capital flow controls international asset pricing and investors welfare a multi country framework this paper investigates the impact of capital flow restrictions on the pricing of securities on the optimal portfolio composition for investors of different nationalities and on their welfare under capital flow controls the equilibrium price of a security is determined jointly by its international and national risk premiums and investors acquire nationality specific portfolios along with a market wide proxy for the world market portfolio removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities and all investors favor a move toward market integration introduction of different types of index funds in the world market generally increases world market integration and investor welfare in recent years the international capital markets have undergone numerous important changes that have increased the international linkage of national markets these changes include the creation of national index funds e g mexico korea taiwan india france and scandinavia and selective liberalization e g brazil india korea sweden and japan despite their potential impact on the national economies and global finance it is not clear what consequences these integrating changes entail for example is welfare increased by allowing cross border investment that is restricted to purchasing the entire national portfolio of which the national index fund is a class unfortunately with the exception of subrahmanyam 1975a who studies the pricing and welfare effects of fully integrating heretofore completely segmented markets other international asset pricing models that incorporate capital flow restrictions for instance black 1974 stulz 1981b lessard et al 1983 errunza and losq 1985 cooper and kaplanis 1986 and eun and janakiramanan 1986 analyze the pricing but not the welfare effects of investment barriers to analyze systematically the welfare implications of various structural changes in the current market environment this paper follows the lead of subrahmanyam and recasts the analysis in two important respects

new issues in corporate finance flow of funds data are used to compare methods of finance in 5 countries over the period 1970 to 1985 many of the problems associated with previous studies are avoided by estimating net instead of gross financing proportions the degree of consolidation of accounts reciprocal arrangements between borrowers and lenders and compensating deposit requirements on borrowers no longer distort financing patterns corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures significant variations in financing emerge these are not readily explained by traditional descriptions of corporate finance in particular taxation as an alternative the paper suggests that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long term finance the separation between investment and finance which has been the starting point of corporate finance theory is untenable in a multiperiod context in which terms of finance define future allocation of control

the incidence of personal income taxation evidence from the tax reform act of 1986 abstract this paper studies the short run incidence of personal income taxation in the us by examining how the wage structure shifted after the tax reform act of 1986 i calculate the marginal tax rate for the median worker of each occupation during the 1980s to determine the professions whose workers were most affected by the tax change when controlling for trends over time in the wage structure by occupation i find that individuals in occupations that experienced large decreases in their median marginal tax rates received lower pre tax wages after 1986 as the number of workers and the hours worked in those professions increased the results suggest that consideration of the wage effects of tax reforms is important when using these reforms to identify behavioral parameters and evaluating their distributional consequences

building a bric stock market opening and investment finance in india since liberalization portfolio equity inflows have been a feature of india s improved growth performance in recent years this study examines a possible connection through the equity financing of capital formation by manufacturing firms emphasis is placed on the funding preferences of owner controlled enterprises with the empirical results connecting equity issues to the management of gearing and the availability of internal funds this context suggests strongly that equity and debt are complementary choices although two channels of influence macroeconomic and allocative combine to encourage investment spending with pro cyclical implications

equity markets transactions costs and capital accumulation an illustration poorly developed equity markets inhibit the transfer of capital ownership moreover the costs of transacting in equity markets affect not just the level of investment but the kinds of investments that are undertaken once equity markets allow the ownership of capital to be transferred economically reductions in costs tend to favor the use of longer maturity investments when there is a relationship between the maturity of an investment and its productivity transactions cost reductions are conducive to observing certain kinds of increases in productive efficiency this article analyzes savings investment and consumption decisions by using an overlapping generation s model with two period lived agents the analysis allows for several technologies for converting current output into future capital that varies by productivity and maturity and it makes ownership of capital costly to transfer a reduction in transactions costs will typically alter the composition of savings and investment and have potentially complicated consequences for capital accumulation and steady state output

endogenous growth and the emergence of equity finance abstract this paper characterises the development of equity markets as a dynamic process that both influences and is influenced by the development of the real sector of the economy in overlapping generations economy borrowers seek funds to run risky investment projects by drawing up contracts which may take the form of either equity or debt issue in the presence of information asymmetry between borrowers and lenders the optimal contract is determined by trading off information dilution costs against bankruptcy costs significantly the equilibrium choice of contract depends on the state of the economy which in turn depends on the contracting regime based on this analysis the paper provides a theory of the joint determination of real and financial development with the ability to explain the emergence of a stock market along the path of real development

political institutions and financial development an empirical study summary this paper examines whether political institutional improvement promotes financial development using a panel dataset of 90 developed and developing countries over 1960 99 the empirical evidence reveals a positive effect of institutional improvement on financial development at least in the short run particularly for lower income countries the preliminary evidence by a before after event study indicates that a democratic transformation is typically followed by an increase in financial development

