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This article presents a discussion of E. M. Bernstein's paper about the financial problems of economic development. Bernstein discusses five facets of this problem: to decrease the size of the development program, to energize the inflow of foreign capital, to encourage domestic savings, to gather together the available resources, and to allocate the resources available to the private sector in a way that will stimulate the greatest increase in production. The author believes that this analysis leaves no room for argument.

A stochastic framework for coordination of macroeconomic policies is introduced in this paper. It is suggested that: (i) measures of policy accountability should allow for the climate of uncertainty that surrounds policy decisions, and (ii) most models of aggregate economic activity impose arbitrary specifications of uncertainty that do not appear to be empirically justifiable. Ambiguities in interpreting the Humphrey-Hawkins reports of policy authorities are sketched in section II; a proposal for maximizing the ex ante prospects of policy objectives is illustrated in section III; finally, nonstationary allocations of uncertainty are discussed in sections IV and V. This paper provides a brief survey of ongoing work by members of the Federal Reserve Board staff on the role of uncertainty in policy forecasts. It suggests that policy discussion could be improved by more explicit consideration of the allocation of uncertainty. [ABSTRACT FROM AUTHOR]

The article comments on a paper published within the issue, "Capital Formation and the Recent Productivity Slowdown," by Peter Clark. The author also discusses results from his own research in "Accounting for United States Economic Growth, 1929-1969," and applies it to Clark's paper. It is suggested that an abrupt rise in energy prices may have affected growth rates during the mid-1970s. The author also looks at a similar analysis made by John Kendrick, who focuses on the U.S. postwar period of 1948-1966.

This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which impacts all sectors and all firms indiscriminately. [ABSTRACT FROM AUTHOR]

The article comments on three papers within the issue: "Long-Term Effects of Government Deficits on the U.S. Output Potential," by George von Furstenburg, "Capital Formation and the Recent Productivity Slowdown," by Peter Clark, and "U.S. Productivity Growth Recession: History and Prospects for the Future," by Michael McCarthy. The author discusses each article and criticizes their shortcomings. He looks at von Furstenburg's use of the Phelps-Shell model of dynamic economic growth and notes the usefulness of neoclassical growth theory. The author feels that his discussion on the effects of government deficits on output growth or productivity represent a fruitful economic analysis innovation.

The purpose of this paper is to reexamine Milton Friedman and Anna J. Schwartz's argument regarding major business cycle movements, limiting the analysis to business cycle peaks and excluding troughs. Friedman-Schwartz argued that appreciable changes in the rate of growth of the stock of money are a necessary and sufficient condition for appreciable changes in the rate of growth of money income. The necessity and sufficiency of a monetary deceleration for a business cycle peak are explored using a definition of monetary deceleration that takes account of both the size and duration of a change in the growth rate of money.

The article presents a discussion of the research paper by Simon Kuznets on the difficulty of making an orderly pattern of long-term change and how it lies in the absence of an effective theory or even of a working hypothesis. The paper deals with economic forecasting. The reviewer presents an analogy to gross national product forecasting. Examined is the rise of the gross national product in 1953 and what it is forecasted to be in 1965. Also commented on is the annual capital increase in real Gross National Product.

The article presents a discussion of papers written by Norris Johnson and John Scanlon. These authors discuss economic forecasting from 1957 to 1967. Particular attention is given to how the demand for capital funds are crowding the supply during most of this period but not in such a manner as to give rise to major capital shortages. The author states that there is no proof positive way of assessing the reliability of the assumptions made in this paper or their implications for the adequacy of funds.

This paper uses a new methodology based on industry comovement to examine the role of financial market development in intersectoral allocation. Based on the assumption that there exist common global shocks to growth opportunities, we hypothesize that country pairs should have correlated patterns of sectoral growth if they are able to respond to these shocks. Consistent with financial markets promoting responsiveness to shocks, countries have more highly correlated growth rates across sectors when both countries have well-developed financial markets. This effect is stronger between country pairs at similar levels of economic development, which are more likely to experience similar growth shocks. [ABSTRACT FROM AUTHOR]

This paper analyzes a model in which long-term risky assets are illiquid due to adverse selection. The degree of adverse selection and hence the liquidity of these assets is determined endogenously by the amount of trade for reasons other than private information. I find that higher productivity leads to increased liquidity. Moreover, liquidity magnifies the effects of changes in productivity on investment and volume. High productivity implies that investors initiate larger scale risky projects which increases the riskiness of their incomes. Riskier incomes induce more sales of claims to high-quality projects, causing liquidity to increase. [ABSTRACT FROM AUTHOR]

The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the distinction between "technical" discount rate changes that are endogenous and "nontechnical" changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and announcement effects. In addition, we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency. [ABSTRACT FROM AUTHOR]

The article focuses on some of the problems developing countries face as it pertains to central banking. This study will briefly survey the role, problems, and the latency of central banks in developing countries, with some discussion of the methodology and techniques of monetary policy that have been utilized. In order to keep the paper's content manageable, no attention will be given to foreign exchange and payment policies, although these are taken care of by the central bank and are a significant aspect of monetary theory.

