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81. Constructing Quality: Producer Power, Market Organization, and the Politics of High Value-Added Markets.

Author:
Elizabeth Carter
Publication Date:
12-2015
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Economists assume increased producer flexibility creates production advantages. So why do inefficient French quality wine producers dominate their flexible, efficient Italian counterparts? French AOC wine producers created “corporatist” producer organizations which served three purposes: encouraged increased product quality information across the supply chain; allowed for the emergence of a unique production style; and enabled producers to define their production methods as “quality” via state regulation. Italian DOC wine producers have fragmented political structures at both the regional and national levels, causing producers to rely more on the price mechanism and less on political structures to coordinate supply chain transactions. Market asymmetries persist across the supply chain, making it difficult for producers to guarantee quality and adversely shaping their potential production and brand strategies. Solving supply chain problems through representative political institutions yields superior economic outcomes than uncoordinated market transactions because the former corrects market power asymmetries.
Topic:
Economics, International Trade and Finance, Markets, Politics, and Regulation
Political Geography:
France, Italy, and Global Focus

82. On the Desirability of Nominal GDP Targeting

Author:
Julio Garin, Robert Lester, and Eric Sims
Publication Date:
08-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
Topic:
Economics, Human Welfare, Markets, and GDP
Political Geography:
Global Focus

83. The Supply of Transaction Assets, Nominal Income, and Monetary Policy Transmission

Author:
Joshua R. Hendrickson and David Beckworth
Publication Date:
06-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
Over the last few years, the Federal Reserve has conducted a series of large scale asset purchases. Given the Federal Reserve’s dual mandate, the objective of this policy has been to generate an increase in real economic activity while maintaining a low, stable rate of inflation. The effectiveness of large scale asset purchases and the ability of the central bank to achieve a particular target has been subject to debate. The monetary transmission mechanism is of primary importance for understanding the effects of both the recent large scale asset purchases and of monetary policy more generally. The purpose of this paper is to propose a monetary transmission mechanism and to present empirical support for this mechanism. In particular, this paper suggests that monetary policy is transmitted through changes in the growth rate of transaction assets through both a direct and indirect effect. First, an increase in the growth rate of the monetary base, whether through lump sum transfers or open market operations, generates a real balance effect that increases real economic activity. Second, the indirect effect is through bank lending. Since bank loans are often a function of nominal income, expansionary monetary policy increases bank lending. Since economics agents are forward-looking and the the effects of monetary policy are persistent, monetary policy is transmitted through the expected future time path of the growth of transaction assets and nominal income. This characteristic is especially important in light of the policy recommendations of Sumner (2011, 2012) and Woodford (2012), in which the central bank attaches an explicit target for the level of nominal income to large-scale asset purchases.1
Topic:
Economics, Markets, Monetary Policy, and Federal Reserve
Political Geography:
Global Focus

84. International Developments in the Insurance Sector: The Road to Financial Instability?

Author:
Therese M. Vaughan and Mark A. Calabria
Publication Date:
05-2015
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
International activity related to the regulation and supervision of financial services has exploded since the global financial crisis. The crisis exposed weaknesses in the structure for regulating internationally active banks, and motivated a number of work streams aimed at strengthening standards (most notably, significant revisions to the Basel capital standard for internationally active banks, now known as Basel III). The insurance sector was also stressed by the meltdown in financial markets that occurred in 2007-2008, albeit far less than the banking sector, and, with the exception of AIG, it is generally recognized that insurers played little role in the financial crisis, and that traditional insurance activities do not pose a systemic risk to the financial system.1,2 Nonetheless, the insurance sector has also been targeted for a new stream of regulatory initiatives at the international level. The most important organizations with respect to these activities are the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB), both based in Basel, Switzerland. The purpose of this paper is to review these developments and to highlight potential concerns for U.S. insurance markets.
Topic:
Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
Global Focus

85. Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks

Author:
William R. Cline
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm does not depend on its capital structure (ratio of equity finance to debt finance), because any reduction in capital cost from switching to higher leverage using lower-cost debt is exactly offset by an induced increase in the unit cost of higher-cost equity capital as a consequence of the associated rise in risk. Statistical tests for large US banks in 2002–13 find that less than half of this M&M offset attains in practice. Higher capital requirements would thus impose increases in lending costs, with associated output costs from lower capital formation. These costs to the economy would need to be compared with benefits from lower risk of banking crises to arrive at optimal levels of capital requirements.
Topic:
Economics, International Trade and Finance, Markets, Politics, and Budget
Political Geography:
Global Focus

