The optimal exchange rate regime for a small country

This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada’s (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank’s policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains “Fear of floating” and “Fear of pegging”.     

‘An Incomplete Contract Approach to Eurozone Fiscal Governance’ – Commitment vs. Flexibility

In this paper, we take an incomplete contract approach to Eurozone Fiscal Governance between the European Commission (EC) and any heavily debt member state, Greece in particular. Incomplete contract approach makes possible to put a long process of Eurozone Fiscal Governance into an extensive form game in which a renegotiation procedure is incorporated. We theoretically reveal the conflict of interests between the EC (Germany) and Greece over the Greek debt repayment plan proposed in 2015. We show that the Greek’s position is consistent with incomplete contract theory, but that the EC (Germany) does not allow the renegotiation for restructuring for growth-oriented debt repayment program proposed by the Greek government because the EC (Germany) judges that the commitment effect (on fiscal austerity) is greater than the flexibility one (pro-growth effect). This will undoubtedly provide a novel and interesting approach to Eurozone Fiscal Governance.     

Testing for intraday interdependence and volatility spillover among the euro, the pound and the Swiss franc markets

To examine intraday interdependence and volatility spillover among the euro, the pound and the Swiss franc, we employ the varying-correlation model of multivariate generalized autoregressive conditional heteroskedasticity. Our main findings are (1) return volatility in the euro spills into the pound and the Swiss franc; and (2) these markets are highly integrated with the euro, and the degree of interdependence is state-dependent: euro news has a simultaneous impact on the pound and the Swiss franc, and co-movements of these currencies and the euro become much higher in proportion to the arrival of news of the euro.     

The Significance of Credit Rationing on Real Investment Activity – A Test for the Significance of Capital-Market Imperfection in Japan

Does bank credit matter to the real investment finance of firms? If so, to what kind of firms does it matter, and why? Despite the progress of research in this field, there is still little empirical consensus on these problems. This paper contributes to the understanding of capital-market imperfection in Japan by answering these questions. I introduce new methods to test the significance of credit rationing and show that bank credit is indeed a very important determinant of real investment activity of small firms. The availability of long-term loans has particularly significant effects on the investment opportunities of small firms, although large firms with capital of more than 1 billion yen are free from credit rationing. JEL Classification Numbers: C51, E44, G21.     

EFFECTS OF REGIONAL COOPERATION AMONG SMALL AND MEDIUM-SIZED FIRMS ON THEIR GROWTH IN JAPANESE INDUSTRIAL CLUSTERS

We examine the effects of regional inter-firm cooperation on firm growth by estimating the firm growth function, using the data of a questionnaire survey for three major industrial clusters in Japan, namely, Tama, Kinki and Hokkaido. We focus on the specific content of cooperative activities for two aspects: that is, three production stages of R&D, commercialization, and marketing for cooperation and different types of alliance partners. The findings for our study areas demonstrate: i) vertical cooperation, the most prevalent with suppliers and customers, does not contribute to firm growth; ii) the clusters do not enjoy "urbanization economies arising from agglomerating a variety of different industrial sectors"; iii) the alliances with "universities" and "cross-industry exchange organizations" show positive effects on firm growth; and iv) both contributions and limitations are identified for the cluster-promotion policies in Japan.     

Using Constraint Programming to Design an Option-based Decision Support System

Financial options and futures give investors the opportunity to form complex strategies that meet their investment objectives for risk management. However, this opportunity gives rise to a difficult task: finding a desired strategy from among a large number of possible strategies. This paper describes an intelligent decision-support system for generating option-based investment strategies by using constraint programming, which is an integrated framework of Artificial Intelligence and Logic Programming. In this system, constraint programming acts as a bridge between qualitative and quantitative analyses in decision processes. In qualitative analysis, logical reasoning with hypotheses is used to automatically create complex strategies through abstract matching with investors' profiles. Here, abstract matching can be regarded as symbolic computation for producing qualitatively reasonable strategies. In quantitative analysis, a set of complete solutions that satisfy user-supplied constraints are obtained by constraint satisfaction and optimization. A constraint language based on the framework of Constraint Logic Programming has been developed in order to integrate these symbolic and numerical computations in a uniform way. The resulting system written in this language has the following features. (1) Unlike rule-based expert systems, the constraint-based system can create novel investment strategies. (2) A smooth transition from qualitative to quantitative analyses can be naturally achieved due to the constraint language. (3) Qualitative analysis can reduce search complexity, because the analysis focuses on a small set of qualitative distinctions in solution space. These features indicate the usefulness of constraint programming for designing intelligent decision-support systems.     

Optimal age‐dependent income taxation in a dynamic extensive model: The case for negative participation tax on young people

We consider optimal age‐dependent income taxation in a dynamic model where the labor‐leisure choice is the extensive margin, each household faces idiosyncratic shocks to labor productivity and a pecuniary cost to work, and there is no insurance market against the shocks. We show that the well‐known property of the optimal participation tax rate in the static model continues to hold in our dynamic economy, that is, the participation tax rates for some income groups with low consumption are likely negative. In dynamic models, the optimal participation tax rate depends on age and on labor income. Our numerical simulations suggest that a negative participation tax should be restricted to young households.     

Optimal Rules of Origin with Asymmetric Compliance Costs under International Duopoly

We examine the optimal rules of origin (ROO) in a free trade area/agreement (FTA) by employing a stylized three-country partial equilibrium model of an international duopoly. We incorporate compliance costs of the ROO into the model. In particular, compliance costs are higher for a firm located in a non-member country of the FTA than for a firm (an internal firm) located in an FTA member country, whereas marginal production costs are lower for the former. The FTA member countries set the optimal level of ROO to maximize their joint welfare. An importing country within the FTA imposes tariffs on imports that do not comply with the ROO. We show that the optimal ROO may have a protectionist bias in the sense that they are set for only the internal firm to comply. ROO may also cause low utilization of FTAs when they are set such that even the internal firm does not comply with them. These cases arise depending on parameter values.