Macroeconomic Volatility, Trade and Financial Liberalization in Africa

This paper examines the effects of financial and trade liberalization on growth volatility of real output and consumption in Africa. Our results suggest trade liberalization is associated with greater output and consumption growth volatility while financial liberalization increases the efficacy of consumption smoothing and stabilizes income and consumption growth. In addition, we find financial market depth and institutional quality operate jointly with trade and financial openness to reduce volatility in output and consumption growth. There is also evidence that good institutions which foster low inflation levels and volatility promote consumption and output growth stability.     

Before Prebendalism: A Positive Analysis of Core Infrastructure Investment in a Developing Fiscal Federalism

This paper provides a framework for making decisions on what type of infrastructure to build and where to build. The basic intuition is that by deriving the marginal physical products of installed infrastructure, we can prioritize infrastructure investment of the same type between regions, and of different types within a region. The methodology is to estimate a panel of regional production functions that allows the intercepts to capture individual differences (‘the fixed effects’) but uses interactive dummies to capture the effect of individual differences on marginal productivity. This framework could be a useful tool for the management of public capital in an economy subject to fiscal federalism, particularly where the interaction of interest-group struggle and the politics of center-state grants may involve difficult trade-offs. Ce document établit un cadre de prise de décision concernant le type d’infrastructures à construire et l’endroit où les construire. L’idée de base est qu’en déterminant le produit matériel marginal des infrastructures installées, nous pouvons classer par ordre de priorités l’investissement dans les infrastructures de même type entre régions et de types différents au sein d’une région. La méthode consiste à définir un panel de fonctions de production régionale dont les coordonnées permettent de saisir les différences individuelles (“les effets fixes”), mais qui recourt à des variables muettes pour obtenir l’effet des différences individuelles sur la productivité marginale. Ce cadre pourrait se révéler utile pour la gestion des investissements publics dans une économie sujette au fédéralisme fiscal, en particulier lorsque l’interaction entre les revendications de groupes d’intérêts et la politique de subvention du gouvernement central risque de donner lieu à des arbitrages difficiles.     

Beer Taxation and Alcohol-Related Traffic Fatalities

Most studies of alcohol-related traffic fatalities find beer taxes to be an important policy variable. This is surprising since beer taxes only have a small impact on consumption and heavy drinkers are the least responsive to prices. This study shows that the tax relationship is not robust across data periods and that it reflects missing variable biases. While lack of control for law enforcement effort does not appear to bias tax coefficients, failure to include determinants of alcohol consumption other than taxes and drinking age and/or factors that simultaneously determine drinking behavior and political support for alcohol taxes apparently do.     

Conditions for Optimality of a Currency Area

Two approaches to the theory of OCA are distinguished in this paper. The first, called the marginalistic approach, attempts to define the OCA from the point of view of a single country, and the second examines the optimality of a currency area of a given membership. The marginalistic approach and its limitations are discussed first. Then, the paper proceeds to the second approach which is discussed in the context of the cooperative game theory in characteristic function form; it argues that a currency area is optimal when the welfare functions of its constituent members are in the core. This implies that the welfare functions of all constituent members of the currency area are maximized and hence they are all better off with a common currency rather than with their own national currencies; hence, no member country has the intention to abandon the currency area. The paper concludes that the condition for the optimality of a currency area independently of the degree of economic similarity of its constituents requires that the characteristic function must exhibit non decreasing returns with respect to its size.     

R&D spillovers and the case for industrial policy in an open economy

In this paper we consider the case for subsidies towards firmswhich generate R&D spillovers in open economies. We showthat in the presence of strategic behaviour by firms many expectedresults are overturned. Local R&D spillovers to other domesticfirms may justify an R&D tax rather than a subsidy; R&Dcooperation by local firms over-internalises the externalityand also justifies an R&D tax; and international spilloverswhich benefit foreign firms may justify a subsidy, even thoughthe government cares only about the profits of home firms.     

A model of labour productivity and union density in British private sector unionised establishments

In this paper, a micro theoretic model of the simultaneous determinationof labour productivity and union density is developed and estimatedusing British establishment-level data from the 1990 WorkplaceEmployee Relations Survey. The main empirical finding is thathigher union bargaining power does not necessarily lower labourproductive in union firms, ceteris paribus. Separate bargainingby multiple unions has a negative effect, but productivity ishigher if management recommends union membership. There is alsoevidence that if unions can more effectively provide servicesto their members, and secure management support for union membership,union density may recover.     

Bubbles, crises, and policy

In many recent cases financial liberalization has led to a bubblein asset prices. The bursting of the bubble results in a bankingcrisis and recession. It is suggested such bubbles are causedby an interaction of the risk-shifting problem arising fromagency relationships in intermediaries and uncertainty concerningthe expansion of credit. Two important policy objectives areidentified. The first is the prevention of bubbles in assetprices. The second is minimizing the impact of spillovers onto the real economy during post-bubble banking crises. The differentpolicy approaches taken in Norway and Japan are compared.