Currency Crisis and Multiple Equilibria: The Role of Co-ordination Failures among Heterogeneous Investors

International capital markets are inherently unstable, and may precipitate an unnecessary currency crisis as a result of a failure by differentiated investors to coordinate their actions in response to a “mild” fundamental shock. This paper illustrates the point in a simple 3-period model, in which two heterogeneous risk-averse representative investors enter the market at different stages, and a policy-maker who, having to adjust to a current account shock, faces the decision whether or not to devalue the currency. A range of values for the shock is identified over which two equilibria, both rational, coexist. In the “good” equilibrium absence of capital flight and ongoing lending allow an orderly adjustment (no regime switch); in the “bad” one capital flight and the drying up of fresh inflows force the policy-maker to devalue. The short-term nature of capital flows is seen as a crucial determinant of such instability, and the availability of an international lender of last resort is shown to eliminate it.

House price developments and fundamentals in the United States

This paper discusses the limitations of the price-income ratio, the price-rent ratio, and of affordability measures as indicators of housing market conditions. For the purpose of assessing whether house prices are misaligned, the most sensible approach is to calculate the user cost of ownership and the implied theoretical ratio of house prices to rents, and compare the latter with the observed ratio. On the basis of this methodology, US house prices appear to have departed from fundamentals since 2004, cumulating an overvaluation of between 25 and 30 per cent by the third quarter of 2006.house prices, affordability, user cost, fundamentals, bubbles

A disaggregated analysis of the export performance of some industrial and emerging countries

The paper describes the evolution of export shares and quantifies the contribution of the geographical and sectoral specialization for some industrial and emerging market economies between 1985 and 2003. While the strong growth of emerging countries as world competitors has lowered the market shares of all industrial countries, the results of a constant-market-share analysis indicate that the latter have benefited from positive structural effects. Specifically, industrial countries gained from being specialized in either fast-growing sectors (high-tech) or destinations (Asia). The magnitude of these effects, however, has been quite diversified across countries.Trade shares; Competitiveness; Constant-market-share analysis

Ricardian selection

We analyze the foundations of the relationship between trade and total factor productivity (TFP) in the Ricardian model. Under general assumptions about the autarky distributions of industry productivities, trade openness raises TFP. This is due to the selection effect of international competition – driven by comparative advantages – which makes "some" high- and "many" low-productivity industries exit the market. We derive a model-based measure of this effect that requires only production and trade data. In a sample of 41 countries, we find that Ricardian selection raised manufacturing TFP by 11% above the autarky level in 2005 (as against 6% in 1985), with a neat positive time trend and large cross-country differences.selection effect, Eaton-Kortum model, international competition

A New Indicator of Competitiveness for Italy and the Main Industrial and Emerging Countries

This paper presents the new competitiveness indicators of the Bank of Italy. While the old ones were calculated with reference to 25 industrial or OECD countries, the new indicators are available for 62 countries, including the main emerging and developing economies. In order to extend the country coverage, we have used a new methodology to compute country weights, introduced by the Federal Reserve, which is entirely based on trade flows; by contrast, the previous IMF-BIS methodology adopted for the old indicators required also data on the domestic production of the manufacturing sector — figures that are rarely available for non-industrial countries. In addition, we have adjusted the trade flows of China and Hong Kong as suggested in the literature, in order to reduce the distortions due to the entrepôt trade of these two countries. Results show that methodological differences have a negligible impact on competitiveness indicators; on the other hand, the effect of the country coverage may be quite remarkable. In Italy’s case, the old and new indicators show a similar dynamics in the period from January 1980 to September 2005; differences in levels, well-contained between 1980 and 1993, grow thereafter reaching a maximum of 5.5 percentage points. During the recent phase of dollar depreciation began in February 2002, Italy recorded a sharp decline in competitiveness. In addition to the United States, the countries that mostly contributed to this negative performance were Japan, China, Hong Kong and Taiwan. These losses were partly offset by the gains recorded with respect to several central and eastern European countries.Real Effective Exchange Rate; Entrepôt trade; Competitiveness;

