Information, Informal Finance, and SME Financing

Informal finance exists extensively and has been playing an important role in small- and medium-sized enterprise (SME) financing in developing economies. This paper tries to rationalize the extensiveness of informal finance. SME financing suffers more serious information asymmetry to the extent that most SMEs are more opaque and can only provide less collateral. Informal lenders have an advantage over formal financial institutions in collecting “soft information” about SME borrowers. This paper establishes a model including formal and informal lenders and high- and low-risk borrowers with or without sufficient collateral and shows that the credit market in which informal finance is eliminated will allocate funds in some inefficient way, and the efficiency of allocating credit funds can be improved once informal finance is allowed to coexist with formal finance. Translated from Economic Research Journal, 2005, 7 (in Chinese)     

Study on the measurement of China’s financial intermediation ratio in terms of stock: 1992–2006

In terms of China’s financial intermediation ratio (FIMR) in stock, we make a thorough empirical study on the change of the ratios during 1992–2006. We find that: The monopoly position of bank credit in the financing channel of non-financial sector is weakened, but bank credit is still the most important financing channel for non-financial sector. There is a structure change in the financing channel of government sector and its FIMR is increasing. Though the scale of non-banking financial institutions underwent rapid development during 1992–2006, their role in social financing cannot be evenly matched with banking system. It is the change of various economy behaviors that induce the changes of FIMR in China.     

Effect of Corporate Economic Performance on Firm-Level Environmental Performance in a Transition Economy

This paper analyzes the effect of corporate economic performance, as measured by value added, on firm-level environmental performance in a transition economy. In particular, it analyzes this economic performance effect using an unbalanced panel of Czech firms for the years 1995–1998. It assesses whether successful economic performance begets or undermines good environmental performance. This connection seems especially important in transition economies since firms are dramatically restructuring their economic management approaches during transitional periods. A majority of the analytical results indicate that successful economic performance undermines good environmental performance, possibly indicating that more focused managerial efforts to improve economic outcomes may distract efforts to manage environmental matters better.     

General equilibrium in economies with adverse selection

We model economies of adverse selection as Arrow–Debreu economies. In the spirit of Prescott and Townsend (Econometrica 52(1), 21–45, 1984a), we identify the consumption set of the individuals with the set of lotteries over net transfers. Thus, prices are linear in lotteries, but they may be non linear in commodity bundles. First, we study a weak equilibrium notion by viewing the economy of adverse selection as a pure exchange economy. The weak equilibrium set is non empty, but some of the allocations may be inefficient, and the equilibria indeterminate. Second, following Prescott and Townsend (Econometrica 52(1), 21–45, 1984a), we introduce an intermediary (firm) supplying feasible and incentive compatible measures. Equilibria are constrained efficient, but the equilibrium set is empty for an open set of economies containing the Rothschild and Stiglitz insurance economies. The research of A. Rustichini was supported by the NSF grant NSF/SES-0136556.     

Patterns of Corporate Financing and Financial System Convergence in Europe

The paper investigates the possibility of convergence in the European Union (EU) in terms of the patterns of corporate financing by banks, bond markets, and stock markets; and in the context of whether the economies are converging towards an Anglo‐Saxon (capital‐market‐oriented) or a continental (bank‐oriented) financial system. GMM estimation of a dynamic fixed‐effects model is implemented to test for conditional and unconditional convergence using a panel of flow of funds data for the period 1972–1996 for seven EU member countries. It is found that the pattern of corporate financing is consistent with the pecking order theory of financing choices. Overall, the evidence suggests convergence of the EU financial systems on a variant of the Anglo‐Saxon model, depicting heavy reliance on internal financing as well as direct financing via equity and bond markets, while bank debt is becoming relatively less important.     

The Impact of the Welfare State and Social Policy on the Working Population: The Recent British Experience

This paper focuses on financing the welfare state expenditures in the UK. It offers a comprehensive analysis of social expenditures and taxes paid by the working population families, and an estimation of the net benefits received by them. While the subsequent analysis of the welfare state and its development primarily concentrates on the British experience, it has a broader application to other OECD countries. The UK as the most egalitarian “liberal market economy,” offers an interesting case for the study of the interaction between the welfare state expansion and economic growth. In terms of her capitalist economic structure, (interaction between market and economy) she is relatively closer to the USA and other Angelo-Saxon (liberal market) economies. In terms of her level of social expenditures, she is much closer to the European “social market economies” than the USA and other more egalitarian “liberal market economies.”     

