Knowledge spillovers, transboundary pollution, and growth

Trade in natural resources is construed as a dynamic game betweenNorth and South. Policies that promote growth in the North alsocause knowledge spillovers and transboundary pollution in theSouth. Cooperative and noncooperative Nash equilibria of thisstrategic trade game are simulated under various scenarios byparallel genetic algorithms to highlight the distortions inthe growth/pollution trade-off. Absent cooperation, both regionsbenefit when North simultaneously cuts waste and increases knowledgespillovers, impelling South to reciprocate by lower resourceprices.     

A Multifactor Model of Credit Spreads

We represent credit spreads across ratings as a function of common unobservable factors of the Vasicek form. Using a state-space approach we estimate the factors, their process parameters, and the exposure of each observed credit spread series to each factor. We find that most of the systematic variation across credit spreads is captured by three factors. The factors are closely related to the implied volatility index (VIX), the long bond rate, and S&P500 returns, supporting the predictions of structural models of default at an aggregate level. By making no prior assumption about the determinants of yield spread dynamics, our study provides an original and independent test of theory. The results also contribute to the current debate about the role of liquidity in corporate yield spreads. While recent empirical literature shows that the level and time-variation in corporate yield spreads is driven primarily by a systematic liquidity risk factor, we find that the three most important drivers of yield spread levels relate to macroeconomic variables. This suggests that if credit spread levels do contain a large liquidity premium, the time variation of this premium is likely driven by the same factors as default risk.     

Trade,Growth, and Environmental Quality*

This paper examines linkages between international trade, environmental degradation, and economic growth in a dynamic North–South trade game. Using a neoclassical production function subject to an endogenously improving technology, North produces manufactured goods by employing labor, capital, and a natural resource that it imports from South. South extracts the resource using raw labor, in the process generating local pollution. We study optimal regional policies in the presence of local pollution and technology spillovers from North to South under both non‐cooperative and cooperative modes of trade. Non‐cooperative trade is inefficient due to stock externalities. Cooperative trade policies are efficient and yet do not benefit North. Both regions gain from improved productivity in North and faster knowledge diffusion to South regardless of the trading regime.