Research Library

Rogoff, Kenneth S. 2001. “The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?”.Abstract

The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty–five years. Our approach elucidates J. McCallum's home bias in trade puzzle, the Feldstein–Horioka saving–investment puzzle, the French–Poterba equity home bias puzzle, and the Backus–Kehoe– Kydland consumption correlations puzzle. That one simple alteration to an otherwise canonical international macroeconomic model can help substantially to explain such a broad arrange of empirical puzzles, including some that previously seemed intractable, suggests a rich area for future research. We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by Rogoff, and what we term the exchange–rate disconnect puzzle.' The latter category of riddles includes both the Meese–Rogoff exchange rate forecasting puzzle and the Baxter–Stockman neutrality of exchange rate regime puzzle. Here although many elements need to be added to our extremely simple model, we can still show that trade costs play an essential role.

Frieden, Jeffry. 2001. “Politics and Exchange Rates in Latin America”.Abstract

This paper explores the impact of political economy factors on exchange rate policy in Latin America. It studies the determinants of the choice of exchange rate regime in Latin America, placing special emphasis on political, institutional and interest group explanations. The presumption is that differences in institutional and political settings, as well as differences in economic structure, can have an effect on the choice of regime and, more generally, on exchange rate policy. In addition to these structural elements, the paper examines whether such political events as elections and changes in government affect the pattern of nominal and real exchange rates.

(Revised version of "Politics and Exchange Rates: A Cross-Country Approach for Latin America")

In The Currency Game: Exchange Rate Politics in Latin America, edited by Jeffry Frieden and Ernesto Stein. Baltimore: Johns Hopkins University Press, 2001.
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Ammerman, Nancy T. 2001. “Doing Good in American Communities: Congregations and Service Organizations Working Together”.Abstract

A Research Report from the Organizing Religious Work Project, Hartford Institute for Religion Research Hartford Seminary

The well–being of every community depends on harnessing the contributions of its citizens. Sustaining viable communities requires places where people can gather, work together, and learn to trust one another – where we generate what Robert Putnam has called "social capital."1 We depend on the neighborhood associations and political action groups, parent associations and leagues of civil rights activists, as well as the churches, synagogues, and mosques that provide places of concern, belonging and action. This is a report on the work being done by such religious organizations and their community partners in seven representative communities in the U.S..

Kartasasmita, Ginandjar. 2001. “Globalization and the Economic Crisis: The Indonesian Story”.Abstract

To what extent has globalization been a factor in Indonesia's economic turmoil? This essay addresses the question by reviewing the experience of the Indonesian economy as it evolved in the decade before the crisis and since the crisis hit. It starts by reviewing the policies adopted by the Indonesian government as it sought to integrate the economy more closely into the global market place and reviews the outcome of this earlier policy shift. The paper then turns to assess the impact of the Asian financial crisis but broadens the scope to include a review of domestic political and social stability. It traces the country's slow and halting movement towards recovery highlighting the major reasons why the economic collapse was so severe and why the recovery process has been slower than in neighboring countries. It also briefly reviews "pro" and "con" globalization arguments, and assesses the role globalization played in Indonesia's economic collapse, before concluding with lessons that can be drawn from the Indonesian experience. The author also looks at the role of the IMF in managing the crisis drawing upon his own role negotiating with the IMF during the critical period in Indonesia's economic and political history.

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WCFIA Working Paper 01–03, January 2001.

Moene, Karl Ove, and Michael Wallerstein. 2001. “Inequality, Social Insurance and Redistribution.” American Political Science Review 95 (4): 859-874.Abstract

Is the political support for welfare policy higher or lower in less egalitarian societies? We answer the question using a model of welfare policy as publicly financed insurance that pays benefits in a redistributive manner. When voters have both redistributive and insurance motives for supporting welfare spending, the effect of inequality depends on how benefits are targeted. Greater inequality increases support for welfare expenditures when benefits are targeted to the employed but decreases support when benefits are targeted to those without earnings. With endogenous targeting, support for benefits to those without earnings declines as inequality increases, whereas support for aggregate spending is a V–shaped function of inequality. Statistical analysis of welfare expenditures in advanced industrial societies provides support for key empirical implications of the model.

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Bestor, Theodore C. 2001. “Markets: Anthropological Aspects.” International Encyclopedia of Social and Behavioral Sciences, 9227-9231.Abstract

Markets are so routinely regarded as fundamentally economic institutions that long–standing and quite varied anthropological perspectives on them are often overlooked. Anthropological attention focuses on patterns of individual and small–group exchange relationships within specific markets, on institutional structures that organize markets, and on the social, political, and spatial hierarchies through which markets link social classes, ethnic groups, or regional societies into larger systems. Anthropological studies of markets analyze them as nodes of complex social processes and generators of cultural activity as well as realms for economic exchange. Anthropologists' interests in markets, therefore, are partially distinct from – although certainly overlapping with – the concerns of economists.

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Bates, Robert H. 2001. “Organizing Violence”.Abstract

Coercion is as normal a part of life as is exchange; what matters is not its presence or magnitude but rather its structure and form. Violence can take the form of predation; it then results in mere redistribution. But violence can be rendered socially productive; it can be employed to defend property rights, thereby strengthening the incentives to engage in productive activity. To explore how violence can be rendered a source of increased welfare, we develop a model of a stateless society and then introduce a specialist in violence. Using the model and case materials, we explore the conditions under which the specialist will utilize her coercive capabilities not to engage in predation but rather to strengthen the incentives to engage in productive effort.

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WCFIA Working Paper 01–06, January 2001.

Broz, Lawrence J. 2001. “Paying for the Privilege of Bank of England Charters, 1694-1843”.Abstract

To discern the public and private motivations behind the establishment and continuance of the Bank of England, we analyze the timing of legislation that renewed the Bank’s charter. The Bank’s original 1694 charter specified a life of only eleven years; at the end of that time, the government could exercise an option to repay its loan to the Bank and dissolve the charter. In fact, the government did not exercise the option, and the Bank’s charter was periodically renewed. We argue that the rechartering process reflected the needs of the government to respond to unforeseen contingencies. The government initiated new charters when budgetary circumstances–shaped largely by wars–required new loans, and when the monopoly value of the Bank’s charter rose. The Bank gained from renegotiating its contract with the government when it faced new and unforeseen competition.

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WCFIA Working Paper 01–05, January 2001. 

Helpman, Elhanan. 2001. “Special Interest Politics”.Abstract

This book reports the results of our research on the role of special interest groups in the process of trade policy formation. However, there is little that is unique about this particular type of policy. The methods that interest groups use to affect trade outcomes are the same as the ones they use to influence a myriad of other policy decisions, including both economic issues and issues outside of the economic realm.

Rogoff, Kenneth S. 2001. “Risk and Exchange Rates”.Abstract

This paper develops an explicitly stochastic new open economy macroeconomics' model, which can potentially be used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes. A crucial feature is that we do not simplify by assuming certainty equivalence for producer price setting behavior. Our framework also provides a sticky–price alternative to Lucas's (1982) exchage rate risk premium model. We show that the level risk premium' in the exchage rate is potentially quite large and may be an important missing fundamental in empirical exchange rate equations. As a byproduct analysis also suggests an intriguing possible explanation of the forward premium puzzle.

Kelman, Herbert C. 2001. “Reflections on the Social and Psychological Processes of Legitimization and Delegitimization.” Cambridge University Press. Cambridge University Press. Publisher's VersionAbstract

The concept of legitimacy has fascinated me for many years. Again and again, particularly over the course of the 1960s, I felt that the concepts of legitimacy and illegitimacy provided the organizing principles that helped explain various phenomena with which I was concerned.

Kelman, Herbert C. 2001. “The Role of National Identity in Conflict Resolution: Experiences from Israeli-Palestinian Problem-Solving Workshops.” Oxford University Press. Publisher's VersionAbstract

My colleagues’ and my work as scholar–practitioners has focused on analysis and resolution of protracted, seemingly intractable conflicts between national, ethnic, or other kinds of identity groups, best exemplified by intercommunal conflicts, such as those in Cyprus, Northern Ireland, Sri Lanka, Bosnia, and apartheid South Africa. My own most intensive and extensive experience, over the past quarter–century, has been with the Israeli–Palestinian conflict, and my analysis draws primarily on that experience.

Using the Israeli–Palestinian conflict as a case in point, this chapter examines the way in which issues of national identity can exacerbate an international or intercommunal conflict and the way in which such issues can be addressed in conflict–resolution efforts. The chapter starts out with a brief history of the Israeli–Palestinian conflict, setting the stage for the identity issues at the heart of the conflict. It then proceeds to describe the struggle over national identity between the two people, which has led them to perceive their conflict in zero–sum terms, with respect to not only territory and resources but also national identity and national existence. Next, it argues that long–term resolution of this and similar deep–rooted conflicts requires changes in the groups’ national identities, such that affirmation of one groups’ identity is no longer predicated on negation of the other’s identity. Such identity changes are possible as long as they leave the core of each group’s national identity intact. Furthermore, the chapter proceeds to argue, such changes need to be and can be "negotiated" between the two groups. One venue for negotiating identity, described in the next section, is provided by the problem–solving workshops between Israeli and Palestinian elites that my colleagues and I have convened for many years. Finally, the paper concludes with an illustration of the possibilities and limits of the negotiation of identity, based on a joint Israeli–Palestinian exploration of the problem of Palestinian refugees.

Sachs, Jeffrey, and John W McArthur. 2001. “Institutions and Geography: Comment on Acemoglu, Johnson and Robinson (2000)”.Abstract

This paper responds to findings by Acemoglu, Johnson and Robinson (2000) that suggest weak institutions, but not physical geography and correlates like disease burden, explain current variation in levels of economic development across former colonies. Using similar data and expanding the sample of countries analyzed, our regression analysis shows that both institutions and geographically–related variables such as malaria incidence or life expectancy at birth are strongly linked to gross national product per capita. We argue that the evidence presented in Acemoglu, Johnson and Robinson is likely limited by the inherently small sample of ex–colonies and the limited geographic dispersion of those countries.

Sachs, Jeffrey. 2001. “Tropical Underdevelopment”.Abstract

Most recent cross–country analyses of economic growth have neglected the importance of physical geography. This paper reviews the distinctive development challenges faced by economies situated in tropical climates. Using geographic information system (GIS) mapping, the paper presents evidence that production technology in the tropics has lagged behind temperate zone technology in the two critical areas of agriculture and health, and this in turn opened a substantial income gap between climate zones. The difficulty of mobilizing energy resources in tropical economies is emphasized as another significant contributor to the income gap. These factors have been amplified by geopolitical power imbalances and by the difficulty of applying temperate–zone technological advances in the tropical setting. The income gap has also been amplified because poor public health and weak agricultural technology in the tropics have combined to slow the demographic transition from high fertility and mortality rates to low fertility and mortality rates. The analysis suggests that economic development in tropical ecozones would benefit from a concerted international effort to develop health and agricultural technologies specific to the needs of the tropical economies.

Rodrik, Dani. 2001. “Did the Malaysian Capital Controls Work?”.Abstract

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.

Caselli, Francesco, and John Coleman. 2001. “Cross-Country Technology Diffusion: The Case of Computers (Forthcoming in American Economic Review)”.Abstract
We use data on imports of computer equipment for a large sample of countries between 1970 and 1990 to investigate the determinants of computer-technology adoption. We find strong evidence that computer adoption is associated with higher levels of human capital and with manufacturing trade openness vis-a-vis the OECD. We also find evidence that computer adoption is enhanced by high investment rates, good property rights protection, and a small share of agriculture in GDP. Finally, there is some evidence that adoption is reduced by a large share of government in GDP, and increased by a large share of manufacturing. After controlling for the above-mentioned variables, we do not find an independent role for the English- (or European-) language skills of the population.
Davis, Christina. 2001. “Linkage and Legalism in Institutions: Evidence From Agricultural Trade Negotiations”.Abstract

In a comparative study of Japanese and European trade policy, this paper explains how the institutional context of negotiations affects political outcomes. I examine two pathways by which negotiation structure promotes liberalization: issue linkage and legal framing. Broadening stakes through issue linkage mobilizes domestic lobbying for liberalization. Use of GATT/WTO trade law in dispute settlement legitimizes arguments favoring liberalization. This study on international institutions addresses the theoretical debates in the field regarding how interdependence and the legalization of international affairs change the nature of state interaction.

I test my argument in the sensitive area of agricultural trade policy. Statistical analysis of U.S. negotiations with Japan and the EU from 1970 to 1999 indicates that an institutionalized issue linkage makes liberalization more likely for both Japan and Europe. This is the most important source of leverage for bringing major policy reform. However, the effect of GATT/WTO legal pressure interacts with the political context. I conclude that domestic political processes make Japan more responsive to pressure from trade rules than the European Union.

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WCFIA Working Paper 01–01, February 2001.

Kelman, Herbert C. 2001. “A Vision for Compromise”. Publisher's VersionAbstract

The continuing deadly escalation of the Israeli-Palestinian conflict threatens to become an all-out war with devastating consequences for both communities. What makes this situation particularly tragic is the fact that the formula and the will for negotiating a mutually satisfactory agreement to end the conflict remain in place.

The negotiators were able to come very close to agreement in Taba last January, and the two populations are still open to a negotiated agreement if they could be convinced that the other side can be trusted.

The breakdown in negotiations and the resulting cycle of violence led to the reemergence on both sides—in classical mirror-image fashion—of the belief that there is no negotiating partner on the other side, that “they” do not want to make the compromises required for peace, and that the only language “they” understand is force. Counteracting these beliefs requires a clear endorsement by the leadership on each side of a political solution that would meet the basic needs of the other. The dynamics of escalating violence prevent the leaders from speaking the words and taking the actions that would reassure the other, lest they be seen as weak and yielding to violence. Moreover, Ariel Sharon's strategy and Yasser Arafat's tactics make it particularly difficult for them to make an unambiguous commitment, in advance, to the kind of political outcome on which the resumption of fruitful negotiations now depends.

