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The market for U.S. Treasury securities is a marvel of modern finance. In 2009 the Treasury auctioned $8.2 trillion of new securities, ranging from four-day bills to thirty-year bonds, in 283 offerings on 171 different days. By contrast, in the decade before World War I, there was only about $1 billion of interest-bearing Treasury debt outstanding, spread out over just six issues. New offerings were rare, and the debt was narrowly held, most of it owned by national banks. This book traces the development of the Treasury market from a financial backwater in the years before World War I to a multibillion dollar market on the eve of World War II. It focuses on Treasury debt management policies, describing the origins of several pillars of modern Treasury practice, including “regular and predictable” auction offerings and the integration of debt and cash management. The book recounts the actions of Secretaries of the Treasury, from William McAdoo in the Wilson administration to Henry Morgenthau in the Roosevelt administration, and their responses to economic conditions. His account covers the Treasury market in the two decades before World War I, how the Treasury financed the Great War, how it managed the postwar refinancing and paydowns, and how it financed the chronic deficits of the Great Depression. It concludes with an examination of aspects of modern Treasury debt management that grew out of developments from 1917 to 1939.

Developing local bond markets is high on the policy agenda of Latin America. Bond markets are an essential component of a well-functioning financial market. Facilitating the efforts of public and private borrowers to issue domestic-currency-denominated, long-term, fixed-rate bonds insulates them from the rollover and balance sheet risks that have been central elements in past financial crises. In addition, a robust bond market is a way for nonfinancial firms to retain their capacity to borrow when the banking system grows reluctant to lend. Latin American bond markets are growing, and may even approach a “big bang”-like surge, although significant challenges remain. This comprehensive examination of the importance of local bond market development in Latin America provides conceptual and comparative assessments, case studies of six countries, surveys of firms and investors, and a cross-country economic analysis of the determinants of bond market development. The book’s case studies of Argentina, Brazil, Chile, Colombia, Mexico, and Uruguay, written by country experts, follow a common methodology, with each offering a history of that country’s bond market development, a comprehensive and unique data set on both private and public bond markets, surveys of firms and investors, and (in many chapters) firm-level analysis. A Web appendix makes available the unique data sets, including results of specially designed surveys of firms and investors participants, used in the book’s studies.

For decades the semiconductor industry has been a driver of global economic growth and social change. Semiconductors, particularly the microchips essential to most electronic devices, have transformed computing, communications, entertainment, and industry. This book traces the industry over more than twenty years through eight technical and competitive crises that forced it to adapt in order to continue its exponential rate of improved chip performance. The industry’s changes have in turn shifted the basis on which firms hold or gain global competitive advantage. These eight interrelated crises do not have tidy beginnings and ends. Most, in fact, are still ongoing, often in altered form. The US semiconductor industry’s fear that it would be overtaken by Japan in the 1980s, for example, foreshadows current concerns over the new global competitors China and India. The intersecting crises of rising costs for both design and manufacturing are compounded by consumer pressure for lower prices. Other crises discussed in the book include the industry’s steady march toward the limits of physics, the fierce competition that keeps its profits modest even as development costs soar, and the global search for engineering talent. Other high-tech industries face crises of their own, and the semiconductor industry has much to teach us about how industries are transformed in response to such powerful forces as technological change, shifting product markets, and globalization. The book also offers insights into how chip firms have developed, defended, and, in some cases, lost global competitive advantage.

Corporate managers who face both strategic uncertainty and market uncertainty confront a classic trade-off between commitment and flexibility. They can stake a claim by making a large capital investment today, influencing their rivals’ behavior; or they can take a “wait and see” approach to avoid adverse market consequences tomorrow. This book describes an emerging paradigm that can quantify and balance commitment and flexibility—“option games” by which the decision-making approaches of real options and game theory can be combined. The book first discusses prerequisite concepts and tools from basic game theory, industrial organization, and real options analysis, bringing important materials and ideas together into a unified framework. It then presents the new approach in discrete time and later in continuous time, beginning with the building blocks of the basic ideas and tools and culminating in richer theoretical analyses.

The European Union began with efforts in the Cold War era to foster economic integration among a few Western European countries. Today’s EU constitutes an upper tier of government that affects almost every level of policymaking in each of its twenty-seven member states. The recent financial and economic crises have tested this still-evolving institutional framework, and this book surveys key economic challenges faced by the EU. European economists examine such topics as the stability of the financial markets and possible policy options to reduce future vulnerability to crises, including Glass–Steagull-style narrow banking; the effect of emerging economies such as China and India on Europe’s economic position; the protection of national interests in industrial policy; reforming and preserving the welfare state in the face of unemployment, population aging, and worker mobility within the EU; and improving the EU’s institutional framework by reassigning responsibilities among supranational, national, and local governments. Among the conclusions that emerge from these analyses are the necessity for banking regulation as well as budgetary discipline; the need to consider global as well as European integration; and the idea that an environment which fosters internal competition will increase Europe’s competitiveness internationally.

