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THE ANALSYIS OF INTERNATIONAL CAPITAL MARKETS

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					THE ANALYSIS OF INTERNATIONAL CAPITAL MARKETS Understanding Europe’s Role in the Global Economy AICM Contract No: HPRN-CT-1999-00067 1st Annual Progress Report 01/02/2000 – 31/01/2001

Professor Philip Lane Department of Economics Trinity College Dublin Dublin 2 Ireland Tel: + 353 1 608 2259 Fax: + 353 1 677 2503 Email: plane@tcd.ie

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RESEARCH RESULTS ...................................................................................... 3 1.1 Scientific Highlights ..................................................................................... 3 1.2 Joint Publications ........................................................................................ 8 1.3 Other Related Publications of the Network................................................ 9
1.3.1 1.3.2 1.3.3 1.3.4 1.3.5 1.3.6 1.3.7 1.3.8 Trinity College Dublin .........................................................................................................9 CentER ...............................................................................................................................9 CEPR .................................................................................................................................9 Centre for Financial Studies ............................................................................................ 11 EPRU .............................................................................................................................. 12 Tel Aviv University........................................................................................................... 13 London Business School ................................................................................................ 13 Università di Bologna / Università di Roma III ................................................................ 14

1.4 Dissemination of Research Output........................................................... 15 2 3 Comparison with the Joint Programme of Work .......................................... 16 Organisation and Management ...................................................................... 17 3.1 Network meetings and workshops ........................................................... 18 3.2 Networking to date ..................................................................................... 20 4 Training and recruitment ................................................................................ 21 4.1 Progress in recruitment to date ................................................................ 21
4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.1.7 Trinity College Dublin ...................................................................................................... 21 CentER, Tilburg............................................................................................................... 21 Center for Financial Studies (CFS), Frankfurt ................................................................ 21 Eitan Berglas School of Economics, Tel Aviv (EBSE) .................................................... 21 EPRU .............................................................................................................................. 22 LBS ................................................................................................................................. 22 Bologna ........................................................................................................................... 22

4.2 Integration of young researchers into research programme ................. 23 5 6 7 DIFFICULTIES .................................................................................................. 24 Annex I – First Network Conference, Frankfurt, February 2000 .................. 25 Annex II – Second Conference Programme, Tel Aviv, November, 2000 ..... 26

8 Annex III – Progress in Recruitment of Young Researchers as of November 2001....................................................................................................... 29

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RESEARCH RESULTS

1.1   

Scientific Highlights Two Network conferences held in Frankfurt (February 2000) and Tel Aviv (November 2000) Produced significant amounts of quality research (working papers, books, journal articles) Presentation of network-related work at numerous conferences

The first major project carried out by Lane (TCD) during this period was a collaboration with Gian Maria Milesi-Ferretti (IMF). This work built a new dataset on foreign asset and liability positions. This dataset has been posted on the internet (at TCD, CEPR and IMF websites). Work was conducted by TCD on several papers.  "The External Wealth of Nations" (accepted for publication in the Journal of International Economics) which described the construction of the dataset and its basic features. "External Capital Structure", which was presented at the Kiel Week conference in June 2000, studied the composition of capital flows between debt, portfolio equity and FDI categories.

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"The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates" (published as CEPR Discussion Paper No. 2511) studied the impact of net foreign asset positions on long-run real exchange rates. A related paper on "Long-Run Determinants of the Irish Real Exchange Rate" was also prepared, which is forthcoming in Applied Economics. Initial work on two more papers was also conducted ("Long-Term Capital Movements" and "External Wealth, the Trade Balance and Real Exchange Rates"). A second major project was carried out in conjunction with Michael Devereux (CEPR) and looked at the impact of financial frictions on optimal monetary policy for emerging market economies. A draft of the paper "Exchange Rates and Monetary Policy for Emerging Market Economies" was presented to seminars at the Bank of England and University College London. Lane also worked on a paper "International Trade and Economic Convergence: The Credit Channel". This paper shows that international trade improves the credit rating of developing countries. It was accepted for publication in Oxford Economic Papers. Another paper in progress was " Do International Investment Income Flows Smooth Income?" which examines whether investment income on foreign investments is correlated with the domestic business cycle. Another member of the TCD team (Giovanni Lombardo) worked on two papers. In "Price rigidity, the mark-up and the dynamics of the current account", he showed that the degree of competition affects the response of the current account to nominal shocks. The mechanism hinges on the relationship between the mark-up and the degree of real rigidity of prices.

Mathias Hoffmann (Young Researcher, TCD) worked on a paper, "Infrastructure and International Capital Flows", which examined the impact on domestic infrastructure on foreign capital flows. Sarisoy and O‟Donnell (both TCD) worked on projects on "Geographical Determinants of FDI" and "Financial Openness and Economic Performance" respectively. In Noisy Financial Signals and Persistent Effects of Nominal Shocks in Open Economies, Andersen (EPRU) studied how exchange rate volatility affects the dynamic adjustment properties of an interdependent world economy consisting of two regions (which could be interpreted as Europe and the United States). Thygesen (EPRU), through his project, The Relationship between the Euro and the Dollar discussed and estimated the economic fundamentals determining the long run equilibrium exchange rate between the euro and the dollar. The empirical estimates indicated that the euro is currently undervalued vis á vis the dollar. Hutchison (EPRU) studied empirically whether removing capital controls prematurely may contribute to currency instability. In addition, he looked at whether capital controls intended to stop 'hot' money may have the opposite effect by signalling the continuation of macroeconomic imbalances and 'bad' policies. He also used a database for 90 industrial and developing countries over the 1975-97 period to analyse the incidence and underlying causes of banking and currency crises and the factors linking the two types of crisis. Nielsen (EPRU) in Cross-ownership of Firms and Capital Income and Profit Taxation (jointly with Huizinga, Tilburg) illuminated how the tendency for capital mobility to drive down taxes on capital income may be held in check by the fact that increased cross-border investment also increases the incentives for governments to tax the profits accruing to foreign owners of the domestic capital stock. In Withholding taxes or Information Exchange: The Taxation of International Interest Income Flows, they studied the incentives for the governments in a region like the EU to co-operate in order to secure effective taxation of cross-border interest flows, given that investors have the option of investing their funds in tax havens outside the EU region. Sorensen (EPRU) in International Co-ordination of Capital Income set out to construct computable general equilibrium models which can be used to quantify the potential welfare gains from various forms of international co-ordination of taxes on capital income and profits. Special emphasis was put on the distinction between regional co-ordination within a subgroup of countries like the EU, and global co-ordination involving all the major countries in the world. The network participants at LBS have engaged in several different areas of research within the RTN network. Imbs has worked on an empirical project on trade and economic development and has written a paper (jointly with Roman Wacziarg) on “Stages of Diversification”. Portes has worked on various aspects of European financial market integration and on the impact of informational costs on capital flows. Ravn has worked on two projects. The first projects examined the link between capital flows and goods market integration among OECD countries including the countries within the EU area. In the other project, Ravn examines how imperfect competition in the goods market affect national and international business cycles. Scott has worked on the structure of government debt. Each of these projects is still in progress but it is anticipated that they will give rise to a number of working papers to be published within the near future.

The research initiatives of the LBS node have contributed towards the project objectives on “Microfoundations of International Financial Markets” and “Macroeconomic Interdependence and International Financial Markets”. The papers have examined empirical aspects of international capital flows and international trade and the papers by Ravn and by Scott have applied and extended the new open economy macroeconomics literature. The research objectives and methods remain realistic as far as the LBS node is concerned. Razin and Sadka (Tel Aviv) completed work on international factor movements and found that increasingly, globalised factor flows have enhanced worldwide efficiency in recent year, but not without adverse, and in some cases devastating, side effects. Cukierman (Tel Aviv) developed, jointly with Spiegel, Kiguel (both Tel Aviv) and Leiderman (Deutsche Bank/CEPR), a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability, but value the flexibility to adjust the nominal exchange rate in order to attain real objectives in the face of stochastic shocks to the current and capital accounts of the balance of payments. In addition, Goldstein, Cukierman and Spiegel (all Tel Aviv) developed a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks. The main focus of research of the CFS Frankfurt group in the first reporting period was on measuring the integration effects in the global economy. Weber and Beck (CFS) have compiled a large spatial data-set of internationally compatible consumer price data for North-America, South-America, Asia and Europe. Both aggregate and dis-aggregated CPI data were gathered. The key aspect of this data collection was to obtain disaggregated time series of the CPI data by both categories of consumer goods as well as regions/cities within each country. This allows the study of the law-of-one-price both across national borders and within a country. Weber and Beck also studied the integration effects of the German Economic and Monetary Union (GMU) and the European Economic and Monetary Union (EMU) on relative price volatility within these common currency areas. They analysed the evolution of goods market segmentation for the European Union countries based on price data from 81 European cities in six European countries prior and during EMU and showed that EMU has reduced price dispersion in Europe by roughly 80 percent within the first two years of EMU. Thus, monetary unification has contributed significantly to a decline in good market segmentation within Europe. Weber and Beck were also invited to conduct some further research on inflation diversity in Europe as visiting research fellows of the European Central Bank, and they will present some of the above findings in an ECB seminar in March 2001. A proposal to extend this line of research to emerging market economies in Asia, Southern America and South-East Europe by studying the disintegration effects of currency crises has been submitted and accepted for presentation at the Annual Research Conference of the International Monetary Fund in Washington D.C. in November 2001, and is planned for publication in the IMF Staff Papers. Kräussl (Young Researcher at Tel Aviv) and Beck (CFS) focused on the empirical analysis of currency crises. Kräussl analysed sovereign ratings and their

impact on recent financial crises. In a related work, Beck (2000a) showed that emerging market eurobond spreads after the Asian crisis can be largely explained by market expectations about macroeconomic fundamentals and international interest rates. Gross (CFS) has focused on the link between trade and international business cycles, which is another key aspect of understanding Europe's role in the global economy. A key stylized fact in international economics is the increasing synchronisation of international business cycles. The aim of this project is to explore the extent to which interdependencies in trade determine the international transmission of country-specific shocks. Kaltenhäuser (CFS) examined the explanatory power of structural reduced form exchange rate models. Using daily data in a VAR analysis he studied the effect of changes in stock market returns on the Dollar/Euro exchange rate. He also found that positive returns on US equities as well as on European stock markets had a negative impact on the US dollar-euro rate. Giancarlo Corsetti (Bologna, together with Mackowiak, Princeton) in their paper proposed a new framework for interpreting a currency crisis associated with a fiscal imbalance, that they found appropriate for the analysis of contemporary economies with outstanding public debt. The paper developed an innovative analysis of currency and financial instability in the presence of nominal liabilities. The analysis is especially relevant to the design of stabilisation policies in the countries that are candidates for joining the EU and/or the Euro Zone. In International Dimensions of Optimal Monetary Policies, Corsetti and Pesenti (Federal Reserve Bank of New York) provide a baseline general-equilibrium model of optimal monetary policy among interdependent economies, with monopolistic firms that set prices one period in advance. The paper analyses the optimal response of a central bank of a large area, such as the Euro area, to the international cycle and policy stance. Corsetti and Luca Dedola (Banca d‟Italia), in Macroeconomics of International Price Discrimination, presented a macroeconomic model with endogenous market segmentation. In contrast to the vast majority of contributions in this area, the model is consistent with two basic stylised facts of the international economy: the failure of the law of one price and expenditure switching effects. It contributes to the understanding of international transmission with segmented markets. Hélène Rey (CEPR/ Princeton) conducted with Richard Portes (LBS) an empirical investigation on the determinants of international transactions in portfolio equity (“The Determinants of Cross Border Equity Flows”). Using a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96, they showed that the geography of information is the main determinant of the pattern of international transactions. In "Information and Capital Flows: The Determinants of Transactions in Financial Assets", Rey, Portes and Oh (LSE) looked at the link between information asymmetries and types of assets and found that international transactions in corporate bonds and portfolio equity are much more sensitive to informational asymmetries than transactions in government bonds. Rey also worked with Philippe Martin (Lille/CEPR) on the links between market size, stock market capitalisation and asset prices. In “Financial Super-Markets:

