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Democratization and Globalization in Emerging Market Countries: An Econometric Study
Abstract
*Earlier versions of this paper were presented at the Annual Meeting of the American Political Science Association, San Francisco, August 30-September 2, 2001 and at the 2001 International Studies Association Meeting in Chicago, Illinois. For comments and criticisms we thank William Bernhard, David Leblang, Brian Roberts, David Stasavage, and Tom Willett. For the data used in gauging the impact of extragovernmental political behavior on financial markets we thank Doug and Joe Bond.
... 1 Following on from this, the political cycle is also crucial to capital markets, which have in the past been acutely sensitive to political developments in Latin American democracies, be they cabinet reshuffles or elections. Bankers and financial markets react to elections (Jensen and Schmith, 2005; Whitehead, 2006; Chang, 2007; Nieto-Parra and Santiso, 2008), re-allocate money after democratic transitions (Rodríguez and Santiso, 2008) or react to political announcements and events (Santiso, 2003; Hays, Freeman and Nesseth, 2003; Frieden, Leblang and Valev, 2008). While this phenomenon is not specific to emerging economies, it remains especially strong there (Campello, 2007). ...
In this paper we test the impact of elections on fiscal policy in Latin American economies in comparison to OECD countries over the period 1990-2006. We find that in Latin American countries, the average primary balance declines by an amount close to 0.7 per cent of GDP during an election year, confirming the hypothesis of fiscal deteriorations during the election cycle. Most of this movement is due to the expenditure component and within this it is current (close to 0.8 per cent of GDP) rather than capital expenditure that is most affected. By contrast, in OECD countries, the observed changes in the primary balance and current expenditures during election years are minimal. Our analysis also suggests that re-elections of incumbent candidates in Latin America have a considerable impact on the expenditure side of the fiscal balance. Finally, by comparing the 2005-2006 electoral cycle with respect to prior electoral cycles, we note a slight improvement of fiscal management around elections in the region. We derive policy implications and recommendations from our findings.
L’objectif de cet article est de tester l’impact des élections sur la politique budgétaire dans les pays d’Amérique Latine par rapport aux pays de l’OCDE pendant la période 1990-2006. Nos résultats montrent qu’en moyenne le solde primaire diminue de près de 0,7 pourcent du PIB pendant l’année électorale, ce qui confirme l’hypothèse d’une détérioration de la discipline budgétaire pendant le cycle électoral en Amérique Latine. Une grande partie de ce mouvement s’explique par une croissance des dépenses publiques qui trouve son origine dans les dépenses courantes (près de 0,8 pourcent du PIB) plus que dans les dépenses en capital. En revanche, dans les pays de l’OCDE, le solde primaire et les dépenses courantes évoluent peu pendant l’année électorale. Notre analyse suggère également que les réélections des candidats en exercice en Amérique Latine ont u
... Empirical evidence analysing the impact of politics on capital markets is abundant. Although the impact of electoral cycles for investors and financial intermediaries is strongly felt, the reaction of global financial markets to politics in emerging democracies may differ significantly within a single region, being dependent on the degree of democratisation and the transparency of the policy‐making process, the historical existence of democratic institutions, the scale of the government's legislative majority and its political cohesion (Hays et al, 2003;MacIntyre, 2001). Eichengreen, Rose and Wyploz (1995) were among the first to address the political dimension of financial crises, finding close links between political processes and exchange‐rate turbulence. ...
This paper focuses on the interactions between the political cycle and capital markets in emerging economies, examining the way in which Wall Street strategists react to major Latin American political events, specifically presidential elections. For this purpose we construct a database of all sovereign bond recommendations of the major investment banks active in emerging bond markets from 1997 to 2008. Assessing the impact of presidential elections on investment banks' recommendations, we conclude firstly, that the political cycle is a major determinant variable in explaining the downgrading of sovereign bonds in the three months prior to presidential elections. Secondly, the credibility of future macro (fiscal and monetary) policies announced by presidential candidates during campaigns stands out as an important determinant of investment banks' recommendations. In particular, if candidates are not committed to defend sustainable macroeconomic policies, investment banks' downgrade sovereign debt prior to elections.
