Foreign exchange reserves

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.
Contents:-

History
Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944-1968, the US dollar was convertible into gold through the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, no major currencies have been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves.
Purpose
In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money itself as IOUs). This action can stabilise the value of the domestic currency.
Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.
Changes in reserves
The quantity of foreign exchange reserves can change as a central bank implements monetary policy. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower). In a flexible exchange rate regime, these operations occur automatically, with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange operations (sterilized or unsterilized[clarification needed]) to maintain the targeted exchange rate within the prescribed limits (China has been repeatedly accused of doing this by the USA).
Foreign exchange operations that are unsterilized will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect monetary policy and inflation: An exchange rate target cannot be independent of an inflation target. Countries that do not target a specific exchange rate are said to have a floating exchange rate, and allow the market to set the exchange rate; for countries with floating exchange rates, other instruments of monetary policy are generally preferred and they may limit the type and amount of foreign exchange interventions. Even those central banks that strictly limit foreign exchange interventions, however, often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements.
To maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase the foreign currency, which will increase the sum of foreign reserves. In this case, the currency's value is being held down; since (if there is no sterilization) the domestic money supply is increasing (money is being 'printed'), this may provoke domestic inflation (the value of the domestic currency falls relative to the value of goods and services).
Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a foreign exchange crisis or devaluation could be the end result. For a currency in very high and rising demand, foreign exchange reserves can theoretically be continuously accumulated, although eventually the increased domestic money supply will result in inflation and reduce the demand for the domestic currency (as its value relative to goods and services falls). In practice, some central banks, through open market operations aimed at preventing their currency from appreciating, can at the same time build substantial reserves.
In practice, few central banks or currency regimes operate on such a simplistic level, and numerous other factors (domestic demand, production and productivity, imports and exports, relative prices of goods and services, etc) will affect the eventual outcome. As certain impacts (such as inflation) can take many months or even years to become evident, changes in foreign reserves and currency values in the short term may be quite large as different markets react to imperfect data.
Costs, benefits, and criticisms
Large reserves of foreign currency allow a government to manipulate exchange rates - usually to stabilize the foreign exchange rates to provide a more favorable economic environment. In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case.
There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollar-denominated assets, but the U.S. dollar has been weakening on the exchange markets, resulting in a relative loss of wealth. In addition to fluctuations in exchange rates, the purchasing power of fiat money decreases constantly due to devaluation through inflation. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets.
Excess reserves
Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as sovereign wealth funds. If those were included, Norway and Persian Gulf States would rank higher on these lists, and UAE's $1.3 trillion Abu Dhabi Investment Authority would be second after China. Singapore also has significant government funds including Temasek Holdings and GIC. India is also planning to create its own investment firm from its foreign exchange reserves.

foreign currency mortgage

A foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident. Foreign currency mortgages can be used to finance both personal mortgages and corporate mortgages.
The interest rate charged on a Foreign currency mortgage is based on the interest rates applicable to the currency in which the mortgage is denominated and not the interest rates applicable to the borrower's own domestic currency. Therefore, a Foreign currency mortgage should only be considered when the interest rate on the foreign currency is significantly lower than the borrower can obtain on a mortgage taken out in his or her domestic currency.
Borrowers should bear in mind that ultimately they have a liability to repay the mortgage in another currency and currency exchange rates constantly change. This means that if the borrower's domestic currency was to strengthen against the currency in which the mortgage is denominated, then it would cost the borrower less in domestic currency to fully repay the mortgage. Therefore, in effect, the borrower makes a capital saving.
Conversely, if the exchange rate of borrowers domestic currency were to weaken against the currency in which the mortgage is denominated, then it would cost the borrower more in their domestic currency to repay the mortgage. Therefore, the borrower makes a capital loss.
When the value of the mortgage is large, it may be possible to reduce or limit the risk in the exchange exposure by hedging (see below).
Managed currency mortgages can help to reduce risk exposure. A borrower can allow a specialist currency manager to manage their loan on their behalf (through a limited power of attorney), where the currency manager will switch the borrower's debt in and out of foreign currencies as they change in value against the base currency. A successful currency manager will move the borrower's debt into a currency which subsequently falls in value against the base currency. The manager can then switch the loan back into the base currency (or another weakening currency) at a better exchange rate, thereby reducing the value of the loan. A further benefit of this product is that the currency manager will try to select currencies with a lower interest rate than the base currency, and the borrower therefore can make substantial interest savings.
There are risks associated with these types of mortgages and the borrower must be prepared to accept an (often limited) increase in the value of their debt if there are adverse movements in the currency markets.
A successful currency manager may be able to use the currency markets to pay off a borrower's loan (through a combination of debt reduction and interest rate savings) within the normal lifetime of the loan, while the borrower pays on an interest only basis.

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality
Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven." There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[12]
Long-term trends
Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [13]
"Buy the rumor, sell the fact"
This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[14] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
Economic numbers
While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations
As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.[15]
[edit] Algorithmic trading in foreign exchange
Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.[citation needed]
An algorithmic trader needs to be mindful of potential fraud by the broker. Part of the weekly algorithm should include a check to see if the amount of transaction errors when the trader is losing money occurs in the same proportion as when the trader would have made money.
Financial instrument(Spot)
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot transactions has the second largest turnover by volume after Swap transactions among all FX transactions in the Global FX market. NNM
Forward
See also: forward contract
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a one day, a few days, months or years. Usually the date is decided by both parties.
Future
Main article: currency future
Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Swap
Main article: foreign exchange swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.
Option
Main article: foreign exchange option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world..
[edit] Exchange-Traded Fund
Main article: exchange-traded fund
Exchange-traded funds (or ETFs) are open ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g., SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators.
[edit] Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[16] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[17]
Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors [18].
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[19] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[20]
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators allegedly made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against International Monetary Fund advice, this view is open to doubt.

