International portfolio reallocation: Diversification benefits and European monetary union

We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross-section of countries spanning over two sample periods: 1997-2001 and 1997-2005. We find that the strongest drivers are the marginal diversification benefits arising from the pure asset component and the initial degree of underweight. This evidence suggests that global portfolio reallocations over the asset boom and bust period were determined by optimal diversification considerations. We also find that due to economic and monetary union (EMU) the weight assigned by euro area investors to investment in euro area countries increased significantly in equity and fixed income portfolios, with a trade diverting effect against the British bond market.     

Globalization, rent protection institutions, and going alone in freeing trade

We construct a two-country North-South Product-cycle model of trade with endogenous growth and trade barriers. We remove the scale effects on growth by incorporating rent protection activities by Northern incumbents. We examine the effects of two forms of globalization - an expansion of the relative size of the South and unilateral trade liberalization by either country. We find that the location of rent protection institutions and the sectoral trade structure determine whether or not globalization raises steady-state economic growth. We demonstrate that for accelerating worldwide economic growth, contrary to conventional wisdom, unilateral Northern trade liberalization is preferable to bilateral trade liberalization.     

Trade, inequality, and the political economy of institutions

This paper investigates the relationship between international trade and the quality of economic institutions. We model institutions as fixed costs of entry, in a framework that has two key features. First, preferences over entry costs differ across firms and depend on firm size. Larger firms prefer to set higher costs of entry, in order to reduce competition. Second, these costs are endogenously determined in a political economy equilibrium. Trade opening can lead to higher entry costs when it changes the political power in favor of a small elite of large exporters, who in turn prefer to install high entry barriers.     

European economic integration and (a)symmetry of macroeconomic fluctuations

This paper empirically investigates output and consumption asymmetries in the Eurozone and enlarged EU over the period 1992–2007, and their consequences for monetary policy. Our results reveal that in the Eurozone output asymmetry has remained practically unaltered; however, there is some indication of greater consumption smoothing. The UK, Denmark and Sweden are no less asymmetric than the average Eurozone member state and could probably enter the EMU without significant macroeconomic costs. New EU member states are diverse but display higher output and, in particular, consumption asymmetries. This warrants some caution against too quick expansion of the EMU.     

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 effects of tariffs on coalition formation in a dynamic global warming game

The prospects for cooperation on climate protection beyond 2012 are currently uncertain. Thus policy instruments which foster participation in International Environmental Agreements (IEA) are in demand. Among the instruments under discussion are trade sanctions. Multi-region optimal growth models are a state of the art tool for integrated assessment, but introducing trade sanctions distorts the competitive equilibrium, making it difficult to compute numerically. We introduce trade and trade sanctions into a model of coalition stability to assess the potential of trade sanctions to support an IEA. Trade is modeled by having all countries produce a generic output good, but adopting national product differentiation (Armington assumption). Coalitions are free to impose tariffs on imports from non-cooperating countries. We solve the model numerically using a refined version of Negishi's [Negishi, T., 1960. Welfare economics and existence of an equilibrium for a competitive economy. Metroeconomica 12, 92–97] basic algorithm. We then apply the model to analyze the influence of tariffs on international cooperation. The model suggests that there is indeed a significant potential to raise participation through trade sanctions, even when goods from different countries are nearly perfect substitutes. Furthermore we investigate the effect of trade sanctions on global welfare, environmental effectiveness, and the credibility of the tariff mechanism.     

Are valuation effects desirable from a global perspective?

Recent studies have emphasized the role of valuation effects due to exchange rate movements in easing the process of adjustment of the external balance of a country. This paper asks to what extent valuation effects are desirable from a global perspective as a mean to achieve an efficient allocation of resources. In a frictionless world, it is desirable to have large movements in prices and exchange rates. But once a small degree of price rigidity is introduced not only should prices be stabilized but also the response of the exchange rate should be muted. There is a minor role for valuation effects that depends both on the size and composition of assets and liabilities.     

What drives international financial flows? Politics,institutions and other determinants

This paper uses a large panel of financial flow data from banks to assess how institutions affect international lending. First, employing a time varying composite institutional quality index in a fixed-effects framework, the paper shows that institutional improvements are followed by significant increases in international finance. Second, cross-sectional models also show a strong effect of initial levels of institutional quality on future bank lending. Third, instrumental variable estimates further show that the historically predetermined component of institutional development is also a significant correlate of international bank inflows. The results thus suggest that institutional underdeveloped can explain a significant part of Lucas [Lucas, Robert E. 1990. “Why Doesn't Capital Flow from Rich to Poor Countries?” American Economic Review (Papers and Proceedings), 80 (2): 92–96. 1990] paradox of why doesn't capital flow from rich to poor countries. The analysis also does a first-step towards understanding which institutional features affect international banking.     

The price effect of tariff liberalization: Measuring the impact on household welfare

Trade policy literature has for many years emphasized open policies positive impact on economic growth and development. While these results generally hold when measured on averages, empirical evidence suggests that trade liberalization is unlikely to produce beneficial results across all households. This study adds to the literature by providing an analysis of the distributive effects of tariff liberalization in Mexico. The paper examines the effect of tariff liberalization from the perspective of households both as consumers and factor owners allowing for imperfect domestic price transmission. The results indicate the overall positive effect of tariff liberalization masks significant differences in the distribution of gains both across income levels and across geographic regions. Richer households are found to have gained relatively more. Urban areas, as well as Mexican states closest to the United States border, are also found to be larger beneficiaries while southernmost states have been largely bypassed by the effects of tariff liberalization. Those results can be explained not only in relation to the different endowments of the households, but also by the diverse effects on local prices that has resulted from Mexican trade liberalization.     

The impact of Chinese monetary policy shocks on East and South‐East Asia1

We study the effects of Chinese monetary policy shocks on China's major trading partners in East and South‐East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework, which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighbouring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies.