Explaining Russia's Currency and Financial Crisis

The paper attempts to sketch a framework for understanding Russia's August 1998 financial and currency crises with reference to the main theories put forward so far. Our thesis is that, while not fitting easily into any pre-existing framework, the Russian crises shares many features of first-generation models inasmuch as it was largely due to inconsistencies among an overvalued peg, tight money, and an evident inability to address the fiscal deficit. In other terms, it derived from the incompatibility between standard IMF stabilisation policies and the difficulties that Russia was facing as a transition economy. On the other hand, by touching both currency markets and the banking sector, the Russian Episode shares also important features of the twin crises framework.The analysis considers the role of exchange rate movements and capital flows on Russia's rising vulnerability, fiscal problems and the building up of the public debt. It assesses the state of the Russian Banking sector and discusses the contagion effects of the Asian crisis and policy response. It shows how the core of the Russian crises lies in an unsound, IMF-backed, defence of the rouble, which in 1998 had become increasingly unsustainable.     

Insurer Profitability in Different Regulatory and Legal Environments

This paper examines the variation in insurance company financial performance across states with different legal and regulatory environments. These environments are distinguished by a diverse set of measures created by the states to address problems in the insurance area. Using firm–level financial data for the period 1984–1991, quantile regression methodology is used to describe the differential relationships between profitability and these measures. The results indicate that the distribution of profitability is only weakly related to insurers regulatory and legal environments, and is significantly related to other factors, such as the size of the firm and the effective number of competitors.     

The demand for broad money in Norway, 1969–1993

Cointegration analysis is applied to investigate the long run relationships between money, prices, and wages in Norway. Broad money is determined endogenously, and monetary balances were exposed to large shocks during the period of financial deregulation in the midst of the 1980s. In the long run these shocks are absorbed, and a long run demand for money relationship is identified in which real money is determined by real income, the relative price on financial assets (the yield spread) and the relative price on goods (the own real interest rate). Money adjusts dynamically to changes in the exchange rate and private wealth. Domestic price inflation is affected by improted inflation including currency depreciation (a pass through effect), domestic cost pressure (unit labour costs), and excess demand in the product market (output gap effect).This paper was presented at the workshop Money Demand in Europe, at the Humboldt University in Berlin, October 10–11, 1997. Thanks to Erik, Biørn, Neil R. Ericsson and Grayham Mizon for their comments on previous versions of the paper and to two anonymous referees and the editors for helpful suggestions.     

Withstanding financial crises: would trade partners help or hurt?

This article provides new empirical evidence on the losses of real activity caused by various financial shocks. Spillover effects due to foreign trade linkages deserve special attention. To this end, we estimate a modify auto-regressive process and a Seemingly Unrelated Regression Equations estimator is used to account for the dependency of one’s country growth on its trade-weighted partners growth. We run estimations on a set of currency collapses, banking crises and sovereign defaults in 49 advanced and developing countries from 1978 to 2011. The trade-weighted foreign demand effect mitigated the economic downturn following a banking or a sovereign debt crisis in all countries, while only the advanced ones benefited from it after a currency collapse. Trade-based spillover effects make banking crises more costly in the developing countries, in those that liberalize their financial account. It contrasts with what is observed during currency or sovereign debt crises.     

The rational regulator's pricing response to enhanced opportunities to “bypass” the public telephone network

Various technological innovations make it profitable—given regulated service prices—for large business customers of local telephone companies to invest in private equipment and reduce their reliance on the public telephone network. Such bypass possibilities reduce demands and increase demand elasticities for regulated business services. The politics of state telephone regulation motivate two specifications of regulatory objectives—specifications designed to reveal positive implications of bypass for regulated prices. One views the regulator as practicing so-called residual pricing, and a generalization assumes that the regulator balances the interests of competing pressure groups. Implications for interpretation of political rhetoric and for future modeling are discussed.     

