capital management in mutual financial institutions abstract capital management by mutual financial institutions such as credit unions provides a valuable testing ground for assessing the impact of capital regulation and theories of managerial behaviour in financial institutions limited access to external equity capital means that capital accumulation must be met primarily by reliance on retained earnings to deal with shocks to the capital position and avoid breaching regulatory requirements managers will aim to have a buffer of capital in excess of the regulatory minimum moreover mutual governance arrangements and an absence of capital market discipline mean that managers have discretion to set target capital ratios which differ significantly from industry averages this paper develops a formal model of capital management and risk management in mutual financial institutions such as credit unions which reflects these industry characteristics the model is tested using data from larger credit unions in australia which have been subject to the basel accord risk weighted capital requirements since 1993 the data supports the hypothesis that credit unions manage their capital position by setting a short term target profit rate return on assets which is positively related to asset growth and which is aimed at gradually removing discrepancies between the actual and desired capital ratio desired capital ratios vary significantly across credit unions there is little evidence of short run adjustments to the risk of the asset portfolio to achieve a desired capital position

from shadow to green linking environmental fiscal reforms and the informal economy in the past few decades many papers have analysed in some depth different environmental tax reforms and the double dividend hypothesis i e the possibility of improving not only the environment but also the economy through the reduction of distortions in the tax system recently more stress has been placed on testing empirically what effects a reduction in labour taxes may have on unemployment when accompanied by a carbon or other environmental tax however such studies have not modelled the effects of the presence of a shadow economy even though informal markets account for a significant and growing part of gdp in many developed economies this paper analyses this link using an applied general equilibrium model for the case of spain which has one of the highest unemployment rates in the world and one of the biggest informal economies of any wealthy country we conclude that our analysis strengthens the case for an environmental tax reform in spain if revenues from a co2 tax are recycled via a labour tax reduction

capital requirements and bank behaviour empirical evidence for switzerland abstract in recent years regulators have increased their focus on the capital adequacy of banking institutions to enhance the stability of the financial system the purpose of the present paper is to shed some light on whether and how swiss banks react to constraints placed by the regulator on their capital building on previous work by shrieves and dahl cf shrieves r e dahl d 1992 the relationship between risk and capital in commercial banks journal of banking and finance 16 439 457 we use a simultaneous equations model to analyse adjustments in capital and risk at swiss banks when those approach the minimum regulatory capital level our results indicate that regulatory pressure induce banks to increase their capital but does not affect the level of risk

drivers for the use of materials across countries abstract this paper analyses drivers for resource use and material productivity across countries this is not only relevant in light of soaring raw material prices but also because eu policies such as the thematic strategy on the sustainable use of natural resources com 2005 670 the eu raw materials initiative com 2008 699 and various similar policies internationally seek to better manage materials along their life cycle and across economies in order to better understand the system dynamics of material use our paper applies methodologies of material flow analysis and regression analysis to identify the major drivers for resource use and decoupling from gdp drivers are understood as those factors that exert influence on human activities to use resources a panel data set is taken for the european union for the years 1980 2000 eu 15 and 1992 2000 eu 25 the main drivers of resource use were found to be energy efficiency new dwellings and roads construction activities shortcomings of the methodology are also discussed

the effectiveness of bank capital adequacy regulation a theoretical and empirical approach the aim of this paper is to analyse how banking firms set their capital ratios that is the rate of equity capital over assets in order to study this isue two theoretical models are developed both models deal with the existence of an optimal capital ratio the first one for firms not affected by capital adequacy regulation the second one for firms which are the models have been tested by estimating a disequilibrium model using data of spanish savings banks

joint effects of interest rate deregulation and capital requirements on optimal bank portfolio adjustments the 1980 depository institution deregulation and monetary control act didmca mandates that regulation q be phased out by 1986 with deregulation of interest rate ceilings the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets thus value maximizing bank managers would need to be concerned not only with the internal risk but also with the external risk in bank portfolio management decisions based upon the cash flow version of the capital asset pricing model this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm the 1980 depository institution deregulation and monetary control act didmca mandates that regulation q be phased out by 1986 with deregulation of interest rate ceilings the cost of raising capital funds for commercial banks would become more volatile and more correlated with interest rates in the money and capital markets the bank s cash profit would be more dependent on the interest rate fluctuation ceteris paribus thus the value of a banking firm would also be more dependent on the correlation of the banking firm s cash profit with that of the external market ceteris paribus therefore as deregulation continues a value maximizing bank manager would need to be concerned not only with variance and covariances among the returns on bank assets but also with covariances between rates on bank assets and liabilities as well as that in the external markets study of portfolio behavior of a banking firm should distinguish between the impact of internal risk and external risk on firm value furthermore with interest rate deregulation and the ensuing interactions among various risks banks may also react differently to capital regulation imposed by the regulatory agency despite numerous studies on regulation of bank capital the joint effects of interest rate deregulation and capital requirements on bank

theories of bank behavior under capital regulation abstract this paper reviews academic studies of bank capital regulation in an effort to evaluate the intellectual foundation for the imposition of the basel i and basel ii systems of risk based capital requirements the theoretical literature yields general agreement about the immediate effects of capital requirements on bank lending and loan rates and the longer term impacts on bank ratios of equity to total or risk adjusted assets this literature produces highly mixed predictions however regarding the effects of capital regulation on asset risk and overall safety and soundness for the banking system as a whole thus the intellectual foundation for the present capital regulation regime is not particularly strong the mixed conclusions in the academic literature on banking certainly do not provide unqualified support for moving to an even more stringent and costly system of capital requirements these widely ambiguous results do suggest however that assessing the implications of capital regulation for balance sheet risk and monitoring effort in diverse banking systems is an important agenda for future theoretical research in the banking area

the econometrics of the environmental kuznets curve an illustration using australian co2 emissions four econometric issues associated with the estimation and testing of the environmental kuznets curve ekc are considered i model specification with respect to the order of the polynomial ii

