Ashoka Mody

Innovation and the international diffusion of environmentally responsive technology

Abstract New evidence is presented on environmental innovation and diffusion over the 1970s and 1980s. At a global level, a substantial amount of innovations occurred. In the United States, Japan, and Germany, the share of environmental patents in all patents varied between 0.6 and 3%, and as such was higher than the corresponding share of pollution abatement expenditure in GDP. Japanese environmental innovation rates were consistently high. Certain plausible connections between environmental regulation and innovation also emerge. Across these three countries and over time, innovation responded to pollution abatement expenditure, an indicator of the severity of environmental regulations. Environmental patenting rates in developing countries were also high, reaching 2% in many years in Brazil. Developing country innovators obtained a non-trivial number of patents, most of which appear geared towards adapting imported technologies to local conditions. However, domestic innovation was only one path to new technologies. ‘Imports’ of disembodied environmental technologies (foreign patents registered in developing countries) were substantial. Foreign patents were typically ‘important’ or generic patents; evidence also suggests that such patents protected intellectual property in equipment exported. Developing countries, especially in East Asia, often chose to obtain technologies embodied in pollution abatement equipment.

Learning through alliances

An alliance is a flexible organization that allows firms with complementary strengths to experiment with new technological, organizational, and marketing strategies. The flexibility is valuable because the project undertaken through the alliance is uncertain. Flexibility is traded off against the weak incentive structure of the alliance. Although the principle goal of the experimental set-up is to learn more about technical and market parameters, learning also occurs about working in an alliance and could lead to greater competence in managing alliances, partially alleviating incentive problems. Through demonstration and externality effects, a few successful alliances can trigger more widespread alliance formation.

Financial Reform: What Shakes It? What Shapes It?

What accounts for the worldwide advance of financial reforms in the last quarter century? Using a new index of financial liberalization, we find that influential events shook the policy status quo. Balance-of-payments crises spurred reforms, but banking crises set liberalization back. Falling global interest rates strengthened reformers, while new governments went both ways. The overall trend toward liberalization, however, reflected pressures and incentives generated by initial reforms that raised the likelihood of additional reforms, stimulated further by the need to catch up with regional reform leaders. In contrast, ideology and country structure had limited influence.

Evolution and Performance of Exchange Rate Regimes

Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.

Japanese and United States Firms as Foreign Investors: Do they march to the same tune?

During the 1980s, U.S. and Japanese multinationals were attracted by some similar country characteristics: low wage inflation, low country risk, good infrastructure, and an educated work force. Both groups of investors displayed a persistence, being strongly attracted to locations with significant past investment. Japanese firms started the decade as somewhat more fluid, but as their investment levels surged, they became much more persistent. Overall, U.S. firms were more influenced by domestic market conditions and moved contrary to changes in host country trade intensity. Japanese investment had a somewhat greater affinity for trade, reflecting their long-standing interest in East Asia. Some limited evidence suggests that factors driving the two groups of investors converged in the second half of the 1980s.

The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip

We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.

From Bear Stearns to Anglo Irish: How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability

This paper attempts to explain the recent rise and differentiation of sovereign spreads across the countries of the eurozone. Following the onset of the subprime crisis in July 2007, spreads rose but mainly on account of common global factors. The rescue of Bear Stearns in March 2008 marked a turning point. Countries thereafter were increasingly differentiated. Sovereign spreads of a eurozone country tended to rise when the prospects of its domestic financial sector worsened. It appears, therefore, that the rescue of Bear Stearns created a link between financial sector vulnerabilities and a larger contingent liability on public finances. Following the failure of Lehman Brothers, spreads also rose faster for countries with higher ratios of public debt-to-GDP. These transitional dynamics appear to have concluded with the nationalization of Anglo Irish: sovereign spreads throughout the eurozone jumped, with the jump emphasizing the differentiation by financial sector vulnerability and public debt levels. The results imply that, to varying degrees, countries may have moved to a new regime of weak economic outlook, financial sector fragilities, and strains on public finances.

Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?

Qualitative accounts have long emphasized the level of interest rates in the advanced industrial countries as a determinant of capital flows to emerging markets and spreads on external debt. Curiously, econometric studies relying on disaggregated data have lent little support to this hypothesis. Upon modelling the issue and pricing decisions jointly, we confirm that global credit conditions have an important impact on the market for developing-country debt. US rates have a negative impact on the demand by international investors for fixed-rate issues by Latin American borrowers, as predicted by the search-for-yield hypothesis. The same effect is apparent for East Asian floating-rate issues, although the evidence there is not as robust. But, whatever the region, this effect is evident only upon controlling for the impact of US interest rates on the decision of developing-country borrowers to issue debt. Copyright 1998 by Blackwell Publishers Ltd.

Sudden Stops and IMF-Supported Programs

Could a high-access, quick-disbursing %u201Cinsurance facility%u201D in the IMF help to reduce the incidence of sharp interruptions in capital flows (%u201Csudden stops%u201D)? We contribute to the debate on this question by analyzing the impact of conventional IMF-supported programs on the incidence of sudden stops. Correcting for the non-random assignment of programs, we find that sudden stops are fewer and generally less severe when an IMF arrangement exists and that this form of %u201Cinsurance%u201D works best for countries with strong fundamentals. In contrast there is no evidence that a Fund-supported program attenuates the output effects of capital account reversals if these nonetheless occur.

The high-yield spread as a predictor of real economic activity : evidence of a financial accelerator for the United States

Previous studies find that the interest rate term spread predicts real U.S. economic activity. We show that this relationship breaks down for the 1990s and suggest that its earlier success was due to high and volatile inflation. We find, however, that the high-yield spread (HYS) between “junk bond” and government bond yields predicts real activity during the 1990s – especially high levels of the HYS. We also find that the HYS works through both the demand and the supply side of the economy. We interpret our findings as supportive of a financial accelerator mechanism.