Rethinking the relationship between local government and financial markets

In the past 20 years local governments have increasingly looked to financial markets for capital financing. The markets want local governments to change their accounting systems and become more transparent, in order to offer information that is more appropriate to private sector investors. The authors argue that this approach is only a partial solution, and that local government and financial institutions would both benefit from changes in their relationships. The article identifies a double knowledge gap that needs to be filled if the public and private sectors want to work together as long-term financial partners.     

A simple model of copyright levies: implications for harmonization

Copyright levies are used as a way of compensating rightholders for the private use made of their protected works. This paper builds a simple model of copyright levies and investigates welfare implications of the harmonization of levy rates. The result is that, when the policy-maker places sufficient weight on the interests of collecting societies, harmonization could reduce social welfare. When countries are asymmetric, the country with a larger proportion of foreign consumption and more inefficient tax system loses more from harmonization. A calibration exercise using European data shows that harmonization would increase aggregate social welfare. However, in some countries, policy-makers are worse off although consumers are better off with harmonization. Especially, when larger countries have higher decision weights, the policy-makers are worse off overall, and hence would not agree to harmonize the levy rates.     

Special Exchange Rates for Capital Account Transactions

The governments of developing countries are constrained in theeffective implementation of domestic policy by the interlinkagesof national and international financial markets. Domestic macroeconomicconditions are influenced by the interaction of national andworld interest rates and prices, and through the impact of realexchange rates on employment. The domestic responses to changesin these factors are often strong and rapid. In an attempt tosever these ties, governments have adopted dual exchange ratesystems in which capital account transactions are conductedat a depreciated exchange rate while an otherwise overvaluedrate is maintained for commercial trade. This article suggeststhat dual rates can indeed be used successfully as a strictlytransitory policy to offset sudden shocks in capital markets.The article develops models which indicate why these dual systemsare able to prevent inflationary or recessionary pressures causedby a misaligned exchange rate in the short term. While freecapital account rates can cut the flow of capital flight, however,a dual rate system cannot prevent a possibly equivalent lossof foreign reserves that will ultimately result because of theimpact of the overvaluation of the commercial rate on the tradebalance. In the longer term, a dual rate system with a misalignedcommercial rate exacerbates the government's deficit; ultimately,real wages must be cut and real interest rates raised to generatesufficient foreign exchange to finance the external debt. Thusa dual rate works well if the commercial rate is maintainedclose to the equilibrium level.     

The Tobin tax proposal : Background, issues and prospects

Less exchange rate volatility facilitates trade, investment and employment, for which, however, substantial international policy collaboration is needed. Tobin's proposal for a small uniform tax on foreign exchange transactions would be an important step, reducing fiscal deficits while discouraging exchange speculation. The fear of hostile reaction from the globalized financial markets makes putting the proposal on the table a more delicate matter for individual governments than for the UN. Doing so would strengthen the UN's claim for a slice of the prospective revenue.     

Markets versus governments

We provide a simple framework for comparing market allocations with government-regulated allocations. Governments can collect information about individuals’ types and enforce transfers across individuals. Markets (without significant government intervention) have to rely on transactions that are ex post beneficial for individuals. Consequently, governments achieve better risk sharing and consumption smoothing than markets. However, politicians in charge of collective decisions can use the centralized information and the enforcement power of government for their own benefits. This leads to political economy distortions and rents for politicians, making government-operated allocation mechanisms potentially worse than markets. We provide conditions under which it is ex ante beneficial for the society to tolerate the political economy distortions in exchange for the improvement in risk sharing. For example, more effective controls on politicians or higher discount factors of politicians make governments more attractive relative to markets. Moreover, when markets cannot engage in self-enforcing risk-sharing arrangements and income effects are limited, greater risk aversion and greater uncertainty make governments more attractive relative to markets. Nevertheless, we also show theoretically and numerically that the effect of risk aversion on the desirability of markets may be non-monotonic. In particular, when markets can support self-enforcing risk-sharing arrangements, a high degree of risk aversion improves the extent of risk sharing in markets and makes governments less necessary. The same pattern may also arise because of “income effects” on labor supply. Consequently, the welfare gains of governments relative to markets may have an inverse U-shape as a function of the degree of risk aversion of individuals.     

Are Open Markets Good for Foreign Investors and Emerging Nations?

Although policymakers of emerging nations routinely brand foreign capital as "hot money" and hold it responsible for the ills of their economies, this article suggests that the experience of opening up their markets to overseas investors has been largely beneficial for the host countries. Based on their own recent study, the authors report that when emerging economies open their markets, the level of stock prices tends to rise without an associated increase in volatility, and more capital becomes available for domestic investment at a lower cost. The stock markets also appear to become more efficient, thus resulting in a better allocation of resources. Furthermore, the inflow of foreign capital does not lead to higher inflation or stronger currencies, nor does the volatility of inflation or exchange rates increase. If some countries experience large capital outflows with damaging consequences, the culprit is not foreign investors, but rather policymakers' futile attempt to defy market forces and the failure of their economies to put the capital to productive uses.
The authors' analysis also suggests that, when the recent turmoil in emerging markets is set in the context of a longer-run historical perspective, nothing appears to have changed that would materially alter the prospects for investing in emerging markets. The recent market volatility and currency crises in emerging nations are by no means extraordinary—indeed, the currencies of many developing countries fall routinely. What distinguishes the Mexican and Thai currency crises from such run-of-the-mill devaluations is that both governments resisted the inevitable until market forces brought about a crash. The recent emerging market currency crises should accordingly be viewed as more or less predictable "road bumps" that can be expected when the policymakers of emerging economies gradually—and grudgingly—relinquish their power to the markets.     