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

financial intermediation as a beliefs bridge between optimists and pessimists this paper proposes a new framework for understandingnancial intermediation in contrast to previous research we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages instead in an economy with overly optimistic entrepreneurs who require funding from overly skeptical pessimistic investors we show that intermediaries can arise endogenously in such a setting only a rational intermediary will be su ciently optimistic tond it worthwhile to invest in a technology for screening entrepreneurs projects and yet be pessimistic enough to use this technology our framework produces implications consistent with heretofore unexplained stylized facts and a number of others which are as of yet untested

taxing fossil fuels under speculative storage long term environmental consequences of taxing fossil fuel usage have been extensively studied in the literature however these taxes may also impose several short run macroeconomic policy challenges the nature of which remains underexplored this paper investigates the mechanisms through which environmental taxes on fossil fuel usage can affect the main macroeconomic variables in the short run we concentrate on a particular mechanism speculative storage formulating and using a dynamic stochastic general equilibrium dsge model calibrated for the united states with an explicit storage facility and nominal rigidities we show that in designing environmental tax policies it is crucial to account for the fact that fossil fuel prices are subject to speculation the existence of forward looking speculators in the model improves the effectiveness of tax policies in reducing fossil fuel usage improved policy effectiveness however is costly it drives inflation and interest rates up while impeding output based on this tradeoff we seek an answer to the question how monetary policy should interact with environmental tax policies in our dsge model of fossil fuel storage we show that in an environment with no speculative storers monetary policy should respond to output along with cpi inflation in order to minimize the welfare losses brought by taxes however when the storage facility is activated responding to output in the monetary policy rule becomes less desirable

carbon dioxide emissions and economic growth panel data evidence from developing countries in this paper we test the environment kuznet s curve ekc hypothesis for 43 developing countries we suggest examining the ekc hypothesis based on the short and long run income elasticities that is if the long run income elasticity is smaller than the short run income elasticity then it is evident that a country has reduced carbon dioxide emissions as its income has increased our empirical analysis based on individual countries suggests that jordan iraq kuwait yemen qatar the uae argentina mexico venezuela algeria kenya nigeria congo ghana and south africa approximately 35 per cent of the sample carbon dioxide emissions have fallen over the long run that is as these economies have grown emissions have fallen since the long run income elasticity is smaller than the short run elasticity we also examine the ekc hypothesis for panels of countries constructed on the basis of regional location using the panel cointegration and the panel long run estimation techniques we find that only for the middle eastern and south asian panels the income elasticity in the long run is smaller than the short run implying that carbon dioxide emission has fallen with a rise in income

material flow accounting in an irish city region 1992 2002 abstract this paper aims to measure raw material inputs and waste flows in an irish city region in order to analyse i whether there was absolute dematerialisation in the particular case study over the period 1992 2002 and ii whether material consumption and waste generation were decoupled from economic growth and increases in disposable income over the same period it was found that the selected material flow indicators showed no evidence of absolute dematerialisation over the given study period although more recent evidence at the national level suggests that a decline in construction activity and extraction of non metallic minerals has resulted in an absolute reduction in material consumption and it is likely that this will be mirrored at the system boundary level it was found that domestic material consumption dmc per capita and direct material input dmi per capita increased at a faster rate than domestic processed output dpo per capita and direct material output dmo per capita between 1992 and 2002 which indicates relative decoupling of consumption from waste generation in addition it was found that there was relative decoupling of consumption and waste generation from disposable income growth over the study period finally it was found that average dmc and dmi figures for the selected case study were lower than the national averages but broadly similar to results for other city regions in the european union eu on a methodological note it was concluded that material flow accounting mfa for city regions in ireland is constrained due to a lack of disaggregated data for material flows with the exception of local waste data and it is recommended that bottom up analysis should be used to complement disaggregated top down data

environmental kuznets curves real progress or passing the buck abstract recent research has examined the hypothesis of an environmental kuznets curve ekc the notion that environmental impact increases in the early stages of development followed by declines in the later stages these studies have focused on the relationship between per capita income and a variety of environmental indicators results imply that ekcs may exist for a number of cases however the measures of environmental impact used generally focus on production processes and reflect environmental impacts that are local in nature and for which abatement is relatively inexpensive in terms of monetary costs and or lifestyle changes significantly more consumption based measures such co2 emissions and municipal waste for which impacts are relatively easy to externalize or costly to control show no tendency to decline with increasing per capita income by considering consumption and trade patterns the author re examines the concept of the ekc and proposes the use of alternative consumption based measures of environmental impact the author speculates that what appear to be improvements in environmental quality may in reality be indicators of increased ability of consumers in wealthy nations to distance themselves from the environmental degradation associated with their consumption

how bank capital buffers vary across countries the influence of cost of deposits market power and bank regulation abstract this paper analyzes the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002 after controlling for adjustment costs and the endogeneity of explanatory variables the results show that capital buffers are positively related to the cost of deposits and bank market power although the relations vary across countries depending on regulation supervision and institutions their impact is the result of two generally opposing effects restrictions on bank activities and official supervision reduce the incentives to hold capital buffers by weakening market discipline but at the same time they promote higher capital buffers by increasing market power institutional quality has the two opposite effects better accounting disclosure and less generous deposit insurance however have a clear positive effect on capital buffers by both strengthening market discipline and making charter value better able to reduce risk taking incentives

