Central Planning and Monetarism: Fellow Travelers?

We discuss the monetary institutions and macroeconomics of centrally planned economies (CPEs) ; objectives and techniques of monetary control; the relevance to CPEs of the neutrality property, the natural rate hypothesis, and the quantity theory; the roles of stock .and flow variables and the stability of asset demand and expenditure functions; the relation between monetary policy, fiscal policy and incomes policy in CPEs; the CPE equivalent of a floating exchange rate and its implications for monetary policy; and "super crowding out." Many considerations suggest that monetarism as theory and policy might be more applicable under central planning than it is in market economies.

The Theory and Measurement of Macroeconomic Disequilibrium in Centrally Planned Economies

The paper considers issues in recent research on macroeconomic equilibrium in centrally planned economies. I defend the explicit aggregative , macroeconomic approach in theory, institutional relationships and measurement. It has offered a fresh, coherent framework for analysis of many CPE phenomena, opened up a range of possibilities for empirical investigation, and generated several important spinoffs: work of planners' behavior, insights into CPE policy problems of the 1970s and early 1980s, which centred on macroeconomic equilibrium and threats to it; and some developments in market economy macro theory and econometrics. The quantity-rationing macro model and disequilibrium econometrics give a more useful as well as a more nuanced view of macroeconomic reality in CPEs than the conventional wisdom characterizing them as perpetual "shortage economies".

Costs and benefits of running an international currency

This report discusses the cost and benefits of running an international currency. It starts by discussing the effect of the euro's internationalization on financial markets, and presents data on the impact of the single currency on private credit. It considers recent work on the effect of the euro on financial integration and the implications of the euro's rising internationalization on the liquidity premium. Then it turns to the vehicle currency role of the euro and presents some results using new data from the latest BIS Triennial Survey on the foreign exchange market. Concerning the direct benefits of running an international currency, the report first offers estimates on the likely gains from international seigniorage and discuss work on the effects of the internationalization of the euro on the terms of trade and invoicing patterns in international trade. The implications of the international role of the euro for portfolio returns and the so-called “exorbitant privilege†are analysed in detail. The effects of the single currency on exchange rate volatility are also considered. It summarizes recent research on the impact of the euro on global bond and equity and analyzes the potential implications of the euro's international status for central banks' reserve holdings. Finally, it turns to the effects of the euro on the stability of domestic money demand and the problems posed for monetary policy, and the implications for international financial stability.euro, international currency, international role of the euro, Papaioannou , Portes , Costs and benefits of running an international currency

New Labour? The Impact of Migration from Central and Eastern European Countries on the UK Labour Market

The UK was one of only three countries that granted free movement of workers to accession nationals following the enlargement of the European Union in May 2004. The resulting large, rapid and concentrated migration inflow can be seen as a natural experiment that arguably corresponds closely to an exogenous supply shock. We evaluate the impact of this migration inflow – one of the largest in British history – on the UK labour market. We use new monthly micro level data and an empirical approach that ascertains which particular labour markets in the UK – with varying degrees of native's mobility and migrants' self-selection – might have been affected. Our results suggest modest effects throughout the labour market. Despite anecdotal evidence, we found little hard evidence that the inflow of accession migrants contributed to a fall in wages or a rise in claimant unemployment in the UK between 2004 and 2006.migration; employment; wages; Central and Eastern Europe; UK

On the Distributional Effects of Trade Policy: A Macroeconomic Perspective

This paper develops a theoretical model to explore the relationship between openness to trade and long-term income inequality. Empirical evidence on the issue is mixed, though greater inequality is often cited as a possible cost of trade liberalization. To quantify the effect of liberalization on inequality I calibrate a two-sector (agriculture and non-agriculture) open-economy macroeconomic model to the Mexican economy. Agents in the model are subject to idiosyncratic, uninsurable labor income risk, and precautionary saving generates endogenous distributions of wealth and income. When preferences are characterized by subsistence floor for food consumption, trade liberalization implies large welfare gains for low wealth agents. At the same time, liberalization increases long-run wealth and income inequality. After liberalization land-owners are worse off since the price of land falls along with the relative price of the agricultural commodity. When tariff revenue must be replaced by an alternative instrument, higher labor taxes are preferred to higher taxes on consumption or capitalFree trade; inequality; agriculture

