GEI Working Paper Abstracts

Working papers produced by the research projects in the Global Economic Institutions Programme have begun to appear. They are available for £4/$8 each from: Subscriptions Officer, Centre for Economic Policy Research, 90-98 Goswell Road, London EC1V 7RR, UK.

Papers: [1-5] | [6-10] | [11-15] | [16-20] | [21-25] | [26-30] | [31-35] | [36-45]

[46-47]

Working Paper No. 36

Konstantine Gatsios and Peter Holmes

August 1997

In recent years more attention has been paid to the extent to which various form of domestic regulatory policies could, deliberately or inadvertently, constitute barriers to trade

Producer interests often demand trade measures to force harmonisation on trading partners. Economists on the other hand argue that differences in national rules and regulations are just one factor which determine comparative advantage and many writers have argued that ‘regulatory competition’ is positively beneficial as a way of selecting the best norms, and cite the writings of Tiebout in support of this claim.

Regulatory competition can be defined as the process where regulators deliberately set out to provide a more favourable regulatory environment, in order either to promote the competitiveness of domestic industries or to attract more business activity from abroad. The setting of national regulations in response to the actual or expected impact on internationally mobile goods, services or factors on national economic activity may lead to a form of arbitrage by economic actors across the various market opportunities.

Critics claim that it can lead to a ‘race to the bottom’ in national standards. Here we argue that the ‘Tiebout Theorem’ is in fact wholly inapplicable to regulatory competition and we conclude that regulatory competition is neither as beneficial as its advocates say nor as harmful as critics maintain.

Gatsios is Professor of Economics at Athens University of Economics and Business. Contact: Athens University of Economics and Business, 76 Patisson St, Athens 104-34, Greece, email: gatsios@aueb.gr. Holmes is Jean Monnet Reader in European Integration at the School of European Studies, University of Sussex. Contact: School of European Studies, University of Sussex, Brighton, BN1 9QN, UK, tel: (44 1273) 606755, email: p.holmes@sussex.ac.uk 

Myrvin Anthony and Ronald MacDonald

March 1998

One key prediction of the target zone model is that the exchange rate should be mean-reverting within the band. In this paper we investigate this prediction by examining the time series characteristics of seven currencies participating in the Exchange Rate Mechanism of the European Monetary System, both immediately before and after the introduction of wide exchange rate bands in 1993. Using standard univariate unit root tests we find some evidence of mean reversion, and this is much more pronounced using variance ratio test statistics. It turns out that such mean-reversion is as strong for the wide band ERM as for the narrow band ERM.

Anthony is lecturer in Economics at University of Strathclyde. Contact: Department of Economics, University of Strathclyde, Glasgow, G4 0LN, UK, tel: (44 141) 548 3854. MacDonald is Professor of International Macroeconomics at University of Strathclyde. MacDonald co-directs two GEI projects ‘Unexplained Relationships in Three Regimes of the International Monetary System’ and Optimal International Regimes and Global Economic Institutions’. Contact: Department of Economics, University of Strathclyde, Glasgow, G4 0LN, UK, tel: (44 141) 548 3861.

Guglielmo Maria Caporale, Michael Chui, Stephen Hall and Brian Henry

March 1998

This paper outlines a new methodology for the study of international coordination, which builds on two seperate approaches previously used in the literature: optimal simple rules, and game theoretic analysis. This new approach is illustrated by using the example of a changed target for the debt-income ratio in the G-3. The results suggest that there are few policy externalities when only fiscal policy is coordinated, whilst coordination of both fiscal and monetary policy results in substantial externalities and welfare improvements. Our findings reflect the fact that, unlike earlier studies, we focus on the strategic interaction between (domestic) policy makers, as well as the standard exchange rate and interest rate transmission mechanisms.

