contagion macroeconomic models with multiple equilibria abstract several concepts of contagion are distinguished it is argued that models that allow only a single equilibrium conditional on the macroeconomic fundamentals are not adequate to capture all forms of contagion hence it is useful to formulate macro models that admit multiple equilibria and self fulfilling expectations a simple balance of payments model is presented to illustrate that phenomenon and some back of the envelope calculations assess its relevance to the coincidence of emerging market crises in 1994 95 and in 1997

income taxes and urban spatial structure abstract this paper examines the impact of an income tax in a monocentric city where households equilibriate their allocation of time between work commuting and leisure an increase in the income tax rate lowers the implicit value of time and hence transportation costs compensated equilibrium comparative statics analysis shows that under certain conditions this results in a larger more dispersed urban area with lower land rents at the city center and less population within any given distance from the center the welfare effect of an income tax rate change is also studied and an expression for the marginal excess burden is derived the income tax produces welfare losses both because it induces substitution in favor of leisure and in favor of travel the latter accompanied by excessive spatial dispersion and consumption of space the marginal excess burden depends not only on the compensated demand elasticity for leisure but also on that for space finally the problem of benefit measurement for transportation projects in this tax distorted spatial economy is examined benefit measures should be deflated to adjust for the fact that further transportation improvements lead to reduction of land use intensity exacerbating the problem of spatial resource misallocation in an already excessively dispersed urban area

strategic interactions and contagion effects under monetary unions this paper applies game theory and a cost benefit analysis to study voluntary exits and contagion effects in countries joined to a monetary union the paper looks at two non core or periphery countries of a large union and examines the role of structural asymmetries and strategic interactions as determinants of equilibrium outcomes following both country specific and common shocks the paper finds that under almost symmetry between countries country specific shocks are never associated with multiple equilibria and if large enough can spread to other countries leading to contagion by contrast common shocks are seen to sustain multiple equilibria if almost symmetric countries are considered and to have implications similar to those found in the country specific case if large structural asymmetries are admitted

financial contracting under extreme uncertainty an analysis of brazilian corporate debentures abstract economic volatility high transaction costs and fragile institutions hinder financial contracting in emerging markets these conditions characterize the economy of brazil yet a nascent corporate bond market thrives i analyze 50 brazilian indenture agreements and find that sample debentures are characterized by i features that mitigate inflation risk for investors ii contingent maturity mechanisms that provide periodic opportunities for exit or renegotiation iii a paucity of covenants that restrict the debtor s investment financing and dividend decisions and iv self enforcement mechanisms that avoid reliance on inefficient institutions analysis of these features enhances our understanding of contracting in emerging economies

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

contagion and banking crisis international evidence for 2007 2009 abstract policy makers aim to avoid banking crises and although they can to some extent control domestic conditions internationally transmitted crises are difficult to tackle this paper identifies international contagion in banking during the 2007 2009 crisis for 54 economies we identify three channels of contagion systematic idiosyncratic and volatility and find evidence for these in 45 countries banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion the results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 37 percent whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy

household behavior in a monocentric urban area with a public sector abstract this paper has examined how a public sector alters the model of urban household behavior and its predictions the qualitative housing price and demand location characteristics remain unchanged by the introduction of either an exogenous or endogenous public sector in addition the household s response to tax rate and public service changes depend solely upon the nonlocational demand relationships the major impact of location per se on the household s demand vector is through an additional hicksian price term whether locational effects reinforce or vitiate nonlocational demand changes depends upon the compensated relationship between the good in question and housing this paper also investigated the design of neutral public budgets government budgets using property income or comprehensive sales taxes to finance public services cannot be neutral with respect to housing demand and location of the four types of taxes considered only a narrow based sales tax can finance public services neutrally

on welfare measurement in cities this paper extends project evaluation in a spatial urban economy to consider the more general case of distortionary public finances if a local public improvement is financed at least in part by a distortionary property tax we show that residential land prices do not accurately measure the value of land improvements even when households are identical and the improvement is infinitesimally small the magnitude and direction of the measurement error will depend on the second order effects on aggregate demand via changes in population density at each location and on overall city size

