Net foreign assets and macroeconomic volatility

This study analyses the co-movements of net foreign asset accumulation, consumption, real exchange rate, and real interest rate in a cross section of countries. Our sample covers both industrial and developing economies, spanning 1981–2010 period. We find that the accumulation of net foreign assets is associated with increasing consumption and real exchange rate appreciation. In a cross section of countries, when a country increases its net foreign assets to GDP ratio by a one-standard deviation, consumption to GDP increases by 0.02% per year and real exchange rate appreciates by 2% per year. Consumption to GDP responds more positively to net foreign asset accumulation in G7 countries, +0.1 to +0.2% per year, while the response is smaller and negative in developing countries reporting a −0.02% per year. The real exchange rate appreciation, however, is about +3% per year in developing countries and only about +0.2% per year in OECD countries.     

International macroeconomic announcements and intraday euro exchange rate volatility

The short-run reaction of Euro returns volatility to a wide range of macroeconomic announcements is investigated using 5-min returns for spot Euro–Dollar, Euro–Sterling and Euro–Yen exchange rates. The marginal impact of each individual macroeconomic announcement on volatility is isolated whilst controlling for the distinct intraday volatility pattern, calendar effects, and a latent, longer run volatility factor simultaneously. Macroeconomic news announcements from the US are found to cause the vast majority of the statistically significant responses in volatility, with US monetary policy and real activity announcements causing the largest reactions of volatility across the three rates. ECB interest rate decisions are also important for all three rates, whilst UK Industrial Production and Japanese GDP cause large responses for the Euro–Sterling and Euro–Yen rates, respectively. Additionally, forward looking indicators and regional economic surveys, the release timing of which is such that they are the first indicators of macroeconomic performance that traders observe for a particular month, are also found to play a significant role.     

Home-product bias, capital mobility, and macroeconomic volatility

This paper uses a dynamic general equilibrium two-country optimizingmodel to analyse the consequences of international capital mobilityfor macroeconomic volatility. To this end, the dynamic macroeconomiceffects of a monetary policy, a fiscal policy, and a labor supplyshock are analysed. Simulations are used to analyse the implicationsof changes in the degree of capital mobility for the propagationof shocks. The simulation results obtained for a bond economyare compared with the simulation results obtained for a complete-marketeconomy. It is shown that allowing for a home-product bias inpreferences has a number of interesting implications for theway changes in international capital mobility and in the structureof international financial markets affect how shocks propagatethrough an open economy.     

The European exchange rate mechanism and the European monetary union

Summary This article addresses two central questions related to the prospects of the Economic and Monetary Union (EMU) in Europe: first, is the current exchange rate mechanism viable in the transition stage to EMU or in the period to come if the EMU should be postponed? Second, is a monetary union necessary in an economically fully integrated European Union or would the current or an alternative exchange rate mechanism suffice an integrating Europe? The article reviews the arguments for and against monetary union, the history of European monetary integration, the theoretical and empirical insights into the functioning of targets zones, and the likely developments and prospects for the EMU.The author wishes to thank Martin M.G. Fase and Simon K. Kuipers for their most helpful comments on a previous version of this article.     

Fiscal discipline in the European monetary union

This paper explores the question of how national fiscal policies could be conducted within the European Monetary Union. The discussion touches upon this issue in relation to the theory of optimum currency areas; presents the debt sustainability issue in the context of a monetary union; examines briefly the determinants of debt dynamics; and interprets the restraints imposed on national fiscal policies by the Maastricht Treaty. The tentative conclusion is that the creation of the EMU will be associated with smaller size national government sectors.Invited Address at the Thirty-Seventh International Atlantic Economic Conference, Athens, Greece, March 8–15, 1994. Financial support by the Economic Research Center of the Athens University of Economics and Business is gratefully acknowledged.     

China's macroeconomic volatility — How important is the business cycle?

The existing literature that discusses China's macroeconomic volatility during the reform period does so with overwhelming reference to the business cycle. However, the business cycle is only a subset of macroeconomic volatility that occurs within a particular frequency band. In this paper we decompose various macroeconomic series by frequency and find that much volatility occurs at lower than business cycle frequencies. This suggests that it is necessary to look beyond the construct of the business cycle in order to understand the nature of China's macroeconomic volatility, and beyond the usual demand side explanations in the discussion of causes.     

Assessing the costs of European monetary union

Much has been made of the importance of asymmetric shocks in arguing against European Monetary Union (EMU). But such shocks are entirely consistent with better monetary policy under EMU. A single money represents the perfect answer to asymmetric shocks coming from currency substitution. In addition, many asymmetric shocks cannot properly be handled through monetary policy; others will not be so because of information problems; still others because of policy mistakes. Some strategic factors also favor EMU if shocks are symmetric. Finally, doubts about the effectiveness of monetary policy in Europe should be kept in mind. On these numerous grounds, little weight can be assigned to criticisms of EMU based on mere asymmetry in the shocks. Distinguished Address presented at the Forty-First International Atlantic Economic Conference, Paris, France, March 12–19, 1996.     