Currency boards, more so than other exchange rate regimes, have come in and out of fashion. Defined by a fixed exchange rate with full convertibility, central bank liabilities backed with foreign exchange reserves, and a high cost of exiting the regime, they were common in colonial times—until most were cast off as countries gained independence after World War II. In the 1990s, currency boards enjoyed a revival as the cornerstone of various macroeconomic stabilization programs—including many in central and eastern European transition economies—only to fall into disfavor again with the collapse of the Argentine regime in 2002. This book takes a balanced look at the effects of currency board regimes on inflation, output growth, and macroeconomic performance more generally. Drawing on historical experience, economic theory, cross-country empirical analysis, and case studies of currency boards in Argentina, Estonia, Lithuania, Bulgaria, and Bosnia and Herzegovina, it concludes that currency boards deliver significant reductions in inflation compared to other regimes and do not seem to result in slower growth or a markedly higher vulnerability to crisis.

Explicit deposit insurance (DI) is widely held to be a crucial element of modern financial safety nets. For this reason, establishing a DI system is frequently recommended by outside experts to countries undergoing reform. Predictably, DI systems have proliferated in the developing world. The number of countries offering explicit deposit guarantees rose from twenty in 1980 to eighty-seven by the end of 2003. This book challenges the wisdom of encouraging countries to adopt DI without first repairing observable weaknesses in their institutional environment. The evidence and analysis presented confirm that many countries would do well to delay the installation of a DI system. Analysis shows that many existing DI systems are not adequately designed to control possible DI-induced risk taking by financial institutions, and the book provides advice on principles of good design for those countries in the process of adopting or reforming their DI systems. Empirical evidence on the efficiency of real-world DI systems has been scarce, and analysis has focused on the experience of developed countries. The contributors to this book draw on an original cross-country dataset on DI systems and design features to examine the impact of DI on banking behavior and assess the policy complications that emerge in developing countries. Chapters covers decisions about DI adoption, design, and pricing, and review individual country experiences with DI—including issues raised by the EU’s DI directive, banking reform in Russia, and policy efforts to protect depositors in China.

No names are more closely associated with modern trade theory than Eli Heckscher and Bertil Ohlin. The basic Heckscher–Ohlin proposition, according to which a country exports factors in abundant supply and imports factors in scarce supply, is a key component of modern trade theory. This book traces the development of the HO model, describing the historical twists and turns that have led to the basic modern theoretical model in use today. It not only presents a cohesive view of the model’s evolution but also reviews the results of empirical tests its various versions. The book surveys the development of the HO model and then assesses empirical tests of its predictions. Most discussions of empirical work on HO models confine themselves to the basic theorem, but the book devotes a chapter to empirical tests of three related propositions: the Stolper–Samuelson theorem; the Rybczynski theorem; and the factor price equalization theorem. It concludes that although the formulation and testing of these later models have improved economists’ understanding of the forces shaping international trade, many empirical trade economists (himself included) were so enamored of the elegant but highly unrealistic factor price equalization models developed from the insights of Heckscher and Ohlin that they have neglected investigation of other models without this relationship.

Competitiveness among nations is often approached as if it were a sports competition: Some countries win medals, others lose out. This view of countries fighting it out in the economic arena is especially popular in business circles and among politicians. Economists, however, take a very different approach to international economic relations, arguing that international trade leads not to winners and losers but to win–win situations in which all countries profit. This book takes on the sometimes-derided concept of competitiveness, demonstrating the value of systematic analysis in an area too often dominated by special interest groups who use (and abuse) the concept to advance hidden agendas. The chapters range from broad theoretical views to case studies, examining the multiple factors that drive competitiveness. Contributors consider the conceptual framework underlying the World Economic Forum’s approach to competitiveness; differences in per capita gross domestice product between the United States and the European Union; an integrated approach to measuring competitiveness and comparative advantage; divergent trends in price and cost competitiveness in the euro area; methodological issues in constructing competitiveness indicators; taxation and international competitiveness; and a case study of Mexico’s competitiveness in world markets in comparison to China’s.