Size Matters for Asset Trade”, they showed that large financial area (like the Euro area) enjoy lower cost of capital for firms, a higher market capitalisation per capita and better risk sharing. In “Financial Integration and Asset Returns”, they used their model to discuss the changing geographical location of financial centres as cost of transacting in financial markets declines and harmonisation of standards across stock exchanges take place. These two studies are especially relevant for the euro area where trading costs are declining due to the elimination of exchange rate uncertainty and European wide harmonisation measures. Finally in a new project (“Financial Globalisation and Emerging Markets: With or Without Crash?”), Martin and Rey studied the impact of global financial integration on financial stability. They show that international capital market integration enhances welfare in good times, but also potentially increases the likelihood of self-fulfilling financial crashes for countries in intermediate range of the income distribution and at an intermediate level of capital market liberalisation. Together with Harald Hau (CEPR/ INSEAD), Rey investigates in “Order Flows, Exchange Rates and Asset Prices” the links between exchange rate movements and asset markets. Such a study is very relevant for the determinants of the euro dollar exchange rate since it has been argued, especially in the press, that the decline of the value of the euro has been driven by European investments in the US stock markets. Hau and Rey found that the empirical correlations between exchange rate, order flows on the foreign exchange market and equity prices can be reconciled only in a model where the exchange rate is determined by trade in assets rather than trade in good and where equity traders do not hedge against currency fluctuations. Finally they emphasised the importance of heterogeneous beliefs to understand the data. Details of the two network conferences which took place during this reporting period can be found in the section on „Networking to date‟ and in Annexes I and II.

1.2

Joint Publications

Michael Devereux (CEPR) and Philip Lane (TCD), “Exchange Rates and Monetary Policy for Emerging Market Economies,” forthcoming in CEPR Discussion Paper No. 2874, 2001. Harry Huizinga (Tilburg) and Soren Bo Nielsen (EPRU), 2000, "The Coordination of Capital Income and Profit Taxation with Cross-Ownership of Firms", forthcoming in Regional Science and Urban Economics. Harry Huizinga (Tilburg) and Soren Bo Nielsen (EPRU), 2000, "Privatization, Public Investment and Capital Income Taxation", forthcoming in Journal of Public Economics. Harry Huizinga (Tilburg) and Soren Bo Nielsen (EPRU), 2000, „The Co-ordination of capital income and profit taxation with cross-ownership of firms‟, forthcoming in Journal of Regional Science and Urban Economics. Harry Huizinga (Tilburg) and Soren Bo Nielsen (EPRU), "The Taxation of Interest in Europe: A Minimum Withholding Tax", in Sijbren Cnossen (ed.), Taxing Capital Income in the European Union, Oxford University Press, 2000. Harry Huizinga (Tilburg) and Soren Bo Nielsen (EPRU), "Withholding Taxes or Information Exchange: The Taxation of International Interest Flows", EPRU Working Paper Series 2000-19. Rey, Hélène (CEPR), “The Determinants of Cross Border Equity Flows”, with R. Portes (LBS), July 2001. http://www.princeton.edu/~hrey/

1.3

Other Related Publications of the Network

1.3.1 Trinity College Dublin Matthias Hoffmann (Young Researcher), 2000, “Infrastructure and International Capital Flows”. Philip Lane, 2000, “International Trade and Economic Convergence: The Credit Channel”. Philip Lane, 2000, “Do International Investment Income Flows Smooth Income?”. Philip Lane and Gian Maria Milesi-Ferretti (IMF), 2000, “The External Wealth of Nations”, forthcoming in Journal of International Economics. Philip Lane and Gian Maria Milesi-Ferretti (IMF), 2000, “External Capital Structure”, CEPR Discussion Paper No. 2583. Philip Lane and Gian Maria Milesi-Ferretti (IMF), 2000, “The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates”, CEPR Discussion Paper No. 2511. Giovanni Lombardo, 2000, “Price Rigidity, the Mark-up and the Dynamics of the Current Account”. Barry O‟Donnell, 2000, “Financial Openness and Economic Performance”. Selen Sarisoy, 2000, “Geographical Determinants of FDI”. 1.3.2 CentER Sylvester Eijffinger and Wolf Wagner, 2001, “ The Welfare Gains from International Consumption Smoothing”, forthcoming. Sylvester Eijffinger and Wolf Wagner, 2001, “Taxation if Captial is not Perfectly Mobile: Tax Competition versus Tax Exportation”, forthcoming. Harry Huizinga, with G. Nicodeme, 2000, “Are International Deposits Tax Driven?”, distributed as a European Commission working paper. Harry Huizinga, with J. Neilssen and R van der Vennet, 2000, “Efficiency Effects of distributed as a Tinbergen Institute Discussion Paper. 1.3.3 CEPR Devereux, Michael, “The Macroeconomics of International Financial Panics” with David Cook, forthcoming. Devereux, Michael, “Capital Flows, Capital Controls, and Exchange Rate Policy”, with David Cook, forthcoming. Devereux, Michael, “International Risk-Sharing and the Exchange Rate: Reevaluating the Case for Flexible Exchange Rates”, forthcoming, CEPR Discussion Paper No. 2900, 2001.