Political Regimes and Currency Crises

This paper examines the relationship between political regime type and currency crises. Some theories suggest that democratic regimes, owing to their greater political transparency and larger number of veto players, should have a lower risk of currency crisis than dictatorships. Alternative arguments emphasize the advantages of political insulation and rulers with long time horizons, and imply that crises should be most likely in democracies and least common in monarchic dictatorships. We evaluate these competing arguments across four types of political regimes using a time‐series cross‐sectional dataset that covers 178 countries between 1973 and 2009. Our findings suggest that the risk of currency crisis is substantially lower in monarchies than in democracies and other types of dictatorship. Further analyses indicate that the adoption of prudent financial policies largely account for this robust negative association between monarchies and the probability of currency crises. This suggests that political regimes strongly influence financial stability, and perverse political incentives help explain why currency crises are so common.     

EXCHANGE RATE REGIMES AND MONETARY COOPERATION: LESSONS FROM EAST ASIA AND LATIN AMERICA*

This paper analyses the mechanisms of, and draws lessons from, currency crises in Asian and Latin American countries in the 1990s and 2000s. In Asian countries fiscal deficits were insignificant in size, and were not part of a crisis trigger, while in Latin America they played a major role in the crisis story. Crisis management by international financial institutions has been evolving over the last 10 years, and private‐sector involvement (PSI) has occupied centre‐stage in efforts to reform the international financial architecture. Sovereign debts, a focus of PSI discussions, were neither a cause nor a propagation of the Asian crises.     

Sunspots and incomplete financial markets: The general case

Summary This paper examines the effects of extrinsic uncertainty or sunspots on competitive equilibrium when financial markets are incomplete. For the canonical two-period, pure-exchange model with bonds (or so-called nominal assets, yielding fixed overall returns specified in units of account, and including pure inside money), the following result is established: Generically in endowments, if there areS sunspot states in the second period, but only 0<I<S distinct types of bonds, then — corresponding to the inherent deficiency in the financial markets — sunspots will generateD=S–I dimensions of consumption allocation or real (as well as spot price or nominal) indeterminacy.     

Bid Design Effects in Multiple Bounded Discrete Choice Contingent Valuation

A potential concern in multiple bounded discrete choice contingent valuation surveys – where the respondent is asked to express voting certainty, rather than a simple yes or no, on a large number of payment amounts (bids) – is whether responses are influenced by the particular position of bids in the bid-voting panel rather than solely on the respondents willingness to pay (WTP). For instance, respondents may systematically state they would pay the first few bid amounts and not pay all subsequent bids – regardless of the actual dollar values. Such systematic bid design effects would suggest that this method does not provide a valid measure of WTP. Using a split-sample survey, we compare responses to three different bid arrays that have an identical minimum bid, maximum bid, and number of bids. Using nonparametric estimation techniques, we find that estimated WTP distributions and corresponding welfare measures are not statistically different across survey samples.     