Econometrics is a study of good and bad ways to measure economic relations. This book discusses the role economic theory ought to play in such measurements. The role theory should play, depends on the researcher’s ideas about the essence of an economic theory. A researcher who believes that his theory is about the actual workings of an economy, can identify his theory’s variables with objects in social reality and solve his measurement problems with the means that present-day econometrics provides. A researcher who believes that his theory is about imaginary matters that have uncertain relations to objects in social reality, faces measurement problems that he can solve with the means that formal econometrics provides. The book presents case studies thatcontrast the empirical analysis of present-day applied econometrics in the tradition of Trygve Haavelmo with the empirical analysis of formal econometrics in the tradition of Ragnar Frisch. The case studies are a varied lot in which the theory is static or dynamic and faces cross-section data or time-series data. In focus are the behaviour of data variables and the inferences about social reality which the empirical analyses yield. The case studies demonstrate that both the statistical analyses and the inferences of present-day and formal econometrics differ in striking ways. In doing that they provide a good basis for discussing the use of theory in measuring economic relations. The book is the last of three books in which the author develops and demonstrates the usefulness of a formal science of economics.

Many countries have experienced major economic changes since the mid-1980s as a result of the deregulation and liberalization of national financial systems—two key aspects of globalization—with some experiencing boom and bust in rapid succession. The small Northern European country of Finland has been hailed as a success story for achieving renewed economic growth and prosperity after a financial crisis and deep depression in the early 1990s. This book offers a detailed analysis of the rapid swings in Finland’s recent economic development, from initial overheating in the late 1980s, through deep crisis in the early 1990s, to recovery and growth since the mid-1990s. Finland’s complex road to recovery offers excellent examples of both unsuccessful and successful policy responses to changing circumstances. The authors examine the three relatively distinct periods of Finland’s recent experience, analyzing the adequacy of the macroeconomic policy response in each case. They assess the real economic effects of financial constraints and look for evidence of the “credit channel” of the monetary system. Finland’s rapid economic growth since the mid-1990s is largely the result of its structural transformation into a high-tech economy; Nokia is the most famous example of this information and communication technology success. Elaborating on Finland’s ICT revolution, the authors demonstrate that well-designed economic policies contributed to Finland’s economic turnaround.

This book argues that, contrary to what many textbooks want readers to believe, the study of the general equilibrium model did not end with the existence and welfare theorems of the 1950s. These developments, which characterize the modern phase of the theory of general equilibrium, led to what this book calls the postmodern phase, marked by the reintroduction of differentiability assumptions and the application of the methods of differential topology to the study of the equilibrium equation. This study demonstrates the central role played by the equilibrium manifold in understanding the properties of the Arrow–Debreu model and its extensions. It argues that the tools of differential topology articulated around the concept of equilibrium manifold offer powerful methods for studying economically important issues, from existence and uniqueness to business cycles and economic fluctuations. After an examination of the theory of general equilibrium’s evolution in the hundred years between Walras and Arrow–Debreu, the book discusses the properties of the equilibrium manifold and the natural projection. It highlights the important role of the set of no-trade equilibria, the structure of which is applied to the global structure of the equilibrium manifold. The book also develops a geometric approach to the study of the equilibrium manifold. Applications include stability issues of adjustment dynamics for out-of-equilibrium prices, the introduction of price-dependent preferences, and aspects of time and uncertainty in extensions of the general equilibrium model that account for various forms of market frictions and imperfections.

The exchange rate is sometimes called the most important price in a highly globalized world. A country’s choice of its exchange rate regime, between government-managed fixed rates and market-determined floating rates has significant implications for monetary policy, trade, and macroeconomic outcomes, and is the subject of both academic and policy debate. This book examines the operation and consequences of exchange rate regimes in an era of increasing international interdependence. The book focuses on the evolution of exchange rate regimes in the modern era, the period since 1973, which followed the Bretton Woods era of 1945–72, and the pre-World War I gold standard era. It offers an integrated treatment of the characteristics of exchange rate regimes and their effects. The book draws on and synthesizes data from the recent wave of empirical research on this topic, and includes new findings that challenge preconceived notions.

The multinational firm and its main vehicle, foreign direct investment, are key forces in economic globalization. Their importance to the world economy can be seen in the fact that since 1990, foreign direct investment has grown more rapidly than the world gross domestic product and world trade. Despite this, the causes and consequences of multinational firm activity are little understood and until recently relatively unexamined in the theoretical literature. This book fills this gap, examining the multinational enterprise (MNE) and foreign direct investment (FDI) from both theoretical and empirical perspectives. In the theoretical chapters, scholars take a wide range of modern analytical approaches-from new growth and trade theories to new economic geography, industrial organization, and game theory. Taking current theoretical work on MNE and FDI as a starting point and aiming to extend the existing theoretical framework, the contributors consider such topics as investment liberalization and firm location, tax competition, and welfare consequences of FDI and outsourcing. The empirical chapters test several of the key hypotheses of recent theoretical work on MNE and FDI, examining topics that include productivity effects on Italian MNEs, the different effects of outsourcing in Austria and Poland, location decisions of MNEs in the European Union, and other topics.

