Public credit and liquidity in James Steuart's Principles

Abstract

The aim of this article is to shed new light on the monetary and financial theory of James Steuart (1767) through his examination of the speculative bubbles of 1720: that is, the John Law System in France and the South Sea Bubble in England. In contrast to most contemporary writers – particularly David Hume and Adam Smith – Steuart had a balanced opinion about these two financial experiments. On the one hand, Steuart considered them worthwhile, since they were attempts at public debt restructuring by reducing its expense and increasing its liquidity. Moreover, according to Steuart, a well-managed public debt favours the liquidity of both banks and the financial market. These worked together for the growth of wealth. However, on the other hand, Steuart claimed that the failure of these experiments was due to: (i) a poor management of money; (ii) a violation of credit rules and its corollary, the weakness of banks; (iii) the adoption of contestable dividend and financial information policy. This article presents Steuart's proposals for creating the liquidity of both banks and the financial market via a well-managed public debt.     

Township and Village Enterprises,Openness and Regional Economic Growth in China

The authors argue that under the current political and economic conditions the restructuring of Russian enterprises on a mass scale is impossible, because the aims and methods of the restructuring programme often get in the way of the interests of different groups who in fact prosper on the inefficiency of private enterprise. These groups pay lip service to the restructuring process but do everything possible to slow down and block the process when their interests are threatened. The only group which is truly interested in restructuring of an enterprise is the middle managers. However, they are the least influential and least organised to affect enterprise restructuring. The article also addresses the legislation and especially the new law on bankruptcy, which potentially could speed up the restructuring process to a considerable extent. However, owing to the activities of some of the interest groups analysed, the law is failing to achieve its original aim. The occasional success stories have a very limited impact on Russian industries and in fact confirm the argument.     

The Bank of England and Parliament were monetarily adroit during the Napoleonic Wars

Abstract

With the connivance of Parliament, was the Bank of England's over issue of banknotes inflationary? The inflation stemmed from military subsidy and Peninsula campaign payments, as well as food imports, far in excess of Britain's export earnings to cover these capital transfers (particularly when crimped by the Continental Blockade), and not merely from domestic credit over issue. Neither domestic money creation nor the fiscal theory of the price level best explains the imbalance in Britain's international accounts during the Napoleonic Wars. This deficit stemmed from domestic production shortfalls in essentials (above all food production) and contractual obligations such as military spending/subsidies relative to the pound's international purchasing power which emanated from the ability of Britain to sell exports and replace imports with domestic output (raise food production internally). These types of highly inelastic transactions tended to operate independently of domestic money creation, fiscal policy (taxes) or price developments (inflation). This article tracks England's bullion debate, which concerned whether gold prices rose (and hence sterling's exchange rate fell) because military capital transfers overwhelmed the balance of payments, or because the Bank of England over issued paper money after the gold cover was removed in 1797. The issues herein are not antiquated because the primary issues in monetary debates for two centuries have concerned the cause of inflation and deflation, and whether the domestic money supply or the balance of payments is responsible. Determining actual causation is critical for the proper solution: monetary deflation, or domestic and international restructuring of trade and investment.     

Restructuring China's Petrochemical Enterprises: A Case Study of the Fushun Petrochemical Company

This article presents a case study of Fushun Petrochemical Company (FPC), which is a large state-owned enterprise (SOE) in Liaoning province under the control of China National Petroleum Corporation. In the first part of the article we argue that China's approach to the reform of large-scale SOEs in upstream industries such as petroleum has a sound economic logic. In the second part we use the recent restructuring of FPC to illustrate China's approach to reforming the petrochemical sector. We draw on interviews with managers and local government officials to discuss both the difficulties that the enterprise faced prior to reform and the main measures that were implemented during restructuring to address these problems. While the restructuring process at FPC has just been completed, we argue that the outcome provides some support for China's decision to promote large SOEs in upstream industries.     

Debt Overhang and Barter in Russia

This paper develops a model in which costly barter is used by firms to protect working capital against outside creditors. Although creditors could agree to postpone debt payments and to avoid destroying the firm's working capital, if the firm cannot commit not to divert cash ex post, the outcome of renegotiation still provides ex ante incentives to use barter. We show that the greater is the debt overhang, the more likely is the use of barter, with and without the possibility of debt restructuring. Empirical evidence from Russian firm-level data is shown to be consistent with the model's predictions. J. Comp. Econ., December 2002, 30(4), pp. 635–656. New Economic School, CEFIR, CEPR, and WDI, Nakhimovsky pr. 47, Moscow 117418, Russia; Sloan School of Management, M.I.T., 50 Memorial Drive, Cambridge, Massachusetts 02142; and ROSES–CNRS and CEPR, Maison des Sciences économiques, 106–112 Bd de l'Hôpital, 75647 Paris Cedex 13, France. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: E41, G34, P31.     

The intraday liquidity management game

We use a game theoretical framework to analyze the intraday behavior of banks with respect to settlement of interbank claims in a real-time gross settlement setting. The game played by banks depends upon the intraday credit policy of the central bank and it encompasses two well-known game theoretical paradigms: the prisoner's dilemma and the stag hunt. The former arises in a collateralized credit regime where banks have an incentive to postpone payments when daylight liquidity is costly, an outcome that is socially inefficient. The latter arises in a priced credit regime where the postponement of payments can be socially efficient. Banks are risk neutral, but we show that most of the results are unaffected by risk aversion.     

On the monetary nature of the interest rate in a Keynes–Schumpeter perspective

Abstract

Keynes, in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this article is twofold. The first objective is to point out the limits of the liquidity preference theory. The fundamental limitation of this theory is that it does not allow to realize the intent declared by Keynes in 1933 to elaborate a monetary theory of production The second objective is to present a more solid theory of the monetary nature of the interest rate. It will be shown that an essential element of this explanation is Schumpeter’s analysis of the role of bank money in a capitalist economy. In fact, this analysis represents a fundamental tool to explain the characteristics that, according to Keynes, distinguish a monetary economy from a real-exchange economy     

The role of legal status in influencing bank financing and new firm growth

We provide an empirical assessment of the suggestion, based on Severo (2012), to use a systemic liquidity risk index (SLRI) for estimating liquidity premia that could be charged on large banks as a compensation for the implicit liquidity support obtained from public authorities (Blancher et al., 2013). To this end we compute, over the period January 2004–December 2012, a parsimonious and fully documented SLRI. We also investigate its statistical significance in explaining the level and variability of stock returns for a group of large international banks across the subprime and the Eurozone sovereign debt crises. Main findings are two: our more parsimonious SLRI is close to Severo’s but provides a stronger signal of liquidity stress and recovery episodes; we consistently fail to detect, within and across the two crises, a stable group of banks among the global systemically important ones listed by the Financial Stability Board.     

A comparison of cardinal tournaments and piece rate contracts with liquidity constrained agents

A celebrated result in the theory of tournaments is that relative performance evaluation (tournaments) is a superior compensation method to absolute performance evaluation (piece rate contracts) when the agents are risk-averse, the principal is risk-neutral or less risk-averse than the agents and production is subject to common shocks that are large relative to the idiosyncratic shocks. This is because tournaments get closer to the first best by filtering common uncertainty. This paper shows that, surprisingly, tournaments are superior even when agents are liquidity constrained so that transfers to them cannot fall short of a predetermined level. The rationale is that, by providing insurance against common shocks through a tournament, payments to the agents in unfavorable states increase and payments in favorable states decrease which enables the principal to satisfy tight liquidity constraints for the agents without paying any ex ante rents to them, while simultaneously providing higher-power incentives than under piece rates. The policy implication of our analysis is that firms should adopt relative performance evaluation over absolute performance evaluation regardless of whether the agents are liquidity (wealth) constrained or not.     

Post-privatisation Enterprise Restructuring

Post-privatisation restructuring of former state-owned enterprises (FSOEs) encompasses both shorter-run 'defensive' actions and longer-run 'strategic' measures. Restructuring involves changes in corporate governance, organisational structure, management, labour, capital, technology, output and sales. Various performance indicators may measure the results of restructuring, but care is required in the selection and interpretation of indicators. In the restructuring of FSOEs foreign strategic investors have many advantages over domestic investors. The study includes examples from experience in the Czech Republic, Hungary and Poland.     

Use of borrowed start-up capital and micro enterprises in Mexico: existence of liquidity constraints

Using the National Survey of Micro enterprises (ENAMIN, Encuesta Nacional de Micronegocios) data I test for the presence of liquidity constraints for obtaining start-up capital in Mexico’s credit markets (formal and informal). I use the bivariate probit model with partial observability to recognize two important decisions in the credit allocation process: first, whether an owner of a micro enterprise wants to apply start-up loan and, second, whether financial institutions decide to provide or not to provide the loan. Finally, I compare the results from this model to those of a simple probit model that looks at whether a micro enterprise owner gets funding or not (i.e. the probit model implicitly assumes that no liquidity constraints exist). The findings of this study show that there is substantial heterogeneity in the socioeconomic background of borrowers, as well as in the sources for start-up capital employed by micro enterprises in Mexico. Moreover, there is clear evidence of liquidity constraints in the market for start-up capital that could hinder the creation and growth of small enterprises. Applying the findings of the study, policy makers could fundamentally increase the effectiveness in establishing an economic environment that fosters growth.

Liquidity management of foreign exchange reserves in continuous time

In order to cope with daily foreign currency exchange payments or trades and avoid liquidity crisis, central banks need to maintain the liquidity of foreign exchange reserves. In this paper, we develop a Foreign Exchange Reserves Liquidity Management (FERLM) model based on stochastic process by introducing a foreign exchange factor. We also generate a feasible target proportion of the liquidity reserve to total foreign exchange reserves, by seeking the balance between capital gains of holding foreign exchange reserves and losses of liquidity insufficiency.     

