Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting

An unanticipated rise in the price level redistributes wealth from lenders to borrowers. Its size depends on the monetary policy regime, as inflation targeting (IT) and price-level targeting (PT) have different implications for the price-level path following price-level movements. The effects of an unexpected 1% price-level increase are measured and assessed under both regimes. Overall, the redistribution of wealth and the implied aggregate and welfare effects are larger under IT than they are under PT. The youngest, the poorest, and the government gain at the expense of the rest of the population and, when the government gain is given to households as lump-sum transfers, the effects on GDP are negative and long-lasting.     

Liquidity, redistribution, and the welfare cost of inflation

The long-run welfare costs of inflation are studied in a micro-founded model with trading frictions and costly liquidity management. By modelling the liquidity management decision, the model endogenizes the responses of velocity, output, the degree of market segmentation, and the distribution of money. Compared to the traditional estimates based on a representative agent model, the welfare costs of inflation are significantly smaller due to distributional effects of inflation. The welfare cost of increasing inflation from 0% to 10% is 0.62% of consumption for the US economy. Furthermore, the welfare cost is generally non-linear in the inflation rate.     

The creation of wealth

The paper is concerned with the existence of a consumption sequence that implies wealth to grow at a given rate. It is shown that under reasonable assumptions such a sequence exists and can be determined by solving a fixed-point problem.     

Firm value and seasoned equity issues: Price pressure,wealth redistribution,or negative information

Announcements of new equity issues have been seen to have a negative effect on stock prices. Potential explanations of this negative effect - the price-pressure, wealth-redistribution, and information-release hypotheses - imply different bond-price reactions to the announcements. By investigating bond-price behavior around the announcement of new equity issues this paper distinguishes the relative importance of these hypotheses. The evidence presented of a significant drop in bond prices is consistent with the information-release hypotheses.     

The wealth effects of shareholder-sponsored proposals

Shareholder-sponsored proposals represent direct attempts to improve the operating and governance performance of publicly held corporations. This study examines the different types of shareholder proposals to determine their impact on value. While some recent studies show positive wealth effects for small or specific samples associated with shareholder proposal announcements or no wealth effects at all, this study documents significant negative abnormal returns for a large sample of firms. The results of previous studies suggest that shareholder proposals are beneficial to shareholders, and this study shows that to be true for only a fraction of them. Although management opposes the overwhelming majority of shareholder proposals, there are rare instances in which they either support the proposal and negotiate a settlement or in which the proposal receives enough support at the annual meeting to pass. This study documents positive abnormal returns for these cases.     

The development of inflation accounting in Turkey

Turkey, as a developing country, suffered from high inflation rates for many years. However inflation accounting was not applied till the year 2003 because of some political reasons. The high rates of inflation heavily distorted the financial statements of the companies in Turkey. The companies tried to benefit from the incentives in the Turkish Tax Regulation negating the effect of inflation till the year 2003. At the beginning of 2004 inflation accounting was applied at last. The purpose of this study is to emphasize the effects of inflation on the companies in Turkey and what they did in order to protect from the distortions of inflation till the year 2003. Also the regulations of the Ministry of Finance and Capital Market Board considering inflation adjustment were examined and compared by illustrations.     

The impact of OBRA on shareholder wealth

Market-return data and a multivariate regression model are used to investigate the impact of the Omnibus Budget Reconciliation Act of 1987 (OBRA) on the wealth of shareholders of firms sponsoring overfunded and underfunded pension plans during the period surrounding the passage of OBRA. Assuming semistrong market efficiency, a reduction in the pension insurance effect associated with the passage of OBRA was hypothesized to have a negative impact on the security prices of all plan sponsors. In general, the market reacted unfavorably to sponsors of both overfunded and underfunded defined-benefit pension plans when OBRA was introduced. However, the market reaction varied as a function of the funding-level change during the period preceding passage of the Act. Firm-specific financial variables were also used in a stepwise regression analysis to investigate whether selected financial variables could explain negative abnormal returns observed during the legislative period. We found that earnings per share and the short-term debt-coverage ratio explained up to 19.4% of the negative abnormal returns for the underfunded sample. However, no significant explanatory variables were identified for the overfunded sample.     

