The Home Bias and Capital Income Flows between Countries and Regions

This paper documents a marked increase in international consumption risk sharing throughout the recent globalization period. Unlike earlier studies that have found it difficult to document a consistent effect of financial globalization on international consumption comovements, we make use of the information implicit in the relative levels of consumption and output to measure long-run risk sharing among OECD countries and US federal states. We derive our empirical setup from a deliberately simplistic model in which countries can trade perpetual claims to each other?s output (Shiller securities). This model allows us to identify the channels through which improvements in international risk sharing have come about. The model predicts crosscountry and cross-regional income flows with considerable precision. Both international income flows as well as consumption risk sharing have increased since 1990, in line with the gradual removal of country portfolio home bias documented elsewhere. Still, the increase in international income flows falls short of explaining all of the consumption risk sharing we see in international data. We show that heterogeneity in countries? gross foreign asset positions is important in explaining this result. While countries with less portfolio home bias enjoy better consumption risk sharing, our findings also suggest that heterogeneity in country portfolios opens an separate channel for consumption risk sharing, possibly through asymmetric valuation effects that have been emphasized in the recent literature. --Consumption Risk Sharing,International and regional business cycles,Capital flows,Home Bias,Non-stationary panel data

Close to Balance or in Surplus. A Policy Maker’s Guide to the Implementation of the Stability and Growth Pact

currency; economic integration; EMU; Euro; European Central Bank; political economy; stability pact

The Economic Importance of Fiscal Rules

The present paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the Stability and Growth Pact in its old and reformed versions. The investigation suggests that fiscal policy has had in the past a limited smoothing effect on the cycle, and therefore the cost of the old rules in the corrective arm of the Pact was also limited. As for the reform of the Pact, the analysis is overall supportive of the new country-specific Medium Term Objectives. The modified rules of the Excessive deficit procedure are likely to give the governments only a limited extra leeway to reduce the variability of the cycle.European Monetary Union, Stability and Growth Pact, fiscal-monetary interactions

"Assessing agglomeration economies in a spatial framework with endogenous regressors"

This paper is concerned with the influence of agglomeration economies on economic outcomes across British regions. The concentration of economic activity in one place can foster economic performance due to the reduction in transportation costs, the ready availability of customers and suppliers, and knowledge spillovers. However, the concentration of several types of intangible assets can boost productivity as well. Thus, using an interesting dataset which proxies regional productivity, we will assess the relative importance of agglomeration and other assets, controlling for endogeneity, spatial autocorrelation and heteroscedasticity at the same time. Our results suggest that agglomeration has a definite positive influence on productivity, although our estimates of its effect are dramatically reduced when spatial dependence and other hitherto omitted variables proxying intangible assets are controlled for.Agglomeration economies, intangible assets, endogeneity, spatial autocorrelation, spatial HAC estimation. JEL classification:C21, J24, R10, R11, R12.

The UK and the EMU

currency; economic integration; EMU; Euro; European Central Bank; political economy; stability pact; U.K.