Explaining the Transition between Exchange Rate Regimes*

This paper studies the transition between exchange rate regimes using a Markov chain model with time‐varying transition probabilities. The probabilities are parameterized as nonlinear functions of variables suggested by the currency crisis and optimal currency area literature. Results using annual data indicate that inflation and, to a lesser extent, output growth and trade openness help explain the exchange rate regime transition dynamics.     

A new methodology linking concentration dynamics to current and steady-state profits:Examining Korean industrial policy during take-off

We model the dynamics of industrial structure and market power using Korean manufacturing data during the take-off period (1978–82). Structure–Conduct–Performance [SCP] methodologies have been criticized for using accounting data and because a few superior firms may have greater shares and greater profits. Both are argued to present possible spurious correlations between concentration and profits. This paper follows earlier work which shows that market structure responds to observed accounting profits as if these were accurate indices of real profits, and not as if leading firms are perceived to have unmatchable advantages. The methodological contribution of this model is a new latent variable for steady-state profits derived from the speed of structural adjustment. Long run profits are identified by the hypothesis that structural adjustment will be more rapid when industries are farther from steady-state levels. We analyze the long run profits latent variable, finding strong support for this hypothesis. The speed of adjustment is greater for positive and negative deviations from steady-state structure. We show that the profits and structural adjustment relationship is non-monotone. The SCP criticisms above are based on spurious correlations which are monotone in profits and structure. Positing spurious correlations which are at the same time monotone in structure and non-monotone in structural adjustment seems less plausible than accepting the SCP results which are consistent with both. Our analysis also is new in that it is the first direct econometric analysis of Korean industrial policy during its take-off years. We note that in Korea, unlike elsewhere, Industrial Policy was hypothesized to lead to concentration and market power in the popular press and by professional economists. Ours is the first direct econometric analysis of this hypothesis, and we find it supported.     

Comparing Investments in New Transport Infrastructure: Roads versus Railways?

This paper contributes to the debate on investment in transport infrastructure and the allocation of public funds between road and railway projects. We model the two options and provide a consistent framework to appraise investment in typical new inter–urban road and rail projects. Our results suggest that road improvements have substantially higher returns than railway schemes. These findings cast doubt on the rationale of the new transport policy for the UK, which proposes to allocate more public funds to the (private) railways than total new investment in strategic roads.     

Modelling Monetary Union in Southern Africa: Welfare Evaluation for the CMA and SADC

This paper proposes a quantitative assessment of the welfare effects arising from the Common Monetary Area (CMA) and an array of broader groupings among Southern African Development Community (SADC) countries. Model simulations suggest that (i) participating in the CMA benefits all members; (ii) joining the CMA individually is beneficial for all SADC members except Angola, Mauritius and Tanzania; (iii) creating a symmetric CMA‐wide monetary union with a regional central bank carries some costs in terms of foregone anti‐inflationary credibility; and (iv) SADC‐wide symmetric monetary union continues to be beneficial for all except Mauritius, although the gains for existing CMA members are likely to be limited.     

Currency crises, sunspots and Markov-switching regimes

This paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotic dynamics for the devaluation expectations. We then propose an econometric technique, based on the Markov-switching regimes framework, by which these models can be brought to the data. We illustrate this empirical approach by studying the experience of the French franc between 1987 and 1993, and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots.     

6. The capital and industrial output sub-system

The World 3 model has an acknowledged sensitivity to the capital sector. It predicts catastrophe. But the great weakness of the capital sub-system is that it assumes inflexible relationships and constants throughout which make overshoot and collapse typical modes of behaviour of the model. It excludes the possibility of adaptive flexible response to changing circumstances—one of the main characteristics of real world behaviour of the economy.     

Global imbalances,cross-market linkages,and the financial crisis: A multivariate Markov-switching analysis

Based on multivariate Markov-switching models, this paper presents new results on the interactions between global imbalances, credit spreads, housing markets, macroeconomic variables, commodities and equities during Q1-1987/Q1-2011. We show that rising global imbalances and the uncontrolled development of the US mortgage and housing markets have been deeply destabilizing the economy, with various shocks impacting subsequently equity markets and macroeconomic variables. But we also uncover, surprisingly, that the cross-market linkages with the commodity markets are strong. Finally, we identify that the US housing market lies at the epicenter of the crisis through its multiple and highly significant interactions with the other variables in the system (including the global imbalances). Sub-samples and alternative time series estimates are provided to check the statistical congruency of the various models.     

Directed search, unemployment and public policy

Abstract .  We examine the effects of public policy parameters in a simple directed search model of the labour market, and contrast them with those in standard random matching models with Nash bargaining. Both finite and limit versions of the directed search model are considered, and the value of the limit model as an approximation of the finite one is assessed. As with the random matching model, job creation is the key channel through which the policy parameters affect the equilibrium of the directed search model. Both comparative static effects of the policy parameters and optimal configurations are identified.