financial development income inequality and the redistributive effects of monetary policy abstract how should financial systems be designed to limit income inequality does the redistributive impact of inflation depend on the extent of financial development should optimal monetary policy vary across countries with different levels of financial development in order to address these questions we develop a monetary growth production model with heterogeneous agents in our economy optimal policy needs to weigh the effects of policy across two groups capital owners and individuals who hold liquid assets in this environment we compare various economies that are identical in every aspect except for their level of financial development interestingly we generally find that economies at the highest stages of financial development economies in which money bonds and claims to capital are traded experience the highest amount of capital formation and social welfare as long as inflation is low yet regardless of the extent of financial development there are generally redistributive consequences from inflation moreover the model tends to predict that economies with relatively small stock markets produce the highest levels of income inequality empirical work examining the role of money growth and the implications of financial development across countries is consistent with predictions from the model

does it matter how monetary policy is implemented abstract in the u s existing monetary base measures add an adjustment factor for changes in reserve requirement ratios to high powered money implicitly the monetary base assumes that the economic effects of changes in reserve requirements are identical to those due to changes in high powered money theory however does not generally support the prediction that the two policy tools will have the same economic effects structural vars are estimated to compare the short run paths of inflation and output growth under two different types of policy shocks in doing so this analysis gives one a measure of the costs associated with this implicit equivalence assumption the evidence is consistent with the hypothesis that the federal reserve at least partially offsets reserve requirement changes with open market operations and the hypothesis that dynamic explanations of macroeconomic variables are improved by separating reserve requirement changes from other monetary policy moves

macroeconomic equilibrium and reform in a transitional economy we build a general equilibrium macro model of a transitional economy to reflect four stylized facts among these are that central planning has left a legacy of highly concentrated industry and a residue of price controls and rationing an almost classical dichotomy obtains in the model monetary expansion leaves output and employment unchanged despite the existence of unemployment though leisure time declines however the economy displays a high degree of complementarity between the state controlled and private sectors giving rise to keynesian multiplier effects we also analyse the effects of price liberalization and privatization on the properties of the economy

earnings management the shapes of the frequency distributions of earnings metrics are not evidence ipso facto we provide evidence that the shapes particularly around zero of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by 1 deflation using for example price or market capitalization 2 sample selection criteria that lead to differential inclusion exclusion of observations to the left of zero versus observations to the right of zero implicit in studies focusing on firms followed by i b e s and explicit in studies partitioning on a variable differing between loss observations and profit observations 3 differences between the characteristics of observations to the left of zero and observations to the right of zero such as market pricing and analyst optimism pessimism or 4 a combination of these factors since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects we conclude that the shapes cannot be used as ipso facto evidence of earnings management

finance and the sources of growth at various stages of economic development this article studies the effects of financial development on the sources of growth in different groups of countries recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries this hypothesis is tested with panel data from 74 countries using gmm dynamic panel techniques results are consistent with the hypothesis finance has a strong positive influence on productivity growth primarily in more developed economies in less developed economies the effect of finance on output growth occurs primarily through capital accumulation jel o4 g1

independent central banks low inflation at no costs a widely held view suggests that politically independent central banks bring about relatively low and stable inflation rates a more debated question is whether one has to pay for this good outcome with more real instability in his seminal contribution kenneth rogoff 1985 suggests that an independent and inflation averse central bank reduces average inflation but as a result increases output variability the conservative central banker reduces the inflation bias due to the time inconsistency problem but stabilizes less however alesina and summers 1993 do not find that at least within the oecd countries more independent central banks are associated with more variability of growth or unemployment thus they conclude that independent central banks bring about low inflation at no apparent real costs the point of this paper is to provide theoretical underpinnings to this finding which is in contrast to rogoff 1985 2 the basic idea is that one can isolate two sources of output variability one is the economic variability induced by standard exogenous shocks that monetary policy is supposed to stabilize for instance money demand shocks or supply shocks the second source of variability is political or more generally policy induced this is the variability introduced in the system by the uncertainty about the future course of policy for instance alesina 1987 studies the effect of uncertain electoral outcomes in a model where the two contending parties have different preferences over inflation and unemployment an inflation averse independent central banker does not stabilize as much the economic variability in order to keep inflation low and stable this is rogoff s point however by insulating monetary policy from political pressures an independent central bank can reduce the political variability the overall effect of independence on output variability is thus ambiguous this result is consistent at least prima facie with the evidence in alesina and summers 1993 on the lack of correlation between centralbank independence and output variability in fact it is possible that when the politically induced output variability is predominant a more independent central bank reduces average inflation and the variance of output

an equilibrium model of incentive contracts in the presence of information manipulation abstract this paper develops an agency model in which stock based compensation is a double edged sword inducing managers to exert productive effort but also to divert valuable firm resources to misrepresent performance we examine how the potential for manipulation affects the equilibrium level of pay for performance sensitivity and derive several new cross sectional implications that are consistent with recent empirical studies in addition we analyze the impact of recent regulatory changes contained in the sarbanes oxley act of 2002 and show how policies intended to increase firm value by reducing misrepresentation can actually reduce firm value or increase the upward bias in manipulated disclosures

