AEAweb: JEP: Contents: Fall 1999

Journal of Economic Perspectives
Vol. 13, No. 4, Fall 1999

Contents

Global Financial Instability: Framework, Events, Issues
Frederic S. Mishkin      3-20

International Institutions for Reducing Global Financial Instability
Kenneth Rogoff      21-42

Restoring Banking Stability: Beyond Supervised Capital Requirements
Gerard Caprio and Patrick Honohan      43-64

How Effective Are Capital Controls?
Sebastian Edwards      65-84

On the Need for an International Lender of Last Resort
Stanley Fischer      85-104

Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist?
Anne O. Krueger      105-124

Survey Measures of Expected U.S. Inflation
Lloyd B. Thomas, Jr.      125-144

Executive Compensation: Six Questions That Need Answering
John M. Abowd and David S. Kaplan      145-168

On the Complexities of Complex Economic Dynamics
J. Barkley Rosser, Jr.      169-192

Measuring Returns on Investments in Collectibles
Benjamin J. Burton and Joyce P. Jacobsen      193-212

Discounting Inside the Washington D.C. Beltway
Coleman Bazelon and Kent Smetters      213-228

In Honor of the Nobel Laureates Robert C. Merton and Myron S. Scholes: A Partial Differential Equation That Changed the World
Robert A. Jarrow      229-248

Retrospectives: Between God and the Market: The Religious Roots of the American Economic Association
Bradley W. Bateman and Ethan B. Kapstein      249-258

Features:
Recommendations for Further Reading      259-268
Correspondence      269-272
Notes     273-276

No abstract available.

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This paper asks how recent developments in research on banking and sovereign lending can help inform the debate on choosing a new international financial architecture. A broad range of plans is considered, including a global lender of last resort facility, an international bankruptcy court, an international debt insurance corporation, and unilateral controls on capital flows. One common failing of the main plans that have been proposed is that they fail to confront the biases in the existing system towards debt finance and bank intermediation, at the expense of equity finance and direct investment.

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Emerging economies have been particularly prone to financial sector crises, reflecting marked information asymmetries and political interference, as well as the substantial volatility in underlying economic conditions, and the vulnerability of banking and finance when structural economic changes create a new and uncharted operating environment. The standard regulatory paradigm relies mainly on supervised capital adequacy, but it may not be enough. Other measures to improve the incentive structure for bankers, regulators, and other market participants could effectively increase the number of concerned, skilled and watchful eyes. Intermittent application of supplementary "blunt instruments" could also be useful.

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A number of authors have recently argued that, in order to avoid financial instability, emerging countries should rely on capital controls. Two type of controls have been considered: controls on capital outflows, and controls on capital inflows. In this paper I review the historical evidence on the effectiveness of these two type of controls. I argue that controls on outflows have been ineffective. They are circumvented and breed corruption. I also analyze Chile's recent experience with controls on inflows, and I argue that their effectiveness has been exaggerated.

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Is there a useful function for an international lender of last resort (ILLR)--defined as crisis lender and crisis manager? Yes for international capital flows are excessively volatile and contagious, and because an ILLR can help mitigate the effects of this instability. I examine the Bagehot rules, and their applicability in an international context, focusing on the problem of moral hazard. I argue that a critical condition for the successful operation of an ILLR, a role that is to an important extent played by the IMF, is to ensure private sector involvement in the resolution of emerging market financial crises.

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Preferential trade arrangements, and especially free trade agreements, have mushroomed in importance in the 1990s. This has revived research on the effects of these arrangements, both on the welfare of the member countries and those excluded, and on the momentum for further liberalization of the open multilateral trading system. This paper reviews the analyses and evidence to date as to these effects, showing that analytically anything can happen and that, to date, there has been insufficient experience to draw conclusions from empirical evidence.

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The forecasting performance of widely accessible surveys of expected inflation are evaluated against naive and financial market benchmark forecasts. In the period of rising inflation (1960-80), the Michigan household consensus forecasts exhibited smaller errors than the Livingston Survey of economists and the benchmark forecasts. Unlike Livingston, the Michigan forecasts were unbiased. Since 1980, Livingston forecasts have been more accurate than Michigan, though unbiasedness is rejected in both cases. SPF forecasts, available since 1981, have been slightly superior to Livingston. In forecasting inflation, respondents generally failed to take account of cyclical conditions, and strong-form rationality is not supported.

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No abstract available.

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Complex economic nonlinear dynamics endogenously do not converge to a point, a limit cycle, or an explosion. Their study developed out of earlier studies of cybernetic, catastrophic, and chaotic systems. Complexity analysis stresses interactions among dispersed agents without a global controller, tangled hierarchies, adaptive learning, evolution, and novelty, and out-of-equilibrium dynamics. Complexity methods include interacting particle systems, self-organized criticality, and evolutionary game theory, to simulate artificial stock markets and other phenomena. Theoretically, bounded rationality replaces rational expectations. Complexity theory influences empirical methods and restructures policy debates.

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This paper considers the question of how to measure and interpret the financial return to investing in collectibles. We review various methodologies for creating priced indexes and then discuss studies that explicitly calculate a rate of return to some set of collectibles. While most collectibles appear to yield positive real returns, the majority embody more risk and yield lower financial returns than stocks. Other characteristics of collectibles prices, such as covariance with other asset prices, are also examined.

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This article focuses on how the choice of discount rate can dramatically affect policy choices. These policies include whether to build a bridge, whether to privatize a Power Marketing Administration which sells electricity generated by government-owned facilities such as dams, how much money should be spent on early-childhood education, or options for reforming Social Security. The ongoing challenge is to discount future costs or benefits in a way that matches the project's level of riskiness. We begin by discussing the underlying issues in choosing an appropriate discount rate. We then discuss the variety of different discount rates that are actually used by various Washington policymakers and the biases they often generate.

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The Nobel Prize was given to Robert C. Merton and Myron S. Scholes for discovering a new method for determining the value of an option. This is known as the Black-Merton-Scholes option pricing formula. The purpose of this essay is to explain why the Black-Merton-Scholes option pricing formula is so important to the finance profession, the economics profession, the financial industry, and society at large. This is done by studying the history of the formula's development, the economic logic underlying the formula's derivation, and the formula's ramifications for the various professions.

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This essay examines the strong influence of the Social Gospel movement on the founding of the American Economic Association. Richard T. Ely, the driving force behind the Association's founding, was also the most popular figure in the Social Gospel movement. The essay discusses Ely's influence in the statement of principles that shaped the early AEA and how the founders conceived their original mission as a scientific enterprise to better the lives of the poor and the working class.

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Features (view in pdf format):
Recommendations for Further Reading  (AEA members only)
Correspondence  (AEA members only) 
Notes    

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