The effect of WTO on the extensive and the intensive margins of trade

We use 6-digit bilateral trade data to document the effect of WTO/GATT membership on the extensive and intensive product margins of trade. We construct gravity equations for the two product margins motivated by Chaney (2008). The empirical results show that standard gravity variables provide good explanatory power for bilateral trade on both margins. Importantly, we show that the impact of the WTO is concentrated almost exclusively on the extensive product margin of trade, i.e. trade in goods that were not previously traded. In our preferred specification, WTO membership increases the extensive margin of exports by 25%. At the same time, WTO membership has a negative impact on the intensive margin. Based on novel comparative statics results about how fixed and variable trade costs impact the product margins of trade, our results suggest that WTO membership works by reducing primarily the fixed rather than the variable costs of trade.     

Monetary policy implementation and transmission in the European Monetary Union

I discuss possible problems engendered by loss of national monetary policies, and study them from three empirical perspectives. First, are business cycles sufficiently synchronized across EMU member countries? The evidence suggests that economic activity in those countries has become increasingly correlated in the 1990s, and that policy co–ordination has played a role in generating that outcome. Second, are there asymmetries in the mechanisms through which policy affects economic activity? The paper documents that policy transmission was indeed heterogeneous in the member countries, and that structural and financial factors were sensibly related to cross–country differences in the response of output to a monetary policy shock. Third, how is policy implemented in an environment of diverse business cycle fundamentals and transmission mechanisms? Estimation of monetary policy reaction functions finds that the European Central Bank is closer to an aggregate of the central banks in Germany, France, and Italy than to the Bundesbank alone.     

Interest rate changes and the timing of debt issues

There is much recent interest in the role of market timing in firm financial decisions. Using a large detailed sample of corporate public debt issues, private placements, Rule 144A issues and bank loans over the period 1970–2006, we investigate the relationship between interest rate changes and issues of floating and fixed-rate debt. Our results indicate that both past and future rates are associated with issuance decisions. We examine whether firms are able to lower their cost of capital by anticipating future rate changes, controlling for firm characteristics and market conditions. Our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined. Over the longest time intervals available in our data, we do not find evidence of timing ability for fixed-rate or floating-rate debt issues.     

On Constraining Fiscal Policy Discretion in EMU

We review the theoretical and empirical literature on the benefitsand costs of imposing restrictions on fiscal policy. We emphasizethat the arguments in favour of restricting discretion of fiscalpolicy go beyond the notion of avoiding unsustainable budgetaryplans that can lead to pressure on the central bank. Restrictionson fiscal policy can also be justified on the grounds that discretionarychanges in spending or taxes can lead to unnecessary volatilityin output and lower economic growth. Empirically, there is evidencethat implicit constraints on governments can be as effectiveas explicit constraints (i.e. rules). From the analysis in EMUcountries in the last 10 years we conclude that there has beena significant change in the conduct of fiscal policy in termsof increased discipline and less use of discretion. However,since 1999 there are clear signs of fatigue in this processas previous trends have either stopped or even reversed.     

EMU, EU, Market Integration and Consumption Smoothing

By taking a new approach to the study of the impact of EMU on consumption smoothing, centering on consumption volatility and therefore on smoothing more directly, we find that even though EMU tends to smooth consumption, it is not through cross-country property and claims. Rather it comes through the promotion of the tradability of goods, capital in particular: specifically, the encouragement of price competition, contestable home markets, ability to borrow and buy insurance at home, and the harmonization of regulations. Some of the consumption smoothing may also depend on EU membership rather than EMU as such but EMU adds to it. As a fundamental part of the analysis, the paper uses a new index of currency union which focuses on the ratio of trade with other countries sharing the same currency relative to total foreign trade.     

How Do Exchanges Select Stocks for Option Listing?

We investigate the factors influencing the selection of stocks for option listing. Exchanges tend to list options on stocks with high trading volume, volatility, and market capitalization, but the relative effect of these factors has changed over time as markets have evolved. We observe a shift from volume toward volatility after the moratorium on new listings ended in 1980. Using control sample methodology designed to correct for the endogeneity of option listing, we find no evidence that volatility declines with option introduction, in contrast to previous studies that do not use control samples.     

PRICE PRESSURE OF TRADING AND EQUITY PRICES IN HEDGE FUND ACTIVISM

In this article, I offer and examine a price pressure hypothesis, which states that stock prices of activism targets temporarily deviate from fundamentals. Increased demand for target stocks upon the formation of activist positions exerts upward pressure on targets’ stock prices in the short term. Such effects are driven by illiquid stocks whose prices are sensitive to order-flow imbalances. When activists use private transactions, price pressure effects are muted. As buying pressure subsides and reverses over the long run, targets’ stock prices decline proportionately to predisclosure accumulations, driven again by illiquid stocks. These price dynamics have important implications for activists’ block-formation strategies and, more generally, shareholder activism.     

What Makes Firms Dissatisfied with Their Bank Loans: New Evidence from Survey Data

Journal of Financial Services Research - We use loan-by-loan association between non-financial firms and their banks to disentangle the effects of financial weakness of borrowers and lenders on the...