Regulations and Productivity Growth in Banking: Evidence from Transition Economies

This paper examines the relationship between the regulatory and supervision framework, and the productivity of banks in 22 countries over the period 1999–2009. We follow a semiparametric two‐step approach that combines Malmquist index estimates with bootstrap regressions. The results indicate that regulations and incentives that promote private monitoring (PMON) have a positive impact on productivity. Restrictions on banks’ activities relating to their involvement in securities, insurance, real estate, and ownership of nonfinancial firms also have a positive impact. Regulations relating to the first and second pillars of Basel II, namely, capital requirements (CAPR) and official supervisory power (SPR) do not have, in general, a statistically significant impact on productivity over the study period although they appear to gain in importance following the onset of the financial crisis in 2007. The latter finding indicates that stringent capital and supervisory standards have positive productivity effects when financial pressures peak. Our results are robust when controlling for various country‐specific features and alternative estimation approaches.     

Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK

This paper investigates the possibility of shifts in the UK economy using a Markov switching open economy dynamic stochastic general equilibrium (DSGE) model. We find overwhelming evidence to reject the hypothesis that the deep structural parameters of the underlying structural model had stayed constant throughout the sample period and there is significant changes to the volatility of the structural shocks. Counterfactual experiments based on the model with the best empirical fit indicate that the change in the policy rule as well as changes to the volatility of the structural shocks over the sample period are crucial features in explaining UK’s macroeconomic performance.     

WESTERN FARM LABOR ISSUES

This paper examines three farm labor issues: (1) how mechanization affects the demand for farm labor; (2) how immigration reform affects the supply of farm workers; and (3) how 10 years of collective bargaining affect the farm labor market. The evidence suggests that mechanization, immigration reform, and collective bargaining have had or will have fewer effects on the farm labor market than is often assumed. However, the farm labor market is vulnerable to future shocks if it remains isolated from nonfarm labor markets.     

Regulating Exclusion from Financial Markets

We study optimal enforcement in credit markets in which the only threat facing a defaulting borrower is restricted access to financial markets. We solve for the optimal level of exclusion, and link it to observed institutional arrangements. Regulation in this environment must accomplish two objectives. First, it must prevent borrowers from defaulting on one bank and transferring their resources to another bank. Second, and less obviously, it must give banks the incentive to make sizeable loans, and to honour their promises of future credit. We establish that the optimal regulation resembles observed laws governing default on debt. Moreover, if debtors have the right to a "fresh start" after bankruptcy then this must be balanced by enforceable provisions against fraudulent conveyance. Our optimal regulation is robust, in that it can be implemented in a way that does not require the regulator to have information about either the borrower or lender. Our results isolate the way in which specific institutions surrounding bankruptcy–namely rules governing asset garnishment and fraudulent conveyances–support loan markets in which borrowers have no collateral.     

Equity Returns and Business Cycles in Small Open Economies

This is the first paper in the dynamic stochastic general equilibrium literature to match key business cycle moments and long‐run equity returns in a small open economy with production. These results are achieved by introducing four modifications to a standard real business cycle model: (i) borrowing and lending costs are imposed to increase the volatility of the marginal rate of substitution over time, (ii) capital adjustment costs are assumed to make equity returns more volatile, (iii) GHH preferences are employed to smooth consumption, and (iv) a working capital constraint to generate countercyclical trade balances. Our results are based on data from Argentina, Brazil, and Chile.