Formation of the non‐state sector and privatisation in Kazakhstan and Uzbekistan

In this paper, we take a detailed look at one Polish bank's experiences with financial sector reforms focusing on a bank-led enterprise-restructuring plan that linked directly bank privatization and recapitalization to bad-debt workouts. Based on personal interviews and original statistical data, we evaluate the performance of Bank Depozytowo-Kredytowy (BDK) in promoting financial and operational restructuring of its clients. We found that BDK continued to provide soft lending to keep four old military‐industrial companies afloat and actually increased its exposure to these companies during the program. The five success stories among BDK's clients were companies that had external agents other than the bank promoting and monitoring their operational restructuring. From our case study of BDK, we conclude that, while banks may play a role in financial restructuring of their clients, their ability to affect operational restructuring is quite limited. Moreover, stateowned banks are particularly vulnerable to incentive problems when dealing with large state-owned enterprises that may be too big or too political to fail.     

Heterogeneity and fine wine prices: application of the quantile regression approach

ABSTRACT

This study addresses the price heterogeneity of the five first growths of Bordeaux. We apply the quantile regression (QR) approach with market segmentation based on wine bottle price quantiles. We compute the hedonic price of wine attributes for various price segments in the market. This approach is applied to a major dataset comprising approximately 50,000 transactions over the 2003–2017 period. The findings indicate that the relative hedonic prices of several wine attributes differ significantly among deciles. The implications of our results are manifold. Vintage and Parker grades have a strong impact on the variation in wine prices, and there is a hierarchy among the five first growths of Bordeaux. There is also a premium commanded by the reputation and experience of an auction house. Since the financial crisis of 2012–2013, investors have considered that the five first growths are overrated, save for the most expensive wines; for those most expensive ones, investors prefer scarcity to liquidity. These results are of import to several actors in the fine wine market: investors, for example, could use the findings herein to better diversify their wine portfolio, while auction houses could better anticipate their future sales based on consumers’ expectation.     

Medical resource utilization and costs for total hip arthroplasty: benchmarking an anterior approach technique in the Medicare population

Aims: The anterior approach (AA) for total hip arthroplasty (THA) is associated with more rapid recovery when compared to traditional approaches. The purpose of this study was to benchmark healthcare resource utilization and costs for patients with THA via AA relative to matched patients.

Materials and methods: This study queried Medicare claims data (2012–2014) to identify patients who received THA via an AA from experienced surgeons, and matched these patients to a control cohort (all THA approaches). Direct and propensity-score matching were employed to maximize similarity between patients and hospitals in the two cohorts. Hospital length of stay (LOS), the proportion of patients discharged to home or home health, and post-acute claim payments during the 90-day episode were assessed. Generalized estimating equations were applied to control for imbalances between the cohorts and clustering of outcomes within hospitals.

Results: A total of 1,794 patients were included after patient matching. Patients who received AA had significantly lower mean hospital LOS vs patients in the control group (2.06?±?1.36 vs 2.98?±?1.58 days, p?<?.0001). The adjusted proportion of patients discharged to home was nearly 20 percentage points higher in the AA cohort vs the control cohort (87.3% vs 68.7%, p?<?.0001). Post-acute claim payments for AA patients were nearly 50% lower than those for control patients ($4,139 vs $7,465, p?<?.0001).

Conclusion: AA patients had significantly lower post-acute care resource use when compared to control patients. Further research is warranted to evaluate the cost effectiveness of AA among surgeons of varying experience levels.     

Three Measures of Corporate Restructuring in a Transition Economy: The Case of Newly Privatised Romanian Companies

This article analyses the restructuring of newly privatised Romanian firms by focusing on three microeconomic variables. Changes in the number of personnel, the volume of fixed assets and the level of research and development are analysed in connection with measures of ownership structure and concentration. Overall, the evidence presented suggests that institutional (possibly foreign) outside stakeholders are more likely to foster restructuring and increase the likelihood of survival of newly privatised firms in Eastern Europe.     

Will Sub-Prime be a Twin Crisis for the United States?

We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis.     

Restructuring of the Hungarian Electricity Industry

Restructuring the monopolistic, state-owned, obsolete and polluting utility industries of post-socialist economies poses a challenge for the utility deregulation wave travelling around the world. Utility restructuring in the Central and Eastern Europe (CEE) region is unique from several perspectives, including the domination of foreign capital vs. national resources as the only feasible vehicle for a drastic change in the industry and the ambitious goals of harmonisation with the EU liberalisation schedule to accelerate accession. It is also widely expected that deregulation will help bring down world-record high energy intensities in these economies. Hungary has been the pioneer among economies in transition in unbundling, deregulating and privatising the utility industries and taking the first steps towards EU-conforming market liberalisation within less than half a decade. The first stages of privatisation and restructuring have been declared a success story in the Western media. However, what is a success story from a foreign perspective may be seen differently from other viewpoints. The article describes the process of utility restructuring in Hungary and examines its impact from the economic, environmental and policy perspectives. The article also compares the pioneer Hungarian deregulation with other CEE countries' restructuring of their energy sectors. However, the lessons to be learned from the Hungarian electricity industry restructuring are not only vital for other economies in transition but are often universally applicable.