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INTERNATIONAL
CONFERENCE ON MODELLING ECONOMIC DYNAMICS (MED2008) LONDON,
AUGUST 23-25, 2008
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Registration:
August 23 Time: 10:30
Meeting Room
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Welcome Reception 10:45
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Session 1:
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Session Chair: Ramon Maria-Dolores,
Universidad de Murcia
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Date: August
23, 2008 Time: 11:00 - 13:00
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Sovereign
default and negotiation: endogenous recovery rates, interest rate spreads and
credit ratings
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Presented by: Tamon Asonuma, Boston
University;
Discussant: Siew
Ling Yew, NUS
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Optimal
Financial Contracts in Leveraged Buy Out: a double-sided moral hazard model
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Presented by: Ouidad
YOUSFI, EconomiX
University of Paris
X Nanterre
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Discussant: Pei-Shih Weng,
National Central
University
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Banking,
Inside Money and Outside Money Presented by: Hongfei Sun,
Queen's University
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Discussant: Ramon Maria-Dolores, Universidad de Murcia
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Lunch Break
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Session 2: MED2
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Session Chair: Hongfei Sun, Queen's University
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Date: August
23, 2008 Time: 14:00 - 17:00
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The Persistence of
Differences in Productivity, Wages, Skill Mixes and Profits Between Firms in
a Rapidly Changing Environment
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Presented by: Katsuya
Takii, Osaka
University,
Discussant: Georg Duernecker, European University Institute
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Econometric and Stochastic General Equilibrium Models
for Evaluation of Economic Policies
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Presented by: Keshab
Bhattarai, University
of Hull
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Discussant: Georg Duernecker,
European University Institute
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Technology
Adoption, Turbulence and the Dynamics of Unemployment
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Presented by: Georg Duernecker,
European University Institute
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Discussant: Tamon Asonuma, Boston
University
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The
Effects of Globalization on International Business Cycle Co-movement
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Presented
by: Scott Davis, Vanderbilt University , Discussant: Keshab
Bhattarai, University
of Hull
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Conference Dinner at 7:00 PM
Dinner
and Closing Ceremony, 7:00 PM
August
25: Optional Tour of Attractions of London
INTERNATIONAL
CONFERENCE ON MODELLING ECONOMIC DYNAMICS (MED2008) LONDON
AUGUST 23-25, 2008
Abstract
of Papers Presented at the Conference
Sovereign
default and negotiation: endogenous recovery rates, interest rate spreads and
credit ratings
Tamon Asonuma, Boston University
Stylized
facts of sovereign defaults suggest (1) there might be a negative relationship
between recovery rates and additional increase in interest spreads, and (2)
given debt/GDP ratio, the countries which have defaulted in the past, might
have higher default probability, higher spreads and low credit ratings. By incorporating additional compoonents together with downgrading in credit ratings
which are determined endogenously, in dynamic stochastic small open economy
model with default and negotiation, we attempt to explain the negative
relationship between recovery and spreads and serial defaults.
Our
quantitative analysis show that (1) there is a negative relationship between
recovery rates and additional components in spreads, and (2) under baseline
case, default probability is weakly increasing with credit history, implying
that the country which has defaulted in the past will have higher probability
for next deault than non-defaulters. Decreasing output cost assumption also
strengthens this result.
Econometric
and Stochastic General Equilibrium Models for Evaluation of Economic Policies
Keshab
Bhattarai, Hull University Business School, HU6 7RX, UK
Impacts
of economic policies are evaluated applying econometric analyses and stochastic
dynamic general equilibrium models for growing economies. Comparing analyses of
economic structure and forecasts generated from simultaneous equation, VAR and
autoregressive models based on quarterly series from 1966:1 to 2007:3 of UK to
those from the stochastic general equilibrium models has provided insights in
objective and subjective analyses of underlying economic processes influenced
by public policies. While estimates of econometrics models are used in
objective formulation of the stochastic dynamic general equilibrium models, the
time series of macro variables generated by solving the stochastic economy are
employed to test the predictions of econometric analyses by calibrating ratios,
variances, covariance and correlations for scientific analyses of economic
policy. Thus this paper shows why
econometric analyses and general equilibrium modelling should be considered
complementary rather than competitive techniques in economic analyses.
The
Effects of Globalization on International Business Cycle Co-movement
Scott
Davis, Vanderbilt University
The
paper examines the impact of globalization on international business cycle
co-movement. We specifically look at globalization in the form of trade and
financial integration. A two country business cycle model is built with a
varying cost of international trade and a varying degree of international
financial market completeness. The effects of trade and financial integration
are examined both separately and together. While it is clear that globalization
will lead to increased consumption co-movement, the impact on production and
labor is less clear. Trade integration will lead to higher co-movement, but
financial integration will lead to less.
