FLOATING WITH A LARGE LIFE JACKET: MONETARY AND EXCHANGE RATE POLICIES IN CROATIA UNDER DOLLARIZATION

Even after more than a decade of low inflation, Croatia remains highly dollarized. Commercial banks avoid currency mismatch by indexing loans to the exchange rate. Although this eliminates direct currency risk, it creates credit risk, because any larger depreciation might induce borrower defaults. Monetary and exchange rate policies focus on exchange rate smoothing to safeguard financial stability. Dollarization has prevented the use of monetary policy to stabilize output. Given Croatia's likely entry into the EU and adoption of the Euro, dedollarization seems unfeasible. Rather than attempting to reverse dollarization, the central bank has taken measures to make the banking system more robust to shocks. (JEL E52, E58, F31, G21, P24 )     

WHY THE COMPOSITE INDEX OF LEADING INDICATORS DOES NOT LEAD

This paper assesses the real-time performance of the Commerce Department's composite index of leading indicators. The authors find that the composite leading index has failed to provide reliable advance warning of cyclical turning points. One reason for this failure is that the leading index's transition from expansion to contraction generally is not very sharp. Consequently, discerning real-time cyclical peaks in the index is difficult. Transitions from contraction to expansion on average are sharp. However, cyclical troughs in the leading index often precede cyclical troughs in the economy by only a few months. Thus, even timely recognition of troughs in the leading index fails to provide advance warning of turnarounds in the general level of economic activity .     

THE SOURCES OF GROWTH AT DIFFERENT STAGES OF DEVELOPMENT

Cross-country growth regressions have become an increasingly common tool in empirical development research. But these regressions typically do not attempt to distinguish among countries in different stages of development. Three empirical methods are used to test for such differences. Several of the factors known to affect economic growth are shown to operate differently for countries in different portions of the global income distribution. The results have implications for the role of financial markets, openness and factor accumulation in promoting growth. (JEL O150 , O160 , O400 )     

The Protective Dimension of Product Warranty Policies and Practices

In consumer good markets, wide variations occur in warranty policies and practices between products, firms and industries. In this paper, those warranty policies designed to provide self-protection for the seller are examined. The protective facet of warranties carefully delimits the responsibility of the manufacturer for post-sale product performance and quality and hence stabilizes the firm's future costs and profits. The author has striven to conceptualize the association which may exist between a firm's products and markets and the policy objectives of its warranty. Several hypotheses concerning the conditions under which the warranty may be viewed by the seller as a tool of self-protection are suggested; these hypotheses are tested through an analysis of survey data collected from industry executives.     

SWEDEN AFTER NUCLEAR POWER

The social costs of providing energy are varied and difficult to compare. Sweden's recent energy policy is notable for its broad-based initiatives to internalize those social costs of energy that are difficult to measure in strictly monetary terms. This article focuses on one such initiative– the Swedish law to phase out nuclear power by the year 2010–and its relationship to other national goals: The hydroelectric system is not to expand, carbon dioxide emissions are to remain at current levels or decline, and oil-import dependence is to be minimized. In addition to this challenge, between now and 2010 the Swedish economy is expected to maintain an average 1.9 percent real annual growth rate and to remain competitive industrially. Scenarios of future electricity demand and the accompanying supply mix illustrate the spectrum of costs – internal and external–from which Sweden can choose in implementing the phase-out plan and in determining whether one can identify paths that simultaneously reconcile Sweden's potentially conflicting policy goals. The results show that the direct economic costs of high-efficiency/low-externality scenarios are less than those of low-efficiency/high-externality scenarios. Traditional societal economics does not stand as a barrier to energy futures that are consistent with Sweden's desire to further reduce the external societal costs of energy. The results are also significant since they demonstrate that strategies to reduce global climate change need not rely on nuclear power.     

NEW CLASSICAL MACROECONOMIC THEORY AND FISCAL RULES: SOME METHODOLOGICAL PROBLEMS

This paper evaluates the theoretical basis of New ClassicalMacroeconomics (NCM) in general, and in particular the basisof one of NCM's main policy conclusions, namely fiscal rules.We analyse NCM in terms of its assumptions of market clearingand rational expectations formations and show how its call forfiscal rules is derived. We argue that NCM is describing a staticworld with no uncertainty. Indeed, we argue that fixed fiscalrules can only make sense in such a world. In view of NCM'sinstrumentalist position, its predictions are then discussedin light of the empirical evidence. The results are discouragingfor proponents of NCM. Our conclusion is that NCM has low explanatoryand predictive power and, as such, does not provide a strongbasis for determining economic policy.     

Credit Indicators as Predictors of Economic Activity: A Real‐Time VAR Analysis

Using readily available indicators of the profitability, price, and availability of credit—the term spread, junk‐bond spread, and banks’ “willingness to lend” as reported by the Federal Reserve—we show that it is possible to significantly improve on the real‐time output and employment predictions of forecasting professionals at the medium‐run horizons that are most relevant to policymakers and private decision makers. Key to this improvement is a flexible state–space model of data revisions. The willingness‐to‐lend variable is the best real‐time predictor of GDP growth. For forecasting job growth, all three credit indicators prove helpful.