Housing price fluctuations and financial risk transmission: a spatial economic model

Financial risk derived from housing price fluctuations in China garnered much public concern recently. Based on the theoretical analyses of the transmission of financial risk from housing price fluctuations, this paper establishes panel spatial Durbin models to empirically analyse housing price fluctuations and financial risks transmission from a spatial economic perspective. Employing the panel provincial data from 1999–2015, we conduct an analysis on the 30 provinces in China as well as a comparison among the Eastern, Middle and Western regions of China. The results indicate that: (1) The soaring housing prices driven by bank credit, real estate developers’ heavy investment, local governments’ land revenue and individuals and households demands leads to financial risk in various sectors; (2) due to the ‘substitution effect’, the capital agglomeration in metropolis from bank credits, real estate developers, and individuals and households furthers the amassment of financial risks; (3) housing prices have a significant spatial contagion effect throughout the country, and financial risk could directly transmit across provinces through housing price fluctuations; (4) financial risks could indirectly transmit across provinces via the ‘imitative behaviour’ or ‘driving effect’ of different sectors for different regions of China.     

Hedging effectiveness of fertilizer swaps

The fertilizer swaps market is a potential tool to protect against fertilizer price risk. The swaps evaluated here are cash settled using The Fertilizer Index. Hedge ratios and hedging effectiveness are calculated for urea and DAP diammonium phosphate (DAP)) swaps. Urea and DAP swaps perform poorly as a hedging tool over a one-week horizon. As the hedging horizon increases, the hedging effectiveness of swaps improves. The swaps are more effective in mitigating risk across ocean freight routes than across inland routes. The limited hedging effectiveness is due to high spatial basis risk in fertilizer markets.     

Irving Fisher's debt deflation analysis: From the Purchasing Power of Money (1911) to the Debt-deflation Theory of the Great Depression (1933)

Abstract

In 1933, Irving Fisher proposed an explanation for the Great Depression based on the distinction between the price level and price change effect of deflation in a context of over-indebtedness. This paper compares the debt-deflation theory of Fisher (1933 Fisher, I., 1933. The debt-deflation theory of great depressions, Econometrica 1 (1933), pp. 337–57. DOI: 10.2307/1907327[Crossref], [Web of Science ®] , [Google Scholar]) with the dynamic depression process he had expounded almost 20 years earlier in the Purchasing Power of Money (1911). The role played by both price level and price change effects in the analyses of Fisher (1933, 1911) are clarified in the context of the disequilibrium model of Tobin (1975 Tobin, J., 1975. Keynesian models of recession and depression, American Economic Review 65 (1975), pp. 195–202.[Web of Science ®] , [Google Scholar]). More precisely, we show that the stationary equilibrium is assumed to be locally unstable according to Fisher's 1911 insights and globally unstable according to his 1933 analysis.     

Why Do Prices Remain Stable in the Bubble and Bust Period?

In spite of a large swing in real output growth in the bubble and bust period, aggregate prices remained relatively stable in Japan. Empirical results show that such price rigidity can be explained by the customer market model combined with financial constraints. The degree of financial constraints that firms face in the bubble and bust period fluctuates significantly, and the impact of financial positions on firms’ prices is counter-cyclical. In booms, liquidity-abundant firms invest in market share by keeping prices down, while in a recession financially constrained firms charge a high price to locked-in customers who remain loyal. Such counter-cyclicality is clearly observed in the pricing behavior of large firms that produce differentiated goods. In contrast, small firms whose product brand is not well established in the market cannot lock in customers, and hence financial constraints do not affect their pricing decisions.     

Institutional Usury and the Banks

Although usury is no longer widely discussed in economic discourse, the concept of usury is useful in explaining financial upheavals such as the recent and on-going crisis. The Scholastics began the study of interest with their teachings on usury, and Keynes brought the usury debate back into the discussions during the period around the Great Depression. Bernard Dempsey, a Jesuit economist, wrote a definitive assessment of scholastic theory in the early 1940s under the direction of Schumpeter. Dempsey developed his own theory of financial crises which he attributed to the presence of what he termed “institutional usury.” The recently implemented policy by the Federal Reserve of paying banks interest on reserves is examined in light of Dempsey's concept of institutional usury. The scholastic concept of the just price is used to analyze market power wielded by large financial institutions in the modern economy.     

OPTIMAL MONETARY POLICY WITH THE STICKY INFORMATION MODEL OF PRICE ADJUSTMENT: INFLATION OR PRICE‐LEVEL TARGETING?

I investigate the optimal monetary policy in a New Keynesian macroeconomic framework with the sticky information model of price adjustment. The model is solved for optimal policy, and welfare implications of three alternative monetary policy regimes under this optimal policy are compared when there is a cost‐push shock to the economy. These monetary policy regimes are the unconstrained policy, price‐level targeting and inflation targeting regimes. The results illustrate that optimal policy depends on the degree of price stickiness and the persistence of the shock. Inflation targeting emerges as the optimal policy if prices are flexible enough or the shock is persistent enough. However, the unconstrained policy or price‐level targeting might be preferable to inflation targeting if prices are not very flexible and the shock is not very persistent. The results also show that as prices become more flexible, the welfare loss usually gets bigger.     

国际油价波动对经济增长的影响——基于中国的实证分析

基于1990年1月至2009年3月的月度数据,本文实证分析了我国经济增长与国际石油价格之间的长期变动关系,其特点在于,采用稳健性较强的T-Y因果检验来分析油价与经济增长的Granger因果关系,同时,运用非对称协整技术以考察油价与经济增长之间的非线性关系。研究发现：①长期中油价是我国经济增长的单向Granger原因;②油价与我国经济增长之间存在非对称协整关系,油价上涨对经济活动的负面影响大于油价下跌的积极影响。基于中国经济运行的实际,本文还分析了实证结果背后的原因,并提出当前国际金融危机背景下,油价呈下跌趋势,需抓住有利时机,动用外汇储备,大力购入石油资源,建立起石油战略储备;在经济复苏、油价上涨时,可以启动石油战略储备来减少石油供应冲击,从而有助于及时保证我国经济平稳快速增长的政策建议。     

Inflation pressure and price intervention: an ominous combination∗

Of the debate regarding the new round of surging inflation in China, structural opinion interprets inflation as a problem of structural price growth, mainly brought about by a price hike for selected commodities as a result of exogenous shocks from different sectors. In line with the explanation, various measures aiming to control prices have been implemented recently. On the basis of basic economic principles and empirical evidence drawn from four cases, this essay argues that price intervention policies are counter-productive in bringing inflation down.     

Teaching Third-Degree Price Discrimination

Abstract: Third-degree price discrimination is taught in almost every intermediate microeconomics class. The theory, geometry, and the algebra behind the concept are simple, and the phenomenon is commonly associated with the sale of many of the goods and services used frequently by students. Classroom discussion is usually vibrant as students can relate their experiences of being on the receiving end of third-degree price discrimination, usually to their advantage. However, the precision of the language used in the exposition of the theory in textbooks is generally less precise than one would hope for, leading students to confuse slope and elasticity. The authors ask textbook writers to provide greater precision in their explanation of why differing elasticities are associated with the prices paid by two (or more) distinct groups of buyers facing third-degree price discrimination.