wage vs profit led growth the role of the distribution of wages in determining regime character the wage versus profit led distinction is a cornerstone of post keynesian growth theory however the existing theoretical literature focuses on the functional distribution of income and ignores the distribution of wages this paper shows how the distribution of wages affects whether an economy is wage or profit led since the distribution of wages impacts personal income distribution that explains why income inequality can also impact regime character increases in workers wage share always increase growth and capacity utilization regardless of the economy s character furthermore an increase in workers wage share can flip an economy from being profit led to wage led

profit maximising goes global the race to the bottom we explore four decades of cyclical and long run dynamics in income distribution and economic activity for a panel of 13 oecd countries as measured by the wage share and output gap when modeled as predator prey dynamics economic activity in oecd countries is weakly profit led convergence to a long run equilibrium is relatively slow delaying the profit squeeze stage for many years our race to the bottom model suggests that the oecd countries have been engaged in undercutting each other s real unit labour costs an extension of the model shows that the long run equilibrium has been shifting south west towards a lower wage share it may even be that this race has the undesirable consequence of decreasing economic activity

margining in derivatives markets and the stability of the banking sector we investigate the effects of margining a widely used mechanism for attaching collateral to derivatives contracts on derivatives trading volume default risk and on the welfare in the banking sector first we develop a stylized banking sector equilibrium model to develop some basic intuition of the effects of margining we find that a margin requirement can be privately and socially sub optimal subsequently we extend this model into a dynamic simulation model that captures some of the essential characteristics of over the counter derivatives markets contrarily to the common belief that margining always reduces default risk we find that there exist situations in which margining increases default risk reduces aggregate derivatives trading volume and has an ambiguous effect on welfare in the banking sector the negative effects of margining are exacerbated during periods of market stress when margin rates are high and collateral is scarce we also find that central counterparties only lift some of the inefficiencies caused by margining

swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

futures prices on yields forward prices and implied forward prices from term structure when futures contracts are settled with respect to underlying asset prices received theory suggests that the differences between futures prices and implied forward prices from the term structure are strictly due to marking to market ceteris paribus empirical evidence appears to indicate that such differences are small for contracts with short maturities what happens when the futures contract settles to yields implied by future prices of underlying assets the eurodollar futures contract which is the most actively traded futures contract in the united states settles to yield as opposed to prices this unique settlement feature is shown to imply that the implied forward prices from the libor term structure should differ from the futures prices even in the absence of marking to market differences due to marking to market effect are small they are shown to vary between 2 to 45 basis points less than one half percent of futures prices on the other hand differences between implied forward prices and futures prices are shown to be relatively large

finance inflation and employment a post keynesian kaleckian analysis the purpose of this paper is to contribute to the post keynesian kaleckian macroeconomic literature we develop a macroeconomic model that explicitly integrates the role of borrowing and cash payment commitments on outstanding debt interest plus principal repayment into the consumption and investment expenditures as well as into the inflation generating process we explore the way that finance influences the distribution effects of inflation in the demand side of a money credit using economy we suggest a new phillips curve that encapsulates the impact of financial commitments on wage and profit claims we argue that high debt and cash payment commitments are likely to be associated with a positive demand side effect of inflation on the rate of employment and that they might be conducive to a negative supply side effect of employment on the inflation rate the author 2011 published by oxford university press on behalf of the cambridge political economy society all rights reserved

pollution control and the ramsey problem pollution is an inevitable by product of production and is only gradually dissolved by the environment it can be reduced by producing less and by cleaning up the environment but neither occur when they are left to the market cleaning activities and the optimal emission charges increase with the stock of pollutants when one allows for pollution of the environment in the classical ramsey problem the capital stock is less than in the market outcome and a fortiori less than under the golden rule the analysis distinguishes between stock and flow externalities arising from pollution an increase in impatience can lead to more capital accumulation even though this leaves less room for current consumption

interest rate swaps abstract using quotations from two interest rate swap dealers with different credit ratings aaa and a we examine the effect of dealers credit reputations on swap quotations and bid offer spreads the aaa offer rates are significantly higher than the a offer rates and the aaa bid rates are significantly lower than the a bid rates we also document the relation between swap rates and par bond yields estimated from london interbank offered rate libor and bid rate libid data we identify some of the problems in testing the implications of swap pricing theory

