Are MMMFs money?

Conclusion In the last twenty years, continual financial innovation has led to the increased use of MMMFs as a substitute for checkable deposits. While many technical considerations suggest that it is inappropriate to list MMMFs as money, traditional Austrian thought has emphasized money’s subjective aspects: money is what people think it is. Since the public increasingly uses MMMFs as money substitutes, they are money in all practical respects. Every technical consideration that would restrict the use of MMMFs as a type of money thus crashes against the rocks of practical, everyday experience. While nonbank financial intermediaries can expand this type of money substitute, the Federal Reserve must still provide initial credit for any multiplication to take place. These nonbanks are even more difficult for the Fed to control, for they face no reserve requirements. But, on the other hand, there are more opportunities for leakage from the system, thereby limiting potential credit expansion. Nonetheless, this is an aspect of money that is becoming increasingly important. And if, as seems likely, MMMF expansion stimulates different sectors of the economy than the banking system generally, we should expect to see monetary inflation manifest itself in different ways than previous inflations. The views expressed in this article are those of the author and do not reflect the official policy or position of the United States Air Force, the Department of Defense, or the U.S. Government. The author thanks Bryan Caplan for crucial insights on the topic as well as Pete Boettke and an anonymous referee for specific comments. As usual, all remaining mistakes are his.     

Reversible Jump Markov Chain Monte Carlo Method for Parameter Reduction in Claims Reserving

Abstract

We present an application of the reversible jump Markov chain Monte Carlo (RJMCMC) method to the important problem of setting claims reserves in general insurance business for the outstanding loss liabilities. A measure of the uncertainty in these claims reserves estimates is also needed for solvency purposes. The RJMCMC method described in this paper represents an improvement over the manual processes often employed in practice. In particular, our RJMCMC method describes parameter reduction and tail factor estimation in the claims reserving process, and, moreover, it provides the full predictive distribution of the outstanding loss liabilities.     

Pricing Participating Inflation Retirement Funds Through Option Modeling and Copulas

Abstract

Pension plans and life insurances offering minimum performance guarantees are very common worldwide. In the Brazilian market, the customers of a common type of defined contribution plan have the right to receive, over their savings, the positive difference between the return of a specified investment fund, usually a fixed income fund, and the minimum guaranteed rate, commonly defined as the composition of a fixed interest rate and a floating inflation rate. This instrument can be characterized as an option to exchange one asset, the minimum guaranteed rate, for another, the return of the specified investment fund. In this paper we provide a closed formula to evaluate this liability that depends on two stochastic rates assuming bivariate normality. We also explore the use of copulas for the modeling of the dependence structure and price the options using Monte Carlo simulation to compare the effects of the copula specification in their values. An application with real data is provided. The model makes use of a one-factor Vasicek framework for the term structures of interest rate and inflation rate.     

Computation of Multivariate Barrier Crossing Probability and its Applications in Credit Risk Models

Abstract

In this paper we consider computational methods of finding exit probabilities for a class of multivariate diffusion processes. Although there is an abundance of results for one-dimensional diffusion processes, for multivariate processes one has to rely on approximations or simulation methods. We adopt a Large Deviations approach to approximate barrier crossing probabilities of a multivariate Brownian Bridge. We use this approach in conjunction with simulation methods to develop an efficient method of obtaining barrier crossing probabilities of a multivariate Brownian motion. Using numerical examples, we demonstrate that our method works better than other existing methods. We mainly focus on a three-dimensional process, but our framework can be extended to higher dimensions. We present two applications of the proposed method in credit risk modeling. First, we show that we can efficiently estimate the default probabilities of several correlated credit risky entities. Second, we use this method to efficiently price a credit default swap (CDS) with several correlated reference entities. In a conventional approach one normally adopts an arbitrary copula to capture dependency among counterparties. The method we propose allows us to incorporate the instantaneous variance-covariance structure of the underlying process into the CDS prices.     

Social Transfers And Income Inequality In Old Age

Abstract

This paper examines variation in old-age income inequality between industrialized nations with modern welfare systems. The analysis of income inequality across countries with different retirement income systems provides a perspective on public pension policy choices and designs and their distributional implications. Because of the progressive nature of public pension programs, we hypothesize that there is an inverse relationship between the quality of public pension benefits and old-age income inequality—that is, countries with comprehensive, universal, and generous public pension systems will exhibit more equal distributions of income in old age.