Caporale is Senior Research Fellow at the Centre for Economic Forecasting, London Business School. Contact: Centre for Economic Forecasting, London Business School, Sussex Place, Regents Park, London, NW1 4SA, UK, tel: (44 20) 7262 5050. Michael Chui is Research Officer at the Centre for Economic Forecasting, London Business School. Contact: Centre for Economic Forecasting, London Business School, Sussex Place, Regents Park, London, NW1 4SA, UK, tel: (44 20) 7262 5050. Stephen Hall is Professor of Economics at the Mangement School, Imperial College. Contact: The Mangement School, Imperial College, 53 Princes Gate, Exhibition Road, London, SW7 2FG, UK, tel: (44 20) 7594 9120. Brian Henry is Director at the Centre for Economic Forecasting, London Business School. Contact: Centre for Economic Forecasting, London Business School, Sussex Place, Regents Park, London, NW1 4SA, UK, tel: (44 20) 7262 5050.

Guglielmo Maria Caporale, Michael Chui, Stephen Hall and Brian Henry

March 1998

A new model of the G-3 is introduced which has a tansparent structure including a simple but analytically tractable side. Extensive policy experiments are conducted on this multicountry model including full Nash solutions and a fully cooperative solution. In the case of a fiscal shock originating in the US we find evidence of significant spillovers to other countries, which can only be amelioated in the fully cooperative regime.

Alessandro Rebucci

March 1998

This paper assesses the role of external and policy factors for growth. The mean group estimator is used to estimate a vector autoregressive system (VAR) on a panel data set of eighteen developing countries. The main findings are that (i) temporary external shocks are an important determinant of medium to long run growth (ii) countries characterized by higher macroeconomic instability are more vulnerable to external shocks than others and (iii) larger effects of external shocks on growth are associated with larger deviations of policy targets from equilibrium in response to these shocks. This evidence is supportive of the conventional view that macroeconomic stability is conducive to growth, and casts doubt on the idea that the growth process might be largely exogenous.

Rebucci is a Ph.D. student in the Economics Department, Queen Mary and Westfield College. Contact: Department of Economics, Queen Mary and Westfield College, Mile End Road, London, E1 4NS, UK, tel: (44 20) 7775 3091, email: a.rebucci@qmw.ac.uk.

Guglielmo Maria Caporale, Michael Chui, Stephen Hall and Brian Henry

June 1998

This paper outlines a new technique which makes optimal control computationally feasible. The new approach is then used to evaluate gains to policy coordination in the context of a macroeconomic model for the G-3. More specifically, we consider policy responses to a temporary price shock in a single country and in multi-country cases. The results show that coordination brings about a striking improvement in the overall control of inflation and a reduction in output costs.

Caporale is Senior Research Fellow at the Centre for Economic Forecasting, London Business School. Contact: Centre for Economic Forecasting, London Business School, Sussex Place, Regents Park, London, NW1 4SA, tel: (44 20) 7262 5050. Michael Chui is Research Officer at the Centre for Economic Forecasting, London Business School. Stephen Hall is Professor of Economics at the Management School, Imperial College. Contact: The Management School, Imperial College, 53 Princes Gate, Exhibition Road, London, SW7 2FG, UK, tel: (44 20) 7594 9120. Brian Henry is Director at the Centre for Economic Forecasting, London Business School.

C Paul Hallwood, Ronald MacDonald and Ian W Marsh

June 1998

This paper investigates dollar-sterling exchange rate expectations during the period 1890-1908. It is shown that the dollar faced a "Peso problem" in that for much of the period financial markets expected it to depreciate against sterling, but this never in fact happened – i.e. expectations were persistently biased. To demonstrate this statistical and econometric techniques are used. Drawing on the economic history of the period eleven "events" are identified which probably gave rise to realignment expectations. Once the dollar’s adherence to the gold standard was settled as a political matter in the 1896 Presidential Election expectations of dollar realignment abruptly subsided and United States interest rates fell relative to British rates.

MacDonald is Professor of International Macroeconomics at University of Strathclyde. MacDonald co-directs two GEI projects "Unexplained Relationships in Three Regimes of the International Monetary System" and "Optimal International Regimes and global Economic Institutions". Contact: Department of Economics, University of Strathclyde, Glasgow, G4 0LN, UK, tel: (44 141) 548 3861.

