The emergence of biofuels and the co-movement between crude oil and agricultural prices

Biofuels are becoming an alternative to non-renewable energy sources but we know little about the economic mechanisms influencing their prices. This paper studies the interrelationships between the spot prices of oil and those of agricultural commodities used as biofuel feedstocks. Using daily data since 1988, we identify a co-movement after 2005 that does not appear for other food-related commodities and is not due to general economic variables. We also find traces of the co-movement in the prices of a large biofuel stock. The results amount to the first systematic piece of empirical evidence linking spot oil and agricultural markets via the emergence of biofuels.

Poor, Hungry and Stupid: Numeracy and the Impact of High Food Prices in Industrializing Britain, 1780-1850

This paper argues that low levels of nutrition impaired cognitive development in industrializing England, and that welfare transfers mitigated the adverse effects of high food prices. Age heaping is used as an indicator of numeracy, as derived from census data. For the cohorts from 1780-1850, we analyse the effect of high grain prices during the Napoleonic Wars. We show that numeracy declined markedly for those born during the war years, especially when wheat was dear. Crucially, where the Old Poor Law provided for generous relief payments, the adverse impact of high prices for foodstuffs was mitigated. Finally, we show some tentative evidence that Englishmen born in areas with low income support selected into occupations with lower cognitive requirements.

Financial Crises and International Portfolio Dynamics

This paper analyzes the behavior of international capital flows by foreigners and domestic agents, especially during financial crises. We show that gross capital flows by foreigners and domestic agents are very large and volatile, especially relative to net capital flows. This is because when foreigners invest in a country domestic agents tend to invest abroad and vice versa. Gross capital flows are also pro-cyclical. During expansions, foreigners tend to bring in more capital and domestic agents tend to invest more abroad. During crises, there is retrenchment, i.e. a reduction in capital inflows by foreigners and an increase in capital inflows by domestic agents. This is especially true during severe crises and during systemic crises. The evidence can shed light on the nature of shocks driving international capital flows. It seems to favor shocks that affect foreigners and domestic agents asymmetrically -e.g. sovereign risk and asymmetric information- over productivity shocks.

Employment Protection, International Specialization, and Innovation

We develop a model to analyse the implications of firing costs on incentives for R&D and international specialization. The Key idea is paying the firing cost, the country with a rigid labor market will tend to produce relatively secure 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 will specialize in 'secondary innovations', that is, improvements in existing goods, while the low firing cost country will more specialize in 'primary innovation', that is, invention of new goods.

Monetary policy with signal extraction from the bond market

Monetary policy is conducted in an environment of uncertainty. This paper sets upa model where the central bank uses real-time data from the bond market togetherwith standard macroeconomic indicators to estimate the current state of theeconomy more efficiently, while taking into account that its own actions influencewhat it observes. The timeliness of bond market data allows for quicker responsesof monetary policy to disturbances compared to the case when the central bankhas to rely solely on collected aggregate data. The information content of theterm structure creates a link between the bond market and the macroeconomythat is novel to the literature. To quantify the importance of the bond market asa source of information, the model is estimated on data for the United Statesand Australia using Bayesian methods. The empirical exercise suggests that thereis some information in the US term structure that helps the Federal Reserve toidentify shocks to the economy on a timely basis. Australian bond prices seemto be less informative than their US counterparts, perhaps because Australia is arelatively small and open economy.

International business cycles, financial markets and household production

This paper investigates the properties of an international real business cycle model with household production. We show that a model with disturbances to both market and household technologies reproduces the main regularities of the data and improves existing models in matching international consumption, investment and output correlations without irrealistic assumptions on the structure of international financial markets. Sensitivity analysis shows the robustness of the results to alternative specifications of the stochastic processes for the disturbances and to variations of unmeasured parameters within a reasonable range.

Speculation, risk premia and expectations in the yield curve

An affine asset pricing model in which traders have rational but heterogeneous expectations aboutfuture asset prices is developed. We use the framework to analyze the term structure of interestrates and to perform a novel three-way decomposition of bond yields into (i) average expectationsabout short rates (ii) common risk premia and (iii) a speculative component due to heterogeneousexpectations about the resale value of a bond. The speculative term is orthogonal to public informationin real time and therefore statistically distinct from common risk premia. Empirically wefind that the speculative component is quantitatively important accounting for up to a percentagepoint of yields, even in the low yield environment of the last decade. Furthermore, allowing for aspeculative component in bond yields results in estimates of historical risk premia that are morevolatile than suggested by standard Affine Gaussian term structure models which our frameworknests.

