The short-run impact of fluctuating primary commodity prices on three developing economies: Columbia,Ivory Coast and Kenya

Computable general equilibrium models are used to study the short-run impact of fluctuating primary commodity prices on the economies of Columbia, Ivory Coast and Kenya. The results indicate that these economies are destabilized by primary commodity price fluctuations unless governments act to hold real domestic absorption constant. To achieve this, however, would require foreign exchange reserves in excess of the level normally available to these governments for the purpose of stabilizing domestic economic activity.     

Prahu Shipping in Eastern Indonesia in The Interwar Period

During the interwar period, prahu (sail) shipping in Eastern Indonesia experienced first decline and then dramatic resurgence. This paper explains this pattern in terms of the interaction between competitive pressures from the modern sector and the impact of the Depression.     

Explaining Managed Trade as Rational Cheating

Postwar “managed-trade” policies feature low baseline tariffs combined with selective nontariff protection. This paper interprets managed trade as a rational strategy to undermine trade-liberalization agreements in the absence of credible external enforcement. Analyzing the Kennedy GATT Round, I explore the calculus that led the United States to undermine across-the-board tariff reductions selectively by introducing nontariff barriers in industries with rapidly rising import demand. I show empirically that nontariff barrier dynamics across 216 industries support a rational-cheating interpretation of managed-trade policy.     

PRICE STATISTICS REQUIRED BY DEVELOPING COUNTRIES FOR NATIONAL ACCOUNTING PURPOSES

In both developed and developing countries, the national accounting statistician who wishes to establish a composite set of values in current and base year prices is faced with a series of difficulties arising from a lack of indicators which are adequate for relating quantities and values within the national accounting framework. Consequently, ad hoc solutions are extensively adopted and use is made of price data which in the majority of cases have been collected for completely different purposes. The inter-relationship of prices, quantities and values fundamental to the compatibility of the national accounts can therefore be, and often is, a rather tenuous one. In the case of many developing countries, the situation is accentuated by a very volatile behaviour of prices, a greater impact of price change and a much greater scarcity of useable statistical material. In addition, since structural change is frequently implicit in a development process, the pattern of values and of prices is often variable and irregular—this in turn creates problems in determining relative importance, in assigning weights and in imputing for prices of items not directly entering into the calculation of the indicators.
This paper analyses the series which are most commonly available, it points out the major deficiencies or limitations and it attempts to formulate a few guide-lines for determining priorities called for in an integrated network of price statistics.     

Book Reviews

Huib Foot, Arie Kuyvenhoven and Jaap Jansen, Industrialisation and Trade in Indonesia, Yogyakarta: Gadjah Mada University Press, 1990, pp. vii + 552.

W.L. Korthals Altes, General Trade Statistics, 1822–1940, Changing Economy in Indonesia, Volume 12a, Amsterdam: Royal Tropical Institute, 1991, pp. 200.

Adrian Clemens, J. Thomas Lindblad and Jeroen Touwen, Regional Patterns in Foreign Trade, 1911–1940, Changing Economy in Indonesia, Volume 12B, Amsterdam: Royal Tropical Institute, 1992, pp. 104.

BRIEFLY NOTED: Australian International Development Assistance Bureau, Introduction to Government Administration, Planning and Budgeting in Indonesia, Canberra: Aidab, 1991, pp. xxii + 60.

Helen Hughes (ed.), The Dangers of Export Pessimism: Developing Countries and Industrial Markets, San Francisco: International Center for Economic Growth, 1992, pp. xxvii + 446.

M.G. Asher el al., Fiscal Incentives and Economic Management in Indonesia, Malaysia and Singapore, Singapore: Asian-Pacific Tax and Investment Research Centre, 1992, pp. viii + 133.

Hal Hill, Indonesia's Textile and Garment Industries: Developments in an Asian Perspective, Occasional paper no. 87, Singapore: Institute of Southeast Asian Studies, 1992, pp. vi + 83.     

Notes And Communications

This communication sketches in headlines long term developments in American and European banking. Contrary to the expectation of both practitioners and theorists in the nineties, has the role of banks in the economy not diminished but increased. This is demonstrated by the long term increase of bank credit as a percentage of GDP (resulting in a stronger growth of M2 and 3 than GDP), a growing contribution of bank sector income to GDP, growing employment (until recently) and a growing share of bank shares in total market capitalisation over the past three decades until 2004–2006. This growing share may have been induced by a comparatively superior performance, supported by a relatively high dividend yield, despite a lower-than-average price-earning ratio. Banks counteracted increased competition and disintermediation tendencies in their traditional lending business by a progressive involvement in capital markets. They developed themselves, in several functions, these markets. For this reason the often used distinction between bank-based and market-based financial systems is less meaningful. Capital markets function thanks to banks. Even more because a rapidly growing volume of new, unlisted investment instruments are constructed by banks and traded over their counter. By this development the risk absorbing and intermediating function of banks – being their basic function in the financial system – is also accentuated. The professional capability of leading banks to fulfil this basic function has in the current “sub prime” crisis come under severe criticism.     

How to Identify and Forecast Bull and Bear Markets?

Because the state of the equity market is latent, several methods have been proposed to identify past and current states of the market and forecast future ones. These methods encompass semi‐parametric rule‐based methods and parametric Markov switching models. We compare the mean‐variance utilities that result when a risk‐averse agent uses the predictions of the different methods in an investment decision. Our application of this framework to the S&P 500 shows that rule‐based methods are preferable for (in‐sample) identification of the state of the market, but Markov switching models for (out‐of‐sample) forecasting. In‐sample, only the mean return of the market index matters, which rule‐based methods exactly capture. Because Markov switching models use both the mean and the variance to infer the state, they produce superior forecasts and lead to significantly better out‐of‐sample performance than rule‐based methods. We conclude that the variance is a crucial ingredient for forecasting the market state. Copyright © 2016 John Wiley & Sons, Ltd.     

Combining density forecasts using focused scoring rules

We investigate the added value of combining density forecasts focused on a specific region of support. We develop forecast combination schemes that assign weights to individual predictive densities based on the censored likelihood scoring rule and the continuous ranked probability scoring rule (CRPS) and compare these to weighting schemes based on the log score and the equally weighted scheme. We apply this approach in the context of measuring downside risk in equity markets using recently developed volatility models, including HEAVY, realized GARCH and GAS models, applied to daily returns on the S&P 500, DJIA, FTSE and Nikkei indexes from 2000 until 2013. The results show that combined density forecasts based on optimizing the censored likelihood scoring rule significantly outperform pooling based on equal weights, optimizing the CRPS or log scoring rule. In addition, 99% Value‐at‐Risk estimates improve when weights are based on the censored likelihood scoring rule.     

Measuring and predicting heterogeneous recessions

This paper examines the usefulness of a more refined business cycle classification for monthly industrial production (IP), beyond the usual distinction between expansions and contractions. Univariate Markov-switching models show that a three regime model is more appropriate than a model with only two regimes. Interestingly, the third regime captures ‘severe recessions’, contrasting the conventional view that the additional third regime represents a ‘recovery’ phase. This is confirmed by means of Markov-switching vector autoregressive models that allow for phase shifts between the cyclical regimes of IP and the Conference Board's Leading Economic Index (LEI). The timing of the severe recession regime mostly corresponds with periods of substantial financial market distress and severe credit squeezes, providing empirical evidence for the ‘financial accelerator’ theory.