macroeconomic shocks structural change and real exchange rates evidence from historical data we present empirical evidence on the forces driving real exchange rates in the long run using data from the us uk and italy across different exchange rate regimes we find support for the hypothesis that productivity and fiscal shocks matter however in some cases fiscal shocks cause depreciations likely triggered by the monetary accommodation of fiscal shocks we also find that the traditional harrod balassa samuelson effect of productivity on real exchange rates is reversed in some cases which confirms the importance of the distributive sector in driving productivity gains

does adding up of economic capital for market and credit risk amount to conservative risk assessment there is a tradition in the banking industry of dividing risk into market risk and credit risk both categories are treated independently in the calculation of risk capital but many financial positions depend simultaneously on both market risk and credit risk factors in this case an approximation of the portfolio value function separating value changes into a pure market risk plus pure credit risk component can result not only in an overestimation but also in an underestimation of risk we discuss this compounding effect in the context of foreign currency loans and argue that a separate calculation of economic capital for market risk and for credit risk may significantly underestimate true risk

risk factor contributions in portfolio credit risk models abstract determining contributions to overall portfolio risk is an important topic in risk management for positions instruments and sub portfolios this problem has been well studied and a significant theory built around the calculation of marginal contributions we consider the problem of determining the contributions to portfolio risk of risk factors this cannot be addressed through an immediate extension of techniques for position contributions since the portfolio loss is a nonlinear function of the risk factors we employ the hoeffding decomposition of the portfolio loss into a sum of terms depending on the factors this decomposition restores linearity but includes terms arising from joint effects of groups of factors these cross factor terms provide information to risk managers since they can be viewed as best hedges of the portfolio loss involving instruments of increasing complexity we illustrate the technique on multi factor portfolio credit risk models where systematic factors represent industries geographical sectors etc

when do long run identifying restrictions give reliable results many recent articles have identified behavioral disturbances in vector autoregressions by imposing restrictions on the long run effects of shocks this article demonstrates that this approach will be unreliable unless the underlying economy satisfies three types of strong restrictions although many aspects of these issues have been raised before this article draws out and illustrates the implications for inferences under the long run scheme furthermore it provides strategies for dealing with the problems

combining fair pricing and capital requirements for non life insurance companies the aim of this article is to identify fair equity premium combinations for non life insurers that satisfy solvency capital requirements imposed by regulatory authorities in particular we compare target capital derived using the value at risk concept as planned for solvency ii in the european union with the tail value at risk concept as required by the swiss solvency test the model framework uses merton s jump diffusion process for the market value of liabilities and a geometric brownian motion for the asset process valuation is conducted using option pricing theory in this setting we study the impact of model parameters and corporate taxation on fair pricing solvency capital requirements and shortfall probability for different safety levels measured by the default put option value we show that even though corporate taxes can have a substantial impact on pricing and capital structure they do not affect capital requirements if the safety level is retained before and after taxation

agricultural development and the size distribution of personal income the tropical african experience abstract we use data from a sample of countries in tropical africa to investigate the relationship between relative income and growth rate of the agricultural sector and income inequality we find that an increase in the income of the agricultural sector relative to that of the non agricultural sector decreases income inequality the growth rate of agricultural production and the proportion of the labor force in the non agricultural sector were also found to be negatively correlated with income inequality

expected shortfall and beyond financial institutions have to allocate so called economic capital in order to guarantee solvency to their clients and counterparties mathematically speaking any methodology of allocating capital is a risk measure i e a function mapping random variables to the real numbers nowadays value at risk var which is defined as a fixed level quantile of the random variable under consideration is the most popular risk measure unfortunately it fails to reward diversification as it is not subadditive in the search for a suitable alternative to var expected shortfall es or conditional var or tail var has been characterized as the smallest coherent and law invariant risk measure to dominate var we discuss these and some other properties of es as well as its generalization to a class of coherent risk measures which can incorporate higher moment effects moreover we suggest a general method on how to attribute es risk contributions to portfolio components

empirical evidence on the insulation properties of fixed and flexible exchange rates abstract this paper investigates whether japanese output stability since the mid 1970s is attributable to the change in exchange rate regime or to the changing nature of underlying disturbances we decompose foreign and domestic influences on output movements using restrictions on the long run dynamics to identify the disturbances we find that the flexible exchange rate regime is more effective in insulating the economy from foreign disturbances than is the fixed rate regime however in the case of japan it is primarily the changing nature of the fundamental disturbances to the economy that is responsible for greater output stability since the mid 1970s

sources of fluctuations in relative prices evidence from high inflation countries casual analysis of six high inflation episodes indicates a strong positive relationship between movements in the relative price ratio measured by wpi cpi and the inflation rate the authors estimate a vector autoregression model in which relative price movements are driven by several fundamental disturbances fiscal monetary output and exchange rate identified using only long run restrictions based on a general equilibrium optimizing model analysis of the endogenous response of relative price changes to these disturbances suggests that output and monetary shocks are the most important driving forces although fiscal and exchange rate shocks are also influential in explaining relative price movements in some countries copyright 1993 by mit press