... The response of financial markets to electoral and partisan change, examined in a study of 78 developing countries using monthly data from 1975 to 1998, confirms that speculative attacks are more likely just after an election as compared to all other periods (Leblang, 2002). The reaction of global financial markets to politics in new democracies within the same region may also differ, depending on the degree of democratization and the transparency (or perceived transparency) of the policy-making process, the length of time democratic institutions have been in existence, and the scale of the government's legislative majority and its political cohesion (Hays et al., 2001; MacIntyre, 2001: 81–122). Thus politics is far from neutral in financial markets. ...
Using survey data, we document that foreign-owned institutions became more pessimistic than locally owned institutions about the strength of the Brazilian currency around the 2002 presidential elections. As a result of their relative pessimism, foreign-owned institutions made larger forecast errors. Consistent with the emergence of their relative pessimism, foreign investors heavily sold Brazilian stocks and the Brazilian currency in futures markets ahead of the 2002 elections. Periods of stronger foreign sell-off were associated with larger equity price declines and larger depreciation of the Brazilian Real in spot and futures markets. These results are consistent with foreign investors’ relative lack of knowledge of Brazilian institutions contributing to the sharp depreciation of the Brazilian currency and stock market ahead of the 2002 presidential elections.
This paper focuses on the interactions between politics and finance in emerging economies stressing the case of Brazilian presidential elections. More precisely, it underlines how Wall Street (i.e. financial markets) incorporates and reacts to major Latin American political and democratic events such as presidential elections. As a case study, we focused on Brazilian presidential elections as a starting point, after having analysed, in a first approximation, the political regimes preferences of markets through the indexes. The second section presents an empirical study of Wall Street analysts' perceptions of a major political occurrence, the presidential elections in Brazil. The empirical analysis is based on the production output and reports of Wall Street investment firms during the years 2002 and 2003, focusing on the top fixed income teams of Wall Street, as ranked by Institutional Investors, Bloomberg and Latin Finance in their league tables. Finally, in the third and last section, we used economic and financial historical data of previous election years in Brazil, in order to view the specific events from a comparative historical perspective.
In this article, I refine and expand the agenda for research on monetary institutions. First, I evaluate the analyses and research designs presented in this special issue of International Organization . Out of this evaluation, several ideas about how to produce a “third generation” of research on this topic emerge. Specific ideas include how to: create a better synthesis with certain branches of economics, such as information economics; broaden the welfare criteria on which institutional choices are made; deepen the analyses of coalitional and other political processes on which the choice of institutions are based; and strengthen the tests that are offered in support of these choices.
In the second part of this article, I explore questions of how popular sovereignty over economic policy and institutional choice are achieved. I show that the institutional regimes proposed in the special issue are, in a sense, democratic as long as the public's “perceived consensus” about economic policies and macroeconomic outcomes is real. However, if, as new work suggests, there is genuine dissensus about policy and macroeconomic objectives, it is no longer clear that the regimes proposed in the special issue are democratic. In the conclusion, I briefly discuss a possible crisis of imagination in institutional design.
Association and at the Conference on “Globalization and Democracy”, University of Minnesota. This work is supported by the Austrian Ministry of Science. The views expressed are the authors ’ alone. Neither the Oesterreichische Nationalbank nor the Ministry is responsible for its contents. We thankWilliam Bernhard, Robert Franzese, Robert Kudrle, and Michael Wallerstein for their comments and The connection between political and bond market equilibration is studied. The conventional wisdom on the subject, the Electoral Information Hypothesis (EIH; Cohen 1993, Alesina, Roubini and Cohen 1997), is criticized on theoretical and empirical grounds. Using a framework proposed by Garrett and Lange (1995) and data from three of the most developed bond markets in the world a revised hypothesis is constructed and tested. The revised hypothesis recognizes the way formal political and bureaucratic institutions mitigate the effects of democratic politics on bond markets as well as the “fat tailed ” distributions and volatility clustering commonly found in financial time series. The results show that empirical support for the revised EIH extends beyond the American case, but this support is not universal. More specifically, where democracy is of the majoritarian type and central banks are weak (the U.K. until recently) the revised EIH holds. Once placed on sounder statistical footings, the U.S. case—one of mixed majoritarian and consensual democracy and a moderately strong central