Technology
Adoption, Turbulence and the Dynamics of Unemployment
Georg Duernecker,
European University Institute, Department of Economics
The
divergence of unemployment rates between the U.S. and Europe coincided with a
substantial acceleration in capital-embodied technical change in the
late 70's. Furthermore, evidence suggests that European
economies have been lagging behind the U.S. in the adoption and usage of new
technologies. This paper argues that the pace of technology adoption plays a
fundamental role for how an economy's labor market reacts to an
acceleration in capital-embodied growth. The framework proposed offers
an appealing and novel explanation for the divergence of unemployment rates
across economies that are hit by the very same shock (i.e. the acceleration in
embodied technical change) but differ in their technology adoption. Moreover,
we challenge the conventional wisdom that high European unemployment is the
result of institutional rigidities by claiming that institutions are not the
principal cause per se but they rather amplify certain forces that promote the
emergence of high unemployment.
Foreign
Direct Investment and Host Country Policies: A Rationale for Using Ownership
Restrictions
Bilgehan Karabay, The Central Bank of the Republic of Turkey
This
paper examines host governments’ motivations for restricting ownership shares
of multinational firms (MNFs) in foreign direct
investment (FDI) projects. A host country has a profitableinvestment
opportunity such as an advantage in producing a particular good. If the MNF
undertakes this project it can create a higher surplus than local firms (LFs) due to its firm-specific advantage. The magnitude of
this additional surplus depends on the effort level chosen by the MNF and the
size of the firm-specific advantage the MNF has. The host government wants to
capture the project’s rent yet cannot observe the extra surplus created by the
MNF. In contrast, in the case of a joint venture (JV), a JV partner can observe
this surplus. The host government can alleviate its informational constraints
by using ownership restrictions to force a JV. This calls into question the
wisdom of calls for ‘liberalizing’ FDI flows by the wholesale elimination of
domestic JV requirements. We show that the optimal mechanism involves ownership
restrictions that decrease as the size of the MNF’s
firm-specific advantage increases.
TERM
STRUCTURE AND THE ESTIMATED MONETARY POLICY RULE IN THE EUROZONE
Ramón María-Dolores,
University of Murcia
Jesús Vázquez, University of the
Basque country
In
this paper we estimate a standard version of the New Keynesian Monetary (NKM)
model augmented with term structure in order to analyze two issues. First, we
analyze the effect of introducing an explicit term structure channel in the NKM
model on the estimated parameter values of the model, with special emphasis on
the interest rate smoothing parameter using data for the Eurozone.
Second, we study the ability of the model to reproduce some stylized facts such
as highly persistent dynamics, the weak comovement
between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The estimation procedure implemented is a
classical structural method based on the indirect inference principle. The
estimation results show that (i) policy inertia and
persistent policy shocks are significant determinants in the estimated monetary
policy rule; (ii) the term spread only plays a role when a backward-looking
policy rule is assumed; and (iii) the model under a backward-looking rule is
close to replicating the observed weak comovement
between output and inflation at short-term forecast horizons and the strong,
positive comovement between interest rates at medium
and long-term forecast horizons.
Asset
prices and Exchange rates: A time dependent approach
Giulia Piccillo, Katholieke Universiteit Leuven
This
paper studies the relationship between the exchange rates and the asset prices.
It takes the approach of order flows to exchange rates. Specifically, it
focuses on the effect of a time varying risk aversion. The switch in the
parameter causes the equilibrium of the system to alternate between two
regimes: an optimistic and a pessimistic one.
The
paper is complete of a wide empirical section where the two equilibria are
identified and specified for three of the main world markets. The regimes
appear to be persistent and consistent with the existing literature on risk
aversion. The analysis uncovers a new development for exchange rate
microstructure models.
Overall
the results show a strong potential for this evolution. 3 of the 4 markets
studied are consistent with both the order flow and the Markov switching model.
The markets analyzed are the UK, Switzerland, Germany and Japan.
Dual
Poverty Trap
Ryo Horii,Graduate
School of Economics, Tohoku University
Masaru
Sasaki, Institute of Social and Economic Research, Osaka University
This
paper constructs an overlapping generations model of
search equilibrium that analyzes intergenerational and coordination traps simultaneously.
When parents are uneducated, their children often face difficulty in finishing
school and therefore are likely to remain uneducated. In addition, if children
expect that other children of the same generation will not receive an
education, they
expect that firms will not create enough jobs for educated
people and thus are discouraged from schooling. These two mechanisms of poverty
trap reinforce each other, creating a dual poverty trap. Escaping from the trap
requires a combined, not separate, implementation of financial assistance for
schooling, and
policies for changing agents’ expectations.
