Functional It\^{o} calculus and stochastic integral representation of martingales

We develop a nonanticipative calculus for functionals of a continuous semimartingale, using an extension of the Ito formula to path-dependent functionals which possess certain directional derivatives. The construction is based on a pathwise derivative, introduced by Dupire, for functionals on the space of right-continuous functions with left limits. We show that this functional derivative admits a suitable extension to the space of square-integrable martingales. This extension defines a weak derivative which is shown to be the inverse of the Ito integral and which may be viewed as a nonanticipative "lifting" of the Malliavin derivative. These results lead to a constructive martingale representation formula for Ito processes. By contrast with the Clark-Haussmann-Ocone formula, this representation only involves nonanticipative quantities which may be computed pathwise.Comment: Published in at http://dx.doi.org/10.1214/11-AOP721 the Annals of Probability (http://www.imstat.org/aop/) by the Institute of Mathematical Statistics (http://www.imstat.org

The potential cost of a Failed Doha Round

The potential cost of a Failed Doha Round

The potential cost of a failed Doha Round:

"In times of economic turmoil, countries might decide to increase current tariff rates to protect domestic industries or raise revenues in order to finance domestic programs. Using the highest applied or bound rate imposed by countries from 1995 to 2008 as an indicator, this study presents several scenarios regarding the economic costs of a failed Doha Round and a subsequent rush into protectionism. For example, in a scenario where the applied tariffs of major economies would go all the way up to currently bound tariff rates, world trade would decrease by 7.7 percent. In a more modest scenario where countries would raise tariffs to maximum rates applied during the past 13 years, world trade would decrease by 3.2 percent. These increases in duties would reduce world welfare by US$353 billion under the first scenario, and by US$134 billion under the more modest scenario. While such an increase in duties would particularly impact agricultural exports (–6.9 percent), especially in developing countries (–11.5 percent), exports of industrial goods could also face a substantial reduction: 2 percent in developed countries and 4.8 percent in developing countries. This study concludes there would be a potential loss of US$1,064 billion in world trade if world leaders were to fail to conclude the Doha Development Round of trade negotiations in the next few weeks and if countries were to implement subsequently protectionist policies, as occurred after the end of the Uruguay Round. The failure of the negotiations would prevent a US$336 billion increase in world trade that would have come from a reduction in tariffs and domestic support, while a worldwide resort to protectionism would contract world trade by US$728 billion." from textAgricultural policies, WTO Doha round, International trade, exports, tariffs, Protectionism,

Eight Years of Doha Trade Talks: Where Do We Stand?

In 2001 the World Trade Organization launched a highly ambitious program of multilateral liberalization. Eight years later, concluding the negotiations is uncertain, though an opportunity still exists. Since 2001, many proposals on market access have been brought to the negotiating table by the European Union, the United States, and the G20. Because it is politically and economically acceptable to many parties, the final December 2008 package could be the basis of an agreement. An evaluation of these various proposals shows how trade negotiations have been following countries’ strategic interests. In eight years, the ambition of the formula in agricultural market access tariff reduction has increased, but additional flexibilities designed to accommodate domestic political constraints have offset delivered market access. The various scenarios imply losses for least-developed countries, reflecting eroded preferences and rising terms of trade for imported commodities, including food products. We study how this trade reform can be more development-friendly.computable general equilibrium modeling, least developed countries, trade negotiations, Financial Economics, International Development, International Relations/Trade, Political Economy, Public Economics,

Why is the Doha development agenda failing? And what can be done?: A computable general equilibrium-game theoretical approach

"We herein use a world Computable General Equilibrium (CGE) model to simulate 143 potential trade reforms and seek solutions to the issues hampering progress in the Doha Development Agenda (DDA). Inside the domain defined by all these possible outcomes, we apply the axiomatic theory of bargaining and select the Nash solution of cooperative games. The solutions vary according to the objective functions adopted by the trade negotiators. When real income is the objective and services are excluded, or when optimizing terms of trade is the objective, the Nash solution is the status quo. Trade liberalization is feasible only when the negotiators focus on national exports or Gross Domestic Product (GDP). Our assessment of some possible solutions reveals that excluding members having a GDP below a certain threshold improves the bargaining process, regardless of the governments' objective. Formation of coalition, such as the G20, constitutes an option for its members to block outcomes imposed by rich members. We also find that side payments may be a solution, but represent a very high share of the global income gain." from authors' abstractTrade negotiations, Computable general equilibrium (CGE) modeling, Nash solution, Side payments, Cooperative games, Globalization, Markets, Doha Development Agenda,

