Modelling the fiscal reaction functions of the GIPS based on state-varying thresholds

We introduce non-linear fiscal reaction functions with endogenously estimated state-varying thresholds to capture the behaviour of fiscal policy authorities during “good” and “bad” times. These thresholds vary with the level of debt, the economic cycle and a financial pressure index.     

Asset price fluctuations without aggregate shocks

We analyze the pricing of a productive asset in a class of dynamic exchange economies with heterogeneous, infinitely-lived agents, and self-enforcing intertemporal trades. Individual incomes fluctuate and are correlated; preferences, dividends and aggregate income are fixed. Almost all economies in this class have a unique stationary Markovian equilibrium with fluctuations in asset prices. As the set of unrationed households changes over time and states, excess demand functions shift, asset returns fluctuate, and some households are shut out of asset markets. Examples suggest that the amplitude of these movements is negatively correlated with the productivity of the asset and with the penalty for default.     

Common markets and trade liberalization

Abstract.  The GATT Rounds show that trade liberalization is essentially a cooperative non‐stationary dynamic process. Therefore, the impact of Regionalism on trade liberalization possibly changes over time. I adapt the trade liberalization model of Devereux (1997) to examine how this impact varies. Common markets lead to a one‐time shock in immediate tariffs, as well as to a change in their rate of decline. I find that common markets that happen late in the trade liberalization process are more likely to lead to a decline in immediate tariffs. Common markets also increase the rate of decline of tariffs after their formation. JEL Classification: F03, F15     

Unemployment dynamics with international capital mobility

We study the response of domestic unemployment rates to shocks in total factor productivity for economies with high capital mobility and low labour mobility. We show that high capital mobility amplifies the impact on the domestic unemployment rate of domestic fluctuations in total factor productivity, shortens the lag of the response to shocks and raises the variability of unemployment. But average unemployment is unaffected. Capital flows increase the riskiness of labour income and reduce the riskiness of capital income but do not reduce mean welfare.     

Predicting the Crises of the Greek Drachma

The paper investigates the role of fundamentals in the speculative episodes experienced by the Greek drachma during the 1990s, and examines whether the openness of the Greek economy has altered the role of fundamentals in the likelihood of a currency crisis. An interesting aspect of the empirical analysis is that the crises are related significantly to macroeconomic fundamentals of the Greek economy. The analysis shows that the openness of the Greek economy has introduced new elements and concerns in the predictability of speculative attacks on the drachma.     

An investor sentiment barometer — Greek Implied Volatility Index (GRIV)

In this paper, we propose a new measure of Greek equity market volatility based on the prices of FTSE/ATHEX-20 index options. Greek Implied Volatility Index is calculated using the model-free methodology that involves option prices summations and is independent from the Black and Scholes pricing formula. The specific method is applied for the first time in a peripheral and illiquid market as the Athens Exchange.The empirical findings of this paper show that the proposed volatility index includes information about future realized volatility beyond that contained in past volatility. In addition, our analysis indicates that there is a statistically significant negative and asymmetric contemporaneous relationship between the returns of the implied volatility index and the underlying equity index. Finally, the volatility transmission effects on the Greek stock exchange from two leading markets, namely the New York Stock Exchange and the Deutsche Börse, are tested and documented.     

Endogenous Debt Constraints in Lifecycle Economies

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump-shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behaviour are consistent with endogenous debt limits but not with exogenous liquidity constraints.     

The Working Behavior of Young People in Rural Cote d'Ivoire

One of the major features of structural adjustment is an attemptto reallocate labor—and hence output—through changesin relative prices. This article assesses how price changesaffect the working patterns of young people in rural Côted'Ivoire. The analysis is based on a model of the labor supplyof rural households and on the construction of composite priceindexes. The data come from the Côte d'Ivoire Living StandardsSurvey for 1985 and 1986. The panel aspect of the data allowsthe work choice made in one year to depend on the individual'schoice in the previous year. Results indicate that the priceof agricultural output generally is a positive incentive onthe decision to participate in the labor force. However, thisresult depends heavily on the employment and education of theindividual in the previous period. Those not already workingare less likely to respond to favorable movements in the pricesof cash crops by entering the work force.