How far does mobility of multinational banks solve problems of financial development? Using a panel of 80,000 loans over 7 years, I show that greater cultural and geographical distance between a foreign bank's headquarters and local branches leads it to further avoid lending to "informationally difficult" yet fundamentally sound firms requiring relational contracting. Greater distance also makes them less likely to bilaterally renegotiate, and less successful at recovering defaults. Differences in bank size, legal institutions, risk preferences, or unobserved borrower heterogeneity cannot explain these results. These distance constraints can be large enough to permanently exclude certain sectors of the economy from financing by foreign banks. [ABSTRACT FROM AUTHOR]

An extensive literature documents the role of financial markets in economic development. To help explain this relationship, this paper constructs an endogenous growth model in which a stock market emerges to allocate risk and explores how the stock market alters investment incentives in ways that change steady state growth rates. The paper demonstrates that stock markets accelerate growth by (1) facilitating the ability to trade ownership of firms without disrupting the productive processes occurring within firms and (2) allowing agents to diversify portfolios. Tax policy affects growth directly by altering investment incentives and indirectly by changing the incentives underlying financial contracts. [ABSTRACT FROM AUTHOR]

The author comments on the article "Commercial Banking in the Sixties," by Paul S. Nadler. The article centers on the over-all growth of the commercial banking system in the 1960s as compared with growth in the gross national product (GNP). According to Nadler, that commercial banking deposits will not grow as fast as GNP, which results in the conclusion that other financial institutions will necessarily grow more rapidly than commercial banks. The author explains that he agrees with Nadler's findings.

The purpose of the paper was to provide an objective and systematic appraisal of the capacity of black-owned commercial banks to finance economic development in the black community. This appeared to be a vital task at the time since these institutions were being formed at an accelerated rate with that specific aim in mind. On the basis of the evidence analyzed (virtually all of which was newly generated information available only through Federal bank supervisory agencies), I concluded that black banks were not viable instruments of economic development. However, I also concluded that they could perform some minor services of benefit to their local areas, and they could serve as symbols of black achievement. As an alternative source of financing, I proposed a domestic version of the existing Edge Corporations. These are subsidiaries of U.S. commercial banks formed for the purpose of conducting foreign financial activities. Among the latter, they can have varying amounts of equity investments in non-financial enterprises abroad. It was this feature which I thought offered promise as a means of expanding the availability of risk-bearing funds in black communities. [ABSTRACT FROM AUTHOR]

By considering yearly production growth rates for several manufacturing industries in more than 100 countries during (roughly) the last 40 years, we show that industries that are more dependent on external finance are hit harder during recessions. The observed difference in the behavior of industries is larger when financial frictions are thought to be more prevalent, linking the result directly to the financial mechanism hypothesis. In particular, more dependent industries are more strongly affected in recessions when they are located in countries with poor financial contractibility, and when their assets are softer or less protective of financiers. [ABSTRACT FROM AUTHOR]

We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problem. [ABSTRACT FROM AUTHOR]

Recent work suggests that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. For firms in poorly developed financial markets, implicit borrowing in the form of trade credit may provide an alternative source of funds. We show that industries with higher dependence on trade credit financing exhibit higher rates of growth in countries with weaker financial institutions. Furthermore, consistent with barriers to trade credit access among young firms, we show that most of the effect that we report comes from growth in the size of preexisting firms. [ABSTRACT FROM AUTHOR]

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U-shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous. [ABSTRACT FROM AUTHOR]

By demonstrating the superiority of the present-value to the recoupment-period criterion, Peter Lindert [2] has made a major contribution to the analysis of foreign investment controls. In fact, after reading Lindert's analysis, one wonders how the recoupment-period criterion got a foothold in the first place' the assessment of the net impact of a control program is clearly dependent on a comparison of capital inflows and outflows occurring at different points in time; and the accepted and traditional way to make such intertemporal comparisons is by a present value calculation. [ABSTRACT FROM AUTHOR]

This paper studies the relation between changes in financial investment opportunities and changes in the macroeconomy. States variables such as the lagged production growth rate, the default premium, the term premium, the short-term interest rate and the market dividend-price ratio are shown to be indicators of recent and future economic growth. Further, the market excess return is negatively correlated with recent economic growth and positively correlated with expected future economic growth. These results offer straightforward interpretations of recent evidence on the forecasts of the market excess return by state variable via their forecasts on the macroeconomy. [ABSTRACT FROM AUTHOR]

Given the tempo of this movement and the enormously important economic development role which the black banks are expected to undertake, it appears vital that an objective and systematic appraisal be made of the capacity of these institutions to perform this task. This paper is devoted to such an assessment. [ABSTRACT FROM AUTHOR]

The article discusses a financial framework for economic growth in the United States. The article presents a unified financial counterpart to a long-term economic projection. Based on assumptions of varying rates of growth, a set of projections of economic activity in 1970 is presented. A "judgment" model will be selected based on the results of the projections. The article then introduces a theoretical framework that links levels of economic and financial activity. By using the "judgment" model as a reference, the pattern of relationships will be applied to a projection of assets and liabilities for the individual components of the financial network.