Determinants of FX Rates

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):
(a) International parity conditions viz; purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
[edit] Economic factors
These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses
The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends
The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends
Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising [. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health
Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Productivity of an economy
Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector. Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Trading characteristics

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXXYYY or YYY/XXX, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EURUSD or USD/EUR is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the "base" currency, was the stronger currency at the creation of the pair. The second currency, counter currency or "term" currency, was the weaker currency at the creation of the pair. Currencies are occasionally incorrectly quoted with the pairs inverted e.g. EUR/USD but this is incorrect. The "/" acts the same as the divide mathematical operator and derives the actual exchange rate. e.g. an amount of $140,000 equates to €100,000. $140,000/€100,000 = $/€ = USD/EUR = a rate of 1.4 hence EURUSD or USD/EUR. See Exchange_rate
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EURUSD: 27%
USDJPY: 13%
GBPUSD (also called cable): 12%
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.

Market participants

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
[edit] Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
[edit] Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[7] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
[edit] Hedge funds as speculators
About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
[edit] Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
[edit] Retail foreign exchange brokers
There are two types of retail brokers offering the opportunity for speculative trading: retail foreign exchange brokers and market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated by the CFTC and NFA might be subject to foreign exchange scams.[8][9] At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.
[edit] Non-bank Foreign Exchange Companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account. Send Money Home offer an in-depth comparison into the services offered by all the major non-bank foreign exchange companies.
It is estimated that in the UK, 14% of currency transfers/payments[10] are made via Foreign Exchange Companies.[11] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
[edit] Money Transfer/Remittance Companies
Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.
Send Money Home is an international money transfer price comparison site that allows consumers access to a range of alternative products/ rates available when remitting (transferring) money worldwide. Provides impartial and unbiased advice for those looking to send money overseas

Market size and liquidity

Presently, the foreign exchange market is one of the largest and most liquid financial markets in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. [2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.[4] In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.
FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Top 10 currency traders [5]% of overall volume, May 2009.
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).[6] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey.[3] These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

Venture Capital and other forms of private equity financing

Venture Capital and other forms of private equity financing represent the engine for the vast majority of global innovation. Whether it is providing startup capital for a highly speculative R&D venture or expansion financing for an established pre-IPO organization, private equity funding is the essential lifeblood of dynamic growth-oriented companies.
The aggregate amount of available investment capital has never been greater. Yet, accessing that financing has seldom been more challenging. Fragmentation in the venture community, combined with unprecedented levels of specialization and conservatism among individual firms, has made the acquisition of investment capital more difficult than at any time in recent memory. To be successful in the current financing environment, corporate entities large and small need every advantage. Today, most effective advantage exists in timely and accurate funding source information.
Capital Vector was established to give developing companies the tools they need to quickly and efficiently obtain investment capital. This is accomplished through both our trusted Venture Capital Directory and Custom Research Service. Developed by entrepreneurs actively involved in the capital acquisition process, these tools are geared specifically to the needs of corporations in critical stages of their search for capital. Our approach is no-nonsense and focused strictly on giving organizations the information they need to discover and secure capital in hostile market environments
ProFile is an end-to-end commercial credit management software solution that enables loan officers, credit analysts and senior bankers to efficiently review, analyze, collaborate and decide on commercial credit applications, manage the relationships with commercial customers and manage credit risk.ProFile provides credit professionals with the information, analysis tools, documentation and collaboration capabilities that they need to profitably manage all types of commercial credit.The system incorporates workflow, document management, risk rating, account aggregation, automated credit memos, relationship management and more in a single, integrated, state-of-the-art software system.Capital Vector created its Venture Capital Directory in order to help entrepreneurs and investors navigate the rough waters of today's Venture Capital marketplace.
However, even the significant utility offered by tools like this cannot always provide organizations with a complete picture of all funding resources available to them. This is particularly true for cutting-edge corporations, whose product or service offerings span a multitude of conventional industry sectors. For these companies, locating firms with compatible industry experience and investment criteria can be an extremely difficult and time-consuming exercise.
This is why Capital Vector offers custom Venture Capital research services to its clients. Now, investment-seeking organizations can engage the considerable research capabilities of Capital Vector to create comprehensive profiles of firms with the highest probability of investment interest.
For Entrepreneurs:
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The capital is the main character of this company if you want to more information you can do it for that you can get here more information of this type of finalsense and advanced.

