Dynamics of international integration of government securities’ markets

This paper investigates the dynamics of international government bond market integration in six of the G7 economies over two decades leading up to the global crisis. It examines whether such integration had been significant; the extent to which integration at the short and long end of the yield curve differed; the nature of such integration; and the extent of the decoupling of the long rates from short rates. These issues are investigated using the rigorous smooth-transition copula-GARCH model framework. The results show that integration at the long end of the yield curve had been increasing, had become pronounced, and was significantly greater than at the short end. Decoupling between the short and long end of the yield curve was notable, with important implications for the efficacy of monetary policy in the period before the crisis.     

KALDORIAN DEMAND FUNCTIONS AND THE RETURN TO CAPITAL: AN ANALYSIS IN A TRADE THEORETIC FRAMEWORK

Abstract.  This paper shows that under certain plausible conditions capital accumulation raises the return to capital. A three good trade theoretic model with Kaldorian demand functions is used to establish this result. This proposition is also independent of the assumption of diminishing return to capital a key feature of endogenous growth theory. Our result sheds light on the high rates of investment and growth that many East Asian economies have achieved.     

EMERGING EQUITY MARKETS: GROWTH, BENEFITS, AND POLICY CONCERNS

Since the mid-1980s, stock market activity has increased substantiallyin many developing countries. This article first examines themain characteristics of emerging stock markets and illustratesthe evolution of equity prices in these markets during the lastdecade. It then discusses the reasons for the markets' growthand assesses the extent to which they have been affected bydomestic policies and external factors. The authors discussthe likely benefits of these markets, the effects any abruptcorrection in stock prices could have for the economy, and theways in which these markets can be made more efficient.      

INDEPENDENT FISCAL AGENCIES

Abstract.  There has been a considerable literature regarding the incentives of policymakers as a prime reason for persistent fiscal deficits and a variety of fiscal rules have been proposed as a remedy. However, the often inadequate flexibility of rules and the success of policy delegation in the monetary realm have motivated a small but growing number of studies that suggest delegating some aspects of fiscal policy to what will here be called 'independent fiscal agencies'. This paper surveys the related literature with a focus on three aspects: the motivation for the establishment of such agencies; their potential design; and the experience with these types of institutions.     

Sovereign Risk: Are the EU's New Member States Different?*

This article examines whether rating agencies and investors perceive the sovereign risk of the new member states (NMS) of the European Union (EU) as different from that of other emerging markets. The results suggest the NMS have enjoyed favourable treatment since somewhere between 2002 and 2004, amounting to an advantage of 1.8 notches in ratings and 100 basis points in foreign currency spreads. We argue that, although several explanations of this effect are possible, it is most likely because of higher policy credibility bestowed by EU membership.     

Exchange Rates and Capital Flows

This paper explores the ability of portfolio and foreign direct investment flows to track movements in the euro and the yen against the dollar. Net portfolio flows from the euro area into US stocks – possibly reflecting differences in expected productivity growth – track movements in the euro against the dollar closely. Net FDI flows, which capture the recent burst in cross‐border M&A activity, appear less important in tracking movements in the euro‐dollar rate, possibly because many M&A transactions consist of share swaps. Movements in the yen versus the dollar remain more closely tied to conventional variables such as the current account and interest differential.     

Fatal attraction: Using distance to measure contagion in good times as well as bad

This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of “positive contagion,” in which capital flows to emerging markets in a herd-like manner largely unrelated to fundamentals. Identifying such periods of “fatal attraction” is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.     

Entry liberalization and export performance: a theoretical analysis in a multi-market oligopoly model

This paper is an attempt to demonstrate how the entry (costless) of firms in an industry may have a dramatic effect on exports from an industry in a country. The results have tremendous implications for LDCs suffering from resource and BOP constraints but having reservoirs of cheap labor. The welfare effects of such entry liberalization policy (or subsidy) can be stated from the Bhagwati theorem that a reduction in an only (single) distortion is necessarily welfare improving by reducing monopoly or oligopoly distortions. However, we have shown that the entry liberalization policy is welfare superior to an equivalent subsidy policy where equivalent is defined in terms of the impact on exports. As a by product, we have also shown how one can integrate the oligopoly models of trade with the general oligopoly literature. The results on the limiting behaviour of an open economy oligopoly model extend the standard results in the oligopoly theory in a closed economy.     

Public and Private Investment and The Growth Process in Developing Countries

This paper examines the relative contribution of public and private investment to per capita GDP growth in developing countries. It extends the basic neoclassical model of growth by separating investment into its public and private components, and estimates this model for a sample of 95 developing countries over the period 1970–90 using both cross-sectional and panel data. Using data on relative supplies of public and private capital stock, rates of return to public and private investment are also computed. The results suggest that once other determinants of growth, such as human capital formation, population growth, and technical progress, are taken into account, public and private investment have different effects on growth, and that these effects are characterized by marked regional and inter-temporal variations.