The Perfect Storm: Hurricanes, Insurance, and Regulation

The intense hurricane seasons of 2004 and 2005 caused considerable instability in property insurance markets in coastal states with the greatest problems occurring in Florida and the Southeast. Insurers have substantially raised rates and decreased their exposures. While no severe hurricanes struck the United States in 2006 and 2007, market pressures remain strong given the high risk still facing coastal states. These developments generate considerable concern and controversy among various stakeholder groups. Government responses have varied. In Florida, political pressures prompted a wave of legislation and regulations to expand government underwriting and subsidization of hurricane risk and constrain insurers' rates and market adjustments. Other states' actions seem more moderate. In this context, it is important to understand how property insurance markets have been changing and governments have been responding to increased catastrophe risk. This article examines important market developments and evaluates associated government policies. We comment on how regulation is affecting the equilibration of insurance markets and offer opinions on policies that are helpful and harmful.     

Federal tax competition and the efficiency consequences for local taxation of revenue equalization

Recent work has shown that a system of equalization grants can neutralize the efficiency loss caused by tax competition among lower-level governments. These models, however, ignore the vertical tax externalities that occur when the federal and lower-level governments levy taxes on the same base. This paper incorporates equalization grants into a standard capital tax competition model in which there are horizontal tax externalities between jurisdictions and vertical tax externalities between the levels of government. It is shown that, even in the presence of vertical tax externalities, an efficient level of lower-level government taxation can be achieved with a modifying version of a standard equalization grant formula.     

RISK-TAKING INCENTIVES OF BANKS AND RISK-ADJUSTED DEPOSIT INSURANCE

The manager of a depository institution is shown to exhibit risk-taking behavior under the current insurance arrangement. Perfect monitoring or risk-based deposit insurance would eliminate this incentive if information were symmetric between bank managers and the insuring agency. Absent symmetric information, it is shown that a recently suggested scheme, where insurers collect insurance premiums based on projected and actual risk levels, does not control the risk-taking incentive. The only way to control this incentive through insurance rates is to levy a relatively high premium, which is not actuarially fair.     

论规制我国地方政府间制度外税收竞争的法治筹划

制度外税收竞争导致税收法定主义弱化,降低了市场机制对经济资源的配置效率。其法治筹划,从税收立法角度来看,要完善规范税收竞争的相关法律,提升税法立法级次,赋予地方适当税收立法权,加快费改税立法进程;从调整税收政策取向来看,要对税收优惠、区域经济协调发展、税制改革、财政转移支付等方面进行深化改革;同时,要通过强化税收执法监督、健全税收司法保障,对制度外税收竞争进行规制保障。     

Trends and determinants of Australian managed fund transaction costs

The present paper examines the often-overlooked managed fund fee that is incurred when investors enter and exit managed fund products. The present paper documents that transaction costs for investors, measured by the application-redemption spread, are above stock market brokerage rates although they have declined since 1995. The study analyses the relationship between this transaction fee and several variables. In summary, retail fund transaction costs are positively related to retail funds’ assets under management, whilst this relationship is negative for larger wholesale funds, consistent with economies of scale. Direct entry and exit fees and initial commissions are positively related to transaction costs which raises the possibility that the commissions are used to levy soft-dollar payments. The paper also documents a relationship between transaction costs and fund flows which differs between retail and wholesale funds. Overall, the findings are consistent with the proposition that the various fees are used by managers as interchangeable and the different fee regimes reflect different products and markets.     

Liquidity and credit premia in the yields of highly-rated sovereign bonds

This paper quantifies liquidity and credit premia in German and French government bond yields. For this purpose, we estimate term structures of government-guaranteed agency bonds and exploit the fact that differences in their yields vis-à-vis government bonds are mainly driven by liquidity effects. Adding information on benchmark rates, we estimate liquidity and credit premia as latent factors in a state-space framework. The results allow us, first, to quantify the price impact of safe-haven flows on sovereign yields, which strongly affected very liquid bond markets during the recent financial crisis. Second, we quantify credit premia for highly rated governments, offering an important alternative to the information based on CDS markets.     