The case for inflation stability

We evaluate the case for inflation stabilization in a New Keynesian (NNS) model that includes various frictions, capital accumulation and a variety of shocks. In such a model, price rigidity may provide the monetary authorities with an opportunity to improve upon the inefficient flexible price equilibrium via the suitable cyclical manipulation of real marginal costs. We find that such an opportunity is of limited value and that a strong case for perfect inflation stabilization remains. Policies that tolerate a small amount of inflation variability may outperform perfect inflation targeting when capital adjustment costs are low and the monetary distortion is substantial but only if prices are very flexible.     

中国输入型通胀特征明显

恰恰是由于美元的滥发,向中国注入了大量的流动性,导致中国财富的稀释,使得中国国内的成本推动型通胀压力日趋沉重。换句话讲,中国当前物价上升具有明显的输入型通胀特征。     

The optimal rate of inflation revisited

Inflation viewed as a tax on cash balances is investigated using the optimal commodity tax framework. The optimal inflation rate is shown to depend on the effect of changes in the rate of inflation on quantity demanded of ‘costly-to-produce’ goods. Even when other goods are taxed, it is not always optimal to have a positive tax on money, as Phelps and others have claimed. A zero tax or even a rate of deflation greater than the pre-tax rate of interest may be optimal.     

The term structure of inflation expectations

We use information in the term structure of survey-based forecasts of inflation to estimate a factor hidden in the nominal yield curve. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury real and nominal yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We establish that model-based inflation expectations are driven by inflation, output, and one latent factor. We find that this factor affects inflation expectations at all horizons but has almost no effect on the nominal yields; that is, the latent factor is hidden. We show that this hidden factor is not related to either current and past inflation or the standard set of macro variables studied in the literature. Consistent with the theoretical property of a hidden factor, our model outperforms a standard macro-finance model in its forecasting of inflation and yields.     

The change in information uncertainty and acquirer wealth losses

A large body of literature demonstrates that acquisitions are on average value destroying for the acquirer. We investigate whether the change in the acquirer??s information uncertainty contributes to acquirer wealth losses. Information uncertainty affects the discount rate (the cost of capital), which in turn influences stock price. Our results indicate that acquisitions lead to increases in information uncertainty, as proxied by analysts?? earnings forecast dispersion. We also find that the change in information uncertainty is negatively related to acquirer long-term stock performance, after controlling for the acquirer??s fundamentals. Taken together, this evidence is consistent with the conclusion that increases in information uncertainty resulting from acquisitions contribute to acquirer post-acquisition wealth losses     

The wealth effects of portfolio rebalancing in emerging equity markets

This paper analyzes the wealth effects of alternative portfolio rebalancing strategies for equity investments in nine emerging markets for the period from 1976 to 1998. The choice of rebalancing intervals has a large effect on wealth accumulation and the geometric mean return. The difference between no rebalancing and semi-annual rebalancing is 5.87 percentage points per year. Surprisingly, semi-annual rebalancing, which was optimal for this data set, was also 2.62 percentage points per year better than monthly rebalancing. Positive first- and second-degree autocorrelation among the monthly returns appears to account for the decrease in returns for rebalancing more frequently than semi-annually.     

The state of research on sovereign wealth funds

The new global economic and political environment brings new challenges to sovereign wealth funds (SWFs) and forces them to adopt new strategies to adapt to the environmental changes. This study is a sequel to Fotak, Gao, and Megginson (2017). We focus on the newly produced research on SWFs and confirm the impact of new environmental changes on SWFs' asset allocations and decision-making process. Recent studies on cross-border SWF investments show that SWFs are different from other private institutional investors although no evidence explicitly proves that SWFs have exerted political influence on recipient countries through their cross-border deals. SWFs are improving their transparency. However, the variations in transparency and institutionalization are attributed to the disparities in national culture, political regime, and internal political dynamics. We re-examine the long-term impact of SWF investments on target firms and industries and affirm the necessity to consider the heterogeneity among SWFs. We also survey the research investigating the government's motivations to establish new SWFs.     

The retirement wealth of the baby boom generation

The paper compares the well-being of the baby boom generation (ages 40-55) in 2001 with the same age group in 1983. I find little evidence that their relative position deteriorated over the period. By some indicators, this generation has seen an improvement. In terms of income, the 40-55 age group was at about the same relative position in 2001 as in 1983. In terms of conventional wealth, there was some slippage over the period. In terms of mean augmented wealth (net worth plus pension and Social Security wealth), their relative position improved somewhat but in terms of median augmented wealth there was again some slippage.     

