Time-Varying Leverage and Basel III: A Look at Canadian Evidence

Why did the conventional leverage indicators not pick up any meaningful signal of the mounting systemic risk before the subprime crisis? They remained almost unchanged in recent decades, whereas the banking landscape underwent a tremendous metamorphosis. Market-oriented banking is characterized by a new type of systemic risk, a risk which essentially evolves off the radar screen, i.e., off-balance sheet (OBS) (Calmès and Théoret Journal of Banking and Finance 34 (7): 1719–1728, 2010, 2011). In this article, we argue that the standard leverage indicators are not fitted to capture this kind of new banking risk. We introduce a new empirical framework which enables us to exploit the cyclical properties of elasticity leverage measures, while at the same time controlling for the noisy information they usually deliver. In a nutshell, thanks to the Kalman filter, we are able to compute optimal levels of bank leverage. This methodology delivers cyclical, forward-looking measures signalling systemic risk bubbles years before their burst. By properly accounting for all activities, including market-oriented banking, these time-varying leverage measures tend to systemically capture regulatory capital arbitrage and the OBS risk it entails.     

Economic sociology: a historical perspective

In this paper we briefly recall what is meant by economic sociology, basing our definition principally on the works of R. Swedberg and M. Cranovetter. We then focus on the questions and problematics which are more particularly relevant to the history of economic and sociological thought in such a way as to make explicit the kind of past in relation to which economic sociology is most pertinent. We shall thus be induced to correct certain explanations and to propose a slightly different perspective on the origin of economic sociology. This historical work enables us to formulate a definition of economic sociology based on two key concepts - economic institution and economic action - and allows us to articulate what economic sociology actually is, rather than merely describing what it is not. Finally, we show that these propositions are not without interest in relation to the present-day economic sociology that tends to go by the name - made fasionable by Granovetter and Swedberg - of ‘New Economic Sociology.’     

Sidgwick and Edgeworth on indeterminacy in the labour market

Commentators have underlined Sidgwick's influence on Edgeworth's thinking and more particularly on New and Old Methods of Ethics (1877). But have failed to notice that Sidgwick remained a major reference in Mathematical Psychics (1881). Therefore, the purpose of this paper is to show that, in this book, Edgeworth wanted to refine upon the problem of wages addressed by Sidgwick in 1879. The thesis of the paper is that Sidgwick and Edgeworth's disagreement as to the role of open competition in the resolution of indeterminacy in the labour market stems from two different notions of competition. This latter can be seen as a differentiation process, as in Sidgwick's, or as a replication mechanism, as in Edgeworth's.     

Non-convex Technologies and Cost Functions: Definitions,Duality and Nonparametric Tests of Convexity

This contribution is the first systematic attempt to develop a series of nonparametric, deterministic technologies and cost functions without maintaining convexity. Specifically, we introduce returns to scale assumptions into an existing non-convex technology and, dual to these technologies, define non-convex cost functions that are never lower than their convex counterparts. Both non-convex technologies and cost functions (total, ray-average and marginal) are characterized by closed form expressions. Furthermore, a local duality result is established between a local cost function and the input distance function. Finally, nonparametric goodness-of-fit tests for convexity are developed as a first step towards making it a statistically testable hypothesis. An erratum to this article is available at .     

Weather Index Drought Insurance: An Ex Ante Evaluation for Millet Growers in Niger

In the Sudano-Sahelian region, which includes South Niger, the inter-annual variability of the rainy season is high and irrigation is limited. As a consequence, bad rainy seasons have a massive impact on crop yield and regularly result in food crises. Traditional insurance policies based on crop damage assessment are not available because of asymmetric information and high transaction costs compared to the value of production. We assess the risk mitigation capacity of an alternative form of insurance which has been implemented at a large scale in India since 2003: insurance based on a weather index. We compare the efficiency of various weather indices to increase the expected utility of a representative risk-averse farmer. We show the importance of using plot-level yield data rather than village averages, which bias results due to the presence of idiosyncratic shocks. We also illustrate the need for out-of-sample estimations in order to avoid overfitting. Even with the appropriate index and assuming substantial risk aversion, we find a limited gain of implementing insurance, which roughly corresponds to, or slightly exceeds, the cost observed in India for implementing such insurance policies. However, when we separately treat the plots with and without fertilisers separately, we see that the benefit of insurance is slightly higher in the former case. This suggests that insurance policies may slightly increase the use of risk-increasing inputs such as fertilisers and improved cultivars, and hence improve average yields, which remain very low in the region.     

A corporate balance-sheet approach to currency crises

This paper presents a general equilibrium currency crisis model of the ‘third generation’, in which the possibility of currency crises is driven by the interplay between private firms’ credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features (i) ex post deviations from purchasing power parity; (ii) credit constraints a la Bernanke-Gertler; (iii) foreign currency borrowing by domestic firms; (iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. We show that an interest rate increase intended to support the currency in a crisis may not be effective, but that a relaxation of short-term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms.     

Mixed bundling auctions

We study multi-object auctions where agents have private and additive valuations for heterogeneous objects. We focus on the revenue properties of a class of dominant strategy mechanisms where a weight is assigned to each partition of objects. The weights influence the probability with which partitions are chosen in the mechanism. This class contains efficient auctions, pure bundling auctions, mixed bundling auctions, auctions with reserve prices and auctions with pre-packaged bundles. For any number of objects and bidders, both the pure bundling auction and separate, efficient auctions for the single objects are revenue-inferior to an auction that involves mixed bundling.     

General equilibrium impact of an energy-saving policy in the public sector

We analyse a disregarded environmental policy instrument: a switch in government expenditure away from energy (or other natural resources) and toward a composite good which includes energy-saving expenditure. We first develop two variants of an analytical general equilibrium model. A composite good is produced with constant returns to scale, and energy is imported or produced domestically with diminishing returns, yielding a differential rent to its owners. The government purchases energy and composite goods from private firms. Such a policy unambiguously increases employment. It also raises private consumption and welfare under two conditions: (i) it is not too costly and (ii) the initial share of the resource is smaller in public spending than in private consumption, or the difference is small enough. We then run numerically a model featuring both importation and domestic production of energy (oil, gas and electricity), for the OECD as a whole. Simulations show that employment, welfare and private consumption rise. We provide magnitudes for different parameter values. Earlier versions of this paper have benefited from conference participants at the European Council for an Energy-Efficient Economy, International Society for Ecological Economics World Congress, CIRED seminar and EUREQua environmental economics seminar. We especially thank Michèle Sadoun and two anonymous referees. The usual disclaimer applies.     

Measuring and Accounting for the Deprivation Gap of Portuguese Immigrants in Luxembourg

This paper examines the relative well‐being of Portuguese immigrants in Luxembourg by looking at indicators of material deprivation. We document material deprivation differences between immigrants and nationals—the “deprivation gap”—and measure the extent to which income differentials (and other sociodemographic differences) explain this gap using a combination of non‐parametric methods and a versatile graphical device. We find a large and significant deprivation gap against Portuguese immigrants, whatever the indicator considered. The extent to which the gap is merely a reflection of differences in income, however, depends on what deprivation items are taken into consideration. Income differences almost fully account for material deprivation differences when the latter is measured using the items included in the official EU social indicator of material deprivation. Inclusion of housing condition indicators mitigates this relationship and we then find compelling evidence that the deprivation gap is not entirely accounted for by income differentials.