Is the Middle East an Optimum Currency Area? A Comparison of Costs and Benefits

This paper examines the macroeconomic costs and benefits of adopting a common currency for 13 Middle Eastern countries. Economic theory suggests that the main benefit is enhanced price stability, while the main cost is higher business-cycle volatility if the member country’s output is not sufficiently correlated with the area’s, as a whole. Using data from 1980–2005, the paper finds that the estimated cost and benefit measures exhibit substantial variability across the countries and are sometimes positively correlated. Moreover, focusing on the results for the last decade, it seems that many Middle Eastern countries (such as Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria and United Arab Emirates) have achieved remarkable convergence both in business-cycle synchronization and inflation outcomes.

Multinationals: Too Many or Too Few?— The Proximity–concentration Trade-off

The paper builds an analytically tractable model that illustrates the “proximity–concentration trade-off” involved in horizontal multinationals. For low trade costs, firms are single-plant firms, for intermediate costs, some are single-plant firms whereas others are multinationals, for large trade costs, firms are multinationals. Because of the modeling strategy, the model is suited for a welfare analysis of multinationals. It shows that too many firms choose to concentrate their production in only one location. Also, for some transport costs, a reduction in transport costs worsens welfare.

Currency Unions: Some Lessons from the Euro-Zone

Whilst there are many sizeable benefits from currency union, the main disadvantage is often the difficulty of adjusting to an asymmetric shock. Such adjustment is easier when the separate countries (regions) in such a union have flexible labour markets, and when there is a federal fiscal system to ease the adjustment process. The euro-zone has neither. We show that the trends in relative unit labour costs have in several recent cases been worsening relative competitiveness, thereby putting the euro-zone under greater centrifugal pressure. Nevertheless the costs of ‘exit’ are so high that it would only probably occur as a consequence of political mis-calculation.

A Puzzle or a Choice: Uniform Pricing for Motion Pictures at the Box

Consumer differentiated preferences over movies make the uniform pricing regime at the box office a puzzle in the motion picture business. This paper explores the nature of price rigidity at the current uniform price. It concludes that the high profit mark-up from concession sales helps to retain uniform pricing as the optimal choice for exhibitors, without distributors’ condemned intervention. Unless many successful event movies are expected, tiered pricing over regular and event movies will not benefit either exhibitors or distributors. The criteria for exhibitors to favor tiered pricing and the distributors’ choices to eliminate the agency problem are also developed.

International Risk Sharing and Government Moral Hazard

This paper analyzes incentive problems caused by international risk sharing. They arise because international risk sharing contributes to the insurance of domestic consumption and thus lowers governments’ incentives to increase output. We show that the resulting distortions can lead to substantial efficiency losses. Complete risk sharing is, therefore, undesirable and the optimal degree of risk sharing may be low. Furthermore, we show that households’ risk sharing decisions are socially inefficient and are effectively maximizing government moral hazard. As a result, financial innovation and integration may reduce welfare by increasing households’ risk sharing opportunities.

Credit Access,the Costs of Credit and Credit Market Discrimination

Since the early 1990s, credit expanded relative to income, especially after 2001. It is hypothesized that traditionally uneven credit access and gaps in the costs of credit by demographic characteristics shrank during this period. Relying on data from the Federal Reserve’s Survey of Consumer Finance, this study looks at financial constraints, the costs of credit and a number of contributions to the costs of credit, including sources and types of loans. The results indicate that taste-based discrimination and structural discrimination may have persisted and possibly increased over time. Gaps in credit access and costs of credit have widened by race, remained high by income, but shrank by ethnicity. Part of the overall differences in credit access was a varying reliance on professional information when making decisions on debt.