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

estimating monetary policy rules when nominal interest rates are stuck at zero did the federal reserve s response to economic fundamentals change with the onset of the global financial crisis estimation of a monetary policy rule to answer this question faces a censoring problem since the interest rate target has been set at the zero lower bound since late 2008 surveys by forecasters allow us to sidestep the problem and to use conventional regressions and break tests we find that in the opinion of forecasters the fed s inflation response has decreased and the unemployment response has increased which suggests that the federal reserve s commitment to stable inflation has become weaker in the eyes of the professional forecasters

on the optimal income taxation and educational decisions abstract in this paper we consider three different ways of incorporating individuals educational choices into the design of optimal income tax policy in one variant of the model case 2 where an individual chooses his education before knowing his ability and after that education makes his labour supply decisions on the basis of known ability it is shown that qualitative features of the optimal income tax schedule are not similar to those of the standard optimal income tax model the marginal tax rate is generally not zero at the endpoints of distribution but is most likely negative using numerical methods some interesting features quite different from earlier numerical results are revealed especially in the second case for example the marginal tax rate is non decreasing in income for a substantial income range in addition our calculations support neither the traditional views on the egalitarian nature of equal education nor its disadvantageous consequences in the perfect utilitarian society

income distribution dynamics with endogenous fertility developing countries with highly unequal income distributions such as brazil or south africa face an uphill battle in reducing inequality educated workers in these countries have a much lower birthrate than uneducated workers assuming children of educated workers are more likely to become educated this fertility differential increases the proportion of unskilled workers reducing their wages and thus their opportunity cost of having children creating a vicious cycle a model incorporating this effect generates multiple steady state levels of inequality suggesting that in some circumstances temporarily increasing access to educational opportunities could permanently reduce inequality empirical evidence suggests that the fertility differential between the educated and uneducated is greater in less equal countries consistent with the model

monetary policy shifts and the term structure we estimate the effect of shifts in monetary policy using the term structure of interest rates in our no arbitrage model the short rate follows a version of the taylor s 1993 discretion versus policy rules in practice carnegie rochester conference series on public policy 39 195 214 rule where the coefficients on the output gap and inflation vary over time the monetary policy loading on the output gap has averaged around 0 4 and has not changed very much over time the overall response of the yield curve to output gap components is relatively small in contrast the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2 4 in 1983 long term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads

determinants of the allocative cost and scope efficiencies of indian banks this study aims to investigate the impact of competition on determinants of allocative scope and cost efficiencies of indian scheduled commercial banks scbs specifically the study analyzes th

current accounts and oil price fluctuations in oil exporting countries the role of financial development abstract oil exporting countries usually experience large current account improvements following a sharp increase in oil prices in this paper we investigate this oil price current account relationship on a sample of 27 oil exporting economies relying upon the estimation of panel smooth transition regression models over the 1980 2010 period we provide evidence that refines the traditional interpretation of oil price effects on current accounts while current accounts are positively affected by oil price variations this effect is nonlinear and depends critically on the degree of financial development of oil exporting economies more specifically oil price variations exert a stronger impact on the current account position for less financially developed countries this influence diminishing with financial deepness

opening a stock exchange abstract a large body of theoretical and empirical literature has established a positive relationship between levels of stock market development and economic growth however previous empirical work has been based on samples of approximately 40 countries with the most highly developed financial systems since 1950 over 70 countries have opened their first national stock exchanges can such exchanges increase economic growth i present a data set of my construction that describes the exchange openings that occurred between 1960 and 1998 and find that these exchanges have generated increases in growth during their first 5 years of existence although the longer term results are ambiguous