Devereux, Michael, “Predetermined Prices and the Persistent Effects of Money on Output”, with James Yetman, forthcoming, CEPR Discussion Paper No. 2917, 2001. Devereux, Michael, “Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility”, with Charles Engel, forthcoming 2001. Devereux, Michael, “Risk sharing and the theory of optimal currency Areas: A reexamination of Mundell 1973”, with Stephen Ching, forthcoming 2001. Devereux, Michael, “Monetary Policy, Exchange Rate Flexibility, and Exchange Rate Pass-through ”, Revisiting the Case for Flexible Exchange Rates, Bank of Canada, forthcoming. Devereux, Michael, “The Malaysian Capital Controls: Determinants and Effects”, with David Cook, Asian Economic Papers, forthcoming. Devereux, Michael, “Expansionary Fiscal Contractions: A Theoretical Exploration", with Frank Barry, Journal of Macroeconomics, forthcoming. Devereux, Michael, “Exchange Rate Pass-through and the Welfare Effects of the Euro", with Charles Engel and Cedric Tille, International Economic Review, forthcoming. Devereux, Michael, “Government Spending and Welfare with Increasing Returns to Specialization”, with Allen Head and Beverly Lapham, Scandinavian Journal of Economics, forthcoming. Devereux, Michael, “A Tale of Two Currencies: The Asian Crisis and the Exchange Rate Regimes of Hong Kong and Singapore”, Review of International Economics, forthcoming. Devereux, Michael, “Dynamic Gains from Trade with Imperfect Competition and Market Power”, with Khang Min Lee, Review of Development Economics, 5, (2001), 183-198. Hau, Harald, 2001, “The Euro as an International Currency: Explaining Puzzling First Evidence from the Foreign Exchange Markets”, forthcoming in Journal of International Money and Finance. Hau, Harald, 2001, “Real Exchange Rate Volatility and Economic Openness: Theory and Evidence”, forthcoming in Journal of Money, Credit and Banking. Rey, Hélène, “International Trade and Currency Exchange”, Review of Economic Studies 68 (2), April 2001, 443-464. Rey, Hélène, “Financial Integration and Asset Returns”, with P. Martin, European Economic Review, Volume (44) 7, June 2000, pp. 1327-1350.

Rey, Hélène, "Information and Capital Flows: The Determinants of Transactions in Financial Assets", with R. Portes (LBS) and Y. Oh, European Economic Review Papers and Proceedings, June 2001. Rey, Hélène, “Financial Super-Markets: Size Matters for Asset Trade”, with P. Martin, July 2001 at http://www.princeton.edu/~hrey/ Rey, Hélène, “The Determinants of Cross Border Equity Flows”, with R. Portes (LBS), July 2001 http://www.princeton.edu/~hrey/ Rey, Hélène, “Order Flows, Exchange Rates and Asset Prices”, with Harald Hau, Princeton 2001 mimeo. Rey, Hélène, “Financial Globalization and Emerging Markets: With or Without Crash?”, with Philippe Martin, Princeton 2001 mimeo. Sutherland, Alan, 2000, “Inflation Targeting in a Small Open Economy”, CEPR Discussion Paper No. 2726.

1.3.4 Centre for Financial Studies Beck, Günter and Axel A. Weber (2001a), “How Wide is the Pacific?“, mimeo. Beck, Günter and Axel A. Weber (2001b), “How Wide are European Borders? – On the Integration Effects of Monetary Unions,“ mimeo. Beck, Roland (2000a), "Do Country Fundamentals Explain Emerging Market Bond Spreads?", mimeo. Beck, Roland (2000a), "The Volatility of Capital Flows to Emerging Markets and Financial Services Trade", mimeo. Gross, Daniel (2000a), "Identifying Country-Specific and Global Shocks", mimeo. Gross, Daniel (2000b), " Trade Flows and the International Business Cycle", mimeo. Kaltenhäuser, Bernd (2001), "Explaining the Dollar/Euro Rate: Do Stock Market Returns Matter? - Evidence from Daily Data", mimeo. Kräussl, Roman (2000), "Sovereign Ratings and Their Impact on Recent Financial Crises", mimeo.

1.3.5 EPRU (Other network-related publications by members of the EPRU team; headings refer to the headings given in the Work Plan described in Annex 1 of the contract) Re. 3.2: Macroeconomic Interdependence and International Financial Markets Books Tom Cargill, Michael M. Hutchison (member of EPRU team) and Takatoshi Ito. Financial Policy and Central Banking in Japan, MIT Press, 2000 Articles in refereed journals: Henrik Jensen: "Optimal Monetary Policy Co-operation Through StateIndependent Contracts With Targets". European Economic Review 44, pp. 517539, 2000. Contributions to edited book volumes: Niels Thygesen: "Evolving Ambitions in Europe's Monetary Unification, in Michael Artis, Elizabeth Hennessey and Axel Weber (eds.), The Euro: A Challenge and Opportunity for Financial Markets, Routledge, 2000. Working Papers: Avinash Dixit and Henrik Jensen: "Equilibrium Contracts for the Central Bank of a Monetary Union". Mimeo, Princeton University and EPRU, University of Copenhagen Hans Peter Lorenzen and Niels Thygesen: "The Relation Between the Euro and the Dollar". EPRU Working Paper, 2000. Torben M. Andersen and Niels C. Beier, Noisy Information Financial Signals and Exchange Rates, CEPR Discussion Paper 2360, 2000 Re. 3.3: Stability of the International Financial System Working papers: Michael M. Hutchison: "European Banking Distress and EMU: Institutional and Macroeconomic Risks". EPRU Working Paper Series, 2000-04. Reuven Glick and Michael M. Hutchison: "Stopping 'Hot Money' or Signalling Bad Policy? Capital Controls and the Onset of Currency Crises", EPRU Working Paper Series, 2000-14.

