Protection and international stability

Summary Since World War II trade negotiations under GATT reduced tariff protection to one-eighth of its pre-war level. From the mid 1970s however, protection increased again, in particular non-tariff barriers were being used. Furthermore, strategic trade policies use subsidies and other non-border protective measures. Protection prevents the world economy from gaining full benefits from specialization combined with expansion of trade. Unlike tariffs, non-tariff barriers fragment the market and encourage a bilateral approach in negotiating trade agreements. Strategic trade policies are difficult to apply properly and may evoke retaliation. Nondiscrimination is the main principle of GATT, on which the present international trading system is based. In order to maintain it, trade negotiations under GATT will hopefully lead to international consensus on the proper use of non-tariff barriers and instruments of strategic trade policies.[/p]     

Asset pricing with unforeseen contingencies

We investigate an economy of heterogeneous agents that cannot specify all exogenous welfare-relevant events and consequently view the impact of unforeseen contingencies as utility shocks. In this setting we characterize an appropriate market equilibrium concept when securities can trade only on demand- and price-contingent events. We establish the existence of an equilibrium for a class of parametric models in which aggregating taste shocks across agents can lead to nonconsumption pricing factors. To fit the stylized facts, (i) non consumption factors must dominate the pricing kernel and contribute to the variation of the wealth-consumption ratio, (ii) markets must be incomplete and the set of claims that are traded endogenously determined, (iii) agents’ preferences with respect to unforeseen contingencies must be non-expected utility, and, (iv) although non-consumption pricing factors can be conditionally uncorrelated with aggregate consumption shocks, they must be correlated with shocks to expected consumption growth.     

Discussion of “Post-Earnings Announcement Drift and Market Participants' Information Processing Biases”

Liang (2003, this issue) hypothesizes that the predictable stock price drifts that occur after earnings earning announcements increase with (a) divergence in analyst beliefs and (b) the reliability of publicly reported quarterly earnings. Whereas the prior literature has generally hypothesized that drifts are caused by the inability of the stock market to fully appreciate predictable autocorrelation in seasonally-differenced quarterly earnings, this paper relies on cognitive biases proposed in the behavioral finance literature. While the results are consistent with these predictions, my discussion raises possible reasons why it may be premature to conclude that the cognitive biases discussed here cause drifts.     

An experimental study of costly coordination

This paper reports data for coordination game experiments with random matching. The experimental design is based on changes in an effort-cost parameter, which do not alter the set of Nash equilibria nor do they alter the predictions of adjustment theories based on imitation or best response dynamics. As expected, however, increasing the effort cost lowers effort levels. Maximization of a stochastic potential function, a concept that generalizes risk dominance to continuous games, predicts this reduction in efforts. An error parameter estimated from initial two-person, minimum-effort games is used to predict behavior in other three-person coordination games.     

Coordination, Challenges, and Innovations in 19 National Sustainable Development Strategies

In this article, we study 19 developing and developed countries to identify key challenges, approaches, and innovations in strategic and coordinated action for sustainable development at the national level. We are interested in the institutional fabric of implementing sustainable development. What are governments actually doing to organize the processes required for this? What are the institutional innovations in this regard and what kind of typologies can be identified?Despite some true progress made, our findings indicate that countries are still at the early stages of learning toward effective action for sustainable development. This applies both to developing and developed countries. Key unsolved challenges include (a) coordination with the national budget, (b) coordination with sub-national level sustainable development strategies, and (c) coordination with other national-level strategy processes.     

Estimating the impact of regional policy: A review of applied research methods

This paper provides a critical review of the methodological approaches that have been used to estimate the impacts of regional economic policies. A considerable variety of approaches are examined, ranging from questionnaire studies through single- and multiple-equation regression models to cost-benefits analysis, and attention is focused on the pros and cons of these approaches and the reliability of the impact assessments derived. The paper concludes with some suggestions for further research in this field.     

Covered interest arbitrage in the 1970's

This paper provides an empirical overview on covered interest arbitrage during the flexible exchange rate regime of the 1970's. It estimates the cost of transactions in foreign exchange and security markets and shows that these costs account for most of the deviations from parity.     

An examination of firms’ responses to tax forgiveness

This study uses state tax amnesties to examine how firms respond to forgiveness—particularly repeated forgiveness—by a taxing authority. We posit that tax forgiveness programs alter taxpayer perceptions of the probability of detection by enforcers or the probability of future forgiveness programs, either of which could affect future tax aggressiveness. We find that firms headquartered in an amnesty-granting state increase state income tax aggressiveness following the first instance of tax amnesty, relative to control firms in other states. Moreover, we find evidence that tax aggressiveness incrementally increases with each additional repetition of a tax amnesty. Finally, we find that the effect of amnesties on tax aggressiveness is more prominent for small firms, which face less scrutiny and for which the tax aggressiveness measures are less confounded. Our findings suggest that repeated programs of tax forgiveness have increasingly negative implications for corporate tax collections.     

Can Short Restrictions Actually Increase Informed Short Selling?

We use the 2008 short selling regulations to test whether short sale restrictions can increase informed short selling. For the preborrow requirement, we find more negative price reactions to short interest announcements though no reliable increase in the price impact of short sales volume. For the stocks with banned short sales, we find an increase in the price impact of short sale volume though no reliable change in the price reaction to short interest announcements. Both restrictions, however, are associated with increased informed trading. Our results suggest that short restrictions will not reduce informed short selling and may actually result in an increase by increasing the proportion of informed short sellers..