Financial liberalization,financial sector development and growth: Evidence from Malaysia

The objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of Malaysia. Using time series data from 1960 to 2001, we conduct cointegration and causality tests to assess the finance-growth link by taking the real interest rate and financial repression into account. The empirical evidence suggests that financial liberalization, through removing the repressionist policies, has a favorable effect in stimulating financial sector development. Financial depth and economic development are positively related; but contrary to the conventional findings, our results support Robinson's view that output growth leads to higher financial depth in the long-run.     

Overbidding in fixed rate tenders—an empirical assessment of alternative explanations

This paper investigates various theories explaining banks’ overbidding in the fixed rate tenders of the European Central Bank (ECB). Using auction data from both the Bundesbank and the ECB, we show that none of the theories can on its own explain the observed overbidding. This implies that the proposed new rules by the ECB, aimed at neutralizing interest rate expectations, would not eliminate overbidding if the rationing rule in the fixed rate tenders remains unchanged.     

Total factor productivity differences: Appropriate technology vs. efficiency

Recent development and growth accounting studies have established that total factor productivity is an important source of cross-country differences in income levels and growth rates. This paper makes two contributions. First, it examines the sensitivity of the development accounting results to the Cobb-Douglas specification of the production function. Second, within the Cobb-Douglas framework, it weighs evidence of the two alternative explanations of total factor productivity differences: the inefficiency view and the appropriate technology view. To accomplish these tasks, the world production frontier is estimated using a nonparametric deterministic approach known as data envelopment analysis. I find that the fraction of income differences explained by physical and human capital increases from 32% to 55% when departing from the Cobb-Douglas assumption. There is also evidence consistent with the appropriate technology view; countries with an inadequate mix of inputs are unable to access the most productive technologies. Moreover, the world technology frontier appears to be shifting out faster at input combinations close to that of the R&D leader. However, inefficiency appears to be the main explanation for low incomes throughout the world; it explains 43% of output variation in 1995, and its importance has increased over time.     

Corrigendum to “When is efficiency separable from distribution in the provision of club goods?” [Journal of Economic Theory 90 (2000) 204-221]

This note corrects a slip in Fraser's (J. Econ. Theory 90 (2000) 204-221) treatment of the necessary condition for partial separation of efficiency from distribution in providing a club good. His corrected Theorem 1 shows that many families of utility function can generate partial (and total) separation, thereby considerably extending the scope of his analysis.     

Fiscal stabilizations: When do they work and why

This paper studies the determinants and channels through which fiscal contractions influence the dynamics of the debt-to-GDP ratio and GDP growth. Using data from a panel of OECD countries, the paper shows that the success of fiscal adjustments in decreasing the debt-to-GDP ratio depends on the size of the fiscal contraction and less on its composition. The rate of growth of output matters too, but higher GDP growth does not drive the success of a fiscal stabilization. In contrast, whether a fiscal adjustment is expansionary depends largely on the composition of the fiscal maneuvre. In particular, stabilizations implemented by cutting public spending lead to higher GDP growth rates. The effects of the composition on growth work mostly through the labor market rather than through agents’ expectations of future fiscal policy. Finally, the evidence suggests that successful and expansionary fiscal contractions are not the result of accompanying expansionary monetary policy or exchange rate devaluations.     

Pension Reform, Capital Markets and the Rate of Return

Abstract. This paper discusses the consequences of population aging and a fundamental pension reform – that is, a shift towards more pre‐funding – for capital markets in Germany. We use a stylized closed‐economy, overlapping‐generations model to compare the effects of the recent German pension reform with those of a more decisive reform that would freeze the current pay‐as‐you‐go contribution rate and thus result in a larger funded component of the pension system. We predict rates of return to capital under both reform scenarios over a long horizon, taking demographic projections as given. Our main finding is that the future decrease in the rate of return is much smaller than often claimed in the public debate. Our simulations show that the capital stock will decrease once the baby‐boom generations enter retirement, even if there were no fundamental pension reform. The corresponding decrease in the rate of return, the direct effect of population aging, is around 0.7 percentage points. While the capital market effects of the recent German pension reform are marginal, the rate of return to capital would decrease by an additional 0.5 percentage points under the more decisive reform proposal.     

The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability

We study how constrained fiscal policy can affect macroeconomic stability and welfare in a two-region model of a monetary union with sticky prices and distortionary taxation. Both government spending and taxes can be used to stabilize regional variables; however, the best welfare outcome is obtained under some tax variability and constant regional inflations. We use a variety of rules to characterize constrained fiscal policy and find that strict fiscal rules coupled with a monetary policy that targets union-wide inflation result in regional inflation stability and the welfare costs of such rules are not as unbearable as one would expect. Fiscal authorities can enhance welfare by targeting the regional output gap, while targeting regional inflation is less successful since inflation stability is guaranteed by the central bank.     

An equilibrium analysis of information aggregation and fluctuations in markets with discrete decisions

This paper shows how the interaction between decentralized information gathering and discreteness of investment decisions at the individual level can generate random fluctuations in aggregate investment that involve occasionally large allocation errors. This interaction is illustrated in a model in which private information is costly to acquire and prices reveal information. The unique rational expectations equilibrium outcome of the model is shown to always be noisy and characterized by investment levels which may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities.     

Evaluating the performance of the search and matching model

Does the search and matching model fit aggregate U.S. labor market data? While the model has become an important tool of macroeconomic analysis, recent literature pointed to some significant failures in accounting for the data. This paper aims to answer two questions: (i) Does the model fit the data, and, if so, on what dimensions? (ii) Does the data “fit” the model, i.e. what are the data which are relevant to be explained by the model?The analysis shows that the model fits certain specifications of the data on many dimensions, though not on all. This includes capturing the high persistence and high volatility of most of the key variables, the negative co-variation of unemployment and vacancies, and the behavior of the worker job finding rate. A key role in this fit is played by the convexity of hiring costs and the stochastic properties of the separation rate. The latter is a major component of the rate discounting the future value of the job-worker match.The paper offers a workable, empirically grounded version of the model for the analysis of aggregate U.S. labor market dynamics.     

Modeling Cyclical Asymmetries in European Imports

This paper applies smooth transition models to capture the nonlinear behavior in the imports data of six major European economies and to assess whether such nonlinearities are related to business cycle asymmetries. Two classes of switch between regimes are considered: endogenously determined transition that assumes nonlinearities are generated by idiosyncratic components specific to foreign trade, and exogenous transition based on GDP growth as a more direct indicator of the cyclical state of the economy. The results support the proposition that the dynamics of imports are nonlinear. In Belgium, France, Spain, and the United Kingdom, regimes change over the business cycle, while in Germany and Italy the switch between regimes is endogenous. National characteristics play a role in defining the position of extreme regimes, the smoothness of the transition, and local dynamics within each state.Previous versions of this article have been presented at the 57th International Atlantic Economic Conference (Lisbon, Portugal, March 10–14, 2004) and at the VII Encuentro de Economía Aplicada (Vigo, Spain, June 3–5, 2004). The authors thank the conference participants and an anonymous referee for their comments.