Challenges of Contemporary Economics


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Volume 13 (2019) Volume 12 (2018) Volume 11 (2017) Volume 10 (2016) Volume 9 (2015) Volume 8 (2014) Volume 7 (2013) Volume 6 (2012) Volume 5 (2011) Volume 4 (2010) Volume 3 (2009) Volume 2 (2008) Volume 1 (2007)

Volume 6 Issue 4 (2012)

Understanding the Drivers of Economic Growth: Grounding Endogenous Economic Growth Models in Resource-Advantage Theory original article

pp. 4-8 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.62

Shelby D. Hunt


Foss (2012) provides an informed and informative comment on my article “Trust, Personal Moral Codes, and the Resource-Advantage Theory of Competition: Explaining Productivity, Economic Growth, and Wealth Creation” (Hunt, 2012). In general, his comment is highly supportive of both the theory and the arguments developed in my article. He does, however, raise certain issues that need to be addressed. These issues relate to the concept of total factor productivity, the role of institutions in promoting economic growth, and the importance of understanding how transaction costs impact entrepreneurship and economic growth. This reply focuses on his discussion of growth economics and endogenous economic growth models.

Keywords: ethics, trust, resource-advantage theory, economic growth, endogenous economic growth models

What Really Ails the Eurozone?: Faulty Supranational Architecture original article

pp. 10-18 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.63

Assaf Razin, Steven Rosefielde


The global financial crisis which erupted in the United States instantaneously swept across Europe. Like the United States, the European Monetary Union (EMU) was ripe for a crash. It had its own real estate bubble, specifically in Ireland and Spain, indulged in excessive deficit spending, financially deregulated, and rapidly expanded credit. Policy responses and recovery patterns for key EU members like Germany, France (within the Eurozone) and the United Kingdom (outside the Eurozone) were similar. However, after the bubble burst and the crisis began unfolding it became clear that the Eurozone plight differed from America’s in one fundamental respect. There was no exact counterpart of Eurozone GIIPS (Greece, Italy, Ireland, Portugal and Spain) in the United States. The disparity is traced to the EU’s and Eurozone’s special form of governance called “supranationality” (a partially sovereign transnational organization) that has been largely ignored in economic treatises about the costs and benefits of customs unions, economic communities, and monetary unions. EZ members have put themselves in a monetary cage, akin to the gold standard. Member states have surrendered control over their monetary and foreign exchange rate policies to the German dominated European Central Bank (ECB), without supplementary central fiscal, private banking and political union institutions. This should be enough in general competitive theory, but too often leads to factional and societal gridlock that compounds the misery, and could cause the EU to permanently and gravely underperform relative to community’s “un-caged” potential.

Keywords: single currency area, supranationality, EU, EMU

External Sector Rebalancing and Endogenous Trade Imbalance Models original article

pp. 20-26 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.64

John Whalley


I discuss the need for trade models to incorporate endogenous trade imbalances both to more adequately capture the reality of a global economy with large imbalances and pressures from the financial crisis for countries to reduce imbalances. Conventional general equilibrium trade models implicitly incorporate monetary neutrality and either have zero trade balance as a property of equilibrium, or have a fixed and exogenous trade imbalance. Models which are discussed here have a variety of forms. In one, central banks fix exchange rates and operate a non accommodative monetary policy and accumulate reserves. Changes in both trade and monetary policies change reserve accumulative and with the external sector imbalances. This is a reflection of China’s current policy regime. In another intertemporal preferences allow for simultaneous inter commodity and intertemporal trade across countries, and with changed intertemporal trade changed external sector imbalances within the period. These formulations are each applied to potential tax initiatives to aid in rebalancing.

Keywords: endogenous trade model, general equilibrium, external sector imbalances

With or Without U? Testing the Hypothesis of an Inverted U-Shaped Union Membership-Age Relationship original article

pp. 28-34 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.65

Claus Schnabel, Joachim Wagner


In this note, we apply a new test by Lind and Mehlum (2010), casting doubt on the claim proposed by Blanchflower (2007) that the probability of unionisation follows an inverted U-shaped pattern in age with a maximum in the mid- to late 40s. With this new test for an inverted U-shaped pattern, which has not been applied to the age-membership nexus before, and by constructing exact confidence intervals for the maximum value, we demonstrate that – at least with respect to West Germany – Blanchflower’s hypothesis does not hold. Our findings suggest that more definitive evidence is needed before the existence of international unionisation-age patterns can be taken for granted.

Keywords: unionisation, age, inverted U-shape, Germany

Does Planning Belong to the Politics of the Past? original article

pp. 36-48 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.66

Barbara Czarniawska


According to many authors, so-called “central planning” had disappeared from European countries by 1989. However, this is by no means certain. Many former centrally planned economies still engage in central planning, in both the private and public sectors. Moreover, there is a striking similarity between so-called “strategic planning” in large private and public units and central planning in a small-sized economy. These similarities and differences are examined in this article using several examples, concluding with city planning. The analysis suggests that city politicians may find useful lessons in organization studies, revealing that while planning has a powerful comforting and tranquilizing function, plans, like tools, need to be abandoned when they are obsolete or cumbersome. Additionally, planners and managers may find it useful to admit that the differences between the private and public sectors are not as large as conventionally assumed and that their activities are always connected to politics.

Keywords: financial markets, equity capital, banking, value at risk (VaR), diversification, risk management, asset-liability management

Banking Firm, Equity and Value at Risk original article

pp. 50-53 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.67

Udo Broll, Anna Sobiech, Jack E. Wahl


The paper focuses on the interaction between the solvency probability of a banking firm and the diversification potential of its asset portfolio when determining optimal equity capital. The purpose of this paper is to incorporate value at risk (VaR) into the firm-theoretical model of a banking firm facing the risk of asset return. Given the necessity to achieve a confidence level for solvency, we demonstrate that diversification reduces the amount of equity. Notably, the VaR concept excludes a separation of equity policy and asset-liability management.

Keywords: financial markets, equity capital, banking, value at risk (VaR), diversification, risk management, asset-liability management

Infinite Portfolio Strategies original article

pp. 54-60 | First published in 7 December 2012 | DOI:10.5709/ce.1897-9254.68

Stephen F. LeRoy


In continuous-time stochastic calculus a limit in probability is used to extend the definition of the stochastic integral to the case where the integrand is not square-integrable at the endpoint of the time interval under consideration. When the extension is applied to portfolio strategies, absence of arbitrage in finite portfolio strategies is consistent with existence of arbitrage in infinite portfolio strategies. The doubling strategy is the most common example. We argue that this extension may or may not make economic sense, depending on whether or not one thinks that valuation should be continuous. We propose an alternative extension of the definition of the stochastic integral under which valuation is continuous and absence of arbitrage is preserved. The extension involves appending a date and state called to the payoff index set and altering the definition of convergence under which gains on infinite portfolio strategies are defined as limits of gains on finite portfolio strategies.

Keywords: infinite time, portfolios, doubling strategy, weak topology, martingale, Ito integral, Radon-Nikodym derivative