International commodity prices, growth and the outbreak of Civil War in Sub-Saharan Africa

To learn more about the effect of economic conditions oncivil war, we examine whether Sub-Saharan civil wars aremore likely to start following downturns in the internationalprice of countries main export commodities. The data showa robust effect of commodity price downturns on the outbreakof civil wars. We also find that Sub-Saharan countries aremore likely to see civil wars following economic downturnsin their main OECD export destinations.

Financial development, financial fragility and growth

This paper studies the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities (e.g., Levine, Loayza, and Beck 2000). On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns (e.g., Kaminski and Reinhart 1999). The paper accounts for these contrasting effects based on the distinction between the short- and long-run impacts of financial intermediation. Working with a panel of cross-country and time-series observations, the paper estimates an encompassing model of short- and long-run effects using the Pooled Mean Group estimator developed by Pesaran, Shin, and Smith (1999). The conclusion from this analysis is that a positive long-run relationship between financial intermediation and output growth co-exists with a, mostly, negative short-run relationship. The paper further develops an explanation for these contrasting effects by relating them to recent theoretical models, by linking the estimated short-run effects to measures of financial fragility(namely, banking crises and financial volatility), and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions.

Does foreign direct investment crowd out domestic entrepreneurship?

In analyzing firm entry and exit across Belgian manufacturing industries,this paper presents evidence that import competition and foreign directinvestment discourage entry and stimulate exit of domestic entrepreneurs.These results are in line with theoretical occupational choice modelsthat predict foreign direct investment would crowd out domesticentrepreneurs through their selections in product and labor markets.However, the empirical results also suggest that this crowding out effectmay be moderated or even reversed in the long-run due to the long termpositive effects of FDI on domestic entrpreneurship as a result oflearning, demonstration, networking and linkage effects between foreignand domestic firms.

Sources and propagation of international cycles: Common shocks or transmission?

This paper studies the generation and transmission of international cycles in a multi-country model with production and consumption interdependencies. Two sources of disturbance are considered and three channels of propagation are compared. In the short run the contemporaneous correlation of disturbances determines the main features of the transmission. In the medium run production interdependencies account for the transmission of technology shocks and consumption interdependencies account for the transmission of government shocks. Technology disturbances, which are mildly correlated across countries, are more successful than government expenditure disturbances in reproducing actual data. The model also accounts for the low cross country consumption correlations observed in the data.

Openness, government size and the terms of trade

This paper investigates the relationship between trade openness and the size of government, both theoretically and empirically. We show that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a unified framework for studying and testing these two mechanisms. First, we show how their relative strength depends on a key parameter, the elasticity of substitution between domestic and foreign goods. Second, while the terms of trade externality leads to inefficiently large governments, the increase in public spending due to the demand for insurance is optimal. We show that large volumes of trade may result in welfare losses if the terms of trade externality is strong enough while small volumes of trade are always beneficial. Third, we provide new evidence on the positive association between openness and the size of government and test whether it is consistent with the terms of trade externality or the demand for insurance. Our findings suggest that the positive relationship is remarkably robust and that the terms of trade externality may be the driving force behind it, thus raising warnings that globalization may have led to inefficiently large governments.

Foreign ownership and productivity dynamics

In analyzing the distinctive contribution of foreign subsidiaries anddomestic firms to productivity growth in aggregate Belgian manufacturing,this paper shows that foreign ownership is an important source of firmheterogeneity affecting productivity dynamics. Foreign firms havecontributed disproportionately large to aggregate productivity growth,but more importantly reallocation processes differ significantly betweenthe groups of foreign subsidiaries and domestic firms.

Monetary policy and exchange rate volatility in a small open economy

We lay out a small open economy version of the Calvo sticky price model, and show how the equilibrium dynamics can be reduced to simple representation in domestic inflation and the output gap. We use the resulting framework to analyze the macroeconomic implications of three alternative rule-based policy regimes for the small open economy: domestic inflation and CPI-based Taylor rules, and an exchange rate peg. We show that a key difference amongthese regimes lies in the relative amount of exchange rate volatility that they entail. We also discuss a special case for which domestic inflation targeting constitutes the optimal policy, and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules.

