Optimal monetary policy and the role of hybrid inflation-price-level targets

This study investigates the role of hybrid inflation-price-level targets as a solution to the well-known stabilization bias problem that arises under discretionary policies. The analysis shows that social welfare will be improved by employing a weighted average of inflation and price level as one of the central bank's target variables in addition to the output gap growth target. The reason is that imposing the optimal hybrid target will reduce inflation variability in a highly efficient way. In particular, the optimal hybrid regime outperforms other previously suggested regimes when the degree of inflation persistence is moderate.     

On Determinants of Japan's Foreign Direct Investment in Eastern Europe

Summary

The paper takes issue with some untested but often repeated assertions that Japanese FDI positions in Eastern Europe are weak. Japan's economic relations with Eastern Europe, including FDI, should be understood in the context of Japan's global economic relations. Therefore, it might not be appropriate to approach the question armed with absolute FDI numbers only. So, the author proceeds to empirically test some of these assertions by calculating directional trade ratios and directional FDI ratios! As a result of his approach, he claims that Japan's FDI position in Poland is not significantly weaker compared to its trade position or to other advanced countries' positions. The paper also suggests that, although Japan's FDI in Poland has been undoubtedly stagnant, the larger problem is that the Polish FDI environment is still problematic due mainly to repayment risks and rather low levels of real per capita income.     

Interest Rates,Target Markets and Sustainability in Microfinance

This paper presents evidence on the reliability of claims in the literature on microfinance institutions (MFIs) regarding the role of interest rates and institutional design in helping MFIs to realize financial self-sufficiency. It pools data from 426 institutions in 41 developing countries from 2004 to 2008. Contrary to expectations, the results of an ordered-logistic regression strongly support an inverted U-shaped function for the relationship between interest rates and sustainability, irrespective of customer orientation. Additionally, a shift away from the poorest borrowers in the low-end market does not significantly improve the likelihood of being more profitable after controlling for other relevant covariates. MFIs may not, therefore, be forced to drift away from their original goal of serving the underprivileged in pursuit of financial viability.     

Institutions and concentration

In a new dataset of 1.3 million firms from over 100 countries, I establish a number of regularities in cross-country differences in economic concentration. Concentration of sales and employment is substantially higher in smaller countries and in less-developed countries; these two factors alone explain roughly half the cross-country variation in concentration. Nevertheless, a number of institutional factors offer additional explanatory power for concentration. Concentration is higher in countries with higher entry costs for new firms, in countries with weaker antitrust policy, in countries with less financial development, in countries with weaker rule of law, and in countries with more burdensome regulation. Weak institutions are associated with higher concentration especially in industries that do not have naturally high levels of concentration. In addition, the relationships between institutions and concentration are more pronounced in nontradable and investment-intensive industries, suggesting that natural barriers to competition facilitate the monopolization of sectors especially when institutions are weak.     

Growth and enduring epidemic diseases

This paper analyzes the interplay of human capital formation and economic growth when there is premature adult mortality. Failing adequate insurance arrangements, a long wave of such mortality can so undermine human capital formation as to induce an economic collapse. In nuclear family structures, random matching of partners is superior to assortative mating only if the shock is not too big and initial levels of human capital are not too low. Full pooling of mortality risks with equal treatment of all children in extended families may fend off a general collapse, depending on the initial conditions and the size and duration of the shock. To avoid undesirable effects on expectations, awareness campaigns should be complemented by policies that credibly promise to reduce future mortality. If mortality depends on the general level of human capital, indeterminacy can arise in the form of more than one rational expectations path.     

Do Private Tutoring Expenditures Raise Academic Performance? Evidence from Middle School Students in South Korea

To shed light on the effectiveness of educational inputs for student outcomes, this paper examines the effect of private tutoring expenditures on the academic performance of middle school students in South Korea. To address endogeneity, the paper uses instrumental variables, first‐difference, propensity‐score matching and nonparametric bounding methods. We apply these methods to a panel dataset from South Korea, the Korea Education Longitudinal Study. The results show that the true effect of private tutoring remains, at most, modest. Instrumental variables (first‐difference) estimates suggest that a 10‐percent increase in expenditure raises a test score by 0.03 standard deviations or 1.1 percent (0.002 standard deviations or 0.08 percent). Matching estimates imply that the same amount of increase in expenditure leads to a 0.33 to 0.72 percent higher average test score. The tightest bounds of the effect of tutoring reveal that a 10‐percent increase in expenditure improves the test score by a low of 0 to a high of 2.01 percent, while statistical tests fail to rule out zero effects. The modest effects of private tutoring found in the present study are comparable to the effects of public school expenditures on test scores and earnings estimated in previous studies.     

Economic transition and gender differentials in wages and productivity: Evidence from Chinese manufacturing enterprises

We use firm-level data to analyze male–female wage differences in Chinese industry in the late 1990s. Our estimates indicate that employers' discrimination against women was not a significant source of the gender wage gap in Chinese state-owned enterprises. Instead, we find that the relative wage of unskilled female to male workers was higher than their relative productivity. This result indicates that unskilled female workers in the state sector had historically received wage premiums and consequently accounted for a disproportionate share of the sector's labor surplus.     

Default and Recovery Risk Dependencies in a Simple Credit Risk Model

This paper provides evidence for the relationship between credit quality, recovery rate, and correlation. The paper finds that rating grade, rating shift, and macroeconomic factors provide a highly significant explanation for default risk and recovery risk of US bond issues. The empirical data suggest that default and recovery processes are highly correlated. Therefore, a joint approach is required for estimating time‐varying default probabilities and recovery rates that are conditional on default. This paper develops and applies such a model.     

The Importance of Asymmetric Tax Policy and Dangers of Aggregation

Existing tax policies have many complex features that make distinctions across goods, factors, and financial structures that distort economic allocations. Their importance is ignored when tax policy is summarized by an “effective” tax rate. In fact, the losses due to asymmetries are often larger than the losses due to the level of taxation.