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

a strategic analysis of sinking fund bonds abstract unlike most securities the pricing of sinking fund bonds is influenced by the distribution of ownership which summarizes the extent to which the market is cornered the effect of the distribution of ownership on the pricing of sinking fund bonds is examined by an explicit game in which the price obtained for bonds sold can depend upon the size of the investor s position this framework is used to contrast the valuation of sinking fund bonds with the valuation of amortizing bonds and straight debt we show that it is generally incorrect to view sinking fund bonds as being equivalent to serial bonds

default risk yield spreads and time to maturity this paper extends the default model of yield spreads for bonds by showing that in gen eral they are a complex function of maturity and in particular are not always monotoni cally increasing contrary to what one traditional view suggests our results may help explain the apparently conflicting empirical results found in the literature

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

the choice of call provision terms evidence of the existence of agency costs of debt an examination of the provisions of bond issues reveals that most bonds prohibit firms from calling the issue during the initial years after which time the bond can be called at the option of the firm a substantial number of firms however also reserve the right to call the issue during this initial period for purposes other than refinancing at a lower coupon rate the additional flexibility which accompanies the option of early redemption can be used to reduce the agency costs of debt associated with future investment opportunities informational asymmetry and the risk incentive problem using a sample of newly issued bonds statistical tests are performed to show that there are in fact differences between firms which do and do not reserve the right of early redemption this paper shows that these differences provide empirical evidence which is consistent with the hypothesis that firms use the option of early redemption to reduce agency costs one of the decisions which a firm must make when it floats a bond issue concerns the use of a call provision if a call provision is included in the bond then the terms of the call provision must be specified such as the years to the first call the initial call price the call price in subsequent years and the circumstances under which a call provision can be used previous work in the area of call provisions focused on fluctuations in interest rates as the reason for their existence it was shown by krause 12 however that in an efficient capital market any call provision decision based on interest rate uncertainty is irrelevant recent work in agency theory has shown that the existing contractual relationships between bondholders and stockholders may not be a zero sum game under these circumstances such financing decisions as capital structure debt maturity and call provisions may not be irrelevant an examination of the call provisions of currently outstanding bond issues reveals an institutional feature which is often overlooked many bonds have a standard call provision which restricts the firm from calling the issue for a stated number of years followed by a period during which firms have the option to call the bond at a stated call price another group of bond issues however contain a two tiered type of call provision which allows the corporation to call the bond for purposes other than refinancing at a lower coupon rate during the initial years of the life of the bond after this initial period the firm has the option of calling the bond issue for any purpose

destabilizing effects of exchange rate escape clauses abstract this paper studies policy rules with escape clauses analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress while well designed escape clause rules can raise society s welfare in principle limited credibility makes it difficult to implement such rules in practice an ems type institution that imposes political costs on policymakers who realign may raise welfare but can also produce equilibria far inferior to an irrevocably fixed exchange rate switches between multiple equilibria may have the character of sudden speculative attacks

are currency crises self fulfilling abstract this paper studies the respective roles of the fundamentals and self fulfilling speculation in currency crises we first present a model of a fixed exchange rate system in which self fulfilling speculation can arise following a bifurcation in the fundamentals we then estimate the model in the case of the 1992 3 crisis of the french franc and find some evidence that self fulfilling speculation was at work

callable bonds reinvestment risk and credit rating improvements role of the call premium we identify the call premium in nonconvertible callable bonds as an effective contracting provision to address agency conflict due to reinvestment risk and credit rating improvements we analyze 4 495 bonds issued between 1980 and 2012 when interest rates are high a majority of investment grade issues and almost the entire subset with long maturities 20 years include a call premium when interest rates are low virtually all investment grade issues with long and short maturities are callable at par high yield issues are limited to short maturities by about 4 1 they include a call premium regardless of interest rate levels