the impact of paying interest on reserves in the presence of government deficit financing this paper reexamines the impact that paying interest on reserves has on price level indeterminacy volatility and economic well being unlike the previous literature this model includes an after tax deficit financed by assets bonds and reserves whose returns are linked i show that the number of steady state equilibria and the corresponding level of indeterminacy are equal to or greater than those arising in the no interest economy when the level of indeterminacy is the same the economic volatility is reduced by paying interest however greater indeterminacy in the interest economy results in greater volatility finally paying interest on reserves can enhance welfare jel d6 e3 e5 i introduction the issue of paying interest on reserves was introduced by friedman almost 50 years ago in a program for monetary stability friedman s original motivation was to make the 100 reserve requirement of the chicago plan more palatable to a banking system subject to only a fractional reserve system the goal of the chicago plan and the proposal to pay interest on reserves was to establish greater price level stability and to reduce excessive price level fluctuations 1 in the subsequent decades there has been considerable research regarding the implications of paying interest on reserves 2 three studies in particular sargent and wallace 1985 smith 1991 and freeman and haslag 1996 have examined in detail whether friedman s proposal would bring about the desired reductions in price level indeterminacy and volatility as well as the welfare implications of switching from a system of not paying interest on reserves to one which did 3 however these works suffered from two specific limitations first they did not equate the interest paid on reserves to returns on assets of similar risk and duration second they assumed that the government either ran a balanced budget or had a surplus by assuming that the budget was not in deficit these works sidestepped two important issues a the impact that deficit financing has on the means for financing interest payments and b the complications that arise from simultaneously attempting to finance a deficit and set the real return on reserves one of the key results of this previous literature was that how interest payments were financed was crucial to the likelihood of indeterminacy and volatility arising however if the sum of government expenditures and interest payments on bonds and reserves exceeds tax revenue then the issue of how interest payments on reserves are financed via taxes or earnings on assets is no longer relevant instead the appropriate concern is whether the government can simultaneously finance the deficit by issuing bonds or printing money link the return on reserves to other assets such as bonds and maintain sufficient returns on bonds and reserves such that both assets are desired by consumers the objective of this paper is to reexamine in the presence of an after tax deficit the impact of switching from a system where reserves earn no interest to one where they do this is accomplished in the context of a two period overlapping generations model with multiple assets and an after tax government deficit that must be financed by a combination of debt and seigniorage income the primary goal is to compare the level of economic indeterminacy economic volatility and welfare gains in an economy where interest is paid on reserves to one where reserves earn no interest more specifically this paper addresses the following three questions first in the presence of a government deficit and a return on storage that dominates all other rates of return does paying interest on reserves reduce potential indeterminacy of equilibria second under the same conditions does the amount of economic volatility increase or decrease third are there any welfare justifications for switching to a sys tem where reserves earn interest

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

the long run relationship between inflation and output in postwar economies abstract we investigate the relationship between inflation and real output in a large sample of postwar economies our methodology is to use a structural vector autoregression to estimate the response of the level of real output to permanent inflation shocks separately for each country we find that a permanent shock to inflation is not associated with a permanent movement in the level of real output for most countries in our sample the main exceptions are certain low inflation countries in which permanent inflation shocks permanently increase the level of output we also find that permanent inflation shocks do not permanently influence real output growth rates in our sample

the effects of monetary policy at different stages of economic development abstract the effects of monetary policy vary significantly across countries in particular recent empirical work finds evidence of a tobin effect in high income countries and a reverse tobin effect in less developed economies we present a neoclassical growth model where money is required for investment and consumption purposes in contrast to standard cash in advance models the reliance on cash is inversely related to the extent of capital formation in this setting we demonstrate that the effects of monetary policy depend on the level of development in particular inflation adversely affects capital formation at low levels of income because there is a high reliance on cash and a high cost of capital by comparison the financial system operates more efficiently in advanced countries consequently monetary policy generates a tobin effect

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

real effects of monetary policy in a world economy abstract we present a two country heterogeneous agent model in which changes in a country s monetary policy affect real interest rates relative prices of traded and nontraded goods and real exchange rates nontransitory real effects of monetary policy stem from legal restrictions in the form of country specific reserve requirements without violating the classical assumptions of individual rationality and flexible prices the model s implications seem qualitatively consistent with the u s experience of the 1980s a monetary policy tightening leading to a rise in the real interest rate and to an initial rise in the real value of the dollar which is subsequently reversed

on the fisher effect abstract we use post war quarterly data for belgium canada denmark france germany greece ireland japan the netherlands the united kingdom and the united states to examine the fisherian link between inflation and short term nominal interest rates in doing so we apply the king and watson 1997 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful fisher effect tests critically depend on such properties we conclude that the data are generally rejecting the fisher effect

monetary policy banking and growth i introduction fischer and modigliani 1978 exhaustively list the costs associated with inflation in recent years a growing body of evidence is consistent with the notion that slower output growth may be added to the fischer modigliani list specifically analyses by kormendi and meguire 1985 fisher 1991 degregario 1992 gomme 1993 wynne 1993 barro 1996 and others find a negative correlation between the inflation rate and output growth both across countries and over time 1 moreover the studies consistently find that the growth rate response to a change in the inflation rate is quite large the different studies produce a range of correlation coefficients a country in which the inflation rate is 10 will grow between 1 4 and 3 4 percentage points slower than a country in which the inflation rate is 0 the purpose of this paper is to determine whether a reasonably calibrated model economy can account for the size of the regression coefficients the model economy is a modified version of a member of the ak class in which bank deposits are used to finance capital accumulation in this model economy fiat money is valued because the bank is required to hold reserves against its deposits throughout this paper bank deposits is used in a narrow sense to include only those deposits against which a reserve requirement applies because monetary policy has two tools at its disposal it is possible to conduct two separate policy experiments the results from these experiments particularly the inflation rate experiment sheds light on the potential importance on the share of investment financed through bank deposits researchers have long been interested in the interaction between financing and growth schumpeter 1911 argued that the financial sector more specifically its stage of development affected a country s growth rate 2 cameron 1967 described financial development in scotland england and france in the late 18th and early 19th centuries cameron concluded that scotland and england entered the industrial revolution ahead of france because it had the financial infrastructure capable of financing capital accumulation on the needed scale king and levine 1993 find that countries with more developed financial sectors tend to grow faster than countries with less developed financial sectors it seems natural therefore to investigate whether the means of financing can yield any insights into the inflation growth relationship other researchers have also quantified the effect that movements in the inflation rate has on the growth rate in particular jones and manuelli 1995 use several variants of economies in which people hold fiat money to satisfy a cash in advance constraint they demonstrate that large growth rate effects cannot be accounted for in these model economies in these models inflation does not materially alter capital accumulation rates affecting instead the allocation between the credit good and cash good purchases jones and manuelli find small growth rate effects in an economy in which the tax code has nominally denominated depreciation rates in two papers that focus on inflation and growth chari jones and manuelli 1995 1996 consider economies in which capital accumulation can be financed through either bank deposits or directly as in the economy specified in this paper reserve requirements are applied against bank deposits agents can avoid the inflation tax by using the direct financing means more intensively consequently the growth rate effects are muted in the chari jones manuelli model economies and are too small to account for the size of the regression coefficients reported in kormendi and mcguire fischer and barro in this paper i assume that all investment is financed through bank deposits with this extreme assumption the model economy can account for the size of the growth rate effects observed in the data 3 thus there is a potentially useful lesson learned from the quantitative results in the all bank financing economy and those reported in chari jones manuelli