Productivity and the welfare of nations

We show that the welfare of a representative consumer can be related to observable aggregatedata. To a first order, the change in welfare is summarized by (the present value of) the Solowproductivity residual and by the growth rate of the capital stock per capita. We also show thatproductivity and the capital stock suffice to calculate differences in welfare across countries, withboth variables computed as log level deviations from a reference country. These results hold forarbitrary production technology, regardless of the degree of product market competition, and applyto open economies as well if TFP is constructed using absorption rather than GDP as the measureof output. They require that TFP be constructed using prices and quantities as perceived byconsumers. Thus, factor shares need to be calculated using after-tax wages and rental rates, andwill typically sum to less than one. We apply these results to calculate welfare gaps and growthrates in a sample of developed countries for which high-quality TFP and capital data are available.We find that under realistic scenarios the United Kingdom and Spain had the highest growth ratesof welfare over our sample period of 1985-2005, but the United States had the highest level ofwelfare.

Entry regulation and intersectoral reallocation

We study how restrictions on firm entry affect intersectoral factor reallocation when openeconomies experience global economic shocks. In our theoretical framework, countries trade freelyin a range of differentiated sectors that are subject to country-specific and global shocks. Entryrestrictions are modeled as an upper bound on the introduction of new differentiated goods followingshocks. Prices and quantities adjust to clear international goods markets, and wages adjustto clear national labor markets. We show that in general equilibrium, countries with tighter entryrestrictions see less factor reallocation compared to the frictionless benchmark. In our empiricalwork, we compare sectoral employment reallocation across countries in the 1980s and 1990s withproxies for frictionless benchmark reallocation. Our results indicate that the gap between actualand frictionless reallocation is greater in countries where it takes longer to start a firm.

Oil price shocks, income and democracy

We examine the effect of oil price fluctuations ondemocratic institutions over the 1960-2007 period. We also exploitthe very persistent response of income to oil price fluctuations tostudy the effect of persistent (oil price-driven) income shocks ondemocracy. Our results indicate that countries with greater net oilexports over GDP see improvements in democratic institutionsfollowing upturns in international oil prices. We estimate that a 1percentage point increase in per capita GDP growth due to apositive oil price shock increases the Polity democracy score byaround 0.2 percentage points on impact and by around 2 percentagepoints in the long run. The effect on the probability of a democratictransition is around 0.4 percentage points.

Determining underlying macroeconomic fundamentals during emerging market crises: Are conditions as bad as they seem?

Emerging market crises are characterized by large swings in both macroeconomic fundamentalsand asset prices. The economic significance of observed movements in macroeconomicvariables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of effective fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).

Research joint ventures in an international economy

D'Aspremont and Jacquemin's (1988) model is extended to studyalternative configurations of research agreements in a two--country integratedworld economy. Under unambiguous conditions on spillovers we show that:1) Allowing national firms to cooperate in R\&D confers them an advantageover foreign rivals, an effect similar to R\&D subsidies. 2) In a policygame, each government would allow national cooperative agreements. 3) Contraryto other trade policies which lead to a ``prisoners' dilemma'' result,welfare in both countries increases when they both allow R\&D cooperation.4) Welfare is even higher if a generalized (international) coalition isformed.

On the impact of leverage constraints on asset prices and trading volume

Researchers have used stylized facts on asset prices and trading volumein stock markets (in particular, the mean reversion of asset returnsand the correlations between trading volume, price changes and pricelevels) to support theories where agents are not rational expected utilitymaximizers. This paper shows that this empirical evidence is in factconsistent with a standard infite horizon perfect information expectedutility economy where some agents face leverage constraints similar tothose found in todays financial markets. In addition, and in sharpcontrast to the theories above, we explain some qualitative differencesthat are observed in the price-volume relation on stock and on futuresmarkets. We consider a continuous-time economy where agents maximize theintegral of their discounted utility from consumption under both budgetand leverage con-straints. Building on the work by Vila and Zariphopoulou(1997), we find a closed form solution, up to a negative constant, for theequilibrium prices and demands in the region of the state space where theconstraint is non-binding. We show that, at the equilibrium, stock holdingsvolatility as well as its ratio to stock price volatility are increasingfunctions of the stock price and interpret this finding in terms of theprice-volume relation.

International consumption risk sharing

This paper formally examines the implications of international consumptionrisk sharing for a panel of industrialized countries. We theoretically derivethe international consumption insurance proposition in a simple setup and showhow it should be modified in more complicated models. We empirically analyzethe implications of the theory for pairs of countries across frequencies of thespectrum and find that aggregate domestic consumption is almost completelyinsured against idiosyncratic real, demographic, fiscal and monetary shocksover short cycles, but that it covaries with these variables over medium andlong cycles. The cross equation restrictions imposed by the theory are, ingeneral, rejected. The policy implications of the results are discussed.

Geographical effects on the accuracy of textile trade data:an international approach for 1913

Foreign trade statistics are the main data source to the study of international trade.However its accuracy has been under suspicion since Morgernstern published hisfamous work in 1963. Federico and Tena (1991) have resumed the question arguing thatthey can be useful in an adequate level of aggregation. But the geographical assignmentproblem remains unsolved. This article focuses on the spatial variable through theanalysis of the reliability of textile international data for 1913. A geographical biasarises between export and import series, but because of its quantitative importance it canbe negligible in an international scale.