forex trading

FXDDAuto provides FXDD clients a fully automated trading system that executes signals and strategies from third party signal providers in an FXDD trading account.
With the FXDD Auto platform, traders have the ability to monitor, control and configure trades from signal providers. A trader's presence is not required to enter or exit trades. Execution and money management is automatic, and includes trailing stop losses, stop and limit orders and trade updates.
Trading the world currency markets were only available to large banks and institutions until recent times. Now thanks to the internet the same opportunity is now available to anyone with an internet connection. Currency trading can be very profitable and it is very easy to learn how to trade currency online.The currency markets or foreign exchange is often called the forex. One of the fastest ways to learn to trade the forex is to sign up with for a free demo account with a forex broker and dive in and start trading. Most forex brokers will provide free demo accounts loaded with play money that they will give you for practicing.With a demo you can start playing around with it and see first hand how the markets work. You can hit your buy and sell buttons and see what happens. At this point it doesn't matter if the demo makes or loses money since it's not real. But it works just like a real money account and will show you exactly how forex trading works.After you start to get a feel for how forex trading works then you can start searching for more information. Since you have some experience now the information you seek and find will have more relevance to you. There are many online courses that will teach you to trade but some can be quite expensive. Courses can be good but a lot of information can be found in books or free on the internet.Although forex trading is simple, it can take a while for many traders to develop the good trading habits and discipline that is most import to having success with trading. Be sure and give yourself plenty of time to practice on a demo and prove to yourself that you can make money before trading with real money.For most new traders it can take months or even a year or two before they get good enough to maintain consistent profits. But this doesn't mean you can't make money right away with forex trading. Automated forex trading is becoming increasingly popular and can bring you immediate profitable trading. Automated forex trading uses computer programs called expert advisors or robots to trade your account for you.Expert advisers can be bought inexpensively, are easy to set up and if you get a good one they can be much more consistent than most human traders. After they are set up they trade using a system and do it all on autopilot. You can host them on either your own computer or a remote server.If you want to learn how to trade currency online start with a demo where you can get some immediate real life experience on how the markets work. Be sure and give yourself plenty of time to go through the learning curve before using real money. If you want to make money now with forex trading use an expert adviser to trade your account for you.
If you looking for a way to increase your income in a relatively short period, Forex trading systems should be on your list of consideration. In the past decade since they were first introduced there dependability and reliability has improved significantly. Presently there are over one hundred systems available for public use.Out of those one hundred currency trading systems, there are a select few that are very high quality. From that select few, there are two products that I think are exceptional software systems and they currently dominate the sales figures within the industry. They are so successful because they deliver to the customers what they promise.Please don't misunderstand me, you simply can not upload a Forex software system to your computer today and begin to make money tomorrow. I wished it worked that way, unfortunately it doesn't. These are TOOLS to help you make money and you need to learn how to operate these tools.Each of these software products has numerous programmable options to allow its users the flexibility of managing there investments according to there individual risk tolerance level. In other words, one person might be willing to accept a higher risk if it means a corresponding larger reward. Where as the next person, might want a low risk factor and for that safety level they are willing to have smaller returns on there investment.Which ever type of investor you are the Forex trading systems I am recommending willing meet your needs. But, to ensure long term profitability I advice you to open a demo Forex account and practice until you are achieving the financial results you are expecting. The systems I use each day to make my living with are named Fap Turbo and Forex MegaDroid. When you have some time, why not review there websites and see what they can do for you if you dedicate yourself to learning how to operate the software?
Perhaps the best advice that you will receive in your trading career is live to trade another day. Currency markets are volatile, brutal and unforgiving. You should learn to survive in the markets.The single most common factor that causes many traders to blow up their accounts is greed. When you get greedy, you start taking unnecessary risks. You will spend countless hours trying to discover the Holy Grail technical indictor or a forex robot that will make you rich. You believe that by discovering that secret of investing, you will become rich without losing a single trade.Unfortunately there is no Holy Grail for anyone in trading. You will win and you will lose. So you must learn not to risk more than 2% of your account on one trade. Grow your account incrementally over time. Never ever be tempted to risk big, making one single winning trade that can make you rich.Now, know how much you are willing to risk in a single trade. I have said 2%. But if you want to be aggressive you can go up to 5%. But stay between 2-5%. Don't exceed it. On the other hand, if you are conservative, you should consider risking between 1-2% only.Once you have decided on the risk you are willing to take, knowing the rest is simple. Suppose you have a $50,000 account and you decide on a risk of 2%. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000. This is the maximum you should risk on a single trade.However, if you are going to trade more than one position at the same time, the amount may become higher. Let's assume you are in 3 trades at the same time trading three currency pairs! You should risk only $1,000 per trade. So your total money at risk will be (3) (1000) =$3,000. Once you have calculated your risk, you are can determine the trade size.Trade size is the number of contracts you purchase in any one single trade. You need to first determine where you want to put your stop loss in order to determine the trade size. Let's use a simple example to make it clear. Suppose you are willing to risk $1000 on trading EUR/USD pair and you decide on a stop loss of 50 pips. Each pip on EUR/USD pair is equal to $10. So the number of contracts that you can trade are 2= (1,000)/ (50) (10).You have taken the guesswork out of your trading once you have determined your risk level and calculated the trade size. You can sleep well now knowing how much of your money is at risk. You are going to be able to trade tomorrow, no matter what happens today.Using these common and simple money management rules will help you avoid the pitfall of losing almost all the money in your account. Never ever take more than 2-5% risk in any single trade. Learning to survive the markets and trading another day is the essence of trading. This can help take your trading to the next level of profitability.
Rollovers occur when a transaction continues for more than two days, and the Forex trading order is automatically rolled over to the next day.Because the Forex trading market is a spot market, where trandsaction are made instantaneously, trades must settle in two business days. But don’t worry… You don’t have to sell everything after two days! This is exactly why we have the option for Forex trading rollovers.In Forex system trading you have the option of a rollover, so that your transaction will remain relevant for two more days. Forex trading Rollover can happen every two days, so your investment stays indefinitely.Rollover Charges and Interest RatesEvery rollover has a certain transaction cost, which is set according to the Forex site and software you are using. This information needs to be looked over before you invest, so there won't be any surprises.Rollover charges are different according to the currency you invest in, and this should also come into account when deciding how to trade.Forex trading Rollovers occur when the NY trading market closes at 17:00 ET. Traders sometimes earn interests on rollovers. US interest rates, for example, are higher than Japan's, so if you are holding a long USD/JPY you will be able to accumulate interest for the rollover. On the other hand, holding the JPY will means paying interest on the rollover.When the rollover is made, the currency can also move up or down for a few pips, so also take that into account when you notice changes in the Forex currency the day after.