monetary fiscal and reserve requirement policy in a simple monetary growth model the authors consider an otherwise conventional monetary growth model in which spatial separation and limited communication create a transactions role for currency and stochastic relocation gives rise to financial intermediaries in this framework they consider how changes in fiscal and monetary policy and in reserve requirements affect inflation capital formation and nominal interest rates there is also considerable scope for multiple equilibria the authors show how reserve requirements that never bind along actual equilibrium paths can play an important role in avoiding undesirable equilibria finally they demonstrate that changes in apparently nonbinding reserve requirements can have significant real effects coauthors are mark g guzman elisabeth huybens and bruce d smith copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

long run neutrality high inflation and bank insolvencies in argentina and brazil abstract using long low frequency data on money and output over 1884 1996 for argentina and over 1912 1995 for brazil it is found that money is long run neutral but not long run superneutral with regard to real output a rise in money growth is associated with a decline in output the opposite of the tobin effect the introduction of dummy variables for 1930s or to capture recent periods of financial disruption associated with bank insolvencies does not restore long run superneutrality for either country however results indicate that bank insolvency episodes have a distinct and negative influence on output

money and endogenous growth the ramsey romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non interconnected generations of households tax financed increases in government consumption and debt depress growth prospects and boost inflation as long as a positive birth rate ensures that future taxes are shouldered by future yet unborn generations debt financed increases in government consumption depress growth and boost inflation even more money financed increases in government consumption depress growth less but increase inflation by more giving subsidies through an increase in monetary growth is non neutral since this increases real growth and thus inflation increases by a lesser amount than monetary growth bond financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation if there are cost adjustment for investment cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate copyright 1994 by ohio state university press

seigniorage in a cross section of countries empirical investigation of the average level of seigniorage in a cross section of up to ninety countries for the period 1971 90 suggests that optimum tax theory explains up to 40 percent of the cross country variation in seigniorage since seigniorage is higher where its deadweight losses are probably lower and where deadweight losses from conventional taxation are probably higher but that average government spending is not a determinant of seigniorage practical concerns about financing transitory government spending explain some of the remaining variation in seigniorage and central bank independence and political instability are useful as well in contrast 90 percent of the cross country variation in conventional taxation appears to be determined by the level of government spending and deadweight losses and additional variables do not add to the results

china s macroeconomic performance and management during transition since reforms started in 1978 china has combined rapid growth with moderate price stability this paper analyzes china s macroeconomic performance over the past fifteen years with special attention to factors responsible both for the pace of economic expansion and the periodic fluctuations regarding the former the author identifies four sources of stimuli administrative decentralization high levels of fixed capital investment the elastic supply and quality of the labor force and the increasing volume of savings supplemented in recent years by a large inflow of foreign direct investment future growth with stability calls for controlling and implementing banking and fiscal reform

fiscal policy monetary targets and the price level in a centrally planned economy an application to the case of china this paper presents a planned economy monetary model of china a money supply equation links changes in broad money to government transactions evaluated at official prices the demand for real money balances by consumers equals the nominal demand for money deflated by an unobserved true price index the model explains money demand as the divergence between the then official and true price indices changes in the money supply are explained by government transactions while money demand is explained by real income and the anticipated true rate of inflation the true rate of inflation is 2 5 times the official rate copyright 1987 by ohio state university press

chief executive officer equity incentives and accounting irregularities this study examines whether chief executive officer ceo equity based holdings and compensation provide incentives to manipulate accounting reports while several prior studies have examined this important question the empirical evidence is mixed and the existence of a link between ceo equity incentives and accounting irregularities remains an open question because inferences from prior studies may be confounded by assumptions inherent in research design choices we use propensity score matching and assess hidden omitted variable bias within a broader sample in contrast to most prior research we do not find evidence of a positive association between ceo equity incentives and accounting irregularities after matching ceos on the observable characteristics of their contracting environments instead we find some evidence that accounting irregularities occur less frequently at firms where ceos have relatively higher levels of equity incentives

stagflationary effect of government bond financing in the transforming chinese economy a general equilibrium analysis abstract this paper studies how the method of government debt financing affects the macroeconomic performance of the transforming chinese economy the investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the chinese economy using this framework we evaluate the effects on the growth rate of output and inflation if the chinese government relies more on bonds and less on money creation for budget deficit and debt repayment financing it is shown that although this policy change can reduce the growth rate of the money supply it can generate a stagflationary effect reducing the rate of output growth while raising the rate of inflation if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and the tax rate on labor income is sufficiently low

