In or out: efficient inclusion of installations in an emissions trading scheme?

Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations. We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared to “blanket coverage” are significant.     

Do technology externalities justify restrictions on emission permit trading?

International emission trading is an important flexibility mechanism, but its use has been often restricted on the ground that access to international carbon credits can undermine the domestic abatement effort reducing the incentive to innovate and, eventually, lowering the pace of climate policy-induced technological change. This paper examines the economics that is behind these concerns by studying how a cap to the trade of carbon offsets influences innovation, technological change, and welfare. By using a standard game of abatement and R&D, we investigate the main mechanisms that shape these relationships. We also use a numerical integrated assessment model that features environmental and technology externalities to quantify how limits to the volume, the timing, and the regional allocation of carbon offsets affect climate policy costs and the incentive to invest in innovation and low-carbon technologies.Results indicate that, for moderate caps on the amount tradable emissions permits and sufficiently high technology spillovers, global innovation and technical change would increase and that this additional innovative effort could lead to economic efficiency gains. The numerical analysis confirms that when constraints are close to 15% of domestic abatement, efficiency losses are small because they are partly compensated by more technological spillovers and lower energy prices. Under a broad range of parameters, restrictions are costly for the constrained countries, but always beneficial for unconstrained ones.     

Growth under exchange rate volatility: Does access to foreign or domestic equity markets matter?

Employing a firm-level dataset, this paper explores the effects of exchange rate volatility on the growth performances of domestic versus foreign, and publicly traded versus non-traded private manufacturing firms in a major developing country, Turkey. The empirical results using dynamic panel data estimation techniques and comprehensive robustness tests suggest that exchange rate volatility has a significant growth reducing effect on manufacturing firms. However, having access to foreign, and to a lesser degree, domestic equity markets is found to reduce these negative effects at significant levels. These findings continue to hold after controlling for firm heterogeneity due to differences in export orientation, external indebtedness, profitability, productivity, size, industrial characteristics, and time-variant institutional changes.     

Returns to individual traders in agricultural futures markets: skill or luck?

Using individual trader data from the Commodity Futures Trading Commission's (CFTC) Large Trader Reporting System (LTRS) for the period January 2000 to September 2009, this article investigates whether noncommercial traders in the corn, live cattle and coffee futures markets persist in making profits. Two out-of-sample measures of skill – a winner and a loser ranking test and a top and a bottom decile test – are used to analyse the ability of traders to consistently perform well at monthly, quarterly and annual time horizons. The findings identify significant persistence in rankings – traders in the top half of the profit distribution in a time period tend to stay in the top half in the next period. Differences in magnitude of profitability between the top and bottom deciles also provide support that persistent skill exists among the top 10% of traders. Detailed examination of annual rankings for those traders who were most continuously in the markets further reveals persistence in profits for a smaller subset of traders, as well as an indication of persistence in the face of losses.     

Does the introduction of stock exchange markets boost economic growth in African countries?

We assess whether the introduction of private equity capital markets affects economic growth in African countries. We address this issue by focussing on stock exchange markets as the predominant type of new equity markets, using a Diff-in-Diff regression method. The analysis uses a panel data set from 48 Sub-Saharan countries over the time range of 1970–2018. 23 countries are part of the “treated” group – which introduced international stock exchanges – and 25 “untreated” countries serve as the control group. Our results show that when compared with the time period prior to the introduction of stock exchange markets, GDP per capita rises by the amount of 532 US$ (around 40% of the Sub-Saharan average) after the introduction of equity capital markets in the treated countries. Over the ten years post introduction, the effect is hump-shaped, with effects becoming statistically significant from the first year after implementation, with a peak in the 5th year, and it then becomes statistically insignificant from then onwards.     

Currency crises and foreign credit in emerging markets: Credit crunch or demand effect?

Currency crises of the past decade highlighted the importance of balance-sheet effects of large devaluations. Currency crisis literature identified a decline in credit as one of the channels through which such crises affect real economic activity. We find empirical evidence of the existence of this channel and quantify its extent and persistence: controlling for a host of fundamentals, we find a decline in foreign credit to emerging market private firms of about 25 percent in the first year following large depreciations. This decline is especially large in the first five months, is less pronounced in the second year, and disappears entirely by the third year. We show that only about a quarter of the initial decline in credit could be attributed to the “credit crunch,” while the rest of the decline is due to contracting demand. After six months, however, most of the credit decline could be attributed to supply effects.     

