THIERRY BRACKE, European Central Bank (ECB)
Email: thierry.bracke@ecb.int
ADALBERT WINKLER, European Central Bank (ECB)
Email: Adalbert.winkler@ecb.europa.eu
ANDRÉ GEIS, European Central Bank (ECB)
Email: andre.geis@ecb.int
MAURIZIO MICHAEL HABIB, European Central Bank (ECB)
Email: maurizio.habib@ecb.int
CSABA MÓRÉ, European Central Bank
Email: Csaba.More@ecb.int
EVA KATALIN POLGAR, European Central Bank (ECB)
Email: eva-katalin.polgar@ecb.europa.eu
EMIDIO COCOZZA, Bank of Italy
Email: emidio.cocozza@bancaditalia.it
HUBERT SCHOKKER, affiliation not provided to SSRN
TINA ZUMER, European Central Bank (ECB)
Email: tina.zumer@ecb.int

This paper reviews financial stability challenges in the EU candidate countries Croatia, Turkey and the former Yugoslav Republic of Macedonia. It examines the financial sectors in these three economies, which, while at very different stages of development and embedded in quite diverse economic settings, are all in a process of rapid financial deepening. This manifests itself most clearly in the rapid pace of growth in credit to the private sector. This process of financial deepening is largely a natural and welcome catching-up phenomenon, but it has also increased the credit risks borne by the banking sectors in the three economies. These credit risks are compounded by the widespread use of foreign currency-denominated or -indexed loans, leaving unhedged bank customers exposed to potential swings in exchange rates or foreign interest rates. Moreover, these financial risks form part of a broader nexus of vulnerabilities in the economies concerned, in particular the external vulnerabilities arising from increasing private sector external indebtedness. That said, the paper also finds that the authorities in the three countries have taken several policy actions to reduce these financial and external vulnerabilities and to strengthen the resilience of the financial sectors.

INGO WALTER, New York University - Stern School of Business
Email: iwalter@stern.nyu.edu
ELIF SISLI, Brandeis University
Email: esisli@brandeis.edu

We examine the industrial organization and institutional development of the assetmanagement industry in Asian developing economies specifically in China, Indonesia,Korea, Malaysia, Singapore, Philippines and Thailand. We focus on the size and growthof the buy-side of the respective financial markets, asset allocation, the regulatoryenvironment, and the state of internationalization of the fund management industry in its key components mutual funds, pension funds and asset management for high net worth individuals. We link these the evolution of professional asset management inthese environments to the development of the respective capital markets and to the evolution of corporate governance. We find that the fund management industry occupies a very small niche in domestic financial systems that are dominated by banks.At the same time, we find that its growth has been very rapid in the early 2000s and wesuggest that this is likely to persist as the demand for professional management of financial wealth in the region develops and as the pension fund sectors of the respectiveeconomies are liberalized to allow larger portions of assets to be invested in collective investment schemes.

PETER L. ROUSSEAU, Vanderbilt University - Department of Economics, National Bureau of Economic Research (NBER)
Email: peter.l.rousseau@vanderbilt.edu
PAUL WACHTEL, New York University - Stern School of Business
Email: pwachtel@stern.nyu.edu

Although the finance-growth nexus has become firmly entrenched in the empirical literature, studies that question the strength of the empirical results have appeared and seem to have become more frequent as well. In this paper we reexamine the core crosscountry panel results that established the relationship between financial depth and growth rates. We examine the sensitivity of the core result to changes in time period and variation in the sample of countries included.We find that the finance-growth relationship in not as strong with more recent data as itwas in the original studies with data for the period from 1960 to 1989. We offer twopossible explanations. First, financial depth may have had greater value as a shock absorber in the 1970s and 80s, decades characterized by worldwide nominal shocks.Second, the spread of financial liberalization in the 1980s may have led to increasing financial depth in countries that lacked the legal or regulatory infrastructure to successfully exploit financial development.We use a rolling regression technique to see which countries provide stronger support forthe finance growth relationship. Among poorer counties, the relationship is positive butimprecisely measured and among very rich countries it is absent. However, there is clear indication that financial deepening increases growth among the countries with real GDP per capita between $3,000 and $12,000 (1995 US). In a word, we find the widely accepted effect of finance on growth to be still present but fragile.