the conduct of monetary policy with a shrinking stock of government debt this article considers the consequences for a central bank of a declining stock of government debt the model has a treasury that taxes spends and issues debt a central bank that conducts open market operations in treasury debt and banks that intermediate private savings it suggests that a sufficiently small stock of debt can put an economy on the pareto inferior side of the seigniorage laffer curve implying unnecessarily high inflation if there is also a primary budget deficit equilibrium might not exist discount window lending is a potentially desirable alternative to open market operations especially if the loans are not subsidized

financial control in the transition from classical socialism to a market economy the transition from socialism to capitalism poses severe problems of financial management that have yet to be resolved in principle let alone in practice one unfortunate consequence is continual financial turmoil as socialist economies of the soviet union and eastern europe attempt reform inflation either open or repressed first accompanies and then undermines attempts to decentralize decision making to dampen inflation and prevent economic chaos even reform governments may be provoked to reintervene by seizing the financial assets of enterprises reinstituting price controls or commandeering outputs through state orders and similar devices but why should the transition from central planning to a market economy be inflationary understanding the system of financial control in the preexisting regime of classical socialism is the key to understanding what might go wrong in the transition under classical socialism all the means of production industrial and agricultural are state owned output targets input levels wages and prices are all set by a stalinist system of central planning accordingly i shall first identify 1 how domestic fiscal and monetary processes interact with and complement central planning in the classical socialist economy and then discuss 2 why this mechanism for securing domestic financial control and avoiding inflation under classical socialism tends to break down when decentralization begins and central planning is weakened the discussion will then turn to 3 how in a more deliberate transition domestic tax and monetary arrangements might be managed to keep the average price level stable as the market prices of individual goods and services become free to fluctuate after sufficient domestic financial control is secured

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

optimal monetary policy and economic growth abstract a question at the center of many analyses of optimal monetary policy is why do central banks never implement the friedman rule to the list of answers to this question we add neoclassical production specifically the tobin effect as one possible explanation to that end we study an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money we assume a production function with a knowledge externality romer style that nests economies with endogenous growth ak form and those with no long run growth the diamond model the tobin effect is shown to be always operative under crra preferences a mild degree of social increasing returns is sufficient but not necessary for some positive inflation to dominate zero inflation and for the friedman rule to be sub optimal irrespective of the degree of risk aversion

generalized search theoretic models of monetary exchange abstract virtually all simple search models of money assume agents with money cannot produce and so everyone has either 0 or 1 units of money in steady state we alternatively assume agents can always produce and simply restrict money inventories to 0 or 1 this seems better for many issues for example in the standard model it is difficult to interpret increases in the money supply because increasing the fraction of agents holding money decreases the economy s productive capacity our model avoids these problems and thus delivers more natural and simpler implications in many contexts we compare results on existence multiplicity and welfare across models

more on monetarist arithmetic abstract in this paper it is shown that the provocative result of sargent and wallace s monetarist arithmetic namely the existence of a permanent trade off between short term and long term control of inflation when the path of fiscal policy is given depends on the particular way in which the idea is modelled that the private sector can only hold a limited amount of public debt once the formulation is made consistent with the overlapping generations model underlying s w s macroeconomic set up the trade off is only temporary in the long run the rate of inflation is independent of the monetary path initially followed

the role of accruals in asymmetrically timely gain and loss recognition we investigate the role of accrual accounting in the asymmetrically timely recognition incorporation in reported earnings of gains and losses timely recognition requires accruals when it precedes complete realization of the gains and losses in cash we show that nonlinear accruals models incorporating the asymmetry in gain and loss recognition timelier loss recognition or conditional conservatism offer a substantial specification improvement explaining substantially more variation in accruals than equivalent linear specifications conversely conventional linear accruals models by omitting the loss recognition asymmetry exhibit substantial attenuation bias and offer a comparatively poor specification of the accounting accrual process linear specifications also understate the ability of current earnings to predict future cash flows these findings have implications for our understanding of accrual accounting and conservatism as well as for researchers estimating discretionary accruals earnings management and earnings quality

can higher inflation reduce real interest rates in the long run this paper describes a simple general equilibrium model in which a permanent easing of monetary policy engineered via open market purchases may produce a permanent decrease in the real interest rate and a permanent increase in the inflation rate under somewhat stronger assumptions the nominal interest rate may also decline est ce qu une inflation plus forte peut reduire les taux d interet reels a long terme ce m6moire pr6sente un modele d 6quilibre g6n6ral simple dans lequel un adoucissement per manent de la politique mon6taire engendr6 par des op6rations d open market peut pro duire une chute permanente du taux d int6ret r6el et un accroissement permanent du taux d inflation dans le cadre de postulats plus contraignants le taux d interet nominal peut meme chuter

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

financial development and pathways of growth state branching and deposit insurance laws in the united states 1900 1940 abstract this paper studies the effect of state level banking regulation on financial development and on components of state level growth in the united states from 1900 to 1940 we use these banking laws to assess the findings of a large recent literature that has argued that financial development contributes to economic growth we contend that the institutional mechanism leading to financial development is important in determining its consequences and that some types of financial development can even retard economic growth for the united states from 1900 to 1940 we argue that the financial expansion induced by expanded bank branching accelerated the mechanization of agriculture and spurred growth in manufacturing in contrast financial expansions induced by state deposit insurance had negative consequences for both the agricultural and manufacturing sectors

how to reform a planned economy lessons from china the countries of eastern europe and the former soviet union have been flooded with advice from the west on how to liberalize their planned econo mies this advice is unfortunately offered in an empirical vacuum no one knows how these econo mies will react to the proposed liberalization meas ures there exists however a neglected source of information china offers a long time series of data over a decade s worth on the effects of reforms on a planned economy china s reforms were gradual but their cumulative effect has been large and they have been remarkably successful china s experiments provide some practical les sons on what kinds of reforms can work elsewhere the dominant school of thought among economists favours the big bang policy of reforming quickly and according to a comprehensive plan partial reforms in this view are useless they will be negated by the remnants of the planning system the proponents of big bang reform have been influential with poland czechoslovakia and rus sia announcing plans for a rapid transition to capi talism

