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Volume 17, Number 4, Fall 2003
Symposium: Activist Antitrust?
Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence by Robert W. Crandall and Clifford Winston
This paper reviews the literature and assesses the effects of antitrust policy and enforcement on consumer welfare. We find no evidence that antitrust policy in the areas of monopolization, collusion, and mergers has provided much benefit to consumers and, in some instances, we find evidence that it may have lowered consumer welfare. We also do not find any evidence that antitrust policy has deterred firms from engaging in actions that could harm consumers. We identify various reasons for the apparent ineffectiveness of antitrust policy, offer preliminary policy recommendations, and suggest ways in which economists could more fully assess antitrust policy.
The Case for Antitrust Enforcement by Jonathan B. Baker
This paper provides evidence of the necessity and success of antitrust enforcement. It begins with examples of socially beneficial antitrust challenges by the federal antitrust agencies to price-fixing and other forms of collusion; to mergers that appear likely to harm competition; and to monopolists that use anticompetitive exclusionary practices to obtain or maintain their market power. It then reviews systematic empirical evidence on the value of antitrust derived from informal experiments involving the behavior of U.S. firms during periods without effective antitrust enforcement, and the behavior of firms across different national antitrust regimes. Overall, it concludes, the benefits of antitrust enforcement to consumers and social welfare -- particularly in deterring the harms from anticompetitive conduct across the economy -- appear to be far larger than what the government spends on antitrust enforcement and firms spend directly or indirectly on antitrust compliance.
Symposium: International Financial Architecture
The Unholy Trinity of Financial Contagion by Graciela L. Kaminsky, Carmen M. Reinhart and Carlos A. Végh
Over the last 20 years, some financial events, such as devaluations or defaults, have triggered an immediate adverse chain reaction in other countries -- which we call fast and furious contagion. Yet, on other occasions, similar events have failed to trigger any immediate international reaction. We argue that fast and furious contagion episodes are characterized by "the unholy trinity": (i) they follow a large surge in capital flows; (ii) they come as a surprise; and (iii) they involve a leveraged common creditor. In contrast, when similar events have elicited little international reaction, they were widely anticipated and took place at a time when capital flows had already subsided.
Restructuring Sovereign Debt by Barry Eichengreen
This paper provides new empirical evidence relevant to the debate over the desirability of reforms to the way that financial markets and the international community deal with sovereign debt crises. In particular, given the ongoing opposition of investors and some sovereigns to greater use of collective action clauses (CACs) in emerging market bonds, we present new evidence on the way that financial markets have priced the use or non-use of CACs.
The Mirage of Exchange Rate Regimes for Emerging Market Countries by Guillermo A. Calvo and Frederic S. Mishkin
This paper argues that much of the debate on choosing an exchange rate regime misses the boat. It begins by discussing the standard theory of choice between exchange rate regimes, and then explores the weaknesses in this theory, especially when it is applied to emerging market economies. It then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates, and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits. The conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal, financial, and monetary institutions in producing macroeconomic success in emerging market countries. This suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable, and more on these deeper institutional arrangements. A focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years.
Articles
Education, Poverty and Terrorism: Is There a Causal Connection? by Alan B. Krueger and Jitka Malecková
The paper investigates whether there is a connection between poverty or low education and terrorism. We review evidence on hate crimes, which are closely related to terrorism; the occurrence of hate crimes is largely independent of economic conditions. We analyze data on support for attacks against Israeli targets from public opinion polls conducted in the West Bank and Gaza Strip; support for violent attacks does not decrease among those with higher education and higher living standards. The core contribution of the paper is a statistical analysis of the determinants of participation in Hezbollah militant activities; having a living standard above the poverty line or a secondary or higher education is positively associated with participation in Hezbollah. We also find that Israeli Jewish settlers who attacked Palestinians in the West Bank in the early 1980s were overwhelmingly from high-paying occupations. Although our results are tentative and exploratory, they suggest that neither poverty nor education has a direct, causal impact on terrorism.
Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others by Lars E.O. Svensson
Existing proposals to escape from a liquidity trap and deflation, including my "Foolproof Way," are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank's commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future.
The Demographic Transition: Three Centuries of Fundamental Change by Ronald Lee
The global demographic transition began around 1800 in Europe with declining mortality followed by declining fertility, trends which spread around the world and continue in this century. At the aggregate level, population size greatly increased, growth accelerated and declined with many countries now shrinking, and age distributions inevitably moved from young to old. Population aging has not yet run its course, Its effects exacerbated by declining retirement ages, straining pensions systems and prompting their reform. These aggregate demographic trends reflect profound changes in risks and behavior for individuals and families, and in the shape of the economic life cycle.
Anomalies: The Law of One Price in Financial Markets by Owen A. Lamont and Richard H. Thaler
The Law of One price states that identical goods (or securities) should sell for identical prices. In financial markets the law of one price is thought to hold almost exactly, and is the basis for much of financial economic theory. We present evidence on several examples of violations of this law, including closed-end country funds, twin shares, dual class shares, and corporate spinoffs. We analyze the causes of these violations, and show they all stem from some limits on the extent to which rational arbitrageurs can intervene.
Policy Watch: The Economics of Fuel Economy Standards by Paul R. Portney, Ian W. H. Parry, Howard K. Gruenspecht and Winston Harrington
One of the most hotly contested of all energy policy issues involves Corporate Average Fuel Economy (or CAFE) standards for new cars and light-duty trucks. Tighter standards would reduce gasoline consumption, and hence both greenhouse gas emissions as well as this country's vulnerability to oil price shocks. But they would also increase the price of new vehicles, worsen traffic congestion and-depending on how they are phased in-possibly even reduce occupant safety. These effects are amenable to economic analysis, and we review the evidence to date bearing on this interesting and important question.
Features
Recommendations for Further Reading
Comments: Luigi L. Pasinetti, Franklin M. Fisher, Jesus Felipe and J. S. L. McCombie, Robert L. Greenfield, Avi J. Cohen and G. C. Harcourt, William H. Kaempfer and Anton D. Lowenberg, Lance E. Davis and Stanley Engerman
Notes