relative pricing of eurodollar futures and forward contracts past research explains observed spreads between futures and forward eurodollar yields as being due to the futures contract s mark to market feature we derive closed form solutions for this yield spread and show that theoretically it should be small also differences in liquidity taxation and default risk cannot account for the large spreads observed we also present evidence that the spreads which are nonnegligible primarily in the first half of the sample period are likely to be attributable to the mispricing of futures contracts relative to the forward rates and that the mispricing was gradually eliminated over time

international competition income distribution and economic growth this paper shows that the neo keynesian case for wage led growth does not generally hold in an open economy model wage increases cause a loss of competitiveness that reduces the trade balance if the economy is relatively open to trade and price elasticities satisfy certain restrictions the worsening of the trade balance more than outweighs the increase in workers consumption thus reducing the growth rate the main theoretical innovation is a flexible markup pricing rule that allows changes in unit labor costs and exchange rates to affect profit margins implications for international relations and class conflict are discussed copyright 1989 by oxford university press

economic growth and transboundary pollution in europe an empirical analysis the existing empirical evidence suggests that environmental kuznets curvesonly exist for pollutants with semi local and medium term impacts ansuategi and perrings 2000 have considered the behavioral basis for thecorrelation observed between different spatial incidence of environmentaldegradation and the relation between economic growth and environmentalquality they show that self interested planners following a nash typestrategy tend to address environmental effects sequentially addressingthose with the most immediate costs first and those whose costs aredisplaced in space later this paper tests such behavioral basis in thecontext of sulphur dioxide emissions in europe

how fast should we graze the global commons unlike the vast preponderance of planets earth has been bequeathed a hospitable environment in which to thrive up to now man s activities have affected this environment negligibly scientists are becoming convinced however that release of carbon dioxide co2 from combustion of fossil fuels will lead to a significant modification of the global climate see woodwell how should we think about such a destruction of our heritage should it be treated as anathema like bondage or should the pace and extent of use of our global commons be subject to the same reasoned balancing of costs and benefits as other economic activities the present paper takes the second approach asking how fast the global economy should allow a buildup of atmospheric co2 the first section reviews the current scientific knowledge on this subject while the second puts this into an optimal growth framework the third section then presents a numerical example while the last presents some realistic policy views on the subject this abstract was borrowed from another version of this item

the middle class in macroeconomics and growth theory a three class neo kaleckian goodwin model this paper presents a three class growth model with labor market conflict the classes are workers a middle management middle class and a top management capitalist class the model introduces personal income distribution that supplements conventional concerns with functional income distribution within such a model endogenously generated changes in personal income distribution can generate endogenous shifts from profit led to wage led regimes and vice versa a model of an economy with three classes enables us to consider richer patterns of class conflict because the middle class has shared interests and conflicts with both capitalists and workers changes that benefit the middle class do not necessarily increase growth or employment or benefit workers

a theoretical basis for the environmental kuznets curve abstract this paper attempts to explain the environmental kuznets curve ekc or inverted u shaped relationship between income and environmental degradation in the framework of endogenous growth model considering a closed economy one part of capital is used for commodity production which generates pollution that degrades existing environment and the remaining part is used for abating pollution i e upgrading environment sufficient abatement activity improves restores environmental quality a sufficient abatement activity associated with commodity production could only lead optimally towards steady state the ratio of allocation of capital between two sectors production and abatement is fixed along the optimal path but it varies along the non optimal path that exists in the off steady state in the economy allocation of capital for abatement activity varies over time thus a change from insufficient to sufficient allocation of capital i e investment for abatement activity is the basis for an inverted u shaped relationship between environmental quality and economic growth

