Regulatory Uncertainty and Share Price Volatility: the English and Welsh Water Industry’s Periodic Price Review

This paper models the London stock markets response to the 1994 Periodic Review of prices in the English and Welsh water industry using both GARCH and stochastic volatility models. The results indicate that a significant reduction in the volatility of share prices for eight of the ten water and sewerage companies followed the announcement of revised industry price-caps. Investor expectations adjusted rapidly, reflecting confidence in the credibility and political sustainability of the settlement.     

Growth at the EU periphery: the next enlargement

In 2004, 75 million people are scheduled to become EU citizens, making this the largest round of expansion of the Western European club to date. Of the 10 new entrants, 8 are former socialist economies, for which membership in the EU represents the coronation of an effort began with the fall of the Berlin wall in 1989. Based on their recent economic performance, the Central and Eastern European countries appear to be well on their way to successfully integrate in the Western European club, while the Baltic Republics still lag behind. The gap between the two groups emerges when we consider the adjustment of the production structure, the composition of trade and FDI flows, and income distribution. The evidence we review appears to support the role of institutional quality to facilitate integration in the world market and overall economic performance.     

THE PUBLIC SECTOR PAY GAP IN FRANCE, GREAT BRITAIN AND ITALY

We investigate public–private pay determination using French, British and Italian microdata. While traditional methods focus on parametric methods to estimate the public sector pay gap, in this paper, we use both non-parametric (kernel) and quantile regression methods to analyze the distribution of wages across sectors. We show that the public–private (hourly) wage differential is sensitive to the choice of quantile and that the pattern of premia varies with both gender and skill. In all countries the public sector is found to pay more to low skilled workers with respect to the private sector, whilst the reverse is true for high skilled workers. When comparing results across countries, we find that where pay formation is more regulated (i.e. as in France and Italy) the public sector pay gap is smaller; whilst where market factors play a larger role in pay determination (i.e. as in Great Britain) the public sector pay gap is larger—particularly in the lower part of the wage distribution—and females are much better off in the public sector as compared to the private sector.     

GAME THEORETIC MODELS OF MIXED OLIGOPOLY

Abstract. In this paper we review various models that have been proposed for the study of mixed oligopoly, that is markets in which private and public firm compete on equal basis using only market instruments.     

Price rigidity, the mark–up, and the dynamics of the current account

The degree of competition affects the current account response to nominal shocks. The mechanism hinges on the relationship between the mark–up and the degree of real rigidity of prices. In a model with intermediate goods, the degree of real rigidity increases in the mark–up. A weaker response of prices to nominal shocks strengthens the 'expenditure switching' effect of the devaluation to the benefit of the current account. We analyse the relationship between the mark–up and the real rigidity in a simple closed economy model and show numerically how the mark–up can affect the response of the current account to monetary shocks in an open economy. JEL Classification: F32, E32
Rigidité des prix, marges bénéficiaires et la dynamique du compte courant. Ce mémoire montre que le degré de concurrence affecte la réaction du compte courant aux chocs nominaux. Le mécanisme dépend de la relation entre la marge beńéficiaire et le degré de rigidité réelle des prix. Dans un modèle qui prend en compte les biens intermédiaires, le degré de rigidité réelle des prix s'accroît avec la marge bénéficiaire. Une réponse plus faible des prix aux chocs nominaux renforce l'effet de « déplacement de la dépense >> de la dévaluation au bénéfice du compte courant. On analyse d'abord la relation entre la marge bénéficiaire et la rigidité réelle des prix dans un modèle simple d'économie fermée. On montre ensuite en chiffres comment la marge bénéficiaire peut affecter la réaction du compte courant aux chocs monétaires.     

Giffen goods and market making

Summary. This paper shows that information effects per se are not responsible for the Giffen goods anomaly affecting traders demands in multi asset noisy, rational expectations equilibrium markets. The role that information plays in traders strategies also matters. In a market with risk averse, uninformed traders, informed agents have a dual trading motive: speculation and market making. The former entails using prices to assess the effect of error terms; the latter requires employing them to disentangle noise traders demands within aggregate orders. In a correlated environment this complicates the signal extraction problem and may generate upward sloping demand curves. Assuming (i) that competitive, risk neutral market makers price the assets or that (ii) uninformed traders risk tolerance coefficient grows unboundedly, removes the market making component from informed traders demands rendering them well behaved in prices.Received: 30 April 2002, Revised: 3 December 2003, JEL Classification Numbers: G100, G120, G140.Support from the Barcelona Economics Program of CREA and the Ente per gli Studi Monetari e Finanziari Luigi Einaudi, are gratefully acknowledged. I thank Anat Admati, Jordi Caballé, Giacinta Cestone, and Xavier Vives for useful suggestions. The comments provided by the Associate Editor and an anonymous referee greatly improved the papers exposition.     

Some notes on inflation and employment: Incomes policy and the perspective of the European Monetary Union

In recent times, a new notion of incomes policy as an instrument aiming both at the control of inflation and at the defense of employment has come to supplant the original conception of incomes policy as the set of conditions which could make the growth of the economy compatible with price stability. The aim of the paper is to emphasize that the theoretical background of the former notion appears profoundly different from—and far less solid than—the one of the latter conception. The second aim is to emphasize that factual experience appears to confirm the role assigned to incomes policy in its original meaning. Wage moderation, important as it may be for the control of inflation, is not sufficient for the defense of employment. The third aim of the paper is to emphasize that the perspective of the European Monetary Union has made the defense of employment even more complex, thus calling for a careful reconsideration of a widely advertised relationship between "Maastricht" and employment. A procedural suggestion addressed to each one of the 15 members of the European Union concludes the paper. This article is published posthumously. His death is a great loss to the economic community.     

Externalities,Cross-Sectoral Spillovers and Productivity Growth

We provide an interpretation of the productivity dynamics in the manufacturing sector based on the idea of the thick market externality à la Diamond. An econometric model has been estimated which allows to disentangle the long run effects of these trading externalities from those of internal economies of scale and of aggregate industry-level economies. The results obtained—based on a cointegrated system of non-linear-error-correction equations—confirm the hypothesis that the trading externality matters. Moreover, our findings point out that the emphasis generally posited both on internal and external economies of scale is not justified.     

An integrated multi-model credit rating system for private firms

This paper presents a integrated credit risk modelling approach for private firms which fulfil 2001 Basel Accord requirements in the case of the adoption of the foundation approach. Our model comprises: (a) a bottom-up technique to initially assess the through-the-cycle one-year Probability of Default (PD) and (b) a top-down approach to refine and calibrate this historical PD in a forward-looking credit risk assessment based on next year’s economic outlook. We present findings from applying this model to a large sample of client firms of the Bank of Rome.     

Bounds for Functions of Dependent Risks

The problem of finding the best-possible lower bound on the distribution of a non-decreasing function of n dependent risks is solved when n=2 and a lower bound on the copula of the portfolio is provided. The problem gets much more complicated in arbitrary dimensions. When no information on the structure of dependence of the random vector is available, we provide a bound on the distribution function of the sum of risks which we prove to be better than the one generally used in the literature.