Special Interests and Technological Change

We study an OLG economy where productivity growth comes from two alternative sources: process innovation and learning-by-doing. There is a trade-off between the two in so far as frequent technological updates reduce the scope for learning on existing technologies. A conflict is shown to arise between the young and the old, because the former favour innovation while the latter prefer learning. We model the interaction between overlapping generations and policy makers as a dynamic common agency problem, where competing generations invest a certain amount of resources to lobby either for the maintenance of the current technology or the adoption of a new one. By focusing on truthful Markov perfect equilibria, we characterize the political equilibrium and show its dependence on the underlying demographic, technological and preference parameters.     

Informational Barriers to Entry into Credit Markets*

Economic theory suggests that asymmetric information between incumbents and entrants can generate barriers to entry into credit markets. Incumbents have superior information about their own customers and the overall economic conditions of the local credit market. This implies that entrants are likely to experience higher loan default rates than the incumbents. We test these theoretical predictions using a unique database of 7,275 observations on 729 individual banks’ lending in 95 Italian local markets. We find that informational asymmetries play a significant role in explaining entrants’ loan default rates. The default rate is significantly higher for those banks that entered local markets without opening a branch, suggesting that having a branch on site may help to reduce the informational disadvantage. We also uncover a positive correlation between banks’ loan default rates in individual local markets and the number of banks lending in that market. We argue that these informational barriers can help to explain why entry into many local credit markets by domestic and foreign banks was slow, even after substantial deregulation. * The views expressed in this article are those of the authors and do not involve the responsibility of the Bank of Italy. The authors thank Franklin Allen, Dario Focarelli, Andrea Generale, Luigi Guiso, Francesca Lotti, Marco Pagano, Alberto Franco Pozzolo, Paola Sapienza, Alessandro Secchi, two anonymous referees and seminar participants at the Bank of Italy, the Federal Reserve of Chicago, the 2003 BIS Workshop on Applied Banking Research, the 2003 EARIE Conference, the First Banca d’Italia/CEPR Conference on Money, Banking and Finance, the 2004 FIRS Conference on Banking, Insurance and Intermediation and the 2004 EEA Meeting for their comments. The usual disclaimer applies to all of them.     

Constrained Indirect Estimation

We develop generalized indirect estimation procedures that handle equality and inequality constraints on the auxiliary model parameters by extracting information from the relevant multipliers, and compare their asymptotic efficiency to maximum likelihood. We also show that, regardless of the validity of the restrictions, the asymptotic efficiency of such estimators can never decrease by explicitly considering the multipliers associated with additional equality constraints. Furthermore, we discuss the variety of effects on efficiency that can result from imposing constraints on a previously unrestricted model. As an example, we consider a stochastic volatility process estimated through a garch model with Gaussian or  t  distributed errors.     

Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle

We provide empirical evidence that deviations from the uncovered interest rate parity (UIP) condition display significant nonlinearities, consistent with theories based on transactions costs or limits to speculation. This evidence suggests that the forward bias documented in the literature may be less indicative of major market inefficiencies than previously thought. Monte Carlo experiments allow us to reconcile these results with the large empirical literature on the forward bias puzzle since we show that, if the true process of UIP deviations were of the nonlinear form we consider, estimation of conventional spot-forward regressions would generate the anomalies documented in previous research.This paper was partly written while Lucio Sarno was a Visiting Scholar at the International Monetary Fund. Financial support from the Economic and Social Research Council (Grant No. RES-000-22-0404) is gratefully acknowledged. The authors are indebted for useful conversations or constructive comments to Josef Zechner (editor), three anonymous referees, Ulf Axelson, Magnus Dahlquist, Paul De Grauwe, Hans Dewachter, John Driffill, Bob Flood, Gordon Gemmill, Campbell Harvey, Peter Kenen, Rich Lyons, Angelo Melino, Chris Neely, Anthony Neuberger, Carol Osler, David Peel, Dagfinn Rime, Piet Sercu, Per Str?mberg, Shinji Takagi, Gabriel Talmain, Mark Taylor, Timo Ter?svirta, Dan Thornton, Shang-Jin Wei, Mike Wickens and Mark Wohar, as well as to participants at the 2005 European Finance Association Annual Conference, Moscow; 2004 Society of Nonlinear Dynamics and Econometrics Annual Conference, Federal Reserve Bank of Atlanta; the 2004 European Financial Management Association Conference, Basel; and seminars at the International Monetary Fund, Swedish Institute for Financial Research, Central Bank of Norway, University of Oxford, Catholic University of Leuven, University ofWarwick, Chinese University of Hong Kong, York University, University of Exeter, University of Kent, and University of Edinburgh. The authors alone are responsible for any errors that may remain and for the views expressed in the paper.     