The efficient markets hypothesis implies that the forward exchange rate--the price of the currency deliverable 30 days in the future--should be an unbiased predictor of the future spot exchange rate. Empirical studies, however, conclude that the forward rate is biased. We argue that democratic political processes affect the forward rate bias. In particular, elections, cabinet negotiations, and cabinet dissolutions may generate uncertainty about the future composition of the government and its commitment to the exchange rate. Since economic agents will be less able to predict future exchange rate movements during periods of political uncertainty, the forward bias will increase during these periods. We test the effect of political events on the forward bias using data from eight industrial democracies between 1974 and 1995. Using both ordinary least squares and seemingly unrelated regression, we find that political uncertainty helps explain forward rate bias.-Hyun Lee provided research assistance. 2 The behavior of economic agents affects not only overall economic performance, but also the nature of voter choice and control in democratic societies (e.g., Block 1977; Lindblom 1977). The speed with which markets adjust to new information may affect the success of a new policy initiative. For instance, economic agents may anticipate a monetary expansion during periods of high unemployment and adjust their behavior accordingly. Because economic agents have already altered their behavior, the monetary expansion will not have the intended effect of stimulating employment growth. Instead, unemployment will remain the same while inflation will increase (Barro and Gordon 1983). Market reactions also affect the quality of democracy. If, for instance, markets can anticipate policy changes, they can negate the ability of governments to pursue certain policies (e.g., Alesina and Roubini 1997). In fact, political economists (e.g., Alesina and Sachs 1988; Alesina and Rosenthal 1995) contend that political parties can achieve divergent economic outcomes only by exploiting the uncertainty surrounding elections and campaigns. Consequently, the less predictable an election, the more opportunity for divergent economic policies.
The European currency crises of 1992-93, the Mexican crisis of 1994-95, and especially the Asian/global crisis of 1997-98, have all contributed to a heightened interest in the early warning signals of financial crises. This pathbreaking study presents a comprehensive battery of empirical tests on the performance of alternative early warning indicators for emerging-market economies that should prove useful in the construction of a more effective global warning system. * Not only are the authors able to draw conclusions about which specific indicators have sent the most reliable early warning signals of currency and banking crises in emerging economies, they also test the out-of-sample performance of the model during the Asian crisis and find that it does a good job of identifying the most vulnerable economies. In addition, they show how the early warning system can be used to construct a "composite" crisis indicator to weigh the importance of alternative channels of cross-country "contagion" of crises, and to generate information about the recovery path from crises. * This timely study comes on the eve of impending changes at the International Monetary Fund as that institution reexamines how it reacts to financial crises. Moreover, the study provides "... a wealth of valuable elements for anyone investigating and forecasting adverse developments in emerging markets as well as industrial countries," according to Ewoud Schuitemaker, vice president of the economics department at ABN AMRO Bank.
We examine the weekly volatility of the Japanese Yen, British Pound, German Mark and Canadian Dollar relative to the U.S. Dollar through five recent U.S. presidential terms. Our EGARCH-M model adds several new findings to the literature. Our results suggest that: 1) the volatility of all four exchange rates is impacted by either the year in the electoral cycle and/or the political party in office; 2) past innovations exert an asymmetric impact on the conditional volatility of exchange rates, and 3) close to a U.S. election, an unexpected dollar depreciation impacts the volatility of the Yen and Mark significantly more than does an unexpected dollar appreciation.
Capital moves more rapidly across national borders now than it has in at least fifty years and perhaps in history. This article examines the effects of capital mobility on different groups in national societies and on the politics of economic policymaking. It begins by emphasizing that while financial markets are highly integrated within the developed world, many investments are still quite specific with respect to firm, sector, or location. It then argues that contemporary levels of international capital mobility have a differential impact on socioeconomic groups. Over the long run, increased capital mobility tends to favor owners of capital over other groups. In the shorter run, owners and workers in specific sectors in capital-exporting countries bear much of the burden of adjusting to increased capital mobility. These patterns can be expected to lead to political divisions about whether or not to encourage or increase international capital market integration. The article then demonstrates that capital mobility also affects the politics of other economic policies. Most centrally, it shifts debate toward the exchange rate as an intermediate or ultimate policy instrument. In this context, it tends to pit groups that favor exchange rate stability against groups that are more concerned about national monetary policy autonomy and therefore less concerned about exchange rate stability. Similarly, it tends to drive a wedge between groups that favor an appreciated exchange rate and groups that favor a depreciated one. These divisions have important implications for such economic policies as European monetary and currency union, the dollar-yen exchange rate, and international macroeconomic policy coordination.
