State‐Dependent Forward Guidance and the Problem of Inconsistent Announcements

Forward guidance can be provided as an unconditional promise, i.e. commitment to a specific low policy rate. Alternatively, the promise may include an escape clause, i.e. a condition defining the state of the economy under which the central bank would not keep such a low rate and, instead, it would revert to setting policy under discretion. The escape clause can be expressed as a threshold in terms of a specific variable. The present paper shows that, when such a threshold is expressed in terms of an endogenous variable (e.g. output, inflation), there are cases where it becomes impossible for the central bank to act in a way that is consistent with its promise. Consistency imposes limits on the policy rate that can be set since reverting immediately to the optimal discretionary rate can be incompatible with exceeding the threshold.     

EMPIRICAL PERFORMANCE OF GARCH MODELS WITH HEAVY‐TAILED INNOVATIONS

We introduce a new type of heavy‐tailed distribution, the normal reciprocal inverse Gaussian distribution (NRIG), to the GARCH and Glosten‐Jagannathan‐Runkle (1993) GARCH models, and compare its empirical performance with two other popular types of heavy‐tailed distribution, the Student's t distribution and the normal inverse Gaussian distribution (NIG), using a variety of asset return series. Our results illustrate that there is no overwhelmingly dominant distribution in fitting the data under the GARCH framework, although the NRIG distribution performs slightly better than the other two types of distribution. For market indexes series, it is important to introduce both GJR‐terms and the NRIG distribution to improve the models’ performance, but it is ambiguous for individual stock prices series. Our results also show the GJR‐GARCH NRIG model has practical advantages in quantitative risk management. Finally, the convergence of numerical solutions in maximum‐likelihood estimation of GARCH and GJR‐GARCH models with the three types of heavy‐tailed distribution is investigated.     

Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms

This study analyzes the macroeconomic impacts of subsidies to attract multinational corporations when firms are determining whether to enter or how to serve foreign markets. We show that a small FDI subsidy scheme induces consumption gains and delivers short‐term welfare improvement for the FDI host country if firms differ in productivity. However, the subsidy generates a new problem and results in the wealth reallocation effect, leading to welfare deterioration for the host country in the long run. Moreover, we find that a subsidy program induces a welfare improvement for the host country if it is offered to all domestic producers instead of foreign producers only in the host country.     

R&D Investments and Tax Incentives: The Role of Intra-Firm Cross-Border Collaboration*

U.S. multinational corporations increasingly use intra-firm, cross-border research collaboration to disperse R&D across different countries. This paper investigates the implications of such collaboration on the abilities of firms to garner benefits from R&D tax incentives. We find that the association between R&D intensity and tax incentives is three to five times larger when firms have extensive cross-border collaboration connected to a country. We also find that the effect is stronger when local intellectual property protection is weaker and when local innovation resources are higher. Our results suggest that cross-border collaboration helps firms achieve more tax-efficient R&D investments both by reducing the nontax frictions posed by weak intellectual property protection and by increasing the nontax benefits of foreign R&D.     

When Do Qualitative Risk Disclosures Backfire? The Effects of a Mismatch in Hedge Disclosure Formats on Investors' Judgments

Disclosure standards mandate the quantitative disclosure of hedging‐instrument‐related risks but not the disclosure of hedged‐item‐related risks. We examine how a match (mismatch) in formats, caused by making quantitative (qualitative) hedged item disclosures alongside quantitative hedging instrument disclosures, affects investors' integration of information from these two related disclosures. Our first experiment varies the hedged item disclosure format (quantitative or qualitative) and the portion of risk hedged (small or large). We find that when disclosure formats are mismatched, the less comparable nature of the two disclosures caused investors to neglect the offsetting relationship when assessing net risks. As a result, risk and investment judgments were influenced by the more prominent quantitative hedging instrument disclosures. Our second experiment finds that the use of a qualitative debiaser that clarifies the relationship between the two disclosures led to the integration of information and mitigated this effect.     

Ag econ angst crisis revisited

The present paper was inspired by and is a response to the Rola-Rubzen, Hardaker and Dillon paper 'Agricultural economists and world poverty: progress and prospects' (Rola-Rubzen et al. 2001). It is agreed that the position of agricultural economists in foreign aid and poverty programs has declined over recent decades. Such a feeling of guilt and remorse expressed by the above authors does indeed create considerable 'angst'. A major reason for this state of affairs lies in 'the flavour of the month' approach of the development agencies. These include women in development, gender-based farming systems research, household nutrition and food security, people participation, and targeting the poorest of the poor. These fads have driven disciplinary considerations to the wall and the more widely-defined objectives have reduced the drive for economic efficiency. We argue there is still a place for better designed and delivered assistance programs within the wider framework of assistance that has become fashionable. Greater application of institutional principles in both the political processes associated with assistance and the implementation agencies would improve the outcomes of many projects. Particular attention would need to be given to the interface between the development agencies and recipient governments. The present paper picks up on the market failure aspects of agriculture's rather poor contribution to development, and develops a wider perspective in terms of the new institutional economics and a continuing role for the agricultural economist.     

FDI facilitated by agglomeration economies: evidence from manufacturing and services joint ventures in China

The open door policy of China’s economic reform since the 1980s has attracted heavy foreign direct investment (FDI) flows into China and especially to Guangdong (particularly the Pearl River Delta region, PRD) and induced significant economic growth during the past two decades. While there exist various classical theories of FDI in attempting to identify the determinants of FDI inflow and to explain the behavior of FDI flows, limited attention has been given from the perspective of agglomeration effects generated by a core-periphery (CP) relation.This paper intends to study the impacts of agglomerations on FDI inflows in the context of Krugman’s CP relation (1991) by investigating (1) the formation of a CP relation via gravity model analysis; (2) whether different types of industry FDI flows will respond differently in the CP-system, given agglomeration effects; and (3) whether FDI origin and firm scale matter in affecting FDI flows.A database consisting of a population frame of 37,742 firm-level manufacturing and services joint ventures investing in Guangdong in 1998 was used. Empirical results show that the agglomerations of the CP relation have affected FDI flow patterns. While both manufacturing and services FDI and sources of investment responded differently to the impacts, smaller firms were found more responsive to the CP-agglomeration settings regardless of FDI by industry type and by source. The significance and implications of the CP-system to further facilitate FDI in the region are discussed.