Introducing Financial Frictions and Unemployment into a Small Open Economy Model
Mathias Trabandt, Lawrence J. Christiano, Karl Walentin
Journal of Economic Dynamics & Control,
No. 12,
2011
Abstract
Which are the main frictions and the driving forces of business cycle dynamics in an open economy? To answer this question we extend the standard new Keynesian model in three dimensions: we incorporate financing frictions for capital, employment frictions for labor and extend the model into a small open economy setting. We estimate the model on Swedish data. Our main results are that (i) a financial shock is pivotal for explaining fluctuations in investment and GDP. (ii) The marginal efficiency of investment shock has negligible importance. (iii) The labor supply shock is unimportant in explaining GDP and no high frequency wage markup shock is needed.
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Industrial Associations as a Channel of Business-Government Interactions in an Imperfect Institutional Environment: The Russian Case
A. Yakovlev, A. Govorun
IWH Discussion Papers,
No. 16,
2011
Abstract
International lessons from emerging economies suggest that business associations may provide an effective channel of communication between the government and the private sector. This function of business associations may become still more important in transition economies, where old mechanisms for coordinating enterprise activities have been destroyed, while the new ones have not been established yet. In this context, Russian experience is a matter of interest, because for a long time, Russia was regarded as a striking example of state failures and market failures. Consequently, the key point of our study was a description of the role and place of business associations in the presentday
Russian economy and their interaction with member companies and bodies of state
administration. Relying on the survey data of 957 manufacturing firms conducted in
2009, we found that business associations are more frequently joined by larger companies, firms located in regional capital cities, and firms active in investment and innovation. By contrast, business associations tend to be less frequently joined by business groups’ subsidiaries and firms that were non-responsive about their respective ownership structures. Our regression analysis has also confirmed that business associations are a component of what Frye (2002) calls an “elite exchange”– although only on regional and local levels. These “exchanges” imply that members of business associations, on the one hand, more actively assist regional and local authorities in social development of their regions, and on the other hand more often receive support from authorities. However, this effect is insignificant in terms of support from the federal government. In general, our results allow us to believe that at present, business associations (especially the
industry-wide and “leading” ones) consolidate the most active, advanced companies and act as collective representatives of their interests. For this reason, business associations can be regarded as interface units between the authorities and businesses and as a possible instrument for promotion of economic development.
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Mergers, Spinoffs, and Employee Incentives
Paolo Fulghieri, Merih Sevilir
Review of Financial Studies,
No. 7,
2011
Abstract
This article studies mergers between competing firms and shows that while such mergers reduce the level of product market competition, they may have an adverse effect on employee incentives to innovate. In industries where value creation depends on innovation and development of new products, mergers are likely to be inefficient even though they increase the market power of the post-merger firm. In such industries, a stand-alone structure where independent firms compete both in the product market and in the market for employee human capital leads to a greater profitability. Furthermore, our analysis shows that multidivisional firms can improve employee incentives and increase firm value by reducing firm size through a spinoff transaction, although doing so eliminates the economies of scale advantage of being a larger firm and the benefits of operating an internal capital market within the firm. Finally, our article suggests that established firms can benefit from creating their own competition in the product and labor markets by accommodating new firm entry, and the desire to do so is greater at the intermediate stages of industry/product development.
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Stock Market-Induced Currency Crises: A New Type of Twins
Stefan Eichler, Dominik Maltritz
Review of Development Economics,
No. 2,
2011
Abstract
This paper explores the link between currency crises and the stock market in emerging economies. By integrating foreign stock market investors in a currency crisis model, we reveal a new fundamental inconsistency as a potential crisis trigger: since emerging economies' stock markets often have high returns, whereas central bank reserves grow slowly or decline, the amount of reserves foreign investors can deplete when selling their stocks and repatriating the proceeds grows over time and is considerably higher than funds that have been invested in the stock market. Capital withdrawals of foreign stock market investors can trigger currency crises by depleting central bank reserves, particularly in successful countries with booming stock markets and large foreign investment.
