External Constraints on Monetary Policy and the Financial Accelerator

We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. Our goal is to explore the connection between the exchange rate regime and financial distress. We first show that a calibrated version of the model captures well the behavior of the Korean economy during its financial crisis period of 1997–98. In particular, the model accounts for the sharp increase in lending rates and the large drop in output, employment, investment, and measured productivity. The financial market frictions play an important role, further, explaining roughly half the decline in overall economic activity. We then perform some counterfactual exercises to illustrate how the fixed exchange rate regime likely exacerbated the crisis by tying the hands of monetary policy.     

Re-Examining the Consumption–Wealth Relationship: The Role of Model Uncertainty

This paper discusses the consumption–wealth relationship. We use data on consumption, assets, and labor income and a vector error correction framework. This framework defines a set of models that differ in the number of co-integrating vectors, the form of deterministic components and lag length. Further models can be defined through parametric restrictions and, in particular, interest centers on a weak exogeneity restriction that says that the co-integrating residuals do not affect consumption and income directly. Key results in previous work relate to the roles of permanent and transitory shocks in driving wealth and how consumption responds to these shocks. We investigate the robustness of these results to model uncertainty and argue for the use of Bayesian model averaging. We find that there is a large degree of model uncertainty. Whether this uncertainty has important empirical implications depends on the researcher's attitude toward the theory used to motivate a co-integrating relationship between consumption, assets and income. If we work with models consistent with this theory and impose the weak exogeneity restriction, we find precisely estimated results that show that permanent shocks have only a small role in driving assets and that the predominant transitory shocks have little effect on consumption. These findings are consistent with the previous literature. However, if we work with a broader set of models and let the data speak, we find that the exact magnitude of the role of permanent shocks is hard to estimate precisely. Thus, although some support exists for the view that their role is small, we cannot rule out the possibility that they have a substantive role to play.     

TRADE OPENNESS: AN AUSTRALIAN PERSPECTIVE

Australia's external trade is relatively low compared with the size of its economy. Indeed, Australia's openness ratio (exports plus imports as a proportion of GDP) in 2002 was the third-lowest among the 30 OECD countries. This paper seeks to understand Australia's low openness by analysing the empirical determinants of aggregate country trade. We present an equation for country openness which explains a substantial amount of the cross-country variation. The most important explanators of openness are population and a measure of distance to potential trade partners. Countries with larger populations trade less, as do countries that are relatively more remote. Furthermore, after controlling for trade policy there is little evidence of a positive correlation between openness and economic development. The openness equation suggests that Australia's level of trade is relatively close to what would be expected. The most important factors in explaining Australia's low openness ratio are its large geographic size and distance to the rest of the world.     

A NOTE ON THE SUPERIORITY OF LEVERED SHARES UNDER THE POSITIVE NPV RULE

The purpose of this note is to demonstrate that under the market conditions upon which the validity of the positive NPV rule in capital budgeting depends, levered shares will on average out-perform unlevered shares to a degree which more than compensates for the additional risk.
Dans ce papier, on démontre que - dans les conditions du marché dont dépend la validité du principe de la valeur actuelle nette relative aubudget en capital - les titres sujets au leverage donneront en moyenne de meilleurs rendements que ceux qui ne le sont pas, couvrant ainsi largement le risque supplémentaire.
Der Zweck dieser Amerkung ist es zu zeigen, dass unter den Marktbedingungen, mvon die Gültigkeit der Kapitalwertmethode im Rahmen der Investitionsplanung abhägt, die Aktienrendite eines verschuldeten Unternehmens die Aktienrendite eines nicht-verschuldeten Unternehmens hinsichtlich des Verschuldungsrisikos überkompensiert.     

Subordinated Market Index Models: A Comparison

The paper compares various processes subordinated to the Wiener process tomodel the leptokurtic characteristics of index returns. Empirical analysisis performed on the Dow Jones and Nikkei 225 indexes. A good model to capturethe typical tail behaviour of these indexes turns out to be a long Studentt distributed one.