Cross-country interdependencies in growth dynamics: A model of output growth in the G7 economies, 1960–1994

Cross-Country Interdependencies in Growth Dynamics: A Model of Output Growth in the G7 Economies, 1960–1994. — Recently developed methods in time series analysis are employed to study output growth across the G7 economies. The methods accommodate the interdependencies that exist between economies’ growth, and provide the means for analyzing the sources of shocks to output growth and for examining the time profiles of the shock effects. Sophisticated dynamic adjustments in output are identified, due to lagged responses to shocks, the feedback of effects across countries, and the differential speeds of response to different types of shock. Among the shocks considered, those to world trade and oil prices are shown to significantly affect many countries’ output levels.     

INTEREST RATE PASS-THROUGH IN THE COMMON MONETARY AREA OF THE SACU COUNTRIES

We investigate the interest rate pass‐through in the four Common Monetary Area (CMA) countries of the South African Customs Union (SACU). We employ an empirical pass‐through model that allows for thresholds, asymmetric adjustment, and structural changes. We show that CMA bank lending markets exhibit quite some degree of homogenization as the pass‐through is often fast and complete. Deposit markets are somewhat more heterogeneous by showing differing degrees of interest rate stickiness and asymmetric adjustment. Policy makers should therefore be concerned about imperfect competition which may be at the heart of the remaining cross‐country differences in monetary transmission in the CMA.     

Default premia on European government debt

Default Premia on European Government Debt. — This paper addresses the question of the existence and size of a risk premium in the Eurobond market. We measure the yield difference between German government bonds and bonds issued in Deutsche Mark by several European countries. The results are regressed against macroeconomic variables supposed to be determinants of the risk of default on government debt. Our yield differences are smaller than those found between US states. However, some of our macroeconomic variables seem to be good predictors of yield differentials. A conclusion is that yield differentials partially are related to risks perceived by market participants.     

Capital mobility and EU enlargement

Capital Mobility and EU Enlargement. — The membership of the Eastern European transition economies in the EU would require inter alia the full liberalization of their capital flows. Using the correlation between domestic saving and investment, this paper provides empirical evidence of the openness with respect to foreign capital that the accession states have attained so far. A comparison with the southern members of the EU shows that the countries under review have reached a similar degree of integration in quantitative terms. Yet, further adjustment in qualitative terms, i.e., in the structure of capital flows, can be expected as the process of accession proceeds.     

Capital controls and international trade finance in a dual exchange rate regime: The Belgian experience post-mortem

Capital Controls and International Trade Finance in a Dual Exchange Rate Regime: The Belgian Experience Post-Mortem. — The purpose of the paper is to model “leads and lags” capital flows on the official segment of a dual exchange market and to examine the effects of various types of capital controls imposed by authorities on the official spot and forward exchange markets. The focus of the analysis is the degree of insulation provided by a “dual exchange market cum capital controls” in face of a speculative crisis. The crucial variables in this respect are the deviation from covered interest parity and the forward risk premium. Results of the theoretical model are confronted with empirical evidence over the 1975–85 period.     

Fiscal flows in Europe: The redistributive effects of the EU budget

Fiscal Flows in Europe: The Redistributive Effects of the EU Budget. — In this paper we analyze the redistributive effects of the EU budget among European countries, exploring the relationship between income and fiscal flows, both in per capita terms. Using a new data set on EU budgets from 1986 to 1998, we find that the EU budget has a redistributive effect, though only on its expenditure side. The most redistributive expenditure category is the Regional Fund, followed by the Social Fund and by the guarantee section of the EAGGF. All of them have become increasingly redistributive in time. Total budgetary revenues show only proportionality with income. As regards the net financial balance, three groups of countries are identified, given the treatment they get from the EU budget that cannot be explained by their per capita income levels.     

FINANCIAL AND MONETARY AUTONOMY AND INTERDEPENDENCE BETWEEN SOUTH AFRICA AND THE OTHER SACU COUNTRIES

The paper uses cointegration and error correction modelling techniques together with tests of weak exogeneity, and monthly interest rates for the period 1990 to 2005, to examine the degree of financial and monetary autonomy and interdependence between South Africa and the other Southern African Customs, Union (SACU) countries. The results reveal a high level of dependence of the other SACU countries' financial systems on South Africa's financial system, which suggests that a monetary unification with a single central bank (South African Reserve Bank) and monetary policy for the union is feasible.     

Real business cycles in an open economy: An application to Germany

Real Business Cycles in an Open Economy: An Application to Germany. — This paper discusses a stochastic, dynamic-optimizing model of an open economy. It is closely related to small open economy models, but differs by introducing an upward-sloping supply curve of foreign bonds. The model is calibrated to match the long-run features of Germany. The simulations show that the model is consistent with the observed regularities of German business fluctuations.     