BERNARD YIN YEUNG, Leonard N. Stern School of Business - Department of Economics, National University of Singapore - Business School
Email: byeung@stern.nyu.edu
RANDALL MORCK, University of Alberta - Department of Finance and Management Science, National Bureau of Economic Research (NBER)
Email: randall.morck@ualberta.ca
DANIEL WOLFENZON, New York University - Stern School of Business, National Bureau of Economic Research (NBER)
Email: dwolfenz@stern.nyu.edu

Around the world, large corporations usually have controlling owners, who are usually verywealthy families. Outside the U.S. and the U.K., pyramidal control structures, crossshareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested creating agency and entrenchment problemsimultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausiblyrelated to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as oneequilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

HUGUES LEVECQ, Hong Kong University of Science & Technology - Department of Information & Systems Management
BRUCE W. WEBER, City University of New York (CUNY) - Baruch College

The internationalization of financial markets and the increasing demand for riskmanagement products have fueled the growth of derivatives markets. While mostexchanges have experienced increasing volumes over recent years, the pace of growthvaries widely across exchanges, and the established marketplaces face increasingcompetitive pressures. In this paper, we investigate whether the trading mechanismoffered to derivatives investors influences growth in market volumes. In particular,we distinguish between manual open outcry and electronic trading. In a floor market,traders gather in a pit and announce their orders. They complete trades using acombination of hand signals and eye contact. In an electronic market, orders aresubmitted to a central order book, and trades are created according to a matchingalgorithm. Using volume data from 1990-1994 for futures and options exchangesworldwide, we compute growth rates for the largest contracts and find that contractstraded in screen-based exchanges have experienced faster growth than those traded inmanual markets. We discuss several interpretations of the data, but conclude thatelectronic exchanges are developing a competitive advantage.

TOMAS ISAKOWITZ, affiliation not provided to SSRN

Hypermedia technology is experiencing a rapid growth due, in large part, tothe WWW. Many hypermedia applications, especially those on the WWWhave a distributed design besides being physically spread among many servers.A distributed design is a design that varies, albeit slightly, from instance toinstance. However, such design variances can lead to undesirable inconsistenciesthat can render a hypermedia application useless. This paper exploresthis problem and presents a solution based on a methodological approachto hypermedia design and construction. The methods are illustrated via asample application

JOSHUA AIZENMAN, University of California, Santa Cruz - Department of Economics, National Bureau of Economic Research (NBER)
Email: jaizen@ucsc.edu
YI SUN, University of California, Santa Cruz - Department of Economics
Email: ysun@ucsc.edu

This paper evaluates the sustainability of large current account imbalances in the era when the Chinese GDP growth rate and current account/GDP exceed 10%. We investigate the size distribution and the durability of current account deficits during 1966-2005, and report the results of a simulation that relies on the adding-up property of global current account balances. Excluding the US, we find that size does matter: the length of current account deficit spells is negatively related to the relative size of the countries' GDP. We conclude that the continuation of the fast growth rate of China, while maintaining its large current account/GPD surpluses, would be constrained by the limited sustainability of the larger current account deficits/GDP of courtiers that grow at a much slower rate. Consequently, short of the emergence of a new "demander of last resort," the Chinese growth path would be challenged by its own success.