86. Global Patent Pledges: A Collaborative Mechanism for Climate Change Technology

Author:
Bassem Awad
Publication Date:
11-2015
Content Type:
Working Paper
Abstract:
Access to and timely diffusion of green technologies required for adaptation and mitigation are among the major challenges faced by the international community. The role of the patent system has become the subject of increased attention in climate change discussions on technology transfer. New mechanisms for collaborative innovation are required to foster the green technology sector.
Topic:
Climate Change, Economics, Environment, Markets, and Science and Technology
Political Geography:
Global Focus

87. Elasticity and Discipline in the Global Swap Network

Author:
Perry Mehrling
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper sketches the outlines of the new international monetary system that has emerged in the aftermath of the global financial crisis. At the center of the system, a network of central bank swaps between the six major central banks serves as an elastic backstop for private foreign exchange operations. Farther out on the periphery, a further network of central bank swaps operates to economize on scarce reserves of the major currencies. Meanwhile, in the private foreign exchange market, basis swaps are emerging as the central location where liquidity is explicitly priced, inside the bounds set by central bank swaps.
Topic:
Markets, Finance, Global Financial Crisis, Central Bank, Banking, and Liquidity
Political Geography:
Global Focus

88. Pseudo-wealth Fluctuations and Aggregate Demand Effects

Author:
Martin Guzman and Joseph E. Stiglitz
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper presents a theory of pseudo-wealth in a model that displays aggregate demand externalities. With heterogeneous beliefs and a market for exploiting those differences in beliefs, pseudo-wealth will be created–i.e. the sum of expected wealth of all the individuals will be larger than what it is feasible for the society. Under some conditions, those perceptions will lead to larger levels of consumption of (tradable and non-tradable) goods, leisure, and borrowing than in a world with common beliefs. If those differences in beliefs disappear, pseudo-wealth will disappear, leading to adjustments in behavior that amplify the initial decrease in expected wealth. That is, we provide a simple general equilibrium model in which the destruction of pseudo-wealth amplifies the effects of the initial disturbance, leading to large decreases in economic activity. Importantly, this downturn is not associated with any change in the state variables that describe the economy. More generally, the paper shows that completing markets (in this case by creating a market for bets) may imply lower output both in the present and in the future, raising unsettling questions on criteria for welfare analysis.
Topic:
Markets, Inequality, Finance, Macroeconomics, Welfare, and Wealth
Political Geography:
Global Focus

89. International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals?

Author:
Shaghil Ahmed, Brahima Coulibaly, and Andrei Zlate
Publication Date:
05-2015
Content Type:
Commentary and Analysis
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs). Our analysis covers the so-called taper-tantrum episode of 2013 and six earlier episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in quite early and persisted throughout this episode. (3) Controlling for economic fundamentals, we also find that, during the taper tantrum, financial conditions deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) For earlier episodes, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities during EME crises of the 1990s and early 2000s. (5) That said, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode. Differences in economic fundamentals played a role in explaining the heterogeneous EME financial market responses during the global financial crisis of 2008, and the role of fundamentals appeared to progressively increase through the European crisis in 2011 and subsequently the 2013 taper tantrum.
Topic:
Economics, Emerging Markets, Markets, Exchange Rate Policy, Fiscal Policy, and Economic Crisis
Political Geography:
Global Focus

90. How do governments respond to food price volatility?

Author:
Per Pinstrup-Andersen
Publication Date:
01-2015
Content Type:
Policy Brief
Institution:
United Nations University
Abstract:
Large food price fluctuations—caused primarily by extreme weather events, market disruptions, investor behaviour and government policy—began in the world market in 2007 and presented serious challenges for governments, private traders, farmers and consumers. A collaborative project between Cornell University, University of Copenhagen, and UNU-WIDER on the political economy of food price policy studied how selected governments responded to increasing food price volatility, and explains why they responded as they did. The degree to which world market price volatility was transmitted to national and local markets varied greatly among the 16 countries included in the project. This was due to trade policies, differences between import and export parity prices, and several other factors. The low degree to which international prices were reflected in domestic prices in some cases, and the large impact of national factors—such as local weather events, poorly functioning domestic markets, and limited dependence on foreign trade—meant that the behavioural response by governments to the international food crisis tended to be similar to the responses to earlier food price fluctuations caused by national factors. Path dependence was widespread.
Topic:
Government, Markets, Food, and Volatility
Political Geography:
Global Focus