Does China have Inflationary Effects on the USA and Japan？

With China＇s share in global trade increasing rapidly, some argued in 2002-2003 that China was exporting deflation to other countries as it was dumping cheap goods in mature markets. Later, others argued that China was causing sharp increases in global prices. This paper uses several econometric techniques to assess the extent of the link between inflation rates between China and the USA and Japan. Only limited empirical evidence at the aggregate level is found for consumer price inflation in China leading to price changes in the USA and Japan. However, there is some evidence that inflation in the USA has an impact on Chinese inflation. The results seem consistent with the Federal Reserve and the Bank of Japan being concerned about inflation and, hence, adjusting policy such that inflation shocks have no significant effect on overall inflation. Recent Chinese price rises are unlikely to have a material effect on the USA or Japan.     

Bank earning asset behavior and causality between reserves and money: Lagged versus contemporaneous reserve accounting

This paper empirically examines the impact of lagged reserve accounting on large individual bank behavior. Its specific objective is to assess the claim that the institution of LRA has led to a decoupling of the earning asset and reserve adjustment decisions of banks. To accomplish this objective, a system of equations which jointly describe the reserve adjustment and earning asset decisions of banks is estimated and tested for differences in the model between the periods before and after 1968. It is found that bank behavior does not differ fundamentally under LRA. Evidence that banks make their earning asset adjustments promptly and that expected future interest rates are important in their decisions is also presented.     

How do firms finance their investments?: The relative importance of equity issuance and debt contracting costs

This paper examines the financing decisions of firms in response to changes in investments and profits. We find that information frictions play important roles in firms' financing decisions. However, we find no evidence that asymmetric information about the value of a firm's assets causes equity to be used only as a last resort. Indeed equity is the predominant source of finance in situations, such as profit shortfalls, investment in intangible assets, and internally generated growth opportunities, where informational asymmetries and agency costs are likely to be high. We also find that firms respond asymmetrically to positive and negative profit shocks. In financing fixed assets, high asymmetric information firms use more short-term debt and less long-term debt, whereas firms with high potential agency problems use significantly more equity and less long-term debt and cash.     

A Panel Data Analysis of the Fungibility of Foreign Aid

The donor community has been increasingly concerned that developmentassistance intended for crucial social and economic sectorsmight be used directly or indirectly to fund unproductive militaryand other expenditures. The link between foreign aid and publicspending is not straightforward because some aid may be "fungible."This article empirically examines the impact of foreign aidon the recipient's public expenditures, using cross-countrysamples of annual observations for 1971–90. For the base sample of 14 developing countries, it finds thataid is not fungible at the aggregate level and there is no associatedtax relief. Increasing the number of countries, however, makesaid fungible. Moreover, results based on the main sample indicatethat aid is fungible in three out of five sectors examined.Developing-country governments receiving earmarked concessionaryloans for agriculture, education, and energy reduce their ownresources going to these sectors and use them elsewhere; onlyloans to the transport and communication sector are fully spenton the purposes intended by donors. Because most aid appearsto be fungible, the rate of return on a specific donor-fundedproject tells little about the impact of that assistance; abetter approach may be to tie foreign aid to an overall publicexpenditure program that provides adequate resources to crucialsectors.     

Rationing Can Backfire: The "Day without a Car" in Mexico City

A ban restricting each car from driving on a specified weekdayis found to have increased total driving in Mexico City. Becauseof the ban, cars effectively represent "driving permits," andsome households have bought an additional car and increasedtheir driving. Greater use of old cars, congestion effects,and increased weekend driving may also have contributed to thedisappointing results. The ban has high welfare costs and doesnot deliver the intended benefits of reduced driving—quitethe contrary. The experience provides an interesting lesson in applied welfareeconomics. Theory indicates that this is a costly way of reducingtraffic and pollution. But the finding that the strategy iscounterproductive could be made only with applied quantitativeanalysis.