Theory and Estimation of the Mortgage Payment Protection Insurance Decision

This paper examines the decision to take out mortgage payment protection insurance (MPPI) in the UK. The paper explains how MPPI has increased in importance over the last decade due to the government stating that Income Support for Mortgage Interest (ISMI) has crowded–out MPPI. A theoretical model of the mortgage protection insurance decision is developed which takes account of the welfare system. The model is estimated using logit analysis on 1995 Glasgow and Bristol data. Elasticities of the probability of take–up with respect to a variety of arguments are calculated, including the level of ISMI. The estimated elasticity with respect to ISMI is found to be very low, which suggests that the crowding–out motivation for the restructuring of Income Support for Mortgage Interest in October 1995 had little support in the data available at the time of the policy decision, and explains the continued low take–up rates since the 1995 restructuring.     

Interest rate determination in a high inflation economy

This study examines the importance of the liquidity effect, inflation uncertainty, and supply shocks in determining interest rates in a high inflation economy (Israel). The results show that a significant liquidity effect exists when it is measured by a broad definition of money. The vanishing liquidity effect, found in studies of the U.S., may be the result of the use of M, to measure it. There is some support for the hypothesis that the strength of the liquidity effect is negatively related to the level of inflation. Interest rates are negatively (and significantly) affected by inflation uncertainty, and positively affected by supply shocks.     

Interest rate pass through and asymmetries in retail deposit and lending rates: An analysis using data from Colombian banks

Using a sample of Colombian banks, we examine retail interest rate adjustment in response to changes in wholesale interest rates. Interest rate pass through running from wholesale to retail rates is found to be both partial and heterogeneous across banks. This suggests that the effectiveness of monetary policy is limited. Further investigation reveals that the behaviour of retail deposit rates appears consistent with collusive behaviour between banks insofar as interest rates are more rapidly adjusted downwards than upwards. In the case of retail lending rates, it appears that banks more rapidly reduce than increase rates. This suggests that expansionary monetary policy in Colombia may be relatively more effective than contractionary policy.     

The impact of federal funds target changes on interest rate volatility

This paper empirically investigates the 1-day response of interest rate volatility to a federal funds target rate change over the period 1989–2003. Federal funds futures data are used to distinguish between anticipated and unanticipated changes in the funds rate target. Interest rate volatility is modeled as an EGARCH process. The volatility response to an unanticipated Fed policy action is relatively large in size and highly significant for short-term interest rates. However, interest rates at long maturities are found to be responsive to target rate changes, even if they are anticipated, when estimations take into account of structural change in association with the Fed's policy disclosure beginning in 1994, as well as asymmetrical effects between monetary easing and tightening.     

The long-run uncovered interest rate parity in view of a trading strategy

Uncovered Interest Rate Parity (UIP) states that bonds in different denomination should produce the same returns if the maturities of the bonds are the same. Given this, if a foreign bond produces a lower holding period return than a home bond of the same maturity, for their remaining lives the same foreign bond ought to produce a return higher than the home bond. A test is designed according to this relationship. With 1 to 6 year interest rate data of U.S., Britain and Germany from 1979 to 2005, our test shows that this relationship is more reliable for 6-year interest rates than the shorter rates in general. This result lends support to the long-run UIP. A trading strategy is developed by utilizing this idea. We show that positive returns can be achieved by the strategy for bonds of longer horizons. This result also serves as indirect evidence of the long-run UIP.     

The firm demand for liquid assets in an inflationary environment

Measures of inflation and the price level are added to the standard model of liquid asset demand and estimated with cross-section data on Brazilian manufacturing firms over a four-year period characterized by substantial inflation (annual rates of 19, 23, 34 and 35%). Results indicate that economies of scale exist in a model that is stable over time. Interest rates have a strong and elastic impact on liquid asset demand when inflation is explicitly controlled for although this result is not consistent across all subsets of data used. The usual assumption of a unitary price level elasticity of liquid asset demand is rejected and firms appear to conserve on liquid asset holdings as the rate of inflation increases suggesting more careful management of payments flows. Some of these findings contradict those of Ungar and Zilberfarb (1980). There are also some difference in behaviour across ownership groups: Brazilian firms do not exhibit economies of scale while multinationals do; and Brazilian firms adjust actual to desired balances faster than multinational firms.     

The informational effects of competition and collusion in legislative politics

We use a mechanism design approach to study the organization of interest groups in an informational model of lobbying. Interest groups influence the legislature only by communicating private information on their preferences and not by means of monetary transfers. Interest groups have private information on their ideal points in a one-dimensional policy space and may either compete or adopt more collusive behaviors. Optimal policies result from a trade-off between imposing rules which are non-responsive to the groups' preferences and flexibility that pleases groups better. Within a strong coalition, interest groups credibly share information which facilitates communication of their joint interests, helps screening by the legislature and induces flexible policies responsive to the groups' joint interests (an informativeness effect). Competing interest groups better transmit information on their individual preferences (a screening effect). The socially and privately optimal organization of lobbying favors competition between groups only when their preferences are not too congruent with those of the legislature. With more congruence, a strong coalition is preferred. Finally, within a weak coalition, interest groups must design incentive compatible collusive mechanisms to share information. Such weak coalitions are always inefficient.     

News and the exchange rate revisited

This paper provides a theoretical framework to explain the increasing impact on the exchange rate of unanticipated money growth, with a stable short-term interest rate, and rising long-term rates. The assumptions of Purchasing Power Parity and Uncovered Interest Rate parity are relaxed. The appreciation of the currency is shown to be a direct result of the expected increase of future interest rates. A discussion is offered on the precise definition of the "surprise," under alternative assumptions. Heterogeneity of agents as regards exchange rate expectations, and the effect of long-term capital investments are also taken into account. It is shown that the surprise may have lagged effects on the exchange rate, and that its sign depends on the horizon of the portfolio investments (short or long). This paper has benefited from the comments of the participants at the 1996 International Atlantic Economic Conference in Paris. Financial support from the Instituto Valenciano de Investigaciones Económicas and the DGCYT under project PB94–1502 is acknowledged.     

Exchange rate volatility and the demand for money in the U.S.

This paper examines the effect of changes in the level and volatility of exchange rates on the demand for money. It hypothesizes that exchange rate volatility exerts a negative influence on money demand separate from the effect of the level of exchange rates. Using U.S. data covering the period from 1974.1 to 1990.4, it is found that, regardless of whether the adjustment process is modeled as an error-correction or a partial-adjustment model, exchange rate volatility is negatively related to the demand for real M2 balances. This relationship is found to be more pronounced when exchange rates are expressed in real terms. The results imply that money demand responds to both the volatility of domestic prices relative to foreign prices and to the volatility of nominal exchange rates. Little evidence is found in support of the hypothesis that the level of exchange rates exerts a significant influence on money demand.     

Does decrease in copying cost support copyright term extension?

Copyright duration has been or is being extended in many countries. Technological and demographical changes were cited by a US Senate report to argue for US copyright term extension. This paper analyzes the validity of the arguments. Simulation of a model of the information product market indicates that a decrease in copying cost of information products due to digital technologies calls for a reduction of copyright duration. Partial support is found for the argument that longer life expectancy and delayed child-bearing may support copyright term extension. Furthermore, an increase in demand for information products is found to call for reduction in copyright duration.     

The comovement between exchange rates and stock prices in the Asian emerging markets

This study investigates the comovement between exchange rates and stock prices in the Asian emerging markets. The sample covers major institutional changes, such as market liberalization and financial crises, so as to examine how the short-term and long-term relations change after such events. The autoregressive distributed lag (ARDL) model proposed by Pesaran et al. (2001) is adopted, which allows us to deal with structural breaks easily, and to handle data that have integrals of different orders. Interest rates and foreign reserves are also included in the analysis to reduce potential omitted variable bias. My empirical results suggest that the comovement between exchange rates and stock prices becomes stronger during crisis periods, consistent with contagion or spillover between asset prices, when compared with tranquil periods. Furthermore, most of the spillovers during crisis periods can be attributed to the channel running from stock price shocks to the exchange rate, suggesting that governments should stimulate economic growth and stock markets to attract capital inflow, thereby preventing a currency crisis. However, the industry causality analysis shows the comovement is not stronger for export-oriented industries for all periods, such as industrials and technology industries, thus implying that comovement between exchange rates and stock prices in the Asian emerging markets is generally driven by capital account balance rather than that of trade.     

Australian monetary growth and short-term nominal interest rates: an interest parity efficient markets approach

The relationship between monetary growth and nominal interest rates continues to attract considerable attention in the literature. Mishkin (1982) has found that, by explicitly imposing market efficiency in an interest rate model for the US, empirical analysis does not support the ‘Keynesian’ proposition that increases in monetary growth are associated with reductions in short-term rates. In this paper a similar theoretical structure is used but, unlike Mishkin, explicit account is taken of the fact that Australia's capital market is closely integrated with international money markets. Incorporating this into the interest rate model indicates there is some empirical support for the ‘Keynesian’ proposition in the Australian case. The analytical model also incorporates a measure of interest rate volatility to account for the risk premium present in the forward rate for 90 day bank bills.     

高管薪酬管制分析——基于多任务委托代理视角

股东和高管之间存在利益冲突,多任务委托代理模型分析表明,高管薪酬决定机制存在激励过度的内在冲动,高管薪酬管制不仅存在合理性,实践中也非常必要,政府可以通过强化高管薪酬股东决策权、细化高管薪酬信患披露制度及建立奖金回追制度等措施来管制.     

INTERNATIONAL BUSINESS CYCLES IN EMERGING MARKETS

I document cyclical behavior of real exchange rates (RERs) in emerging and developed economies: stronger RER procyclicality coincides with larger relative volatility of consumption and more countercyclical trade balance. I then reevaluate the sources of fluctuations in emerging economies using an international business cycle model estimated to match the behavior of the RERs. Interest rate shocks, without any frictions, account for most of output fluctuations. This result is driven by imperfect substitution between domestic and foreign goods, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption.     

The effects of zero interest rate commitment in Japan

This article examines the effectiveness of the Bank of Japan's Zero Interest Rate Commitment Policy (ZIRCP). Using the Exponential Autoregressive Conditional Heteroskedasticity model, we present an empirical analysis of the volatility of return on Japanese interest rates for the short-, medium-, long- and super long-term. We find that each interest rate is affected by the ZIRCP. However, the ZIRCP stabilizes the daily change for only the super long-term interest rate. This suggests that the ZIRCP effect includes the decrease in interest rate and the reduction in super long-term variability.     

Optimal credit rationing in not‐for‐profit financial institutions*

We examine the dynamic optimization problem for not‐for‐profit financial institutions (NFPs) that maximize consumer surplus, not profits. We characterize the optimal dynamic policy and find that it involves credit rationing. Interest rates set by mature NFPs will typically be more favorable to customers than market rates, as any surplus is distributed in the form of interest rate subsidies, with credit rationing being required to prevent these subsidies from distorting loan volumes from their optimal levels. Rationing overcomes a fundamental problem in NFPs; it allows them to distribute the surplus without distorting the volume of activity from the efficient level.     

Coal gasification: An economic evaluation

Political interest in developing the capability to produce gaseous fuel from coal in the United States has been cyclical in nature, depending primarily upon the security of the international market for oil and public attitudes toward nuclear power. Interest in coal gasification technology by private investors, however, depends primarily on the economic and technological considerations analyzed in this paper. A cost forecasting model is developed with the capability to take into account future economic and technological uncertainties associated with producing high BTU gas (a substitute for natural gas) from coal. The cost forecasting model incorporates probabilistic information on key economic and technological parameters subject to future uncertainty and simulates, by Monte Carlo methods, the costs which private investors would incur over the life of a commercial size coal gasification plant. The results suggest it is highly unlikely that the coal gasification process could produce high BTU gas more cheaply than the price at which natural gas is likely to be available.The cost forecasting model is also modified to compare the cost per kilowatt–hour of generated electricity when fueling a 1,000 Mw power plant with oil versus high BTU gas from coal. Again, based upon the costs to private investors, the simulation results indicate a very low probability that high BTU gas from coal would prove the least costly fuel for generating electricity.The implied economic infeasibility for private investment in coal gasification does not necessarily provide a basis for public policy to abandon the technology. Public policy recommendations must consider social costs as well as private costs. Possibly the greatest social cost associated with abandoning coal gasification is the risk of a significant energy supply interruption. A diversified national energy policy including coal gasification may in fact be less costly if relevant social costs are included in the calculations. Results from the cost forecasting model indicate the size and type of public subsidies that may be necessary to support a diversified energy industry which would include coal gasification.     

Modes of foreign bank entry and effects on lending rates: Theory and evidence

Policy makers who decide to liberalize foreign bank entry frequently put limitations on the mode of entry. We study how different entry modes affect the lending rates of foreign and domestic banks. In our model, the mode of entry determines whether a foreign bank inherits a customer base. This, in turn, affects how information is distributed between foreign and domestic banks. We show that this distribution of information about incumbent customers leads to stronger competition if foreign entry occurs through a greenfield investment. As a result, domestic bank lending rates are lower after greenfield entry. We find empirical support for this prediction for a sample of banks from 10 Eastern European countries for the period 1995–2003.     

INTEREST RATES, RATE SPREADS, AND ECONOMIC ACTIVITY

Interest rates and the spreads between interest rates are widely regarded as useful indicators of the future level of economic activity. This paper shows that when these series are divided into (i) an ordinary time series process and (ii) the effects of extraordinary disturbances, only the extraordinary disturbances predict economic activity. These disturbances are associated with periods of monetary policy intervention. Most of the predictive power is in contractionary disturbances that have persistent effects over time. The results imply that the predictive power of interest rates comes primarily from periods of contractionary monetary policy and is not due to ordinary movements in interest rates.     

Don't shoot yourself in the foot! A (real-effort task) experiment on income redistribution and voting

This paper reports results from a laboratory experiment that investigates the Meltzer–Richard model of equilibrium tax rates in which individuals are either low or high skilled workers and face a real-effort task that includes leisure at the work place. We find that a large proportion of low-skilled workers vote for the lowest tax rate (the one that gives them the lowest payoff), especially when the alternative tax rate is very high. However, this proportion is significantly reduced in treatments in which the subjects are given extra information about how the tax operates in redistributing income. This result suggests that the lack of information about the role of taxes in income redistribution may be an important factor in explaining the counter-intuitive voting behavior of low-income voters over income redistribution. We also find some support that the prospect of upward mobility and the belief in the negative effect of taxes on productivity make low-income voters support low tax rates, especially when the alternative tax rate is very high.