A sectoral approach to Okun’s Law

The study adds to the existing literature on the relationship between output and unemployment by using a sectoral specification of Okun’s Law to capture the differential sensitivity of the unemployment rate to output developments in the services and manufacturing sectors. Using quarterly data for the period between 2000 and 2012, we show that Malta’s unemployment rate has been more sensitive to output developments in the services sector than to those in the manufacturing sector. We use different equation specifications and the youth unemployment rate to show that the impact resulting from developments in the manufacturing sector occurs mainly via lay-offs while developments in the services sector affect the unemployment rate via the hiring of new entrants into the labour market.     

A review of: “EXPLOITING CYCLE TIME IN TECHNOLOGY MANAGEMENT”BY GERALD H. GAYNOR McGraw-Hill,Inc., New York, 1993, xvi + 349 pp. ISBN 0-07-023474-4. List $46.50.

Teaching engineering economy at the undergraduate level has changed little over the past century. In fact, it has become stagnant as its focus has turned toward financial mathematics and away from decision analysis. This is seen as a disservice to students who must eventually develop engineering economy studies. This paper provides motivation and suggestions to revitalize the curriculum, including teaching engineering economy in a decision-making context and integrating research advances into the curriculum. From these suggestions, a tested semester outline is presented. In the spirit of this special issue, it is hoped that these suggestions help move the teaching of engineering economy to the “next level” such that we can produce effective decision makers in the critical area of capital investment analysis.     

Adverse selection as an explanation of credit rationing and different lender types

An adverse selection model is utilized to demonstrate that informational asymmetry may make it wealth optimal for the financial intermediary (FI) to credit ration and to rationalize the existence of different lenders in the credit market. The crucial assumption is that borrowers differ in their tolerance for a lender-imposed default penalty, the severity of which also varies with the lender. The credit rationing portion proves that the FI will: 1) be forced by a binding regulatory constraint to overinvest in capital; 2) ration its worst risk class borrowers; 3) establish its optimal loan interest rate on the basis of the average quality of its loans and the interest rate elasticity of the borrower demand in its best risk category; and 4) decrease the total loan volume and increase the loan interest rate due to an increase in the capital requirement, but the effect on the default risk quality of its loan portfolio is ambiguous. The existence result is that if a lender has a high default penalty, he can charge a lower rate and attract only “good” borrowers, i.e., heterogeneous lender types encourage the screening of borrowers and vice versa.