the economics and politics of regulation this article provides a critical survey of the literature on the economics and politics of regulation after some conceptual clarifications the article surveys the evolution of perspectives on regulation during the post second world war period emphasizing especially the interactions between intellectual changes and real world economic and political developments it then looks at some themes that are neglected in the current literature the inevitability of regulation the need to create and not simply regulate markets distributional issues dynamic considerations and the politics of regulation and suggests that incorporating these themes more closely into the discussion will improve our understanding in this area copyright 1997 by oxford university press

tight money policies and inflation revisited in this paper we reconsider the link between tight money policies and inflation in the spirit of sargent and wallace s 1981 influential paper some unpleasant monetarist arithmetic a standard neoclassical model with capital bonds and return dominated currency is used the potential for tight money policies to be inflationary unpleasant arithmetic exists even when the real interest rate is below the growth rate of the economy additionally the likely observability of unpleasant arithmetic in real world economies is shown to depend crucially on the type of monetary policy rule that is used jel classification e52 e63 un autre coup d il sur la relation entre politiques monetaires restrictives et inflation ce memoire re examine la relation entre politiques monetaires restrictives et inflation dans l esprit du travail de sargent et wallace 1981 some unpleasant monetarist arithmetic les auteurs utilisent un modele neo classique standard avec capital debentures et une monnaie dont les rendements sont domines par ceux d autres reservoirs de valeur la possibilite que les politiques monetaires restrictives soient inflationnistes existe meme quand le taux d interet reel est plus petit que le taux de croissance de l economie de plus on montre que l obtention de ces resultats deplaisants dans les economies concretes depend fondamentalement du type de regle monetaire qu on utilise

productivity growth increasing income inequality and social insurance the case of china abstract this paper builds a simple dynamic general equilibrium model to mimic two striking stylized facts observed in china s reform productivity growth contributes significantly to output growth and income inequality increases dramatically over time calibration exercises broadly matches the data the economic growth rate the aggregate productivity and income inequality increase as the coverage of the social insurance decreases perfect insurance is shown to be sub optimal with empirically plausible parameters the level of income inequality under different degrees of social insurance can be very similar even though their welfare implications are not social insurance cannot effectively reduce inequalities

is reserve ratio arithmetic more pleasant does it matter in a revenue neutral setting if the government changes the inflation tax base or the inflation tax rate we answer this question within the context of an overlapping generations model in which government bonds capital and cash reserves coexist we consider experiments that parallel those studied in sargent and wallace s unpleasant monetarist arithmetic the government uses seigniorage to service its debt choosing between changing either the money growth rate the inflation tax rate or the reserve requirement ratio the inflation tax base in the former case we obtain standard unpleasant arithmetic in the long run a permanent open market sale results in higher money growth and higher long run inflation somewhat surprisingly it turns out that for a given money growth rate lower reserve requirements fund the government s interest expense associated with the lower reserve requirements is lower long run inflation and higher welfare compared with the money growth case the broad message is that reserve ratio arithmetic can be pleasant even when money growth arithmetic is not

monetary policy arithmetic reconciling theory with evidence empirical evidence indicates that in countries with low inflation rates a permanent decrease in inflation rate either has no impact on capital stock and output superneutrality or causes them to fall moderately existing budget arithmetic models of monetary policy cannot deliver superneutrality in this paper we conduct a budget arithmetic analysis of monetary policy using a money demand specification money in the utility function that is new to this literature we find that one simple assumption about utility from money delivers superneutrality while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence jel classification e60 e13

policy cooperation among benevolent governments may be undesirable this paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable it also explains circumstances under which such counterexamples are possible and relates them to the literature on time inconsistency since the work of hamada 1976 investigating the effects of increasing policy cooperation among countries has been a major topic in international economics a standard conclusion of this work is that increasing policy cooperation among countries is desirable in a seminal paper rogoff 1985 has challenged this view using a simple monetary model rogoff shows that cooperation among policy makers can lead to a lower level of welfare than noncooperation does rogoff s result has caused much consternation among those who advocate policy cooperation and his work has been criticized along several dimensions for example some authors including canzoneri and henderson 1988 have noted that a key assumption in rogoff s model is that the objective function of each country s policy maker does not coincide with the objective function of its residents indeed if in his model policy makers maximize the welfare of their country s residents the counterexample is overturned and cooperation strictly dominates noncooperation this feature leads some to interpret rogoff s result as simply saying that if policy makers form a coalition against the private sector they may be worse off than if they do not others such as neck and dockner 1988 have claimed that rogoff s result depends on private agents acting strategically under this interpretation rogoff s result is relevant to say economies with a large trade union but not to economies with a large number of competitive private agents in a somewhat different vein persson 1988 and especially devereux 1986a b have questioned the significance of welfare comparisons across different institutional regimes in a model without a solid foundation for the behavioural relationships this paper presents a simple model in which governments are benevolent but cooperation is still undesirable the model is a two country version of fischer s 1980 optimal tax model in it private agents are competitive in that each agent takes both prices and government policies as uninfluenced by his actions and each government maximizes the welfare of its country s residents in the paper the two different regimes cooperative and noncooperative

tight money and inflation abstract in a recent paper sargent and wallace present an example where tightening of monetary policy over a specified time interval in conjunction with a constant deficit leads to an increase in the rate of inflation not only beyond this interval but even from the outset in the present paper i show how the latter result can be derived from a standard monetary growth model of the sidrauski brock type this enables a relatively simple interpretation of the apparent paradox

the economics of earnings manipulation and managerial compensation this article examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm when realized these earnings constitute hidden information that is privately observed by the manager who may expend resources to generate an inflated earnings report we characterize the optimal managerial compensation contract in this setting and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits and to report those profits honestly as a result some degree of earnings management must be tolerated as a necessary part of an efficient agreement