The effect of changes in policy regimes on real interest rates has important implications for financial and economic theory. There is little current evidence that policy regime changes have any impact on the level of real interest rates. We use large political changes as our measure of policy regime changes. Changes in presidential administration are more significantly correlated with real rate changes than are changes in the Federal Reserve Chair or the mean shift points identified by Garcia and Perron (1996) using time series methods. We also show that change of party control of congress is a significant factor explaining real rates. We argue that theoretical models built on the assumptions of constant or policy invariant real interest rates are at variance with the empirical evidence.
The Markov switching model is useful because of the potential it offers for capturing occasional but recurrent regime shifts in a simple dynamic econometric model. Existing treatments, however, restrict the transition probabilities to be constant over time; that is, the probability of switching from one regime to the other cannot depend on the behavior of underlying economic fundamentals. In contrast, we propose a class of Markov switching models in which the transition probabilities can vary with fundamentals. We develop an EM algorithm for estimation of the model and we illustrate it with a simulation example. We conclude with a discussion of directions for future research, including application to exchange rate and business cycle modelling.
We consider the time series behavior of the U.S. real interest rate from 1961 to 1986, using the methodology of Hamilton (1989), by allowing three possible regimes affecting both the mean and variance. The results suggest that the ex-post real interest rate is essentially random with means and variances that are different for the periods 1961-1973, 1973-1980 and 1980-1986. The inflation rate series also shows interesting shifts in both mean and variance. Series for the ex-ante real interest rate and expected inflation are constructed. Finally, we make clear how our results can explain some recent findings in the literature.
The value of the dollar appears to move in one direction for long periods of time. The authors develop a new statistical model of exchange rate dynamics as a sequence of stochastic, segmented time trends. They reject the null hypothesis that exchange rates follow a random walk in favor of their model of long swings. The authors' model also generates better forecasts than a random walk. The specification is a natural framework for assessing the importance of the "peso problem" for the dollar. The authors nonetheless reject uncovered interest parity. Copyright 1990 by American Economic Association.
Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last two years compared with what a Taylor rule would suggest.
The recent game-theoretic macroeconomic literature provides a useful tool for analyzing the relationship between political institutions and the macroeconomy. In particular, this paper examines two related issues: the effects of electoral competition on macroeconomic policy and on the economic cycle, and the role of different degrees of independence of the Central Bank as a determinant of monetary policy. The game-theoretic literature in this area has generated several results that are consistent with the empirical evidence. This claim is supported by reviewing the available empirical results and by performing several new tests. In particular, this paper emphasizes the different empirical implications of rational and optimizing politico-economic models in respect to non-rational approaches. Several open issues and new directions of research are also explored in the conclusions.
In an intriguing synthesis of current theories of international finance, trade, and industrial organization, Paul Krugman presents a provocative analysis of the extraordinary volatility of exchange rates in the 1980s.Krugman focuses on imperfect integration of the world economy, showing how this has become both a cause and effect of exchange rate instability. He outlines the costs and benefits of recent flexible-exchange rate policies and offers fresh insight into why the models that worked in the first half of the 1980s don't work in the growing uncertainty of the latter half. Krugman's analysis is succinct and accessible, with technical appendixes that offer powerful backing to his ideas."Exchange Rate Instability "contains a surprising reevaluation of the author's own work on exchange rates. Krugman questions the need for further devaluation of the dollar, arguing that uncertainty - rather than the lack of cost-competitiveness explains the failure of current policies to reduce the United States trade deficit. He proposes an eventual return to fixed exchange rates.Paul R. Krugman is Professor of Economics at MIT "Exchange Rate Instability "inaugurates the Lionel Robbins Lectures series.
I explain how prices of publicly traded securities can be used to estimate the expected economic consequences of national elections. The methodology presented here is applied to the 1992 British general election, an election lost by the Labour Party. Had the Labour Party won in 1992, short-term interest rates in the United Kingdom would have increased approximately one percent and British stock markets would have dropped approximately five percent and experienced a surge in volatility. These conclusions illustrate how the linkage of security price data with electoral research contributes to the analysis of the economic consequences of government partisanship.
