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The Centre for Growth and Business Cycle Research

Discussion papers 2007

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Alper, K., (2007). 'Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 93.

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This paper analyses the transmission of monetary and external shocks in a dollarized economy by making use of a small, static analytical model, which dwells on Agénor and Montiel (2006, 2007). The focus is particularly on the implications of endogenous country risk premium on the transmission of shocks. Endogenous risk premia arise from the imperfect information in international capital markets. As is the case in the literature on credit market imperfections, the net worth of the banks intermediating between the domestic investors and international capital markets is the main determinant of the country's risk premium. Fluctuations in the exchange rate affect the net worth of banks and so the cost of foreign resources which is, in turn, reflected into domestic lending rates. We show that in such a setting the conventional effects of monetary and external shocks might be reversed.

Haque, M.E., Kneller, R., (2007). 'Corruption and Development: A test for Non-linearities', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 92.

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Using different combinations of culture, development and openness to international trade, we test the variability in the incidences of corruption at different stages of development or in other words the non-linearities in the relationship between corruption and development. We employ formal threshold model developed by Hansen (2000), and unlike the existing literature, we find that: (1) non-linear models that search for the break points in the relationship between corruption and development are statistically preferable than linear regressions; (2) the effect of development at any stage is much lower than that has been suggested by studies using linear regressions approach; (3) both culture and openness do not affect corruption directly; rather they have an effect on the location of break points in the relationship between corruption and development.

Savva, C.S., Neanidis, K.C., Osborn, D.R., (2007). 'Business Cycle Synchronization of the Euro Area with the New and Negotiating Member Countries',Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 91.

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We examine business cycle synchronizations between the euro area and the recently acceded EU and currently negotiating countries. Strong evidence is uncovered of time-variation in the degree of comovement between the cyclical components of monthly industrial production indicators for each of these countries with a euro area aggregate, which is then modelled through a bivariate VAR-GARCH specification with a smoothly time-varying correlation that allows for structural change. Where required to account for the observed time-variation in correlations, a double smooth transition conditional correlation model is used to capture a second structural change event. After allowing for dynamics, we find that all new EU members and negotiating countries have at least doubled their business cycle synchronization with the euro area, or changed from negative to positive correlations, since the early 1990s. Furthermore, some have exhibited U-curved or hump-shaped business cycle correlation patterns. The results point to great variety in timing and speed of the correlation shifts across the country sample.

Agénor, P-R., Montiel, P.J.,(2007). 'Monetary Policy Analysis in a Small Open Credit-Based Economy', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 90.

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This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is is the only source of external finance. At the heart of the model is the link between banks' lending rates (which incorporate a premium over and above the marginal cost of borrowing) and firms' net worth. In contrast to models in the Stiglitz-Weiss or Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing rate. The central bank sets the refinance rate and provides unlimited access to liquidity at that rate. The model is used to study the effects of changes in official interest rates, under both fixed and flexible exchange rates. Various extensions are also discussed, including income effects, the cost channel, the role of land as collateral, and dollarization.

Agénor, P-R., Neanidis,K.C., (2007). 'Optimal Taxation and Growth with Public Goods and Costly Enforcement', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 89.

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This paper studies optimal direct and indirect taxation in an endogenous growth framework with a productive public good and costly tax collection. Optimal (growth-maximizing) tax rules are derived under exogenous collection costs. The optimal direct-indirect tax ratio is shown to be negatively related to the administrative costs of collecting these taxes, as documented in cross-country data. This result also holds under endogenous collection costs (with these costs inversely related to administrative spending on tax enforcement), but for these to generate significant effects on tax collection requires implausibly high degrees of efficiency in spending, or the allocation of a large fraction of resources to tax enforcement. Depending on how it is financed, the latter policy may entail adverse effects on growth. Improving "tax culture" and the sense of civic duty through greater budgetary transparency may be a more effective policy to improve tax collection and promote economic growth.

Blackburn, K.,Forgues-Puccio, G.F.,(2007). 'Why is Corruption Less Harmful in Some Countries Than in Others?', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 88.

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Empirical evidence shows that not all countries with high levels of corruption have suffered poor growth performance. Bad quality governance has clearly been much less damaging (if at all) in some economies than in others. Why this is so is a question that has largely been ignored, and the intention of this paper is to provide an answer. We develop a dynamic general equilibrium model in which growth occurs endogenously through the invention of new goods based on research and development activity. For such activity to be undertaken, firms must acquire complementary licenses from public officials who are able to exploit their monopoly power by demanding bribes in exchange for these (otherwise free) permits. We show that the effects of corruption depend on the extent to which bureaucrats coordinate their rent-seeking behaviour. Speci?cally, our analysis predicts that countries with organised corruption networks are likely to display lower levels of bribes, higher levels of research activity and higher rates of growth than countries with disorganised corruption arrangements.

Agénor, P-R., Montiel, P.J.,(2007). 'Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates', Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 87.

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Monetary policy is analyzed in a simple model with credit market imperfections, flexible prices, and a floating exchange rate. Banks’ lending rates incorporate a premium, which depends on firms’ net worth, over the cost of borrowing from the central bank. In contrast to models in the Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing lending rate. The central bank sets the refinance rate and provides banks with unlimited access to liquidity at that rate. The model is used to study the macroeconomic effects of changes in the refinance and reserve requirement rates, central bank auctions, shifts in the risk premium and contract enforcement costs, and changes in public spending and world interest rates.