Re. 3.4: Taxation and the International Financial System Articles in refereed journals: Peter Birch Sorensen: "The Case for International Tax Reconsidered". Economic Policy 31, October 2000, pp. 429-472. Working papers: Torben M. Andersen: "International Integration, Ta-xa-tion and Welfare Policies". mimeo, University of Aarhus. „Privatization, public investment, and capital income taxation‟, by Harry Huizinga and Soren Bo Nielsen, forthcoming in Journal of Public Economics. 1.3.6 Tel Aviv University Assaf Razin, Efraim Sadka, and Phillip Swagel, 2001, “Tax Burden and the Welfare State: Political-Economy Theory and Evidence, “ Journal of Public Economics, forthcoming. Assaf Razin and Efraim Sadka, 2001, “Labour, Capital and Finance: International Flows”, Cambridge University Press, forthcoming. Alex Cukierman, Yossef Spiegel, and Leonardo Liederman, 2000, “The Choice of Exchange Rate Bands: Balancing Credibility and Flexibility”, forthcoming. Alex Cukierman, Itay Goldstein and Yossef Spiegel, 2000, “The Choice of Exchange Rate Regime and Speculative Attacks”, forthcoming. Alex Cukierman, 2000, “Are Contemporary Central Banks Transparent about Economic Models and Objectives and What Difference Does It Make?”, forthcoming. Itay Goldstein and Ady Pauzner, 2000, “Demand Deposit Contracts and the Probability of Bank Runs”. Itay Goldstein, 2000, “Strategic Complementarities and the Twin Crises”. Itay Goldstein and Ady Pauzner, 2000, “Contagion of Self-Fulfilling Financial Crises Due to Diversification of Investment Portfolios”. 1.3.7 London Business School Papers: Morten O. Ravn, 2001, “Consumption Dynamics and Real Exchange Rates”, working paper. Morten O. Ravn, 2001, “Imperfect Competition and Prices in a Dynamic Trade Model with Comparative Advantage”, working paper. Jean Imbs and Romain Wacziarg, 2000, “Stages of Diversification”, CEPR Discussion Paper No. 2642. Co-ordination

1.3.8 Università di Bologna / Università di Roma III Giancarlo Corsetti and Bartosz Mackowiak (Prnceton), 2000, “Nominal debt and the dynamics of currency crises”. Giancarlo Corsetti and Paolo Pesenti (Federal Reserve of New York), 2000, “International Dimensions of Optimal Monetary Policies”. Giancarlo Corsetti and Luca Dedola (Banca d‟Italia), 2000, “The Macroeconomics of International Price Discrimination”.

1.4

Dissemination of Research Output

Research output from the Network was presented at numerous seminars, workshops and conferences (home node of presenter(s) in parenthesis):           Kiel Week conference, June 2000 (TCD) Irish Economics Association, April 2000 (TCD) CEPR/CREI “Exchange Rates and Prices” conference, Barcelona, May 2000 (all nodes) CEPR European Summer Symposium on International Macroeconomics, Tarragona, June 2001 (all nodes) Universities of Warwick, Geneva and Lausanne, February 2000 (TCD) Hong Kong Institute of Monetary Research, March 2000 (TCD) Bank of England, June 2000 (TCD) University College London, June 2000 (TCD) 2001 North American Meetings of the Econometric Society, New Orleans, January 2001 (Bologna, TCD) Universitá di Trento, NUI-Maynooth, European Economic Association annual conference (2000), the Macro, Money and Finance annual conference (2000) and the Dublin Economics Workshop, January 2001 (TCD) EEA and AEA Annual Meetings (Tel Aviv) Economic Policy Research Unit (EPRU), University of Copenhagen, May 2000 (Tel Aviv) University of Cyprus, November 2000 (Tel Aviv) Taipei Conference on Public Finance and Welfare, December 2000 (Tel Aviv) Annual Congress of the European Economic Assocciation, Lausanne (CFS) European Meeting of the Econometric Society, Lausanne (CFS) Annual Meeting of the German Verein für Sozialpolitik, Rostock (CFS) European Central Bank, March 2000 (CFS) Yale University, Princeton University, Federal Reserve Bank of New York, European Summer Symposium in Economic Theory (2000) (Bologna) Universities of Milan, Tilburg, Salerno, Stockholm, Warwick and Yale, Banca d‟Italia and MIT (Bologna) European Commission (CentER Tilburg) NBER Conference, Gerzensee May 2000 (CentER Tilburg)

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2   

COMPARISON WITH THE JOINT PROGRAMME OF WORK Three young researchers successfully hired in the first year Papers presented by young researchers at several conferences Collaboration with dissemination industry and policy-makers through research and

The network as a whole considers that the research objectives for which it is responsible in the areas of 'Macroeconomic Interdependence and International Financial Markets', 'Stability of the International Financial System', and 'Taxation and the International Financial System' are still relevant and achievable. The TCD node has worked intensively on its research objectives. The project with Milesi-Ferretti is part of the network's analysis of the determinants of international capital flows and also contributes to understanding of international systemic issues. The project with Devereux (CEPR) is part of the effort to improve our understanding of open-economy macroeconomic interdependence. The Bologna node focused intensively on macroeconomic interdependence and speculative behaviour in financial markets, reaching important results in the theory of stabilisation in open economy. The work ahead requires empirical and policyoriented applications of these results. Corsetti and Mackowiak have an empirical project on the design of stabilization policies in the countries that are candidate to join the EU and or the euro area. Corsetti and Pesenti have a new project showing how an optimal currency area could endogenously when the central bank pursues specific stabilisation rule. They also have a project to collect evidence on the suboptimality of stabilization policies that are inward-looking, and do not appropriately respond to exchange rate movements. Corsetti and Dedola have a model of asymmetric shocks in a monetary union, encompassing both national and sectoral shocks, as well as nominal and real shocks. They also plan to develop a paper simulating the model with realistic parameter value, so as to shed light on inflation and employment dynamics across large currency areas (preliminary results are already available). The CentER Tilburg node’s work on issues in international taxation has progressed according to plan. Tel Aviv is pursuing consistent research methods capturing systematic deviations of the capital market from the new classical, perfect information/ perfect competitive paradigm. Overall, there are no changes to the research method and Work Plan to report.

