Overlapping Generations or Infinitely-Lived Agents: Intergenerational Altruism and the Economics of Global Warming

Do we need an overlapping generations model for the economics of global warming? To answer this question, an infinitely-lived agent (ILA) approach and an overlapping generations (OLG) model are contrasted. ILA and OLG can be viewed as polar representations of intergenerational altruism. With ILA an immortal agent acts through his investment/savings decisions as trustee on the behalf of the future generations. With OLG, agents need not behave altruistic. They simply save during working years and dissave completely during retirement. Nevertheless, ILA and OLG must not differ in their implication for greenhouse policy. Greenhouse gas abatement is a straightforward alternative to physical capital formation and, even without altruism, each age cohort has an incentive to provide current abatement in order to reduce future damages attributable to climate change. Indeed, under reasonable assumptions and parameter values, our simulations reveal such an invariance result. Provided carbon taxes are the only policy tool and tax revenues are recycled through socially mandated rules, projections of economic growth, climate change and energy consumption are only insignificantly affected by the choice of approach.     

Reserve Requirements,Liquidity Risk,and Bank Lending Behavior

Although reserve requirements (RR) have been used in emerging markets to smooth credit cycles, the transmission mechanism remains blurry. Using bank‐level data, we unveil the interaction of RR with bank lending. We identify a new channel that works through a decline in banks’ liquid assets and loan supply due to an increase in RR. “Quantitative tightening” through RR raises the short‐term funding needs of the banking system, which is met by collateralized central bank lending, thus depleting banks’ unencumbered liquid assets. Our results suggest that such a shift in bank liquidity is associated with a significant change in lending.     

Persistent mispricing in a recently opened emerging index futures market: Arbitrageurs invited

The purpose of this study is to analyze the persistent, typically negative, mispricing in the new stock index futures market in Turkey, which has amounted to 5–8%, several multiples of transaction costs. The observations suggest that it is the outcome of a combination of practical difficulties of shorting in the spot stock market, behavioral effects, and insufficient arbitrage. The magnitude of the mispricing and the absence of arbitrage make behavioral effects more visible and provide a unique opportunity to examine extant behavioral hypotheses. Results confirm effects such as disposition and/or conservatism with the mispricing negatively related to past returns, but unrelated to future returns. Finally, an orderly weakening of the negative relation to past returns and behavioral effects is observed, suggesting that such effects will diminish as the market matures. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:218–243, 2009     

Financialization and Vested Interests: Self-Regulation vs. Financial Stability as a Public Good

I propose an institutionalist analysis of financialization through the lens of Thorstein Veblen, built on some peculiar characteristics of money and related financial instruments in a market-based capitalist economy. Following the case of the overcapitalization of farmlands, studied by Veblen (1919), I argue that modern capitalism is a financialized society dominated by vested interests that rely on financial liberalization-led speculative overcapitalization, often leading to a perverse accumulation process and resulting in systemic catastrophes. Consequently, one of the major constituent institutions of liberal finance, market-dependent selfregulation, proves unable to deal with society-level issues like financial stability. This latter issue must be handled at a systemic level, as a public good. Therefore, specific public regulation and action mechanisms must be designed to maintain society (and dominant vested-interests) within some viability limits to ensure a smooth functioning of the economy.     

AN ANALYSIS OF INTERNATIONAL PRICE DIFFERENTIALS ON EBAY

Online auction sites like eBay provide ways to measure what consumers buy and how much they pay. Does this imply that consumers pay similar prices, irrespective of their location? Comparing prices for homogeneous, tradable goods in the euro area and the United Kingdom, we find that prices differ significantly. The differential is not related to countries' having different currencies. However, price dispersion—the variance of prices—does seem to be smaller if two countries share a common currency. Our results confirm the importance of national borders in explaining price differences and their magnitude is related to (not) sharing a common currency. (JEL E30, E31, E50, F40)     

Restructuring of the Hungarian Electricity Industry

Restructuring the monopolistic, state-owned, obsolete and polluting utility industries of post-socialist economies poses a challenge for the utility deregulation wave travelling around the world. Utility restructuring in the Central and Eastern Europe (CEE) region is unique from several perspectives, including the domination of foreign capital vs. national resources as the only feasible vehicle for a drastic change in the industry and the ambitious goals of harmonisation with the EU liberalisation schedule to accelerate accession. It is also widely expected that deregulation will help bring down world-record high energy intensities in these economies. Hungary has been the pioneer among economies in transition in unbundling, deregulating and privatising the utility industries and taking the first steps towards EU-conforming market liberalisation within less than half a decade. The first stages of privatisation and restructuring have been declared a success story in the Western media. However, what is a success story from a foreign perspective may be seen differently from other viewpoints. The article describes the process of utility restructuring in Hungary and examines its impact from the economic, environmental and policy perspectives. The article also compares the pioneer Hungarian deregulation with other CEE countries' restructuring of their energy sectors. However, the lessons to be learned from the Hungarian electricity industry restructuring are not only vital for other economies in transition but are often universally applicable.     

Trust Me! I am a European Central Banker

In the aftermath of the financial crisis, the European Central Bank (ECB) has experienced an unprecedented deterioration in the level of trust. This raises the question as to what factors determine trust in central banking. We use a unique cross‐country data set that includes a rich set of socioeconomic characteristics and supplement it with variables meant to reflect a country's macroeconomic condition. We find that besides individual socioeconomic characteristics, macroeconomic conditions play a crucial role in the trust‐building process. Our results suggest that agents are boundedly rational in the trust‐building process and that current ECB market operations may even be beneficial for trust in the ECB in the long run.     

The “Boston” school-choice mechanism: an axiomatic approach

The Boston mechanism is a popular student-placement mechanism in school-choice programs around the world. We provide two characterizations of the Boston mechanism. We introduce two new axioms; favoring higher ranks and rank-respecting invariance. A mechanism is the Boston mechanism for some priority if and only if it favors higher ranks and satisfies consistency, resource monotonicity, and rank-respecting invariance. In environments where each type of object has exactly one unit, as in house allocation, a characterization is given by favoring higher ranks, individual rationality, population monotonicity, and rank-respecting invariance.     

Currency total return swaps: valuation and risk factor analysis

Abstract

Currency total return swaps (CTRS) are hybrid derivative instruments that allow us to simultaneously hedge against credit and currency risks. We develop a structural credit risk model to evaluate CTRS premia. An empirical test on a sample of 23,005 price observations from 59 underlying issuers yields an average percentage error of around 10%. This indicates that, beyond interest rate risk, firm-specific factors are major drivers of the variations in the valuation of these instruments. Regression analysis of residuals shows that exchange rate determinants account for up to 40% of model pricing errors, indicating that a currency risk premium affects the CTRS price significantly but only marginally, which confirms the prevalence of credit risk in the pricing of CTRS.