Persistent unemployment and co-ordination issues: an evolutionary perspective

Abstract. In this paper we look at unemployment as a phenomenon which reflects the co-ordination problems that characterize out-of-equilibrium processes of adjustment. The analysis carried out shifts the focus from structural factors to the economic process. It shows that unemployment cannot be satisfactorily explained – and policy interventions devised – by focusing only on specific characters of the technology or confining the analysis to structural factors concerning the labour market. The co-ordination mechanisms of adjustment processes rather than the fundamentals of the economy appear, in this light, as the main determinants of differences in unemployment trends in different economies; and monetary policy comes back to the center of the stage as an essential element of the working of these mechanisms. RID="*" ID="*" We thank anonymous referees for their very useful comments, and Elena Lega for the helpful support to the simulation analysis carried out. Correspondence to: J.-L. Gaffard     

Does performance explain mutual fund flows in small markets? The case of Portugal

We study the performance reaction of investors in a specific small market context. Our sample includes all Portuguese open-end equity funds that invested in stocks issued by Portuguese companies in the period December 1993–June 2009. Instead of the convex flow–performance relationship usually documented for the US, we find an absence of reaction to past performance. We find no evidence to support the “smart money effect”, given that capital flows do not favour next period performance winners. We also document persistence of fund flows. Our results are consistent with the idea that large financial intermediaries have the capacity “to drive” their customers to funds with larger fees.     

Belief heterogeneity and survival in incomplete markets

In complete markets economies (Sandroni in Econometrica 68:1303–1341, 2000), or in economies with Pareto optimal outcomes (Blume and Easley in Econometrica 74:926–966, 2006), the market selection hypothesis holds, as long as traders have identical discount factors. Traders who survive must have beliefs that merge with the truth. We show that in incomplete markets, regardless of traders’ discount factors, the market selects for a range of beliefs, at least some of which do not merge with the truth. We also show that impatient traders with incorrect beliefs can survive and that these incorrect beliefs impact prices. These beliefs may be chosen so that they are far from the truth.     

Reflections on the perspectives of the global economy from the point of view of emerging economies

 Recently a number of emerging economies, with high inflation and various kinds of imbalances have experienced what has come to be referred to as dollarization– the phenomenon of currency substitution where the dollar gradually replaces the national currency in the performance of its fundamental functions. The phenomenon is most commonly encountered as a component of the exchange-rate-based stabilization programs implemented in a number of emerging economies in Latin America, Asia and the Middle East. The fundamental issue we want to explore is whether this process forces the monetary authorities of emerging economies to act with their hands tied, as if caught in a trap. It is argued that when the expansion of liquidity and domestic credit is determined by the quantity of foreign-exchange reserves, an independent monetary policy vanishes and national sovereignty itself is shackled. Since this scenario typically occurs in a world of increasing globalization of finance, this paper also discusses (with reference to emerging economies) the risks and implications of capital inflows for macroeconomic policy autonomy, economic instability, and vulnerability to external shocks.     

On a clear day you might see an environmental Kuznets curve

We shed some new light on the Environmental Kuznets curve (EKC) and show how it can be viewed as a particular form of equilibrium relationship, where technology and preference parameters determine the shape of the curve. In contrast to most of the literature on the EKC, we estimate a theoretically consistent model on long-run data (Swedish sulfur emission, covering the period 1900–2002). Furthermore, we test and date structural change. The model suggests four regimes, 1900–1918, 1919–1933, 1934–1967 and 1968–2002, generating four rather different patterns for pollution over time. The policy-conclusions are consonant with Pearce’s general view about the EKC: there is no theoretical presumption that it has an inverted U shape, nor should any country try to “grow out of the environmental problems” without analyzing the benefits and costs of so doing.     

The Zilcha criteria for dynamic inefficiency reconsidered

We reconsider necessary and sufficient conditions for dynamic inefficiency given in Zilcha (J Econ Theory 52:364–379, 1990, J Econ Theory 55:1–16, 1991) and a critique by Rangazas and Russell (2005). First, we show that the characterization given in Zilcha (1990) for nonstationary economies is correct and correct Zilcha’s proof. Second, using this insight, we complement Rangazas and Russell’s (Econ Theory 26:701–716, 2005) discussion of the counterexamples to Zilcha (J Econ Theory 55:1–16, 1991). Third, we discuss consequences of our results for applied tests of (in-)efficiency based on the Zilcha criteria. We would like to thank Itzhak Zilcha, and in particular Peter Rangazas and Steve Russell for detailed and very helpful comments.     

Market crashes,speculation and learning in financial markets

A natural conjecture is that if agents’ beliefs are almost correct then equilibrium prices should be close to rational expectations prices. Sandroni (J Econ Theory 82:1–18, 1998) gives a counterexample in an economy with sunspots and complete markets. We extend Sandroni’s result by showing that the conjecture is generically true for economies with complete markets. We consider a standard General Equilibrium model with large but finite horizon and complete markets. We show that, for almost every such economy, if conditional beliefs eventually become correct along a path of events then equilibrium prices of assets traded along this path converge to rational expectations equilibria in the sup-norm. Moreover, we establish that, generically, there exist along any such path local diffeomorphisms between individual beliefs and equilibrium prices. I would like to thank C. Ewerhart and A. Kirman for their comments, as well as the seminar participants at the University of Minho, the General Equilibrium Workshop 2005 in Zurich, and the 15th Asian General Equilibrium Conference 2007 in Singapore. An anonymous referee also provided very valuable comments.     