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.     

Do exchange rate changes have symmetric or asymmetric effects on the demand for money in Turkey?

As a result of the research conducted by Nobel Laureate Robert Mundell (1963), most studies estimating the demand for money today do include the exchange rate in their specification to account for currency substitution. Previous studies that did this for the Turkish demand for money assumed that exchange rate changes do have symmetric effects on the demand for money in Turkey. In this article, we question this assumption. By using the nonlinear ARDL approach, we show that indeed exchange rate changes do have short-run and long-run asymmetric effects on the M1 demand for money. Introducing nonlinearity also yields a stable money demand.     

Tax on emissions or subsidy to renewables? Evaluating the effects on the economy and on the environment

We examine the relationship between the economy and the environment in a model where production uses nonpolluting renewable and polluting nonrenewable resources. There is policy intervention through a tax on emissions and a subsidy to renewables extraction/production. Results show that both instruments are able to decrease emissions intensity of output. However, when used together, the desired effect is higher. Empirically it is shown that the subsidy achieves higher renewables intensity and although present emissions per output are similar for both instruments, the subsidy achieves lower future levels.     

Eurozone crisis and BRIICKS stock markets: Contagion or market interdependence?

This paper examines the financial contagion in an emerging market setting by investigating the contagion effects of GIPSI (Greece, Ireland, Portugal, Spain and Italy), USA, UK and Japan markets on BRIICKS (Brazil, Russia, India, Indonesia, China, South Korea and South Africa) stock markets. During Euro-zone crisis period (October 19, 2009–January 31, 2012), the empirical results indicate that among GIPSI countries, Ireland, Italy and Spain appear to be most contagious for BRIICKS markets compared to Greece. The study reports that Brazil, India, Russia, China and South Africa are strongly hit by the contagion shock during the Eurozone crisis period. However, Indonesia and South Korea report only interdependence and not contagion. From policy perspective, the findings provide useful implications for possible decoupling strategies to insulate the economy from contagious effects. For multilateral organizations like International Monetary Fund (IMF) and World Bank, the study will provide an important direction in undertaking coordinated rescue measures for the vulnerable as well as contagious countries.     

The impact of monetary policy on financial markets in small open economies: More or less effective during the global financial crisis?

This paper estimates the impact of monetary policy on exchange rates and stock prices of eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia, and Thailand. On average across these countries in the full sample, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 0.5–1% fall in stock prices, with somewhat stronger effects in OECD countries than non-OECD countries (though differences are sometimes not significant). We find little robust evidence of a change in the effect of monetary policy surprises during the recent financial crisis.     

Bank competition in transition countries: Are those markets really in equilibrium?

This paper investigates the degree of market competition in the banking industries of 17 Central and Eastern European (CEE) countries over the period 1994–2008, using the H statistic proposed by Panzar and Rosse (J Ind Econ 35:443–456, 1987). Differing from previous works, this paper applies the newly developed censored stochastic frontier model (CSFM) to test whether these markets have achieved long-run equilibrium, which is an issue overlooked by previous literature. The CSFM appears to be preferable to the conventional one that requires adding a unity to the dependent variable return on assets for all observations, making the so-derived dependent variable non-negative. One can then take the natural logarithm of this distorted dependent variable for a subsequent equilibrium test. Inconsistent parameter estimates may occur and lead to doubtful testing results. Empirical outcomes show that a majority of the banking markets under study experience rising H statistics during the sample period and are operating under monopolistic competition. Moreover, our results indicate that some CEE banking sectors are characterized as contestable markets that may have contributed to the recent deregulation and liberalization progress. More importantly, the CSFM confirms that most of the banking sectors are in long-run equilibrium, justifying the use of the Panzar–Rosse model, while the conventional, transformed dependent variable approach tends to reject the equilibrium hypothesis in more sample countries.     

The role of Chinese stock market in global stock markets: A safe haven or a hedge?

