Beyond Eurosclerosis

Europe no longer suffers from Eurosclerosis; unemployment, notably long-term unemployment, had decreased substantially for more than a decade. Mobility across labour market states increased in those countries where unemployment has been falling the most. Institutional reforms -- such as declining employment protection for new entrants in the labour market and less generous unemployment benefits -- account for this increase in mobility. Focusing on these reforms, we rationalize why EU workers, including those with permanent contracts, are increasingly unhappy about labour market conditions in spite of the disappearance of mass unemployment in Europe. Due to these perceptions, policy reversals cannot be ruled out. Governments wishing to minimize the risk of going back to Eurosclerosis should move towards flexicurity configurations, compensating workers for higher risks of job loss, and introduce tenure tracks to the labour market, preventing the development of dual labour market structures. This would avoid dissipating the employment gains of the last decade during this recession.
--- Tito Boeri and Pietro Garibaldi     

Confidence building on Euro convergence: Evidence from currency options

We study the evolution of investor confidence in 1992-1998 over the chance of individual currencies to converge to the Euro, using data on currency option prices. Convergence risk, which may reflect uncertainty over policy commitment as well as exogenous fundamentals, induces a level of implied volatility in excess of actual volatility. This volatility wedge should gradually decrease as confidence grows over time as convergence policy is maintained, and the risk of a reversal is progressively resolved. Empirically, we indeed find a positive volatility wedge which declines over time only for currencies involved in the Euro convergence process. The wedge and other convergence risk measures are correlated with both exogenous fundamentals and proxies for policy commitment uncertainty. We also find that the wedge responds to policy shocks in an asymmetric fashion, suggesting that policy risk is resolved at different rates after negative and positive shocks. Finally, we estimate a regime-switching model of convergence uncertainty, using data on interest rates, currency rates, and currency option prices. The results confirm the time-varying and asymmetric nature of convergence risk, and indicate that investors demand a risk premium for convergence risk.     

Resources, innovation and growth in the global economy

The relative performance of open economies is analyzed in an endogenous growth model with asymmetric trade. A resource-rich country trades resource-based intermediates for final goods produced by a resource-poor economy. The effects of an increase in the resource endowment depend on the elasticity of substitution between resources and labor in intermediates' production. Under substitution (complementarity), the resource boom generates higher (lower) income, lower (higher) employment in the primary sector and faster (slower) growth in the resource-rich economy. In the resource-poor economy, the shock induces a higher (lower) relative wage and positive (negative) growth effects that are exclusively due to trade.     

Net Neutrality in Europe: Desperately seeking a market failure

Net Neutrality has become the focus of attention in the regulatory debate on the Internet. This article attempts to strip down the debate to its bare essential. It identifies two main types of Net Neutrality obligations that have been put forward and assesses what type of potential concerns they may be designed to address. It concludes that while some of these concerns may be important it remains doubtful (at least in Europe) that an ex ante per se rule, such as those proposed under the Net Neutrality term, is the best way to address them.     

Factor-eliminating technical change

Perpetual growth requires offsetting diminishing returns to reproducible factors of production. In this article we present a theory of factor elimination. For simplicity and clarity, there is no augmentation of non-reproducible factors, thus excluding the standard engine of growth. By spending resources on R&D, agents learn to change the exponents of a Cobb–Douglas production function. We obtain the economy's balanced growth path and complete transition dynamics. The theory provides a mechanism for the transition from an initial technology incapable of supporting perpetual growth to one with constant returns to reproducible factors that supports it.     

The influence of the institutional context on corporate illegality

This paper examines the relationship between the institutional environment and sustained corporate illegality. We find that cognitive assumptions generate expectations that can, under specific circumstances, induce organizations to amplify illegal actions and that serve to lessen regulatory scrutiny. We also find that, once initiated, illegal actions can become hidden because of institutionalized practices that enable their concealment and that weaken the prospect of detection. These processes and effects are particularly noticeable in networks of professional regulators who become mutually over-confident and over-influenced by each other to the extent that their independent critical assessments and judgements are compromised. Mechanisms of mimetic herding and social humiliation compromise independence of judgement. Networks of interacting professionals are thus vulnerable to a collectively induced lowering of regulatory vigilance.     

Rational panics and stock market crashes

This paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders. We show that uninformed traders can precipitate a price crash because as prices decline, they surmise that informed traders received negative information, which leads them to reduce their demand for assets and drive the price of stocks even lower. The model yields several implications, such as that crashes can occur even when the fundamentals are strong, and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market.     

A note on the exact transformation associated with the first-order moving average process

Exact analytical expressions for the transformation that can be used to transform a generalized regression problem into a simple regression problem are available for a variety of models. Such is the case, for instance, for purely heteroscedastic models, for the first-order Markov process and for error components models. For the first-order moving average process, on the other hand, the exact transformation has not yet been produced. This gap is filled in the present note.Implications for estimation and prediction are also considered.