We investigate the behavior of stock market indices across 33 countries around political election dates during the sample period 1974–1995. We find a positive abnormal return during the two-week period prior to the election week. The positive reaction of the stock market to elections is shown to be a function of a country’s degree of political, economic and press freedom, and a function of the election timing and the success of the incumbent in being re-elected. In particular, we find strong positive abnormal returns leading up to the elections (i) in less free countries won by the opposition, and (ii) called early and lost by the incumbent government. These results are consistent with the uncertain information hypothesis (UIH) of Brown et al. (Brown, K.C., Harlow, W.V., Tinic, S.M., 1988. Journal of Financial Economics 22, 355–385) and the model of election behavior of Harrington (Harrington, J.E., 1993. The American Economic Review 83, 27–42).
The early warning of protracted political violence needs firm empirical footing in dynamic indicators of the political processes leading to political crises. This study provides a conceptual framework for the analysis of conflict-carrying capacity (or CCC) defined as the ability of political systems to regulate intense internal conflicts. CCC is indexed by the multiplicative interaction between the proportions of civil contention, state repression, and violence. The PANDA Project (1983-1994) is used to illustrate the usefulness of this CCC index in capturing system stability in an institutionalized democracy (the United States), a bureaucratic-authoritarian regime (Mexico), an institutionalized Communist regime (China), and a peaceful democratic transition (Poland). It provides early warning signals of civil war (Algeria, Sri Lanka) and moves toward political stability (Peru). Civil contention and state repression are not destabilizing per se. Rather it is the simultaneous combination of these with violent contention that leads to internal political crises and, alternatively, to political stabilization.
This article argues that political gridlock in Korea was responsible for the defeat of many economic reform efforts before the economic crisis. Successful and timely economic reforms would have made the Korean economy less vulnerable to the economic crisis. The persistence of political gridlock can be attributed to the immature or unconsolidated nature of Korean democracy, including weak democratic institutions and traditional political values and practices. With a model of policy gridlock in the context of the Korean decision-making process, the article attempts to link Korean political culture and institutions to the occurrence of policy gridlock.
In this updated and expanded edition of his classic text, Arend Lijphart offers a broader and deeper analysis of worldwide democratic institutions than ever before. Examining thirty-six democracies during the period from 1945 to 2010, Lijphart arrives at important-and unexpected-conclusions about what type of democracy works best. Praise for the previous edition: "Magnificent.... The best-researched book on democracy in the world today."-Malcolm Mackerras, American Review of Politics "I can't think of another scholar as well qualified as Lijphart to write a book of this kind. He has an amazing grasp of the relevant literature, and he's compiled an unmatched collection of data."-Robert A. Dahl, Yale University "This sound comparative research ... will continue to be a standard in graduate and undergraduate courses in comparative politics."-Choice.
Economic issues loomed large in the March 2000 presidential election in Taiwan. These issues ranged from high-minded concerns about the future of bilateral trade relations with China to charges of economic manipulation leveled at the incumbent government. This paper seeks to lay bare crucial features of the redistributional consequences of this election and, in particular, tests the importance of China in explaining the sensitivity of the Taiwanese economy to the outcome of the election. Evidence from Taiwanese financial markets is offered of a strong China component to the economic consequences of the election.
Speculative currency attacks are a regular feature of the international political economy. Nevertheless, not all speculative attacks result in a devalued currency. In many cases, politicians were willing and able to defend the exchange rate peg. I develop a model of strategic interaction between speculators in currency markets and policymakers in governments. This model indicates that speculative attacks occur when economic fundamentals are weak or when there is uncertainty about the capability and/or willingness of governments to defend the currency peg. I show that the government's decision to defend the peg reflects institutional, electoral, and partisan incentives. I test hypotheses from this model on a sample of 90 developing countries between 1985 and 1998 using a strategic probit model.