Restructuring European union trade with central and eastern European countries

Central and eastern European countries (CEECs) participate in the European economy with trade shares of the European Union (EU) and levels of intraindustry trade comparable to peripheral EU countries. However, the opening of CEECs has induced increased specialization in EU countries, which contrasts with the development in previous decades. This partially explains the cautious approach to the eastward enlargement in the EU. Furthermore, CEECs are more similar to each other than to EU countries. The pattern of the CEECs' trade with the EU resembles that of Turkey. Trade diversion is likely to present a significant burden for countries omitted from the first wave of the enlargement.     

Banks and securities markets: Corporate financing in Germany and the United Kingdom

This paper compares corporate financing in the German bank-based and UK market-based systems. Large German firms pay out a lower proportion of their profits as dividends and finance a larger proportion of their investments from retentions. German banks extend more long-term finance to medium-sized firms but UK firms raise more new equity. The paper tests alternative theories of corporate finance. It finds no relation between finance and taxation, and information theories only receive limited support. Instead, it concludes that control models of corporate finance are consistent with observed patterns of finance.     

The German financial system and European monetary union

In connection with the European monetary union there has been much speculation about changes European monetary union will engender in member states’ financial systems. Assessments have varied greatly, and are still varying. On the other hand, for a number of reasons, it is important to be able to forecast the impact of European monetary union on the financial system. The paper outlines some major developments in the German financial system during the past few years. It is, however, often very difficult to identify a clear and causal connection between the launch of monetary union and these changes. The paper concludes with some monetary policy implications and issues.     

Macroeconomic impacts of European union membership of central and eastern European economies

This paper examines the impact of an eastern enlargement of the European Union. This is modeled as an increase in total factor productivity and a decrease in the risk premium for the central and eastern European countries (CEECs). In particular, a multicountry model of the world economy is used to assess the direct effects and spillovers of these changes. Inflation targeting for the euro zone by the European Central Bank and alternative scenarios with respect to fiscal policy behavior in the CEECs are considered. According to these simulations, productivity effects are stronger than risk premium effects, and spillovers are small.     

European trade liberalisation and the stillborn Nordic customs union in the 1950s

Abstract

Historical research on the aborted Nordic customs union of the 1950s has emphasised the conflicting commercial interests of the countries involved. This study identifies the common commercial interests that from 1954 committed governments to further progress in the customs union issue. It argues that increased frustration over the ‘hardening’ of the European commercial regime made the governments opt for a customs union to develop Nordic manufacturing industries.     

Corporate governance and the cost of public debt financing: Evidence from Japan

This paper explores the relationship between corporate governance mechanisms and the cost of public debt financing in Japan. Using a sample of corporate bonds newly issued in Japan during the period 2005–2008, I find that CEO ownership is associated with higher yield spreads after controlling for other governance, bond, and firm characteristics. Founding family ownership is also positively related to yield spreads. In contrast, firms with large corporate shareholders enjoy lower yield spreads. These results are robust to various alternative specifications. Overall, my results indicate the importance of corporate governance mechanisms in Japanese corporate bond markets.     

Horizontal and vertical intra-industry trade between Eastern Europe and the European union

Horizontal and Vertical Intra-Industry Trade Between Eastern Europe and the European Union. — The share of intra-industry trade (IIT) in total trade between central and east European nations and the EU is broken down into various components. Vertical IIT is found to account for 80 to 90 percent of total IIT. Controlling for country-specific effects, it is positively associated with product differentiation, labor intensity of production, economies of scale, and foreign direct investment (FDI). Horizontal IIT is also positively correlated with FDI and product differentiation; however, a significant negative relationship is found for scale and labor intensity.     

European monetary union and asymmetric shocks in a new Keynesian model

This paper attempts to quantify the costs imposed by asymmetricshocks under European Monetary Union compared to free floating.A simple two-country model is examined where policy is set inan optimal, time consistent manner. Nominal and real rigiditiesare present in both economies, but prices are set in a forwardlooking manner and expectations are rational. Results suggestthat the costs of asymmetric shocks under EMU may be significantlyhigher than under free floating, particularly if fiscal policyis not used for demand management.     

Estimates of trade effects of Portugal's and Spain's entry to the European union

Summary The paper first analyses the consequences of the entry of the two countries to the E.U. in 1986. We find that both now trade relatively more with each other but that, while Spain's trade with the E.U. and Portugal's import from the E.U. soared, Portugal's export to the E.U. stagnated in relative terms. We try to explain this phenomenon. We also find quite a lot of trade diversion as a consequence of the entries - from Northern as well as from Southern countries. We finally try to find evidence for theories of trade: there is little to say for intra-industry trade while comparative cost theories are sometimes vindicated in their static guise.     

Reserve requirements,currency substitution,and seigniorage in the transition to European monetary union

This article considers a transition toward European monetary union that combines increased substitution of currencies and greater monetary, financial, and fiscal policy coordination. It explores how such a transition would affect national inflation and interest rates and required reserve ratios when governments depend in part on seigniorage funding for public expenditures. We find that greater coordination of policies would lead to lower inflation and interest rates but higher reserve-requirement ratios. Because higher reserve-requirement ratios could place European banks at a competititve disadvantage, we conclude that the interaction between reserve requirements and seigniorage concerns makes it less likely that the gradualist approach of the Maastricht treaty is a sustainable means of transition to European union.