Trade-Revealed TFP

We introduce a novel methodology to measure the relative TFP of the tradeable sector across countries, based on the relationship between trade and TFP in the model of Eaton and Kortum (2002). The logic of our approach is to measure TFP not from its "primitive" (the production function) but from its observed implications. In particular, we estimate TFPs as the productivities that best fit data on trade, production, and wages. Applying this methodology to a sample of 19 OECD countries, we estimate the TFP of each country's manufacturing sector from 1985 to 2002. Our measures are easy to compute and, with respect to the standard development-accounting approach, are no longer mere residuals. Nor do they yield common "anomalies", such as the higher TFP of Italy relative to the US.Multi-factor productivity, TFP measurement, Eaton-Kortum model

Ricardian selection

We analyze the foundations of the relationship between trade and TFP in the Ricardian model. Under general assumptions about the autarky distributions of industry productivities, trade openness raises TFP. This is due to the selection effect of international competition --- driven by comparative advantages --- which makes "some" high- and "many" low-productivity industries exit the market. We derive a model-based measure of this effect that requires only production and trade data. For a sample of 41 countries, we find that Ricardian selection raised manufacturing TFP by 11% above the autarky level in 2005 (6% in 1985), with a neat positive time trend and large cross-country differences.selection effect, Eaton-Kortum model, international competition

A disaggregated analysis of the export performance of some industrial and emerging countries

The paper describes the evolution of export shares and quantifies the contribution of the geographical and sectoral specialization for some industrial and emerging market economies between 1985 and 2003. While the strong growth of emerging countries as world competitors has lowered the market shares of all industrial countries, the results of a constant-market-share analysis indicate that the latter have benefited from positive structural effects. Specifically, industrial countries gained from being specialized in either fast-growing sectors (high-tech) or destinations (Asia). The magnitude of these effects, however, has been quite diversified across countries

A disaggregated analysis of the export performance of some industrial and emerging countries

The paper describes the evolution of export shares and quantifies the contribution of the geographical and sectoral specialization for some industrial and emerging market economies between 1985 and 2003. While the strong growth of emerging countries as world competitors has lowered the market shares of all industrial countries, the results of a constant-market-share analysis indicate that the latter have benefited from positive structural effects. Specifically, industrial countries gained from being specialized in either fast-growing sectors (high-tech) or destinations (Asia). The magnitude of these effects, however, has been quite diversified across countries

A New Indicator of Competitiveness for Italy and the Main Industrial and Emerging Countries

This paper presents the new competitiveness indicators of the Bank of Italy. While the old ones were calculated with reference to 25 industrial or OECD countries, the new indicators are available for 62 countries, including the main emerging and developing economies. In order to extend the country coverage, we have used a new methodology to compute country weights, introduced by the Federal Reserve, which is entirely based on trade flows; by contrast, the previous IMF-BIS methodology adopted for the old indicators required also data on the domestic production of the manufacturing sector — figures that are rarely available for non-industrial countries. In addition, we have adjusted the trade flows of China and Hong Kong as suggested in the literature, in order to reduce the distortions due to the entrepôt trade of these two countries. Results show that methodological differences have a negligible impact on competitiveness indicators; on the other hand, the effect of the country coverage may be quite remarkable. In Italy’s case, the old and new indicators show a similar dynamics in the period from January 1980 to September 2005; differences in levels, well-contained between 1980 and 1993, grow thereafter reaching a maximum of 5.5 percentage points. During the recent phase of dollar depreciation began in February 2002, Italy recorded a sharp decline in competitiveness. In addition to the United States, the countries that mostly contributed to this negative performance were Japan, China, Hong Kong and Taiwan. These losses were partly offset by the gains recorded with respect to several central and eastern European countries