Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation

We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in 10 Eastern European countries. Using a large firm‐level data set, we show that capital account liberalization decreases the dispersion in the return to capital across firms, particularly in sectors more dependent on external finance. We provide evidence that capital account liberalization improves capital allocation by allowing financially constrained firms to demand more capital and produce at a more efficient level. Finally, using a model of misallocation we document that capital account liberalization increases aggregate productivity through more efficient capital allocation by 10% to 16%.     

Preventing the “Abuses” of Democracy: Hayek,the “Military Usurper” and Transitional Dictatorship in Chile?

Hayek famously claimed that he would prefer a “liberal” dictator to “democratic government lacking in liberalism.” While Hayek's views of the Pinochet regime have generated much controversy, surprisingly little has been written about Hayek's defense of transitional dictatorship. Making use of previously un‐translated foreign language archival material, this paper helps shed light on Hayek's views of authoritarianism, totalitarianism, transitional dictatorship, and the Pinochet regime as well as helping to separate Hayekian ‘fact’ from Hayekian ‘fiction’.     

COALITION GOVERNMENTS AND SOVEREIGN DEBT CRISES

This article examines the domestic politics of sovereign debt crises. I focus on two alternative mechanisms that aggregate the preferences of domestic actors over debt repayment: single-party versus multiparty coalition governments. I uncover a very strong empirical regularity using cross-national data from 48 developing countries between 1971 and 1997. Countries that are governed by a coalition of parties are less likely to reschedule their debts than those under single-party governments. The effect of multiparty coalitions on sovereign defaults is quantitatively large and roughly of the same order of magnitude as liquidity factors such as debt burden and debt service. These results are robust to numerous specifications and samples.     

Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates

I characterize optimal monetary and fiscal policy in a stochastic New Keynesian model when nominal interest rates may occasionally hit the zero lower bound. The benevolent policymaker controls the short‐term nominal interest rate and the level of government spending. Under discretionary policy, accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound. Under commitment, the gains associated with the use of the fiscal policy tool remain modest, even though fiscal stabilization policy is part of the optimal policy mix.     

The Impact of Liquidity Risk: A Fresh Look*

This paper takes a fresh look at the importance of liquidity risk using a comprehensive liquidity measure, weighted spread, in a Value‐at‐Risk (VaR) framework. The weighted spread measure extracts liquidity costs by order size from the limit order book. Using a unique, representative data set of 160 German stocks over 5.5 years, we show that liquidity risk is an important risk component. Actually, liquidity risk is increasing the total price risk by over 25%, even at 10‐day horizons and for liquid blue chip stocks and especially in larger, yet realistic order sizes beyond €1 million. When correcting for liquidity risk, it is commonly assumed that liquidity risk can be simply added to price risk. Our empirical results show that this is not correct, as the correlation between liquidity and price is non‐perfect and total risk is thus overestimated.     

The Federal Reserve,the Emerging Markets,and Capital Controls: A High‐Frequency Empirical Investigation

In this paper, I use weekly data from seven emerging nations—four in Latin America and three in Asia—to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short‐term interest rates during the 2000s. The results suggest that there is indeed an interest rates “pass‐through” from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different—in terms of impact, steady state effect, and dynamics—in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a “twist” policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.     

Related Party Transactions: A Preliminary Evaluation of SFAS 57 and IAS 24 Using Four Case Studies

Transactions between related parties have been the subject of increasing concern in recent years. Corporate scandals, overseas and local, have typically involved non-arm's length transactions contrived between the reporting entity and related companies or affiliates. These scandals provided catalysts for the relatively recent development of accounting standards on related party transactions.
This paper considers whether the application of the new pronouncements, particularly the Financial Accounting Standards Boards' statement 57 and its international equivalent, International Accounting Standard 24, is likely to overcome the problems highlighted in several major scandals. The methodology adopted involves the hypothetical application of the two pronouncements to the pertinent facts in four case studies: (1) Continental Vending, a U.S. criminal court case; (2) Penn Central, a U.S. Securities and Exchange Commission investigation case; (3) Tarling (Haw Par), a Singapore criminal court case; and (4) Stanhill, an Australian case investigated by a government appointed Inspector.
In each hypothetical application, the resultant presentation is compared with the stated expectations found in the relevant findings of the case. In all cases, SFAS 57 and IAS 24 are found to be deficient.
While four case studies may not be sufficient for drawing general conclusions about either SFAS 57 or IAS 24 the conclusions of this study represent preliminary evidence for evaluating those standards.     

CENTRAL BANK STRATEGIC FORECASTING

In most of the literature on transparency it has been standard to assume that central banks release truthful information when communicating with the public. However, the monetary policymaker may act strategically and misrepresent private information intending to reduce economic volatility by manipulating inflation expectations. We set up a simple model which includes misrepresentation as a possible action for the central bank and derive some testable implications. The empirical evidence from the analysis of inflation forecasts of six central banks (Brazil, Canada, England, Iceland, New Zealand, and Sweden) is consistent with the existence of strategic forecasting. (JEL E52, E58)     

Global Food Chains, African Smallholders and World Bank Governance

This paper critically examines the World Bank's analysis of the development of agribusiness in Africa in the World Development Report 2008 in relationship to its governance policies, which seek to introduce institutional reforms to promote private and public sector linkages with the participation of civil society. The paper argues that this confuses food chain governance (control over quality and the logistics of production) with democratic governance and essentially promotes oligopolization of the food industry and the interests of the powerful in the name of smallholder farmers.     

Strategic Complementarity in the Dynamic Private Provision of a Discrete Public Good

Individual voluntary contributions to a discrete public good are shown to be strategic complements in a dynamic private provision game. This is in contrast to a public good that can take on any value in a continuum where they are strategic substitutes.