The greenhouse effect: Damages,costs and abatement

The buildup of so-called greenhouse gases in the atmosphere — CO₂ in particular-appears to be having an adverse impact on the global climate. This paper briefly reviews current expectations with regard to physical and biological effects, their potential costs to society, and likely costs of abatement. For a worst case scenario it is impossible to assess, in economic terms, the full range of possible non-linear synergistic effects. In the most favorable (although not necessarily likely) case (of slow-paced climate change), however, it seems likely that the impacts are within the affordable range, at least in the industrialized countries of the world. In the third world the notion of affordability is of doubtful relevance, making the problem of quantitative evaluation almost impossible. We tentatively assess the lower limit of quantifiable climate-induced damages at $30 to $35 per ton of CO₂ equivalent, worldwide, with the major damages being concentrated in regions most adversely affected by sea-level rise. The non-quantifiable environmental damages are also significant and should by no means be disregarded.The costs and benefits of (1) reducing CFC use and (2) reducing fossil fuel consumption, as a means of abatement, are considered in some detail. This strategy has remarkably high indirect benefits in terms of reduced air pollution damage and even direct cost savings to consumers. The indirect benefits of reduced air pollution and its associated health and environmental effects from fossil-fuel combustion in the industrialized countries range from $20 to $60 per ton of CO₂ eliminated. In addition, there is good evidence that modest (e.g. 25%) reductions in CO₂ emissions may be achievable by the U.S. (and, by implication, for other countries) by a combination of increased energy efficiency and restructuring that would permit simultaneous direct economic benefits (savings) to energy consumers of the order of $50 per ton of CO₂ saved. A higher level of overall emissions reduction — possibly approaching 50% — could probably be achieved, at little or not net cost, by taking advantage of these savings.We suggest the use of taxes on fossil fuel extraction (or a carbon tax) as a reasonable way of inducing the structural changes that would be required to achieve significant reduction in energy use and CO₂ emissions. To minimize the economic burden (and create a political constituency in support of the approach) we suggest the substitution of resource-based taxes in general for other types of taxes (on labor, income, real estate, or trade) that are now the main sources of government revenue. While it is conceded that it would be difficult to calculate the optimal tax on extractive resources, we do not think this is a necessary prerequisite to policy-making. In fact, we note that the existing tax system has never been optimized according to theoretical principles, and is far from optimal by any reasonable criteria.During the academic year 1989–90 Dr. Ayres was at the International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria.During the summer of 1989 Mr. Walter was a member of the Young Scientists' Summer Program at IIASA.     

Ein Entscheidungsmodell für Konsumieren und Sparen

Summary The present study analyses the simultaneous problem of consumption and saving by means of a consistent demand system; for this purpose the linear—expenditure—system (LES), developed by R. Stone, has been modified and used as a methodological base. Saving takes, for the sake of operationality, the character of a consumer—good and becomes an argument of the utility function. The usual neoclassical assumption of utility maximization allows the derivation of a linear expenditure system of consumption and saving (LESSC) when prices and income are given. The simultaneous LESSC-model has remarkable weaknesses, however: the assumption of certainty, the static character of the model, the disregard for major savings—motives and private expenditure on homebuiding led to bad elasticity—estimates. The assumpion of directly—additive utility functions causes furthermore collinearity between income—and price—elasticities such that the meaning of the derived elasticities is greatly reduced.The income—elasticities derived from the LESSC are positive throughout but show a remarkable variance. The calculation of the Friedman—bias demonstrates a rather strong bias due to the assumption of certainty. A modification resulted in income—elasticities of private consumption and savings of around 0,93 (unmodified: 0,88) and 1,41 (unmodified: 1,76). The demand for consumption goods of great necessity was income—inelastic whereas the demand for goods of less importance to survival was income—elastic. An analysis of income—elasticities of the disaggregated system and the relation between transitory components of consumption and income existing in Austria gave the impression that unexpected changes in income are not only reflected in saving but also in changes of the consumption—structure.The respective price—elasticites are all negative and smaller than 1. For less important consumption—goods lower price—elasticities have been measured and for easily substitutable goods higher ones. Marked crossprice—elasticities could only by discovered with clothing and food products. Generally it can be said that an increase in prices of goods of the daily needs hits both the expenditure on easily substitutable consumption goods and causes dissaving.A comparison with the elasticities calculated through OLS shows a greater reliance of LESSC—elasticities as far as data of differing aggregation levels are concerned.

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Mécanique Sociale may one day take her place along with Mécanique Celeste throned each upon the double—sided height of one maximum principle, the supreme pinnacle of moral as of physical science.     

