http://www.cepr.org New Discussion Papers from the Centre for Economic Policy Research (CEPR), a network of over 700 Research Fellows based throughout Europe, who collaborate through the Centre in research and its dissemination. The Centre produces applied theory and empirical work, as well as research that addresses a wide range of European and international policy issues, with an emphasis on all aspects of European integration. en-gb Copyright 2012, Centre for Economic Policy Research pubs@cepr.org (CEPR Publications) webmaster@cepr.org (CEPR Webmaster) http://rss.cepr.org/images/cepronline.gif http://www.cepr.org 104 54 Research on a wide range of European policy issues. Wed, 16 May 2012 13:15:02 GMT Wed, 16 May 2012 13:15:02 GMT http://www.cepr.org/DP8974 http://www.cepr.org/DP8974 The ECB as Lender of Last Resort for Sovereigns in the Euro Area

Author(s): Willem H. Buiter, Ebrahim Rahbari

CEPR Discussion Paper Number 8974
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Programme Area(s): International Macroeconomics (IM)

Date of Publication: 23/05/2012

Keyword(s): Central bank, EMU, Financial repression, Lender of Last Resort, Quasi-fiscal activities, Seigniorage

JEL(s): E02, E31, E42, E43, E44, E63, G21, G28, H12

Abstract: The paper establishes that sovereigns, like banks, need a lender of last resort (LoLR). In the euro area the ECB, with its estimated €3.4 trillion non-inflationary loss absorption capacity, is the only credible sovereign LoLR. The ECB/Eurosystem has been acting as sovereign LoLR through its SMP purchases of periphery sovereign debt in the secondary markets. It has also contributed, through the deeply subsidised bank funding it provided through the 3-year LTROs, half of a mechanism to purchase periphery sovereign debt in the primary issue markets. The other half has been financial repression requiring banks in Italy and Spain to purchase more of their own government’s debt than they would voluntarily and at below-market yields. We expect that, once Spain and Italy are under troika programmes, the Eurosystem will also lend to these sovereigns indirectly, through loans by the national central banks to the IMF which on-lends them to these sovereigns. We recommend that, to increase its effectiveness as LoLR, the ESM be given a banking license. To reduce the illegitimate and unaccountable abuse of the ECB/Eurosystem as a quasi-fiscal actor, we propose that all its credit risk-related losses be jointly and severally guaranteed/indemnified by the 17 euro area member states.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8973 http://www.cepr.org/DP8973 A Reconciliation of SVAR and Narrative Estimates of Tax Multipliers

Author(s): Karel Mertens, Morten O Ravn

CEPR Discussion Paper Number 8973
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Programme Area(s): International Macroeconomics (IM)

Date of Publication: 23/05/2012

Keyword(s): fiscal policy, measurement error, narrative identification, tax changes, vector autoregressions

JEL(s): E20, E32, E62, H30

Abstract: Existing empirical estimates of US nationwide tax multipliers vary from close to zero to very large. Using narrative measures as proxies for structural shocks to total tax revenues in an SVAR, we estimate tax multipliers at the higher end of the range: around two on impact and up to three after 6 quarters. We show that earlier findings of lower multipliers can be explained by an output elasticity of tax revenues assumption that is contradicted by empirical evidence or by failure to account for measurement error in narrative series of tax shocks.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8971 http://www.cepr.org/DP8971 The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe

Author(s): Daniel Cohen, Sébastien Villemot

CEPR Discussion Paper Number 8971
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Programme Area(s): International Macroeconomics (IM)

Date of Publication: 23/05/2012

Keyword(s): Levy stochastic processes, Sovereign debt

JEL(s): F34

Abstract: Why do countries default? This seemingly simple question has yet to be adequately answered in the literature. Indeed, prevailing modelling strategies compel the to choose between two unappealing model features: depending on the cost of default selected by the modeler, either the debt ratios are too high and the probability of default is too low or the opposite is true. In view of the historical evidence that countries always default after a crisis, we propose a novel approach to the theory of debt default and develop a model that matches the key stylized facts regarding sovereign risk.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8970 http://www.cepr.org/DP8970 Switching Costs and Equilibrium Prices

Author(s): Luís M B Cabral

CEPR Discussion Paper Number 8970
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Programme Area(s): Industrial Organization (IO)

Date of Publication: 23/05/2012

Keyword(s): price competition, switching costs

JEL(s): l13

Abstract: In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8969 http://www.cepr.org/DP8969 Local Bias and Stock Market Conditions

Author(s): Mariassunta Giannetti, Luc Laeven

CEPR Discussion Paper Number 8969
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Programme Area(s): Financial Economics (FE)

Date of Publication: 23/05/2012

Keyword(s): behavioral finance, financial cycles, home bias, institutional investors, investor sentiment, local bias, market uncertainty, mutual funds, stock market

JEL(s): E32

Abstract: We show that the local bias in U.S. mutual fund portfolios varies significantly over time and is more pronounced at times of heightened market uncertainty, such as during financial crises. Similarly, the local bias is less pronounced in periods when market sentiment is strong. These results do not depend on past fund performance or fund inflows during good times. Additionally, we do not find that fund managers earn superior returns on local stocks during periods of heightened market uncertainty. Overall, we conclude that informational advantages or scale economies are unlikely to be important factors in explaining the dependence of local bias on market conditions, and that our evidence is more consistent with a behavioral explanation whereby changes in market conditions affect the preference for local stocks of ambiguity averse investors.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8968 http://www.cepr.org/DP8968 Wage Rigidity and Job Creation