The Interaction of Foreign Direct Investment with Electronic Commerce in Less Developed Countries

This paper argues that the international growth of e-commerce (whether business–business, business–consumer or consumer–business) can increase a critical technology infrastructure gap that disadvantages less-developed countries (LDCs) in their future e-commerce participation. This gap is linked to the type as well as the volume of foreign direct investment (FDI) which economies at different levels of development attract. The macro technical, legal and socio-economic problems that entwine FDI inflow and e-commerce growth in LDCs, reducing e-commerce attractiveness and also making FDI less attractive, are classified. Governments must recognise this interdependence, pin-point the types of macro constraints operating in their particular economy that curb FDI in e-commerce attracting investment and prioritise the desirability and incentives offered to the various types of FDI infrastructure.     

城市生态建设的市场化融资框架探讨

加强城市生态建设，仅仅依靠财政提供资金是不够的，还必须面向市场融资。面向市场融资需要构造一定的机制，使各种社会资本能够顺畅地进入环保行业。面向市场融资还需要选择一定的模式，如银行贷款模式、证券融资模式、城市污染治理投资基金模式、项目融资模式、创业资本模式、信托模式、发行彩票模式等多种形式。     

R&;D and productivity: using UK firm-level data to inform policy

The UK’s business R&D (BERD) to GDP ratio is low compared to other leading economies, and the ratio has declined over the 1990s. This paper uses data on 719 large UK firms to analyse the link between R&D and productivity during 1989–2000. The results indicate that UK returns to R&D are similar to returns in other leading economies and have been relatively stable over the 1990s. The analysis suggests that the low BERD to GDP ratio in the UK is unlikely to be due to direct financial or human capital constraints (as these imply finding relatively high rates of return).     

Convergence Across the United States: Evidence from Panel ESTAR Unit Root Test

Many empirical studies try to test whether there is income convergence across metropolitan areas in the continental United States. Drennan et al. (Journal of Economic Geography 4(5), 2004) claim that income among metropolitan economies is diverging for the period 1969–2001, after applying univariate unit root tests to the time series data. This paper brings new information to this area of study by using the nonlinear panel unit root test of the Exponential Smooth Auto-Regressive Augmented Dickey–Fuller (ESTAR-ADF) unit root test on the time series data for the period 1929–2005. Our results find evidence of stationarity for time series and thereby support beta and sigma convergence among states in a nonlinear setup. However, when the non-linear test encompasses cross section dependence as advocated by Cerrato et al. (2008), the evidence is attenuated.     

Testing the balanced growth hypothesis: evidence from China

We investigate whether China’s experience during 1952–2004 supports the balanced growth entailment of the neoclassical growth model. Estimation of long-run relations among output, consumption and investment for the full period reject the balanced growth hypothesis for both the national and regional economies. When the economic reforms of the late 1970s are modelled as a structural break by the methods of Johansen et al. (Economet J 3(2):216–249, 2000) and Perron (Econometrica 57(6):1361–1401, 1989), we find some evidence of balanced growth in the pre-break period but in the post-break period the ‘great ratios’ are trend-stationary, precluding fully balanced growth, though permitting a common (stochastic) productivity trend.      

Institutional design and the closure of public facilities in transition economies

As part of the reforms of their systems for financing and delivering health care, many transition economies, particularly in central and eastern Europe, have adopted national insurance funds that are institutionally separate from ministries of health. Most of these countries have also grappled with the problem of restructuring the delivery system, especially the need to reduce hospital capacity. Although improving the performance of medical care providers through a shift from passive budgeting to explicitly incentive mechanisms is important, why this change in financial relations between the government and providers could not be implemented simply by reforming the role of health ministries is not obvious. This paper presents an explicit rationale for the separation of powers between the regulator (the ministry of health) and the financing body (the insurance fund), based on the inability of a single agency to commit to closing hospitals. JEL classification: L51, P20, P35, I18.     

Assessing Recent Determinants of Borrowing Costs in Sub‐Saharan Africa

This study explores macroeconomic implications of the sovereign bond rush that has been taking place in sub‐Saharan Africa since 2006. The focus is on the sub‐Saharan sovereign bond yields as proxies for the region's ability to raise new funds on international markets. Despite the subcontinent's tour‐de‐force entrance to the international bond market, this paper reveals that recent (since early 2000s) borrowing in foreign currency is not without macroeconomic risk. Empirically this paper finds that sovereign bond yields are significantly influenced by global volatility, commodity prices and global liquidity—all factors that are out of the control of the sub‐Saharan economies in question. These findings suggest that portfolio repositioning by institutional investors prompted by improved growth prospects and implicit monetary policy tightening in the advanced economies or heightened risk perceptions, are likely to result in increased borrowing costs for the sub‐Saharan bond issuers and affect their ability to raise funds in international markets. Furthermore, a change in borrowing costs might lead to higher debt‐service costs and policy uncertainty, which in turn could lead to suboptimal investment levels and, ultimately, hinder economic development.