FINANCIAL MARKETS, PUBLIC POLICY, AND THE EAST ASIAN MIRACLE

Many factors contributed to the rapid growth of the economiesof East Asia in the past quarter century. This article examinesone important aspect of that growth—commonly referredto as the "East Asian miracle"—public policies affectingthe financial markets. East Asian governments intervened extensivelyin financial markets at all stages of their development. Whatsets their actions apart from those of other developing countriesthat have not fared as well? We do not have the informationto answer conclusively what effect particular actions had (thatrequires a counterfactual test of what growth would have beenwithout the particular intervention). But we can identify themarket failures the East Asian governments addressed, assesssome of the theoretical reasons why each policy might be growthenhancing, and provide some data attesting to the impacts ofthe policy. Several characteristics of financial sector interventionsin East Asia stand out: they incorporated design features thatimproved the chances of success and reduced opportunities forabuse; interventions that did not work out were dropped unhesitatingly;and policies were adapted to reflect changing economic conditions.      

Sub-nationals' risk premia in fiscal federations: Fiscal performance and institutional design

The recent debt crisis in Europe highlighted the importance of institutional design and, in particular, bail-out clauses in determining States' risk premia in fiscal or quasi-fiscal federations. This paper examines the determinants of sub-national governments' risk premia in fiscal federations using secondary market data for the USA, Canada, Australia and Germany. It finds that, as for central governments, fiscal fundamentals matter in the pricing of risk, and sub-national governments with higher public debt and larger deficits pay higher premia. However, this relationship is not uniform across federations and it differs with institutional arrangements. In particular, market pricing mechanisms are less effective in presence of explicit or implicit guarantees from the central government. We show that when sub-national governments depend on high transfers from the central government (i.e., when there is some form of implicit guarantee from the center), markets are less responsive to sub-national governments' fiscal fundamentals. Using primary market data, the paper also shows that high transfer dependency lowers the probability of sub-national governments to borrow on capital markets.     

Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance

Fannie Mae and Freddie Mac are unique and controversial participants in the housing finance system of the United States. Because of these enterprises' federal government charters, the financial markets believe that the government would not allow Fannie and Freddie to fail to honor their debt obligations, and they are thereby able to borrow more cheaply in credit markets; in turn, they lower interest rates for residential mortgages. If the financial markets are right, however, Freddie and Fannie also create a contingent liability for the government. Though there are positive externalities from home ownership, the Fannie/Freddie route is far too broad and unfocused to address those externalities effectively. Privatization, accompanied by targeted federal assistance for potential first-time low- and moderate-income home buyers, would be a superior policy direction.     

Sovereign risk assessment and agency credit ratings

Sovereign ratings are gaining importance as more governments with greater default risk borrow in international bond markets. However, while the ratings have proved useful to governments seeking market access, the difficulty of assessing sovereign risk has led to agency disagreements and public controversy over specific rating assignments. Recognising this difficulty, the financial markets have shown some scepticism toward sovereign ratings when pricing issues.     

Monetary policy and financial stability: What role for the futures market?

This paper examines interactions between monetary policy and financial stability. There is a general view that central banks smooth interest rate changes to enhance the stability of financial markets. But might this induce a moral hazard problem, and induce financial institutions to maintain riskier portfolios, the presence of which would further inhibit active monetary policy? Hedging activities of financial institutions, such as the use of interest rate futures and swap markets to reduce risk, should further protect markets against consequences of unforeseen interest rate changes. Thus, smoothing may be both unnecessary and undesirable. The paper shows by a theoretical argument that smoothing interest rates may lead to indeterminacy of the economy's rational expectations equilibrium. Nevertheless, our empirical analysis supports the view that the Federal Reserve smoothes interest rates and reacts to interest rate futures. We add new evidence on the importance for policy of alternative indicators of financial markets stress.     

Foreign exchange intervention and equilibrium real exchange rates

Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects – when they are significant – would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.     

燃油税政策的国际比较与启示

世界各国征收的燃油税大多是以消费税和增值税为主的多个税种的组合。尽管各国燃油税有差异,但也有许多共性,如燃油课税的主要目的都是作为道路交通建设资金的来源;燃油税多是采取从量定额征收,税费占燃油价格的比例都较高;车用燃料消费所占比例越高的油品,征收环节越靠近生产环节;对非道路用燃料进行税收减免等。本文认为,开征燃油税首要目的是筹集道路养护资金,其次才是促进节能与环保,应综合考虑各种因素来设置税率,并辅之以相应的税收优惠措施。     

International tax competition with endogenous sequencing

This paper examines endogenous timing in an international tax competition model. Unlike existing studies, governments are assumed to decide not only tax rates but also whether they are set early or late. The Nash equilibrium provides four conclusions for alternative double tax allowances. First, tax deductions cause simultaneous tax competition, whereas tax credits yield sequential tax competition. Second, any double taxation relief would generate capital trade. Third, a credit system could maximize one country’s economic welfare but would lower another country’s economic welfare more than a deduction regime. Fourth, a home country’s government would choose credit regimes under a maximax rule, but select deduction methods under minimax and maximin rules, while all double tax allowances are indifferent to a host country. The findings resolve the question raised by Bond and Samuelson (Economic Journal 99:1099–1111, 1989) of why governments choose tax credits when tax deductions are clearly better. Namely, this paper shows that one country is better off but another is worse off with credits rather than deductions. Accordingly, we cannot clearly specify whether governments choose credit systems or deduction regimes. The possible double tax allowances employed by the governments depend on their own decision criterion.