LIMITED ENFORCEMENT,FINANCIAL INTERMEDIATION,AND ECONOMIC DEVELOPMENT: A QUANTITATIVE ASSESSMENT*

We present a model of economic development where the importance of financial differences caused by limited enforcement can be measured. Economies where enforcement is poor direct less capital to the production sector and employ less efficient technologies. Calibrated simulations reveal that the resulting effect on output is large. Furthermore, the model correctly predicts that the average scale of production should rise with the quality of enforcement. Finally, we find that the importance of limited enforcement rises with the importance of capital in production.     

Does oil corrupt? Evidence from a natural experiment in West Africa

This paper explores the oil discovery announcements in Sao Tome and Principe (1997-1999) to assess the role of natural resources in determining corruption. For this purpose, we use a natural experiment framework which contrasts Sao Tome and Principe to Cape Verde, a control West African country sharing the same colonial past and important recent economic and political shocks. Our measurement is based on tailored household surveys we conducted in both island countries. The unique survey instrument was retrospective and used personal histories to elicit memories from the respondents. We analyze changes in perceived corruption across a wide range of public services and allocations. We find clearest increases on vote buying, education (namely in the allocation of scholarships) and customs, ranging from 31 to 40% of the subjective scale. We interpret these findings as symptoms of increased competition for core state resources.     

Pricing and static hedging of European-style double barrier options under the jump to default extended CEV model

This paper develops two novel methodologies for pricing and hedging European-style barrier option contracts under the jump to default extended constant elasticity of variance (JDCEV) model, namely: a stopping time approach based on the first passage time densities of the underlying asset price process through the barrier levels; and a static hedging portfolio approach in which the barrier option is replicated by a portfolio of plain-vanilla and binary options. In doing so, both valuation methodologies are extended to a more general set-up accommodating endogenous bankruptcy, time-dependent barriers and the commonly observed stylized facts of a positive link between default and equity volatility and of a negative link between volatility and stock price. The two proposed numerical methods are shown to be accurate, easy to implement and efficient under both the JDCEV model and the nested constant elasticity of variance model.     

Periodograms on fiscal illusion: discussing the cycle lengths of public finances in European countries

In this article, we study the duration of public finance cycles in 12 European countries since 1960. We applied periodogram techniques on the levels of fiscal illusion found for these established democracies and tested the statistical significance of the Fourier frequency peaks. Our empirical efforts revealed that most of the cycles in these countries could be characterized as long-term cycles (approximately 30 years), embodying subcycles of approximately 15 years. These findings show that in addition to the commonly studied electoral cycles or real business cycles, our democracies demonstrate extended public finance cycles that extend over various legislative tenures ruled by different political parties.     

The heterogeneous effect of finance on international trade

Is the impact of financial development on international trade heterogeneous – being positive, negative or null – across manufacturing sectors? And is it dependent on the level of sectoral requirement on external finance for capital need? To examine these questions this article uses a panel trade database on 21 manufacturing sectors in 80 countries between 2000 and 2009. The analysis demonstrates that the effect of financial development on trade is indeed heterogeneous by estimating a coefficient for each sector and showing that the signs and significance levels vary across them. The article also demonstrates that sectors with strong reliance on external finance export higher volume from countries with developed financial system and that financial development reduces trade in industries with low financial dependence level.     

Animal spirits and the composition of innovation in a lab-equipment R&D model with transition

We study the effect of animal spirits on the composition of aggregate R&D, the consumption level and economic growth in a tournament model of horizontal and vertical R&D. By considering a full lab-equipment specification, the model predicts a positive effect of animal spirits on the balanced-growth-path (BGP) level of per-capita consumption without impacting on economic growth and on aggregate vertical R&D. However, transition is slower under “waves of enthusiasm”, implying a longer period in which growth rates are higher than the BGP level. An economy that is subject to expectations shocks then converges at a time-varying speed. On average over time, transition is longer but less “painful”—i.e., with higher per-capita consumption levels—than otherwise.     

Remittances in Mexico and their unobserved components

ABSTRACT

The present study aims to determine the common trends and the permanent and transitory components of remittances received by Mexican households. This is done by estimating a small Dynamic Factor Model (DFM), using the approach first proposed by Gonzalo and Granger [1995. “Estimation of Common Long-memory Components in Cointegrated Systems.” Journal of Business and Economic Statistics 13 (1): 27–35], determining the number of common trends subject to the cointegration results. The study also shows the similarities between this small DFM with respect to large DFM, which are widely used in the econometric literature. The results indicate the presence of one cointegration relationship. Consequently, there are four common trends. The cointegration relationship is negatively dominated by Mexico's economic activity and positively by the US industrial production. The effects of the exchange rate and the US unemployment rate are positive, but less relevant. This economic scenario leads to remittances exceeding its permanent component.     

The Effect of Government Spending on the Debt‐to‐GDP Ratio: Some Keynesian Arithmetic

According to the standard approach to the issue of public debt sustainability, fiscal austerity is the route that many countries must currently follow to reduce their debt‐to‐GDP ratios back to sustainable paths. We challenge this conventional wisdom and argue that, below full employment, an increase in government spending may paradoxically reduce the debt‐to‐GDP ratio. This claim is particularly relevant today because with Central Bank interest rates near zero there is no alternative to fiscal policy, and the only argument against increasing government expenditure as a way to fight unemployment is its supposed negative effect on the state of public finances.     

Capital–skill complementarity and inequality: A sensitivity analysis

Krusell et al. in [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] analyzed the capital–skill complementarity hypothesis as an explanation for the behavior of the US skill premium. We refit Krusell et al.'s [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] model with two alternative capital equipment price series: One proposed by Greenwood et al. [Greenwood, J., Hercowitz, Z., Krusell, P., 1997. Long-run implications of investment-specific technological change. Amer. Econ. Rev. 87 (3), 342–362] and the official, revised National Income and Product Accounts (NIPA) data. We find that capital–skill complementarity is preserved, but other results were sensitive to the data used. Specifically, the fit of the model was similar to Krusell et al.'s [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] using the NIPA data, but not the Greenwood et al. [Greenwood, J., Hercowitz, Z., Krusell, P., 1997. Long-run implications of investment-specific technological change. Amer. Econ. Rev. 87 (3), 342–362] data. Also, both series produce estimates of the elasticity of substitution between unskilled labor and equipment that are substantially larger than Krusell et al.'s [Krusell, P., Ohanian, L., Ríos-Rull, J.V., Violante, G.L., 2000. Capital–skill complementarity and inequality: A macroeconomic analysis. Econometrica 68 (5), 1029–1053] estimates.