Foreign Direct Investment and the External Wealth of Nations: How Important Is Valuation?

While the balance sheet approach has increased the focus on position data, differences in valuation practices for foreign direct investment (FDI) make cross‐country comparisons difficult. To enhance comparability, the IMF's Balance of Payments and International Investment Position Manual, sixth edition, which some countries have already implemented and others will implement in the coming years, recommends seven methods for valuation of unlisted FDI. This paper demonstrates that both the valuation method and simple differences in estimation techniques can fundamentally change a country's financial balance sheet. Using Denmark as an illustration, unlisted FDI equity liabilities vary from 22 to 156 percent of GDP when applying different estimation techniques, but just one valuation method, price to earnings. These measurement uncertainties can lead to important misunderstandings and affect policy recommendations, thus pointing to the need for further international harmonization. While the results are presented in an FDI context, the uncertainties also apply to other macroeconomic datasets, including national accounts statistics.     

The effectiveness of anti-leakage policies in the European Union: results for Austria

With the third trading period of the EU emissions trading scheme (EU ETS) starting in 2013, the system of allocating emission allowances will significantly change: In contrast to the previous two trading periods, auctioning of the allowances should now be the rule rather than the exception. Accompanying this policy change, concerns over competitiveness of energy intensive, trade exposed sectors as well as over limited environmental effectiveness via the channel of carbon leakage, have regained prominence. In this paper, we thus explore the impacts of potential EU policies to counter losses in international competitiveness and carbon leakage from the perspective of Austria. Based on numerical simulations with a computable general equilibrium model, we evaluate three policy options: an input subsidy for carbon allowances (thus reflecting the planned partially free allocation mechanism in the third EU ETS phase), a subsidy for domestic production, and an export rebate based on sectoral CO₂ costs. Our results show that each policy has the potential to support domestic production in exposed sectors relative to a full auctioning scenario and thus increase competitiveness. However, none is imperatively effective at reducing Austria’s net carbon emissions: while the carbon trade balance is improved and hence leakage declines, the tradability of emission permits within the EU ETS allows CO₂ emissions from Austria’s ETS output to increase. A cost benefit analysis indicates that the two policies promoting domestic output and exports are more cost effective than the CO₂ input subsidy.     

WELFARE ECONOMICS AND THE MEASUREMENT OF NNP*

Some relationships between NNP and economic welfare are explored in the confines of a simple, static welfare maximization model. Various assumptions concerning both the measurement of NNP and the economic system underlying this model are dropped seriatem and the implications for the correspondence between NNP and economic welfare are examined. The following conclusions emerge. There are several classes of resource reorganization in which NNP and welfare move in the same direction, so that NNP can serve as an ordinal proxy for welfare. These include changes in taxes or competitive imperfections which result in product substitution and movements along the transformation function. With a general qualification, NNP-welfare correspondence is preserved for allocative changes which affect the real costs and prices of goods included in NNP or of non-included goods in inelastic demand; changes in involuntary unemployment; and changes in technological externalities affecting producers. There are other cases where changes in NNP and welfare are not positively correlated. Included here are changes in real costs of non-included goods for which demand is elastic and changes in technological externalities imposed on consumers.     

Worker remittances,migration, accumulation and growth in poor developing countries: Survey and analysis of direct and indirect effects

A broad but brief survey of the literature on remittances and growth shows that indirect effects are only included via interaction terms. Then, we regress data for migration, worker remittances, savings, investment, tax revenues, public expenditure on education, interest rates, literacy, labor force growth, development aid and GDP per capita growth on migration, remittances and other variables for a panel of countries with income below $1200. The estimated dynamic equations are integrated to a system used for baseline simulations. Comparison with the counterfactual policy simulations ‘only 50% remittances’ or ‘no net migration anymore’ shows that the total effect of remittances on levels and growth rates of GDP per capita, investment and literacy are positive, and that of net migration is negative for literacy and investment but positive for growth.     