The article presents commentary on the address "Long-Term Trends in the Financing of Regulated Industries, 1870-1950," by Melville J. Ulmer, "Trends in Capital Formation and Financing in Agriculture," by Alvin S. Tostlebee, and Sergei Dobrovolsky's "Capital Formation and Financing Trends in Manufacturing and Mining, 1900-1953," all included within the issue addressing the development of the U.S. capital market. The application of the historical data to the development of other countries is discussed, outlining implications of U.S. economic history on general financial theory.

This article presents a discussion about the U.S. Securities and Exchange Commission's (SEC) Special Study, "Report of the Special Study of the Securities Markets of the Securities and Exchange Commission," by Irwin Friend, in which he distinguishes between the public interest and the protection of investors aspects of the securities acts. The author here supports Friend's criticism of the report, which is that it does not contain generally acceptable means for judging the performance of the securities markets.

The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D. U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth. [ABSTRACT FROM AUTHOR]

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings ( PE) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth. [ABSTRACT FROM AUTHOR]

Using a unique sample of commercial loans and mergers between large banks, we provide micro-level (within-county) evidence linking credit conditions to economic development and find a spillover effect on crime. Neighborhoods that experience more bank mergers are subject to higher interest rates, diminished local construction, lower prices, an influx of poorer households, and higher property crime in subsequent years. The elasticity of property crime with respect to merger-induced banking concentration is 0.18. We show that these results are not likely due to reverse causation, and confirm the central findings using state branching deregulation to instrument for bank competition. [ABSTRACT FROM AUTHOR]

We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets. [ABSTRACT FROM AUTHOR]

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias. [ABSTRACT FROM AUTHOR]

In countries with more secure property rights, firms might allocate resources better and consequentially grow faster as the returns on different types of assets are more protected against competitor's actions. Using data on sectoral value added for a large number of countries, we find evidence consistent with better property rights leading to higher growth through improved asset allocation. Quantitatively, the growth effect is as large as that of improved access to financing due to greater financial development. Our results are robust using various samples and specifications, including controlling for growth opportunities. [ABSTRACT FROM AUTHOR]

We construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring, and allows for compensation for illiquidity. Using a new and relatively efficient method, we estimate the model using Russian dollar-denominated bonds. We consider the determinants of the Russian yield spread, the yield differential across different Russian bonds, and the implications for market integration, relative liquidity, relative expected recovery rates, and implied expectations of different default scenarios. [ABSTRACT FROM AUTHOR]

We have constructed a simple two-sector model of the demand for housing and corporate capital. Economic growth and an increase in the inflation rate were then simulated with a number of model variants. The model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it. The existence of capital-market constraints offsets the bias against corporate capital, but it introduces a sharp, inefficient reallocation of housing from less wealthy, constrained households to wealthy households who do not have gains on mortgages and are not financially constrained. [ABSTRACT FROM AUTHOR]

It is generally recognized that there is a high degree of economic concentration in the United States and elsewhere.1 The term economic concentration refers to the extent to which an industry's assets, output, or sales are distributed among the firms in that industry. Economic concentration frequently results in a distribution of assets in an industry that is similar to log normal distributions. In other words, a few firms hold a large share of an industry's assets while many firms hold small shares of the assets. Such skewed distributions are readily observable in the steel, banking, and automobile industries to name a few. Log normal distributions have been replicated by a variety of simulation techniques which has led some observers to conclude that market structure may be determined stochastically. This article uses a Monte Carlo simulation growth process and a financial model developed by Lerner and Carleton to assess the relationships between selected financial variables and economic concentration. The variables are financial leverage, rate of return on assets, interest rates, proportion of earnings retained, and income tax rates. As an outgrowth of the simulations, it was also possible to examine some financial characteristics of the fastest and slowest growing firms in a hypothetical industry. The article is divided into four parts. Part one defines two measures of economic concentration and simulates a growth process. In Part two, growth is measured by a financial model, and Monte Carlo simulations are used to examine the impact of growth on economic concentration. The third part presents selected financial characteristics of the fastest growth firms and those that are growing at a slower rate. The final part concerns some institutional factors. [ABSTRACT FROM AUTHOR]