Under the circumstances, outside parties, especially the United States, can make a unique contribution, not only by encouraging the parties to resume serious negotiations but by offering a vision of the broad outlines of the final agreement to which these negotiations must be directed. Following up on Secretary of State Colin Powell's constructive policy address, this vision should be based on the historic compromise that was implicit in the Oslo agreement.

Anchored in UN Resolutions 242 and 338, this compromise has the added advantage of international legitimacy. It is predicated on an agreement to end the conflict by sharing the land both peoples claim, through the establishment and peaceful coexistence of two states, in which the two peoples can fulfill their respective rights to national self-determination, give political expression to their national identities, and pursue independent, secure, and prosperous lives.

The vision of such a historic compromise must spell out three implications for resolving outstanding issues in the conflict. Each of these implications is painful to one or both parties, but they follow directly from the essence of the compromise.

First, the historic compromise must enable Palestinians to establish an independent, sovereign state consisting of the West Bank and the Gaza Strip. To be viable and governable, the state must have contiguous territory within each of its two units and a secure corridor between them. It cannot, therefore, accommodate Israeli settlements with extraterritorial rights, a separate network of roads, and protection by Israeli forces.

Second, the historic compromise implies Palestinian acceptance of the legitimacy of Israel as a Jewish-majority state (with full democratic rights for its Arab minority). Therefore, to maintain its Jewish character and its cohesion, Israel cannot accommodate an automatic, large-scale return of Palestinian refugees to the country.

Third, the historic compromise calls on the two peoples to share Jerusalem, as an open city, containing the capitals of both states and ensuring full access to the holy sites of all religious communities.

Within the broad parameters of these three principles, it is necessary and possible to negotiate mutual accommodations central to the narratives and the internal cohesion of the two societies. Thus, on the issue of settlements, negotiations need to take cognizance of the domestic turmoil that dismantling large numbers of settlements would create for Israel and consider exchanging small segments of the West Bank that have a heavy concentration of Israeli settlers for Israeli territory of equal size and value.

On the issue of refugees, recognizing its centrality to the Palestinian identity and narrative, negotiations need to agree on language whereby Israel would acknowledge its share of responsibility and express regret for the plight of the refugees and on a comprehensive program of resettlement and compensation for refugees, including return of a limited number to Israel. On the issue of Jerusalem, negotiations need to work out arrangements for sharing sovereignty and use of both holy sites and public spaces vital to both communities and for providing governance, security, and municipal services on a citywide basis.

Formulas for dealing with many of these issues in a mutually satisfactory way have already been explored in previous negotiations, although further efforts are required to shape them into a comprehensive package. That work must and can be done by the parties themselves. Where the United States can make an indispensable contribution is in bringing the parties back to the negotiating table by offering a broad vision of the historic compromise toward which the negotiations must be directed.

Cooper, Richard N. 2001. “Chinese Economic and Budgetary Prospects”.Abstract

Market exchange rates can move around a lot, particularly but not only around currency crises. For this reason, they can properly be averaged over several years for international comparisons. However, the Chinese yuan has been fixed at roughly 8.3/dollar since 1994. In my view it is modestly undervalued, as evidenced by the steady growth of China's foreign exchange reserves, the result of central bank market intervention to keep the yuan from appreciating. China has also had a significant trade surplus in recent years. However, it still maintains controls on outflows of domestic capital. And it is about the enter the WTO, following which under the access agreements China must reduce its import barriers much more than its trading partners do. Many Chinese are fearful of withering foreign competition. If these fears prove to be valid and widespread, the yuan might have to depreciate over the next five years, although my guess is the required depreciation will be modest, e.g. 10-15 percent. Moreover, WTO membership may result in more inbound foreign investment, thus mitigating the required depreciation or even eliminating it altogether. The bottom line is this: the market exchange rate provides a much better basis for converting Chinese GDP into dollars than does some artificially constructed ppp rate. Following the pattern of Japan and Korea, the real exchange rate of the rmb might appreciate over time, as China develops, but that process will occur at a modest rate, over decades.

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Paper presented at Congress public hearing "Chinese Budget Issues and the Role of the PLA in the Economy," December 7, 2001.

Frankel, Jeffrey. 2001. “The Role of Industrial Country Policies in Emerging Market Crises”.Abstract

This paper considers policies of the industrialized countries, as they pertain to crises in emerging markets. These fall into three areas: (1) their own macroeconomic policies, which determine the global financial environment; (2) their role in responding to crises when they occur, particularly through rescue packages, which have three components —reforms in debtor countries, public funds from creditor countries, and private sector involvement; and (3) efforts to reform the international financial architecture, with the aim of lessening the frequency and severity of future crises. A recurrent theme is the tension between mitigating crises that occur, and the moral hazard that such efforts create in the longer term. In addition to reviewing these three areas of policy, we consider the institutions through which the more powerful countries exercise their influence. We conclude with a discussion of the debate over the sins of the International Monetary Fund, and proposals for reform.