Currency Unions in Africa: Is the Trade Effect Substantial Enough to Justify their Formation?

Using estimates that currency unions double trade, we quantify the welfare effects of forming currency unions for the African regional economic communities and for the African Union as a whole. The potential increase in trade is shown to be small, and much less than that resulting from the adoption of the euro. Allowing for increased African trade does not overturn the negative assessment of African currency unions, due to asymmetries in countries’ terms‐of‐trade shocks and their degree of fiscal discipline.     

Small businesses as a research subject: Some reflections on knowledge of small businesses and its effects on economic theory

Most economists agree in their view of small and medium-sized enterprises, or small businesses (SMEs), as a marginal scientific subject. They may go so far as to ignore them, either because they think these economic units do not lend themselves to conventional economic studies — studies which, for instance, take into account the sacred cow theory of economies of scale — or because they see them as being not really different from big businesses.However, at least a few economists have recognized, first, the many characteristics differentiating SMEs from big firms, and second, their increasing importance in terms of numbers and job creation within economies. Among these few, Schumpeter was one of the first to show the importance of entrepreneurs and SMEs as the main variable of change in an economy. Simon and Lucas also explained the difference between small and big firms through the differing abilities required by managers to run them. Penrose looked at the question from another point of view by highlighting the interstices taken up by SMEs to fulfil needs that cannot be fulfilled by bigger units. Critics of the theory of economies of scale showed that such economies may be offset by a number of diseconomies, thus justifying the efficiency of many SMEs. More recently, Mills and Schumann suggested that SMEs compensate for their lack of economies of scale by their production flexibility, particularly in today's turbulent economy.The limits of traditional economic theory are clearly demonstrated by the fact that it does not take account of all these theories, concepts and ideas. It thus neglects a number of important economic phenomena, including the persistence and current expansion of SMEs. Consideration of such phenomena may lead to the development of a new economic theory based on the concepts of instability and contingency, together with the behaviour of entrepreneurs and small firms, thus tending to contradict, in particular, the concept of equilibrium in conventional economic theory.A first version of this paper has been presented as invited speaker at the symposium of TETRA Group at Lyon, France, 30–31 May 1990. I thank the colleagues Fritz Rieger, Frances Solé Parrellada, Jacques Filion and the two referees for their very interesting suggestions on a preliminary second version.     

Implementing the Mortensen rule in a frictional labor market

We show that, in settings where meetings can be multilateral, the allocation rule proposed by Mortensen (1982) can be relatively straightforward to implement: as a local auction conducted by sellers. The implications of using this mechanism in a simple model of the labor market are then explored. We characterize the equilibrium properties of this model, which include wage dispersion, and examine its implied Beveridge curve. A dynamic version of the model is calibrated to the US labor market, and we show that the model can account for observed vacancy rates, given parameters that are chosen to match the average wages and the natural rate of unemployment, although the implied wage dispersion is quite small. Finally, in the limit, as the time between offer rounds in the model approaches zero, the equilibrium approaches the Walrasian competitive equilibrium.     

Fiscal policy independence in a European Monetary Union

Do plans for a monetary union in Europe call for limits on the freedom of the country members of the union to use fiscal policy? In order to provide a tentative answer, we simulate the IMF model MULTIMOD, given various shocks, in the case of a European Monetary Union consisting only of France and Germany. The results clearly indicate the possible value of allowing unfettered use of fiscal policy in both countries. The reasons lie partly in differences in the initial position of the two, partly in differences in their preferences. We also examine the change in the policy significance of the current account in the monetary union. Current account imbalances clearly cease to have the same significance in a monetary union; but they do not therefore become irrelevant.     

RESIDUAL WAGE DISPARITY AND COORDINATION UNEMPLOYMENT*

How much of residual wage dispersion can be explained by an absence of coordination among firms? To answer, we construct a dynamic directed search model with identical workers where firms can create high‐ or low‐productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy. Workers can exploit ex post opportunities once approached by firms, and can conduct on‐the‐job search. The stationary equilibrium wage distribution is hump‐shaped, skewed significantly to the right, and, with baseline parameters, generates residual dispersion statistics 75–90% of those found empirically. However, the model underestimates the average duration of unemployment.     

OLIGOPOLISTIC PRODUCT WITHHOLDING IN RICARDIAN MARKETS

We consider strategic behaviour in the rental market for quality-differentiated goods. In his classic analysis Ricardo showed that at the competitive equilibrium the price of the marginal unit is driven to zero. An oligopolistic market structure usually leads to a radically different equilibrium. Deliberate withholding of units often becomes part of a firm's best response, and whenever this occurs, a pure strategy equilibrium fails to exist. A necessary but not sufficient condition for a pure strategy equilibrium to exist is for one firm to own all the best quality units. A mixed strategy equilibrium always exists and the associated payoff is aiways greater than the competitive payoff.     

Raising Capital in an Insurance Oligopoly Market

We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty. Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model with regard to the insurance industry specificities and regulation.     

Understanding the economic determinants of the severity of operational losses: A regularized generalized Pareto regression approach

We investigate a novel database of 10,217 extreme operational losses from the Italian bank UniCredit. Our goal is to shed light on the dependence between the severity distribution of these losses and a set of macroeconomic, financial, and firm‐specific factors. To do so, we use generalized Pareto regression techniques, where both the scale and shape parameters are assumed to be functions of these explanatory variables. We perform the selection of the relevant covariates with a state‐of‐the‐art penalized‐likelihood estimation procedure relying on L₁‐penalty terms. A simulation study indicates that this approach efficiently selects covariates of interest and tackles spurious regression issues encountered when dealing with integrated time series. Lastly, we illustrate the impact of different economic scenarios on the requested capital for operational risk. Our results have important implications in terms of risk management and regulatory policy.