INFORMATION TECHNOLOGY AND THE NEW ECONOMY

The superior performance of the U.S. economy in the late 1990s has led many commentators to speculate that a "New Economy" has emerged in which heavy investment in information technology (IT) has led to an era of sustained economic growth. Although the recent economic slowdown has dampened some of the enthusiasm for the idea of a New Economy, a fundamental question remains: can the output growth experienced in the late 90's, which was significantly higher than that observed in previous decades, be traced back to IT?
This paper addresses this question by looking at the behavior of labor productivity, a key measure of economic well-being that grew at a significantly faster rate in the late '90s. The New Economy hypothesis to be examined is whether investment in IT caused the acceleration in productivity. The evidence suggests a growing consensus on two conclusions:
Information technology is an important factor in the recent acceleration in productivity growth.
Both the production and the use of IT contributed to the productivity revival.
Seen in this perspective, the idea of the New Economy is not as fanciful as some recent skeptics would claim.
While forecasting productivity growth is a chancy and often unsuccessful enterprise, there is some reason to believe that the acceleration in labor productivity could persist for several more years. This guarded optimism is informed by a recurrent theme in the literature that investments in IT manifest themselves in higher productivity with a lag of a few years. Thus, the enormous investments made by U.S. firms in IT in the late 90's could possibly show up in productivity numbers well into the first decade of the 21st century.
The rest of the paper is organized as follows: section I introduces some general concepts of productivity analysis, section II explains growth accounting, the standard framework for understanding productivity growth, section III applies this framework to the question of IT's impact on productivity, section IV looks at this question with methods other than growth accounting, and section V concludes.
I. PRODUCTIVITY
In its simplest form, productivity is the amount of output that can be produced with a given amount of input. Labor productivity, then, measures the amount of output produced with a given amount of labor. At the aggregate level this means GDP divided by the total number of hours worked in the economy. This definition highlights why labor productivity is considered such an important measure of the long-term performance of the economy: growth in labor productivity increases the amount of goods and services available for consumption without a corresponding increase in the amount of time spent working. For this reason productivity growth often proxies for the change in the standard of living--the variable that, in the final analysis, most people really care about.
To measure growth in labor productivity involves calculating the ratio of the change in real (inflation-adjusted) GDP to the change in hours worked. While determining hours worked presents relatively few measurement problems, calculating the change in real GDP has been a research topic at the center of the New Economy debate. Nominal GDP, which is easily measured, is the product of the price index and the quantity of goods and services sold in the economy. Thus, the percent change in nominal GDP is approximately equal to the percent change in prices (inflation) plus the percent change in quantities (real GDP growth). The problem is how to attribute changes in nominal GDP between changes in prices and changes in quantities. If the type and quality of goods consumed changes very little from year-to-year, as could be expected in an industrial "Old Economy" era, then measuring changes in quantities should be trivial. If, on the other hand, the type and quality of goods available changes rapidly, as is the case with many IT-related New Economy products, then making accurate quality-adjustments to the change in quantities becomes crucial in gaining a true idea of what's going on in the economy. For example, although the price of desktop computers has not changed greatly over the past decade, the quality and power of those computers has soared. To incorporate this observation, the price per unit of computing power, rather than per computer, should have plummeted over this period. In fact, the two agencies responsible for constructing the productivity numbers, the Bureau of Labor Statistics and the Bureau of Economic Analysis, have recognized this problem and have exerted considerable effort in order to insure their numbers accurately reflect the rapid pace of change caused by technological innovation. Despite these efforts, the measurement issues surrounding the New Economy have left lingering debate.
The annual labor productivity growth rates for the past 50 years are presented in Chart 1 (see below). One noteworthy aspect of this series is its procyclical variability. While the relation between the business cycle and productivity has been a topic of intense controversy in recent decades, one feature of this correlation deserves mention. In the presence of fixed costs of hiring and firing workers, economic theory suggests that labor productivity should be procyclical. This idea, known as the 'labor hoarding' theory of procyclical productivity, holds that because firms cannot costlessly adjust the amount of labor input used in response to shifts in output, we can expect aggregate hours to change less than one-for-one in response to changes in aggregate output. Sudden contractions or expansions in output (recessions or recoveries) usually generate drops or jumps in measured labor productivity because firms don't meet these contractions or expansions with immediate and proportional increases or decreases in employment.
The procylicality of productivity has two points of relevance for the present discussion. First, this feature of the data indicates why the contraction in labor productivity in the first quarter of 2001 should not necessarily be seen as the death knell of the productivity revival, but rather as a cyclical adjustment. Second, some had claimed that the productivity revival in the late '90s was, in large measure, a reflection of the procyclicality of the productivity series. This view, however, has been subjected to the critique that the cyclical aspect of productivity is usually felt at the beginning of a recovery whereas the productivity revival picked up steam several years into the expansion of the '90s.
The productivity growth rates of the recent past can be divided into two sub-periods: 1973-1995, the era of the "productivity slowdown", and 1995-19992, the New Economy. Though measurement methodologies differ from study to study, the estimates of average annual growth in aggregate labor productivity for these periods tend to cluster around one and one-half percent for the earlier period and two and one-half percent for the latter period.
This one percentage point difference may not appear terribly important. Yet if permanent, this difference would mean living standards doubling every 28 years rather than every 46 years. Consequently, understanding the determinants of productivity growth has been a major project of contemporary economics.
Nevertheless, both the productivity slowdown and its more recent revival have been somewhat of a puzzle to economists. The deceleration in productivity growth in the 70's and 80's has attracted many candidate causes: among others, high energy prices, increased labor and environmental regulations, and monetary instability. The productivity revival, on the other hand, has focused attention on one possible explanation--the increased prevalence of IT in the American economy. In order to quantify the impact of IT on labor productivity, economists commonly use a decomposition known as growth accounting.
II. GROWTH ACCOUNTING
The cornerstone of growth accounting is the decomposition of labor productivity growth into a weighted sum of effective capital growth and effective labor growth plus a residual term known as total factor productivity where uppercase delta refers to change and a is a parameter.4 Effective capital growth, k, refers to the growth in the aggregate flow of capital services minus the growth in aggregate hours worked. Growth in effective capital, also know as capital deepening, has a positive effect on labor productivity because a larger amount of capital per worker should increase the output of that worker. As we will see, capital deepening can be measured for different classes of capital, in particular for deepening of IT capital. Growth in effective labor, l, captures the effect of changes in labor quality.

