Working Papers
1996
October 1, 1996
Race to the Center: Competition for the Nikkei 225 Futures Trade
Description: This paper examines the impact of changes in margin requirements on returns, transaction volumes, and price volatility of Nikkei 225 futures on the Osaka Securities Exchange (OSE) and the Singapore International Monetary Exchange (SIMEX). An increase in margin requirement on one exchange is shown to reduce trading volume in the implementing exchange and to shift trade to the competing exchange. Price volatility or returns are not systematically affected by changes in margin requirements. The loss of OSE’s market share of Nikkei futures trade is partly due to the increased transactions costs (relative to SIMEX), including the margin requirement.
October 1, 1996
Growth Accounting and Growth Processes
Description: The standard growth accounting framework, which weights various inputs by their factor shares to measure their contributions to output growth, is known to underestimate the contribution of inputs in the presence of externalities and increasing returns. This paper develops a model in which, in the absence of such departures from the standard neoclassical framework, growth can occur through either embodied technological progress or firms replication of existing technology. The standard growth accounting framework fails to distinguish between these contrasting development processes. This failure thus reveals another limitation to the use of growth accounting in identifying the processes of economic developments.
October 1, 1996
Exchange Rate Pass-Through in Spain
Description: This paper examines the factors underlying the stability of inflation observed following devaluations of the Spanish peseta, which took place during the 1992-93 Exchange Rate Mechanism (ERM) crisis. The long-run equilibrium relationships between the exchange rate and the aggregate price indices are estimated using the Johansen maximum likelihood-method. The short-run dynamics are obtained from error-correction models. The model is then simulated by calibrating changes in the exogenous variables to their actual values. The results indicate that the cost-push-up effect of devaluations may have been completely offset by determinants of the cyclical position of the economy and the low inflation rate in 1993-94 should not be viewed as unusual.
October 1, 1996
Japan's Medium: and Long-Term Fiscal Challenges
Description: This paper assesses the sustainability of Japan’s fiscal position. The simulations indicate that, even if the government’s pension reform plan is fully implemented, the initial budget imbalance, combined with pressures from population aging, would lead to explosive increases in government deficits and debt. Present-value calculations point to a fiscal “gap” of about 4 percent of GDP, indicating the combination of tax increases and/or spending cuts that would be required to generate a sustainable long-run fiscal position. Finally, the paper presents an illustrative package of tax and spending measures that could be implemented to close this gap.
October 1, 1996
Macroeconomic Experiences of the Transition Economies in Indochina
Description: This paper examines stabilization policies in Vietnam, Cambodia, and Laos since the late 1980s. Compared with other transition economies, the Indochinese countries avoided an output collapse and moved quickly to strong GDP growth and low inflation. Each adopted a similar mix of policies centered on flexible exchange rates, high real interest rates, fiscal adjustment through expenditure cuts, and the imposition of hard budget constraints on public enterprises. In none of the countries was an exchange rate anchor considered feasible, and money-based stabilization proved effective, despite evident instability in the demand for money.
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1996
September 1, 1996
Investment in Inflationary Economies
Description: The paper presents a model of irreversible investment under uncertainty, where investment takes place whenever a threshold level of marginal returns is reached. The threshold depends positively on price volatility; a change from high to low inflation induces an upward capital stock adjustment. In economies that move in and out of temporary stabilizations, the observed effect is a negative inflation-investment correlation that replicates previous empirical findings, due to purely short-term dynamics. I study how this correlation is affected by the expected duration of each regime. Empirical evidence from ten inflationary economies confirms the predictions of the model.
September 1, 1996
Privatization and Restructuring: An Incomplete-Contract Approach
Description: Since an enterprise, which is to be privatized, has to be restructured in uncertainty, and the restructuring investments are sunk when the final decision on the sale price is taken, there is an imminent danger that restructuring is not efficient, and there is underinvestment. We consider, restructuring by the private buyer of the firm, by a government privatization agency, and by both. In the first two cases—one-sided restructuring—a first best can be achieved. In the case of both-sided restructuring, however, the first best cannot be reached if both parties engage in restructuring after signing the contract.