COALITION GOVERNMENTS AND SOVEREIGN DEBT CRISES

This article examines the domestic politics of sovereign debt crises. I focus on two alternative mechanisms that aggregate the preferences of domestic actors over debt repayment: single-party versus multiparty coalition governments. I uncover a very strong empirical regularity using cross-national data from 48 developing countries between 1971 and 1997. Countries that are governed by a coalition of parties are less likely to reschedule their debts than those under single-party governments. The effect of multiparty coalitions on sovereign defaults is quantitatively large and roughly of the same order of magnitude as liquidity factors such as debt burden and debt service. These results are robust to numerous specifications and samples.     

Bank loan portfolios and the Canadian monetary transmission mechanism

Abstract .  Following a monetary tightening, bank loans to consumers decrease. This is true for both mortgage and non-mortgage loans, and it is true for a tightening by the Bank of Canada that is, and is not, a response to a tightening by the Federal Reserve System. In contrast, business loans increase following a monetary tightening. The 'perverse' response of business loans cannot be explained by an increase in the demand for funds due to a reduction in real activity. These results are consistent with a change in bank portfolio behaviour in favour of business loans in response to a monetary tightening.     

Will Sub-Prime be a Twin Crisis for the United States?

We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis.     

On monopolistic competition and optimal product diversity: workers' rents also matter

Abstract .  In the Dixit-Stiglitz model of monopolistic competition, entry of firms is socially too small. Other authors have shown that excess entry is also a possibility with other preferences for diversity. We show that workers' rents also contribute to explain excess entry through a general equilibrium mechanism. Larger wages indeed raises the aggregate earnings and firms sales and profits, which entices too many firms to enter. We discuss the possibility of over-provision of varieties by comparing the equilibrium to unconstrained and constrained social optima and to other regulatory frameworks where wages are not controlled.     

Run equilibria in the Green–Lin model of financial intermediation

We study the Green–Lin model of financial intermediation [E.J. Green, P. Lin, Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1–23] under a more general specification of the distribution of types across agents. We derive the efficient allocation in closed form. We show that, in some cases, the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism. In these cases, the mechanism also admits an equilibrium in which some (but not all) agents “run” on the intermediary and withdraw their funds regardless of their true liquidity needs. In other words, self-fulfilling runs can arise in a generalized Green–Lin model and these runs are necessarily partial, with only some agents participating.     

Agricultural impacts on water quality and implications for virtual water trading decisions

Research on the flow of virtual water associated with agricultural crop production and trade has focussed almost entirely on water quantity. It is pertinent to consider and quantify the opportunity costs in terms of reduced water quality associated with crop production. This paper investigates the impacts of water quality on virtual water trading by creating a proxy for water quality impacts by calculating the amount of water required to dilute nonpoint-source agrochemical inputs to relevant water quality guideline values. The quantity of water required for dilution of five agrochemicals (two nutrients; nitrogen and phosphorus and three insecticides; azinphos-methyl, chlorpyrifos and endosulfan) was estimated for five crops in South Africa (maize, wheat, sugar cane, citrus and cotton) and compared to consumption of irrigation water (blue water) and rainfall (green water) for the same crops. Results indicate that the volume of water required for dilution is similar to the total sum of green and blue water required for crop production, but significantly greater than blue water use (irrigation use). For all crops phosphorus losses require greater amounts of water for dilution than for nitrogen, while pesticides result in the greatest water quality use. Estimates of water quality use are based on assumptions for a number of input variables (i.e. fertilizer application rates, percentage loss of agrochemicals from cropped areas). A Monte Carlo analysis (5000 iterations) was run to randomly select input variables from within defined ranges. Water quality use was calculated and expressed as a factor of blue water use. For all crops the average factor indicated that the volume of water required for dilution of all agrochemicals was greater than that required for irrigation. The results of this study clearly indicate that the impacts of agriculture on water quality need to be considered in virtual water trading scenarios. The incorporation of a method to predict impacts on water quality provides a comparative tool which generates a more holistic frame of reference for decision making with regard to impacts on the water resource and virtual water trading.     

Volatility spill-overs in commodity spot prices: New empirical results

The classical rational expectations model of commodity markets implies that expected spot price risk is an explanatory variable in spot price regressions; and also that inventory carryover, which is reduced by a larger price variance, creates autoregressive conditional heteroscedastic processes in spot prices. In order to falsify/verify this theory, it has typically been assumed that the square root of the conditional variance of spot prices, a proxy for spot price risk, enters the conditional mean function of spot prices. Based on this simple representation, a typical but counter intuitive outcome has been that spot price risk has an insignificant impact on spot prices, see, e.g., Beck (Beck, S., 1993. A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence. International Economic Review 34, 149–168, Beck, S., 2001. Autoregressive Conditional Heteroskedasticity in Commodity Spot Prices. Journal of Applied Econometrics 16, 115–132). In this paper, we propose an alternative functional relationship (from GARCH(1,1) to GARCH(1,1)-AR(m)) between spot price risk and spot prices that is fully supported by the classical rational expectations model, and based on this new representation we are able to provide stronger empirical support for Muth's rational expectation theory.     

PRIOR ELICITATION IN MULTIPLE CHANGE‐POINT MODELS*

This article discusses Bayesian inference in change‐point models. The main existing approaches treat all change‐points equally, a priori, using either a Uniform prior or an informative hierarchical prior. Both approaches assume a known number of change‐points. Some undesirable properties of these approaches are discussed. We develop a new Uniform prior that allows some of the change‐points to occur out of sample. This prior has desirable properties, can be interpreted as “noninformative,” and treats the number of change‐points as unknown. Artificial and real data exercises show how these different priors can have a substantial impact on estimation and prediction.     

Brotherhood of competition: Foreign Direct Investment and domestic mergers

We examine the effects of mergers on Foreign Direct Investment (FDI), and on shaping national policies regarding FDI. In this work we develop a partial equilibrium model of an oligopolistic industry in which a number of domestic and foreign firms compete in the market for a homogeneous good in a host country. It is assumed that the number of foreign firms is endogenous and can be affected by the government policy in the host country. The government sets the policy (subsidies) to maximise social welfare. We allow domestic mergers. Our main results suggest that when the host country government imposes discriminatory lump-sum subsidy in favor of foreign firms, a merger of domestic firms will increase the number of FDI if the subsidy level is exogenous. With an endogenous level of subsidy, a merger of domestic firms will decrease (increase) the welfare if the domestic firms are more (less) efficient.     

Poverty in US Lesbian and Gay Couple Households

Poverty is a widely researched topic in economics. However, despite growing research on the economic lives of lesbians and gay men in the United States since the mid 1990s, very little is known about poverty in same-sex couple households. This study uses American Community Survey data from 2010 to 2014 to calculate poverty rates for households headed by different-sex versus same-sex couples. Comparing households with similar characteristics, the results show that those headed by same-sex couples are more likely to be in poverty than those headed by different-sex married couples. Despite that overall disadvantage, a decomposition of the poverty risk shows that same-sex couples are protected from poverty by their higher levels of education and labor force participation, and their lower probability of having a child in the home. Lastly, the role of gender – above and beyond sexual orientation – is clear in the greater vulnerability to poverty for lesbian couples.