A new estimator for trade costs and its small sample properties

This paper discusses the estimation of parameters of a traditional transportation model, as it is typically present in so-called Takayama–Judge type spatial price equilibrium models. In contrast to previously used estimation methods, observations of regional prices as well as of trade costs are used in a direct estimation of the first order conditions. The proposed method uses bi-level programming techniques to minimize a weighted least squares criterion under the restriction that the estimated parameters satisfy the Kuhn–Tucker conditions for an optimal solution of the transport model. A penalty function and a smooth reformulation are used to iteratively approximate the complementary slackness conditions. Monte-Carlo simulations are used to trace out some properties of the estimator and compare it with a traditional calibration method. The analysis shows that the proposed technique estimates prices as well as trade costs more precisely than the traditional calibration method. It is suggested to apply the same method to a range of linear and quadratic models.     

The impact of alternative transportation systems on urban structure

This paper extends a recent von Thünen-type model of urban structure by Mills to include two competing forms of transportation, and then compares simulated representative American and European cities with respect to size, density, and land rents. Assuming consumers minimize costs in choosing between competing travel modes, the 19-equation model demonstrates that land rent differentials are diminished by adding an alternative travel mode, and that transport capacity is far more important than fare structures in determining transit patterns and land use. American urban structure appears to resemble European urban patterns as transportation modes proliferate.     

Quantal Response Equilibria for Extensive Form Games

This article investigates the use of standard econometric models for quantal choice to study equilibria of extensive form games. Players make choices based on a quantal-choice model and assume other players do so as well. We define an agent quantal response equilibrium (AQRE), which applies QRE to the agent normal form of an extensive form game and imposes a statistical version of sequential rationality. We also define a parametric specification, called logit-AQRE, in which quantal-choice probabilities are given by logit response functions. AQRE makes predictions that contradict the invariance principle in systematic ways. We show that these predictions match up with some experimental findings by Schotter et al. (1994) about the play of games that differ only with respect to inessential transformations of the extensive form. The logit-AQRE also implies a unique selection from the set of sequential equilibria in generic extensive form games. We examine data from signaling game experiments by Banks et al. (1994) and Brandts and Holt (1993). We find that the logit-AQRE selection applied to these games succeeds in predicting patterns of behavior observed in these experiments, even when our prediction conflicts with more standard equilibrium refinements, such as the intuitive criterion. We also reexamine data from the McKelvey and Palfrey (1992) centipede experiment and find that the AQRE model can account for behavior that had previously been explained in terms of altruistic behavior. This revised version was published online in August 2006 with corrections to the Cover Date.     

The business cycle with nominal contracts

Summary In this paper we study the quantitative implications of nominal wage contracts for business cycle fluctuations. We address this issue using a model economy based on the neoclassical growth model supplemented by the assumption that cash is needed to purchase goods. We consider a variation of the standard recursive competitive equilibrium concept that is intended to capture the important features of wage contracting. We use this equilibrium construct to address three issues. First, we consider whether monetary shocks, propagated by nominal contracts, constitute a viable alternative to technology shocks as a source of aggregate fluctuations. Our results suggest that, while monetary shocks and nominal rigidities succeed in causing output volatility of the required magnitude, the resulting data have properties that are inconsistent with several key features of U.S. data. Second, we consider how the behavior of the economy varies with contract length. We find that the volatility induced by both monetary and technology shocks increases sharply with contract length. Finally we consider how much rigidity would be necessary to match the volatility of U.S. output. We find that only a very small amount of rigidity would be necessary to cause output volatility of the magnitude observed.We have received helpful comments from David Chapman, Paul Gomme, Jeremy Greenwood, Gary Hansen, Michael Keane, Tim Kehoe, Lee Ohanian, Edward Prescott, and Warren Weber. The usual disclaimer applies. This research is supported in part by NSF Grant SES-8921346 and the John M. Olin Foundation.     

Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice

In models of local public goods with mobile consumers, existence of equilibrium is problematic. Difficulties with existence of equilibrium that arise in models with discrete locations and in models with voting are compounded when both features are introduced into the same model. We present conditions under which equilibrium exists in a model where freely mobile households choose community of residence and amount of housing consumption, and vote on the level of public goods provision. These conditions involve restrictions on preferences and the technology of public goods supply. At least some of these conditions appear consistent with empirical observations. We discuss the implications of the conditions, and their role in assuring existence of equilibrium. A series of computational examples provide illustrations of the way these conditions interact, and the difficulties that must be confronted if they are to be relaxed.