Complexity and financial stability in a large random economy

I study the limit of a large random economy, in the ideal case of perfect competition, where full information is available to all market participants, and where a set of consumers invests in financial instruments engineered by banks in order to optimize their future consumption. This provides a picture of how unregulated financial innovation pushes an economy towards the ideal limit of complete markets. Hedging new products with existing products allows financial institutions to reduce the associated risk and hence the risk premium. This has the expected consequence that markets, under such ideal conditions, converge to market completeness as the repertoire of financial instruments expands. As markets approach completeness, however, two ‘unintended consequences’ also arise: (i) equilibrium portfolios develop a marked susceptibility to idiosyncratic shocks and/or parameter uncertainty and (ii) hedging engenders divergent trading volumes in the interbank market. Combining these suggests an inverse relation between financial stability and the size of the financial sector, which can be quantified within the present framework. These results suggest that even under perfect competition and symmetric information, the pursuit of market efficiency—in terms of completeness—may erode financial stability. The proliferation of financial instruments exacerbates the effects of market imperfections and, in order to prevent an escalation of perverse effects, markets may require institutional structures that become more and more substantial as their complexity expands.     

Exploring the effect of gender diversity in MFIs during turbulent periods

Abstract

Gender diversity is generally recognized as relevant in microfinance, and the relationship between gender diversity and firms’ performance has received attention in academic literature. The above-mentioned relationship has not been addressed until now in the microfinance industry specifically. This study seeks to explain the role played by gender diversity in the workforce of microfinance institutions (MFIs) during turbulent periods in the firms’ performance. The study analyses data from 555 ratings of 185 MFIs from MicroFinanza Rating, a leading microfinance rating agency. The analysis shows that the number of women on the staff of MFIs is significantly and positively associated with both the Return on Equity and Operational Self-Sufficiency of MFIs, indicating a positive impact of gender diversity on firms’ performance.     

The Euro — A Tale of 20 Years: What Are the Priorities Going Forward?

Intereconomics - First, we need to recall the initial objectives set for the euro and how these have changed over time, notably due to the weaknesses that came to the fore throughout the recent...     

The ‘Duce hometown effect’ on local industrial development: The case of Forlì

Abstract

The history of fascist intervention and rescue in support of Italian banks and firms (either through nationalisation or direct aid) in the inter-war years is well known. The case of Forlì adds an important piece of information to the broad literature on state-sponsored development. Benito Mussolini was born in Predappio, a small village in the Apennines in the province of Forlì. And Forlì was meant to become ‘la città del Duce’ (‘the Duce’s hometown’). The case of Forlì offers an original perspective: entrepreneurs who chose Mussolini’s hometown to obtain special concessions, a novel element in the crowded panorama of special relationships between government and industry in Italy. But on the other hand, this article will also underline the unsuitability of big business to local economic characteristics (and post-war challenges) and the return to a traditional growth path centred around the small-firm model specialising in traditional sectors and family-owned, centralised management. State-sponsored business failed and provided no stimulus to local growth: any talk of ‘industrial continuity’ in Forlì requires us to acknowledge that it is based on the steady presence and continuous regeneration of locally grown, small family businesses.     

On some ‘Austrian’ misreadings of Cantillon's notions of intrinsic value and market price

The article clarifies some aspects of the Cantillonian notions of intrinsic value and of market prices. Furthermore, the major flaws of the ‘Austrian’ interpretations put forward in recent years by Rothbard and Thornton are highlighted. This criticism provides an additional dimension to the view already expressed by Groenewegen against the new edition of Cantillon's Essai by Thornton. Finally, the connection between the Essai and mature classical economics is highlighted and the proposed ‘Austrian’ interpretation of Cantillon is strongly rejected.     

Firm location and corporate debt

This study examines the influence of a firm’s geographical location on corporate debt and provides evidence that the higher cost of collecting information on firms distant from urban areas has significant implications on a wide array of corporate debt characteristics. We find that rural firms face higher debt yield spreads and attract smaller and less prestigious bank syndicates than urban firms. Rural firms attempt to reduce their informational disadvantage by relying more on relationship banking. Our results on the effect of location on corporate debt are robust to the inclusion of an extensive set of firm and issue characteristics.     

THE EFFECTS OF FISCAL POLICY SHOCKS IN SVAR MODELS: A GRAPHICAL MODELLING APPROACH

We apply graphical modelling (GM) theory to identify fiscal policy shocks in SVAR models of the US economy. Unlike other econometric approaches – which achieve identification by relying on potentially contentious a priori assumptions – GM is a data based tool. Our results are in line with Keynesian theoretical models, being also quantitatively similar to those obtained in the recent SVAR literature à la Blanchard and Perotti (2002) , and contrast with neoclassical real business cycle predictions. Stability checks confirm that our findings are not driven by sample selection.     

Identification of lagged duration dependence in multiple-spell competing risks models

We show that lagged duration dependence is non-parametrically identified in mixed proportional hazard models for duration data, in the presence of competing risks and consecutive spells.