MAURO BAMBI, Swiss Federal Institute of Technology Zurich - CER-ETH - Center of Economic Research at ETH Zurich
Email: mauro.bambi@eui.eu

Several contributions have recently reconsidered the role of the time to build assumption in explaining some relevant stylized facts. In this paper, the similarities and differences which may emerge when the time to build structure of capital is introduced in a continuous or discrete time framework are studied and enlightened. The most striking difference lies in the dimensionality of the two frameworks, which is always finite in discrete but infinite in continuous time. Then, the deterministic version of the traditional time to build model developed by Kydland and Prescott is presented, and it is shown how the typical time to build model setup in continuous time can be obtained. Moreover, the richest dynamics in continuous time is investigated and, more importantly, it is shown that the predictions in terms of capital, output, and consumption behavior are not significantly different from its discrete version once the economy is calibrated properly.

MAURO BAMBI, Swiss Federal Institute of Technology Zurich - CER-ETH - Center of Economic Research at ETH Zurich
Email: mauro.bambi@eui.eu
AURÉLIEN SA�DI, EconomiX
Email: aurelien.saidi@u-paris10.fr

We consider a real business cycle model with a productive externality and an aggregate non-convex technology set a la Benhabib and Farmer embodying capacity utilization, which exhibits indeterminacy of the steady state and multiplicity of deterministic equilibria under plausible values of the increasing returns to scale. The aim of the paper is to rank these different equilibria according to the initial value of consumption using both a linear-quadratic approximation, extensively explained by Benigno and Woodford [2006a, 2006b], and simulation methods. We study the implications of such a ranking in terms of smoothness of the welfare-maximizing trajectory and show that the welfare-maximizing consumption and labor paths are all the smoother since the level of increasing returns is low. At last, we show that this solution provides a good benchmark for judging the desirability of the stabilization policy proposed by Guo and Lansing [1997].

DJAVAD SALEHI-ISFAHANI, The Brookings Institution
Email: dsalehi@brookings.edu
NAVTEJ DHILLON, The Brookings Institution
Email: ndhillon@brookings.edu

Young people in the Middle East (15-29 years old) constitute about one-third of the region's population, and growth rates for this age group are the second highest after sub-Saharan Africa. Today, the entire Middle East region is experiencing a demographic boom along with an oil boom. The concurrence of sound economic growth and a large youthful working population create the social and political impetus for fundamental institutional change which can enable the region to capitalize on these twin dividends for lasting economic development. Thus, tapping the full potential of young people is one of the most critical economic development challenges facing the Middle East in the twenty-first century.

In recent years, a number of policy frameworks have emerged to address youth transitions from education to employment and to family formation. These frameworks recognize that the critical transitions experienced by youth within a relatively short timeframe in turn have lifelong impacts on them, their families, and society at large.

Building on these existing frameworks, this paper focuses on the role of markets and institutions in mediating youth transitions, namely education systems, labor and housing credit markets, and social norms governing marriage and family formation. Difficult youth transitions and social exclusion are interpreted as a consequence of failures in these market and non-market institutions. Economic and social policy should be designed to improve the institutional environment and create incentives that will allow youth to better manage their transitions to adulthood.

GODWIN CHUKWUDUM NWAOBI, University of Abuja, Nigeria - Department of Economics
Email: gcnwaobi@yahoo.com

Information and communication technologies are one of the most pervasive technologies in the world, second only to 'human intelligence' or the human brain.Thus, understanding the factors that determine the diffusion of new technologies across African countries is important to understanding the process of economic development. And whereas, energy is linked with the capacity to perform, the rate at which energy is consumed for the acceleration of the pace of socio-economic activities is regarded as power. Consequently, it will be obvious that the magnitude of the standard of living in any society; the growth and development of such an economy; and its ability to affect the course of events (such as ICT revolution) will be a function of the extent to which its energy (power) resources are developed and utilized. This paper therefore argued for the need to provide assistance in reducing vulnerability and building the capacity of African countries to more widely reap the benefits of the clean development mechanism in areas such as the development of cleaner and renewable energies. Inevitably, this is the critical condition for the sustainability of the emergent e-learning platforms and digital networks in Africa.