Latin American financial markets

Harvey Arbeláez and Reid Click. 2005. Latin American Financial Markets: Developments in Financial Innovations (Vol. 5). Amsterdam: Elsevier JAI. 445 pages. ISBN: 0‐7623‐1163‐0.     

Utility of gambling II: risk,paradoxes, and data

We specialize our results on entropy-modified representations of event-based gambles to representations of probability-based gambles by assuming an implicit event structure underlying the probabilities, and adding assumptions linking the qualitative properties of the former and the latter. Under segregation and under duplex decomposition, we obtain numerical representations consisting of a linear weighted utility term plus a term corresponding to information-theoretical entropies. These representations accommodate the Allais paradox and most of the data due to Birnbaum and associates. A representation of mixed event-and probability-based gambles accommodates the Ellsberg paradox. We suggest possible extensions to handle the data not accommodated.      

Natural estimation of variances in a general finite discrete spectrum linear regression model

The method of “natural” estimation of variances in a general (orthogonal or nonorthogonal) finite discrete spectrum linear regression model of time series is suggested. Using geometrical language of the theory of projectors a form and properties of the estimators are investigated. Obtained results show that in describing the first and second moment properties of the new estimators the central role plays a matrix known in linear algebra as the Schur complement. Illustrative examples with particular regressors demonstrate direct applications of the results.     

Consumption, (dis)aggregate wealth,and asset returns

In this work, I show, from the consumer's budget constraint, that the residuals of the trend relationship among consumption, financial wealth, housing wealth and labor income (summarized by the variable cday) should predict better U.S. and U.K. quarterly stock market returns than a variable like cay from Lettau and Ludvigson (2001), which considers aggregate wealth instead.I find that the superior forecasting power of cday is due to: (i) its ability to track the changes in the composition of asset wealth; and (ii) the faster rate of convergence of the coefficients to the “long-run equilibrium” parameters.In addition, the results suggest that, while financial wealth shocks are mainly transitory, fluctuations in housing wealth are very persistent. Moreover, they highlight that expectations about future returns are “synchronized” across countries.     

Fiscal Consolidations and Economic Growth

The aim of this paper is to deepen the understanding of the macroeconomic consequences of fiscal consolidations. In particular, there is evidence in the literature of fiscal consolidation episodes producing (non‐Keynesian) expansionary effects in the short run. We replicate this result for a panel of OECD countries under exogeneity of the fiscal consolidation. However, we provide some evidence that output growth might affect the fiscal tightening process so that fiscal consolidations are not exogenous to economic growth. Once we allow for feedback effects from economic growth to fiscal adjustments, we find that expansionary effects disappear and recover the typical Keynesian effect of fiscal adjustments. This finding points to the need to take these short‐term negative implications into account in the design of fiscal consolidations.     

The price of advice

We develop a model of consulting (advising) where the role of the consultant is to reveal signals to her client that refine the client's original private estimate of the profitability of a project. Although the client can perfectly observe and evaluate these signals, the consultant may only be able to do the same imperfectly, or not at all. This captures the idea that the expert may not fully understand the impact of her advice on the client. We characterize the optimal contract between the consultant and her client. It is a menu consisting of pairs of transfers specifying payments between the two parties in case the project is undertaken by the client and in case it is not. The main result of the article is that in the optimal mechanism, the consultant obtains the same profit as though she could perfectly observe and evaluate the impact of the signals whose release she controls on the client's profit estimate.     

The sustainability of the current account in the Czech Republic,Hungary and Slovenia

The aim of this paper is to investigate empirically the sustainability of the current account in three Central European countries, the Czech Republic, Hungary and Slovenia, since their move towards market economy about 15 years ago. The analysis is based on the intertemporal approach to the current account which states that if real exports and real imports are integrated of order one then cointegration between them is a necessary and sufficient condition for the economy to satisfy its intertemporal budget constraint. On the basis of various unit-root and cointegration tests on the shares of real exports and imports in real GDP, this study concludes that the Czech Republic and Slovenia are not in violation of their intertemporal budget constraint and their trade imbalances are sustainable. However, the real exports and imports of these countries, and also the export, import measures of Hungary, do not seem to behave as random walks, excluding the possibility of cointegration between them.