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ORGANISATION AND MANAGEMENT

The network is making extensive use of the Internet for the collaboration and dissemination of work. The network web-site is www.cepr.org/research/Networks/IMLAN/default.htm. Links to all the teams‟ home pages are accessible via this web-site. Corsetti (Bologna) has also disseminated his project-related output through his personal web-site. He received over 3,000 and 12,000 „hits‟ on his personal website http://www.econ.yale.edu/~corsetti for two of the papers reported earlier under the section, “Other related publications”. All CEPR Discussion Papers are available via the main CEPR web-site www.cepr.org .        Trinity College Dublin CentER, Tilburg University Center for Financial Studies Economic Policy Research Unit, University of Copenhagen Eitan Berglas School of Economics, University of Tel Aviv London Business School Università di Bologna (Università di Roma Tre)

www.tcd.ie/Economics/ http://center.kub.nl/ http://www.ifk-cfs.de/i http://www.econ.ku.dk/epru/ http://econ.tau.ac.il/ http://www.london.edu/ http://www.unibo.it (http://w3.uniroma3.it/index.htm)

3.1 

Network meetings and workshops

Two major network meetings were held during the reporting period: The first meeting was held at CFS, Frankfurt and consisted primarily of the team leaders. In addition to a set of research presentations, the team leaders met to discuss plans for the network. A programme is attached in Annex I. The second, a major conference held at Tel Aviv, took place in November 2000. This was co-sponsored by the Bank of Israel and brought together a large number of network members, together with a number of outside experts. Despite the political tensions at the time, the conference was well attended and a definite success. The team leaders again met at this conference and agreed on two major workshops for 2001 (at EPRU in June 2001 and London Business School in November 2001). The conference programme can be found in Annex II.

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The conference in Tel Aviv, held from November 25-26, 2000, was organised by both CEPR and the Eitan Berglas School of Economics based at Tel Aviv University. The organisers were Giancarlo Corsetti (Bologna), Philip Lane (Trinity College Dublin), Assaf Razin (Tel Aviv) and Leonardo Leiderman (Deutsche Bank and CEPR). In all, there were 33 participants from Europe and the USA. The conference consisted of four main sessions over the two days:   Session I – this focused on „Balance Sheet Effects, Bailout Guarantees and Financial Crises‟. Session II looked at „Currency Unions and International Integration‟ and „Interdependent Banking and Currency Crisis in a Model of Self-Fulfilling Beliefs‟ Session III consisted of papers on „International Tax Co-ordination: Regionalism versus Globalism‟ and „Withholding Taxes or Information Exchange: The Taxation of International Interest Flows‟. Session IV was on the subjects of „Globalisation and Capital Markets‟ and „Capital Flows, Exchange Rates and Asset Prices‟.





Two further Network meetings have already been scheduled to take place during the second year of the project at EPRU, Copenhagen in June 2001 and at London Business School in November 2001. The Network structure has been very instrumental in fostering collaboration in research and scientific interaction. Network members have met at various workshops and conferences during the course of this project, including the European Summer Symposium in Macroeconomics, which was organised by CEPR and held in Tarragona, Spain in May 2000. ESSIM is an annual meeting that brings together economists from across Europe and key researchers from outside the region. It provides a unique opportunity for macroeconomists from

different universities and countries to discuss research in a relaxed atmosphere and to develop long-term collaborative relationships. Another important aim of ESSIM is to provide young researchers with the opportunity to meet and discuss their work with senior economists. The dissemination of the research of the Network was planned to take place in the first instance through CEPR‟s Discussion Paper Series, in order that papers receive the widest possible professional scrutiny, both in the research and the policy communities. On average 500 copies of each Discussion Paper are circulated throughout Europe and the rest of the world. CEPR Discussion Papers are also abstracted widely, and summaries of the papers are also distributed on a monthly basis by electronic mail to over 3,000 individuals. Each Discussion Paper is also listed in the CEPR Bulletin which is circulated to over 6,000 members of the academic community in Europe and elsewhere, and appears on CEPR‟s webpage, where it is also available in PDF form.

3.2

Networking to date

In 2000 Soren Bo Nielsen of the EPRU team has had three bilateral meetings with Harry Huizinga of the Tilburg team with the purpose of co-ordinating and discussing joint research projects within the network. Harry Huizinga has also paid a short visit to EPRU in 2000. The LBS team has been very active in communicating with the other nodes of the network. Portes, Scott, and Ravn all participated in the ESSIM 2000 meetings and Ravn and Scott presented their research at that conference. Portes and Ravn participated in the first network meeting in Frankfurt and Portes presented his work at that meeting. Imbs, Portes, Ravn and Viola all participated in the second network meeting in Tel Aviv and Ravn presented his work there. Furthermore, Imbs also presented his work at Trinity College Dublin. On top of this, there have been several exchanges of discussion between various LBS network members and network members at other nodes. LBS also invited Philip Lane (TCD) to hold a seminar at the LBS during the reporting period. Lane (TCD) visited the IMF during March 2000 to pursue his collaboration with Milesi-Ferretti. Mick Devereux (CEPR) visited TCD during 2000 also to work on their joint project. Alan Sutherland of the CEPR team was invited to visit TCD to present his work also. The papers from the TCD team were posted on their website, as was the "External Wealth of Nations" database. This date and some papers were also disseminated via the CEPR Discussion Paper series and IMF Working Paper series.