does the basle capital accord reduce bank fragility an assessment of the value at risk approach abstract we examine the economic implications arising from a bank using a var constrained mean variance model for the selection of its trading portfolio as a consequence of the basle capital accord surprisingly we show that when a var constraint is imposed it is plausible that certain banks will end up selecting riskier portfolios than they would have chosen in the absence of the constraint accordingly regulators such as the basle committee on banking supervision should be aware that allowing a bank to use var to determine its minimum regulatory capital may increase its fragility alternatives to var based bank capital regulation that mitigate or even preclude its perverse implications are presented

assessing the risk return trade off in loan portfolios abstract this paper proposes a methodology to analyse the risk and return of large loan portfolios in a joint setting i propose a tractable model to obtain the distribution of loan returns from observed interest rates and default frequencies i follow a sectoral approach that captures the heterogeneous cyclical features of different kinds of loans and yields moments in closed form i investigate the validity of mean variance analysis with a value at risk constraint and study its relationship with utility maximisation finally i study the efficiency of corporate and household loan portfolios in an empirical application to the spanish banking system

low carbon scenarios for transport in india co benefits analysis abstract dependence on oil for transport is a concern for india s policymakers on three counts energy security local environment and climate change rapid urbanisation and accompanying motorisation has created some of the most polluting cities in india and rising demand for oil is leading to higher imports besides causing more co 2 emissions the government of india wants to achieve the climate goals through a sustainability approach that simultaneously addresses other environment and developmental challenges this paper analyses a sustainable low carbon transport slct scenario based on sustainable strategies for passenger and freight mobility vehicle technologies and fuel using global co 2 prices that correspond to 2 c global stabilisation target the scenarios span from years 2010 to 2050 and are analysed using the energy system model answer markal the slct scenario has improved energy security cumulative oil demand lower by 3100 mtoe improved air quality pm 2 5 emissions never exceed the existing levels and the cumulative co 2 emissions are lower by 13 billion t co 2 thereby showing that achieving development objectives with co 2 co benefits is feasible

managing efficient capital allocation with emphasis on the chinese experience responsible risk management is central to banking ethics with the 1999 publication of the basel committee s proposal basel ii for a new capital accord to replace the 1988 agreement basel i an attempt has been made to address the problem of correlating banks risk management with their capital requirements the basel ii framework finalised in june 2004 is designed to improve risk management by using models based on past performance to help set the amount of capital banks are required to hold by regulators with the purpose of improving the efficiency of capital allocation the objectives of this study are to investigate how banks generally but particularly those located in china could improve their risk management systems and what the implications of these new regulations are for them three relevant propositions were formulated namely basel ii will improve risk management basel ii will improve capital allocation efficiency and compliance with advanced risk management systems is biased in favour of the large banks evidence was assembled with which to evaluate these three propositions by gathering relevant primary data by means of a representative survey of chinese banking executives involved in risk management the findings strongly support the first two of the above propositions and partly support the third proposition

risk based capital requirements and bank portfolio risk abstract we construct a linear programming model and analyze the effectiveness of r b capital adequacy standards when bank deposits are fully insured we derive a set of optimal asset risk weights given a constraint in raising equity and using these weights the r b capital plan is an effective regulation mechanism without a constraint on equity maximum leverage restrictions and r b capital plans are mutually exclusive alternatives as we deviate from the optimal risk weights a combination of a leverage restriction and a r b equity ratio seems to be the more appropriate approach to controlling bank portfolio risk

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

how economic growth affects emissions an investigation of the environmental kuznets curve in portuguese and spanish economic activity sectors abstract it is a disquieting reality that increased economic growth for many years now in the western world is at odds with environmental degradation in this paper the relationship between economic growth and environmental variables is analyzed under two non linear specifications a quadratic and a cubic specification the study is conducted for portugal and spain in the period 1975 2012 using data for 13 sectors gva is used as proxy for income while energy use and carbon dioxide account for environmental degradation there is evidence for an inverted u shaped ekc however there are also other inverted n shaped functions that explain the relationship between economic growth and emissions altogether empirical results do indicate particular differences between portuguese and spanish sectors the results are of interest not only for researchers but also for policy makers political mitigation measures are also analyzed

banks buffer capital how important is risk abstract most banks hold a capital to asset ratio well above the required minimum defined by the present capital adequacy regulation basel i using bank level panel data from norway important hypotheses concerning the determination of this buffer capital are analyzed focus is on the importance of i risk ii the buffer as an insurance iii the competition effect iv supervisory discipline and v economic growth a negative or non significant risk effect is found which suggests that introducing a more risk sensitive capital regulation basel ii is likely to affect norwegian banks support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

energy consumption economic growth and carbon emissions challenges faced by an eu candidate member abstract this paper investigates the long run granger causality relationship between economic growth carbon dioxide emissions and energy consumption in turkey controlling for gross fixed capital formation and labor the most interesting result is that carbon emissions seem to granger cause energy consumption but the reverse is not true the lack of a long run causal link between income and emissions may be implying that to reduce carbon emissions turkey does not have to forgo economic growth

economic growth and emissions reconsidering the empirical basis of environmental kuznets curves abstract recent empirical research indicates that certain types of emissions follow an inverted u or environmental kuznets curve ekc as income grows this regularity has been interpreted as a possible de linking of economic growth and patterns of certain pollutants for developed economies in this paper the empirical basis of this result is investigated by considering some statistical particularities of the various ekc studies performed it is argued that the inverted u relationship between income and emissions estimated from panel data need not hold for specific individual countries over time based on insights from intensity of use analysis in resource economics an alternative growth model is specified and estimated for three types of emissions co2 nox and so2 in four countries netherlands uk usa and western germany it is found that the time patterns of these emissions correlate positively with economic growth and that emission reductions may have been achieved as a result of structural and technological changes in the economy sustainable growth is defined as the rate of economic growth that does not lead to growth in emissions its rate is calculated for each type of emission and country based on estimated parameter values the resulting indicators reflect a balance between the positive influence of growth and negative influence of structural change and technological progress on emission levels