Has Austria’s Accession to the EU Triggered an Increase in Competition? A Sectoral Markup Study

We estimate the pro-competitive effects of Austrias participation in the Single Market after its European Union (EU) accession in 1995 in terms of firms market power as measured by the Lerner index, using a sample of 46 industries and 7 industry groups, covering the period 1978–2001. In the framework of the markup estimation method suggested by Roeger (1995), we test for both an instantaneous structural break between 1993 and 1998 and also estimate logistic smooth transition models to take up the proposition that the regime shift is likely to have occurred gradually rather than as a big bang. In sum, the results provide no reason for being euphoric: Pronounced markup reductions were only found in three industry groups (mining and quarrying, wholesale and retail trade; financial services and real estate). At the more disaggregate level, the picture is mixed: Both increases and reductions in market power have been found.     

Einige absorptionstheoretische Überlegungen zum österreichischen Leistungsbilanzdefizit

Summary The study explains the Austrian current account deficit in terms of a modified and disaggregated absorption approach. In small integrated countries absorption depends not an internal demand alone but on the difference of capacity utilisation at home and abroad. Disaggregation suggests that in years of increasing current account deficits households normally increase their net—saving while entrepreneus increase their net—indebtedness less than proportionally. It is the government which as a rule has high absorption during current account deficits. Since the government demands only few foreign goods, this correlation must be explained indirectly. Four mechanisms are suggested: First that budget deficits increase overall domestic capacity utilisation relative to that of the trade partners and so stimulate imports and restrain exports; secondly: The budget deficit may sustain full employment even if the economy has lost its international competitiveness; thirdly: An oversized public demand diverts capacities from the export industry, or fourthly: The foreign financing of budget deficits leads to a real transfer within a short time. A brief discussion of the Austrian situation attaches most weight to mechanisms one and two, a little less to point four.

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Überarbeitete Fassung eines Referates im Rahmen des Workshop Zahlungsbilanz im Österreichischen Institut für Wirtschaftsforschung am 14. Juni 1977. Der Autor dankt den Teilnehmern des Workshop, insbesonders Dr.H. Handler, Professor Dr.K. Rothschild und Professor Dkim.H. Seidel für wertvolle Anregungen.     

Research policy and endogenous growth

This paper studies the effects of different types of research policy on economic growth. We find that while subsidies to private research, public funding of private projects, and basic research performed at public institutions have unambiguously positive effects on growth, performing applied research at public institutions could have negative growth effects. This is due to the large crowding out of private research caused by public R&D when it competes with private firms in the patent race.JEL Classification: O31, O38, O40I thank the helpful comments of Jordi Caballé, David Pérez-Castrillo and two anonymous referees. I also aknowledge the financial support of Fundaci ón Séneca project PB/3/FS/02.     

The Regulation of Private Schools Serving Low-Income Families in Andhra Pradesh,India

This paper sets out some findings of a research project carried out in private unaided schools in low-income areas of Hyderabad, India. The part of the research project documented here was designed to examine the question: Is the regulatory regime conducive to entrepreneurial action and market discovery with particular reference to the low-income schools in Hyderabad. This paper is narrowly focused, setting out the results of pattern matching empirical data with the Austrian economic concepts of entrepreneurship, rivalry, and market discovery. The research discovered that two regulatory regimes exist, one that is set out on paper in the Education Acts and associated rules, and another that operates in practice. That is, there is a combination of regulations on paper and regulations existing in an extra-legal sector. Generally it was found that the regulations in practice are consistent with market principles. Conversely the regulations set out on paper are not conducive to entrepreneurial innovation and market discovery. Recommendations for potential policy initiatives include the possibility of legitimising the extra-legal sector by introducing self-regulation possibly via self-evaluation systems for the private unaided schools.     