4

TRAINING AND RECRUITMENT

4.1   

Progress in recruitment to date

Advertisements of vacant positions within the network have been published in Economics Research Network job opportunities service, published in Job Openings for Economists publicised throughout CEPR‟s research network and on CEPR‟s website

4.1.1 Trinity College Dublin Mathias Hoffmann was hired as a PhD student, beginning September 2000 for 24 months. Under Lane's supervision, he worked during this period on a project "Infrastructure and International Capital Flows". He also helped with research assistance on the projects with Milesi-Ferretti and Devereux (CEPR). Hoffmann had already completed his MSc coursework at Bristol before joining the network. At TCD, he made presentations to the Graduate Studies Seminar and the International Economics Workshop. He also regularly participated in the Dublin Economics Workshop. Plans for further training in 2001 were also made. Giovanni Ganelli was interviewed and accepted a position as a post-doc research fellow for 24 months. The start of this contract was deferred, pending the completion of his doctorate at Warwick University. 4.1.2 CentER, Tilburg No hiring occurred during this period, although efforts were made to do so and resulted in interviews. More recently, it is very likely that Dr. Yildirim (Tel Aviv) will be hired as a post-doc at the Tilburg node. He will work on issues in international banking and finance and thus fits well within the research objectives of the programme. The node is continuing in its search for additional hires. 4.1.3 Center for Financial Studies (CFS), Frankfurt By the end of this reporting period the CFS will have agreed with Marco Hoeberichts (Tilburg, NL), on an 18-month post-doctoral contract starting May 14, 2001. 4.1.4 Eitan Berglas School of Economics, Tel Aviv (EBSE) Roman Kräussl (Germany, Ph.D Frankfurt), was hired from September 2000 for four months.

4.1.5 EPRU Two post-doctoral researchers have been identified by the end of the reporting period: Wolfgang Eggert and Thomas Dickescheid (both from Germany) are expected to take up the post offered to them in September 2001. 4.1.6 LBS Maria Fabiana Viola, (Italian 29 years old at time of appointment) was hired and started on September 1, 2000 for a total of 24 months as a pre-doctoral researcher. Her thesis subject is „International Capital Flows‟. LBS is also in the process of hiring Natalie Chen, ECARES, Brussels, for a post-doc position. With this hiring they will provide 36 months of training but would like to extend it to 48 months (24 pre-doc and 24 post-doc). 4.1.7 Bologna Two applicants have been identified so far as potential hires to start in the summer of 2001. One potential applicant (Bartosz Mackowiak) has already been selected for a contract starting in March 2002. The hiring is on hold while the node waits for approval from the Commission for their request to move the team from Bologna to Rome. Contract deliverable of Young Young Researchers financed by Researchers to be financed by the contract so far (personthe contract (person- months) months) Pre-doc Post-doc Total Pre-doc Post-doc Total (a) (b) (a+b) ( c) (d) (c+d) 25 24 49 4 0 4 22 0 23 12 27 12 24 18 0 18 24 14 24 18 40 0 41 36 41 36 42 0 0 0 0 0 5 0 0 0 0 0 4 0 0 0 0 0 0 4 0 0

Participant

TCD CentER CEPR CFS EPRU EBSE LBS BOLOGNA/ ROMA III TOTAL

145

140

285

9

4

13

4.2

Integration of young researchers into research programme

Hoffman (TCD) has initially been working on a project called „Capital Flows and Public Infrastructure‟ and also assisting in Professor Lane‟s research on „Perspectives on International Borrowing and Lending‟. He also attended the Tel Aviv network meeting in November 2000. Kräussl (Tel Aviv) has been involved with the research being carried at both Tel Aviv and at his home institution at CFS, Frankfurt. The London Business School hired Maria Viola as a pre-doc student. Maria started at the LBS in August 2000, will be working on international capital markets and has also joined the PhD programme at the London Business School. She has fully participated in the activities of the RTN network (including conferences etc) and she has been fully involved in the activities of the LBS node of the network. Maria has been provided with extensive training and has attended PhD level courses in all areas of economics. These courses have been provided by the London Business School, and by other colleges of the University of London. Furthermore, Maria will also attend a specialist PhD course in international macroeconomics offered by the Royal Economic Society. Given Maria‟s research interests, the training provided by the LBS and the participation in the network activities has clearly benefited her very substantially. Maria Viola participated in the conference “Analysis of International Capital Markets: Understanding Europe's Role in the Global Economy'', held in Tel Aviv, 26/27 November 2000.

5

DIFFICULTIES

Bologna The major difficulty for the Bologna node has been the unexpected transfer of Giancarlo Corsetti from Bologna to Rome University. From the point of view of the goals of the project, there are no disadvantages in the move. However, the process of moving has delayed hiring. With the consensus of Bologna – which did not express an interest in retaining its status as a participant institution without Corsetti – the Italian team has asked permission from the Commission to move the node to Università di Roma III and while they have been waiting for this, a few candidates for the positions in Rome have been hired by other teams. The new Rome node is now in the process of hiring people whilst awaiting official approval. Two post-docs have already been contacted, and should come to Rome in Spring 2002 for three months each, to work on the empirical side of the projects. A number of interviews with applicants are scheduled during the period December 2001 - January 2002, when the US „market‟ opens up. The Tel Aviv node is experiencing difficulties in recruitment due to the current situation in Israel. All nodes are expecting to substantially increase their recruitment activities in the second year, and none envisage any problems, although LBS need to increase their pre-doc month allocation from the original budgetary total of 12 months to accommodate their hire and provide her with ample opportunity to gain experience within the network. It is anticipated that one or more of the nodes may be able to transfer some of their allocation if the Commission allows this. A prompt response from the Commission on whether this is feasible would be greatly beneficial to LBS‟s hiring activities as well as those of other nodes who may be involved.