Reform of the federal income tax system has become a perennial item on the domestic policy agenda of the United States, although there is considerable uncertainty over specifics. Indeed the recent report of the President’s Advisory Panel on Federal Tax Reform recommended not one but two divergent policy directions (and included extensive discussion of a third). This book discusses a wide range of issues raised by the prospect of significant tax reform, identifying the most critical questions and considering whether the answers are known, unknown—or unknowable. The debates over tax reform usually concern the advantages and disadvantages of income-based taxation as opposed to any of the several alternative forms of consumption-based taxation. The book opens with chapters that discuss the strengths, weaknesses, and political feasibility of these options. Other chapters consider the effect of tax reform on businesses, especially their investment behavior, and include a discussion of possible problems in any transition to a consumption-based tax; international taxation issues arising in an era of globalization; and individual behavioral response to tax reform, including a view of the topic from the perspective of the relatively new field of behavioral economics.

Game theory models are ubiquitous in economics, common in political science, and increasingly used in psychology and sociology; in evolutionary biology, they offer compelling explanations for competition in nature. But game theory has been only sporadically applied to the humanities; indeed, we almost never associate mathematical calculations of strategic choice with the worlds of literature, history, and philosophy. And yet, as this book shows, game theory can illuminate the rational choices made by characters in texts ranging from the Bible to Joseph Heller’s Catch-22 and can explicate strategic questions in law, history, and philosophy. Much of its analysis is based on the theory of moves (TOM), which is grounded in game theory, and which is developed gradually and applied systematically throughout. TOM illuminates the dynamics of player choices, including their misperceptions, deceptions, and uses of different kinds of power. The book examines such topics as the outcome and payoff matrix of Pascal’s wager on the existence of God; the strategic games played by presidents and Supreme Court justices; and how information is slowly uncovered in the game played by Hamlet and Claudius. The reader gains not just new insights into the actions of certain literary and historical characters but also a larger strategic perspective on the choices that make us human.

This book is devoted to the study of the guidance, control and coordination problems of an enterprise economy. Our basic approach requires an understanding of the roles of money and financial institutions. Our viewpoint differs from most current approaches in stressing together specifically game theory, methods of physics and experimental gaming; together with and more generally a broader evolutionary approach from the biological and other behavioural sciences. Our intended audiences are economists, physicists, experimental gamers, accounting theorists , legal scholars and other behavioural scientists willing to explore beyond their own specialist disciplines. Our biases run primarily to an exposition most congenial to economists, experimental gamers and physicists, but we aim to have all basic concepts understandable regardless of technical background. A mathematically precise unification of Walrasian general equilibrium with macroeconomic dynamics and Schumpeterian innovation is provided utilizing strategic market games.

Revolutionary developments in economics are rare. The conservative bias of the field and its enshrined knowledge make it difficult to introduce new ideas not in line with received theory. Happiness research, however, has the potential to change economics substantially in the future. Its findings, which are gradually being taken into account in standard economics, can be considered revolutionary in three respects: the measurement of experienced utility using psychologists’ tools for measuring subjective well-being; new insights into how human beings value goods and services and social conditions that include consideration of such non-material values as autonomy and social relations; and policy consequences of these new insights that suggest different ways for government to affect individual well-being. This book, emphasizing empirical evidence rather than theoretical conjectures, substantiates these three revolutionary claims for happiness research. After tracing the major developments of happiness research in economics and demonstrating that we have gained important new insights into how income, unemployment, inflation, and income demonstration affect well-being, it examines such wide-ranging topics as democracy and federalism, self-employment and volunteer work, marriage, terrorism, and watching television from the new perspective of happiness research. Turning to policy implications, the book describes how government can provide the conditions for people to achieve well-being, arguing that a crucial role is played by adequate political institutions and decentralized decision making. Happiness demonstrates the achievements of the economic happiness revolution and points the way to future research.

Empirical literature in disciplines ranging from behavioral genetics to economics shows that in virtually every aspect of life, the outcomes of children are correlated to a greater or lesser extent with the outcomes of their parents and their siblings. This book offers theoretical, statistical, and methodological tools for understanding these correlations. It presents a comprehensive survey of intergenerational and sibling correlations for a broad range of outcomes—including fertility and longevity, intelligence and education, income and consumption, and deviancy and religiosity. It then offers a critique of the sometimes conflicting explanations for these correlations proposed by social scientists from such disciplines as developmental psychology, sociology, and economics. It also provides an axiomatic framework for thinking about the complex interplay of heredity, family, and environments, drawing on game theory, control theory, and econometrics. It discusses such topics as the important contributions of Francis Galton (1822–1911) and the statistical study of heredity, the family as an engine of inequality and diversity, and natural experiments designed to identify how environments, families, peer groups, and neighborhoods affect human outcomes. It also presents technical material on statistical, theoretical, and methodological tools used by the earlier chapters. The book’s goal is not to argue for either nature or nurture but to suggest more rigorous ways to assess the diverse contributions to this lively debate.