Bureaucracy, Tax System, and Economic Performance

This paper investigates the consequences for government size, growth and welfare if a selfish bureaucracy provides a congested input. Alternative exogenous tax systems are introduced and numerical analyses are carried out. The welfare optimum is only met under very specific assumptions: proportional congestion, a tax system only consisting of distortionary taxes and a bureaucracy that maximizes the budget's growth rate. Otherwise the relative size of the public sector becomes suboptimally large thus inducing welfare losses. From a welfare economic point of view bureaucratic selfishness is worse than a suboptimal taxing regime that does not (completely) internalize the congestion externalities.     

ARE THERE ADVERSE INFLATION EFFECTS ASSOCIATED WITH NATURAL GAS DECONTROL?

The Natural Gas Policy Act (NGPA) will decontrol gas prices in 1985, and there is concern about its inflation and output effects. In this investigation of these concerns, two misapprehensions are remedied. First, inflation is primarily a monetary phenomenon so that a rise in energy prices affects the price level, but any impact on inflation is temporary. Second, while analyses of NGPA have assumed that the price of gas will achieve parity with petroleum, they have neglected decontrol's effect on OPEC's optimal price, Our estimates of the decontrol effect demonstrate that energy prices will fall, not rise     

Bias in an Empirical Approach to Determining Bond and Mortgage Risk Premiums

Empirical studies of bond and commercial mortgage performance often quantify a required risk premium by examining the difference between the promised yield and the realized yield as adjusted for default occurrence. These studies omit the effects of various other sources of risk, however, including collateral asset market risk, interest rate risk, and possibly call risk. These omissions downwardly bias the empirical risk premium estimate on the debt. In this paper, we disentangle and quantify the sources of this bias by modeling secured coupon debt (the commercial mortgage) as used in the calculation of a realized investment return. We consider deterministic and stochastic interest rate economies with mortgage contracts that are either noncallable or subject to a temporary prepayment lockout period. Given realistic parameter values associated with the term structure, underlying asset dynamics, and debt contracting, we show that the magnitude of the bias can be significant.     

The Duration of an Adjustable-Rate Mortgage and the Impact of the Index

With the increasing use of adjustable-rate mortgages for asset/liability management, there exists the need to properly evaluate their price sensitivity to interest rate changes. This paper provides a foundation by deriving the duration of an adjustable-rate mortgage. The properties of this duration are unique and have some important differences from those of fixed-rate securities. One important characteristic of an adjustable-rate mortgage concerns the index used to adjust the mortgage rate. It was found that the index tended to be more important than the adjustment frequency in determining the duration of an adjustable-rate mortgage.