mexico s balance of payments crisis a chronicle of a death foretold this paper claims that the roots of mexico s balance of payments crisis are found in the prevailing high degree of capital mobility and financial globalization under these circumstances shifts in foreign capital flows and anticipation of a banking system bailout may produce large imbalances between stocks of financial assets and foreign reserves threatening the sustainability of currency pegs econometric analysis suggests that half of mexico s reserve losses could be accounted for by these phenomena large financial imbalances are also fertile ground for self fulfilling prophesy crises which lead devaluations to produce deep recessions these difficulties can be partly remedied by appropriate policies

informational contagion of bank runs in a third generation crisis model abstract this paper highlights the international spread of bank runs in a third generation model of financial crises through an informational channel banks short term liabilities include loans granted by foreign creditors who have imperfect information about the liquidation costs of banks assets a bank panic in a country induces lenders to downgrade early liquidation yields in other countries and thus to require higher interest rates to enable their banks to roll over their maturing debt those banks become therefore more prone to self fulfilling depositors runs the paper then studies the effect on contagion of increased transparency and bailouts

expectations and contagion in self fulfilling currency attacks this paper shows how expectations driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation the model of morris and shin 1998 is extended to allow speculators to trade in a second currency market if speculators believe that a devaluation of this other currency will make a domestic devaluation more likely they will engage in trades that link the two markets a sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of ac risis there fulfilling the original expectations even though this contagion is driven solely by expectations the model places restrictions on observable variables and these restrictions are broadly consistent with existing empirical evidence

gaining and losing erm credibility the case of the united kingdom the model of this paper highlights two aspects of credibility signaling the type of government which is assumed not to be known and for any type the likelihood that if circumstances are sufficiently unfavorable a devaluation will be impossible to avoid since not to do so would go against the government s interests these two factors have opposite implications for the link between unemployment and interest differentials high unemployment signals a tough government but also makes it less likely that even a tough government will maintain an existing parity copyright 1995 by royal economic society

market crashes and informational avalanches this paper analyses a security market with transaction costs and a sequential trading structure transaction costs may prevent many traders from revealing their private information if they trade in a sequential fashion due to the information aggregation failure hidden information gets accumulated in the market which may be revealed by a small trigger yielding a high volatility in the absence of an accompanying event the paper first characterizes the optimal trading strategy of the agent which constitute the unique equilibrium further properties of the price sequence are obtained using the concepts of informational cascade and informational avalanche the results are applied to the explanation of market crashes in particular the dynamics of market crashes are illustrated as evolving through the following four phases 1 boom 2 euphoria 3 trigger and 4 panic where the euphoria corresponds to the informational cascade and the panic corresponds to the informational avalanche

the relative tax benefits of alternative call features in corporate debt this paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt this tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices the equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered

local income taxation in an urban area abstract this paper indicates the response of a metropolitan area to the levying of a local income tax the analysis is focused on a central city and its surrounding suburbs but allows for migration to and from the metropolitan area of primary interest are the spatial effects of local income taxation and the associated welfare costs derived from additional transportation expenditures the analysis indicates the forms of compensation to central city high income households for the fiscal deficit they bear changes in wage rates and land rentals are derived and the question of full capitalization is considered

relative risk aversion and the transmission of financial crises we study how investor behavior affects the transmission of financial crises if investors exhibit decreasing relative risk aversion then negative wealth shocks increase the risk premium required to hold risky assets we integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals investor behavior can be a transmission channel of financial crises as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker the feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely the possible stabilization effects of capital controls and a tobin tax on the international transmission of financial crises are also studied

debt financing under asymmetric information the authors analyze the optimal design of debt maturity coupon payments and dividend payout restrictions under asymmetric information they show that if the asymmetry of information is concentrated around long term cash flows firms finance with coupon bearing long term debt that partially restricts dividend payments if the asymmetry of information is concentrated around near term cash flows and there exists considerable refinancing risk firms finance with coupon bearing long term debt that does not restrict dividend payments finally if the asymmetry of information is uniformly distributed across dates firms finance with short term debt