equity markets and growth cross country evidence on timing and outcomes 1980 1995 abstract the rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries this paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980 1995 after describing recent theories on the role of stock markets in growth and considering a pure cross sectional empirical approach our panel vars show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output the findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy

the effects of open market operations in a model of intermediation and growth we examine an otherwise standard model of capital accumulation to which spatial separation and limited communication create a role for money and shocks to portfolio needs create a role for banks in this context we examine the existence multiplicity and dynamical properties of monetary equilibria with positive nominal interest rates moderate levels of risk aversion can lead to the existence of multiple monetary steady states all of which can be approached from a given set of initial conditions in addition even if there is a unique monetary steady state monetary equilibria can be indeterminate and oscillatory equilibrium paths can be observed thus financial market frictions are a potential source of both indeterminacies and endogenously arising economic volatility we also consider the consequences of monetary policy actions that rearrange the composition of government liabilities contractionary monetary policy activities can have complicated consequences depending especially on the nature of the steady state equilibrium that obtains when there are multiple steady states under plausible conditions however a permanent contractionary change in monetary policy raises both the nominal rate of interest and the rate of inflation and reduces long run output levels thus liquidity provision by a central bank just as by the banking system as a whole can be growth promoting loose monetary policy also is conducive to avoiding development trap phenomena

growth efficiency and convergence in china s state and collective industry in china as in the soviet union and eastern europe economic reform initiatives seek to increase productivity by introducing elements of market oriented policies and institutions into an economy formerly dominated by state planning efforts to evaluate the impact of reform of chinese industry have focused on the measurement of productivity change in state enterprises this study expands the prior framework of analysis in several directions our investigation of productivity trends is not limited to state enterprises but includes quantitative comparisons with china s fast growing collective industries which contributed 36 of overall industrial output in 1988 1 unlike previous studies our analysis works with gross rather than net output this permits us to investigate changes in the productivity of intermediate inputs which occupy a large portion of total costs in chinese industry as well as labor and capital to do this we develop a quasi frontier estimation procedure which seems appropriate for comparisons of total factor productivity based on chinese industrial data finally we offer a quantitative perspective on the extent to which reform efforts have moved industrial resource allocation toward patterns expected of a market system the analysis confirms our previous finding based on a restricted framework employing only labor fixed capital and net output that multifactor productivity in state industry has risen substantially during

post reform industrial productivity performance of china new evidence from the 1985 industrial census data i introduction during the last decade china implemented a series of economic reforms that followed what many observers agreed was a period of stagnation in industrial productivity 1 the first wave of chinese economic reforms 1978 79 following the economic opening to the west under the four modernizations began after the third plenum of the eleventh central committee of the communist party of china announced a new policy of economic modernization in december 1978 a major goal of the new policy was to improve productivity toward this end the party would 1 allow the formation of private enterprises 2 permit state owned and collective enterprises to retain a portion of their profits 3 devolve a greater degree of decision making to factory managers and drastically reduce the scope of planning 4 introduce material incentives such as bonuses to labor and 5 place increased reliance on markets for inter industry resource allocation it is important to note that at this time in the early 1980s real reform was limited to the agricultural sector as discussed in perkins 1988 the second wave of reforms occurred in 1983 84 with the announcement of sweeping changes for the urban industrial sector these reforms included four major measures 1 a reduction in the number of leadership positions in enterprises 2 a further expansion of enterprise managers authority 3 the substitution of an income tax for remission of profits to the state and 4 removal of the ceiling on bonuses naturally it is important to know whether or not these reforms improved chinese industrial productivity since the early 1980s both chinese and western economists have conducted many empirical studies on china s post reform economic performance however the results from these studies are far from conclusive for example the world bank 1983 1985 field 1984 yeh 1984 chen 1986 chen and sang 1986 pan 1986 and tidrick 1986 have reported that input accumulation accounts for nearly all of output increases in industry as a whole in the early 1980s in particular tidrick 1986 found that china s performance has been extremely disappointing total factor productivity in the state owned industrial sector declined at an annual rate ranging from 0 10 percent to 1 20 percent for the period 1978 83 in contrast more recent studies such as those by kuan et al 1988 and jefferson 1988 have found that china s post reform industrial productivity was significantly improved most notably kuan et al 1988 found that chinese industrial productivity in the state owned sector grew at an average annual rate ranging from 2 7 to 3 1 percent for 1980 84 and from 15 3 to 18 2 percent for 1984 85 this difference in the findings reported in the literature is striking and requires further investigation one explanation is that the various studies are based on different data sets time periods models and data construction methods for example tidrick 1986 used aggregate time series data for state owned industry for the period 1952 83 while kuan et al 1988 used aggregate time series data including only independent accounting units within the state owned industrial sector for the period 1953 85 perkins 1988 reviewed china s overall post reform economic performance using data at the national level he found that during 1976 85 total factor productivity in china grew at an annual rate of 3 79 percent accounting for over 40 percent of china s net material product he concluded that reform and productivity growth thus led the way to higher overall growth and that agriculture and the collectively organized small scale industrial enterprises play an important role in the accelerated productivity growth of the reform periods perkins however hastened to point out that his conclusion is based on impressionistic evidence and is in no sense definitive and suggested that disaggregated data on outputs and inputs by sector or individual industries are required to identify those sectors that accounted for most of the rise in productivity perkins 1988 628

tight money and inflation further results abstract the sargent wallace results on inflationary effects of monetary restraint are considered in a sidrauski money growth model when the utility function is unrestricted except for separability temporary monetary tightening will eventually lead to higher inflation when the deficit is fixed only if the elasticity of money demand with respect to the money growth rate is less than unity it is also shown that for inflation to rise immediately further requires the elasticity with respect to the nominal interest rate to be no less than unity