forbearance deposit insurance pricing and incentive compatible bank regulation abstract this paper examines the incentive compatible role of regulatory forbearance policy in the context of optimal bank regulation under moral hazard we show that when a bank s asset portfolio returns have market risk the regulator can influence the bank s choice of ex ante risk by delaying the closure of an insolvent bank the optimal closure policy involves co ordinating the closure decision with market wide performance such a policy may significantly alleviate the bank s ex ante risk shifting problem furthermore even fixed rate deposit insurance can be optimal when combined with a sound forbearance policy and a minimum capital standard

international comparison of resource use and its relation to economic growth the development of total material requirement direct material inputs and hidden flows and the structure of tmr abstract resource flows constitute the materials basis of the economy at the same time they carry and induce an environmental burden associated with resource extraction and the subsequent material flows and stocks which finally end up as waste and emissions a reduction of this material throughput and the related impacts would require a reduction of resource inputs and breaking the link between resource consumption and economic growth would require an increase in resource productivity material flow analysis mfa can be used to quantify resource flows and indicate resource productivity in this article we study the available empirical evidence on the actual de linkage of material resource use and economic growth we compare resource use with respect to total material requirement tmr and direct material input dmi for 11 and 26 countries respectively and the european union eu 15 the dynamics of tmr as well as of the main components are analysed in relation to economic growth in order to show whether there is a decoupling relative or absolute from gdp and a change of the metabolic structure in the course of economic development dmi cap so far only decoupled from gdp cap in relative terms that is in most countries it reached a rather constant level but with the exception of czech republic showed no absolute decline yet tmr cap was reduced in two high income countries and one low income country due to political influence changes in tmr were more influenced by hidden flows hf than by dmi we analyse the dynamics of the structure and composition of tmr in the course of economic development in general the economic development of industrial countries was accompanied by a shift from domestic to foreign resource extraction different relations can be discovered for the share of biomass fossil fuel resources construction resources and metals and industrial minerals

non renewable and renewable energy consumption and co2 emissions in oecd countries a comparative analysis abstract this paper attempts to explore the determinants of co 2 emissions using the stirpat model and data from 1980 to 2011 for oecd countries the empirical results show that non renewable energy consumption increases co 2 emissions whereas renewable energy consumption decreases co 2 emissions further the results support the existence of an environmental kuznets curve between urbanisation and co 2 emissions implying that at higher levels of urbanisation the environmental impact decreases therefore the overall evidence suggests that policy makers should focus on urban planning as well as clean energy development to make substantial contributions to both reducing non renewable energy use and mitigating climate change

gradual green tax reforms abstract green tax reforms have become an important tool not only in protecting the environment but also in bringing about a more efficient tax system however reforms often imply accepting sacrifices in the short run and bring about the risk of potential political opposition within this framework the debate on whether to implement green tax reforms in one step or gradually becomes of great interest in this paper we use a dynamic general equilibrium model calibrated to the spanish economy to evaluate different reforms that consist in increasing energy taxes and adjusting capital taxation in a revenue neutral framework our findings show that although an environmental dividend is always granted the existence of an efficiency dividend depends on the type of reform its size and how gradually it is implemented thus one step reforms that produce an efficiency dividend would imply large efficiency costs in the short run in this case the reform could only produce efficiency gains in the short run if it is implemented gradually although such gains would end up disappearing in the long run

the impact of economic development and social political factors on ecological footprint a panel data analysis for 15 mena countries abstract this paper extends the work of al mulali and ozturk 2015 1 by re investigating the environment kuznets curve ekc hypothesis for 15 mena middle east and north african countries using the ecological footprint ef as a proxy of environmental degradation over the period 1975 2007 unlike the existing studies we augment the basic ekc relationship by considering life expectancy at birth fertility rate and political institutional index variables as new possible determinants of environmental degradation the estimation of this relationship has been conducted for all mena 15 countries for oil exporting and non oil exporting countries sub samples the results show that energy use worsens ecological footprint whereas real gdp per capita exhibits an inverted u shaped relationship with ef in oil exporting countries and in the sample as a whole i e the ekc hypothesis is validated for the non oil exporting countries the relationship between ef and economic growth is u shaped moreover our findings show that socio demographic variables such as urbanization life expectancy at birth and fertility rate improve the environment in the long term we also found that the improvement of political institutions in those countries has not been accompanied by a reduction of environmental stress the granger causality results support evidence of the existence of an error correction mechanism between the ef real gdp energy use and the fertility rate specifically in the short term we found strong evidence for bidirectional causality among the ecological real gdp and energy use variables

the virtues of gradualism and legitimacy in the transition to a market economy this paper presents a simplified model of sectoral restructuring in eastern europe a move towards allocative efficiency is desired by the reform minded government but the shift to higher productivity which such efficiency requires would lead to massive layoffs and labour reallocation in the transition period we look at the impact of political constraints unanimity and or majority worker approval on reform proposals when the government faces a heterogeneous workforce holding private information on relative outside opportunities when the budgetary consequences of exit compensations are so important as to make partial reforms preferable to full reforms gradualism emerges as the optimum in a dynamic context without government commitment it is also shown that under democratic majority rule a government in control of the agenda of reforms can win majority approval for plans which end up hurting majority interests intertemporally by threatening to switch majorities in future reform proposals this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

can regulators allow banks to set their own capital ratios abstract basel regulators have received widespread criticism for failing to prevent two credit crises that hit the u s over the last two decades nonetheless banks were considerably overcapitalized prior to the onset of the 2007 2009 subprime crisis compared to those which had undergone the 1990 1991 recession therefore if capital requirements were achieved prior to the subprime crisis how could the basel framework be blamed again for having accelerated if not caused another credit crunch we find that the answer to this question lies in the relationship between the capital ratio and the leverage ratio which is governed by risk weights categories determined by the basel regulation we show that changes to risk weight categories which affect the correlation pattern between both ratios are not reflected in the subprime crisis this minimizes the implication of the basel ii regulation in the crunch that succeeded its announcement in contrast to basel i we demonstrate that these dynamics are governed by a formula linking the two ratios together which derives from the sensitivity of the risk based capital ratio to a change in its risk weight s one implication of our work regarding the basel iii regulation consists in validating the newly established capital increments in a mathematical rather than heuristical approach