A switching ARCH (SWARCH) model of stock market volatility: some evidence from Latin America

We use the Markov regime-switching ARCH (SWARCH) model of Hamilton and Susmel (J Econometrics 64:307–333, 1994) to document the presence of high volatility regimes in six Latin American countries (Argentina, Brazil, Chile, Mexico, Peru, and Venezuela). We found four high volatility episodes, each associated to either a local (the Mexican crisis of 1994, the Brazilian crisis of 1998–1999, the Argentinean crisis of 2001–2002) or a worldwide financial crisis (the Asian financial crisis of 1997). However, we found that the effects of each financial crisis are short-lived and that between 2 and 4 months after each crisis, all markets return to low volatility regimes.

The Impact of Gender Quotas on Votes for Women Candidates: Evidence from Italy

To explore the impact of quotas on women's political representation, this study estimates a conditional multinomial logit for the probability of voting for men and women, utilizing data that includes all regional candidates in four Italian regions in 1995 and 2000. This regional electoral system allows voters to choose both the party and the specific candidate (open-list proportional system). The results show that the introduction of a 50 percent gender quota in candidate lists leads to a substantial increase in the probability that voters will choose women candidates, from 12 to 36 percent. Nevertheless, the probability of voting for women (36 percent) is lower than the probability for men (64 percent). Voters have a male bias in Italy. Both the district size and the political party have an effect on the probability of voting for women versus men. The more liberal the party is, the higher the probability that women receive votes.     

The changing structure of local credit markets: Are small businesses special?

In many countries consolidation in the banking industry has reduced the number of small banks and led to significant shifts in market shares; deregulation has fostered entry in local credit markets and the expansion of branch networks, increasing competition in local markets. Small businesses are believed to be more vulnerable to these changes, since they are more dependent on credit from local banks. In this paper we investigate the consequences of consolidation and entry for these borrowers compared with those for large firms. We employ a data set for Italy, which provides information on volumes of loans and bad loans by size of borrower with a detailed geographical partition. We find that mergers are followed by a temporary reduction in outstanding credit to all sizes of borrowers and by an increase in bad loans, most likely due to the reassessment of banks portfolios. Entry has a relatively persistent negative impact on credit supply to small and medium-sized firms. Our results also show that concentration, branch density and the share of branches of small banks affect the volumes of credit and bad loans of small borrowers.     

International trade and financial integration: a weighted network analysis

The authors analyse patterns of international trade and financial integration using complex network analysis. The combination of both binary and weighted approaches delivers more precise and thorough insights into the topological structure and properties of international trade and financial networks (ITN and IFN). It is found that the ITN is more densely connected than the IFN, while both types of network display a core–periphery structure. This hierarchical organization is more pronounced in financial markets, suggesting that the bulk of trade in financial assets occurs through a handful of countries acting as hubs. High-income countries are better linked and form groups of tightly interconnected nodes. This kind of structure can explain why the recent financial crisis has spread rapidly among advanced countries while reaching emerging markets only in a second phase.