the default risk of swaps we characterize the exchange of financial claims from risky swaps these transfers are among three groups shareholders debtholders and the swap counterparty from this analysis we derive equilibrium swap rates and relate them to debt market spreads we then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders in a simplified case we obtain closed form solutions for the value of the default risk in the swap for interest rate swaps we obtain numerical solutions for the equilibrium swap rate including default risk we compare these with equilibrium debt market default risk spreads swaps have been one of the most explosive and important innovations in international capital markets in the last 10 years in its simplest form a swap consists of an agreement hetween two entities called counterparties to exchange in the future two streams of cash flows in a currency swap these streams of cash flows consist of a stream of interest and principal payments in one cvtrrency exchanged for a stream of interest and principal payments of the same maturity in another currency in an interest rate swap they consist of streams of interest payments of one type fixed or floating exchanged for streams of interest payments of the other type in the same currency the two types of swap are shown in appendix 1 the economic importance of swap transactions is the fact that they can he comhined with deht issues to change the nature of the liahility for the borrower the sum of a hond issue and a currency swap gives a net liability stream which is equivalent to transforming the bond liability into a different currency a floating rate note combined with an interest rate swap results in a liability equivalent to fixed rate debt two issues have dominated the academic literature on swaps the first concerns the reasons for their use arbitrage of imperfections in capital markets was the original cause of their appearance price and henderson 1984 turnbull 1987 shows that lowering borrowing costs by a synthetic transaction involving a swap is not possible in a complete integrated capital market subsequent authors wall and pringle 1988 arak estrella groodman and silver 1988 smith smithson and wakeman 1987 observe

transboundary externalities in the environmental transition hypothesis the environmental kuznets curve ekc is a hypothesis which implies that it is possible to grow out of environmental degradation most theoretical models of the ekc relation have not accounted for transboundary and intergenerational externalities nor have empirical studies provided evidence that validates an inverted u shaped relation between environmental degradation and economic growth for pollution problems where the effects are far displaced or are long delayed

the impact of collateralization on swap rates interest rate swap pricing theory traditionally views swaps as a portfolio of forward contracts with net swap payments discounted at libor rates in practice the use of marking to market and collateralization questions this view as they introduce intermediate cash flows and alter credit characteristics we provide a swap valuation theory under marking to market and costly collateral and examine the theory s empirical implications we find evidence consistent with costly collateral using two different approaches the first uses single factor models and eurodollar futures prices and the second uses a formal term structure model and treasury swap data the traditional approach to interest rate swap valuation sundaresan 1991a and duffie and singleton 1997 treats a swap as a portfolio of forward contracts on the underlying floating interest rate under specific assumptions regarding the nature of default and the credit risk of the counterparties duffie and singleton 1997 prove that swap rates are par bond rates of an issuer who remains at libor quality throughout the life of the contract this result is extremely useful for extracting zero coupon bond prices pricing swap derivatives and testing spot rate models despite the popularity of the traditional view market practice brings into question some of the underlying assumptions of this approach as the swap market rapidly grew in the late 1980s and early 1990s an increasingly diverse group of counterparties entered the market to mitigate their exposure to counterparty credit risk market participants began using a number of credit enhancements to improve the credit quality of swap contracts without question the most important credit enhancement is the posting of collateral in the amount of the current mark to market value of the swap contract isda 1999 due to these credit enhancements market participants commonly view interest rate swaps as free of counterparty default risk see e g tuckman 2002 this implies that in contrast to the traditional approach swap rates should be discounted not at default risky libor rates but rather at default free rates johannes and sundaresan are with the columbia business school we thank seminar partici

stagnation income distribution and monopoly power the deceleration in the rate of industrial growth in the indian economy since the middlesixties initially interpreted by some as a temporary downward deviation from trend hasnow come to be generally accepted as reflecting long run tendencies towards stagnation several explanations for these tendencies have been offered bhagwati and desai 1970 and bhagwati and srinivasan 1975 have focused on inefficiencies and the misallocationof resources arising from industrial policies pursued by the government others chakravarty 1974 raj 1976 and vaidyanathan 1974 among them have emphasisedthe sluggishness of agricultural growth which is alleged to have retarded industrial growthby limiting markets and the supply of wage goods and raw materials a third view reflectedin srinivasan and narayana 1977 for example has put the blame on a slackening of invest ment demand due to lower public investment but does not explain why public investmentfell or why its fall restrained industrial growth finally there is the explanation put forthin bagchi 1970 1975 1982 in nayyar 1978 and in parts of mitra 1977 that inequali ties in income distribution have resulted in a limited demand for industrial goods reducedincentives for investment and therefore reduced growth this view seems to suggest apositive relation between growth and income equality which is opposed to the generallyaccepted idea derived from cambridge growth models that higher growth requires greaterinequality the purpose of this paper is to examine the last explanation by considering the inter action between growth and income distribution in an underdeveloped economy with thehelp of a simple macroeconomic model the model is a stylisation of the indian economy so that we will be able to use the model to assess the argument that a deceleration in therate of growth of the indian industrial economy could have been caused by an unequaldistribution of income the argument will not be made that this income distributional con straint is the binding constraint on industrial growth the model will merely examine theinternal consistency of the argument that a bad income distribution could explain stagnation in the sense of reduced growth and show that in the indian context as in other similarcontexts this argument can be put forward in explaining stagnation our argument is first presented with a highly simplified schematisation of the indianeconomy which we shall call the basic model the economy modelled produces only one