The contribution of the study is threefold. First, the paper proposes a new empirically testable definition for a safe haven and a hedge from the viewpoint of extreme and regular dependences measured by a modern statistical tool of copulas. Second, this paper investigates the extreme and regular dependences between the Chinese and the G7 stock markets, using a mixture copula specification, and the results reveal that the Chinese stock market has been not only a hedge but also a safe haven for the G7 stock markets all these years. Finally, this study suggests that the Chinese stock market is the target market for global stock fund managers and international investors, who are seeking a hedge or a safe haven for their portfolios, under turbulence.     

The real exchange rate in Brazil Mean reversion or random walk in the long run?

This paper studies the behavior of the real exchange rate in Brazil over the longest possible period for which data are available: 1855–1990. Does the real exchange rate follow a random walk or does it revert to its mean, possibly nonstationary, level? The evidence is mixed. Formal tests can not reject the hypothesis of nonstationary behavior, although the judgement is borderline. However, time-series identification favors a stationary interpretation, and simple autoregressive processes for the real exchange rate yield extremely robust and satisfactory estimates.     

Forecasting in efficient bond markets: Do experts know better?

Term structure theory suggests that bond rates in efficient markets approximately follow a random walk. We show that the random walk forecasts of 10-year U.S. Treasury and Moody's Aaa corporate bond rates for 1988–2005 are generally unbiased. Blue Chip forecasts, however, are both biased and inferior to random walk forecasts. Both models produce unbiased forecasts of the default spread, with the random walk again outperforming the Blue Chip. In addition, Blue Chip fails to accurately predict directional change. Emphasizing that the success of the random walk model is theoretically expected, we discuss why experts fail to beat random walk predictions.     

Conditional price volatility,speculation, and excessive speculation in commodity markets: sheep or shepherd behaviour?

The present study aims to investigate the dynamics of primary commodity spot prices and the role of speculation for the period 1995–2012. Using a linear and nonlinear Granger causality analysis, the relationship between speculation and GARCH conditional price volatility on the one side, and the linkage between excessive speculation and GARCH conditional price volatility on the other side, is carefully examined with the scope to establish whether volatility drives speculation or speculation drives price volatility, or whether there are no linkages between the two variables. The results show that excessive speculation leads conditional price volatility, and that bilateral relationships often exist between price volatility and speculation. In addition, the lead-lag relationships are not found for the entire sample period, but rather when small sub-periods are taken into account. It turns out, in fact, that excessive speculation has driven price volatility for maize, rice, soybeans, and wheat in particular time frames, but the relationships are not always overlapping for all considered commodities. Generally, the results under linear causality tests are in agreement with those obtained under nonlinear counterparts.     

Technology gaps in European banking: Put the blame on inputs or outputs?

This paper investigates the production efficiency of 12 European banking systems over the period 1997–2004, taking into account possible technology heterogeneity. Using a non-parametric metafrontier framework, efficiency and metatechnology ratio measures are computed and decomposed into input- and output-invariant components. Empirical findings indicate the existence of significant and rather increasing technology heterogeneity within European banking. A typology of the national banking systems is also developed, based on the overall productive performance with respect to the European technological edge, the absorptive capacity and the role of knowledge spillover effects. Decomposition results draw attention to catching up policies focusing on input and/or output scale adjustments.     

Hysteresis in unemployment: Fact or fiction?

A stylized fact of European unemployment dynamics is one of extreme persistence and possible unit root behavior. This has led to a major reconsideration of the natural rate paradigm. We apply the Kalman filter to estimate the natural rate of unemployment for Germany and France. When the moving natural rate model is tested against the alternative of a unit root process, the unit root hypothesis is resoundingly rejected.     

The mystery of the Chinese exchange rate regime: basket or no basket?

Economists have taken for granted the claim made by the Chinese government that the policy shift introduced in July 2005 constituted a change in the exchange rate regime from a fixed peg to a basket peg. We demonstrate that neither the stylized facts nor the empirical evidence support the proposition of a basket peg and suggest several reasons as to why China has not adopted this regime. The results could prove useful for identifying the Chinese exchange rate regime in the aftermath of the perceived policy shift following the August 2015 devaluation.