financial structure and economic growth recent empirical work on financial structure and economic growth analyzes multi country dataset in panel and or cross section frameworks and concludes that financial structure is irrelevant we highlight their shortcomings and re examine this issue utilizing a time series and a dynamic heterogeneous panel methods our sample consists of fourteen countries tests reveal that cross country data cannot be pooled financial structure significantly explains output levels in most countries the results are rigorously scrutinized through bootstrap exercises and they are robust to extensive sensitivity tests we also test for several hypotheses about the prospective role of financial structure and financial development on economic growth

an upper bound on optimal income taxes abstract the message of this paper is very simple a certain range of tax rates determined by supply and demand functions only can be disregarded in linear optimal taxation approaches before any interpersonal utility comparisons are made in particular no marginal tax rate above a certain level can be optimal with respect to pareto inclusive social orderings it is shown that is in general not larger than and sometimes strictly less than the minimal tax rate at which tax revenues are maximal conditions under which is the least upper bound are given and a comparison is made with tax rates obtained by the rawlsian maximin principle

corporate governance and equity prices evidence from the czech and slovak republics the 1992 czechoslavakia mass privatization program involving about 1 500 eneterprises and implemented through a voucher scheme with competitive bidding was a bold step in changing the ownership and governance of a large part of the economy it represents a clear test case of one approach and other countries may benefit from its lessons at the time much skepticisism was voiced about mass privatization it would lead to diffuse ownership and no effective corporate governance would result but innovative forces led to the emergence of investment funds that collected much of the individuals voucher points leading to a much more concentrated ownership structure it has been expected that this concentrated ownership would lead to improved corporate governance but the jury is still out so far only limited and largely anecdotal evidence is available on the impact investment funds have on the way firms are being managed too little time has passed and too many shocks have occurred for example the split of the czech and slovak republics to expect to find discernible changes in corporate governance on measures of actual firm performance an alternative approach is to investigate whether firms that ended up with more concentrated ownership and possibly improved governance sell for higher prices either in the last voucher round or in the secondary market since then in a forward looking financial market one can expect prices to incorporate the effects of better ownership on future firm performance and associated dividends to shareholders put differently one would expect that two firms with different shareholding structures but otherwise identical would trade at different prices with the firm with a more concentrated ownership and presumably better corporate governance trading at a higher price on a cross sectional basis ownership structure may thus be significant in explaining relative share prices the author explores this line of reasoning controlling for a number of firm and sector specific variables he finds 1 majority ownership by a domestic or foreign investor has a positive influence on firm prices 2 firms with many small owners have lower prices 3 ownership by many small scale investors makes it easier for any single investor to establish effective control but such control does not necessarily translate into higher prices the author also provides two possible explanations of why higher prices appear to be associated only with majority ownership by a single investor he finds 1 the corporate legal framework and the difficulty in collecting proxy votes in the czech and slovak republics may prevent a small investor from making the necessary changes in the way firms are managed thus keeping prices low and 2 commercial banks are both managers of invesment funds and creditors of individual firms funds managers may face conflicts of interest and not be interested in increasing the value of equity alone but also the value of credits this could explain why prices are relatively lower for those firms in which investment funds have effective control

taxing family size and subsidizing child specific commodities abstract the effects and optimal choice of policy instruments directly affecting the welfare of parents and children are examined within the context of a household economics model if fertility were exogenous and households differed in number of children only a first best could be implement through a grant conditional on family size outside this very special case public intervention is either not justifiable on distributional grounds or involves taxing child specific commodities less than adult specific commodities if fertility is endogenous family size must be taxed or subsidized according to whether household expenditure on children is decreasing or increasing in the mother s wage rate

financial system development in transition economies this paper provides an overview of the major issues with respect to financial system development in transition economies which were discussed at a conference in groningen the netherlands december 1997 after a brief remark on the role of financial system design during economic transition the paper focuses on the role of stock markets in the process of financial intermediation with emphasis on the role of regulations in these markets the role of deposit insurance to improve bank system stability and the importance of an independent central bank measurement issues relating to central bank independence and its impact on inflation and growth 2000 elsevier science b v all rights reserved

optimal linear income taxation with general equilibrium effects on wages abstract the paper argues that the endogeneity of wages may make a considerable difference to optimal linear tax rates in this case there is not only the usual direct redistribution via the fiscal system but also the general equilibrium redistribution due to the change in wages depending on the elasticity of substitution of the production function and the labour supply elasticities these may be reinforcing or opposing it is shown that the general equilibrium effect may plausibly outweigh the direct effect so that net redistribution to the lower paid involves a wage subsidy financed by a lump sum tax

