The advent of the Internet and the use of component-based technology have each individually in uenced the software development process. The Internet has facilitated geographically distributed software development by allowing improved communication through such tools as distributed CM systems, shared white-board systems, and real-time audio and video. Component-based technology has facilitated the construction of software through assembly of relatively large grained components by dening standards for component interaction such as CORBA 5]. But, it is their combined use that has led to a radically new software development process: increasingly,software is being developed as a \system of systems" by a federated group of organizations.
Sometimes such a process is initiated formally,as when organizations create a virtual enterprise 4] to develop software. The virtual enterprise establishes the rules by which dependencies among the components are to be maintained by the members of the enterprise. Other times it is the connectivity of the Internet that provides the opportunity to create incidental systems of systems.
In his paper on optimal currency areas, Robert Mundell (1961) proposed several conditions under which a monetary union between two or more regions would define a feasible regime of exhange rates. First, factors of production, capital and labour, should be highly mobile across regions. With one region facing an adverse demand shock, say, moving factors from that region would bring markets back into equilibrium. Second, macroeconomic shocks should be synchronized, i.e. a shock hitting one region should hit other regions in same direction. Third, nominal factor prices, including wages, should be flexible, in order to restore equilibrium in the factor markets after a shock. For a currency area to function smoothly, at least one of these conditons should be met.
This general proposition has been applied at the national level, bringing up the issue whether a particular economy is suitable for joining a larger currency area, of which the European Monetary Union (EMU) is a recent example. Several advantages have been listed from joining such a union. First, the reduction of transaction costs that are incurred in exchanging from one currency to another. Second, the elimination of exchange rate risk, reducing real interest rate uncertainty, and in turn, the accompanying premium. Third, more transparity in prices across countries. These effects are likely to improve market efficiency in general, enhancing economic activity and growth. Among the disadvantages from entering a monetary union are: first, a loss of a degree of freedom, the nominal exchange rate, as a means of reacting to macroeconomic shocks. Second, the surrender of national sovereignty, as the monetary authority no longer conducts an independent monetary policy.
In Beaudry and Portier [2004b], we used U.S. data to document properties of the joint behavior of Total Factor Productivity (hereafter TFP) and stock prices (hereafter SP) that are supportive of a “news view” of business cycles, that is, a view of business cycles where it is news about future developments in productivity that drive fluctuations. In particular, we presented two orthogonalized moving average representation for these variables: one based on an impact restriction and one based on a long run restriction. We then examined the correlation between the innovations that drive the long run movements in TFP and the stock prices innovation which is contemporaneously orthogonal to TFP.
We found this correlation to be positive and almost equal to 1, indicating that permanent changes in productivity growth are preceded by stock market booms. We showed why this observed positive correlation runs counter to that predicted by simple models where surprise changes in productivity drive fluctuations. We also discussed how the pattern could arise if agents have advanced information about future technological opportunities, or if productivity growth emerges as a delayed byproduct of a period high investment activity. In either case, the results suggests that expected changes in technological opportunities may be central to business cycle fluctuations even if surprise changes in productivity are not.