REMITTANCES, POVERTY AND INEQUALITY

This paper explores the effect of remittances across the distribution of income. Based on a panel of 46 countries that covers the period between 1970 and 2000, we find that the effect of remittances is non-monotone across the distribution of income and strongest in low income countries. The impact of remittances is positive and decreasing in income for the bottom 70 percent of the population, and negative and increasing in income in the top 20 percent of the population. All else equal, remittances decrease inequality as their effect is mostly felt among the poor and they are negatively related to the income of the rich. We estimate that for low income countries a 1 percent increase in remittances would increase the first decile¡¯s income by approximately 0.43 percent, while the same change would increase the seventh decile¡¯s income by only 0.04 percent. In contrast, a 1 percent increase in remittances is associated with a 0.10 percent decrease in the income of the top 10 percent of the population.Remittances, Poverty, Inequality, Migration

The Determinants Of Cross-Border Equity Flows

We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information heavily determines the pattern of international transactions. Our model integrates elements of the finance literature on portfolio composition and the international macroeconomics and asset trade literature. Gross asset flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. The resulting augmented 'gravity' equation has equity market capitalisation representing market size and distance proxying some informational asymmetries, as well as a variable representing openness of each economy. But other variables explicitly represent information transmission (telephone call traffic and multinational bank branches), an information asymmetry between domestic and foreign investors (degree of insider trading), and the efficiency of transactions ('financial market sophistication'). This equation accounts for almost 70% of the variance of the transaction flows. Dummy variables (adjacency, language, currency or trade bloc, and a 'major financial centre' effect) do not improve the results, nor does a variable representing destination country stock market returns. The key role of informational asymmetries is confirmed. Our information transmission variables also substantially improve standard gravity equations for trade in goods.Equity flows, cross-border portfolio investment, information asymmetries, gravity model

The Anatomy of Financial Crises

A financial crisis is a disturbance to financial markets. associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital. In this paper we analyze the generation and propagation of financial crises in an international setting. We provide a perspective on the danger of a serious disruption to the global financial system by comparing the last full-fledged financial crisis - that of the 1930s - with conditions prevailing today. Our definition of a financial crisis implies a distinction between generalized financial crises on the one hand and isolated bank failures, debt defaults and foreign-exchange market disturbances on the other. We represent this distinction in three sets of linkages: between debt defaults; and between exchange-market disturbances and bank failures. In both the 1930s and 1980s, the institutional environment was drastically altered by rapid change in foreign exchange markets, in international capital markets, and in the structure of domestic banking systems. Our comparative analysis underscores the critical role played by institutional arrangements in financial markets as a determinant of the system's vulnerability to destabilizing shocks.

Sovereign CDS and Bond Pricing Dynamics in the Euro-area

This analysis tests the price discovery relationship between sovereign CDS premia and bond yield spreads on the same reference entity. The theoretical no-arbitrage relationship between the two credit spreads is confronted with daily data from six Euro-area countries over the period 2004-2011. As a first step, the supposed non stationarity of the two series is verified. Then, we examine whether the non-stationary CDS and bond spreads series are bound by a cointegration relationship. Overall the cointegration analysis confirms that the two prices should be equal to each other in equilibrium, as theory predicts. Nonetheless the theoretical value [1, -1] for the cointegrating vector is rejected, meaning that in the short run the cash and synthetic market's valuation of credit risk differ to various degrees. The VECM analysis suggests that the CDS market moves ahead of the bond market in terms of price discovery. These findings are further supported by the Granger Causality Test: for most sovereigns in the sample, past values of CDS spreads help to forecast bond yield spreads. Short-run deviations from the equilibrium persist longer than it would take for participants in one market to observe the price in the other. That is consistent with the hypothesis of imperfections in the arbitrage relationship between the two markets.