Author(s): Christian Haefke, Marcus Sonntag, Thijs van Rens

CEPR Discussion Paper Number 8968
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Programme Area(s): International Macroeconomics (IM), Labour Economics (LE)

Date of Publication: 23/05/2012

Keyword(s): business cycle, search and matching models, wage rigidity

JEL(s): E24, E32, J31, J41, J64

Abstract: Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level data from the CPS to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions. The wage of new hires, unlike the aggregate wage, is volatile and responds almost one-to-one to changes in labor productivity. We conclude that there is little evidence for wage stickiness in the data. We also show, however, that a little wage rigidity goes a long way in amplifying the response of job creation to productivity shocks.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8967 http://www.cepr.org/DP8967 The Pricing of Art and the Art of Pricing: Pricing Styles in the Concert Industry

Author(s): Pascal Courty, Mario Pagliero

CEPR Discussion Paper Number 8967
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Programme Area(s): Industrial Organization (IO)

Date of Publication: 23/05/2012

Keyword(s): Behavioral pricing, exploitation of market power, Fair pricing, Price discrimination, Pricing style, Rationing

JEL(s): D42, D45, L21, L82, Z11

Abstract: We document the existence of pricing styles in the concert industry. Artists differ in the extent to which they rely on second- and third-degree price discrimination and in how likely they are to sell out concerts. Most strikingly, artists who use multiple seating categories are more likely to vary prices across markets and less likely to sell out concerts. These patterns are difficult to explain under a standard profit maximization paradigm. The hypothesis that artists differ in their willingness to exploit market power provides a plausible framework for explaining these patterns in artist pricing style.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8965 http://www.cepr.org/DP8965 Sale of Visas: A Smuggler's Final Song?

Author(s): Emmanuelle Auriol, Alice Mesnard

CEPR Discussion Paper Number 8965
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Programme Area(s): Development Economics (DE), Public Policy (PP)

Date of Publication: 23/05/2012

Keyword(s): legalisation, market structure, migration, migration policies

JEL(s): F22, I18, L51, O15

Abstract: We study how smugglers respond to different types of migration policies - legalisation through the sale of migration visas, or more traditional repressive policies through borders' enforcement, employers' sanctions or deportation - by changing the price they propose to illegal migrants. In this context a government that aims at eradicating smugglers and controlling migration flows faces a trade-off. Eliminating smugglers by the sale of visas increases the flows of migrants and may worsen their skill composition. In contrast, repressive policies decrease the flows of illegal migrants and may improve their skill composition but do not eliminate smugglers. We then study how a combination of increased repression -through reinforced external and internal controls- and sale of visas may be effective at eliminating smugglers and controlling migration flows while not weighing on public finances. Simulations allow us to quantify the partial equilibrium effects of the policies under study.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8963 http://www.cepr.org/DP8963 Networked FDI: Sales and Sourcing Patterns of Japanese Foreign Affiliates

Author(s): Richard Baldwin, Toshihiro Okubo

CEPR Discussion Paper Number 8963
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Programme Area(s): International Trade and Regional Economics (IT)

Date of Publication: 23/05/2012

Keyword(s): complex FDI, Japanese foreign affiliates, networked FDI, sales, sourcing, vertical and horizontal FDI

JEL(s): F21, F23

Abstract: Using firm-level data on the sales and sourcing patterns of Japanese affiliates, this paper suggests that very little FDI falls neatly into the standard bins of horizontal, vertical and export-platform FDI. Most affiliates import some intermediates and export some output suggesting a pattern that might be called ‘networked FDI’. This suggests that that the nature of FDI is influenced by ‘regional comparative advantage’ i.e. the proximity of markets and suppliers. The paper also suggests an empirical strategy for testing and classifying the nature of FDI based on firms’ sales and sourcing patterns rather than standard macro-level variables such as market size and income differences.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]> http://www.cepr.org/DP8962 http://www.cepr.org/DP8962 The Dictator Effect: How Long Years in Office Affects Economic Development in Africa and the Near East

Author(s): Jason Papaioannou, Jan Luiten van Zanden

CEPR Discussion Paper Number 8962
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Programme Area(s): Development Economics (DE)

Date of Publication: 23/05/2012

Keyword(s): Africa, dictatorships, economic growth, political institutions

JEL(s): H7, O2, O55

Abstract: This paper contributes to the growing literature on the links between political regimes and economic development by studying the effects of years in office on economic development. The hypothesis is that dictators who stay in office for a long time period will become increasingly corrupt, and that their poor governance will impact on economic growth (which is reduced), inflation (which increases) and the quality of institutions (which deteriorates). This may be related to the fact that their time horizon is shrinking: they develop (in the terminology developed by Olson) from ‘stationary bandits’ into ‘roving bandits’. Or they may get caught into a ‘disinformation trap’, caused by the ‘dictator dilemma’. We test these hypotheses and indeed find strong evidence for the existence of a dictator effect: the length of the rule is negatively related to economic growth and the quality of democratic institutions, and positively related to inflation. This effect is particularly strong in young states and in ‘single-party’ regimes. The negative effect of years in office was almost constant in time and did not disappear after about 1992.

* CEPR Research Fellows and Affiliates, Corporate Members and Subscribers can download papers without charge. Individual Papers may be purchased at www.cepr.org ]]>