We utilize an empirical model of growth as a platform for examining the effects of capital account liberalization on growth. While we test for the direct effects of liberalization, we are equally interested in another facet of liberalization: sequencing. We ask what prior political, social, or economic conditions were required for capital account liberalization to have led to subsequent growth. Our key independent variable is a measure of capital account openness that comes in the form of five-year time-series, cross-sectional observations for 80 nations, 1950 (or independence) to 1997. Our focus is on change indicators of liberalization, as we argue that level indicators of government policies in political economic research are generally too imprecisely specified to exclude the influence of other collinear political economic variables. We focus not simply on the economic preconditions for beneficial liberalizations, but the political and social preconditions as well. We find that capital account liberalization has a robust and direct effect on subsequent economic growth in most countries. Capital account liberalization does not, however, lead to higher growth in emerging market democracies that have weak welfare states. We conclude that policymakers in emerging market democracies have ample reason to be cautious about full capital account liberalization. Policymakers in emerging market nations are routinely urged to liberalize their international

Applications of modern methods for analyzing data with missing values, based primarily on multiple imputation, have in the last half-decade become common in American politics and political behavior. Scholars in this subset of political science have thus increasingly avoided the biases and inefficiencies caused by ad hoc methods like listwise deletion and best guess imputation. However, researchers in much of comparative politics and international relations, and others with similar data, have been unable to do the same because the best available imputation methods work poorly with the time-series cross section data structures common in these fields. Weattempttorectify this situation with three related developments. First, we build a multiple imputation model that allows smooth time trends, shifts across cross-sectional units, and correlations over time and space, resulting in far more accurate imputations. Second, we enable analysts to incorporate knowledge from area studies experts via priors on individual missing cell values, rather than on difficult-to-interpret model parameters. Third, because these tasks could not be accomplished within existing imputation algorithms, in that they cannot handle as many variables as needed even in the simpler cross-sectional data for which they were designed, we also develop a new algorithm that substantially expands the range of computationally feasible data types and sizes for which multiple imputation can be used. These developments also make it possible to implement the methods introduced here in freely available open source software that is considerably more reliable than existing algorithms. We develop an approach to analyzing data with

This paper evaluates the relative impact of the efficiency and compensation perspectives on the globalization-welfare state nexus using panel data for 18 OECD countries over the period 1961-1994.

We show theoretically that the responsiveness of a fund manager’s portfolio allocations to changes in public information decreases in the manager’s skill. We go on to estimate this sensitivity (RPI) astheR 2 of the regression of changes in a manager’s portfolio holdings on changes in public information using a panel of U.S. equity funds. Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance, and between RPI and fund flows. We also document that both fund- and manager-specific attributes affect RPI. THE CONCEPT OF SOPHISTICATED INVESTORS permeates the economic literature in several areas, including market microstructure, tests of the efficient market hypothesis, and the performance evaluation of financial institutions. Sandroni (2000, p.1303) succinctly describes these investors as those who “are consistently better in predicting prices. ” Whether such investors exist and whether they outperform others has been the subject of debate for at least a few decades,

Economic models of decentralization generally emphasize beneficial consequences—efficient provision of local public goods, hard budget constraints, and sorting of residents according to taste. This paper notes two less benign effects. First, political decentralization makes it easier for subnational governments to collude with enterprises at the center’s expense, offering firms political protection against central tax collectors and bankruptcy agents (“regional fiscal protection”). Second, because multiregional enterprises have a larger set of potential regional protectors, political decentralization advantages them over smaller, single-region firms (the “multiregional advantage”). Fiscal decentralization alleviates some problems, but exacerbates others such as the shift of output underground. A simple model shows how these and other phenomena follow from the assumption of revenue-maximizing governments in a state with inter-level revenue-sharing and imperfect law enforcement. Various predictions of the model are compared to recent economic experience in Russia and are found to fit remarkably well. Many problems—including official stagnation, booming underground economy, growing interregional fiscal inequality, economic dominance of the “oligarchs”, falling federal tax revenues, and frequent economic conflict between central and regional governments—that are often explained by ad hoc and personal factors (Yeltsin’s health, high-level corruption, misguided economic reform strategies) can all be traced at least in part to the logic of competition in a decentralizing, revenue-sharing state.

