Start-up costs and pecuniary externalities as barriers to economic development

We use a dynamic monopolistic competition model to show that an economythat inherits a small range of specialized inputs can be trapped into alower stage of development. The limited availability of specialized inputsforces the final goods producers to use a labor intensive technology, whichin turn implies a small inducement to introduce new intermediate inputs. Thestart--up costs, which make the intermediate inputs producers subject todynamic increasing returns, and pecuniary externalities that result from thefactor substitution in the final goods sector, play essential roles in themodel.

Bubbly collateral and economic activity

This paper develops a model of the bubbly economy and uses it to study the effects of bailoutpolicies. In the bubbly economy, weak enforcement institutions do not allow firms to pledge futurerevenues to their creditors. As a result, "fundamental" collateral is scarce and this impairs the intermediationprocess that transforms savings into capital. To overcome this shortage of "fundamental"collateral, the bubbly economy creates "bubbly" collateral. This additional collateral supports anintricate array of intra- and inter-generational transfers that allow savings to be transformed intocapital and bubbles. Swings in investor sentiment lead to fluctuations in the amount of bubblycollateral, giving rise to bubbly business cycles with very rich and complex dynamics.Bailout policies can affect these dynamics in a variety of ways. Expected bailouts provideadditional collateral and expand investment and the capital stock. Realized bailouts reduce thesupply of funds and contract investment and the capital stock. Thus, bailout policies tend to fosterinvestment and growth in normal times, but to depress investment and growth during crisis periods.We show how to design bailout policies that maximize various policy objectives.

Measuring time-varying economic fears with consumption-based stochastic discount factors

This paper analyzes empirically the volatility of consumption-based stochastic discount factors as a measure of implicit economic fears by studying its relationship with future economic and stock market cycles. Time-varying economic fears seem to be well captured by the volatility of stochastic discount factors. In particular, the volatility of recursive utility-based stochastic discount factor with contemporaneous growth explains between 9 and 34 percent of future changes in industrial production at short and long horizons respectively. They also explain ex-ante uncertainty and risk aversion. However, future stock market cycles are better explained by a similar stochastic discount factor with long-run consumption growth. This specification of the stochastic discount factor presents higher volatility and lower pricing errors than the specification with contemporaneous consumption growth.

Catalan government popularity. An example of economic effects on sub-national government support

The aim of this essay is to deal with economic voting in contexts ofmultilevel governance and to be a contribution to the debate on attribution of responsibilities in popularity functions literature. We use aggregate and individual data from Catalonia in order to analyse the relation between the state of the economy and the support for a sub-state government. The empirical analysis shows that the responsibility hypothesis works in regional governments without explicit macroeconomic competencies. We have also considered the evaluations of government performance on certain specific policies in order to clarify and determine the factors that drive Catalan government support. The article considers the implications of the findings for future attempts to model party support in a context of the European Union.

Determinants of economic growth: Will data tell?

Many factors inhibiting and facilitating economic growth havebeen suggested. Can agnostics rely on international incomedata to tell them which matter? We find that agnostic priorslead to conclusions that are sensitive to differences acrossavailable income estimates. For example, the PWT 6.2 revisionof the 1960-96 income estimates in the PWT 6.1 leads tosubstantial changes regarding the role of government,international trade, demography, and geography. We concludethat margins of error in international income estimates appeartoo large for agnostic growth empirics.

Economic growth and investment in the Arab world

This paper analyses the economic growth performance in the Arab world overthe last forty years. The Arab world has managed to reduce povertyperformance despite its relatively disappointing growth performance. Werelate this poor performance of both oil and non-oil producers toinvestment. Contrary to widespread belief, we do not find evidence that lowquantity of investment is the main of low growth. The decline in theinvestment rate followed rather than preceded the reduction in the aggregategrowth rate. We conclude that the low quality of investment projects is thekey determinant of growth. The excessive reliance on public investment, thelow quality of financial institutions, the bad business environment (due topolitical and social instability and to excessive public intervention andoverregulation) and the low quality of human capital are importantdeterminants of systematically unproductive investment decisions and, thus,low economic growth.

Modern energy consumption and economic modernisation in Latin America and the Caribbean between 1890 and 1925

In the absence of comparable macroeconomic indicators for most of the Latin Americaneconomies before the 1930s, the apparent consumption of energy is used in this paper as a proxyof the degree of modernisation of Latin America and the Caribbean. This paper presents anestimate of the apparent consumption per head of modern energies (coal, petroleum andhydroelectricity) for 30 countries of Latin American and the Caribbean for 1890 to 1925,multiplying the number of countries for which energy consumption estimates were previouslyavailable. As a result, the paper provides the basis for a quantitative comparative analysis ofmodernisation performance beyond the few countries for which historical national accounts areavailable in Latin America.

