Ex ante CEO severance pay and risk-taking in the financial services sector

We examine 533 CEO severance contracts for financial services firms from 1997 to 2007 and find that ex ante severance pay is positively associated with risk-taking after controlling for the incentive effects provided by equity-based compensation. We report a positive causal relation between the amount of severance pay and risk-taking using popular market-based risk measures as well as the distance-to-default and the Z-score. We also find that severance pay encourages excessive risk-taking using metrics such as tail risk and asset quality. Our results are consistent with the risk-shifting argument and provide support for recent reforms on severance pay in the financial sector.     

Testing the transparency benefits of inflation targeting: Evidence from private sector forecasts

Using inflation forecast data for 11 IT adoption countries, IT adoption is found to promote convergence in forecast errors, suggesting that it enhances transparency. This result, which is subjected to several robustness checks and found to be robust, supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate.     

The Euro and inflation uncertainty in the European Monetary Union

This paper adopts a time-varying GARCH framework to estimate short-run and steady-state inflation uncertainty in 12 EMU countries, and then investigates their relationship with inflation. The effects of the Euro introduction in 1999 are examined by utilising a dummy variable. Tests for endogenously determined breaks are also employed. We find a considerable degree of heterogeneity across EMU countries in terms of average inflation, its degree of persistence, and both types of uncertainty, whilst the trend component of inflation is generally decreasing. Various breaks in the relationship between inflation and inflation uncertainty are found, frequently well before the Euro introduction.     

Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case

We study the short run response of daily stock prices on the Spanish market to the announcements of inflation news at an industrial level, deepening the potential explanatory factors of this response (risk-free interest rate, risk premium and growth expectations). We observe a positive and significant response of the stock returns in case of “bad news” (total inflation rate higher than expected one) in recession, and also in case of negative inflation surprises (“good news”) in non-economic recession. This behaviour is consistent with the evolution of the company dividend growth expectations, since we observe that the relationship between this theoretical component of the stock price and the unexpected inflation, to a large extent, seems to explain the observed behaviour.     

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.     

Openness, the sacrifice ratio, and inflation: Is there a puzzle?

The standard time-inconsistency-based explanation for the negative correlation between openness and inflation requires an inverse relationship between the sacrifice ratio and openness, but Daniels et al. (2005, Openness, central bank independence, and the sacrifice ratio. Journal of Money, Credit, and Banking 37 (2), 371–379.) have provided evidence that controlling for central bank independence reveals a positive relationship. This paper embeds the time-inconsistency approach within a model of a multisector, imperfectly competitive, open economy. In this setting, greater openness raises the sacrifice ratio but reduces the inflation bias. Thus, failure to observe an inverse relationship between openness and the sacrifice ratio does not necessarily imply that the time-inconsistency approach is irrelevant to understanding the openness–inflation relationship.     

Credit crunch in a small open economy

We construct an open-economy DSGE model with a banking sector to analyze the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland-a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by approximately 1.5 percent.     

Capital market behavior and operational announcements of layoffs,operation closings,and pay cuts

This article examines the relation between stock returns and a set of operating decisions: layoffs, operation closings, and pay cuts. We find evidence that cost-cutting measures occur after significant stock price declines. Announcements of layoffs and temporary operation closings are associated with negative returns, while permanent operation closings do not have significant announcement effects.     

Owner-occupied homes,income-producing properties,and REITs as inflation hedges: Empirical findings

New evidence on the correlation patterns of various real estate returns with inflation is presented. Returns on a wide array of real estate, nonresidential as well as residential, are investigated. Stock and bond returns are also analyzed for comparison purposes. Extensive heterogeneity is found in real estate return correlations with inflation. Nonresidential property returns are most strongly positively correlated with inflation, although the appreciation in owner-occupied homes is also positively associated with inflation. However, REIT returns tend to be strongly negatively correlated with inflation. In this respect, they look more like traditional stocks and bonds than any other type of real estate. Finally, new evidence on return correlations with energy prices is also presented. Nonresidential real estate performs best here, too, although no real estate asset fully compensates investors for adverse energy price shocks.     

应对危机的投入政策与我国的“三农”问题

为了应对国际金融危机,我国政府实施了积极财政政策和适度宽松的货币政策,本文在此背景下对我国三农问题进行了分析,认为要解决农民就业、城乡收入差距扩大等矛盾,政府需改变长期投资结构,加强农村社会保障体系建设,发展综合性的农村经济,提高在地化的非农就业,最终通过保持农村的稳定来维护国家经济安全和社会稳定。     

Optimal factor and commodity taxation in a small open economy

A two-sector trade model with specific factors and perfect international capital mobility is used to analyze the optimal mix of factor and commodity taxation in a small open economy that faces domestic or international constraints on its tax instruments. In the unconstrained benchmark case, the small country will tax specific factors and domestic consumption but chooses zero tax rates for a selective production tax (i.e., an origin-based commodity tax) and a source-based tax on capital income. When commodity taxation must follow a combination of origin and destination principles, then this mixed commodity tax rate will be positive and its production effects are partly compensated in the optimum by a capital subsidy. These international restrictions interact with domestic constraints when rents accruing to fixed factors cannot be taxed by a separate instrument, and a positive tax rate on capital serves as an indirect way of rent taxation.     