The relationship between political and economic cycles is one of the most widely studied topics in political economics. This book examines how electoral laws, the timing of elections, the ideological orientation of governments, and the nature of competition between political parties influence unemployment, economic growth, inflation, and monetary and fiscal policy. The book presents both a thorough overview of the theoretical literature and a vast amount of empirical evidence. A common belief is that voters reward incumbents who artificially create favorable conditions before an election, even though the economy may take a turn for the worse immediately thereafter. The authors argue that the dynamics of political cycles are far more complex. In their review of the main theoretical approaches to the issues, they demonstrate the multifaceted relationships between macroeconomic and political policies. They also present a broad range of empirical data, from the United States as well as OECD countries. One of their most striking findings is that the United States is not exceptional; the relationships between political and economic cycles are remarkably similar in other democracies, particularly those with two-party systems.
Both state-space models and Markov switching models have been highly productive paths for empirical research in macroeconomics and finance. This book presents recent advances in econometric methods that make feasible the estimation of models that have both features. One approach, in the classical framework, approximates the likelihood function; the other, in the Bayesian framework, uses Gibbs-sampling to simulate posterior distributions from data. The authors present numerous applications of these approaches in detail: decomposition of time series into trend and cycle, a new index of coincident economic indicators, approaches to modeling monetary policy uncertainty, Friedman's "plucking" model of recessions, the detection of turning points in the business cycle and the question of whether booms and recessions are duration-dependent, state-space models with heteroskedastic disturbances, fads and crashes in financial markets, long-run real exchange rates, and mean reversion in asset returns.
Globalization is exposing social fissures between those with the education, skills, and mobility to flourish in an unfettered world market--the apparent "winners"--and those without. These apparent "losers" are increasingly anxious about their standards of living and their precarious place in an integrated world economy. The result is severe tension between the market and broad sectors of society, with governments caught in the middle. Compounding the very real problems that need to be addressed by all involved, the kneejerk rhetoric of both sides threatens to crowd out rational debate. From the United States to Europe to Asia, positions are hardening. Author Dani Rodrik brings a clear and reasoned voice to these questions.Has Globalization Gone Too Far? takes an unblinking and objective look at the benefits--and risks--of international economic integration, and criticizes mainstream economists for downplaying its dangers. It also makes a unique and persuasive case that the "winners" have as much at stake from the possible consequences of social instability as the "losers." As Rodrik points out, ". . . social disintegration is not a spectator sport--those on the sidelines also get splashed with mud from the field. Ultimately, the deepening of social fissures can harm all." President Clinton read the book and it provided the conceptual basis for the trade/IMF portions of his State of the Union message in January 1998. * Globalization is "the next great foreign policy debate," Thomas Friedman of the New York Times wrote, and he found Has Globalization Gone Too Far? "provocative" on the subject. This book provides a critical definition--and welcome clarity--to that debate.
The Asian crisis has sparked a thoroughgoing reappraisal of current international financial norms, the policy prescriptions of the International Monetary Fund, and the adequacy of the existing financial architecture. To draw proper policy conclusions from the crisis, it is necessary to understand exactly what happened and why from both a political and an economic perspective. In this study, renowned political scientist Stephan Haggard examines the political aspects of the crisis in the countries most affected--Korea, Thailand, Malaysia, and Indonesia. * Haggard focuses on the political economy of the crisis, emphasizing the longer-run problems of moral hazard and corruption, as well as the politics of crisis management and the political fallout that ensued. He looks at the degree to which each government has rewoven the social safety net and discusses corporate and financial restructuring and greater transparency in business-government relations. Professor Haggard provides a counterpoint to the analysis by examining why Singapore, Taiwan, and the Philippines escaped financial calamity.
The paper re-examines the efficiency hypothesis in the foreign exchange market. The traditional efficiency-testing equations are reviewed and a more general model is developed that incorporates Bayesian revisions of devaluation expectations. A number of properties regarding the pattern of the coefficients in efficiency-testing equations are established. The empirical estimation of the model by using data from the emerging foreign exchange market in Greece confirms the properties of the theoretical model.
This paper develops and tests the uncertain information hypothesis as a means of explaining the response of rational, risk-averse investors to the arrival of unanticipated information. The theory predicts that following news of a dramatic financial event, both the risk and expected return of the affected companies increase systematically, and that prices react more strongly to bad news than good. An empirical investigation of over 9000 marketwide and firm-specific events produces results consistent with these predictions. We conclude that the market reacts to uncertain information in an efficient, if not instantaneous, manner.
This paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios. In the presence of short-selling constraints, the gain of gathering information at a fixed cost may diminish as markets grow. Moreover, if a portfolio manager's marginal cost for yielding below-market returns exceeds the marginal gain for above-market returns, there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows. Numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets.