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

the cyclical behaviour of european bank capital buffers using an unbalanced panel of accounting data from 1997 to 2004 and controlling for individual bank costs and risk we find capital buffers of the banks in the eu15 have a significant negative co movement with the cycle for banks in the accession countries there is significant positive co movement capital buffers of commercial and savings banks and of large banks exhibit negative co movement those of co operative and smaller banks exhibit positive co movement speeds of adjustment are fairly slow we interpret these results and discuss policy implications noting that negative co movement of capital buffers will exacerbate the pro cyclical impact of basel ii

bank capital and equity investment regulations abstract this paper uses an intermediation model to study the efficiency and welfare implications of both banks minimum required capital asset ratio and the regulation that limits and in some countries forbids banks investments in the equity of nonfinancial firms there are two sources of moral hazard in the model one between the bank and the provider of deposit insurance and the other between the bank and an entrepreneur who demands funds to finance an investment project among other things the paper shows that capital regulation improves the bank s stability and can also be pareto improving equity regulation is never pareto improving and does not increase the bank s stability

the effects of closure policies on bank risk taking abstract this paper models bank closure policy for a risk averse bank that enjoys flat rate deposit insurance we find that increasing the level of net worth at which banks are closed can increase or decrease induced risk aversion as well as increase the likelihood that marginally healthy banks would be subject to extreme moral hazard these result suggest that more timely closure policies should be imposed in conjunction with greater monitoring of bank portfolio risk and with restrictions on risk taking for marginally healthy banks in addition we find that changes in closure policy can increase or decrease desired leverage and that this effect depends on the degree of correlation among asset returns

or forum design of risk weights banking regulations set minimum levels of capital for banks these requirements are generally formulated through a ratio of capital to risk weighted assets a risk weighting scheme assigns a weight to each asset or category of assets and effectively functions as a linear constraint on a bank s portfolio choice it also changes the incentives for banks to hold various kinds of assets in this paper we investigate the design of risk weights to align regulatory and private objectives in a simple mean variance framework for portfolio selection by setting risk weights proportional to profitability rather than risk the regulator can induce a bank to reduce its overall level of risk without distorting its asset mix because the regulator is unlikely to know the true profitability of assets we introduce an adaptive formulation in which the regulator sets weights by observing a bank s portfolio the adaptive scheme converges to the same combination of weights and portfolio choice that would hold if the regulator knew the asset profitability we also investigate other objectives including steering banks to a target mix of assets adding robustness mitigating procyclicality and reducing system wide risk in a setting with multiple heterogeneous banks

systemic risk and bank business models textabstractin this paper we decompose banks systemic risk into two dimensions the risk of a bank bank tail risk and the link of the bank to the system in financial distress systemic linkage based on extreme value theory we estimate a systemic risk measure that can be decomposed into two subcomponents reflecting these dimensions empirically we assess the relationships of bank business models to the two dimensions of systemic risk the observed differences in these relationships partly explain why micro and macroprudential perspectives sometimes have different implications for banking regulation

dynamic linkages between globalization financial development and carbon emissions evidence from asia pacific economic cooperation countries abstract this study determines the dynamic linkages between globalization financial development and carbon emissions in asia pacific economic cooperation apec countries in the presence of energy intensity and economic growth under the framework of environment kuznets curve ekc this study employs the panel data from 1990 to 2016 westerlund cointegration technique to find long run cointegration and continuously updated bias corrected cup bc and continuously updated fully modified cup fm methods to check the long run elasticities between the variables empirical results indicate that globalization and financial development significantly reduce carbon emissions but economic growth and energy intensity increase them these results support the ekc hypothesis for apec countries the dumitrescu and hurlin causality analysis shows that globalization granger causes co2 emissions globalization also causes financial development and energy intensity a feedback effect exists between financial development and co2 emissions furthermore financial development causes economic growth but similar is not true from opposite side in granger sense finally this study presents important policy implications with respect to apec countries

bank resolution a framework for the assessment of regulatory intervention more than ever the current crisis has highlighted the cost of banking crises in budgetary and economic growth terms whether or not to restructure a bank is a key determinant of who bears the costs the present article surveys the main issues concerning banks restructuring by considering the bargaining game that is played between regulators and shareholders when a bank is in distress this revolves around the framework of negotiation that was established by the regulator the fall back position which is determined by bankruptcy legislation and the objective function of the regulator in this context we argue that it is possible to improve upon existing restructuring mechanisms by making banks bail outs less costly to taxpayers and improving the ex ante incentives of banks managers and shareholders the authors 2012 published by oxford university press