optimum taxation with errors in administration abstract the paper compares the welfare levels which can be achieved by two distinct tax regimes lump sum taxation where one attempts to identify individuals and allocate transfers or subsidies on the basis of characteristics and income taxation where characteristics are not observed but personal incomes are measured and taxed where there are no errors in classifying individuals lump sum taxation is superior but where mistakes are made in the allocation of lump sum grants or subsidies income taxation may be more attractive the level of errors where the regimes are equally desirable in terms of social welfare is computed in simple models following that of feldstein 1973 where there is strong aversion to inequality then income taxation becomes preferable at quite small errors in analysing income taxation it is shown that in the feldstein model with endogenous wages the marginal tax rate in optimum income taxation on the more skilled is negative and that on the less skilled is positive in contrast to the standard results see seade 1977 with exogenous wages

the coevolution of the real and financial sectors in the growth process the role of debt and equity changes over time and with the level of development what are these changes and why should they systematically occur across different countries and time periods this article characterizes financial innovation as a dynamic process that both influences and is influenced by the development of the real sector it focuses on the emergence and development of equity markets using a model that allows for growth and for capital accumulation that is financed externally through a combination of debt and equity as an economy develops the aggregate ratio of debt to equity will generally fall yet debt and equity remain complementary sources for the financing of capital investments the results suggest how various government policy actions might affect capital accumulation and equity market activity

financial development and economic growth convergence or divergence abstract this study tests for convergence in financial development and economic growth by incorporating the interaction between the real and financial sectors into an otherwise traditional test for convergence the results show strong evidence for conditional convergence middle and high income countries conditionally converge to parallel growth paths not only in per capita gdp but also in financial development the mutually reinforcing relationship between financial development and economic growth is stronger in the early stage of economic development and this relationship diminishes as sustained economic growth gets under way as such low income countries with a relatively well developed financial sector are more likely to catch up to their middle and high income counterparts and those with a relatively under developed financial sector are more likely to be trapped in poverty this finding explains the observed great divergence between poor and rich countries another finding is that while human capital is more important to growth in the early stage of economic development economic freedom becomes more important in the later stage

choice of occupation tax incidence and piecemeal tax revision a model is presented where workers move between two different occupations in response to economic incentives which are distorted by an income tax wages assume equilibrium values which are affected by the tax parameters incidence and welfare effects of small tax revisions are analyzed with particular attention to the role of tax induced wage changes it is demonstrated that within the economic setting of the model such wage effects may be neglected in assessments of piecemeal tax revisions

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

what does monetary policy do to long term interest rates at the zero lower bound this article uses a structural var with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound the var is identified using the assumption that monetary policy shocks are heteroskedastic monetary policy shocks have especially high variance on days of fomc meetings and certain speeches while there is otherwise nothing unusual about these days a complementary high frequency event study approach is also used i find that stimulative monetary policy shocks lower treasury and corporate bond yields but the effects die off fairly fast

liquidity shocks and real gdp growth evidence from a bayesian time varying parameter var we examine the dynamic impact of liquidity shocks resonating in stock and housing markets on real gdp growth we fit a bayesian time varying parameter var model with stochastic volatility to us data from 1970 to 2014 gdp becomes highly sensitive to house market liquidity shocks as disruptions in the sector start to emerge yet more resilient to stock market liquidity shocks throughout time we provide substantial evidence in favour of asymmetric responses of gdp growth both across the business cycle and among business cycle troughs stock and house market liquidity shocks explain on average 17 and 35 of the variation in gdp during the great recession respectively