The residual in the growth accounting equation, TFP, is commonly equated with technological change. TFP represents all the increase in output that cannot be accounted for by an increase in any other input. In this sense it is a costless expansion of the economy's set of possible production bundles. It is sometimes said that TFP is "a measure of our ignorance" in that any productivity increase we cannot attribute to a growth in an input factor we lump in with TFP.6 This is a valid criticism and because of this we should be mindful that TFP can pick up increases in productivity due to process innovations or efficiencies generated by organizational changes. Despite its limitations, growth accounting is a useful framework and remains the starting point for the analysis of economic growth.
III. PRODUCTIVITY AND IT
Information technology can affect aggregate labor productivity through two channels: the production of IT and the use of IT. Few question that IT production has exhibited phenomenal productivity growth. This is probably best illustrated in the case of semiconductors. In the 1960's Gordon Moore, the founder of Intel, predicted that microprocessor power would double every 18 months. The prediction was accurate enough that it became known as Moore's Law. Even accounting for R&D expenditures, the technological progress of the IT manufacturing sector has been remarkable and has contributed to the acceleration in labor productivity. In growth accounting terms, this contribution should appear as an increase in the TFP of IT-producing industries.
The second avenue through which information technology has the potential to increase labor productivity is though its use. The rhetoric of the New Economy proponents often focuses on the efficiencies that will accrue to firms engaged in activities other than the production of IT but which nevertheless successfully integrate the use of IT into their existing operations. Firms that use IT could expect productivity gains for two reasons. First, the rapid decline in the price of computing power has spurred huge investments in IT. This investment, like any other form of capital spending, should raise the productive capacity of those firms that undertake it. Second, IT has the potential to allow firms to implement efficiency-enhancing changes in the way they do business. These two effects would show up in a growth accounting equation as a capital deepening in IT-using firms and an increase in TFP of IT-using firms. Table 1 summarizes where we would expect the productivity contributions from the use and production of IT to appear in a growth accounting exercise.
The possible effect of IT use on TFP has attracted considerable attention. It is in this sense that IT could be considered a General Purpose Technology (GPT). As defined by Helpman (1998) a GPT is a "drastic innovation [that] has the potential for pervasive use in a wide range of sectors in ways that drastically change their mode of operation." Similarly, Bresnahan and Trajtenberg (1995) speak of GPT's as "'enabling technologies' opening up new opportunities rather than offering complete, final solutions." A classic example of a GPT is electricity. Around the turn of the century American industry underwent radical change due to the widespread utilization of electricity. Firms invested heavily in electric machinery as the price of electivity relative to other forms of power fell. If these firms didn't change their production process they could still expect an increase in productivity due to this capital deepening. However, as David (1990) points out, the switch from steam to electric power also allowed firms to change the floor plans of their factories in a way that increased efficiency. Thus, firms did change their production process' and hence experienced a second productivity 'kick' from using electricity.
The distinction between production and use of IT has been critical in the debate concerning the impact of IT upon productivity. In a series of papers, Gordon (1999, 2000) has argued that IT's contribution to the acceleration in productivity experienced in the late '90s has been solely through the more efficient production of IT. The use of IT, Gordon claims, has not added to the uptick in productivity. In a certain sense, this distinction is immaterial: nobody denies that productivity did accelerate in the period under question. In another sense, Gordon's interpretation, if true, would have certain implications about the sustainability of the New Economy. The narrow concentration of productivity growth in one sector would make the economy's continued health vulnerable to disruptions in that sector. Furthermore, the efficiency gains in IT production, particularly semiconductors, will eventually run into physical constraints; Moore's Law cannot hold indefinitely. Gordon's reading of the facts, however, has been controversial and as we will see shortly, several studies have found the use of IT to have made a substantial contribution to the productivity revival.
The growth accounting equation has been applied to the two sub-periods mentioned above by a number of economists in order to clarify how and why the pickup in productivity occurred. Growth accounting exercises can produce different results for the same period because there are several choices to be made as to how to measure the aggregate flow of capital and labor services. Three of the most recognized studies include one government survey, BLS (2000) and two academic works, Jorgenson and Stiroh (1999) and Oliner and Sichel (2000).
All three surveys decompose the approximately one percentage point acceleration in productivity growth into the standard categories of capital deepening, increased labor quality, and TFP. Furthermore, these studies separate capital deepening into IT-capital deepening and all other forms of capital deepening. In all three cases IT-capital is defined as computer hardware, software, and communications equipment. The two academic studies disaggregate TFP into IT-producing and non-IT-producing sectors.
The results of these studies reveals that IT-related capital deepening contributed between one-third to one-half a percentage point to the acceleration in productivity in the late nineties. This indicates that a large part of why workers became more productive after 1995 is that they had more high-technology equipment with which to perform their jobs. Growth in investment in all other forms of capital, machinery, structures, etc., slowed during the late '90s and contributed less to productivity in this period than during the "productivity slowdown". The increase in labor quality was relatively similar across both time periods and thus did not contribute much to the productivity revival. TFP, on the other hand, did accelerate appreciably in the later period, adding between two-thirds to nine-tenths of a percentage point to the relative change in the rate of productivity growth.