EU-wide money and cross-border holdings

EU-Wide Money and Cross-Border Holdings. —The paper explores the economic properties of several measures of EU-wide money that include different definitions of cross-border holdings (CBHs). ‘Very broad’ aggregates are poorly linked with EU-wide income and price developments; in contrast, the demand for aggregates which is ‘focused on the European Union’ (which hinge on the inclusion of CBHs denominated in EU currencies and/or kept within the EU) is shown to be stable and predictable. Although aggregates extended to include CBHs do not yet outperform the traditional measure of broad money, they are likely to become an increasingly important tool for monetary analysis at the EU level.     

The linkage of interest rates within the EMS

The Linkage of Interest Rates within the EMS. — The paper explores the linkage between interest rates in Germany and the United States with those on other currencies within the Exchange Rate Mechanism (ERM) of the European Monetary System. Monthly data on money market interest rates and rolling window cointegration techniques are used. The principal findings are that during the early part of the sample period (1979–1995), there is widespread cointegration between both US and German interest rates and those on other currencies in the ERM; but during the later part of the sample, this “worldwide” linkage disintegrates, cointegration between German and other ERM interest rates strengthening whilst that with the US disappears.     

Silver fetters? The rise and fall of the Chinese price level 1928–34

We show how the silver standard transmitted world silver price fluctuations into China and made the Chinese price level closely linked to the world silver price. Inflation was transmitted between 1929 and 1931 when the world silver price was falling; while deflation was transmitted during 1932 and 1934 when the world silver price was rising. Using micro-level evidence and counterfactual simulations, we show that the exchange rate was the main shock transmission channel, and silver stocks played an insignificant role.     

Disinflation costs, accelerating inflation gains, and central bank independence

Disinflation Costs, Accelerating Inflation Gains, and Central Bank Independence. - This paper considers the impact of central bank independence on both the costs of disinflation and the gains of accelerating inflation. For this purpose, sacrifice ratios for disinflation episodes and benefice ratios for accelerating inflation episodes are constructed by using a new method. The ratios are calculated for 19 industrial countries over the period 1960–1992. The results indicate that central bank independence only matters during disinflation episodes: Sacrifice ratio and output loss are higher, the more independent the central bank is; whereas during accelerating inflation episodes, central bank independence has no influence on either the benefice ratio or the output gain.     

Macroeconomic and Sectoral Effects of International Trade: A Vector Error-Correction Study

This study examines various claims that in the U.S., international trade has contributed to a loss of manufacturing base, an increased gap between unskilled and skilled wages, lower employment, and a loss of productivity. Cointegration tests indicate that in the long run and at the macro level, the ratio of trade to output and FDI to output are correlated with the manufacturing share of output, the ratio of unskilled to skilled wages, labor productivity, and the employment rate. However, Granger causality tests reveal that, with one exception, causation does not run from trade to the domestic variables, the only exception being that FDI Granger causes productivity. When the focus is shifted to the manufacturing sector, the results support the proposition that openness to trade has had adverse effects on this sector.A slightly different version of this paper was presented at the Fifty-sixth International Atlantic Economic Conference, October 16–19, 2003 in Quebec City, Canada. The research reported in this paper is partially funded by a grant from the Institute for Global Economic Affairs at Marquette University.     

SYNCHRONISATION BETWEEN SOUTH AFRICA AND THE U.S.: A STRUCTURAL DYNAMIC FACTOR ANALYSIS

This paper studies the synchronisation of the South African and the US cycles and transmission channels through which supply and demand shocks from the US affect economic activity in South Africa in a structural dynamic factor model framework. We find, using the full-sample period, US supply shocks are transmitted to South Africa through business confidence and imports of goods and services; while US demand shocks are transmitted via interest rates, stock prices, exports of goods and services, and real effective exchange rates. Second, there is a decrease in integration over time translated by a drop in synchronisation of cycles. The impact of an increase in comovement of GDP is outweighed by the structural reforms initiated by the government after the end of apartheid. Finally, the idiosyncratic component still plays an important role in the South African economy.     

Can the European Community Afford to Neglect the Need for More Accountable Safety-Net Management?

As financial institutions and markets transact more and more cross-border business, gaps and flaws in national safety nets become more consequential. Because citizens of host (home) countries may be made to pay for mistakes made in the home (host) country, Basel's lead-regulator paradigm violates the principle of democratic accountability. Because important differences exist in policymaking authority, instruments, and goals, banking supervisors need to improve their ability to monitor and mitigate the consequences of defects in one another's performance. A straightforward way to enhance both capacities would be to establish opportunities for public trading in debt obligations and reinsurance derivatives issued by country-level deposit-insurance entities.Presidential address presented at the Sixtieth International Atlantic Economic Conference, October 6–9, 2005, New York, New York. This paper extends and refocuses analysis first presented in Kane (2003) and (2005). The author wishes to thank Richard C. Aspinwall, Bill Bergman, and Mark Flannery for helpful criticisms of an earlier draft.