Banks, liquidity crises and economic growth

How do the liquidity functions of banks affect investment and growth at different stages ofeconomic development? How do financial fragility and the costs of banking crises evolve with the level of wealth of countries? We analyze these issues using an overlapping generations growth model where agents, who experience idiosyncratic liquidity shocks, can invest in a liquid storage technology or in a partially illiquid Cobb Douglas technology. By pooling liquidity risk, banks play a growth enhancing role in reducing inefficient liquidation of long term projects, but they may face liquidity crises associated with severe output losses. We show that middle income economies may find optimal to be exposed to liquidity crises, while poor and rich economies have more incentives to develop a fully covered banking system. Therefore, middle income economies could experience banking crises in the process of their development and, as they get richer, they eventually converge to a financially safe long run steady state. Finally, the model replicates the empirical fact of higher costs of banking crises for middle income economies.

Economic rationality and ethical behavior

This paper argues that economic rationality and ethical behavior cannotbe reduced one to the other, casting doubts on the validity of formulaslike 'profit is ethical' or 'ethics pays'. In order to express ethicaldilemmas as opposing economic interest with ethical concerns, we proposea model of rational behavior that combines these two irreducible dimensions in an open but not arbitrary manner. Behaviors that are neither ethicalnor profitable are considered irrational (non-arbitrariness). However,behaviors that are profitable but unethical, and behaviors that are ethicalbut not profitable, are all treated as rational (openness). Combiningethical concerns with economic interest, ethical business is in turn anoptimal form of rationality between venality and sacrifice.Because every one prefers to communicate that he acts ethically, ethicalbusiness remains ambiguous until some economic interest is actuallysacrificed. We argue however that ethical business has an interest indemonstrating its consistency between communication and behavior by atransparent attitude. On the other hand, venal behaviors must remainconfidential to hide the corresponding lack of consistency. Thisdiscursive approach based on transparency and confidentiality helpsto further distinguish between ethical and unethical business behaviors.

The economic tragedy of the XXth Century: Growth in Africa

The dismal growth performance of Africa is the worst economic tragedy ofthe XXth century. We document the evolution of per capita GDP for thecontinent as a whole and for subset of countries south of the Saharadesert. We document the worsening of various income inequality indexesand we estimate poverty rates and headcounts. We then analyze some ofthe central robust determinants of economic growth reported bySala-i-Martin, Doppelhofer and Miller (2003) and project the annual growthrates Africa would have enjoyed if these key determinants had taken OECDrather than African values. Expensive investment goods, low levels ofeducation, poor health, adverse geography, closed economies, too muchpublic expenditure and too many military conflicts are seen as keyexplanations of the economic tragedy.

Economic booms, trade deficits and economic policy

Many economic booms have been accompanied by realexchange rate appreciations, large trade defcits -whichhave sometimes persisted after the return to the initialexchange rate parity- and a deteriorating traded sector.Those circumstances have typically raised the questionof the de-sirability of some stabilization policy. We show that the dynamics induced by an expectedproductivity shock in an economy where the capital stockis non-mobile across sectors, match those circumstances.Furthermore, we obtain that credit market imperfectionstend to exacerbate trade deficits, and to cause aninefficient capacity reduction in the traded sector.Some stabilization policies are explored.

An economic theory of church strictness

This paper makes several contributions to the growing literatureon the economics of religion. First, we explicitly introduce spatial-location models into the economics of religion. Second, we offer a newexplanation for the observed tendency of state (monopoly) churches tolocate toward the "low-tension" end of the "strictness continuum" (ina one-dimensional product space): This result is obtained through theconjunction of "benevolent preferences" (denominations care about theaggregate utility of members) and asymmetric costs of going to a moreor less strict church than one prefers.We also derive implications regarding the relationship between religiousstrictness and membership. The driving forces of our analysis, religiousmarket interactions and asymmetric costs of membership, high-light newexplanations for some well-established stylized facts. The analysis opensthe way to new empirical tests, aimed at confronting the implications ofour model against more traditional explanations.

Economic integration and corruption: The corrupt soul of the European Union

We study the link between corruption and economic integration. We show that if an economic union establishes a common regulation for public procurement, the country more prone to corruption benefits more from integration. However, if the propensities to corruption are too distinct, the less corrupt country will not be willing to join the union. This difference in corruption propensities can be offset by a difference in efficiency. We also show that corruption is lower if integration occurs. A panel data analysis for the European Union confirms that more corrupt countries are more favorable towards integration but less acceptable as potential new members.