It appears, then, that the productivity revival is concentrated in IT-capital deepening and a pickup in TFP. Jorgenson and Stiroh and Oliner and Sichel both find that TFP acceleration in IT-producing industries added about a quarter percentage point to the productivity revival. The increase in TFP in other industries accounted for about a half of a percentage point. This acceleration in TFP in non-IT-producing industries could be due to the use of IT or it could be due to a number of other factors--the coarseness of the growth accounting framework is ill-suited to localize the causes of TFP growth. Among the contributions of IT to TFP, the evidence suggests that it is unlikely that the Internet has yet to contribute substantially to productivity growth. One possible avenue through which the Internet could make the economy more productive is through the cost efficiencies attained through business-to-business e-commerce. Nevertheless the magnitude of these transactions has not been large enough to have much impact on the aggregate numbers. It is possible that valuing the services provided by the Internet as a final, consumer good has suffered from the measurement issues discussed above, in which case the Internet has made some very modest contribution to productivity.
The results of both these studies suggest that the productivity acceleration was not entirely due to higher productivity in the manufacture of semiconductors and other IT equipment. Rather, these industries probably contributed around one quarter of the one percentage point difference between productivity growth during 1973-1995 versus productivity growth during 1995-1999. By identifying IT-capital deepening, these studies also put a lower bound on the contribution from the use of IT of around one-third of a percentage point. The contribution from IT use could be even greater if some or all of the increase in TFP in non-IT-producing industries can be attributed to IT use.
IV. OTHER ANALYSES
Growth accounting is a blunt tool that can leave many questions answered unsatisfactorily.8 In order to get a better idea of how investment in IT has affected productivity, many authors have conducted the analysis at the level of the firm or the industry.
Two studies which are representative of this literature are Stiroh (2001) and Brynjolfsson and Hitt (2000). Stiroh's study looks at productivity in the late 90's in 61 different industry groups sorted by level of investment in IT. In order to control for endogeneity, he measures industry IT investment undertaken before 1995.9 His main finding is that industries that had invested heavily in IT experienced more rapid productivity growth than other industries. This result is consistent with the New Economy story that the increased use of IT is making American business more productive. After comparing industry groups, Stiroh concludes that the aggregate productivity revival is entirely due to industries that produce IT or intensively use IT; industries that do not intensively use IT contributed essentially nothing to the productivity revival. While industry productivity is compared to lagged IT investment for econometric reasons, the incidental finding of this paper is that unlike other forms of capital, outlays for IT affects productivity several years after the investment is made.
In order to estimate the effect of investment in IT on firm productivity, Brynjolfsson and Hitt track the amount of computer investment undertaken by a sample of 600 firms over an eight year period. They find that over the short-term, the marginal cost of computer investment is equal to its marginal revenue--a result that suggests that over the short-term IT investment contributes to productivity solely though the capital deepening mechanism. Interestingly, they find that over the longer-term (seven years) marginal revenue rose to between two to five dollars for every dollar invested in computers. The authors interpret this finding as suggestive evidence of the existence of productive complementarities between computer investment and organizational restructuring.
Both of the above papers uncover evidence that investment in IT affects productivity with a lag of a few years. This finding is consonant with the theory that rapid capital investment entails large "adjustment costs". According to the IT version of this story, adjustment costs are equated with the time and resources spent by employees in learning how to properly utilize the newly available IT capital as well as the time and resources spent in organizational learning as firms reconfigure their operations. Along these lines, several studies have postulated that the productivity slowdown and subsequent revival are intimately linked by adjustment costs. Greenwood and Yorukoglu (1997) claim that investment in IT, which experienced rapid growth in 1970's caused the productivity slowdown as unmeasured adjustment costs made output growth look artificially small. The productivity revival, they claim, represents the efficiency gains from IT investment finally outpacing the associated adjustment costs. This theory would seem to provide a direct reply to the 'Solow paradox'. Writing in 1987, Robert Solow famously remarked "We see the computer age everywhere except in the productivity statistics." According to the adjustment cost view, the slow growth in productivity experienced at the time of Solow's remark reflect the large unmeasured costs of adapting to the computer age during the 1970's and 1980's--costs that were finally outweighed by the benefits by the late 1990's.10
The finding that IT investment affects productivity with a lag would seem to bode well for future productivity growth. Aggregate investment in IT continued at a brisk pace well into the late 1990's. If the pattern of lagged dependence of productivity on IT continues, we could expect productivity to continue its healthy growth. Caution, however, is warranted when predicting productivity numbers. As Taylor (2001) observes,
From a macroeconomic perspective the New Economy isn't really new. After all, productivity growth rates averaged about 3.0 percent per year in the 1950' and 1960's. …But the stagflation of the 1970's--resulting from a combination of unlucky economic events and ill-conceived public policy--arrived nonetheless.
It is sometimes said that from an economic perspective technological progress is like manna from heaven, a gift whose source is not well understood. Because of this, it is unlikely that a policymaker can affect the arrival rate of this gift in the short run. Public policy can, however, create an environment that allows society to fully capture the benefits of technological advancements. The rapid pace of change in the high tech sector requires labor and capital markets that are fluid and dynamic. Excessive regulation could harm the ability of industry to quickly and effectively respond to new opportunities opened up by technological breakthroughs. Moreover, the inherent volatility of enterprise in a sector of the economy undergoing rapid technological change demands a tax structure that creates the appropriate incentives for entrepreneurs and investors to accept this added risk. The likely existence of "spillover effects" from the development of IT implies that the benefits from entrepreneurial activity in this sector flow throughout the economy. Thus, creating incentives for IT entrepreneurial activity is akin to encouraging the private provision of a public good.
V. CONCLUSION
A consensus has emerged regarding the acceleration in productivity that occurred in the late 1990's. Two points that have found widespread agreement are:
Information technology contributed significantly to the productivity revival. At least half of the one-percentage point increase in labor productivity growth is attributable to IT. In all likelihood the contribution from IT is even greater than this conservative estimate.
Both the production and use of IT has had an impact on the productivity revival. These results imply that the New Economy thesis, when applied to the historical experience, has a sound empirical foundation.

