probabilistic net present value (NPV) analysis, expressed in terms of benefits and costs, the expected value and variance of the net present value are determined from the expected values and variances of the benefits and costs and correlations between benefits and costs. This article outlines an empirical study and an examination of the correlation between benefits and costs. Intercomponent and intertemporal correlations are estimated. In addition, the article determines the upper and lower bounds of the variance of the net present value, when the exact intertemporal and intercomponent correlations are not known.