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Exploring the Economic Convergence in the EU New Member States by Using Nonparametric Models
Monica Raileanu Szeles
IWH Discussion Papers,
No. 2,
2011
Abstract
This paper analyzes the process of real economic convergence in the New Member States (NMS) bein g formerly centrally planned economies, using nonparametric methods instead of conventional parametric measurement tools like beta and sigma models. This methodological framework allows the examining of the relative income distribution in different periods of time, the number of modes of the density distribution, the existence of “convergence clubs” in the distribution and the hypothesis of convergence at a single point in time. The modality tests (e.g. the ASH-WARPing procedure) and stochastic kernel are nonparametric techniques used in the empirical part of the study to examine the income distribution in the NMS area. Additionally, random effects panel regressions are used, but only for comparison reasons. The main findings of the paper are the bimodality of the income density distribution over time and across countries, and the presence of convergence clubs in the income distribution from 1995 to 2008. The findings suggest a lack of absolute convergence in the long term (1995-2008) and also when looking only from 2003 onwards. The paper concludes that, in comparison with the parametrical approach, the nonparametric one gives a deeper, real and richer perspective on the process of real convergence in the NMS area.
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Currency Crises and the Stock Market: Empirical Evidence for Another Type of Twin Crisis
Stefan Eichler, Dominik Maltritz
Applied Economics,
No. 29,
2011
Abstract
We explore the dependency between currency crises and the stock market in emerging economies. Our focus is two-fold. First, the risk of a currency crisis rises as the foreign stake in the domestic stock market increases. Successful economies with high capital flows into their booming stock markets especially are prone to stock market-induced currency crises. Second, we apply the dividend growth model to show that stock markets crash in the run-up to a currency crisis. This new type of twin crisis is empirically tested by employing a logit framework using quarterly data for 33 emerging economies for 1994Q1–2007Q4.
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State Aid in the Enlarged European Union. An Overview
Jens Hölscher, Nicole Nulsch, Johannes Stephan
Abstract
In the early phase of transition that started with the 1990s, Central and Eastern European Countries pursued economic restructuring of the enterprise sector that involved massive injections of state support. Also foreign investment from the West and facilitation of the development of a market economy involved massive injections of state support. With their accession to the European Union (EU), levels and forms of state aid came under critical review by the European Commission. This inquiry investigates whether the integration of the new member states operates on a level playing field with respect to state aid. Quantitative and qualitative analysis is relied upon to answer this key, as well as other, related questions. Findings suggest that in recent years a level playing field across the EU has indeed emerged. State aid in the new EU member countries is rather handled more strictly than laxer compared to the ‘old’ EU countries.
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Governmental Learning as a Determinant of Economic Growth
Marina Grusevaja
IWH Discussion Papers,
No. 23,
2010
Abstract
Systemic economic transition is a process of determined radical institutional change, a process of building new institutions required by a market economy. Nowadays, the experience of transition countries with the implementation of new institutions could be reviewed as a method of economic development that despite similar singular steps has different effects on the domestic economic performance. The process of institutional change towards a market economy is determined by political will, thus the government plays an important role in carrying out the economic reforms. Among the variety of outcomes and effects the attention is drawn especially to economic growth that diverges significantly in different post-transition countries. The paper attempts to shed light upon the problem on the basis of institutional economics, of economics of innovation and partially of political economy of growth using an evolutionary, process-oriented perspective. In this context the issue central to the promotion of economic growth is the successful implementation of new institutions through governmental activities. The paper shows that under the conditions of bounded rationality and radical uncertainty economic growth is determined, inter alia, by the capacity for governmental learning.
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Human Capital Investment, New Firm Creation and Venture Capital
Merih Sevilir
Journal of Financial Intermediation,
No. 4,
2010
Abstract
This paper studies the relation between firm investment in general human capital, new firm creation and financial development for new firm financing, such as the existence of a venture capital industry. On one hand, firm investment in general human capital leads employees to generate new innovative ideas for starting their own firm. Since employees need a venture capitalist to start their new firm, firm investment in general human capital encourages the creation of venture capitalists by increasing the need for their services, such as providing advice and monitoring. On the other hand, as new firm financing becomes available, firms' willingness to invest in general human capital increases, and as a by-product, the creation of employee-founded and venture capital-backed new firms increases in the economy. Hence, our model provides a rational explanation for the emergence of new firms created by employees of established firms, which represents one of the most common type of new firms in many industries.
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Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy
Mathias Hoffmann, Oliver Holtemöller
Scandinavian Journal of Economics,
2010
Abstract
We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass-through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non-EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, and the UK) using a heterogeneous dynamic panel approach.
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