The structural dynamics of output growth and inflation: some international evidence

We examine the dynamics of output growth and inflation in the US, Euro area and UK using a structural time varying coefficient VAR. There are important similarities in structural inflation dynamics across countries; output growth dynamics differ. Swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks. Changes over time in the structure of the economy are limited and permanent variations largely absent. Changes in the volatilities of structural shocks matter.

On the timing of balance of payments crises: Disaggregated information and interest rate policy

This paper proposes a dynamic framework to study the timing of balance of paymentscrises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be eective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

Trade, extent of the market and economic growth 1960-1996

We find that trade and domestic market size are robust determinants of economic growth overthe 1960-1996 period when trade openness is measured as the US dollar value of imports andexports relative to GDP in PPP US$ ('real openness'). When trade openness is measured asthe US dollar value of imports and exports relative to GDP in exchange rate US$ ('nominalopenness') however, trade and the size of domestic markets are often non-robust determinantsof growth. We argue that real openness is the more appropriate measure of trade and that ourempirical results should be seen as evidence in favor of the extent-of-the-market hypothesis.

Productivity growth and the exchange rate regime: The role of financial development

This paper offers empirical evidence that a country's choice of exchange rate regime can have a signifficant impact on its medium-term rate of productivity growth. Moreover, the impact depends critically on the country's level of financial development, its degree of market regulation, and its distance from the global technology frontier. We illustrate how each of these channels may operate in a simple stylized growth model in which real exchange rate uncertainty exacerbates the negative investment e¤ects of domestic credit market constraints. The empirical analysis is based on an 83 country data set spanning the years 1960-2000. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.

Gross capital flows: Dynamics and crises

This paper analyzes the behavior of international capital flows by foreign and domestic agents,dubbed gross capital flows, over the business cycle and during financial crises. We show thatgross capital flows are very large and volatile, especially relative to net capital flows. Whenforeigners invest in a country, domestic agents invest abroad, and vice versa. Gross capital flowsare also pro-cyclical. During expansions, foreigners invest more domestically and domesticagents invest more abroad. During crises, total gross flows collapse and there is a retrenchmentin both inflows by foreigners and outflows by domestic agents. These patterns hold for differenttypes of capital flows and crises. This evidence sheds light on the sources of fluctuations drivingcapital flows and helps discriminate among existing theories. Our findings seem consistent withcrises affecting domestic and foreign agents asymmetrically, as would be the case under thepresence of sovereign risk or asymmetric information.

International capital flows and credit market imperfections: A tale of two frictions

The financial crisis of 2007-08 has underscored the importance of adverse selection in financialmarkets. This friction has been mostly neglected by macroeconomic models of financialimperfections, however, which have focused almost exclusively on the effects of limited pledgeability.In this paper, we fill this gap by developing a standard growth model with adverseselection. Our main results are that, by fostering unproductive investment, adverse selection:(i) leads to an increase in the economy s equilibrium interest rate, and; (ii) it generates a negativewedge between the marginal return to investment and the equilibrium interest rate. Underfinancial integration, we show how this translates into excessive capital inflows and endogenouscycles. We also extend our model to the more general case in which adverse selection and limitedpledgeability coexist. We conclude that both frictions complement one another and show thatlimited pledgeability exacerbates the effects of adverse selection.

Employment protection, international specialization and innovation

We develop a model to analyse the implications of firing costs on incentivesfor R&D and international specialization. The Key idea is paying the firingcost, the country with a rigid labor market will tend to produce relativelysecure goods, at a late stage of their product life cycle.Under international trade, an international product cycle emerges where,roughly, new goods are first produced in the low firing cost country willspecialize in 'secondary innovations', that is, improvements in existinggoods, while the low firing cost country will more specialize in 'primaryinnovation', that is, invention of new goods.

Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects

In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and lowspreads. Then the financial crisis erupted and pushed them into deep recessions, raising theirdeficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and,surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocatedfrom the private to the public sectors, reducing investment and deepening the recessions evenfurther. To account for these facts, we propose a simple model of sovereign risk in which debtcan be traded in secondary markets. The model has two key ingredients: creditor discriminationand crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereigndebt offers a higher expected return to domestic creditors than to foreign ones. This providesincentives for domestic purchases of debt. Crowding-out effects arise because private borrowingis limited by financial frictions. This implies that domestic debt purchases displace productiveinvestment. The model shows that these purchases reduce growth and welfare, and may lead toself-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countriesin the Eurozone, and how they may be addressed by policies at the European level.