energy consumption carbon emissions and economic growth nexus in bangladesh cointegration and dynamic causality analysis abstract the paper investigates the possible existence of dynamic causality between energy consumption electricity consumption carbon emissions and economic growth in bangladesh first we have tested cointegration relationships using the johansen bi variate cointegration model this is complemented with an analysis of an auto regressive distributed lag model to examine the results robustness then the granger short run the long run and strong causality are tested with a vector error correction modelling framework the results indicate that uni directional causality exists from energy consumption to economic growth both in the short and the long run while a bi directional long run causality exists between electricity consumption and economic growth but no causal relationship exists in short run the strong causality results indicate bi directional causality for both the cases a uni directional causality runs from energy consumption to co 2 emission for the short run but feedback causality exists in the long run co 2 granger causes economic growth both in the short and in the long run an important policy implication is that energy electricity as well can be considered as an important factor for the economic growth in bangladesh moreover as higher energy consumption also means higher pollution in the long run policy makers should stimulate alternative energy sources for meeting up the increasing energy demand

the cyclical effects of the basel ii capital requirements abstract capital requirements play a key role in the supervision and regulation of banks the basel committee on banking supervision is in the process of changing the current framework by introducing risk sensitive capital charges some fear that this will unduly increase the volatility of regulatory capital furthermore by limiting the banks ability to lend capital requirements may exacerbate an economic downturn the paper examines the problem of capital induced lending cycles and their pro cyclical effect on the macroeconomy in greater detail it finds that the capital buffer that banks hold on top of the required minimum capital plays a crucial role in mitigating the impact of the volatility of capital requirements

revisiting the environmental kuznets curve hypothesis evidence from the asean 5 countries with structural breaks abstractthis paper tests if the environmental kuznets curve ekc hypothesis exists for asean 5 countries in an annual sample data that covers 1971 2013 by utilizing auto regressive distributed la

a new environmental kuznets curve relationship between direct material input and income per capita evidence from industrialised countries abstract many studies have focused on the quantification of the input of materials into the economy however the insights provided by those studies have generally been limited this paper attempts to bring analytical value to the discussion on dematerialization considering direct material input dmi per capita as the dependent variable in a test of the environmental kuznets curve ekc the explanatory variable is as usual gross domestic product per capita the quadratic and cubic versions of the ekc are tested econometrically using panel data ranging from 1960 to 1998 for 16 industrialised countries the results indicate a strong and robust support for both the quadratic and cubic ekc relationships between material input and income in industrialised economies while the statistical support to both types of evolution may seem contradictory it suggests that as industrialised economies grow the intensity of material consumption first increases but eventually starts exhibiting a decreasing trend after a certain income threshold is reached the inverted u or quadratic relationship is confirmed even though for the ranges of income considered in this study the trend is mostly on the increasing part of the inverted u curve however the statistical support to the cubic specification suggests that these results need to be regarded with caution overall the statistically stronger models are the quadratic and cubic models with country random effects and the cubic model with country and year fixed effects

the capital energy substitutability debate a new look over the last twenty years many studies have been made of the elasticity of substitution between capital and labor the reported estimates are highly variable and reveal an apparent dichotomy between cross sectional and time series studies the former suggest that capital and energy are substitutes while the latter suggest the converse all these studies reported allen partial elasticities of substitution we suggest that the morishima elasticity may be a more useful measure for the issues of concern to capital energy substitution we calculate the morishima elasticities from parameters estimated in a selection of earlier studies and find no excessive variability nor any evidence of the time series cross section dichotomy capital and energy are morishima substitutes copyright 1995 by mit press

accounting for banks capital regulation and risk taking this paper examines risk taking incentives in banks under dierent accounting regimes with capital regulation in the model the bank s decisions of capital issuance and investment policy are jointly determined given exogenous minimum capital requirement the bank is more likely to issue equity capital in excess of the minimum required level and implement less risky investment policy under either lower of cost ormarket accounting or fair value accounting than under historical cost accounting but fair value accounting may induce more risk taking compared to lower of cost or market accounting due to short term interest in the part of the bank however the disciplining role of lower of cost or market accounting may discourage bank s incentive to exert project discovery eort

unintended consequences of the market risk requirement in banking regulation abstract we analyze a bank that operates under the basel credit and market risk requirements and that maximizes its value through recapitalizations dividends and liquid asset investments according to our model the market risk requirement may postpone recapitalization and this way increase the bank s default probability we show that this is indeed the case if the expected return and volatility of the liquid asset portfolio are high i e then the market risk requirement raises the default probability of the bank in this sense the market risk requirement is inefficient

capital requirements and the behaviour of commercial banks abstract i study the consequences of capital regulations on the portfolio choices of commercial banks elaborating on previous work by kareken and wallace 1978 koehn and santomero 1980 and kim and santomero 1988 i obtain the following results if the objective of commercial banks is maximization of the market value of their future profits value maximizing banks capital regulations cannot prevent banks from choosing very specialized and very risky portfolios risk based insurance premia are in fact the relevant instrument for that purpose on the other hand if banks behave as portfolio managers utility maximizing banks capital regulations can be effective but only if the weights used in the computation of the ratio are proportional to the systematic risks of the assets their betas because of limited liability of commercial banks a minimum capital regulation or a closing rule may become necessary as well to prevent failing banks from betting for resurrection

a comparison of the original and revised basel market risk frameworks for regulating bank capital abstract recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis the basel committee on banking supervision 2011 revised its regulatory framework for trading portfolios in this paper we compare 1 the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk and 2 the relative adequacy of these frameworks in setting minimum capital requirements our main findings are as follows first both systems allow the selection of portfolios with substantive tail risk but one based on the revised framework tends to be less effective in controlling tail risk second the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework hence on balance the revised framework improves upon the original framework we also suggest further improvements for consideration by bank regulators

