This paper provides an overview of the recent theoretical and empirical research on herd behavior in financial markets. It looks at what precisely is meant by herding, the causes of herd behavior, the success of existing studies in identifying the phenomenon, and the effect that herding has on financial markets. The paper also surveys a selected number of studies that evaluated the demand for money using the error-correction model approach in the 1990s across a range of industrial and developing countries.

This paper analyzes portfolio diversification, leverage, and financial contagion. It studies the extent to which basic principles of portfolio diversification explain “contagious selling” of financial assets when there are purely local shocks. The paper demonstrates that the elementary portfolio theory offers key insights into “contagion.” Most important, portfolio diversification and leverage are sufficient to explain why an investor will find it optimal to significantly reduce all risky asset positions when an adverse shock impacts just one asset.

This paper discusses the origins of the pyramid schemes and the way the authorities handled them. The paper analyzes the economic effects of the pyramid schemes, concluding that despite the descent into anarchy triggered by the schemes’ collapse, their direct effects on the economy are difficult to specify and appear to have been limited. The paper also argues that prevention of pyramid schemes is better than cure and that government and international financial institutions should be vigilant in clamping down on frauds.

This last issue for 2005 comprises seven new papers, including a contribution to the journal's occasional Special Data Section about domestic debt markets in Sub-Saharan Africa, and also an in-depth look at the internal job market for entry-level economists at the IMF. The remaining articles cover toics as diverse as: modeling of asset markets, exchange rates in developing countries, international bank claims on Latin America, the effectiveness of "early warning" systems, and the use (by emerging market countries) of the IMF's Special Data Dissemination Standard (SDDS).

This paper presents a broad overview of postwar analytical thinking on international macroeconomics, culminating in a more detailed discussion of recent progress. The paper reviews important empirical evidence that has inspired alternative modeling approaches, as well as theoretical and policy considerations behind developments in the field. The paper presents an empirical study of fiscal policy in countries with extreme monetary regimes. It also examines members of multilateral currency unions, dollarized countries that officially use the money of another country, and countries using currency boards.

This paper empirically investigates the monetary impact of banking crises in Chile, Colombia, Denmark, Japan, Kenya, Malaysia, and Uruguay during 1975–98. Cointegration analysis and error correction modeling are used to research two issues: (i) whether money demand stability is threatened by banking crises; and (ii) whether crises lead to structural breaks in the relation between monetary indicators and prices. Overall, no systematic evidence that banking crises cause money demand instability is found. The paper also analyzes inflation targeting in the context of the IMF-supported adjustment programs.

Forty years ago, Marcus Fleming and Robert Mundell developed independent models of macroeconomic policy in open economies. Why do we link the two, and why do we call the result the Mundell-Fleming, rather than Fieming-Mundell model?