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

risk capital allocation for rorac optimization abstract this paper considers the financial optimization problem of a firm with several sub businesses striving for its optimal rorac an insightful example shows that the implementation of classical gradient capital allocation can be suboptimal if division managers are allowed to venture into all business whose marginal rorac exceeds the firm s rorac the marginal rorac requirements are refined by adding a risk correction term that takes into account the interdependencies of the risks of different lines of business it is shown that under certain stationarity conditions this approach can guarantee that the optimal rorac will eventually be achieved

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

an economic capital model integrating credit and interest rate risk in the banking book banks often measure credit and interest rate risk in the banking book separately and then add the risk measures to determine economic capital this approach misses complex interactions between the two risk types we develop a framework where these risks are analysed jointly since banking book positions are generally not marked to market our model is based on book value accounting our simulations show that interactions matter and that ignoring them leads to risk overstatement the magnitude of the errors depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

international trade and the business cycle this paper develops a new empirical framework for analysing the dynamics of the trade balance in response to different types of macroeconomic shocks the model provides a synthetic perspective on the conditional correlations between the business cycle and the trade balance that are generated by different shocks and attempts to reconcile these results with unconditional correlations found in the data the results suggest that in the post bretton woods period nominal shocks have been an important determinant of the forecast error variance for fluctuations in the trade balance in g 7 countries the world economy has become increasingly integrated in recent years spurred by rapid expansions in trade and financial flows across national borders the rising share of international trade in world output suggests that trade could potentially have a greater influence on business cycle fluctuations both within and across countries hence understanding the factors driving fluctuations in international trade is important from a number of different perspectives including macroeconomic forecasting as well as for short run domestic policy considerations and international policy coordination the existing empirical literature on international aspects of business cycle fluctuations has followed a number of different approaches one strand of literature uses error component models to identify the sources of business cycle fluctuations and to assess the importance of common international shocks relative to country specific or industry specific shocks see stockman 1988 glick and rogoff 1995 another approach has been to document the role of international trade in the transmission of business cycles across countries as in

perspectives and problems of development in sub saharan africa this paper analyzes the initial conditions for development facing post colonial african nations outlines alternative development strategies followed by different groups of countries and assesses the consequences for growth and poverty alleviation on the basis of this diagnosis the paper outlines a number of policy priorities for the future including greater research extension and infrastructure support for smallholder agriculture an improvement in the overall structure of incentives in favor of agriculture a more realistic urban formal sector wage structure to reduce rural urban migration and foster a more internationally competitive manufacturing sector and greater emphasis on surplus generation through government budgets and parastatal enterprises

a new approach to optimal capital allocation for rorac maximization in banks abstract we introduce a new model for optimal internal capital allocation which would allow banks to maximize their return on risk adjusted capital rorac under regulatory and capital constraints we extend the single period model of buch et al 2011 to a multi period model and improve its forecasting accuracy by including the debt effect and bayesian learning innovations the empirical application shows that our model significantly improves the rorac of a sample of banks listed in the s p 500 index

nominal shocks and real exchange rates evidence from two centuries abstract this paper employs structural vector autoregression methods to examine the contribution of real and nominal shocks to real exchange rate movements using two hundred and seventeen years of data from britain and the united states shocks are identified with long run restrictions the long time series makes possible an investigation of how the role of nominal shocks has evolved over time due to changes in the shock processes or to structural changes in the economy which might alter how a shock is transmitted to the real exchange rate the sample is split at 1913 which is the end of the classical gold standard period the last of the monetary regimes of the 19th century the earlier subsample 1795 1913 shows a much stronger role for nominal shocks in explaining real exchange rate movements than the later subsample 1914 2010 counterfactual analysis shows that the difference between the two periods is mainly due to the size of the nominal shocks rather than structural changes in the economy these findings are consistent with the view that the financial instability and frequent deflation of the 19th century had real economic effects

the overvaluation of purchasing power parity abstract recent panel studies of purchasing power parity have reported strong evidence of mean reversion in real exchange rates however these studies fail to control for cross sectional dependence in the data this failure has dramatic consequences raising the significance level of tests with a nominal size of 5 percent to as much as 50 percent it is shown in this paper that controlling for cross sectional dependence no evidence against the random walk null can be found in panels of up to 64 real exchange rates this finding cannot be attributed to low power as there is ample power in panels of this size to reject the unit root null