New EU member states and the Euro: economic readiness,benefits and costs

All of the new EU member states (NMSs) have made a commitment to adopt the Euro. This essay considers the countries’ economic readiness to adopt the Euro as well as the economic benefits and costs of adoption. Paper applies a method suggested by Bayoumi and Eichengreen (1997) and finds that the changes of real effective exchange rates between the Euro area and the new EU member states follow the pattern predicted by the optimum currency area theory. This finding allows the construction of the readiness for adoption index for every NMS. The tangible benefits (for NMSs) of adoption are also examined in this essay. Analyses suggest that the costs of currency exchange and hedging against the uncertainty in foreign exchange markets account for about 0.08–0.012% of the countries’ GDP. In addition, countries that adopt the Euro might expect lower inflation and interest rates. This essay also examines the possible costs of adoption. These are in the forms of the lost ability to use monetary policy tools and set the level of seigniorage. Analysis suggests that many countries had given up their independence over monetary policy even before the accession to the EU. In addition, bigger NMSs have not used seigniorage as the source of fiscal income. However, they used exchange rate flexibility to depreciate their currencies during the recent crisis.     

Nonlinear stochastic effects of substitution — an evolutionary approach

Technological innovations have been investigated by means of substitution and diffusion as well as evolution models, each of them dealing with different aspects of the innovation problem. In this paper we follow the well known research traditions on self-organisation models of complex systems. For the first time in the literature we show the existence of a specific niche effect, which may occur in the first stage of establishment of a new technology. Using a stochastic Master equation approach, we obtain analytical expressions for the survival probabilities of a new technology in smaller or larger ensembles. As a main result we demonstrate how a hyperselection situation might be removed in a stochastic picture and thresholds against the prevailing of a new technology in a step-by-step process can be overcome.     

Modeling Cyclical Asymmetries in European Imports

This paper applies smooth transition models to capture the nonlinear behavior in the imports data of six major European economies and to assess whether such nonlinearities are related to business cycle asymmetries. Two classes of switch between regimes are considered: endogenously determined transition that assumes nonlinearities are generated by idiosyncratic components specific to foreign trade, and exogenous transition based on GDP growth as a more direct indicator of the cyclical state of the economy. The results support the proposition that the dynamics of imports are nonlinear. In Belgium, France, Spain, and the United Kingdom, regimes change over the business cycle, while in Germany and Italy the switch between regimes is endogenous. National characteristics play a role in defining the position of extreme regimes, the smoothness of the transition, and local dynamics within each state.Previous versions of this article have been presented at the 57th International Atlantic Economic Conference (Lisbon, Portugal, March 10–14, 2004) and at the VII Encuentro de Economía Aplicada (Vigo, Spain, June 3–5, 2004). The authors thank the conference participants and an anonymous referee for their comments.     

The effect of nonreciprocal preferential trade agreements on benefactors’ exports

Over the last decades, developed countries have provided developing countries with preferential market access via trade policies in the form of nonreciprocal preferential trade agreements (NRPTAs). Despite the lack of reciprocity of this kind of agreements, certain criteria for designating eligible countries refer to the commercial interests of benefactor countries. This paper examines for the first time the effect of NRPTAs on benefactors’ exports to beneficiary countries. Using recent developments in the econometric analysis of the gravity equation, we find robust evidence that nonreciprocal agreements have had an economically significant effect on exports not only for beneficiary countries but also for benefactor countries.     

Trust and reciprocity: extensions and robustness of triadic design

Our paper reconsiders the triadic design proposed by Cox (Games and Economic Behavior 46:260–281, 2004) to identify trust and reciprocity in investment games. Specifically, we extend the design in two directions. First, we collect information on investors’ choices by using both the direct-response (as does Cox) and strategy methods. Using the latter, we are able to condition reciprocity on initial inequality, which is endogenous when investigating reciprocity. We demonstrate that the triadic design provides evidence for reciprocity once that initial inequality is considered. Second, we elicit expectations and test their coherence with the triadic outcomes. By examining the relationship between trust actions and expected gains, we analyze whether investors’ expectations are consistent with their behavior. Finally, we test for the existence of an emotional bias, i.e., whether expectation mismatches induce trustees to change actual choices from the planned ones.     

Information Exchange and Transnational Environmental Problems

This paper analyzes information exchange in a model of transnational pollution control in which countries use private information in independently determining their domestic environmental policies. We show that countries may not always have an incentive to exchange their private information. However, for a sufficiently high degree of predictability of domestic environmental policy processes, the expected welfare from sharing information is greater than the expected welfare from keeping it private. The minimum degree of policy predictability for which information sharing occurs increases with the level of environmental risk. Intuitively, information exchange can help mitigate the perception of global uncertainty (both political and scientific) that surrounds transnational environmental problems and potentially improve welfare if policymaking processes are sufficiently aligned with evidence-based approaches (predictable).     

Competition with Congestible Networks

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that equilibrium capacities are at first increasing and then decreasing in the strength of congestion. Furthermore, capacities are higher under Cournot competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.     

Minsky Goes to Buffalo—and Takes on the Economics Establishment

This essay is based on remarks presented by the author at The Fourth Bi-Annual Cross-Border Post Keynesian Conference, Buffalo State College, on October 9, 2009. It addresses the economic challenges facing Buffalo, New York, and countless other American cities, especially in the Northeast and Midwest; draws on the writings of Hyman Minsky to offer an interpretation of what many now call the Great Recession, which began in late 2007; and challenges the image of Minsky presented by mainstream economists and journalists, with special attention to a recent lecture by Paul Krugman. The essay closes by returning to Buffalo, where—as Minsky anticipated in the 1990s—the economic fate of working families depends largely on the outcome of a national struggle over the shape of future U.S. economic transformation.     

Capital asset pricing models with default risk: Theory and application in insurance

The Capital Asset Pricing Model has been used frequently to derive a fair price of insurance. But the use of this model overestimates insurance premiums because it does not account for the insolvency risk of insurers. This paper examines how the insurance price should be fairly adjusted when insurers' default risk is considered. It develops a model which shows that fair insurance premiums are lower when insurance firms have a positive probability of being insolvent. Using data of property liability insurers during the period from 1943–99, the paper further estimates the effects of the insolvency risk on insurers' underwriting profit rate. It shows that the incorporation of the default risk of insurers in the model, by significantly reducing the required price for insurance, would lead to lower profit potentials. Some writers argue that including the insolvency risk when calculating insurance premiums is not so necessary because of the existence of states' guaranty insurance funds which protect consumers. However, as shown in the paper, these funds have provided inadequate protection to consumers. Therefore, because of the increase in the number of insolvencies in recent years, and because of the limited coverage provided by states' guaranty funds, it seems that considering the insolvency risk in insurance pricing has become very necessary.     

On myopia as rationale for social security

It has been argued that “paternalistically motivated forced savings constitutes an important, and to some the most important, rationale for social security retirement systems.” This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go (PAYG) social security in dynamically efficient economies. If the competing asset is linear storage and myopic agents are allowed to borrow against future pension benefits, there is no welfare-rationale for PAYG pensions. Sufficiently strong myopia may justify such pensions only if agents cannot borrow against their future pension, but then they are at a zero-saving corner. With enough myopia, co-existence of positive optimal pensions and positive private saving is possible if the return to saving declines with saving, as in a model with a neoclassical technology.