Advanced Search

Excellent discussion of economist Friedrich Hayek's theories of entrepreneurial capitalism vs. Keynesians

Atlantic Monthly article discusses differences between Asian and Western economic systems

Peter Drucker analyzes industrialization's latest manifestations: an economic order where knowledge is the key resource; a social order where inequality based on knowledge is a major challenge; and a polity where government can't solve social and economic problems.

James Fallows claims that Americans think that Adam Smith's rules for free trade are the only legitimate ones despite evidence to the contrary from history and other economies.

Ed Sim offers this blog post about globalization, referencing some interesting sources and graphics.

With a trade deficit of $400 billion, and a net foreign debt of $4 trillion, the U.S. is headed for monetary meltdown, says C. Fred Bergsten, director of the Institute for International Economics. Bergsten, predicted that the dollar will drop in value by 20% to 25% sometime during the next three years. His advice to the government: Do keep money in the bank and pay down debt; don't adopt the tax cuts proposed by Congressional Republicans. {free registration required}

Paper from the Federal Reserve Bank of St. Louis examines Int'l capital flows in the context of a simple Diamond-Dybvig model in which there are neither moral hazard nor adverse selection problems, thus isolating exchange rate risk as the propagator of capital flows.

In Capitalism, Socialism and Democracy Joseph A. Schumpeter concluded that socialism would eventually displace capitalism in Western democracies. This would come about as a result of the superior performance of capitalism. Six essential elements of Schumpeter's prediction about the fate of capitalism are confronted with the development of the Swedish economy.

This paper by the Federal Reserve Board compares the predictions for the market value of firms from the Gordon growth model with those from a dynamic general equilibrium model of production. Special attention is focused on the prediction for movements in the market value of firms in response to a decline in the required return or an increase in the growth rate of the economy. The tension between theory and data suggests that the skyrocketing market value of firms in the second half of the 1990s may reflect a degree of irrational exuberance.

This 42-page .pdf paper analyzes whether an industry with no antitrust policy will converge to monopoly, competition or somewher in between using a dominant firm model with rational agents, endogenous mergers and constant returns to scale production. It finds that mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise prices through mopolization is limited. Additionally, as the discount rate increases, it becomes harder to mopolize the industry because the dominant firm cannot commit to not raising prices in the future.

This IMF working paper analyzes the costs and benefits of full dollarization compared to its closes alternative, a currency board. The paper lists several advantages and disadvantages while reviewing how various country characteristics influence the balance of arguments.

Exchange rate changes are volatile and difficult to explain. Economists have long suspected that monetary policy shocks might play an important role in accounting for this behavior. This paper combines recent developments in international finance and econometrics to assess what firm conclusions can be drawn about the role of monetary policy shocks in exchange rate behavior.

Interesting investigation/analysis of the Open Source phenomenon. Quoting the author, "The problem of intellectual property rights is about creating incentives for innovators. ... means of 'protecting' knowledge assure that economic rents are created and that some proportion of those rents can be appropriated by the innovator...Open Source software inverts this logic...Collaborative Open Source software projects such as Linux...have demonstrated...that a large, complex system of code can be built...in a non-proprietary setting..." Paper also includes a history of open source and a description of open source process.

When a credit card company changes interest rates or increases the credit limit of its consumers, how do these consumers respond? The answers are far from predictable, as David B. Gross of the University of Chicago and Wharton's Nicholas S. Souleles have found out. In a paper titled, "Consumer Response to Changes in Credit Supply: Evidence from Credit Card Data," Gross and Souleles examine the effects of changes in the credit limits and interest rates. Their study found that people starting at near their credit limit respond most sharply to changes in credit limits.

This 39-page report was written by Paul Collier, David Dollar, and Nicholas Stern, all of the World Bank. It provides "an interpretative view of the development experiences of the past 50 years," with a special emphasis on the past ten years. The authors's analysis of development in the 1990s found, overall, that market-oriented reform worked unreliably and often neglected "the institutional foundations necessary for markets to be effective for poverty reduction. It is not enough to focus attention on 'getting prices right'; public action is needed to 'get the markets right'." The report especially examines development in the Middle East, North Africa, and South Asia. It also looks at financial institutions, public service delivery, and financial sectors.

Interesting (and no doubt controversial depending on your political persuasion) analysis of effects on economy of government's treatment of taxation and national debt. Essentially, article argues that government should spend any surpluses on tax reduction to stimulate growth (reduced revenues partially being offset by taxes from the higher base).

The steep drop in the U.S. personal saving rate over the last decade has fueled speculation that Americans are spending recklessly. But alternative measures of personal saving show that households are actually setting aside a larger share of their resources than the official figures suggest. In addition, government saving has risen markedly, leading to an increase in overall domestic saving that has helped finance a surge in U.S. investment.

So what do the words "new economy" mean? Three articles in this issue of _The Region_ from the Federal Reserve Board of Minneapolis investigate that question, but with an emphasis on economic fundamentals and, ultimately, on the implications for policymaking. The articles are: "Improving our Understanding of Productivity," "The New
(and Improved) Economy," and "Old Ideas at Work in the New Economy."

Empirical research over the last decade has uncovered predictive relationships between the slope of the yield curve and subsequent real activity and inflation. Some of these relationships are highly significant, but their theoretical motivations suggest that they may not be stable over time. We use recent econometric techniques for break testing to examine whether the empirical relationships are in fact stable. We consider continuous models, which predict either economic growth or inflation, and binary models, which predict either recessions or inflationary pressure. In each case, we draw on evidence from Germany and the United States. Models that predict real activity are more stable than those that predict inflation, and binary models are more stable than continuous models. The model that predicts recessions is stable over our full sample period in both Germany and the United States.