US clears way for swine flu vaccine scheme

US regulators stole a march on their European counterparts on Tuesday by approving four pandemic flu vaccines, clearing the way for an immunisation programme to begin across the country next month.
The Food and Drug Administration said it had authorised the use of products made by CSL, Sanofi-Aventis, Novartis and MedImmune, using the traditional techniques for seasonal flu but adapted to help protect against the current H1N1 swine flu virus.

However, it has yet to make a decision on a newer range of more sophisticated vaccines that would allow global supplies to stretch further and help protect a far larger number of people.
The European Medicines Agency has already approved in principle pandemic vaccines based on “mock-up” dossiers submitted for similar products developed to protect against the H5N1 bird flu virus, but is still considering safety data from final trials in the vaccines adapted for the current flu strain.
Margaret Hamburg, the FDA’s commissioner, said in a statement: “Today’s approval is good news for our nation’s response to the 2009 H1N1 influenza virus. This vaccine will help protect individuals from serious illness and death from influenza.”
But the FDA has yet to rule on the safety and efficacy of other flu vaccines containing “adjuvants” – chemicals designed to stimulate the human immune response – including variants made by Sanofi-Aventis and Novartis, as well as rivals such as GlaxoSmithKline.
Adjuvants would help lift global production capacity for flu vaccines, although recent studies have already raised hope that a single dose of vaccine may be sufficient to provide protection rather than two as previously thought.
The US regulator has not approved any new adjuvanted vaccine for 80 years, although this month FDA officials played down long-standing concerns over the safety of the adjuvant AS04 contained in Cervarix, GSK’s vaccine against the HPV virus that causes cervical cancer.
The US government has bought 48m doses of the Sanofi-Aventis vaccine alone, but the company said clinical trials for its adjuvanted vaccine that had been planned in the US prior to approval had yet to begin.

Ukrainians forced to cross border for work

While millions of Poles have long travelled west to find better work, the same has been true of many Ukrainians. They have seen Poland as a land of opportunity, especially now their own country has been hit by the economic crisis.
In the 1990s many Ukrainians went to work in Poland because visas were not needed, the fast-growing Polish economy needed workers and Ukraine could not provide enough well-paying jobs. The flow of migrants dried up a couple of years ago, when Poland joined the EU and then the Schengen visa-free zone, which made it more difficult for Ukrainians to enter at a time when their own economy was finally beginning to grow.
EDITOR’S CHOICE
Downturn puts paid to Polish mobility - Sep-15
Editorial Comment: Survival lessons for developing nations - Jul-14
Foreign workers suffer under Saudi sponsors - May-25
US jobless rise hits migrants’ home countries - Jul-13
Immigration: Economic crisis puts tolerance to the test - Jun-09
Fall in migrants could stall recovery - May-24
Mykhaylo Strizhyk was one of those who found a job at home as a construction worker in 2006 after a decade spent near Warsaw working as a plumber.
But the developer he worked for in the west Ukrainian city of Lviv went bankrupt in November, and his wife found her hours as a seamstress slashed in half due to a dearth of sewing orders from Germany.
Now Mr Strizhyk is again in Poland, as are many other Ukrainians forced to make the journey west.
“I’m too old to make this kind of trip,” complains the 49-year-old, “but I had no choice – there is no work for me in Ukraine.”
Similar stories are heard outside the Polish consulate in Lviv, where a queue forms every day to get work visas.
Nadiya, 44, says she recently lost her job as a baker, and wants to go to Poland to pick apples.
“I’m going to Poland because there is a crisis here – I’m going to earn a crust,” she said.
With unofficial estimates saying the number of unemployed in Ukraine has doubled to more than 1m since the crisis struck, and the economy expected to contract by 14 per cent this year, Poland has again become an attractive destination.
The numbers are fuzzy because many Ukrainians travel to Poland on tourist visas, and some overstay their visas, but as many as half a million Ukrainians are thought to be working in Poland.
Just like Poles in Great Britain, Ukrainians in Poland tend to do the hard and low-paid work that locals avoid – such as picking fruit, domestic work or unskilled construction labour. The wages are lower than for Poles – one apple picker said she hoped to make about €20 ($29, £17.50) for a 14-hour working day, but the pay is still better than that back home.
“It’s difficult to be away from home, but I prefer to be working than be unemployed,” says Mr Strizhyk.