Peter Sinclair and David Vines

November 1998

Starting with a world where all countries apply Nash-optimal tariffs against all imports, this paper asks when, if ever, a group of countries can gain by trading freely ("promise") and when, if ever, it pays an outsider to join them ("attractiveness"). The free trade club is promising if enough join, but it cannot be attractive. If the club, instead, abolishes internal tariffs and reduces tariffs on imports from non-members, it can be attractive, and will be promising if it is attractive. The results are then modified to incorporate cronyism (policies to enhance the rent of a domestic firm at the expense of other domestic agents). Although a trade-liberalizing club stands to gain more from cutting tariffs on a true welfare basis, because cronyism implies higher tariffs, the distorted measure of welfare implied by cronyism may well register a fall, and especially when the club is large.

Peter Sinclair is Professor of Economics at Birmingham University. Contact: Department of Economics, University of Birmingham, Edgbaston, Birmingham, B15 2TT, tel: (44 121) 414 6641/6742, fax: (44 121) 414 7377, email: P.J.N.Sinclair@bham.ac.uk. David Vines is Director of the GEI Research Programme. He is Fellow of Economics at Balliol College Oxford, Adjunct Professor of Economics at the Australian National University, and Research Fellow at CEPR. Contact: Institute of Economics and Statistics, Manor Road, Oxford OX1 3UL, tel: (44 1865) 271067/271090, fax: (44 1865) 271094, email: david.vines@economics.ox.ac.uk

Jan Aart Scholte

November 1998

Although the International Monetary Fund maintains the great majority of its contacts with member states, the institution has, especially since the late 1980s, also developed relationships with civil society. In this way business associations, trade unions, religious bodies, non-governmental organisations and other civic groups have come to make direct inputs to the policy process of the IMF. This paper examines relations between the Fund and civil society by: (a) surveying the range of contacts that have developed; (b) identifying the various aims that the IMF and civic associations have pursued vis-à-vis each other; (c) describing the strategies and tactics that the parties have employed in their interactions; (d) assessing the impacts that civil society has had on both the substantive policies and the operating procedures of the IMF; (e) noting and accounting for certain major limitations in IMF-civil society relations; and (f) suggesting several reforms which could enhance the contributions of these relationships to more effective and democratic global economic governance.

Jan Aart Scholte is Senior Lecturer in International Studies at the Institute of Social Studies, the Netherlands. Contact: Institute of Social Studies, PO Box 29776, 2502 LT The Hague, tel: (31 70) 426 0615, email: scholte@iss.nl

Jenny Corbett and David Vines

October 1998

This paper presents an analytical framework for understanding the Asian crises. We argue that vulnerability was created by the boom and bust incurred under pegged exchange rates, and by liberalisation in the presence of a bank-based financial regime which implied implicit promises of bail-out. These vulnerabilities were interconnected. Negative shocks precipitated both currency devaluation and financial crisis, the latter of which created obligations for the government to bail out the financial sector. The critical feature which led to collapse was - we argue - the fact that currency depreciation led to a worsening of the financial crisis, due to massive unhedged borrowing in foreign currency, to which the fixed exchange rate regime had led. Financial collapse resulted when the currency devaluation was sufficiently large that those who had lent to the financial system came to believe that the government guarantees to it could not be honoured. This in turn triggered fears of sovereign insolvency, which turned currency depreciation into currency collapse. A final two sections discuss the implications of this analysis for crisis-resolution policy.

Jenny Corbett is Fellow in Economics at St Antony’s College, Oxford and a Research Fellow at CEPR. Contact: Nissan Institute of Japanese Studies, University of Oxford, 27 Winchester Road, Oxford OX2 6NA, tel: (44 1865) 274575, email: jenny.corbett@nissan.oxford.ac.uk. See Working Paper no. 44 for David Vines’ contact details.