This complementary paper to Froot, Scharfstein, and Stein (1993) seeks to explore some of the corporate finance foundations of monetary economics. In particular, it investigates the impact of corporate risk management strategies on the monetary transmission mechanism. It employs a simple model of a financial accelerator (synonymously: a broad credit channel of monetary policy transmission) to argue that information asymmetries - which are at the heart of these models of the transmission mechanism - create incentives for corporate hedging programmes, that is, cash flow management. These policies, in turn, diminish the impact of monetary policy measures, which is reduced to the pure cost-of-capital effect.

Quite an impressive amount of recent academic research focuses on the idea that financial factors may cause or reinforce real fluctuations. In these models, it is typically a monetary policy shock that serves to lower the value of an asset which is used to secure a firm's borrowing, thereby generating broad credit channel effects of monetary transmission. We empirically investigate the impact of corporate risk management strategies on this specific transmission channel by using the seminal paper of Gertler and Gilchrist (1994) as a benchmark. A potentially important impact of corporate hedging is suggested by corporate finance models that generate hedge incentives by introducing asymmetric information into the credit markets, the assumption at the very heart of the available theories of a broad credit channel. The advent of liquid US interest rate derivatives markets in the mid-1970s should, therefore, serve as something like a turning point in the history of US monetary transmission. Credit channel effects should have been in operation prior to the introduction of these markets, while any such effect should have tended to vanish afterwards. In addition, we should be able to detect marked differences in the behaviour of small and large firms up to the 1970s in contrast to a broadly identical behaviour on the part of these firms in the period thereafter.

This article first reviews methods of foreign exchange intervention and then presents evidence—focusing on survey results—on the mechanics of such intervention. Types of intervention, instruments, timing, amounts, motivation, secrecy and perceptions of efficacy are discussed.

This isn't the first investment boom to go bust. Lessons have been learned from OPEC, Michael Milken and Japan.

This pamphlet presents the results of an empirical analysis of the factors affecting economic growth in sub-Saharan Africa, using data for the period 1981-97 and a sample of 32 countries. The empirical work involved the estimation of a growth equation to identify the key determinants of per capita real GDP growth, including economic variables that reflect the influence of economic policy changes as well as other explanatory factors. On the basis of this analysis and a review of the evidence of economic recovery during 1995-97, using a much larger sample of countries, the pamphlet attempts to determine which policies appear to have been the most effective in terms of increasing economic growth and suggests the key elements of a policy framework that could promote sustainable economic growth and reduce poverty in sub-Saharan Africa.

Though somewhat dated (Feb '00) this interesting article is useful for the larger question it raises about the power of the yield curve as an economic indicator.

This BusinessWeek article argues that the foreign exchange markets have shifted their dominating reliance on central bank actions (specifically interest rate interventions) to also consider equity markets and global M&A activity.

Article offers an overview of the issues involved with dollarization, especially in Latin America.

ABSTRACT: A sizeable literature has argued that the growth effects of changes in flat rate taxes are small. In this paper, we investigate the relatively unexplored area of the growth effect of changes in the tax structure, in particular, in the progressivity of taxes. Considering such a tax reform seems empirically more relevant than considering changes in flat tax rates. We construct a general equilibrium model of endogenous growth in which there is heterogeneity in income and in the tax rates. We limit heterogeneity to two types, skilled and unskilled, and posit that the probability of staying or becoming skilled in the subsequent period depends positively on expenses on "teacher" time. In the production sector, we consider two sources of growth. In the first, growth arises as a purely external effect on account of production activities of skilled workers. In the second, a portion of the skilled workforce is used to work in research and other productivity enhancing activities and is compensated for it. Our analysis shows that changes in the progressivity of tax rates can have positive growth effects even in situations where changes in flat rate taxes have no effect. Experiments on a calibrated model indicate that the quantitative effects of moving to a flat rate system are economically significant. The assumption made about the engine of growth has an important effect on the impact of a change in progressivity. Quantitatively, welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equlibria; however, when the costs of transition to the higher growth equilibrium is taken into account only the currently rich slightly prefer the flat rate system.

ABSTRACT: This article examines empirically the dynamic relationship between two key US money market interest rates - the federal funds rate and the 3-month Treasury bill rate. Using daily data over the period 1974-1999, we show that a long-run no-arbitrage relationship exists between these two rates. This relationship is shown to be remarkably stable across monetary policy regimes of interest rate and monetary aggregate targeting. Employing vector equilibrium correction models which allow for both asymmetric and non-linear dynamics, we find that most of the adjustment towards the no-arbitrage long-run equilibrium occurs through the federal funds rates. The results appear to suggest that, contrary to conventional wisdom, it is the Treasury bill rate, rather that federal funds rate, that 'anchors' the short end of the term structure.

ABSTRACT - It is widely believed that the Fed controls the funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target for the federal funds rate. Recently, however, several economists have suggested that open market operations may not be necessary for controlling the funds rate. Rather, they suggest that the Fed controls the funds rate through open mouth operations. The Fed merely indicates its desire to change the funds rate and the market does the rest. This paper investigates the extent to which the close relationship between the federal funds rate and the federal funds rate target is due to open market or open mouth operations. Finding little evidence to support either the open market or open-mouth hypothesis, the possibility that many target changes represent the endogenous actions of the Fed real shocks and inflation surprises is briefly considered.