the determinants of the maturity of corporate debt issues we document the determinants of the term to maturity of 7 369 bonds and notes issued between 1982 and 1993 our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum this pattern is consistent with the theory that risky firms do not issue short term debt in order to avoid inefficient liquidation but are screened out of the long term debt market because of the prospect of risky asset substitution traditionally capital structure research has focused on how much of a firm s future cash flows should be paid out to debtholders instead of equityholders an equally important issue is when future cash flows should be paid out to debtholders a firm that finances its projects with short term debt risks serious financial difficulty if the debt cannot be extended similarly a firm that finances its activities with long term debt can sacrifice profits by needlessly risking mismanagement of resources after cash flows are returned from investments but before they are due to debtholders this study investigates the factors that firms consider when choosing the maturity of their liabilities we document the determinants of the maturity of 7 368 public debt issues made by u s corporations between 1982 and 1993 our empirical tests are based on existing theoretical models that relate the maturity of a firm s borrowings to the riskiness of its cash flows the time until investments pay off the quality of information held by outsiders the expected

the greek debt crisis likely causes mechanics and outcomes we use insights from the literature on currency crises to offer an analytical treatment of the crisis in the market for greek government bonds we argue that the crisis itself and its escalating nature are very likely to be the result of i steady deterioration of greek macroeconomic fundamentals over 2001 09 to levels inconsistent with long term emu participation and ii a double shift in markets expectations from a regime of credible commitment to future emu participation under an implicit emu german guarantee of greek fiscal liabilities to a regime of non credible emu commitment without fiscal guarantees respectively occurring in november 2009 and february march 2010 we argue that the risk of contagion to other periphery emu countries is significant and that without extensive structural reforms the sustainability of the emu is in question

the optimality of call provision terms there is substantial variation in fixed price call provision terms call price premium and call protection i investigate determinants of call price call protection and estimated call option value

default on sustainable public debt illiquidity suspect convicted abstract according to a well established economic principle any public debt that does not exceed the discounted stream of future primary surpluses should find buyers this paper argues why this principle may not hold if the government has only imperfect control over its net income flow a small risk of unsustainability appears to be at the origin of a much larger risk of illiquidity solving the model for the rational expectations equilibrium we find that the maximum debt level that investors are willing to hold may be much lower than the commonly used sustainable level

the greek financial crisis growing imbalances and sovereign spreads abstract we discuss the origins of the greek financial crisis as manifested in the growing fiscal and current account deficits since euro area entry in 2001 we then extend a model typically used to explain risk premia to assess the extent to which credit ratings captured these premia next we estimate a cointegrating relationship between spreads and their long term fundamental determinants and compare the spreads predicted by this estimated relationship with actual spreads we find that spreads were significantly below what would be predicted by fundamentals from end 2004 up to the middle of 2005 by contrast since may 2010 actual spreads have exceeded predicted spreads by some 400 basis points

on the relevance of debt maturity structure in this paper we present a tax induced framework to analyze debt maturity problems we show that under some modifications of the existing u s tax code debt maturity is irrelevant even in the presence of taxes and bankruptcy costs that yield an optimal capital structure if this restrictive structure is relaxed and assuming the miller 15 equilibrium does not prevail tax reasons would usually imply the existence of an optimal debt maturity structure if there exists a gain from leverage then an increasing term structure of interest rates adjusted for default risk results in long term debt being optimal a decreasing term structure under similar circumstances renders short term debt optimal in the absence of agency costs a miller 15 type result emerges at equilibrium and irrelevance prevails we also argue that agency costs could again reverse the irrelevance and imply a firm specific optimal debt maturity structure there has been extensive discussion in the literature concerning the existence of an optimal debt maturity structure kraus 13 states without proof that efficient capital markets preclude the existence of an optimal debt maturity stiglitz 20 demonstrates the irrelevance of debt maturity but in an economic environment in which the entire financing decision is irrelevant due to the absence of taxes and bankruptcy costs in contrast morris 16 argues that the issuance of short term debt can reduce the risk to stockholders and thereby increase equity value if the covariance between the net operating income and future interest rates is positive this result by morris is obtained even in the absence of taxes and when there is no probability of default the discrepancy between morris and stiglitz arises because morris uses the bogue and roll 31 multiperiod capital asset pricing model to incorporate uncertain future interest rates which implicitly assumes that investors cannot diversify away intertem