6 ANNEX I – FIRST NETWORK CONFERENCE, FRANKFURT, FEBRUARY 2000
Understanding Europe’s Role in the Global Economy Programme Saturday, February 5, 2000 10.30 – 11.15 Philip Lane (Trinity College Dublin and CEPR) ‘The Transfer Effect Revisited: Net Foreign Asset Positions and Real Exchange Rates’ 11.15 – 12.00 Peter Birch Sorensen (University of Copenhagen and EPRU) ‘The Case for International Tax Co-ordination Reconsidered’ 12.00 – 13.00 13:00 – 15:00 15:00 – 15:30 15:30 – 16:15 Buffet Lunch Discussion of Administrative Issues Coffee Break Richard Portes (London Business School, University of California, Berkeley and CEPR) ‘The Determinants of Cross-Border Equity Flows’ 16:15 – 17:00 Giancarlo Corsetti (Bologna University) ‘Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders’

7 ANNEX II – SECOND CONFERENCE PROGRAMME, TEL AVIV, NOVEMBER, 2000
The Analysis of International Capital Markets: Understanding Europe’s Role in the Global Economy
A Bank of Israel/CEPR/Eitan Berglas School of Economics Workshop

26/27 November 2000, Tel Aviv

Programme Sunday 26 November
Session I 09.30 – 10.45 Crises Balance Sheet Effects, Bailout Guarantees and Financial Martin Schneider (University of Rochester) *Aaron Tornell (University of California, Los Angeles) Discussants: University) 10.45 – 11.00 11.00 – 12.15 Coffee Competition and Prices in a Dynamic Trade Model with Comparative Advantage *Morten O Ravn (London Business School and CEPR) Mathias Hoffmann (University of Southampton) Zalman Shiffer (Bank of Israel) Lunch Session II 14.00 – 15.15 Currency Unions and International Integration Charles Engel (University of Wisconsin) *Andrew K Rose (University of California, Berkeley, and CEPR) Michael Hutchison (University of California, Santa Cruz) Richard Portes (London Business School and CEPR) Interdependent Banking and Currency Crisis in a Model of Self-Fulfilling Beliefs Itay Goldstein (Princeton University) Michael B Devereux (University of British Columbia and CEPR) David Frankel (Eitan Berglas School of Economics, Tel Aviv

Discussants: 12.15 – 14.00

Discussants:

15.15 – 16.30

Discussants: Philippe Bacchetta (Studienzentrum Gerzensee and CEPR)

Roel Beetsma (Universiteit van Amsterdam and CEPR) 16.30 – 17.00 17.00 – 18.00 Coffee Working Meeting of the RTN Group on „The Analysis of International Capital Markets: Understanding Europe‟s Role in the Global Economy‟ (RTN Leaders/RTN Participants only) Dinner

20.00

Monday 27 November
Session III 09.15 – 10.30 International Tax Coordination: Regionalism versus Globalism *Peter Birch Sørensen (University of Copenhagen) Laura Bottazzi (IGIER, Università Bocconi, Milan, and CEPR) Michel Strawczynski (Bank of Israel) Coffee Withholding Taxes or Information Exchange: The Taxation of International Interest Flows *Harry Huizinga (Tilburg University, European Commission and CEPR) *Søren Bo Nielsen (Copenhagen Business School and CEPR) Efraim Sadka (Eitan Berglas School of Economics, Tel Aviv University) TBA Lunch Session IV 13.15 – 14.30 Globalization and Capital Markets Maurice Obstfeld (University of California, Berkeley, and CEPR) *Alan M Taylor (University of California, Davis) Mark Salmon (City University Business School, London, and CEPR) Frank Warnock (Federal Reserve Board, Washington DC) Capital Flows, Exchange Rates and Asset Prices Harald Hau (ESSEC, Cergy-Pontoise, and CEPR) *Hélène Rey (Princeton University and CEPR) Maria Demertzis (De Nederlandsche Bank) Fabio Ghironi (Federal Reserve Bank of New York)

Discussants: 10.30 – 10.45 10.45 – 12.00

Discussants:

12.00 – 13.15

Discussants:

14.30 – 15.45

Discussants:

15.45
* Denotes presenter

Close

Organizers:

Giancarlo Corsetti (Yale University, Università di Bologna and CEPR) Philip Lane (Trinity College Dublin and CEPR) Leonardo Leiderman (Deutsche Bank and CEPR) Assaf Razin (Eitan Berglas School of Economics, Tel Aviv University, and CEPR)

8 ANNEX III – PROGRESS IN RECRUITMENT OF YOUNG RESEARCHERS AS OF NOVEMBER 2001
Recruitment Position as of November 2001

Partner

Hired

Comments

Months promised in budget

Months provided/ committed to date

Variance

Months promised/ committed to date as % of budget 98%

TCD

Matthias Hoffmann Giovanni Ganelli Corrado di Maria

CentER

Canan Yildirim CFS EPRU Marco Hoeberichts Wolfgang Eggert Helga Kristjansdottir Roman Kraussl Maria Viola Natalie Chen

Tel Aviv LBS

Roma III (prev. Bologna)

Bartosz Mackowiak

Oct 2000 – Oct 2002 (predoc) Oct 2001 – Oct 2003 (postdoc) Unable (so far) to complete 20 month contract due to serious family problems January 2002 – January 2004 (TBC) May 2001 – October 2002 (18 months post-doc) September 2001 – August 2002 (post-doc) October 2001 – December 2001 (pre-doc) September 2000 – December 2000 (post-doc) September 2000 – September 2002 (pre-doc) October 2001 – October 2002 (post-doc) to be extended to 24 months To be hired from Spring 2002 for 12 months approx.

49

24 24

-1

40

0

- 16

60%

24 36 36 18 12 3 41 36 4 24 12/24 - 37 0 9% 100%/133 % - 18 - 21 50% 42%

42

0 (12 to be confirmed in January 2002) 145

- 42

0%

TOTAL

285

- 140

50.87%


				
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