Economics of export taxation in a context of food crisis

This paper aims to assess the rationales for the use of export taxes, in particular in the context of a food crisis. First, we summarize the effects of export taxes using both partial and general equilibrium theoretical models. When large countries have an objective of constant food domestic prices, in the event of an increase in world agricultural prices the optimal response is to decrease import tariffs in net food-importing countries and to increase export tariffs in net food-exporting countries. The latter decision is welfare improving while the former is welfare reducing: it is the price to pay to get domestic food prices constant. Small countries are harmed by both decisions. Second, we illustrate the costs of a lack of cooperation in and regulation of (binding process) such policies in a time of crisis using a global computable general equilibrium (CGE) model illustration, mimicking the mechanisms that have appeared during the recent food price surge. We conclude with a call for international regulation, in particular because small net food-importing countries may be substantially harmed by these beggar-thy-neighbor policies that amplify the already negative impact of the food crisis.Computable general equilibrium (CGE), export taxes, Food crisis, optimum tariff,

Eight years of Doha trade talks

In 2001, the World Trade Organization launched a highly ambitious program of multilateral liberalization. Eight years later, concluding the negotiations is uncertain, though an opportunity still exists. Since 2001, many proposals on market access have been brought to the negotiating table by the E.U., the United States, and the G-20. Because it is politically and economically acceptable to many parties, the final December 2008 package could be the basis of an agreement. An evaluation of these various proposals shows how trade negotiations have been following countries’ strategic interests. In eight years, the ambition of the formula to reduce agricultural market access tariffs has increased, but flexibilities added to accommodate domestic political constraints have offset delivered market access. The December 2008 package would reduce these average tariffs by 25 percent, a reduction very close to the one implied by the Harbinson and Girard proposals of 2003. This has to be compared with the 73 percent reduction in world agricultural protection by the very ambitious 2005 U.S. proposal. The 2005 G-20 and E.U. proposals were intermediate outcomes. The December 2008 package implies a reduction of agricultural protection by 6 percentage points in high-income countries and 0.5 percentage points in middle-income countries. If the U.S. proposal had been applied, these figures would have been 12.4 and 4.7, respectively. Different scenarios imply losses for developing countries, reflecting eroding preferences and rising terms of trade for imported commodities, including food products. We study how this trade reform can be more development-friendly.Computable general equilibrium (CGE) modeling, Developing countries, Trade negotiations, WTO Doha round,

An economic perspective on the enforcement of credit arrangements: the case of daylight overdrafts in Fedwire

A fundamental concern for any lender is credit risk - the risk that a borrower will fail to fully repay a loan as expected. Thus, lenders want credit arrangements that are designed to compensate them for - and help them effectively manage - this type of risk. In certain situations, central banks engage in credit arrangements as lenders to banks, so they must manage their exposure to credit risk. This article discusses how the Federal Reserve manages its credit risk exposure associated with daylight overdrafts. The authors first present a simple economic framework for thinking about the causes of credit risk and the possible tools that lenders have to help them manage it. They then apply this framework to the Federal Reserve's Payments System Risk policy, which specifies the use of a variety of tools to manage credit risk. The study also analyzes a possible increase in the use of collateral as a credit risk management tool, as presented in a recent proposal by the Federal Reserve concerning changes to the Payments System Risk policy.Payment systems ; Federal Reserve System ; Credit ; Risk management

The potential cost of a failed doha round:

"This study offers new conclusions on the economic cost of a failed Doha Round. The first section is devoted to an analysis of how trade policies evolve in the long and medium runs. We show that even under normal economic conditions, policymakers modify tariffs to cope with the evolution of world markets. We then use the MIRAGE Computable General Equilibrium model to assess the potential outcome of the Doha Round, and then examine four protectionist scenarios. Under a scenario where applied tariffs of major economies increase up to the currently bound tariff rates, we find that world trade decreases by 7.7 percent and world welfare drops by US$353 bn. We then compare a resort to protectionism when the Doha Development Agenda (DDA) is implemented versus a resort to protectionism when the DDA is not implemented. We find that this trade agreement could prevent the potential loss of US$ 809 bn of trade, and could therefore act as an efficient multilateral insurance scheme against the adverse consequences of “beggar-thy-neighbor” trade policies." from authors' abstractTrade negotiations, Computable general equilibrium (CGE) modeling, Bound duties, Domestic support, Globalization, Markets, Doha Development Agenda,