theory and estimation in the economics of housing demand the main purpose of this paper is to review recent theoretical and empirical developments in the economics of housing demand in particular we ask what is known concerning the permanent income elasticity of housing demand vis a vis the current or measured income elasticity what is known concerning price elasticities what is the appropriate functional form for housing demand equations what is the role of demographic variables what is known concerning dynamic aspects of housing demand what appear to be the major sources of bias in existing estimates of demand equations

a model of crises in emerging markets this paper presents a perfect foresight model of speculative attacks on emerging markets credit constrained governments are assumed to have two objectives to accumulate liquid assets in order to self insure against shocks to national consumption and to insure poorly regulated domestic financial markets this policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities the model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks the model suggests that a common shock generated capital inflows to emerging markets in asia and latin america after 1989

the synchronization of credit cycles abstract this paper proposes a simple econometric procedure to test for the synchronization of credit cycles using a century of data for 14 advanced economies we find that credit cycle synchronization dropped in the early 1920s from initially relatively high levels between the 1920s and the 1970s synchronization was overall low and concentrated within five predominantly regional clusters however synchronization has significantly increased in the post bretton woods era and has become less associated with geographic proximity australia denmark france italy japan norway spain switzerland the uk and the us form a single major credit cycle cluster since the 1970s a smaller cluster is formed by canada the netherlands and sweden while the german credit cycle follows a distinct path using logistic regressions we find that the synchronization of credit and business cycles go hand in hand our findings are especially relevant for the international coordination of macroprudential policy as well as to spur and inform further analysis on credit cycle dynamics

unconventional economic policies and sentiment an international assessment this paper estimates using bayesian and global vars the spillover effects of unconventional fiscal and monetary policies implemented in the united states and in the eurozone during the last decade consumer confidence and investor sentiment indicators are introduced in the models in order to highlight the signalling channel in the responses to economic policy innovations in times of crisis our results reveal that consumer and investor perceptions of innovative economic measures are relevant to study the pass through of economic policies to the real sector in times of crisis and zero lower bound interest rates in particular the signalling channel plays an important role in successful unconventional economic policies moreover if unconventional economic policies have an impact abroad the effects are similar to those measured in the domestic country region consequently coordination and transparency are a prerequisite for ensuring short term growth after a global financial crisis

the general equilibrium effects of the residential property tax incidence and excess burden abstract an urban general equilibrium model is used to explore the efficiency effects and distributional consequences of the residential property tax in a model of a small open city the replacement of a nondistortionary land tax with the residential property tax reduces the land area density and population of the city the aggregate net return on land falls by an amount equal to 164 93 of total tax revenue in a model of a closed region when city q replaces the land tax with the residential property tax production and employment shift to other cities in the region the net return on land decreases in city q and increases in other cities in the region in aggregate landowners are made better off by the change in tax policy while residents are made worse off the excess burden of the property tax is computed as 6 5197 of tax revenue

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

the call sinking fund and term to maturity features of corporate bonds an empirical investigation do bond issuing firms attempt to choose the call sinking fund and term to maturity features of bonds to improve shareholder wealth this paper develops and tests two hypotheses about the determinants of bond features using a conditional logistic model the model is estimated on a sample of bonds issued between 1982 and 1986 model estimates show that a bond s call sinking fund and term to maturity features are statistically related to the issuing firm s retention ratio ratio of convertible to long term debt two year change in net operating income and whether the firm is listed on the nyse and included in the s p400 these findings support the view that firms financing highquality projects but facing information asymmetries choose shorter term medium term callable bonds with and without the sinking fund feature