Decentralizing lottery allocations in markets with indivisible commodities

Summary In economies with indivisible commodities, consumers tend to prefer lotteries in commodities. A potential mechanism for satisying these preferences is unrestricted purchasing and selling of lotteries in decentralized markets, as suggested in Prescott and Townsend [Int. Econ. Rev.25, 1–20]. However, this paper shows in several examples that such lottery equilibria do not always exist for economies with finitely many consumers. Other conditions are needed. In the examples, equilibrium and the associated welfare gains are realized if consumptions are bounded or if lotteries are based upon a common sunspot device as defined by Shell [mimeo, 1977] and Cass and Shell [J. Pol. Econ.91, 193–227]. The paper shows that any lottery equilibrium is either a Walrasian equilibrium or a sunspot equilibrium, but there are Walrasian and sunspot equilibria that are not lottery equilibria.This paper is based on Chapter 3 of my doctoral dissertation, written while I was a student at Cornell University. I thank Larry Blume, Yue Yun Chen, David Easley, Aditya Goenka, John Marshall, Bruce Smith, John Wooders and an anonymous referee. I am particularly grateful to Karl Shell and Cheng-Zhong Qin. I thank the Academic Senate at UCSB for financial support.     

The Economic Logic for Conditioning Bell Entry into Long Distance on the Prior Opening of Local Markets

One of the most important and most contentious issues for regulation and competition raised by the 1996 Telecommunications Act is when to authorize the regional Bell companies to offer long-distance services. The Department of Justice (DOJ) adopted a standard requiring that a Bells local market must first be irreversibly open to competition. This paper analyzes the competitive benefits and costs of authorizing Bell entry, explains the DOJs standard, and argues that the incentives created by this standard will help achieve the Acts competitive goals more efficiently and rapidly than other standards, ultimately reducing the need for intrusive regulation.     

Catching-Up Investment without Regulatory Commitment

This paper analyses a regulated firms incentives to undertake catching-up investments when the firm has private information about the initial technology and the regulator is unable to commit himself to incentive contracts prior to the firms investment decision. In the absence of commitment power, the firm takes into account that the investment decision may serve as a signal to the regulator about the firms initial technology. Any pure strategy equilibrium of the signaling game is shown to be pooling in the sense that the efficient type mimics the inefficient type by investing. By not following this strategy, the efficient type reveals its efficiency to the regulator, who responds by inducing the firm to produce without rents. Restricting attention to undefeated pooling equilibria, the level of investment is shown to be lower than the first-best level.     

Endogenous Growth and Natural Resource Scarcity

Endogenous growth theory has rekindled interest in the role of innovation in determining long-term economic growth. Generally, this body of literature has ignored the contribution of natural resources to growth or the role of innovation in overcoming resource scarcities. The latter problem has been a focus of resource economics for many years, but innovation is usually modelled as exogenous rather than endogenous technological change. Recent investigations in political economy have additionally suggested that the supply of innovation may itself be constrained by resource scarcities, especially in the developing world. The following paper attempts to bridge these theoretical gaps through the formal analysis of two issues: First, a simple Romer-Stiglitz model of endogenous growth with resource scarcity and population growth is developed to determine the optimal balanced growth path for the economy. Second, the basic model is extended to allow for the possibility of resource availability constraining the supply of innovation, so that in the long run innovation net of any resource constraint is zero. However, under the latter conditions it is still possible to avoid resource exhaustion and thus achieve a constant level of per capita consumption in the long run. The paper therefore demonstrates that endogenous growth can overcome resource scarcity, but the outcome in the long run depends critically on assumptions concerning any constraints imposed by resource availability on the generation of innovation.     

Banking,currency, stock market and debt crises in Spain, 1850–1995

What type of crisis is generated when debt increases? We extend the literature by framework by introducing currency and stock market crises in the analysis. We apply our proposal to the case of Spain, since this is a country that has experienced a very important amount of financial crises from the nineteenth century onwards. We find the same results as the previous literature for the determinants of banking and debt crises but substituting external and public debt with perpetual debt and where perpetual debt has a less important role than crises in the private sector. Moreover, we find evidence in favour of the hypothesis that currency crises depend strongly and positively on financial centre crises and negatively and mildly on perpetual debt. We justify the negative relalionship due to an inflation tax. We also find evidence in favour of the hypothesis that stock market crises depend only positively and strongly on financial centre crises.