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

the optimal public employment policy abstract this paper studies optimal public employment in a model with two types of labor unskilled and skilled and a single consumption good a linear income tax is used to redistribute income it is shown that if the income tax and public employment levels are optimal then there is less unskilled labor and more skilled labor in public production than is necessary to minimize costs at the prevailing gross wage rates the robustness of this result is investigated by examining a second model

endogenous fertility and the henry george theorem abstract models of endogenous demographic change deal with population size as an additional object of the welfare analysis in these models the overlapping generations olg model serves as the basic framework in club theory too population size is treated as an endogenous variable in local public goods lpg models the so called henry george theorem which requires local public expenditures to be financed by a 100 tax on aggregate land rent is known as a first order condition for club efficiency the present paper establishes and exploits an isomorphism between steady states of the olg model and allocations of the lpg model the paper revisits samuelson s fallacy concerning his goldenest golden rule and it explores institutional arrangements that sustain the optimum growth of population

the optimal linear income tax with tax credits contingent on fertility abstract the literature on the optimal linear income tax is extended by incorporating tax credits contingent on the number of dependents the taxpayer is responsible for the choice over how many dependents to be responsible for is made endogenous by allowing taxpayers a choice over their own fertility formulae are derived governing the government s optimal choice of the labor income tax rate and the tax credit contingent on fertility it is also shown that if the government chooses its policy based on the belief that fertility behavior is exogenous when it is actually endogenous then a suboptimal policy will be chosen if certain conditions are fulfilled the government will choose a labor income tax rate lower than that which is actually optimal

credit markets and the control of capital traditional discussions of the role of capital markets have identified a number of distinct functions which they perforrn they allocate scarce capital among competing users and uses l and they provide signals to guide managers in making their investment decisions 2 in this lecture i wish to focus on a rather different function of the capital market what i shall refer to as the control of capital 3 conventional theory treats the typical firrn in an anthropomorphic manner it acts as a single rational individual doing what it is supposed to be doing maximizing stock market value that may have been well and good in those nostalgic bygone days of small firrns each run tightly by their owners who were single mindedly pursuing their lust for wealth but today a majority of production occurs in large corporations in which no shareholder owns more than a small fraction of the shares in which the separation of ownership and control that frank knight was so concerned with in his writings some sixty five years ago has become a reality those

conducting monetary policy at very low short term interest rates can monetary policy committees accustomed to describing their plans and actions in terms of the level of a short term nominal interest rate find effective means of conducting and communicating their policies when that rate is zero or close to zero the very low levels of interest rates in japan switzerland and the united states in recent years have stimulated much interesting research on this question and have led some central banks to make changes in their operating procedures and communications strategies in this paper we will give a brief overview of current thinking on the conduct of monetary policy when short term interest rates are very low or even zero monetary policy works for the most part by influencing the prices and yields of financial assets which in turn affect economic decisions and thus the evolution of the economy when the short term policy rate is at or near zero the conventional means of effecting monetary ease lowering the target for the policy rate is no longer feasible however it would be a mistake to think that monetary policy was impotent we discuss three strategies for stimulating the economy at an unchanged level of the policy rate these involve i providing assurance to investors that short rates will be kept lower in the future than they currently expect ii changing the relative supplies of securities in the marketplace by altering the composition of the central bank s balance sheet and iii increasing the size of the central bank s balance sheet beyond the level needed to set the short term policy rate at zero quantitative easing we also discuss the costs and benefits of very low interest rates an issue that bears on the question of whether the central bank should take the policy rate all the way to zero before undertaking alternative policies

income taxation endogenous factor prices and production efficiency in an analysis of a two type income tax model with endogenous wages this paper shows that production efficiency is violated in the optimum with i non linear and ii linear income taxation if and only if a distortionary tax schedule is implemented these findings complement earlier results of the literature in passing it is also shown that optima with non linear redistributive income taxation cannot be identified with the redistributive regime if the assumption of endogenous wages is taken seriously

income distribution policies with endogenous fertility the implications of endogenous fertility for intra generational welfare comparisons of alternative policies with respect to income taxation and family allowances are considered the interactions among the choices between leisure options labor force participation and fertility are shown to be crucial to the determination of both the signs and the magnitudes of the optimal child allowances and income tax rates the implications of a negative marginal tax rate and a negative child allowance are considered annotation

redistributive taxation in the roy model we consider optimal redistribution in a model where individuals can self select into one of several possible sectors based on heterogeneity in a multidimensional skill vector we show that when the government does not observe the sectoral choice or underlying skills of its citizens the constrained pareto frontier can be implemented with a single non linear income tax we derive formulas for this optimal tax schedule if sectoral inputs are complements a many sector model with self selection leads to optimal income taxes that are less progressive than the corresponding taxes in a standard single sector model under natural conditions however they are more progressive than in a multi sector model without occupational choice or without overlapping wage distributions as in stiglitz 1982

