Semi‐Parametric Estimates of Taylor Rules for a Small,Open Economy – Evidence from Switzerland

This article estimates the policy reaction function of the Swiss National Bank (SNB) using real‐time internal inflation forecasts and output gap estimates from 2000 to 2012. We analyze potential nonlinearities of policy rate responses to economic fundamentals using a novel semiparametric approach. We find a linear response of the SNB's policy rate to inflation forecasts but a strong nonlinear response of the policy rate to the output gap and exchange rate changes. This finding suggests that the SNB reacts to extreme movements of these variables if they become a concern for price stability and economic activity.     

Cloud Computing – A Classification, Business Models, and Research Directions

Lately, a new computing paradigm has emerged: “Cloud Computing”. It seems to be promoted as heavily as the “Grid” was a few years ago, causing broad discussions on the differences between Grid and Cloud Computing. The first contribution of this paper is thus a detailed discussion about the different characteristics of Grid Computing and Cloud Computing. This technical classification allows for a well-founded discussion of the business opportunities of the Cloud Computing paradigm. To this end, this paper first presents a business model framework for Clouds. It subsequently reviews and classifies current Cloud offerings in the light of this framework. Finally, this paper discusses challenges that have to be mastered in order to make the Cloud vision come true and points to promising areas for future research.     

Local identification in DSGE models

The issue of identification arises whenever structural models are estimated. Lack of identification means that the empirical implications of some model parameters are either undetectable or indistinguishable from the implications of other parameters. Therefore, identifiability must be verified prior to estimation. This paper provides a simple method for conducting local identification analysis in linearized DSGE models, estimated in both full and limited information settings. In addition to establishing which parameters are locally identified and which are not, researchers can determine whether the identification failures are due to data limitations, such as lack of observations for some variables, or whether they are intrinsic to the structure of the model. The methodology is illustrated using a medium-scale DSGE model.     

Lowering the Marginal Corporate Tax Rate: Why the Debate?

In an effort to attract new investors and retain existing producers, governments use corporate tax rates as a policy tool for industrial recruitment, resulting in inter‐state tax competition. Foreign direct investment (FDI) growth and GDP growth are the two policy outcomes gauged in inter‐state tax competition. The assumption is that lower corporate taxes lead to increases in FDI, which results in capital formation that generates GDP growth. This 60‐nation panel study tests that assumption through examining economic indicators contingent on taxation, such as FDI and mergers and acquisitions among multinational corporations between 1999 and 2009. The results suggest that reduced corporate tax rates can increase FDI but decrease annual GDP growth. The main policy implication is that tax competition may attract investment, but may not promote overall economic growth, offering support for value‐extraction theories.     

The case against currency boards

Conclusion We have argued that a CB is a creation of the state, aiming at granting particular political favors, and purposefully designed to secure the reappearance of an independent domestic money producer. A CB establishes a foreign fiat money standard enforced by legal tender laws for its bank notes, which are mere money substitutes in the context of fractional-reserve commercial banking. This insight helps us to understand why CBs have always degenerated into national central banks of the modern type: they were intentionally created to do so. This surely will also be the fate of present-day CBs. Although technically the transition from a CB to a commodity money (gold or other commodity standard) is facilitated by the warehouse aspect of the currency board, this institution does not present any incentive for the policy-makers to subject the production of money to the regulation of the free market. The paper was presented at the Southern Economic Association meeting, New Orleans, 2002.     

Pricing of guaranteed minimum withdrawal benefits in variable annuities under stochastic volatility,stochastic interest rates and stochastic mortality via the componentwise splitting method

This paper values guaranteed minimum withdrawal benefit (GMWB) riders embedded in variable annuities assuming that the underlying fund dynamics evolve under the influence of stochastic interest rates, stochastic volatility, stochastic mortality and equity risk. The valuation problem is formulated as a partial differential equation (PDE) which is solved numerically by employing the operator splitting method. Sensitivity analysis of the fair guarantee fee is performed with respect to various model parameters. We find that (i) the fair insurance fee charged by the product provider is an increasing function of the withdrawal rate; (ii) the GMWB price is higher when stochastic interest rates and volatility are incorporated in the model, compared to the case of static interest rates and volatility; (iii) the GMWB price behaves non-monotonically with changing volatility of variance parameter; (iv) the fair fee increases with increasing volatility of interest rates parameter, and increasing correlation between the underlying fund and the interest rates; (v) the fair fee increases when the speed of mean-reversion of stochastic volatility or the average long-term volatility increases; (vi) the GMWB fee decreases when the speed of mean-reversion of stochastic interest rates or the average long-term interest rates increase. We investigate both static and dynamic (optimal) policyholder's withdrawal behaviours; we present the optimal withdrawal schedule as a function of the withdrawal account and the investment account for varying volatility and interest rates. When incorporating stochastic mortality, we find that its impact on the fair guarantee fee is rather small. Our results demonstrate the importance of correct quantification of risks embedded in GMWBs and provide guidance to product providers on optimal hedging of various risks associated with the contract.     

Taming Trojan Horses: Identifying and Mitigating Corporate Social Responsibility Risks

Organizations are exposed to increasing pressures from their constituents to integrate corporate social responsibility (CSR) principles into their ongoing business practices. But accepting new and potentially open-ended commitments is not a harmless exercise, and companies may well expose themselves to serious risks when embracing such principles. To identify these risks, we conducted two naturalistic studies: one exploratory, the other corroborative. The results show that CSR adoption is associated with at least seven different business risks, ranging from failing strategy implementation to legitimacy destruction. To alleviate these risks, we discuss a set of managerial mitigation strategies that have the potential to realign companies’ CSR activities with their strategic objectives. Pursey Heugens is an Associate Professor of Organization Theory in the Department of Business-Society Management at RSM Erasmus University. He received his PhD from the same school. His research interests span positive and normative theories of organizaton, including bureaucracy theory, neo-institutional theory, contractualist business ethics, and virtue ethics. Nikolay Dentchev is an independent research fellow at Ghent University, Belgium, and a project coordinator at the corporate venturing department of Fortis Group (Fortis Venturing). He holds a Ph.D. in business economics from Ghent University. His current research is related to entrepreneurship, instrumental stakeholder theory, and management challenges of corporate social responsibility     

Nonparametric estimation of scalar diffusion models of interest rates using asymmetric kernels

This paper proposes an asymmetric kernel-based method for nonparametric estimation of scalar diffusion models of spot interest rates. We derive the asymptotic theory for the asymmetric kernel estimators of the drift and diffusion functions for general and positive recurrent processes and illustrate the advantages of the Gamma kernel for bias correction and efficiency gains. The finite-sample properties and the practical relevance of the proposed nonparametric estimators for bond and option pricing are evaluated using actual and simulated data for U.S. interest rates.