Implications of Monetary Union for Catching-up Member States

We examine the implications of monetary union for macroeconomic stabilization in catching-up participating countries. We allow member states’ supply conditions to differ, especially with regard to sectoral characteristics. Sectoral productivity shocks of the type associated with the Balassa–Samuelson effect tend to hamper the stabilization properties of a currency union. In the face of aggregate supply disturbances, the stabilization costs of renouncing monetary autonomy diminish with a steeper supply curve (as induced by higher trade openness) and—barring idiosyncratic shocks—with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability.

Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark

This paper assesses China’s “natural” place in the world economy with a new set of trade integration indicators, which are used as a benchmark in order to examine whether China’s share in international trade is consistent with fundamentals such as economic size, location and other relevant factors. They constitute a better measure of trade integration that incorporates many more factors than traditional openness ratios. The model tracks international trade well and confirms that China is already well integrated in world markets, particularly with North America, several Latin American and East Asian emerging markets and most euro area countries.

Country size and the trade effects of the euro

This paper investigates whether small countries gain relatively more than large countries from an ‘expansion’ of their market through the creation of a single currency. The introduction of the euro offers a particularly valuable source to test this hypothesis, which we motivate using the theoretical model by Casella of the year 1996. Our results from a panel data analysis, using both aggregate and disaggregated trade data, point to a statistically significant but quantitatively moderate small country bonus. On average, the euro has led to an improvement of the small euro area’s relative export performance by 3–9%.

Cantor’s Diagonal Argument: An Extension to the Socialist Calculation Debate—A Comment

In a recent article Robert P. Murphy (2006) uses Cantor’s diagonal argument to prove that market socialism could not function, since it would be impossible for the Central Planning Board to complete a list containing all conceivable goods (or prices for them). In the present paper we argue that Murphy is not only wrong in claiming that the number of goods included in the list should be uncountable, but also that the number of equations/prices is irrelevant from the point of view of market socialism.

Monetary Inflation’s Effect on Wealth Inequality: An Austrian Analysis

Austrian monetary inflation theory claims that changes in the money supply are disproportionately distributed throughout an economy, and as a result wealth is coercively redistributed. This study proposes and tests a model illustrating this connection by examining monetary inflation’s effect on wealth inequality. After testing the model’s validity, this study compares monetary inflation’s effect on several measures of wealth inequality, concluding that not only is monetary inflation a significant variable, but its effect on wealth inequality is more pronounced at the extremities of the distribution.

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Funding Shocks and Optimal University Admissions and Financial Aid Policies

A positive shock to funding, such as a major donation, causes an optimizing university to raise its admissions standards and reduce tuition charges net of financial aid across all student categories. However, the shock’s effect on enrollment may not be uniform. Student categories given little weight in the university’s objective function may be treated as inferior goods; that is, positive shocks decrease their enrollments, while other student categories’ enrollments are increased. The paper’s findings shed light on the effect of federal direct-to-student aid on tuition levels, permitting a new perspective on William Bennett’s controversial hypothesis that aid accommodates tuition hikes.

Peer Effects and Cigarette Use Among College Students

This study adds to the collegiate substance use literature by measuring the magnitude of peer effects upon individual cigarette use. The study employs data from the 2001 Harvard School of Health College Alcohol Survey to construct this peer effect measure and to study the effect of other variables upon a university student’s decision to smoke. The main finding of this paper is that moving a student from a university where no students smoke to an institution where 25 percent of the population smokes increases that student’s probability of smoking by 10.71 percent. The results of this paper suggest the potential for universities to institute student-led, anti-smoking organizations.

Gray Marketing: Does It Hurt the Manufacturers?

It is generally believed that the existence of gray channels hurts authorized retailers because gray marketers often free-ride on the marketing activities performed by authorized retailers. However, the effect on manufacturers’ profits is still rather vague. This paper sets up a two-stage sub-game perfect equilibrium model to examine the effects of gray goods on authorized retailers and manufacturers. It is found that manufacturers who are against parallel importation are likely to be those whose product has a low gray good penetration ratio, low price elasticity of demand, high cross-price elasticity of demand, or a high demand convexity.