GLOBAL ECONOMY WEEKAHEAD-Getting money flowing after stress test

Now that the largest U.S. banks have completed their stress tests, the bigger stress is figuring out how to get credit flowing normally so that the global economy can start growing again.
In the United States and in Europe, central bank surveys show that lending remains extraordinarily tight even though official borrowing costs have been cut to record lows.
"It's not really the price of credit. It's the availability," said Howard Archer, chief UK and European economist at IHS Global Insight in London.
The problem is the underlying economy is still hurting -- despite all the talk of "green shoots" of recovery -- which means more people will lose their jobs and fall behind on bill payments. Banks are worried their losses will grow.
Figures due next Friday are expected to show the euro zone's recession deepened in the first quarter, and economists widely expect that the region won't return to growth until 2010 or perhaps even 2011.
The weaker the economy, the weaker the banks. That is what last week's U.S. stress tests aimed to address -- how big of a capital cushion would the biggest firms need should the economy deteriorate even further? The number the regulators came up with was just under $75 billion, far less than once feared.
Last week, Finnish Finance Minister Jyrki Katainen called for joint stress tests in Europe, but a top banking regulator said bank examinations and bailouts were a national responsibility and there would be no pan-European stress test.
The International Monetary Fund has estimated that European banks need to write down $750 billion in bad loans and raise as much as $725 billion in capital through 2010 -- figures that many European officials have dismissed as too high.
FEEDBACK LOOP
The financial crisis, which first exploded in August 2007, has underscored the strong link between the state of the financial system and the health of the broader economy. When banks curb lending, the economy slows, jobs are lost, bills go unpaid and banks suffer losses.
Economists call that a "feedback loop," and many of the steps that central banks have taken to shore up lending were aimed at breaking it.
Dean Maki from Barclays Capital in New York said there were signs that the feedback loop "appears to be turning positive."
"It is still the case that a financial market deterioration seems to pose the biggest risk to the anticipated economic recovery, though at this point it is not clear what the trigger for such a disruption might be," he said.
While a healthier economy would certainly help banks, there is no guarantee that credit flows will rebound to pre-crisis levels once the recession ends.
The problem is not simply that banks are reluctant to lend. The securitization market where loans were repackaged into securities and sold to investors has yet to return to normal working order, and that is restricting credit.
For example, the amount of commercial paper, which companies use regularly for short-term financing, is down 26 percent from the average level in 2007, according to Drew Matus, an economist with Merrill Lynch in New York.
At the same time, companies and consumers are leery of taking on more debt while uncertainty is running high over the job market and the economy.
"Even if credit is available, you cannot force people or firms to take loans," Matus wrote in a note to clients.
Matus thinks lending will start to expand again in late 2009, provided the economy is healing. He said stabilization in the housing and job markets would go a long way toward easing credit conditions.
That doesn't mean everything will go back to normal.
"Although credit markets may thaw and banks increase lending, credit will continue to prove a scarce commodity for some time," Matus said.

RPT-UPDATE 3-As global economy contracts, IMF urges action

The global economy will shrink as much as 1 percent this year -- its first contraction since World War Two -- the International Monetary Fund warned on Thursday, urging quick action to deal with problem assets on banks' balance sheets.
In two reports prepared for a meeting of Group of 20 nations last week, the IMF said it was still forecasting a gradual economic recovery in 2010. But it zeroed in on the problem of the "toxic assets," saying the sooner they were dealt with, the better.
"Even in countries where banking sectors still appear resilient, the deepening global financial crisis is likely to imply greater stresses," the IMF said. It said G20 countries should also develop plans for coping with stricken financial institutions so they don't infect the broader economy.
Its expectations for economic performance are darkening. In January, the IMF projected the global economy would grow by 0.5 percent in 2009 rather than shrink, but it said those prospects were being worn down by the severity of the financial crisis.
A senior IMF official told a conference call with reporters there would be no enduring recovery until financial sector stability was restored and the world's leading economies increased their policy coordination.
The reports will flavor discussions on April 2 in London, when political chiefs, including U.S. President Barack Obama, join finance ministers from the G20 for another round of talks that will aim to bolster hopes that the recession's impact can be cushioned to some degree.
The IMF official said there were "considerable" downside risks to the forecast and the Fund may need to further cut its projections if the risks intensified.
For now, the IMF said advanced economies were in a severe recession that will shrink their GDP growth by a range of 3.0 percent to 3.5 percent in 2009, improving to around zero growth in 2010.
It said the United States economy would likely contract by 2.6 percent this year, while the euro area economy would decline by 3.2 percent in 2009.
Japan will likely suffer a 5.8 percent contraction in 2009 and will continue to shrink in 2010 by 0.2 percent.
It said major central banks should communicate their intentions to keep rates low until a recovery firmly takes hold. While U.S. and Japanese central banks have cut rates to near zero, there was still room for the European Central Bank to lower rates further, the IMF added.
Policy rate reductions have, however, had little impact on financial conditions, the Fund said.
EMERGING MARKETS SLOWING
Meanwhile, emerging and developing economies are slowing abruptly and likely to see growth taper to between 1.5 percent and 2.5 percent in 2009, recovering slightly next year to between 3.5 percent and 4.5 percent, the IMF said.
"Capital account pressures are intensifying for many emerging economies, amidst a contraction in cross-border lending," the IMF said.
It said central and eastern European countries were being hardest hit by the crisis because of their large current account deficits and a sharp decline in capital inflows.
In Latin America, tight financial conditions and weaker external demand are a drag on growth, and in Asia, countries are being hurt by a drop in manufacturing exports.
Meanwhile, in Africa and the Middle East, growth was slowing more modestly compared to other regions, it added.
Asked where the global recovery will begin, a senior IMF official said: "It will be different around the world."
In China, the official said, there were already signs that domestic activity was firming, but elsewhere in emerging market economies, a sustained recovery will depend on the performances of advanced countries.
In the United States, the IMF urged the new administration to provide more details on exactly how it plans to deal with banks' toxic assets and undercapitalized or bankrupt banks.
The IMF also said countries with sufficient international currency reserves should help companies that are having difficulties in accessing foreign capital.
It said emerging economies should make contingency plans to address the growing risk of large-scale corporate failures. There is mounting concern that the situation for many large emerging market economies could worsen as maturing debt for banks and large corporations comes due and global credit strains make it difficult to access financing.