Decomposition of GDP Growth in Some European Countries and the United States

Summary  The composition of economic growth can be analyzed in two different ways. In the ‘traditional method’ for the decomposition of GDP growth, total imports are deducted from exports. This approach underestimates the importance of exports for the growth in GDP, and overestimates the importance of domestic expenditure categories. In the alternative methodology proposed in this paper, imports are allocated to all expenditure categories. Although this ‘import-adjusted method’ is more complex than the ‘traditional method’, it has the considerable advantage that the contributions of the expenditure categories to GDP growth provide a better understanding of why GDP growth decelerates or accelerates. The methodology and data requirements for calculating the import content of final demand, and the implications for the decomposition of real GDP growth, are discussed. For six European countries and the United States, the paper shows that applying the alternative methodology provides rather a different economic story.      

Foreign Exchange Market Contagion in the Asian Crisis: A Regression-Based Approach

This paper investigates whether, during the Asian crisis, contagion occurred from Thailand to the other crisis countries through the foreign exchange market, and, if so, determines the contribution of this contagion to the crisis. More specifically, we examine whether the effect of the exchange market pressure (EMP) of Thailand, the origin of the crisis, on the EMP of four Asian crisis countries increased during the crisis. Instead of measuring contagion by the commonly used correlation coefficients, we apply regression analysis. To control for the impact of macroeconomic fundamentals, we construct a time-varying indicator measuring the fragility of each economy. Additionally, we control for spillovers and common external shocks. We find evidence of contagion from Thailand to Indonesia and Malaysia, with 13 and 21 percent of the pressure on the respective currencies attributable to that contagion. For Korea and the Philippines there is no evidence of contagion from Thailand. JEL no. F30, F31, G15     

Does Environmental Economics Produce Aeroplanes Without Engines? On the Need for an Environmental Social Science

In this paper we first critically review conventional environmental economics. We conclude that the standard theory offers too narrow a perspective for many real world problems and that many theories are not empirically tested. Consequently, environmental economics is at risk of producing aeroplanes without engines. Next, we welcome and discuss some recent trends, particularly the rapid developments of behavioural and new institutional economics as well as the increased interest in empirical analysis. Yet, we conclude that more ‘logical duels’ between competing theories, more interaction between theory and empirics, and more integration between the social sciences are needed to achieve a better understanding of real world environmental problems and the development of adequate policy handles. Finally, we present an outline of steps towards the development of an environmental social science and briefly present the papers that make up this special issue as important building stones of such a discipline.     

Currency crises with the threat of an interest rate defence

While virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it, this is seldom modelled explicitly. We add the threat of an interest rate defence to the global game model of Morris and Shin (American Economic Review 88, 1998). With an endogenous defence, actions of speculators may become strategic substitutes instead of the usual complements. Nevertheless, our generalised model remains tractable and has a unique threshold equilibrium. It provides additional insights. For instance, the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong.     

One model and various experts: Evaluating Dutch macroeconomic forecasts

The Netherlands Bureau for Economic Policy Analysis (CPB) uses a large macroeconomic model to create forecasts of various important macroeconomic variables. The outcomes of this model are usually filtered by experts, and it is the expert forecasts that are made available to the general public. In this paper we re-create the model forecasts for the period 1997-2008 and compare the expert forecasts with the pure model forecasts. Our key findings from the first time that this unique database has been analyzed are that (i) experts adjust upwards more often; (ii) expert adjustments are not autocorrelated, but their sizes do depend on the value of the model forecast; (iii) the CPB model forecasts are biased for a range of variables, but (iv) at the same time, the associated expert forecasts are more often unbiased; and that (v) expert forecasts are far more accurate than the model forecasts, particularly when the forecast horizon is short. In summary, the final CPB forecasts de-bias the model forecasts and lead to higher accuracies than the initial model forecasts.     

Ethical Corporate Consultancy

As ethical consultancy to business develops what are its principles, its methods and its possible pitfalls? The author is Professor of Business Ethics at the Netherlands School of Business, Nijenrode, and Chairman of the European Business Ethics Network.     

Book Review: Bridging the Gap Between Values and Reality

John Donaldson, Business Ethics. A European Casebook , Academic Press, 1992, pp. xxvi + 293, pb, £14.94, ISBN: 0 12 220543X.     

A dual description of the class of games with a population monotonic allocation scheme

A vector of balanced weights infers an inequality that games with a nonempty core obey. This paper gives a generalization of the notion ‘vector of balanced weights.’ Herewith, it provides necessary and sufficient conditions to determine whether a TU-game has a population monotonic allocation scheme or not. Furthermore, it shows that every four-person integer valued game with a population monotonic allocation scheme has an integer valued population monotonic allocation scheme and it gives an example of a seven-person integer valued game that has only noninteger valued population monotonic allocation schemes.     

Coordination of speculation

We extend the models of Krugman [Journal of Money, Credit and Banking, 11 (1979) 311] and Flood and Garber [Journal of International Economics, 17 (1984) 1] on balance of payments crises to a multi-country setting such that coordination among speculators is important for a focal point to emerge. The moment of successful coordination when the currency is devalued is shown to depend on initial beliefs, the degree of imperfect communication, the rate of domestic credit creation, and the number of countries that have overvalued currencies. Contagion arises naturally in our framework. Subsequent speculative attacks occur faster and faster and communication among speculators results in fluctuating stocks of reserves prior to the attack.