the economics of fraudulent accounting we argue that earnings management and fraudulent accounting have important economic consequences in a model where the costs of earnings management are endogenous we show that in equilibrium low productivity firms hire and invest too much in order to pool with high productivity firms this behavior distorts the allocation of economic resources in the economy we test the predictions of the model using firmlevel data we show that during periods of suspicious accounting firms hire and invest excessively while managers exercise options when the misreporting is detected firms shed labor and capital and productivity improves our firm level results hold both before and after the market crash of 2000 in the aggregate our model provides a novel explanation for periods of jobless and investment less growth

alternative forms of government expenditure financing a comparative welfare analysis this paper derives criteria for evaluating the impact of an increase in government expenditure on both the time path of instantaneous utility and overall welfare under alternative forms of tax financing these consist of three factors the first is the direct crowding out effect which reflects the utility differential between the government expenditure being undertaken and the private consumption it is displacing the second describes the intertemporal trade off between the effect on the short run rate of capital accumulation and the resulting change in the the long run capital stock the final term is due to the distortion arising from the pre existence of a tax on wage income copyright 1992 by the london school of economics and political science

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

reserve requirements and optimal seigniorage abstract this note presents a model of optimizing agents who chose to hold deposits at financial intermediaries which are required to hold fractional reserves of fiat money when the stock of fiat money is expanded the reserve requirement functions as a tax on deposits the combination of reserve requirements and inflation results in a lower steady state utility than a direct tax on deposits the optimal monetary policy when reserves are required is to minimize reserve requirements and inflate without limit the stock of fiat money

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

the role of money in two alternative models when is the friedman rule optimal and why abstract in models of money with an infinitely lived representative agent ilra models the optimal monetary policy is almost always the friedman rule in overlapping generations og models by contrast the friedman rule may not be optimal in this paper we use this difference in monetary policy prescriptions to help us identify and study the key difference between these two models as models of money we study the welfare properties of monetary policy in a simple og model under two very different money demand specifications and two alternative assumptions about the generational timing of taxes for money retirement we conclude that the key difference between ilra and og monetary models is that in the latter the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers under alternative government fiscal monetary regimes that offset these intergenerational transfers the friedman rule is always optimal

international evidence on the long run impact of inflation in this paper i use a structural vector autoregression framework to analyze the effects of a permanent change in inflation on the long run real interest rate and real output level in 14 industrialized countries long run monetary superneutrality is rejected for all 14 countries using annual data the results indicate that a permanent increase in inflation lowers the long run real interest rate in each country a permanent increase in inflation also increases the long run real output level in a number of countries long run monetary superneutrality is also rejected for four out of the five countries examined using quarterly data under long run monetary superneutrality lrsn a per

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

what does ceos pay for performance reveal about shareholders attitude toward earnings overstatements if overstatements were a symptom of the agency conflict pay for performance sensitivities should have increased in response to the additional penalties for misreporting imposed by sox our finding of their decrease is inconsistent with the view that overstatements were an unintended consequence of incentive pay prior to 2002 to corroborate our interpretation we show that i ceo pay for performance sensitivities are higher among firms whose shareholders stand to benefit from overstatements ii this cross sectional relationship weakens significantly after sox and iii the within firm decrease in pay for performance sensitivity is most pronounced among firms with high pre sox shareholder benefits from overstatements

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

inflation and the capital stock there is a long literature examining the theoretical relationship between the rate of inflation and the size of the capital stock in an economy this literature has produced varied predictions about the effects of inflation on the capital stock in this paper we present some time series evidence on this issue we estimate a structural var model for thirty four countries and discover that for the majority of these countries there is no statistically significant long run effect of inflation on the capital stock moreover for countries where a significant effect is found the long run coefficient estimate is typically positive overall our empirical results support the view that the long run level of the capital stock is invariant to permanent changes in the inflation rate

are small stock markets different abstract recent literature has established a positive correlation between financial development and economic growth while papers such as bencivenga et al j econom theory 67 1995 53 identify potential nonlinearities in this relationship empirical research to date has allowed for only linear relationships this paper uses regression tree techniques to investigate whether the partial correlation between growth and financial development differs based on countries levels of financial and economic development as in previous studies growth and financial development are positively correlated in countries with high levels of market capitalization however this relationship does not appear to hold for countries with low levels of market capitalization

does competition destroy ethical behavior explanations of unethical behavior often neglect the role of competition as opposed to greed in assuring its spread using the examples of child labor corruption excessive executive pay corporate earnings manipulation and commercial activities by universities this paper clarifies the role of competition in promoting censured conduct when unethical behavior cuts costs competition drives down prices and entrepreneurs incomes and thereby reduces their willingness to pay for ethical conduct nonetheless i suggest that competition might be good for ethical behavior in the long run because it promotes growth and raises incomes higher incomes raise the willingness to pay for ethical behavior but may also change what people believe to be ethical for the better this abstract was borrowed from another version of this item