Inventories and optimal monetary policy in a small open economy

We study how inventory investment affects the design of optimal monetary policy in a New Keynesian small open economy model. We find that under producer currency pricing, when the intratemporal elasticity of substitution is smaller than 1, optimal monetary policy in our model with inventories is similar to a standard model without inventories. However, when the intratemporal elasticity of substitution is larger than 1, inventory investment increases the importance of nominal exchange rate stabilization relative to a standard model without inventories. The importance of nominal exchange rate stabilization increases with the intratemporal elasticity of substitution.     

Financial integration and business cycles in a small open economy

The purpose of this study is to examine a dynamic, stochastic, general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy. The existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy. Moreover, there is uncertainty involved in the production process which leads to collateralized borrowing by firms and, therefore, has to be taken into account in the design of the loan contracts between firms and financial intermediaries. It is shown that increasing financial integration amplifies the effect of a positive, temporary monetary shock on output, consumption, investment, labor demand and loans; whereas it has barely any implication for the impact of a positive, temporary technology shock on the economy.     

Anticipated foreign military threat, arms accumulation, and the current account in a small open economy

This paper examines the effects of an anticipated foreign military threat on consumption, the home weapons stock, and net foreign asset position in a small open economy. If the utility function is separable between butter and guns, the economy decreases both butter and guns when the news arrives, accumulates foreign assets prior to the foreign threat realization, and increases guns as the foreign threat realizes. If the utility function is nonseparable between butter and guns, the economy may have two dynamic responses. The first is similar to the separable case, except that consumption exhibits a discrete jump when the foreign threat realizes. The second is that the economy increases both butter and guns on impact, decumulates foreign assets prior to the foreign threat implementation, but either increases or decreases guns as the foreign threat realizes.     

The spirit of capitalism, asset pricing and growth in a small open economy

Conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics. This may be due to preference specifications in conventional models. In this paper, we consider preferences with the “spirit of capitalism” (the desire to accumulate wealth as a way of acquiring status). We analyze a number of potential effects of international catching-up and the spirit of capitalism on savings, growth, portfolio allocation and asset pricing. Moreover, we obtain a multi-factor Capital Asset Pricing Model (CAPM). Our results show that status concerns have non-trivial effects on savings, growth, portfolio allocation, asset prices and the foreign exchange risk premium.     

Unemployment and debt dynamics in a highly indebted small open economy

The paper analyzes the dynamic effects of a total factor productivity shock and an interest rate risk premium shock in a highly indebted open economy. In contrast to the standard open economy framework, search unemployment and wage bargaining are introduced. We find that a negative total factor productivity shock primarily has effects on the economy's production side and on welfare, but not on its stock of foreign debt and the country specific risk premium, and large part of the adjustment happens in the short-run. In contrast, a pure increase in the country specific risk premium causes substantial dynamics and a considerable reduction in foreign debt, allowing higher consumption in the long run and creating an intertemporal welfare gain, even though unemployment increases strongly in the short-run. A 50% haircut of foreign debt significantly reduces the initial response of the unemployment rate. In case of a temporary productivity shock, sticky wages imply smaller employment, but generate higher welfare than flexible wages.     

Consumption-smoothing in a small, cyclically volatile open economy: Evidence from New Zealand

New Zealand's current account of the balance of payments has been persistently in deficit since the early 1970s and increased markedly during the late 1990s. Should this cause significant concern, for such a small, cyclically volatile open economy? Our results show that VAR1 and VAR2 forms of the traditional intertemporal consumption-smoothing model reflect very satisfactorily the volatile directions and turning points observed, that the data are not consistent with consumption-tilting to the present, and that New Zealand has had considerable success to date in consumption-smoothing around its average 5% current account deficit. Perhaps more unexpectedly, a Bergin–Sheffrin-type model of a small open economy with variable interest rates and exchange rates has not performed noticeably better.     

Bank pay caps,bank risk,and macroprudential regulation

This paper studies the consequences of a regulatory pay cap in proportion to assets on bank risk, bank value, and bank asset allocations. The cap is shown to lower banks’ risk and raise banks’ values by acting against a competitive externality in the labour market. The risk reduction is achieved without the possibility of reduced lending from a Tier 1 increase. The cap encourages diversification and reduces the need a bank has to focus on a limited number of asset classes. The cap can be used for Macroprudential Regulation to encourage banks to move resources away from wholesale banking to the retail banking sector. Such an intervention would be targeted: in 2009 a 20% reduction in remuneration would have been equivalent to more than 150 basis points of extra Tier 1 for UBS, for example.     

The European economy at the cross roads: Structural reforms, fiscal constraints, and the Lisbon Agenda

This paper studies the incentives to sustain and extend a monetary union under alternative assumptions about the extent of market reform within the union and accession countries. Lack of labour mobility, or wage/price flexibility, or fiscal reform, brings costs for both new entrants and in the existing union. Countries will therefore want a union where there has been sufficient reform, and also one where markets are more flexible than their own. But existing members will want the same properties of their partners. Fiscal restrictions may exaggerate this incentive mismatch and could therefore delay the necessary reforms. Similarly, too large costs up front may also delay those reforms.