Banking,
Inside Money and Outside Money
Hongfei Sun, Queen's
University
This
paper presents an integrated theory of money and banking. I address the
following question: when both individuals and banks have private information,
what is the optimal way to settle debts? I develop a dynamic model with
micro-founded roles for banks and a medium of exchange. I establish two main
results: first, markets can improve upon the optimal dynamic contract at the
presence of private information. Market prices fully reveal the aggregate
states and help solve the incentive problem of the bank. Secondly, it is
optimal for the bank to require loans be settled with short-term inside money,
i.e., bank money that expires immediately after the settlement of debts.
Short-term inside money makes it less costly to induce truthful revelation and
achieve more efficient risk sharing.
The
Persistence of Differences in Productivity, Wages, Skill Mixes and Profits Between Firms in a Rapidly Changing Environment
Katsuya Takii, Osaka School of
International Public Policy
Osaka
University
In
this paper, we construct a dynamic assignment model that can provide a unified
explanation of persistent differences in productivity, wages, skill mixes and
profits between firms in a changing and uncertain environment. Large expected organization capital
(firm-specific knowledge) attracts skilled workers, who help to accumulate
organization capital. Accumulated large
organization capital, in turn, confirms high expectations. This positive feedback brings about
persistent differences in these variables in an uncertain environment. We estimate parameters and simulate the
model. Our results show that a positive
assignment mechanism accounts for a large part of the observed persistence; the
difficulty of estimating organization capital plays only an auxiliary
role.
Asymmetry
and Long Memory in Dynamics of Interest Rate Volatility
Pei-Shih Weng (PhD Candidate), Department
of Finance, National Central University, Taiwan.
Empirically,
the conditionally heteroskedastic volatility effect
in short rate volatility process has been presented for broad discussion, and
the long memory phenomena is also tested. However, these two effects have been
never involved together to model the
dynamics of short rate volatility. This paper introduces a asymmetry and long memory conditional variance model, says
FIEGARCH, to model the dynamics of short-term interest rate volatility on the
three-month U.S. Treasury bills. By finding the significant estimates, we
recognize the necessity of the asymmetric volatility function with the long
memory property. Our results also show that the nonlinearity is not a necessary
fact for the short rate drift, instead, the asymmetric
specification plays an important role in the mean function. Finally, according
to the comparison for the prediction of the volatility dynamics, the FIEGARCH
shows better forecasting ability, especially in monthly frequency.
Optimal
social security in a dynastic model with human capital externalities, fertility
and endogenous growth
Siew Ling Yew, National University of Singapore;
Jie Zhang National University of Singapore and University
of Queensland
In
this paper we investigate the optimal scale of Pay-As-You-Go social security in
a dynastic family model with human capital externalities, fertility and
endogenous growth. Human capital externalities reduce the return to human
capital investment and hence lead to under-investment in human capital and
over-reproduction of the population. If the taste for the number of children is
sufficiently weak relative to the taste for the welfare of children, social
security can be welfare enhancing by reducing fertility and raising human
capital investment per child.
Optimal
Financial Contracts in Leveraged Buy Out: a double-sided moral hazard model
Ouidad YOUSFI, EconomiX University
of Paris X Nanterre
We
consider a double moral hazard model with three agents: the entrepreneur, the
LBO fund and the bank. The entrepreneur and the LBO fund have to exert efforts
in order to improve the productivity of their project; efforts are not
observable. We show that the bank's payments decrease with the outcome of the
project. When the project is not very risky, the entrepreneur and the LBO fund
exert first best efforts and they get equal shares of the project's outcome.
When it is highly risky, debt gives high powered incentives to the two agents
to provide efforts but it still not sufficient to induce them to provide the
first best efforts. However, these efforts are more efficient than those that
could be provided if the entrepreneur asks the LBO fund for advice and money.
Moreover, when the entrepreneur asks for advice from a consultant and for money
from a bank, they get equal shares whether the project is very risky or not.
When the project is lowly risky, the identity of the advisor (consultant/ LBO
fund) is irrelevant. When it is highly risky, the optimal financial structure
of capital depends on the impact of their efforts on the performance of the
project.
Programme
Committee
Keshab Bhattarai:University of Hull, UK
Georg Duernecker:European University Institute , Italy
Katsuya Takii, Osaka University, Japan
Conference venue and directions:
Travelodge London Kings Cross Royal
Scot Hotel
100 Kings
Cross Road, London, WC1X 9DT
Tel: 0871 984
6272; Fax: 0207 833 8261.
This venue is 4 minutes walking
distance from the London Kings' Cross Station.
Directions from the King' Cross Station, N1 9AP
(According to Route Planner):
0.4 mi (about 4 mins)
1. Head north on A5200/York Way toward
Caledonia St 151 ft
2.Turn right at
Caledonia St 367 ft
3.Turn right at
A5203/Caledonian Rd 308 ft
4.Turn left at
A501/Pentonville Rd 269 ft
5. Slight right at A201/King's Cross Rd 0.2 mi
C