semi autonomous household expenditures as the causa causans of postwar us business cycles the stability and instability of luxemburg type external markets similar patterns can be observed in post wwii us business cycles the initial upswings tend to be led by household investment and debt financed personal consumption expenditures which then wane in relative importance and lead downswings as those expenditures are financed in significant part by money creation they function as an external market driving accumulation by enabling monetary profit realisation in a way analogous to rosa luxemburg s treatment of the public and foreign sectors empirical studies on wage led profit led demand regimes typically exclude household investment or include it in with business investment this paper argues that it is vital to distinguish an independent role for semi autonomous household expenditures as a driver of effective demand and cyclical dynamics the failure to do so in empirical studies sustains misleading conclusions such as the perceived relevance of goodwin type profit squeeze cycles

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

negative swap spreads and limited arbitrage since october 2008 fixed rates for interest rate swaps with a thirty year maturity have been mostly below treasury rates with the same maturity under standard assumptions this implies the existence of arbitrage opportunities this paper presents a model for pricing interest rate swaps where frictions for holding bonds limit arbitrage i show analytically that negative swap spreads should not be surprising in the calibrated model swap spreads can reasonably match empirical counterparts without the need for large demand imbalances in the swap market empirical evidence is consistent with the relation between term spreads and swap spreads in the model

the tips treasury bond puzzle we show that the price of a treasury bond and an inflation swapped treasury inflation protected securities tips issue exactly replicating the cash flows of the treasury bond can differ by more than 20 per 100 notional treasury bonds are almost always overvalued relative to tips total tips treasury mispricing has exceeded 56 billion representing nearly 8 of the total amount of tips outstanding we find direct evidence that the mispricing narrows as additional capital flows into the markets this provides strong support for the slow moving capital explanation of arbitrage persistence

a joint analysis of market indexes in credit default swap volatility and stock markets abstractthis paper analyses the joint dynamics of the cds volatility and stock markets using both var and markov regime switching var models with market index data it shows that the joint behaviour of the three markets is better characterized by the markov model with two regimes corresponding to low and high volatile market conditions the relationship between changes in the market indexes under a regime is consistent with theory and persistent the information transmission process of shocks to the markets is similar for the two regimes with a more important role for cds shock and the volatility in the money market is an important determinant of regime switching the findings have practical implications particularly for hedging strategies with market indexes under different market conditions

toward a new conception of the environment competitiveness relationship accepting a fixed trade off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress studies finding high environmental compliance costs have traditionally focused on static cost impacts ignoring any offsetting productivity benefits from innovation they typically overestimated compliance costs neglected innovation offsets and disregarded the affected industry s initial competitiveness rather than simply adding to cost properly crafted environmental standards can trigger innovation offsets allowing companies to improve their resource productivity shifting the debate from pollution control to pollution prevention was a step forward it is now necessary to make the next step and focus on resource productivity

can interest rate volatility be extracted from the cross section of bond yields most affine models of the term structure with stochastic volatility predict that the variance of the short rate should play a dual role in that it should also equal a linear combination of yields however we find that estimation of a standard affine three factor model results in a variance state variable that while instrumental in explaining the shape of the yield curve is essentially unrelated to garch estimates of the quadratic variation of the spot rate process or to implied variances from options we then investigate four factor affine models of the models tested only the model that exhibits unspanned stochastic volatility usv generates both realistic short rate volatility estimates and a good cross sectional fit our findings suggest that short rate volatility cannot be extracted from the cross section of bond prices in particular short rate volatility and convexity are only weakly correlated c 2009 elsevier b v all rights reserved

an empirical examination of the convexity bias in the pricing of interest rate swaps abstract this paper examines the convexity bias caused by the non linearity of payoffs in the pricing of interest rate swaps off the eurocurrency futures curve the evidence from four major currencies dm and during 1987 1996 suggests that swaps were initially being priced off the futures curve ignoring the convexity adjustment subsequently the market swap rates drifted below the rates implied by futures prices after rejecting alternative explanations we use alternative term structure models to show that the convexity bias is related to the empirically observed swap futures differential we interpret these results as evidence of mispricing of swap contracts during the early years which was eliminated over time