Theoretical work on money and growth is a major forward step in the development of monetary theory as a part of economic theory. From these developments, we can expect to obtain a firmer foundation for social policy. Meanwhile, I believe we can accept some of the main policy conclusions--the advantages of permitting competitive banking, removing the prohibition against interest payments on demand deposits, and steady, or at least steadier, growth of money--on the basis or analysis that is much less restrictive and better validated than the theory used to establish the set of propositions we now call optimal monetary policy. [ABSTRACT FROM AUTHOR]

In summary, the experience of the Credit Crunch of 1966 shows: 1. The Federal Reserve was trying to operate under a broad target of furthering economic growth by restricting overheated areas and aiding depressed ones, rather than maintaining a narrow target such as free reserves or money supply alone would have provided. 2. The Federal Reserve recognized that quantitative credit controls have qualitative impact and it was moving to more selective intervention to offset this. 3. The Federal Reserve was working to maintain the status quo in banking structure so that liability management by the major banks would not help the large banks grow larger while the small stagnated. Allowing the Credit Crunch of 1966 thus was no blunder on the part of the Reserve Authorities. Rather it was a new direction in monetary policy. For the large banks were trying to become immune to credit restraint through the new technique of liability management, and the Federal Reserve responded by developing new, broader, and more selective tools of its own. [ABSTRACT FROM AUTHOR]

The reception accorded the S.E.C. Special Study ranged from the vituperative to the lyrical. Interestingly enough, some of the more deprecatory comments came from academicians while some of the more glowing came from the financial community. On a previous occasion, together with a colleague, I indicated in some detail that perhaps the best-known of these criticisms--that by Professor Stigler attacking the ineptitude of the Special Study and the ineffectiveness of the S.E.C.--was without much foundation. As pointed out at that time, I consider the Special Study a competent and useful document and the S.E.C. a valuable and effective agency. Since the justification for this view has already been set forth at some length, it will not be necessary to repeat it here. The Special Study has already had a major and I think generally beneficial impact on the securities markets through new legislation, new regulations, and the intensified attention given both by the securities industry and the S.E.C. to the solution of both old and new problems. [ABSTRACT FROM AUTHOR]

The article assesses financial innovation and structural change in the early stages of industrialization based on the experience of the financial sector in Mexico from 1945-1959. A description of a traditional economy is included as is the transformation by which such an economy can become a developing economy through alterations in the production function. There are five ways, the article states, for financing innovation in developing economies, including self-financing, tax increases, direct financing, government securities, and indirect financing.

The article discusses the policy acceptance in the U.S. of reliance on automatic fiscal stabilizers. The author provides a history of previous fiscal stabilizer studies. The author states that it is necessary to illustrate the potential incompatibility of an annually balanced budget that has economic stability. The article also discusses institutional changes which made automatic fiscal stabilizers more important and the acceptance of automatic fiscal stabilizers as part of government policy. An analysis of how the U.S. executive and legislative branch is involved is also provided.

The article discusses the method of control of capital issues adopted by Great Britain. The author states that an increasing number of economists have focused their interest on the problems associated with secular acceleration. These problems include a long-run tendency for planned investment to exceed planned savings, rather than on the main concern of the 1930's, which was secular stagnation. The article also discusses the scope of controls, the argument of the "bonus-issue," and problems with hiring and purchasing.

The article examines financial problems in underdeveloped countries and various conflicts associated with financing development programs in these regions. Developing an economy is more complex than simply incorporating a few businesses using modern methods of production. If economic development is to be meaningful, it must also have a change in attitudes towards production, consumption, saving and investment. Economic development needs social values that encourage business and technological innovations, while simultaneously causing expansion and growth. The author states that a major conflict for improved development is sociological.

The article discusses the promotion of economic growth for underdeveloped areas of the world through international co-operation. It is explained that the economic growth of underdeveloped nations of the world is stated to depend upon the fulfillment through international action of two conditions, which includes the provision of technique or know-how, and, second, the supplying of capital funds to the underdeveloped nations. The article focuses on the economic growth and assistance occurring in Venezuela.

This article focuses on investment prospects in the U.S. The article is the result of early research conducted by the Committee for Economic Development, but not a product of that body. The author discusses the immediate prospect of high employment and successful investment, then addresses concerns that the form of financing of investment may lead to depression and unemployment, and finally, addresses possible forms of investment financing that will successfully avoid depression and stagnation. The author presents strategies that will facilitate the flow of cash into equity as opposed to debt, including fiscal policy recommendations relative to tax structure and state and local regulations.

While it is frequently asserted that British industry has earned an inadequate return on investment, there has been little agreement among economists as to what exactly this rate has been in recent years. This note provides striking new evidence that the profitability of British industry is currently much lower than anyone had previously supposed. [ABSTRACT FROM AUTHOR]