Shortage and currency substitution in transition economies: Bulgaria, Hungary, Poland, and Romania

This paper examines currency substitution in Bulgaria, Hungary, Poland, and Romania during the end of central planning and transition to market economies. Before liberalization, central European economies faced increasing shortage and repressed inflation in the official sector. Households held substantial wealth in real assets and foreign currency. Furthermore, part of their savings was held as hunting money against potential opportunities to buy in bulk at bargain prices in official stores or pay a premium price on the black market. The shift from centrally-planned to market economies is modeled with a shortage variable. Foreign currency demand and consumption functions are estimated by the Johansen procedure. Environmental constraints play a key role in interpreting estimates. The official sector shortage is an important determinant of foreign currency demand in each country.     

Debt crisis,accumulation crisis and economic restructuring in Latin America

The policy debate over the Latin American debt crisis has shifted from the issue of short-term adjustment to that of long-term restructuring. The history of import substituting industrialization (IS) is reviewed in order to establish a context for the current restructuring debates. We argue that the demise of the IS model was primarily due to narrow domestic markets, heavy imports of capital goods and excessive ties with foreign multinationals, not to inefficiencies inherent in market-constraining policies. From this perspective, free market, export-led growth policies are opposed as an appropriate restructuring strategy and policies of redistribution, regional integration and major debt concessions are supported.     

Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges

We present an example that compares the effects on earnings of designating a foreign currency forward contract as either a cash-flow or fair-value hedge of a foreign currency denominated receivable. Entities engaging in exchange transactions not denominated in their functional currency frequently enter into foreign currency forward contracts in order to mitigate their foreign exchange rate risk exposure. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge is also known on the date the contract is initiated; whereas the effect on each periods’ earnings from a fair-value hedge cannot be determined until the respective balance sheet dates. Therefore, designating forward contracts as cash-flow hedges may suppress volatility in reported earnings compared to designating forward contracts as fair-value hedges. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is lower when a forward contract is designated as a cash-flow hedge relative to designating it as a fair-value hedge. This suggests foreign currency forward contracts designated as cash-flow hedges are more consistent with the purpose of hedge accounting: to mitigate the effects on earnings of applying different measurement criteria for the hedge and the hedged item.     

Option-Implied Risk Aversion Estimates

Using a utility function to adjust the risk‐neutral PDF embedded in cross sections of options, we obtain measures of the risk aversion implied in option prices. Using FTSE 100 and S&P 500 options, and both power and exponential‐utility functions, we estimate the representative agent's relative risk aversion (RRA) at different horizons. The estimated coefficients of RRA are all reasonable. The RRA estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of RRA declines broadly with the forecast horizon and is lower during periods of high market volatility.     

The Impact of Capital Requirements and Managerial Compensation on Bank Charter Value

This paper examines the joint impact of capital requirements and managerial incentive compensation on bank charter value and bank risk. Most of the previous literature in the area of banking and agency theory has focused on asymmetric information between either banks and regulators, (and therefore on the role of bank capital), or between bank shareholders and bank managers, (and therefore on the role of managerial ownership). In this paper we unify these issues and present empirical results from the regression of capital requirements jointly with measures of incentive compensation on Tobin's Q, our proxy for bank charter value, and on the standard deviation of total return, our proxy for bank risk. In a sample of 102 bank holding companies we find that capital levels are consistently a significant positive factor in determining bank charter value and a significant negative factor in determining risk. On the other hand, we find our six measures of incentive compensation to be generally insignificant relative to charter value but do provide some evidence consistent with a theory relating types of incentive compensation with risk.     

Uncertainty and Financing Constraints

Using a panel of Dutch listed firms this paper provides empirical evidence for the hypothesis that more risky firms are confronted with more severe capital market constraints than relatively less risky firms. The paper also contributes to the discussion on the usefulness of cash flow as a measure of financial constraints. We present a stochastic version of the Kaplan-Zingales (1997) model. We show that cash flow sensitivity can be used as a meaningful indicator of financing constraints if firms are classified by the degree of uncertainty they face and if the uncertainty originates from cost uncertainty.     

Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models

This paper investigates the effects of institutional changes within the UK housing market in recent decades using structural break tests and time-varying parameter models. This approach is motivated by models of institutional change drawn from the political science literature which focus on the existence of both fast-moving and slow-moving institutional changes and the interactions between them as drivers of the dynamics of asset prices. As a methodological contribution, we use several time-varying parameter models for the first time in investigations of institutional change. Our findings support the existence of both structural breaks and continuous variance in parameters. This contributes to our understanding of the housing market in two respects. Firstly, the dates of structural breaks appear to better match unexpected market shocks rather than remarkable political events, and this supports prior institutional theory. Secondly, assessment of the effect of slow-moving institutional changes shows that people’s biased expectations rather than the economic fundamentals have increasingly played an important role in driving housing prices in the short run although fundamentals continue to drive house prices to converge to their long-run equilibrium.     

A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust Without Shedding Jobs

We consider the extent to which U.S. fast-food businesses could adjust to an increase in the federal minimum wage from its current level of $7.25 an hour to $15 an hour without having to resort to reducing their workforce. We consider this issue through a set of simple illustrative exercises, whereby the US raises the federal minimum wage in two steps over four years, first to $10.50 within one year, then to $15 after three more years. We conclude that the fast-food industry could absorb the increase in its overall wage bill without resorting to cuts in their employment levels at any point over this four-year adjustment period. We find that the fast-food industry could fully absorb these wage bill increases through a combination of turnover reductions, trend increases in sales growth, and modest annual price increases over the four-year period. Working from the relevant existing literature, our results are based on a set of reasonable assumptions on fast-food turnover rates, the price elasticity of demand within the fast-food industry, and the industry’s underlying trend for sales growth. We also show that fast-food firms would not need to lower their average profit rate during this adjustment period.