Euro conversion and return dynamics of European financial markets: a frequency domain approach

Using a frequency domain approach, we compare the spectra of equity market index returns for the 12 Euro-zone countries, the UK, the US, and Japan, over several time frames before and after the introduction of the Euro. In the immediate aftermath of the Euro-introduction, we find a reduced volatility over all frequencies, in which no strong cyclical components are present. However, in the long run, equity markets exhibit a volatility increase: the larger European equity markets develop dynamics that exhibit strikingly similar patterns, while the smaller European equity markets appear to follow dynamics closely resembling white noise. The similarity in dynamics is a likely candidate to explain the increase in correlation among the European markets. Furthermore, the European equity markets initially exhibited dynamics that resembled those of the US, while after the introduction of the Euro, the dynamics of the European Markets exhibits patterns similar to those found the UK. This suggests a change in the dynamic interdependency between the UK and the European markets and an increased convergence of UK market behavior with that behavior dominant in the Euro-zone. The findings may provide important implications for investors seeking to take advantage of international diversification.     

Competition Policy as Strategic Trade with Differentiated Products

The paper analyzes how countries use competition policy as a tool for strategic trade. In the model, two countries export to a third country. Each exporting country is endowed with a set of differentiated products. Each government chooses the number of exporters for its country and the products that each exporter sells in the first period, and a tax policy in the second period. Firms choose prices or quantities independently in the third period. In the unique subgame‐perfect equilibrium, both countries group all their products within a single firm—the “national champion policy.” We study the implication of different assumptions about the timing of the game.     

The effects of domestic rice market interventions outside business-as-usual conditions for imported rice prices

The Philippine government intervenes in the domestic rice market through the imposition of import tariffs and the provision of producer and consumer subsidies. While policymakers are aware that these programmes come with allocative efficiency costs, they justify the programmes on the grounds that they insulate the domestic economy from unexpected price spikes in the international rice market. An interesting matter for policy evaluation is to quantify the insulation benefit that the programmes provide in circumstances of sudden severe import price spikes. To examine this question, we undertake a dynamic computable general equilibrium (CGE) simulation in which the Philippines is subject to an external rice price shock. We find that the insulation benefit of the support programmes under a 2008-like event is worth approximately 0.10% of real consumption. However, the cost of insuring against these price spikes is significant. We estimate the annual cost of the rice market interventions at approximately 0.40% of real consumption.     

Jacques Le Bourva's theory of endogenous credit-money ∗

About 30 years ago, Jacques Le Bourva published two little-known articles that clearly set out the present post-Keynesian theory of endogenous money developed by Kaldor and Moore. The main features of these two articles are presented, in particular Le Bourva's belief that reverse causation, rather than the instability of the velocity function, is the key objection to the quantity theory of money and the mainstream theory of inflation. Other features include a graphical and an algebraic pedagogical representation of the theory of endogenous money, the use of the Banking school's efflux/reflux mechanism, the dismissal of the money multiplier, and the impossibility of an excess supply of money. Le Bourva's theory of inflation also resembles that adopted by many post-Keynesians, in which price increases due to excessive wage demands and attempts by firms to raise their profit margins to finance investment.     

Measuring inflation expectations: a survey data approach

Measures of expected inflation from consumer surveys are derived using a modification of the Carlson-Parkin probability approach, which does not assume unbiasedness of expectations, makes use of survey data on expected future as well as perceived past price developments and allows for time varying response thresholds. We apply this method to the normal, central-t and noncentral-t distributions, thereby investigating the effects of nonnormal peakedness and asymmetry. We find that the effects on expected inflation of the former are small and of the latter are substantial, without increasing the accuracy of the expectations, however. Expected and actual inflation show substantial persistence, and, for most of our expectations measures, are cointegrated. Furthermore, the forecast error is stationary, implying weak-form rationality. The co-movement of currently observed expected inflation measures and the unobserved 12-months-ahead inflation rate is of interest for policy makers, for example in the direct inflation targeting strategy. Notwithstanding this, caution is warranted in using them as information variables because the inflation expected by consumers is no causal determinant of actual future inflation.     

Asset Prices and the Financial Crisis of 2007–09: An Overview of Theories and Policies

The financial crisis of 2007–09 has led to a rethinking of the role of monetary and financial regulatory policy. It has also called into question the benefits of financial innovation and monetary policy that focuses solely on inflation and the output gap. This paper discusses financial instabilities in general, the recent financial crisis as well as the appropriate role of monetary and financial regulatory policy in dealing with asset bubbles. The paper concludes by evaluating appropriate policies to reduce the economic impact of future financial crises.