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

functional income distribution and aggregate demand in the euro area an increase in the wage share has contradictory effects on the subaggregates of aggregate demand private consumption expenditures ought to increase because wage incomes typically are associated with higher consumption propensities than capital incomes investment expenditures ought to be negatively affected because investment will positively depend on profits net exports will be negatively affected because an increase in the wage share corresponds to an increase in unit labour costs and thus a loss in competitiveness therefore theoretically aggregate demand can be either wage led or profit led depending on how these effects add up the results will crucially depend on how open the economy is internationally the paper estimates a post kaleckian macro model incorporating these effects for the euro area and finds that the euro area is presently in a wage led demand regime implications for wage policies are discussed

a supermultiplier stock flow consistent model the return of the paradoxes of thrift and costs in the long run supermultiplier models have been recently brought to the post keynesian debate yet these models still rely on quite simple economic assumptions being mostly ow models which omit the nancial determinants of autonomous expenditures since the output growth rate converges in the long run to the exogenously given growth rate of non capacity creating autonomous expenditure and the utilization rate moves towards the normal utilization rate the paradoxes of thrift and costs remain valid only as level e ects average growth rates this paper investigates whether the core conclusions of supermultiplier models hold in a more complex economic framework described by means of a supermultiplier sfc model in which private business investment is assumed to be completely induced by income while the autonomous expenditure component in this case consumption out of wealth becomes endogenous the results of the numerical simulation experiments suggest that the paradox of thrift can remain valid in terms of growth e ects and that a lower pro t share can also be associated to a higher accumulation rate though with a lower pro t rate

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

the term structure of interbank risk we infer a term structure of interbank risk from spreads between rates on interest rate swaps indexed to the london interbank offered rate libor and overnight indexed swaps we develop a tractable model of interbank risk to decompose the term structure into default and non default liquidity components from august 2007 to january 2011 the fraction of total interbank risk due to default risk on average increases with maturity at short maturities the non default component is important in the first half of the sample period and is correlated with measures of funding and market liquidity the model also provides a framework for pricing hedging and risk management of interest rate swaps in the presence of significant basis risk

pollution control with uncertain stock dynamics when and how to be precautious abstract the precautionary principle pp applied to environmental policy stipulates that in the presence of uncertainty society must take robust preventive action to guard against worst case outcomes it follows that the higher the degree of uncertainty the more aggressive this preventive action should be this normative maxim is explored in the case of a stylized dynamic model of pollution control with uncertain in the knightian sense stock dynamics using the robust control framework of hansen and sargent 12 optimal investment in damage control is found to be increasing in the degree of uncertainty thus confirming the conventional pp wisdom optimal mitigation decisions however need not always comport with the pp in particular when damage control investment is both sufficiently cheap and sensitive to changes in uncertainty damage control investment and mitigation may act as substitutes and a pp with respect to the latter can be unambiguously irrational the theoretical results are applied to a calibrated linear quadratic model of climate change the analysis suggests that a reversal of the pp with respect to mitigation while theoretically possible is very unlikely

what is sustainable development this paper introduces two axioms that capture the idea of sustainable development and characterizes the welfare criterion that they imply the axioms require that neither the present nor the future should play a dictatorial role in society s choices over time theorems 1 and 2 show there exist sustainable preferences which satisfy these axioms and provide a full characterization theorems 3 5 study a standard dynamical system representing the growth of a renewable resource economy give a turnpike theorem and exhibit the differences between sustainable optima and the ones according to discounted utilitarianism

personal income inequality and aggregate demand this paper presents a theoretical and empirical investigation of how changes in the size distribution of income can aect aggregate demand and the demand regime of an economy after presenting empirical evidence for the us economy that the propensity to save increases signicantly from the bottom to the top quintile of wage earners we demonstrate that more equal distributions always lead to higher output in the traditional neo kaleckian macroeconomic model we also present conditions under which a reduction of income inequality among workers turns demand more wage led this view is supported by the results of an econometric study for the united states 1967 2010 which show that the rise after 1980 in income inequality has made the us economy more prot led