关于危机后通货膨胀目标制有效性的探讨

20世纪90年代以来,通货膨胀目标制逐渐成为全球主流的货币政策框架选择。但在全球金融危机爆发后,国际经济金融环境的巨大变化对通胀目标制提出挑战,通胀目标制是否已经过时成为了当前全球货币政策框架研究的一个热点议题。文章以英国为例,揭示了危机以来通胀目标制实践所遇到的制约,阐述了对通胀目标制进行完善而不是放弃的理由,探讨了未来通胀目标制的调整方向以及中央银行会面临的相关挑战。     

The Friedman rule and inflation targeting

We use concepts from the financial economics discipline – and in particular the methods of continuous time finance – to develop a monetarist model under which the rate of inflation evolves in terms of a first-order mean reversion process based on a ‘white noise’ error structure. The Fokker–Planck (i.e. the Chapman–Kolmogorov) equation is then invoked to retrieve the steady-state (i.e. unconditional) probability distribution for the rate of inflation. Monthly data for the UK Consumer Price Index (CPI) covering the period from 1988 until 2012 are then used to estimate the parameters of the probability distribution for the UK inflation rate. The parameter estimates are compatible with the hypothesis that the UK inflation rate evolves in terms of a slightly skewed and highly leptokurtic probability distribution that encompasses non-convergent higher moments. We then determine the Hamilton–Jacobi–Bellman fundamental equation of optimality corresponding to a monetary policy loss function defined in terms of the squared difference between the targeted rate of inflation and the actual inflation rate. Optimising and then solving the Hamilton–Jacobi–Bellman equation shows that the optimal control for the rate of increase in the money supply will be a linear function of the difference between the current rate of inflation and the targeted inflation rate. The conditions under which the optimal control will lead to the Friedman rule are then determined. These conditions are used in conjunction with the Fokker–Planck equation and the mean reversion process describing the evolution of the inflation rate to determine the probability distribution for the inflation rate under the Friedman rule. This shows that whilst the empirically determined probability distribution for the UK inflation rate meets some of the conditions required for the application of the Friedman rule, it does not meet them all.     

The quest for prosperity without inflation

In recent years, activist monetary policy rules responding to inflation and the level of economic activity have been advanced as a means of achieving effective output stabilization without inflation. Advocates of such policies suggest that their flexibility may yield substantial stabilization benefits while avoiding the excesses of overzealous discretionary fine-tuning such as is thought to characterize the experience of the 1960s and 1970s. In this study I present evidence suggesting that these conclusions are misguided. Using an estimated model, I show that when informational limitations are properly accounted for, activist policies would not have averted the Great Inflation but instead would have resulted in worse macroeconomic performance than the actual historical experience. The problem can be attributed, in large part, to the counterproductive reliance of these policies on the output gap. The analysis suggests that the dismal economic outcomes of the Great Inflation may have resulted from an unfortunate pursuit of activist policies in the face of bad measurement, specifically, overoptimistic assessments of the output gap associated with the productivity slowdown of the late 1960s and early 1970s.     

The wealth effects of takeover bids regulation in the European Union

We investigate the wealth effects of the Takeover Bids Directive, enacted by the European Union (EU), on mergers and acquisitions. The directive aims at protecting target minority shareholders by restricting antitakeovers provisions and preventing managerial entrenchment. We test the regulation impact using a treatment sample of EU public acquisitions and a control sample from outside the EU. Our results suggest diverse effects of the regulation across treatment countries: acquirers from countries with better shareholder protection engage in more value-enhancing acquisitions postregulation that could otherwise be too costly. The regulation also increases the likelihood of firms becoming targets and raises market value.     

The effect of pre-emptive right amendments on shareholder wealth

Pre-emptive rights allow existing shareholders to purchase a new offering of shares before the general public. This paper investigates the effect on shareholder wealth of removing pre-emptive rights from corporate charters. Two hypotheses are constrasted: (1) Shareholder wealth maximization suggests that management uses this extra degree of freedom to pick the least cost method for raising new equity; hence, the amendment increases shareholder wealth. (2) Management welfare maximization holds that management will use the passage of the amendment to maximize their own welfare, sometimes to the detriment of shareholders; hence, the amendment decreases shareholder wealth. The evidence indicates that the amendment decreases shareholder wealth.