flattening of bond yield curves for long maturities the paper presents a theoretical proof that flattening of yield curves for par bonds is inevitable for long maturities this proof implies that behavioral explanations of flattening are unnecessary the proof also implies that the use of yields to maturity of couponbearing bonds to estimate the true term structure as well as forward rates for long maturities has potentially infinite bias suggesting that a greater effort should be made to directly estimate the true term structure in empirical work empirically observed bond yield to maturity curves have consistently been found to become flat for long maturities as evidenced by the empirical work of durand 6 7 8 malkiel 15 and the treasury bulletin 25 a concise summary of this evidence is contained in malkiel 15 he presents three dimensional graphs of corporate bond yield curves from 1900 to 1965 15 pp 8 9 and two dimensional graphs of yield curves for u s government securities for the period 1953 66 15 p 13 both of these show that flattening of yield curves occurs consistently for long maturities more recent u s government bond yield curves in the treasury bulletin exhibit a similar flatness for long maturities malkiel 15 considered flattening of yield curves for long maturities to be an important desiderata that a theory of the term structure must fulfil he said that a term structure theory must account for the pervasive tendency of the yield curve to level out as term to maturity increases and to develop what is called a shoulder irrespective of the general shape in the early maturities slopes with large absolute values occur only in the early maturities 15 p 16 malkiel has suggested that the shape of yield curves depends on the sensitivity of bond price to changes in interest rates according to malkiel s viewpoint if long term bonds of different maturities have essentially the same price sensitivity to interest rate changes yield curves would tend to be flat for long maturities in another viewpoint lutz 14 has said that the flattening of yield curves is the result of constant long term forward rates for long maturities this view would be justified if investors would use the same forecasted rate as the best predictor of all distant rates because of the uncertainties attached to expectations of future rates in different but distant future periods the major innovative result of our paper is a formal proof that flattening of yield curves for par bonds is inevitable for long maturities the power of this proof is that no assumptions are required about forward rates zero coupon

location housing and leisure demand muth s model of cbd employed household behavior has been successfully extended to include labor leisure choice in order to deal with the original version s deficient treatment of commuting time the extension demonstrates how all the basic results of the simpler formulation remain valid this paper provides a similar extension for the locally employed household variant of muth s model the analysis demonstrates a surprising difference between the demand gradient and comparative static results for the locally employed household without leisure choice and the locally employed household with leisure choice not observed for the cbd employed household model

callable bonds a risk reducing signalling mechanism the theory of financial economics has failed to distinguish advantages of callable bonds from those of short term debt this paper shows that either type of borrowing can signal a firm s better prospects but that short term debt does so at the cost of weakened risk sharing with capital markets by issuing either equity or long term non callable debt a firm with poor investment opportunities will not pool its prospects with those of a better firm but equity produces superior risk sharing perhaps this explains the almr ost complete absence of long term non callable bonds from observed corporate capital structures financial theory has found only moderate success in explaining the routine inclusion of call provisions among the covenants of corporate bonds in the absence of market imperfections or incompleteness the incremental compensation promised to bondholders should exactly offset the value of the call provision retained by equityholders indifference should obtain 1 nevertheless it is hard to accept indifference as an explanation given the near universality of call provisions in corporate bond contracts in this paper we argue that in the presence of asymmetric information about investment quality corporate managers can signal their firm s better prospects by issuing bonds that include call provisions our major result shows that this signalling mechanism can be more attractive to risk averse managers than would be the choice of short term debt which could also serve to signal furthermore we demonstrate that non callable corporate debt is a dominated security that is both it and equity signal bad news but equity provides risk sharing this finding helps to explain the relative absence of long term non callable debt from corporate financial markets previous attempts to explain the prevalence of call provisions in corporate bond contracts fall into four categories two categories involve pure wealth transfers from bondholders to stockholders in these constant sum environments a gain to one group constitutes a loss to the other in the first category managers possess private information with regard to future interest rate movements issuing callable bonds will capture gains for stockholders when anticipated drops