the stock market monetary policy and economic development author affiliation edgar a ghossoub department of economics university of texas at san antonio san antonio tx 78249 usa e mail edgar ghossoub utsa edu robert r reed dagger department of economics finance and legal studies 200 alston hall university of alabama tuscaloosa al 35487 e mail rreed cba ua edu corresponding author acknowledgment we thank two anonymous referees and the co editor kent kimbrough for their insightful comments 1 introductiona vast amount of research in macroeconomics studies the role of financial markets for economic development for example king and levine 1993 document that active banking systems help economies achieve higher rates of growth 1 in addition to banking systems other measures of financial development are important notably levine and zervos 1998 conclude that stock market liquidity promotes activity 2 however minier 2003 identifies nonlinearities in the relationship between stock market activity and growth in particular minier concludes that there are threshold effects from financial development to economic performance beyond a threshold level of financial development growth and stock market activity are positively related however the correlation is not observed in countries with small stock markets consequently access to a stock market may result in a significant increase in economic activity or it may have little impact 3in addition to the stage of financial development monetary policy also affects the development process while initial studies indicate that inflation is generally associated with slower economic progress more recent research concludes that the effects of monetary policy vary across countries bae and ratti 2000 observe that higher rates of money growth are correlated with lower levels of output in argentina and brazil in contrast bullard and keating 1995 point out that inflation may be associated with an increase in output in low inflation countries in particular the recent work of ahmed and rogers 2000 finds evidence of a tobin effect for the united states 4 5why does the impact of financial development vary across countries furthermore why does the effect of monetary policy also differ across countries in this article we demonstrate that the impact of financial development depends on the services provided by various financial markets that is the economic functions of banks may be substantially different than stock markets although different types of financial markets fulfill unique allocative functions there has been surprisingly little attention devoted to studying the ways in which asset markets collectively interact from a general equilibrium perspective 6 furthermore previous work does not address how the role of monetary policy depends on the extent of financial market development we attempt to fill this gap by developing a monetary growth model that incorporates money bank deposits and equity 7 as in schreft and smith 1998 spatial separation and limited communication create a role for money and commercial banks in our economy young individuals are subject to random relocation shocks as money is the only asset that can cross locations relocated agents must liquidate all their asset holdings into currency thus random relocation is analogous to the liquidity preference shocks in diamond and dybvig 1983 as a result our model illustrates the risk pooling role of financial intermediaries in contrast to banks we consider that the stock market promotes economic development by establishing a market in which capital can be transferred across time for example this may reflect specialization of factor inputs to illustrate such ideas we consider the following motivation individuals in the economy have specialized production technologies

transactions costs technological choice and endogenous growth abstract hicks a theory of economic history clarendon press oxford 1969 argues that an important aspect of industrial development is the adoption of technologies requiring highly illiquid capital investments the adoption of such technologies becomes economically viable in the presence of low cost financial markets that provide liquidity to investors this observation provides a mechanism by which the costs of transacting in financial markets affect the equilibrium choice of technology productive efficiency and by implication growth we analyze how the costs of financial market transactions affect the set of technologies in use and the equilibrium growth rate transactions cost reductions may depending on the capital structure enhance or reduce growth journal of economic literature classification numbers d90 e13 g14

some even more unpleasant monetarist arithmetic does monetizing a deficit always result in a higher rate of inflation than bond financing the same deficit t j sargent and n wallace 1981 produced conditions under which the answer was negative unpleasant monetarist arithmetic subsequent authors have challenged the empirical validity of these conditions the authors develop a model similar to that of sargent and wallace and modify it to allow for financial intermediation in the presence of reserve requirements unpleasant arithmetic arises even when the real rate of growth exceeds the real return on bonds moreover under empirically plausible restrictions there exists a unique equilibrium no laffer curve considerations arise

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

banks and markets in a monetary economy abstract modern financial sectors consist of banks asset markets and a central bank this paper builds a model where these institutions provide different financial services and their interaction supports efficient allocations when one institution is missing equilibria are by construction inefficient the paper analyzes how interest rates and asset prices depend on the structure of the financial sector and characterizes the central bank policy that supports efficient allocations the analysis relies on the difference between liquidity and real shocks and relates the notion of liquidity used in this paper to the one adopted in other studies

introducing convexity into optimal compensation contracts abstract we study when it is appropriate to add a convex component such as stock options to an optimal managerial compensation contract we show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion in addition we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price the opposite effect results when increases in skewness leave the mean stock price unchanged

overstatement and rational market expectation abstract when an agent overstates his her true performance a rational market can still correctly guess the true performance this paper shows however that such rational market expectation and a profit maximizing principal can exacerbate the lack of productive effort by the agent

taxation and uncertainty while taxes may be certain u s tax policy has certainly not been furthermore intrinsic economic risk makes investment decisions risky therefore a serious examination of the effects of tax policy on dynamic economic behavior should consider both sources of uncertainty this paper presents a simple theoretical and computational model that can analyze both intrinsic risk and uncertain taxation furthermore it will be clear that these techniques will be useful for examining general problems of taxation and risk when studying the impact of past and or proposed tax changes one of two extreme assumptions are usually made either agents are perfectly aware of future tax policy a perfect foresight assumption or they always believe that no change will ever occur a myopic foresight assumption these two assumptions yield substantially different views of recent tax experience as alan auerbach and james hines 1987 demonstrate in a partial equilibrium context both are clearly wrong the myopic specification assumes that individuals believe at each point in time that the current tax law will surely continue forever even after they have been hit repeatedly with tax changes on the other hand it is absurd to think that in say 1977 a significant number of individuals perfectly knew the various tax changes that would occur during the following decade this paper analyzes a dynamic general equilibrium model wherein taxpayers understand the uncertainty in tax policy when making their deci

financial markets in development and the development of financial markets what is the relationship between markets and development it is argued that markets promote growth and that growth in turn encourages the formation of markets two models with endogenous market formation are presented to analyze this issue the first examines the role that financial markets banks and stock markets play in allocating funds to the highest valued use in the economic system it is shown that intermediation will arise under weak conditions the second focuses on the role that markets play in supporting specialization in economic activity the consequences of perfect competition in market formation are highlighted

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

inflation taxes and the coordination of monetary and fiscal policy by use of a game of chicken in this study some of the consequences of an uncertain policy struggle game of chicken between independent taxing agencies a monetary and a fiscal authority are exam ined we show that policy uncertainty may improve upon regimes where there is no uncer tainty and one agency succeeds in implementing a low tax policy at the expense of the other agency an uncertain tax policy never dominates a fully coordinated tax policy but it can move average tax rates in the right direction in this sense the game of chicken between agencies can be beneficial and can compensate for the lack of a specific coordinating admin