the co2 emissions income nexus evidence from rich countries the paper attempts to test the environment kuznets curve ekc hypothesis for 36 high income countries for the period 1980 2005 the test is based on the suggestion of narayan and narayan 2010 various panel data unit root and co integration tests are applied carbon dioxide co2 emissions and gdp series are integrated of order one and co integrated especially after controlling for cross sectional dependence additionally the blundell bond system generalised methods of moments gmm is employed to conduct a panel causality test in a vector error correction mechanism vecm setting unidirectional causality running from real per capita gdp to per capita co2 emissions is uncovered in both the short run and the long run the empirical analysis based on individual countries provides evidence of an ekc for greece malta oman portugal and the united kingdom however it can be observed that for the whole panel a 1 increase in gdp generates an increase of 0 68 in co2 emissions in the short run and 0 22 in the long run the lower long run income elasticity does not provide evidence of an ekc but does indicate that over time co2 emissions are stabilising in the rich countries

banks debt and risk assessing the spillovers of corporate taxes we find evidence of tax driven strategic allocation of debt and asset risk across group entities of european banks we evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk and show that the degree of coordination in implementing the hypothetical tax reform matters in particular a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis by contrast uncoordinated tax reforms are not equally beneficial precisely because national tax policies generate spillovers through cross border bank activities jel g21 g28 h25

internalizing co2 emissions via central banks financials evidence from the world researchers and policy makers have suggested tools to mitigate co2 emissions worldwide however there appears to be uncertainty in terms of policy effectiveness the objective of this paper is to develop an innovatively effective co2 internalizing mechanism worldwide which builds on currency in circulation as its core operational tool the study is based on a large sample of countries findings show that urbanization electric power consumption and trade positively impact on co2 emissions no evidence is found in favour of the environmental kuznets curve while the use of renewable energy reduces the level of co2 emissions the paper proposes a central bank carbon dioxide emissions internalizing fund which rests on quantitative and qualitative tools to ensure a truly effective mechanism in co2 emissions abatement quantitatively this implies the use of a direct tax on currency in circulation and a conversion penalty in the fund qualitatively there is the need to establish a global institution which would ensure that funds flow to the most polluting sectors in each country in view of unleashing the strongest decline in co2 emissions

a reexamination of mean variance analysis of bank capital regulation abstract the mean variance framework has been used to analyze the effects of bank capital regulation on the asset and bankruptcy risk of insured utility maximizing banks this literature claims that more stringent capital regulation will increase asset risk and can increase bankruptcy risk these conclusions are notable because they are opposite to those obtained for insured value maximizing banks in this paper we show that the utility maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank s investment opportunity set by neglecting the option value of deposit insurance

quantifying u s aluminum in use stocks and their relationship with economic output abstract a dynamic material flow analysis model is developed to quantify aluminum in use stocks and old scrap recycling and recovery in the united states for the period of 1900 to 2007 the total in use aluminum stock in 2007 is estimated as 93 million metric tons which represents approximately 34 of the cumulative apparent consumption since 1900 alternately since 1900 nearly 40 of the cumulative discarded aluminum has not been recycled for domestic use in the u s or for export to foreign consumers statistical time series analysis is used to explore the relationship between model results of in use stocks and gross domestic product gdp unlike most previous studies of material consumption and economic activity which ignore the statistical properties of time series data to the detriment of model estimation and inference data stationarity is explicitly evaluated through unit root testing and model specification is adjusted accordingly the annual percentage change in gdp is found to have a large and significant association with the annual percentage change in net additions to in use stocks model sensitivity and uncertainty are quantified through the application of the fourier amplitude sensitivity test and alternate specifications of product lifetime probability density functions

system dynamics modelling and the environmental kuznets curve in ecuador 1980 2025 abstract is it possible for a country in the process of development to comply with the environmental kuznets curve ekc hypothesis in the medium term this is the question that inspired this study this paper is an extension of a previous study focused on economic development and co2 emissions in the coming years in ecuador robalino lopez et al submitted for publication the main goal of this paper is to analyze whether the ekc hypothesis holds within the period 1980 2025 under four different scenarios this paper uses co integration techniques stock and watson 2010 to test the existence of the ekc hypothesis in ecuador in the medium term using jaunky s 2011 specification our proposal goes a step further than previous contributions and intends to see under which conditions a country could approach the fulfilment of this hypothesis in the medium term results do not support the fulfilment of the ekc nevertheless our estimations show that ecuador could be on the way to achieving environmental stabilization in the near future if economic growth is combined with an increase in the use of renewable energies an improvement of the productive sectoral structure and the use of a more efficient fossil fuel technology

speed of adjustment and self fulfilling failure of economic reform abstract an economic reform programme where inefficient public labour is laid off is considered the immediate effect is a lowering of wages and increased profitability in the private modern sector over time as capital accumulates in the modern sector wages and production increases big bang reform generates a sharp transitory drop in wages while gradual reform gives a more modest decline in the presence of a subsistence wage constraint popular resistance can cause the cancellation of big bang reform two arguments for gradualism can in that case be made first a more gradual reform requires a less abrupt drop in the wage and will therefore be feasible second the initial wage drop will be stronger if a cancellation of reform is expected and since cancellation is dependent on the severity of the initial wage drop multiple equilibria occurs the existence of multiple equilibria is dependent on the speed of reform sufficiently gradual programmes have a unique successful equilibrium

capital and risk in property liability insurance markets abstract this paper investigates the capital and portfolio risk decisions of property liability insurance firms a theoretical model based on option pricing theory is developed which predicts a positive relationship between insurer capital and risk as firms balance these two factors to achieve their desired overall insolvency risk the implications of the model are then tested empirically using a simultaneous equations methodology the results support the predictions of the model they also provide evidence that managerial incentives play a role in determining capital and risk in insurance markets the findings have significant implications for insurance solvency regulation