Japanese Banks’ monitoring activities and the performance of borrower firms: 1981–1996

We construct an index measure that quantitatively describes the monitoring activities of Japanese banks. Using micro data on Japanese banks and borrower firms, we examine the effects of bank monitoring on the profitability of borrower firms. We find significant positive effects in the periods 1986–1991 and 1992–1996, although there is no significant effect in the period 1981–1985. We also examine how banks’ monitoring affects borrowers. The results show that the positive effects of banks’ monitoring on borrowers’ profitability are mostly caused by screening effects, not performance-improving effects.

Estimated Open Economy New Keynesian Phillips Curves for the G7

In this paper we develop an open economy model of firms’ pricing behaviour under imperfect competition. This allows us to introduce various terms of trade effects influencing the firm’s pricing decision, in addition to labour costs which dominate most closed-economy specifications of the New Keynesian Phillips curve (NKPC). Our analysis gives rise to a hybrid open economy NKPC which nests existing closed and open economy specifications adopted in empirical work. We estimate this specification for the G7 economies and find that the US, UK and Canada typically enjoy less inertia in price setting than the European G7 economies and Japan and that these estimates are both plausible and in line with survey evidence. We also find that the proportion of firms which use simple backward-looking rules of thumb in price setting is greater when the frequency of price change is smaller. Finally there is evidence of significant asymmetries in price setting amongst EMU members.

Euro-Area Inflation: does the Balassa–Samuelson effect matter?

The paper argues that the Balassa–Samuelson effect is of little importance for the inflation target of the ECB. First, econometric tests of the Balassa–Samuelson effect suggest that the most robust link is found between relative sectoral deflators and relative unit labour costs; i.e. a link that accounts for an incomplete wage pass-through. For the (change in the) HICP — the target of the ECB — and its components additional factors seem to cause divergent international and sectoral developments. Second, countries with high productivity growth in industry may experience a real devaluation in the sector of tradable goods which counters the real appreciation resulting from a relative increase in service prices. It follows that the difference in productivity growth and thus the difference in the size of the relative price adjustment between countries does not have unambiguous consequences for the overall inflation rate, and as such can thus not justify an inflation target well above zero.

Overall trade specialization and economic development: countries diversify

This paper provides evidence for an aspect of trade often disregarded in international trade research: countries’ sectoral export diversification. The results of our semiparametric empirical analysis show that, on average, countries do not specialize; on the contrary, they diversify. Our results are robust for different statistical indices used to measure trade specialization, for the level of sectoral aggregation, and for the level of smoothing in the nonparametric term associated with per capita income. Using a generalized additive model (GAM) with country-specific fixed effects it can be shown that, controlling for countries’ heterogeneity, sectoral export diversification increases with income.

Premarital Birth Among Young Hispanic Women: Evidence from Semiparametric Competing Risks Analysis

The existing literature on welfare effects on marriage and fertility has largely focused on groups of white and black women. By contrast, Hispanic women have received little attention. This paper examines the effects of welfare generosity on a sample of young Hispanic women’s premarital fertility and marriage choices. A bivariate competing risks duration model framework allows us to identify the process of young women’s premarital fertility and the process of marriage, effectively controlling for observed characteristics and unobservables. Our findings indicate a 10% increase in welfare generosity results in a 10% increase in premarital births and a 7% decrease in marriages by age 24; both effects are significant.

FDI and the relevance of spatial linkages: do third-country effects matter for Dutch FDI?

The aim of this paper is to test for the relevance of spatial linkages for Dutch (outbound) foreign direct investment (FDI). We estimate a spatial lag model for Dutch FDI to 18 host countries. After controlling for fixed effects, we find for our sample period 1984–2004 that third-country effects matter. Apart from our benchmark spatial lag model, we also estimate various alternative models by looking at European host FDI countries only, by dividing FDI into industry and services FDI, and by estimating a spatial error model.