The choice of numeraire,capital intensity uniqueness,and the reswiritching of techniques

This paper examines the condition for capital-intensity uniqueness and the phenomenon of reswitching of techniques in a two-sector linear capital model when the prices and wages are measured in terms of the value of net output per man (the Sraffa numeraire). It is shown that when the Sraffa numeraire is used, a) the capital-intensity condition is not sufficient to ensure a unique relationship between the value of capital per man and the rate of profit; and b) reswitching of techniques is possible even if there is only one capital good in the system. The results arise only from the interaction between the price and composition effects in the model using the Sraffa numeraire.     

The Hicks‐Malinvaud average period of production and ‘marginal productivity’: A critical assessment

Abstract

Malinvaud took up the concept of the average period of production introduced by Hicks in Value and Capital and then Capital and Time, in an article of 2003 celebrating Wicksell's contribution to the theory of capital, where he observed that once techniques are ranked according to the average period for a given initial rate of interest, a rise in the rate of interest entails the use of a technique with a shorter average period. After a brief reconstruction of Malinvaud's argument, it is shown that the result is far less encouraging for neoclassical theory than it might seem. The most important problem is not the fact that change in the interest rate affects the average period of production associated with a technique, despite the concern this aroused in Hicks and Malinvaud, but rather that it affects the ranking of techniques. An example with two techniques is used to show that a rise in the rate of interest entails the use of a technique with a shorter average period even in the case of reswitching simply because the ranking of techniques is inverted at the two switch points.     

The puzzling dual of the uncovered interest parity puzzle evidence from Pacific Rim capital flows

International financial arbitrage should prevent the existence of non-zero expected returns when borrowing in one currency and lending in another implying that interest differentials should predict exchange rate movements. The failure of interest differentials to act as an unbiased predictor of future exchange rate movements is referred to as the uncovered interest parity puzzle. This paper explores whether capital flows respond to these interest differentials in the context of a model in which dynamic adjustment costs keep capital from flowing immediately across borders. The paper finds little or even a negative relationship between expected excess returns on exchange rate adjusted U.S. money market rates (relative to domestic interest rates) and capital flows to the U.S. from Australia, Canada, Japan or Korea.     

Demographics and real interest rates: Inspecting the mechanism

The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity—or expectations thereof—puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.     

CREDIT UNION MEMBER GROUP DOMINATION UNDER HIGH INTEREST RATE ENVIRONMENTS

Theoretical models for credit unions advocate that such organizations should pursue a neutral orientation in order to accommodate the conflicting interests of borrower members, who seek lower interest rates, and saver members, who look for higher returns on their savings. However, there is a lack of empirical support for such neutrality in high interest rate environments. This is because under such conditions, credit unions could accomplish their social mission by providing microcredit at a lower interest rate to local communities, thus becoming more borrower‐dominated. This paper investigates the member group domination of credit unions in Brazil, a country known for its high interest rates, and finds that the majority of credit unions (78.34%) are borrower‐dominated. This behavior becomes more pronounced when local interest rates rise, contradicting the predictions of neutrality‐seeking models. A percentage increase in the interest rate, increases about 5 times the likelihood of a CU becoming extreme borrower‐dominated. Besides interest rates, age, lower size, capital and lower efficiency of the credit unions are the main determinants of borrower domination.     

C.E.S. production functions in the light of the Cambridge critique

The Cambridge debate of the 1960s showed conclusively that the aggregation of capital, so as to obtain a surrogate production function according to Samuelson, is not possible in general, with critical implications also for other variants of neoclassical theory. The framework for the demonstration is that of linear activity analysis.There is an individual wage curve in function of the rate of profit for each technique. If these individual wage curves were straight lines, their envelope would define a wage curve resulting from all techniques, from which a surrogate production function could be derived, but all wage curves are straight only, if there is only one industry. And if wage curves are not straight, phenomena such as reswitching show that essential neoclassical hypotheses need not hold. A recent empirical investigation by Han and Schefold has found one empirical example for reswitching and several for reverse capital deepening.A rigorous derivation of surrogate production functions thus is ruled out also on empirical grounds, but the paradoxes seem not to be as frequent as the critics once thought, so that the question arises whether approximate surrogate production functions could be derived, with individual wage curves which would be sufficiently linear to construct approximate surrogate production functions, indicating a relationship between the intensity of capital and output per head which would be sufficiently precise to work with.The paper is part of a wider investigation, in which conditions for the existence of quasi-linear wage curves and the possibility of the construction of approximate surrogate production functions are given. The emphasis here is on the special hypotheses needed to obtain C.E.S. production functions.     

A principal components analysis of market interest rates in The Netherlands, 1962–1970

This paper reports about a principal components analysis of 20 Dutch market interest rates. We found that on the money market 96% of total variation is explained by the first principal component and 2% by the second one. On the capital market these percentages are 90 and 8.The main conclusions are: (1) the first component identifies the true interest rate, while the second and third component are related to risk and the rate of inflation. (2) The textbook distinction between money and capital markets does not show up. (3) The use of many interest rates in macro models has only a limited economic meaning.     

REGULATION OF BANK INTEREST RATE RISK

This paper argues that the direct control approach to regulating bank interest rate risk is not the most effective one. First, a bank's interest rate exposure cannot be summarised in a single measure. Rather there are a number of such measures, depending on the target adopted, and it is not possible to determine all of them simultaneously. Basing a capital requirement on any one of these measures can have ‘unintended consequences' for the others. Secondly, changes in interest rates have a range of complex effects on banks and these effects cannot be incorporated in any single numerical measure of interest rate exposure. The paper also raises doubts about the usefulness of disclosure requirements as a tool of prudential regulation of bank interest rate risk management. The preferred approach is a supervisory regime which ensures that banks have in place an effective system for managing their own interest rate exposures. One aspect of this supervision must be to ensure that banks are using simulation analysis to measure the effect on them of changes in interest rates.     

Feldstein–Horioka puzzles

The high correlation between national saving and investment rates in advanced economies—the Feldstein–Horioka puzzle—has been referred to as the “mother of all puzzles.” Perhaps more puzzling is that for emerging economies saving–investment correlations tend to be significantly lower, though still positive. This deepens the Feldstein–Horioka puzzle because the mobility of capital is generally believed to be much lower in emerging economies than in advanced economies, and a country with less mobile capital should have a tighter relationship between local saving and investment rates. This paper develops a DSGE model that, without resorting to any real or financial friction, simultaneously explains these two aspects of the Feldstein–Horioka puzzle: positive saving–investment correlations in both advanced and emerging economies and significantly lower saving–investment correlations in emerging economies than in advanced economies. The main features of the model include long-run risk, an endogenous world interest rate, and cross-correlations of national and global shocks. The findings hold for both quarterly time series and long-run averages.     

A Comment on ‘The Measurement of Prices of Production’ by Peter Flaschel,Reiner Franke & Roberto Veneziani

After giving a summary of the Cambridge debate, the comment criticizes the proposal by Flaschel, Franke and Veneziani to base the classical approach on systems of production with unequal rates of profit both theoretically and on empirical grounds: The classical gravitation of market prices towards normal prices is hard to defend, if there are persistent differentials of profit rates, but the profit rate differentials in the paper are not even stable. The comment further defends the idea of representing states of knowledge about technology by means of input-ouput tables against objections regarding the transferability of methods between countries and discusses alternative approaches to the treatment of fixed capital. It is shown that the data used by the authors for capital stocks are not supported by the data of the German Statistical Office. I agree with the authors in the most essential point, however: Contrary to the position taken e.g. by Joan Robinson, we all believe that the problems of capital theory raised in the Cambridge debate must be analyzed not only in abstract theory but also at the applied level. We all were surprised to find that empirical wage curves tend to be close to straight lines so that double intersections of such wage curves, hence reswitching and reverse capital deepening, must be rare. This phenomenon needs to be explained; a possible explanation can be derived from the random nature of the input-output matrices, and, so far, no other explanation has been proposed.     

商业银行利率市场化风险分析——以5家股份制商业银行为例

利率升高和利率作不规则的波动是商业银行利率市场化的主要风险。本文用实证方法,选取了我国5家股份制商业银行,从资本充足率、资产负债率、利息收入占营业收入比率3个关键指标来分析商业银行的利率风险。分析表明,我国的商业银行处于高风险状态。本文最后指出了利率风险的防范和规避的途径。     

Tax Evasion and the Time Consistency of the Government's Income Tax Policy

It is shown that it is not necessarily optimal for the government to tax capital income at a high rate even when capital is in fixed supply because the supply of capital for tax purposes may be elastic if capital income tax evasion occurs. An example is given where the wage tax rate is positive and greater than the interest income tax rate even though capital is in fixed supply. Conditions are also derived under which the capital income tax rate is lower in the closed-loop policy game, where capital is fixed, than in the open-loop game, where it is not.
JEL Classification Numbers: E61, H26.     

Macroeconomic adjustment with managed exchange rates and capital controls: Some lessons from China

This paper examines the performance of capital controls and exchange-rate management when the economy finds itself in dark corners. These are times when the real sector experiences a sequence of prolonged negative shocks from world demand, while the central bank faces low world interest rates on its foreign-exchange reserve holdings. We examine two regimes, one of a fixed exchange rate with strong capital controls and another with a more open capital account with a managed exchange rate. We show how this model replicates recent experiences of China as it moved from a relatively fixed exchange rate regime with strong capital controls to a more flexible exchange rate regime with a more open capital account. Our results show that capital-account liberalization should be accompanied by domestic price liberalization to avoid large losses in foreign exchange reserve and jumps in unemployment during dark corners in the more open regime.     

Macroeconomic stability and the optimal degree of capital mobility

This paper examines the relationship between capital mobility and the short-term stability of employment and of prices. It looks at the optimal degree of capital mobility to stabilize income. The sources of instability considered are fluctuations of domestic expenditure or absorption, net exports and international interest rate. In this latter case, loans at fixed nominal interest rates and floating rates are analyzed. Fixed and flexible exchange rate regimes are studied.     

Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?

Abstract.  This paper provides a selective overview of puzzles in exchange rate economics. We begin with the forward bias puzzle: high interest rate currencies appreciate when one might guess that investors would demand higher interest rates on currencies expected to fall in value. We then analyse the purchasing power parity puzzle: the real exchange rate displays no (strong) reversion to a stable long‐run equilibrium level. Finally, we cover the exchange rate disconnect puzzle: the lack of a link between the nominal exchange rate and economic fundamentals. For each puzzle, we critically review the literature and speculate on potential solutions. JEL classification: F31     

Is capital a collusion device?

Summary. We examine how irreversible capital reduces the possibility of a duopoly to sustain implicit collusion by grim strategies, when the product is homogenous and firms compete in quantities. Compared with the case of reversible capital, there are two countervailing effects: Deviation from an existing collusion is less attractive, because capital once installed causes costs forever. But the punishment will also be less severe due to the high capacity the deviating firm can build before punishment starts. The last effect dominates, meaning that the commitment value of capital is negative for all firms. If capital is irreversible, collusion breaks down for realistic magnitudes of interest rates. Received: April 30, 1999; revised version: November 30, 2001     

The Choice of Technique with Multiple and Complex Interest Rates

This article clarifies the relationships between internal rates of return (IRR), net present value (NPV), and the analysis of the choice of technique in models of production analyzed during the Cambridge capital controversy. Multiple and possibly complex roots of polynomial equations defining the IRR are considered. An algorithm, using these multiple roots to calculate the NPV, justifies the traditional analysis of reswitching.     

Interest Rates,Local Housing Markets and House Price Over‐reactions

Understanding the effects of interest rates on city‐specific house price to household income ratios is important for managing local housing markets. In particular, there is concern that keeping interest rates at sufficiently low levels can distort the relationship between local house prices and fundamentals. We use house price to income ratios across capital cities in Australia to investigate this issue and show that there is a national interest rate ‘transition’ point below which housing dynamics can become unstable. This result lends support to the presence of a duration‐dependent threshold effect (hitherto mainly explored in theoretical models).     

Financial Integration and EMU’s External Imbalances in a Two-Country OLG Model

The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations’ model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge.     

动态无效率产生的原因解析——对David Romer《高级宏观经济学》教科书观点的修正

美国经济学家David Romer通过一个特例说明有可能存在动态无效率的现象,而没有深究为什么会存在这种现象,这种做法在美国高级宏观经济学教科书中一脉相承。通过对拉姆齐模型和世代交叠模型的比较,本研究发现,动态无效率的现象源于世代交叠模型两期寿命的假定,导致实际利率的变化缺少了约束,会低于持平投资的增长率。本研究指出:动态无效率不是来源于资本动态学方程的特例,而是来源于模型的期限结构,内生于模型的结构。萨缪尔森世代交叠模型可以证明本研究的结论。