Abstract: In the postwar era until recently, public-transfer shares of GDP have risen dramatically in every developed democracy. Much positive theory purports to explain this development as a direct consequence of differing distributions of political (votes) and economic (money) resources. This literature concludes, inter alia, that the size of tax-and-transfer systems (T&T) increases in the skew of the income distribution. This paper builds from that basis, suggesting theoretical additions and amendments deriving from further consideration of the democratic processes that transform resources into influence. It especially emphasizes that not everyone participates politically and that participants and non-participants are not randomly selected. Together these facts imply that aggregate participation rates will mediate T&T responses to income inequality, and, conversely, that income inequality will mediate T&T responses to aggregate participation rates. Specifically, since the relatively wealthy have higher propensity to participate politically, higher aggregate participation rates will generally coincide with increased democratic representation of the relatively less well-off, suggesting that democratic governments will respond to greater inequality with larger T&T increases the higher the participation rate and, vice versa, increased participation will produce larger T&T increases the more unequal the underlying income distribution. The postwar T&T experiences of developed democracies support that hypothesis empirically. 1

Few propositions are more widely accepted today among policy makers and economists than the assertion that, by making its central bank more independent from the national government, a nation can secure better levels of economic performance. The financial press has concluded that “the argument for central bank independence...appears overwhelming, ” and many nations have made their central banks more independent during the 1990s. 1 Even the new monetary union now being established in Europe is organized around a central bank designed to be highly independent of political control (Goodhart 1995; Fratianni and von Hagen 1992; Gros and Thygesen 1992). The argument for central bank independence rests on three pillars. First, a body of economic theory has been developed to explain why the independence of the central bank enhances economic performance (Persson and Tabellini 1994; Cukierman 1992). Second, several national cases are cited to support this view, of which the most prominent is the Federal Republic of Germany whose Bundesbank also provides the model for the new European Central Bank (Canzoneri, Grilli, and Masson 1993; Fratianni, von Hagen, and Waller 1992). Third, an influential set of empirical studies seems to confirm that, by making the central bank more independent, a nation can secure lower rates of inflation without any adverse economic effects

For the first time in modern history, free trade co-exists with free finance. Free trade and free finance are not mutually reinforcing, but cause a mismatch between the demand and supply of risk capital. This mismatch potentially hurts small firms and local interests most. What can they do about it? It depends on state institutions: the more centralized the state, the fewer opportunities available to potential losers to curb free finance. As a result, financial globalization is most successful in centralized countries, where resistance to centralization is least strongly felt. This hypothesis is systematically tested on a sample of OECD countries. Domestic Responses to Free Trade and Free Finance in OECD Countries * This is not the first time that national financial markets are becoming more global. They reached a similar, if not more advanced, state of mutual dependence during the classic era of the Gold Standard. 1 What is unique about the last three decades of the Twentieth Ce...

: In the postwar era until recently, transfer payments have risen seemingly inexorably as a fraction of GDP in every developed democracy. A considerable body of positive theory purports to explain this development as a direct consequence of the differential distributions of political (votes) and economic (money) resources. This literature concludes, inter alia, that the size of tax-andtransfer systems (T&T) increases in the pre-T&T skew of the income distribution. This paper builds from that basis, suggesting theoretical additions and amendments deriving from further consideration of the political processes that transform resources into influence. It particularly emphasizes that not everyone participates politically and that participants and non-participants are not randomly selected. Together these facts imply that the response of T&T to changes in income inequality will be mediated by participation rates and, vice versa, the response to increases in participation will be mediated by ...

ABSTRACT: Using a new dataset on capital account openness, we investigate why equity return correlations changed over the last century. Based on a new, long-run dataset on capital account regulations in a group of 16 countries over the period 1890-2001, we show that correlations increase as financial markets are liberalized. These findings are robust to controlling for both the Forbes-Rigobon bias and global averages in equity return correlations. We test the robustness of our conclusions, and show that greater synchronization of fundamentals is not the main cause of increasing correlations. These results imply that the home bias puzzle may be smaller than traditionally claimed.