Luxembourg Income Study data indeed show that cross-national variation in old-age income inequality is partly explained by differences in the percentage of seniors’ total income derived from public pension transfers. Sweden, for example, has the highest level of government transfers and the lowest level of old-age income inequality, while Israel and the United States have the lowest levels of dependency on government transfers and the highest levels of income inequality. A notable exception is Canada, where public transfers represent only a moderate portion of elderly income, yet old-age income inequality is relatively low. These findings suggest that quality of public pension benefits does indeed play a role in explaining differences in old-age income inequality between industrialized nations, yet these variations are also likely influenced by other factors.     

Authors’ Reply: Credit Standing and the Fair Value of Liabilities: A Critique - Discussion by Marsha Wallace

Abstract

As investment plays an increasingly important role in the insurance business, ruin analysis in the presence of stochastic interest (or stochastic return on investments) has become a key issue in modern risk theory, and the related results should be of interest to actuaries. Although the study of insurance risk models with stochastic interest has attracted a fair amount of attention in recent years, many significant ruin problems associated with these models remain to be investigated. In this paper we consider a risk process with stochastic interest in which the basic risk process is the classical risk process and the stochastic interest process (or the stochastic return-on-investmentgenerating process) is a compound Poisson process with positive drift. Within this framework, we first derive an integro-differential equation for the Gerber-Shiu expected discounted penalty function, and then obtain an exact solution to the equation. We also obtain closed-form expressions for the expected discounted penalty function in some special cases. Finally, we examine a lower bound for the ruin probability of the risk process.     

Comparing Approximations for Risk Measures of Sums of Nonindependent Lognormal Random Variables

Abstract

In this paper we consider different approximations for computing the distribution function or risk measures related to a discrete sum of nonindependent lognormal random variables. Comonotonic upper and lower bound approximations for such sums have been proposed in Dhaene et al. (2002a,b). We introduce the comonotonic “maximal variance” lower bound approximation. We also compare the comonotonic approximations with two well-known moment-matching approximations: the lognormal and the reciprocal Gamma approximations. We find that for a wide range of parameter values the comonotonic “maximal variance” lower bound approximation outperforms the other approximations.     

The diaspora solution to innovation capacity development: Immigrant entrepreneurs in the contemporary world

The international migration of highly skilled labor was formerly a threat to the underdeveloped world with regard to indigenous innovation capacity. However, certain countries have successfully turned “brain drain” into “brain gain” by effective engagement with a skilled diaspora who have returned to set up business ventures in the homeland. This article advocates an entrepreneurial approach to the development of national innovation capacity through contemporary diasporic entrepreneurship (CDE). Drawing evidence mostly from China, the article argues that (1) CDE offers an alternative to conventional indigenously and internationally oriented approaches toward innovation capacity development; (2) compared to other ways of diaspora homeland engagement, CDE is most beneficial to capacity development; and (3) besides participating in philanthropic and scientific projects, a skilled diaspora returning as private business owners represents an often more productive way of contributing to national capacity development. © 2010 Wiley Periodicals, Inc.     

Entwickeln sich wirtschaftswissenschaftliche Forschung und Politikberatung auseinander?

Most German economists show strong patterns of professional specialisation. In their work, they either focus on basic research or on policy consultancy. The evidence provided by Haucap und Mödl has been used to question work incentives in academia. The suggestion to change work incentives, however, is not supported by Richter, who rather calls into question the German tradition of research funding. He argues that Germany should devote more competitive funding to research projects and less to institutions. Schmidt et al. explore the question the other way around: do policy consultants publish in top journals? They conclude that they do. Güth/Kliemt show how precarious and limited our (technologically useful) knowledge is. The discussion of alternative policies among economic experts should be used to tease out the controversial arguments to allow for better informed political judgements. Wagner/Fratzscher take a historical view, showing that when modern economic research (and economic research institutes) apply a more pluralistic paradigm than that which prevailed in Germany for a long period after the Second World War, economic research will automatically have a more significant impact on politics, since policy advisors will produce more varied advice with the potential for realisation. Koll also claims that policy advice must not be based on a single supply-side oriented mainstream point of view. By drawing lessons from the crisis, economics must identify a new mainstream providing reliable guidance and policy advice.