capital regulation heterogeneous monitoring costs and aggregate loan quality abstract this paper develops a banking sector framework with heterogeneous loan monitoring costs banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure after analyzing an unregulated banking system we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks to gauge the impact of capital requirements we define loan quality in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population under the assumption of a specific cross sectional distribution of banks our simulations show that the imposition of binding capital requirements on a previously unregulated banking system unambiguously increases the market loan rate and reduces aggregate lending but has an ambiguous effect on loan quality nevertheless once capital requirements are in place the simulations indicate that regulators can contribute to higher overall loan quality by toughening capital requirements

capital controls and bank risk abstract we analyze the effects of deposit guarantees on banks loan portfolio in contrast to earlier work we view bank loans net of evaluation and monitoring costs as non zero npv investments e g market securities deposit guarantees lead to inefficient investment and under plausible circumstances capital requirement increases lead banks to increase asset risk the risk increase reduces the beneficial effects of capital increases on the probability of default and on the economic efficiency of bank lending in some cases a tightening of the capital constraint even leads to an increase in the probability of default and financial instability and to higher expected costs of transferring assets to regulatory agencies increases in bank capital are not a substitute for risk monitoring and control and may imply an increased need for such surveillance

capital regulation and bank risk taking a note abstract this paper examines theoretically the effects of more stringent capital regulation on bank asset portfolio risk the analysis shows that for a value maximizing bank incentives to increase asset risk decline as its capital increases thus as long as regulatory efforts to contain asset risk and size are not reduced more stringent capital regulation unambiguously reduces the expected liability of the deposit insurance system

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

income inequality and pollution a reassessment of the environmental kuznets curve abstract improvements in some measures of air and water quality can accompany rising per capita income as illustrated by the so called environmental kuznets curve for pollution variables which show such a relationship we hypothesize that a more equitable distribution of power contributes to these outcomes by enhancing the influence on policy of those who bear the costs of pollution relative to the influence of those who benefit from pollution generating activities an empirical analysis of international variations in seven indicators of air and water quality supports this hypothesis literacy political rights and civil liberties are found to have particularly strong effects on environmental quality in low income countries

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

energy consumption income and carbon emissions in the united states abstract this paper investigates the effect of energy consumption and output on carbon emissions in the united states earlier research focused on testing the existence and or shape of an environmental kuznets curve without taking energy consumption into account we investigate the granger causality relationship between income energy consumption and carbon emissions including labor and gross fixed capital formation in the model we find that income does not granger cause carbon emissions in the us in the long run but energy use does hence income growth by itself may not become a solution to environmental problems

environmental kuznets curve time series application for turkey why controversial results exist for similar models abstract this paper investigates the environmental kuznets curve ekc hypothesis using 40 year spanned time series for the turkey case co 2 emission series representing environmental pressure and gdp per capita values representing economic development are used for the period 1968 2007 a cointegration has been determined among nonstationary series first phases of an inverted u form ekc relationship have been determined for turkey from the econometric estimations this result is conflicting with that of the similar models for turkey case on the other hand this conflict refers the important arguments in the literature and constitutes the main points of the paper sensitivity critiques for example ahking et al for cointegration tests johansen and engle granger tests have been supported in our study moreover we detected important diversion in results according to drift and trend assumptions both in ci vector and ekc model specifications we conclude that building ekc model according to cointegration ci equation restrictions can be important source for diversion when sensitivity exists in estimations and cointegration tests therefore ekc estimations should be held in non restrictive way the additional structural reasons have been also discussed for developing country ekc cases the most important one is that the narrow income sample of developing countries makes it possible to be defined by similar but different paths therefore policy implications to be drawn from those analyses should not ignore this feature of developing country analyses

the impact of bank capital on profitability and risk in asian banking abstract this article applies the generalized method of moments technique for dynamic panels using bank level data for 42 asian countries over the period 1994 to 2008 to investigate the impacts of bank capital on profitability and risk ignoring influence factors the extant literature presents an ambiguous impact of bank capital on profitability risk however when the effects from the influencing factors are taken into consideration three conclusions are reached first along with the change in the categories of banks investment banks have the lowest and positive capital effect on profitability whereas commercial banks reveal the highest reverse capital effect on risk second banks in low income countries have a higher capital effect on profitability banks in lower middle income countries have the highest reverse capital effect on risk while banks in high income countries have the lowest values third banks in middle eastern countries own the highest and positive capital effect on profitability far east central asian banks have the largest reverse capital effect on risk while the lowest value occurs in middle eastern countries banks finally our results also reveal that persistence of profit is greatly affected by different profitability variables and all risk variables show persistence from one year to the next

banks non traditional activities under regulatory changes impact on risk performance and capital adequacy using the big six canadian chartered banks quarterly financial statements and daily stock market data from 1982 to 2018 we examine the impact of non interest income on canadian banks risk perfor

optimal fiscal policy in a stochastic growth model although most neoclassical growth models focus on competitive equilibria which are pareto optimal and ignore the role of government recent works by romer 28 29 judd 20 baxter and king s and bizer and judd 7 have shown that government can be introduced into and suboptimal equilibria can be studied in these models as well their studies however are positive analyses of the effects of fiscal policy in competitive equilibria the purpose of this paper is to apply ramsey s 27 theory of optimal taxation to the normative study of fiscal policy in a stocastic growth model ramsey studied a static representative consumer economy with many goods in his formulation a government consumes a fixed amount of these goods which it purchases at market prices and finances by levying flat rate excise taxes prices and quantities are determined in a competitive equilibrium the government is benevolent and its objective is to choose the optimal tax rates to maximize the representative consumer s utility a number of economists among them kydland and prescott 23 barro 3 turnovsky and brock 31 and lucas and stockey 26 have noted that ramsey s formulation can be applied to dynamic economies with uncertainty if one reinterprets the goods in static problems as dated state contingent goods in this framework a fiscal policy is a rule which specifies state contingent tax rates and the amount of public debt issue in each date the optimal fiscal policy is defined as the one which leads to a quantity