The relationships between the workings of democratic institutions and currency markets are studied. Several competing propositions about how political (re)equilibration affects currency markets are derived and tested. The results support the view that democratic politics affects currency markets. Expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency market equilibria. Additionally, opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and (or) the contents of public policies. Electoral institutions mitigate the impact of politics on currency market equilibria. Political effects are weaker in countries with proportional representation electoral systems than in countries with majority-plurality systems. There is less evidence that central bank independence, consensual-corporatist systems, or "political coherency" reduces the effect of politics on currency markets.
Because of regulation projects from control organizations such as the European solvency II reform and recent economic events, insurance companies need to consolidate their capital reserve with coherent amounts allocated to the whole company and to each line of business. The present study considers an insurance portfolio consisting of several lines of risk which are linked by a copula and aims to evaluate not only the capital allocation for the overall portfolio but also the contribution of each risk over their aggregation. We use the tail value at risk (TVaR) as risk measure. The handy form of the FGM copula permits an exact expression for the TVaR of the sum of the risks and for the TVaR-based allocations when claim amounts are exponentially distributed and distributed as a mixture of exponentials. We first examine the bivariate model and then the multivariate case. We also show how to approximate the TVaR of the aggregate risk and the contribution of each risk when using any copula.
This paper analyzes the link between the 1992 United States presidential election outcome and a collection of American economic sectors. Based on data from the 1992 Iowa Political Stock Market and campaign-period stock portfolio behavior, we identify 15 economic sectors, of 74 examined, whose profits varied in a statistically significant manner with movements in Iowa Market-based measures of presidential candidate standing. And, in light of 1992 campaign rhetoric pertaining to defense policy and environmental issues, we build on this finding with an analysis of selected defense firms and firms known to be toxic waste emitters. Copyright 1999 Blackwell Publishers Ltd..
Standard exchange rate models perform poorly in out-of-sample forecasting when compared to the random walk model. We posit part of the poor performance of these models may be due to omission of political factors. We test this hypothesis by including political variables that capture party-specific, election-specific and candidate-specific characteristics. Surprisingly, we find our political model outperforms the random walk in out-of-sample forecasting at 1–12 month horizons for the pound/dollar, mark/dollar, pound/mark and the trade-weighted dollar, mark and pound exchange rates.
Malaysia recovered from the Asian financial crisis swiftly after the imposition of capital controls in September 1998. The fact that Korea and Thailand recovered in parallel has been interpreted as suggesting that capital controls did not play a significant role in facilitating Malaysia's rebound. However, the financial crisis was deepening in Malaysia in the summer of 1998, while it had significantly eased up in Korea and Thailand. We employ a time-shifted differences-in-differences technique to exploit the differences in the timing of the crises. Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market.
Markov switching (MS) models raise a problem known as testing hypotheses when a nuisance parameter is not identified under the null hypothesis. I show that the asymptotic distribution theory used for testing in presence of such a problem appears to work also for MS models, even though its validity can be questioned because of identically zero scores under the null estimates. Assuming the validity of this distribution theory, I derive the asymptotic null distribution of the likelihood ratio (LR) test for various MS models. Monte Carlo experiments show that the LR asymptotic distributions approximate the empirical distributions very well.
During the nineties, Europe became a major recipient of FDIs but Italian regions have been largely excluded from this process. Was it due to their characteristics, or were Italian regions “doomed” by a negative country effect? In this paper we address this issue by estimating the determinants of multinational firms’ location choices in 52 EU regions. We find that Italian regions indeed attracted significantly less than their observable potential, and that this could be explained by the inefficiency of the bureaucratic apparatus and of the legal system. The effect of taxes is instead strongly sensitive to the inclusion of agglomeration variables and is asymmetric across regions.
Political Cycles and the Macroeconomy (l992) The Effect of Political Risk on the Forward Exchange Rate Bias: The Case of
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Institutions and Investors: The Politics of the Economic Crisis in Southeast
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Fitting the Moments: A Comparison Of ARCH and Regime Switching Models for Daily Stock Returns
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(l993) Regime Switching with Time Varying Transition Probabilities: Methodological Issues and Applications to Exchange Rates
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