modeling sovereign yield spreads a case study of russian debt we construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring and allows for compensation for illiquidity using a new and relatively efficient method we estimate the model using russian dollar denominated bonds we consider the determinants of the russian yield spread the yield differential across different russian bonds and the implications for market integration relative liquidity relative expected recovery rates and implied expectations of different default scenarios this paper develops a model of the termstructure of credit spreads on sovereign bonds that accommodates i default or repudiation the sovereign announces that it will stop making payments on its debt ii restructuring or renegotiation the sovereign and the lenders agree to reduce or postpone the remaining payments and iii a regime switch such as a change of government or the default of another sovereign bond that changes the perceived risk of future defaults we build on the framework of duffie and singleton 1999 showing that cash flows promised by a sovereign bond can be discounted using a default adjusted short termdiscount rate that reflects the m ean arrival rate and associated losses in market value upon arrival of each of the aforementioned types of credit events since a sovereign credit event is often not a liquidation event the model allows for continued trading and pricing of a sovereign instrument through credit events possibly after writedowns in face value or cash distributions to creditors on credit event dates additionally we accommodate the possibility that bonds issued by the same sovereign of exactly the same type but possibly of different maturities may be priced in the market using different discount factors reasons for this may include i bond covenants may not include cross default clauses that would force upon the default of one bond the simultaneous default of other bonds of the same type but of a different maturity for various strategic reasons related to internal

a comparison of forward and futures prices of an interest rate sensitive financial asset this paper focuses on contractual distinctions as an explanation for the price divergence between futures and forward contracts specifically it investigates the effect of marking to market on the observed price differences using the pricing model described in cox ingersoll and ross cir 1981 journal of financial economics 9 321 346 using previously unavailable data this paper employs eurodollars an interest rate sensitive financial asset to test the cir model unlike prior empirical studies test results support both the weak prediction concerning the sign of the average price difference and the stronger prediction that specific covariances explain the variation in the price differences futures contracts and forward contracts are fundamentally similar both contracts are agreements between two parties to trade a specific good or asset at a future date at a price determined today these agreements facilitate the transfer of risk between contracting parties permitting the creation of hedging strategies in spite of their conceptual similarity the implementation of these two contracts is quite different participants in futures markets trade highly standardized contracts by open outcry on organized exchanges clearing associations tor the exchanges control default risk by assuming the opposite side of each transaction guaranteeing payment to reduce traders incentive to default the exchanges mark positions to market by settling contract gains and losses daily in contrast to the futures market the market for forward contracts is mostly an over the counter market in the absence of a clearinghouse trader reputation helps control default risk unlike futures contracts no markingto market occurs the parties in the contract make no payments until maturity of the contract the forward market for financial interest rate instruments departs even further from the futures market format a trader can use the cash market for interest rate instruments to establish a forward position for example a trader can secure a forward position for a three month t bill beginning three months in the future by buying a t bill with a six month maturity and selling a t bill with a three month maturity

pricing interest rate derivative securities this article shows that the one state variableinterest rate models of vasicek 1977 and cox ingersoll and ross 1985b can be extended sothat they are consistent with both the current termstructure of interest rates and either the currentvolatilities of all spot interest rates or the currentvolatilities of all forward interest rates theextended vasicek model is shown to be very tracta ble analytically the article compares option pricesobtained using the extended vasicek model withthose obtained using a number of other models

competition among exchanges does competition among e nancial intermediaries lead to excessively low standards to examine this question we construct a model where intermediaries design contracts to attract trading volume taking into consideration that traders differ in credit quality and may default when credit quality is observable intermediaries demand the right amount of guarantees a monopolist would demand fewer guarantees private information about credit quality has an ambiguous effect in a competitive environment when the cost of default is large small private information leads to higher lower standards we exhibit examples where private information is present and competition produces higher standards than monopoly does i introduction in spite of the general acceptance of the competitive mechanism as an allocation scheme many observers consider e nancial intermediation an exception competition is thought to lead to a race to the bottom in which e nancial intermediaries settle for excessively low levels of contractual guarantees in an attempt to increase volume evaluating futures exchanges a joint report from the treasury and the federal reserve board written in the wake of the 1987 crash states that t here is sufe cient possibility that at some point sros self regulatory organizations might establish margins that were inconsistent enough to present market problems or set them at levels that might present potential costs to other parties that regulatory approval should be established in all markets 1

unemployment and the real wage the economic basis for contesting political ideologies using the keynesian theory of effective demand this paper demonstrates how particular models such as that of cooperative capitalism enunciated by the left keynesian social democrats the marxian model of profit squeeze emphasizing distributive conflict and even the conservative model relying on supply side stimulus fit in as particular variants of a more general theoretical scheme through a reconstruction of the familiar is schedule the argument is weaved around the theme of the relations between unemployment and real wage in the context of both a closed and an open economy to explain the common macroeconomic basis of contesting ideologies copyright 1990 by oxford university press

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

identification of maximal affine term structure models building on duffie and kan 1996 we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations because these variables possess unambiguous economic interpretations they generate a representation that is globally identifiable further this representation has more identifiable parameters than the maximal model of dai and singleton 2000 we implement this new representation for select three factor models and find that model independent estimates for the state vector can be estimated directly from yield curve data which present advantages for the estimation and interpretation of multifactor models

ekc type transitions and environmental policy under pollutant uncertainty and cost irreversibility abstract previous studies have suggested that some pollutant levels first increases due to the economic growth and then start decreasing the pattern being called the environmental kuznets curve ekc we examine ekc type transitions of pollutant levels not with respect to economic growth but more generally in time assuming that each policy maker optimally executes the two switching options of regulation and unregulation for pollution the switching dynamics of environmental policy can be described by an alternating renewal process it is shown that the double laplace transform of transition density of a pollutant level can be obtained by a novel application of renewal theory the expected level of overall pollutants is then calculated numerically and found to exhibit either a shaped or an n shaped pattern in time our results present a simple explanation for the ekc type transitions of pollutant levels within a real options framework

some instability puzzles in kaleckian models of growth and distribution a critical survey we tackle the issue of the possible instability of the kaleckian distribution and growth model distinguishing between keynesian and harrodian instability we review various mechanisms that have been proposed by critics of the kaleckian model to tame harrodian instability while bringing back the rate of utilisation to its normal rate we find that the mechanisms that have been suggested are far from convincing therefore we conclude that it may be premature for the critics of the kaleckian model to dismiss the endogeneity of the rate of capacity utilisation in long run growth equilibrium copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

pollution control under uncertainty and sustainability concern we analyze the implications of environmental policy on pollution in a stochastic framework with finite horizon and sustainability concern the social planner seeks to minimize the social environmental and economic costs associated with pollution we allow for the planner to attach different relative weights to the discounted and end of planning horizon costs in order to assess how sustainability concern might affect the optimal level of policy intervention we show that the optimal environmental policy increases with the degree of sustainability concern reducing thus the amount of pollution the society is forced to bear a calibration based on world textit co 2 data supports our conclusions further highlighting the importance of higher degrees of sustainability concern to achieve greener long run outcomes it also allows us to show that under a realistic model s parametrization the optimal environmental policy tends to rise with higher degrees of uncertainty in a precautionary manner

pollution control under emission constraints switching between regimes in this paper we develop a model of pollution control the aim of the society is to maximize the net social benefits which are negatively affected by the emission of pollutants we show that the presence of an upper constraint on pollution growth rate affects the actual trajectory of emissions even when emissions are far below the level where the constraint binds we get three main results first we find that for a society it is optimal to take into account the impact of the latent constraint at the outset of the planning horizon and to modify the emission flows even when the constraint is still slack second we analyze how the constraint works effectively in the intermediate phases before the constraint binds one crucial result is that the constraint on pollution growth may generate the unexpected result of increasing instead of reducing the emissions at the beginning and in the intermediate phases before the constraint binds finally we state the boundary conditions to compute the optimal trajectory of emissions switching between regimes

pricing factors in multiple term structures from interbank rates abstract this article analyzes the reward for the risk embedded in interbank derivatives seeking to characterize the size and economic sources of the components of this risk premium in interbank spread quotes the basis swap bs spreads floating to floating interest rate swaps are employed as a vehicle used by investors to express their views concerning the risk of borrowing on the interbank market our results show that the size of the risk premium ranges from 20 to 60 basis points depending on the tenor during periods of financial distress moreover the evolution of this risk premium increases dramatically after august 2007 primarily due to the evolution of credit variables such as sovereign and financial sector risks finally we also document important sources of commonality between risk premiums at different tenors an analysis of the determinants of risk premia reveal that investors compensation relates to financial sector credit and liquidity uncertainty and risk aversion