stock markets corporate finance and economic growth an overview the research presented here focuses on four issues first it constructs more measures or criteria of stock market development than any previous study it compares liquidity concentration volatility institutional development and international integration across forty four industrial and developing countries from 1976 to 1993 besides identifying general characteristics of these measures and defining stock market development empirically these data facilitate further research into the relationship between stock market development and financial intermediaries corporate finance decisions and economic growth these measures ranked for each country can be used for inter country comparisons of the level of stock market development in addition the data provide a basis for gauging the success of capital market development projects using objective criteria second with these new data the research investigates the relationships between stock markets and financial intermediaries third the research analyzes the relationship between stock market development and long run economic growth fourth the research studies the ties between stock market development and financing choices of firms this overview puts this research in context and reviews the main results of the study section i provides a brief review of the role of stock markets in economic development and documents the evolution of debt and equity markets during the growth process section ii defines stock market development and presents summary data on the development of financial intermediaries and stock markets section iii presents evidence on the effect of stock market development on economic growth section iv summarizes the empirical results on how stock market development affects firm financing decisions section v concludes by discussing policy implications

the role of the state in financial markets this paper reexamines the role of the state in financial markets and identifies seven major market failures that provide a potential rationale for government intervention in practice government interventions in capital markets even in industrial countries have been pervasive the paper provides a taxonomy of those interventions with respect to both the objectives they serve and the instruments they employ there is a role for the government in financial markets but the success of government interventions has been mixed it is important that interventions be well designed the paper sets out principles for government regulatory interventions and applies them to prudential regulation it then examines three other areas of intervention directed credit finanical repression and competition policy and identifies circumstances in which some amount of financial repression may actually be beneficial

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

analytical issues in external financing alternatives for sbes as the amount of information about an enterprise is generally not neutral with respect to firm size financiers have problems to identify the default risk associated with a borrower or to have control over a borrower s investments this review paper analyses how various control mechanisms are fit to reduce this information problem and how various types of capital suppliers are endowed to finance small business enterprises

venture capital exits in domestic and cross border investments abstract we compare and contrast the performance of cross border and domestic venture capital vc investments in terms of the time it takes vc backers to exit portfolio companies through initial public offering ipo trade sale m a or other routes initial analysis suggests that cross border investments are exited more quickly than domestic investments and this difference is driven by the cross border investments in north america we explore whether the difference between domestic and cross border exits can be explained by regional variations in economic market activity and legal systems we find it is important to allow for the impact of these macro variables on the time to vc exit to vary across regions this is crucial not just to capture the full impact of the macro factors but also to explain the differences in time to exit between domestic and cross border investments

inequality aversion and marginal taxes the concept of a lower bound on optimal linear taxes is analyzed a marginal tax rate is defined to be optimal if the corresponding state of the economy is a welfare maximum for some social welfare function reflecting at least a minimal aversion to inequality the lower bound on optimal tax rates is proved to be strictly positive this tax rate is also calculated in a numerical example based on swedish data the value obtained is 29 per cent

assessing the temporal variation of macroeconomic forecasts by a panel of changing composition this paper calls attention to the problem of changing panel composition in surveys of forecasters and documents the problem in the survey of professional forecasters to study the temporal variation of forecasts we recommend analysis of the time series of predictions made by individual forecasters this makes transparent the heterogeneity of the panel and avoids improper inferences due to changing panel composition we warn against the traditional practice of aggregate time series analysis which con ates changes in the expectations of individual forecasters with changes in the composition of the panel should analysis of aggregated predictions be thought desirable as a simplifying device we recommend analyses of sub panels of xed composition

capital control liberalization and stock market development the authors address two questions what happens to stock market size liquidity volatility and integration with world capital markets after capital controls are liberalized and what is the relationship between those indicators of stock market development and regulations about information disclosure accounting standards and investor protection an analysis of data on stock markets in 16 developing countries suggests the following a stock markets become larger more liquid more integrated internationally and more volatile after controls on capital and dividend flows are liberalized b easy access to information about firms is positively associated with the size and liquidity of stock markets and c countries that officially establish internationally accepted accounting standards and laws to protect investors do not have substantially better functioning stock markets than countries that do not adopt those official standards

