A New Approach to Currency Depreciation

Currency depreciation has been studied conventionally in terms of three hypotheses—the elasticities approach, the monetary approach and the absorption approach. In this paper we offer another hypothesis called the price approach, wherein the balance of payment disequilibrium results from an inappropriate price level. Specifically, a country has a trade surplus if the equilibrium price level is below that compatible with balanced trade; by contrast, it has a trade deficit if the price level is above that compatible with balanced trade. We illustrate the price approach with the experience of currency devaluations that have occurred in emerging markets since 1997.     

The causal relation between government revenue and spending: Evidence from Egypt and Jordan

In investigating the causal relation between government revenue and spending, our empirical results support the tax-and-spend hypothesis for Egypt and the fiscal synchronization hypothesis for Jordan. Breaking away from these historical trends is essential for both countries to eliminate the budget deficit and therefore ensure the availability of domestic saving for private investment. To cope with unemployment and poverty, continuing privatization is recommended for both countries to improve productivity and efficiency in the domestic economy. Privatization should lead to higher domestic saving and investment and at the same time eliminate the budget deficit by enhancing revenue and curbing spending. (JEL H62, H63)     

Bargaining and markets: complexity and the competitive outcome

Rubinstein and Wolinsky (Rev. Econ. Stud. 57 (1990) 63-78) consider a simple decentralised market game in which agents meet randomly or voluntarily and bargain over the terms of trade. They show that any individually rational price can be sustained as a sequential equilibrium even though the model has a unique competitive outcome. Here, I consider Rubinstein and Wolinsky's model and show that if complexity costs of implementing strategies enter players’ preferences, together with the standard payoff in the game, then every equilibrium is stationary/Markov and induces the unique competitive price. Thus, I demonstrate that aversion to complexity may provide a justification for the competitive outcome.     

Fair value disclosures and crash risk

In response to the public criticism of the inadequate disclosures mandated by SFAS No. 157, Fair Value Measurements, the FASB issued ASU (Accounting Standards Update) 2010–06, Improving Disclosures about Fair Value Measurements, and ASU 2011–04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, in an effort to increase the reporting transparency. We examine whether the increased fair value disclosures required by these two updates effectively decrease crash risk, defined as the frequency of extreme negative stock returns. In support of the hypothesis, we find that increased transparency from these updates reduces crash risk among U.S. banking firms and that the reduction is greater in banks that have a higher level of Level 3 financial assets.     

Skilled and Unskilled Immigrants and Entrepreneurship in a Developed Country

Evidence from some OECD countries suggests that skilled immigrants are over‐represented in entrepreneurship. We offer an analytical explanation to show that it may be a direct outcome of asymmetric information between immigrants and potential employers in the rich countries. Limiting occupational choices to self‐employment and employment, we show that skilled immigrants vis‐à‐vis natives may be proportionally over‐represented in small businesses. This compensates for the income loss in the labor market. It results from higher critical risk aversion among skilled immigrants compared with natives and subsequently leads to higher average income for all immigrants in the cross‐section. Finally, we show why a lesser number of unskilled immigrants enter self‐employment and discuss the speed of income convergence between all immigrants and natives.     

Foreign Capital and Urban Congestion in Emerging Markets

Traditional literature emphasizes the role of foreign capital, especially foreign direct investment (FDI) in explaining the high growth rates that many emerging economies have enjoyed during 1990s and 2000s. The present paper accepts this conventional wisdom but argues that the FDI has also created problems of urban sprawl and congestion that would not be so intense if economic development had primarily come from domestic sources. This is because the FDI is typically concentrated in urban areas that abound in manufacturing and it neglects the rural areas where agriculture predominates. The paper suggests that a small tax on foreign capital tends to mitigate the side effects of foreign investment.     

Traded and Nontraded Goods and Real Wages

The paper explains most, if not all, observations made by the empirical literature regarding the behavior of skilled and unskilled real wages in the United States, especially those since 1980. Generalizing the Stopler–Samuelson theorem, the authors show that the nontraded sector is critical to explaining the effects of changes in the price of traded goods on relative and absolute wages. Factor‐intensities play their role as in the traditional Stolper–Samuelson model, but the output of the nontraded sector matters as well. Specifically, freer trade benefits capital and hurts both the skilled and unskilled labor if the import as well as the nontraded sectors contract. This is a new result to the literature on Stolper–Samuelson issues.     

UNIFORM TECHNICAL PROGRESS: CAN IT BE HARMFUL?

Abstract.  In a model incorporating trade in final goods, intermediate goods and capital, we show how 'uniform' technical progress across sectors can lead to immiserization. The condition for immiserizing technical progress crucially depends on the pattern of specialization. Our results tend to hold in a more general specification of the basic structure.