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

endogenous fertility and optimal population size pareto optimality which is the standard criterion of efficiency in general equilibrium models takes population size as given and therefore cannot be directly applied to analyze the question of optimal population size the criterion then for optimal population size must be based on a more restrictive definition of optimality this paper extends peter diamonds 1965 golden golden rule growth model by assuming that individuals derive utility from their own consumptionand from their own children offspring are assumed to consume resources before reaching adulthood the authors show that the optimal steady state utility yields a higher population growth rate when it converges to the golden rule allocation they then demonstrate that a voluntary social security program in which the size of the transfer to a particular agent is directly tied to his own fertility leads the competitive allocation to be identical to the allocation corresponding to the maximum of the steady state utility of the representative individual

consumption and real exchange rates in professional forecasts standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange rate depreciations across countries the striking lack of evidence for this link the consumption realexchange rate anomaly or backus smith puzzle has prompted research on risk sharing indicators with incomplete asset markets that research generally implies that the association holds in forecasts rather than realizations using professional forecasts for 28 countries for 1990 2008 we find no such association thus deepening the puzzle independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of hand to mouth consumers may help to explain the evidence

fertility and the tax benefit system a reconsideration of the theory of family taxation the author examines the simultaneous nature of the decision to have children the decision to spend money on them and the decision to seek employment it will be argued that the children income trade off emphasised by the present paper is more relevant to most family decisions than the income leisure trade off on which much of the policy debate has been centred in order to do that we shall bring together the recently developed economic theory of the family or new home economics with the microeconomic branch of the theory of public finance a model of family choice is developed the main message of the present paper is that if as the evidence suggests parents have some control over the number of children they put into the world then the effect of taxes and subsidies on the familys allocation of time and money will be generally weaker and in some respects the opposite of what it would be if the number of children were physiologically constrained or exogenously given another is that if parents derive utility from having children this has to be taken into account in any welfare calculation fertility may thus affect the design of optimal policy in two ways indirectly through its effect on market behaviour and directly through its effect on welfare excerpt

population size individual choice and social optima optimal population size when fertility is endogenous is considered in relation to two social welfare criteria a benthamite and a millian and in relation to purely individualistic maximization of utility in the current generation the authors show that a tax subsidy scheme involving child allowances and subsidies to future generation consumption can be found to support a social optimum through individual choice a general proof that the optimal population size according to the benthamite criterion is always larger than that given by the millian criterion is presented but it is shown that no general conclusions about the size of the population under laissez faire are possible excerpt

redistribution and pollution taxes with non linear engel curves abstract this paper analyses optimal corrective taxation and optimal income redistribution the pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages moreover under general utility functions optimal pollution taxes should be set below the pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods however if engel curves are linear optimal pollution taxes should follow the first best rule for the pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods the often used quasi linear ces and stone geary utility functions all have linear engel curves if engel curves are linear and if pollution taxes are not optimised pareto improving green tax reforms exist that move the pollution tax closer to the pigouvian tax simulations demonstrate that optimal corrective taxes should be pigouvian if the demand for polluting goods is derived from a les demand system but deviate from the pigouvian taxes if demand for polluting goods demand is derived from a piglog demand system

equivalence scales horizontal equity and optimal taxation under utilitarianism abstract this paper analyzes the question of how differences in family size should be treated by the income tax system in order to achieve horizontal equity family size is incorporated into the demand system by the procedure of demographic scaling horizontal equity is defined as equal treatment of equals it is shown that when lump sum taxes are not available and the government has to rely on income taxation then the only way to entail equal utilities for household of different size is to equate the labor supplies and the per standard adult consumptions of these households

stock markets in africa emerging lions or white elephants abstract the number of stock markets in african countries has doubled over the last 7 years although these markets remain small and illiquid they are growing rapidly and will become an increasingly important part of many african economies using examples taken from experience in other developing regions and africa s recent past this paper evaluates the common economic criticisms of stock markets and the political pitfalls involved in their operation it concludes that the positive economic effects of bourses on african economies are far larger than any negative effects and argues that the political costs can be mitigated while political benefits can also be gained it finishes by suggesting reforms that can be put in place to reap more benefits and further reduce costs from stock markets on the continent

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

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic