shifts in the composition of government spending in response to external debt burden abstract this paper examines the effects of external public debt burden on the composition of public spending in a sample of 47 developing countries for 1972 2001 we specify a system of equations for the relative spending shares of six economic categories and estimate it using several estimation methods and samples we find support for the adverse effect of the debt burden on capital expenditure in the full sample and in the middle east north africa and sub saharan africa subsamples where the debt burden was relatively high among components of current expenditure increased debt burden shifted the shares against nonwage goods services and subsidy and transfers while leaving the share of politically sensitive category of wages and salaries unscathed in most cases

the relative yields on taxable and tax exempt debt a valuation model for corporate tax liabilities is developed and used to derive a relationship for the relative yields of taxable and tax exempt debt the model incorporates both the incomplete tax loss offset of the u s corporate tax code and the resulting probabilistic marginal tax rate the relationship is then tested using regression analysis the results are both positive and strong copyright 1986 by ohio state university press

airline market power and intertemporal price dispersion this paper analyzes the empirical relationship between market structure and price dispersion in the airline markets connecting the u k and the republic of ireland price dispersion is measured by the gini coefficient calculated using fares posted on the internet at specific days before takeoff we control for passengers heterogeneity in their purpose of travel as well as for such peak periods as christmas and easter our finding of a negative correlation between competition and price dispersion suggests that competition is likely to hinder the airlines ability to price discriminate although this effect appears to be lessened in peak periods

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

does competition reduce price dispersion new evidence from the airline industry we analyze the effects of competition on price dispersion in the airline industry using panel data from 1993 q1 through 2006 q3 competition has a negative effect on price dispersion in line with the textbook treatment of price discrimination this effect is pronounced for routes with consumers characterized by relatively heterogeneous elasticities of demand on routes with a homogeneous customer base the effects of competition on price dispersion are smaller our results contrast with those of borenstein and rose who found that price dispersion increases with competition we reconcile the different results by showing that the cross sectional estimator suffers from omitted variable bias

price discrimination in the airline market the effect of market concentration we test the hypothesis that price discrimination increases with competition in the airline market using a large cross section of tickets offered by several carriers on various routes we approximate price discrimination with marginal implicit prices of ticket restrictions that carriers typically use to price discriminate saturday night stayover re quirements and advanced purchase discounts we find that the restrictions are associated with lower airfares but that the discounts are smaller on routes with higher market concentration the results suggest that price dispersion attributed to ticket restrictions increases as markets becomemore competitive

preferred habitat taxable tax exempt yield spreads and cycles in property liability insurance several theories seek to explain the spread between the yields on taxable and tax exempt bonds of comparable maturity this paper reconsiders the market segmentation theory by focusing on property and liability insurance companies plics plics can provide evidence on the market segmentation theory both because they are major participants in the market for longer term tax exempt bonds and because of their industry s pronounced profit cycle which causes wide variations in plics need fortax shields if investors have preferred habitats as per the market segmentation theory their preferences should cause plics purchases and sales of tax exempts to have different impacts on taxable tax exempts yield spreads at different maturities this paper finds strong evidence of market segmentation during the 1972 84 period when the industry experienced two extremely pronounced cycles and weaker evidence of market segmentation during the 1959 71 and 1985 89 periods copyright 1992 by ohio state university press

price discrimination in cournot competition abstract we examine the average equilibrium price when quantity setting oligopolies price discriminate it is known that for the price discrimination extension of cournot competition the average price is independent of the extent of price discrimination whenever the demand is linear we show that this result holds under a larger class of demand functions

a simulation study of the interactive effects of taxes and inflation on the relative price of land recent experience in the united states with high and variable inflation has led to an outpouring of research concerning inflation s impact on the relative prices of real and financial assets with the exception of three recent papers feldstein 1980a rose 1986a alston 1986 the impact of inflation on the relative price of land has been neglected land is usually eliminated from economic models of the tax system so that the effects of inflation s complex interaction with the income tax system on firm financing and valuation of capital can be highlighted in this paper we take the opposite approach the effects of inflation on corporate financing of capital are suppressed by allowing only bond financing in order to highlight the effects of inflation and tax rate changes on the relative price of land

government spending and budget deficits in the industrial economies fiscal policy nouriel roubini and jeffrey sachs this paper examines the evolution of the size of government and of budget deficits in oecd economies we highlight the rapid increase in government spending in the 1970s the sharp rise in budget deficits and public debt after 1973 and the reversal in these trends in the 1980s the increase in the size of government was associated in part with the slowdown in growth after 1973 but also reflected gradual adjustment of the ratio of spending to output towards a long run target which depends on political and institutional characteristics of the economy the political orientation of the government the degree of wage indexation and the degree of stability of the political system such factors also explain the size of budget deficits when faced with an adverse shock subsequent deficit reduction requires a measure of political consensus we note that such consensus is hard to achieve in multi party coalitions in consequence countries with such a political structure tended in consequence countries with such a political structure tended toin consequence countries with such a political structure tended to experience much more rapid increases in their debt gnp ratios

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

the pricing of short term debt and the miller hypothesis a note in 1977 miller 2 challenged conventional wisdom concerning the gain from corporate leverage introducing an equilibrium model of the municipal and corporate debt markets and arguing that the effective personal tax rate on equity is negligible miller concluded that the relevant marginal tax rate operating across the two markets would be the corporate rate and as a result the marginal value of the tax shield to an individual firm would be zero the purpose of this paper is to present additional evidence regarding implied marginal tax rates on interest income taxable and tax free money market funds are compared making it possible to avoid difficulties in previous studies involving long term bond yields the results support the miller hypothesis when these short term rates are compared when there is little term structure impact and when risk differences are small observed returns on taxable and tax free investments imply a tax rate almost exactly equal to the corporate rate

intra day arbitrage opportunities in foreign exchange and eurocurrency markets we have two primary objectives in this study first we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets second we measure the profitability of covered interest arbitrage and one way arbitrage our empirical analysis has been conducted using real time quotations the empirical results indicate that a the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available and b the frequency of attaining simultaneous market equilibrium is surprisingly low thus opening the door for one way arbitrage the role of transaction costs in explaining the deviation of the actual forward price from the interest parity forward price has been studied extensively based on covered interest arbitrage frenkel and levich 1975 1977 have shown that the interest parity line is bound by a neutral band defined as

municipal bond liquidity and default risk this paper examines the pricing of municipal bonds i use three distinct complementary approaches to decompose municipal bond spreads into default and liquidity components and find that default risk accounts for 74 to 84 of the average spread after adjusting for tax exempt status the first approach estimates the liquidity component using transaction data the second measures the default component with credit default swap data and the third is a quasi natural experiment that estimates changes in default risk around pre refunding events the price of default risk is high given the rare incidence of municipal default and implies a high risk premium

dynamic competition with random demand and costless search a theory of price posting this paper studies a dynamic model of perfectly competitive price posting under demand uncertainty firms must produce output in advance after observing aggregate sales in prior periods firms post prices for their unsold output in each period the demand of a new batch of consumers is randomly activated existing customers who have not yet bought and then new customers arrive at the market in random order observe the posted prices and either purchase at the lowest available price or delay their purchase decision we construct a sequential equilibrium in which the output produced and its allocation across consumers is efficient thus consumers endogenously sort themselves efficiently with the highest valuations purchasing first transaction prices in each period rise continuously as firms become more optimistic about demand followed by a market correction by the last period prices are market clearing

taxes default risk and yield spreads this paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities the tax loss consequences of default are recognized traditionally tax free municipal bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk while our model supports the linearity assumption it implies that the slope and intercept are both functions of both the break even tax rate and the default probability ies clientele effects among both municipal and taxable bonds are demonstrated finally the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds students of financial markets cannot help but be impressed by the number of new financial instruments that have been introduced successfully in recent years the fixed income market has been particularly innovative as bonds carrying a whole host of specific features have been successfully marketed bonds with small or zero coupons variable coupon rates or detachable warrants are three examples from among an expanding list of such features not surprisingly there has developed a large and expanding literature attempting to explain the rate spreads between different fixed income securities this literature has evolved much as one would expect early empirical work was in general not well founded in theory and was not based on an underlying expected return price model later empirical research has tended to be more careful in its specification of factors affecting yield spreads and as a consequence better founded in valuation

oligopoly price discrimination with many prices abstract the model of price discrimination in cournot nash oligopoly is extended to the case of many prices analogous to 1st degree monopoly price discrimination in the limit all viable customers are served but the price charged the keenest customers is well below the highest price charged by a monopoly

what do oecd countries cut first when faced with fiscal adjustments expenditure in this article we explore the relationship between components of government expenditure and government size during the period 1970 2007 for a sample of 25 developed countries to shed light on how fiscal discipline might influence public spending composition in the coming years using the pooled mean group estimation we find that fiscal adjustments protect functions that have both a social and productive character such as education and health spending in addition the most productive spending that related to transport and communications is also isolated from budgetary cuts this result shows evidence of governments reacting to the voter s increasing realization that reducing productive expenditures harms long term economic growth by striking a balance between utility and economic growthenhancing expenditure

the curious attraction of wagner s law wagner s law of increasing state activity has recently been subjected to intensive use of recondite econometric testing procedures an examination of the relevant articles reveals ignorance both of wagner s definition of state activity and of his insistence that he was not engaged in prediction consequently the omission of public enterprises contained in wagner s definition leads to a model misspecification and the object of testing his hypothesiss remains obscure

dynamic pricing advance sales and aggregate demand learning in airlines this paper uses a unique u s airlines panel data set to empirically study the dynamic pricing of inventories with uncertain demand over a finite horizon i estimate a dynamic pricing equation and a dynamic demand equation that jointly characterize the adjustment process between prices and sales as the flight date nears i find that the price increases as the inventory decreases and decreases as there is less time to sell consistent with aggregate demand learning and price adjustment demand shocks have a positive and much larger effect on prices than the positive effect of anticipated sales

is the effect of competition on price dispersion nonmonotonic evidence from the u s airline industry we investigate the effect of competition on price dispersion in the airline industry using panel data from 1993 to 2008 we find a nonmonotonic effect of competition on price dispersion an increase in competition is associated with greater price dispersion in concentrated markets but with less price dispersion in competitive markets an inverse u relationship our empirical findings are consistent with an oligopolistic second degree price discrimination model and encompass contradictory findings in the literature

marginal tax rates evidence from nontaxable corporate bonds a note this study offers an alternative method of calculating marginal personal tax rates through the pairing of nontaxable industrial development and pollution control and taxable corporate bonds this procedure is shown to produce matched bond pairs that are comparable two hundred pairs of bonds are examined from the second quarter of 1973 through the second quarter of 1983 testing of the marginal tax rate relationships indicates that the marginal personal tax rate is less than the corporate statutory tax rate the examination of the relative pricing of taxable and nontaxable bonds provides an estimate of the marginal tax rates of bondholders who are indifferent between taxable and nontaxable bonds see for example gordon and malkiel 1 trczinka 6 and skelton 4 typically these implied marginal tax rates are calculated by comparing yield indices of taxable corporate bonds and nontaxable municipal bonds a potential problem with this method pointed out by trczinka 6 is that municipal and corporate bonds may not be of the same risk requiring some adjustment in the calculation another problem with this method is that the bond yield indices are computed from a sample of outstanding bonds introducing a potential yield to maturity bias associated with discount bonds skelton 4 an alternative procedure for calculating implied marginal tax rates is employed in this paper which avoids the problems of differential risks and the potential yield to maturity bias for discount bonds implied tax rates are calculated from pairs of newly issued bonds where each pair consists of one nontaxable corporate bond a tax exempt industrial development or pollution control bond and one taxable corporate bond 1 since only newly issued bonds are used in the computations the bias associated with capital gains and losses is avoided this study is organized into the following sections section i describes the data and the collection procedure the resultant implied marginal rates are presented in section ii summarizing and concluding remarks are provided in section iii

competition and price dispersion in the airline markets we use two ticket level data sets on one way domestic flights for the us airlines to examine the potentially nonlinear relationship between price dispersion and three forms of competition inter firm inter flight and frequency competitions the linear relationship is rejected at any conventional significance levels in particular there is an s shaped relationship between market concentration and price dispersion this can be a reason for the mixed results in the literature roughly speaking the inter flight and frequency competitions have opposite effects on price dispersion finally in general the size of aircraft has a positive effect on price however for very large aircraft the relationship becomes negative

term structure effects on default risk premia and the relationship of default risky tax exempt yields to risk free taxable yields a note abstract the behavior of the default risk premium on bonds has caught the attention of many researchers some researchers have analyzed how default risk premia may vary with maturity it has been suggested that default risk premia are independent of maturity however recent research by rodriguez 1988 shows this to not hold for nonpar taxable bonds this research shows that the shape of the underlying term structure affects default risk premia for even par bonds in a systematic way furthermore the maturity dependent variation in equilibrium tax rates has a strong impact upon default risk premia behavior where equilibrium tax rates are derived from comparisons of taxable and tax exempt bonds the inclusion of the shape of the underlying term structure also has very important implications for the relation between taxexempt yields and taxable yields the slope and intercept terms of the relation between taxexempt and taxable yields are clearly dependent upon maturity a fact which has not been recognized before

was the tax exempt bond market inefficient or were future expected tax rates negative this paper shows that the sharp narrowing with maturity of the spread between taxable and tax exempt yields leaves room for tax arbitrage at times tax exempt forward rates have exceeded taxable forward rates at such times only expectations of higher taxes on treasury than on municipal bonds would eliminate profit opportunities the authors develop the idea of forward tax rates and compute forward tax rates for 1955 through 1984 they also outline tax arbitrage mechanisms involving private forward sale of long municipal bonds or the use of the municipal bond futures contract and show the potential profits the municipal yield curve has been upward sloping for the entire postwar period even at times when taxable yield curves were humped or downward sloping thus the spread in yields between taxable and tax free bonds narrows dramatically with increasing maturity this paper focuses on the term structure of the spread in yields between taxable and tax exempt bonds we show that the sharp narrowing of the spread with maturity leaves room for some apparently unexploited tax arbitrage at times the narrowing has been so dramatic that taxexempt forward rates have exceeded taxable forward rates in other words only expectations of negative future tax rates on treasury interest or the expectations of a reversal in the relative taxability of treasury and municipal bonds would eliminate profit opportunities this situation makes little sense if the markets are well arbitraged three theories of the relationship between the yields on taxable and taxexempt bonds have attracted attention 2 miller 8 asserts that the corporate tax rate determines the yield spread between taxable and tax exempt debt in the

market segmentation and the term structure of municipal yields an issue of considerable controversy in recent years is whether segmentation exists in the municipal bond market the presence of market segmentation suggests that securities can be subdivided into distinct groups according to some characteristic and there exists a lack of substitution between these groups on the part of borrowers and or investors 1 4 8 hendershott and kidwell 4 for example found evidence that market segmentation affected yields between regionally and nationally marketed municipal bond issues others contend that the municipal bond market is relatively efficient and no permanent segmentation effects can exist 2 9 most recently campbell 2 examined possible segmentation resulting from the large acquisitions of municipal securities by commercial banks and found that bank demand for municipal securities had no significant influence on the yield spreads between municipal bonds which differed in default risk term to maturity and tax treatment this is consistent with the argument that the combination of progressive personal income tax rates and fixed corporate income tax rates induces corporations to issue an amount of debt such that the marginal investor in taxable and tax exempt securities pays taxes at the full corporate rate 9 if segmentation does not exist two peculiar features of the term structure of municipal yields cannot be fully explained for one municipal yields have almost always increased monotonically with maturity this is true both for market averages of similarly rated municipal securities and for reoffering yields on individual serial

relative risk in municipal and corporate debt the yields of municipal bonds and corporate bonds are often compared the ratios of municipal bond yields to corporate bond yields are thought by many to be indicative of the marginal tax bracket of the marginal holder of the bonds if for example the ratio is 60 the implication is that an investor in the fortypercent tax bracket will be indifferent between the fully taxed corporate and the fully tax exempt municipal this assumes that the two bonds are currently selling at par such comparisons have attracted increased attention since the publication of merton miller s seminal debt and taxes in this work miller indirectly suggests that the marginal tax bracket at work across tax exempt and taxable bonds is equal to the corporate tax rate while the ratio of yields seems to indicate that this is true for short term bonds the yields of long term taxexempts seem too high relative to long term taxables to confirm miller s hypothesis implicit in these comparisons and the conclusions drawn from them is the tenuous notion that the compared bonds are identical except for the taxability of the coupon for example some authors have questioned whether municipals and corporates are equally risky see trzcinka 1982 the purpose of this paper is to present preliminary evidence on the relative riskiness of the two classes of bonds

the economics and politics of the structure of public expenditure the paper derives a complete system ofdemand equations for public consumptionexpenditures as the outcome of rationalbehaviour in a model where governmentmaximizes expected electoral support theallocation of expenditures is found todepend not only on the prices of publicservices and total expenditure and tosatisfy the constraints of demand theory which have been the focus of attention ofprevious empirical studies of theallocation of public expenditures but inaddition on the prices of privateconsumption goods the distribution ofvoter incomes and the expected change invoter support from varying the levels ofpublic provision

marginal stockholder tax effects and ex dividend day price behavior evidence from taxable versus nontaxable closed end funds almost all research on the movement of stock prices on ex dividend days has found that prices decline by less than the dividend though this is consistent with tax effects several papers have argued that this phenomenon could be caused by market microstructure effects in this paper we make use of a natural experiment that provides support for the tax explanations of ex dividend behavior some closed end funds have taxable and some have nontaxable dividend distributions both types are subject to taxes on capital gains the implication of this for ex dividendday price behavior is very different between these two types of funds if taxes matter this paper demonstrates that the direction of ex dividendday price behavior is consistent with a tax explanation and that ex dividend day price behavior changes as theory would suggest with changes in the tax law

tax management and investment strategies of property liability insurers abstract the tax reform act tra of 1986 reduced the incentives for institutional investors to participate in the tax exempt bond market this paper develops a model of profit maximization incorporating the tra provisions applicable to property liability pl insurers the theory predicts that pl insurers will use underwriting losses to shelter taxable investment income and invest the balance of their portfolios in tax favored securities our empirical evidence reveals that insurers continued to invest in tax exempts following the tra suggesting that implicit tax rates are low enough to attract insurers into the long term tax exempt market however insurers reduced the proportions of income derived from tax exempt interest and dividends following the tra

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

one way arbitrage foreign exchange and securities markets a note theorem in the case of traders with exogenous needs to acquire foreign currency recently deardorff 3 coitned the phrase one way arbitrage to describe the behavior of those traders and showed that it probably precludes round trip covered interest arbitrage from breaking even deardorff s analysis focuses on the conditions under which in the presence of transaction costs there would be both spot and forward transactions on the foreign exchange markets at equilibrium in this paper we extend the analysis to derive the conditions under which transactions would exist in both the home and foreign securities markets and we generalize the results to the case of transactions in all markets

banks firms and the relative pricing of tax exempt and taxable bonds abstract the traditional analysis of the relative pricing of tax exempt and taxable debt is a habitat theory of the term structure of interest rates in the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets recent work by fama 1977 suggests that banks are potential arbitrageurs across tax exempt and taxable bond markets which force a particular equilibrium on the pricing of short term bonds miller 1977 suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax exempt and taxable bonds this paper exploits the institution of regulation q and its effects on the banking system to bring evidence to bear on the predictions of these three models

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

a model of covered interest arbitrage under market segmentation existing models of covered interest arbitrage typically assume market participants have equal capital and foreign exchange market access this paper derives sufficient conditions for the existence of neutral interest parity forward price bands when capital markets are segmented and exchange rates are dually quoted all forward price intervals are completely characterized in terms of simultaneous two way and one way arbitrage flow possibilities the parameters of the no arbitrage price region are shown to be established on the basis of relative advantage with respect to the set of available arbitrage strategies copyright 1991 by ohio state university press

the default rate experience on high yield corporate debt recent 1978 83 net returns on high yield low rated debt have been impressive averaging 490 to 580 basis points above the long term government bond index but low rated junk bonds pose a risk of default not present in the higher rated segment of the bond market the authors divided the par value of defaulting debt by total low rated straight debt outstanding to arrive at an estimate of the default rate for high yield bonds excluding johns manville which had the only defaulting debt rated investment grade just prior to the default date for the 1974 84 period this averaged 1 52 per cent or 152 basis points annually year to year variations in the rate were substantial furthermore default experience differed across various industry segments railroads and reits were particularly vulnerable to default in the past although they are unlikely to represent a large portion of future defaults retailer electronic computer airline and oil and gas defaults have become more common in recent years losses from default are actually lower than the default rate alone implies defaulted bonds traded on average at 41 per cent of par shortly after default after accounting for the bonds retained value and the loss of interest the average reduction in return to the investor who had purchased the bonds at par would have been in the range of 96 to 100 basis points annually

systematic peak load pricing congestion premia and demand diverting empirical evidence abstract this paper finds empirical support to systematic peak load pricing in airlines higher fares in ex ante known congested periods it estimates a congestion premia and supports the main empirical prediction in gale and holmes gale i holmes t 1993 advance purchase discounts and monopoly allocation of capacity american economic review 83 135 146 less discount seats on peak flights

the resiliency of the high yield bond market the ltv default this paper investigates the resiliency of the new issue high yield bond market by examining the changes in implied default rates of such bonds before and after the largest high yield bond default i e the ltv bankruptcy specifically the paper compares implied default probabilities of high yield bonds during the post ltv period calculated from actual new issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred a comparison of these probabilities reveals that the market s perception of default on the hjgh risk segment of the bond market increased significantly after the ltv bankruptcy however the effect was transitory lasting only six months thus the market was resilient to a major default in recent years high yield debt has become a significant segment of the corporate bond market the main source of the growth has come from new issues of high yield corporate bonds rather than an increase in fallen angels 1 the driving force behind this new breed of high yield debt growth has been its use as a means to tap the capital markets to finance increasingly common leveraged buyouts hostile takeovers and major corporate restructurings the market acceptance of high yield bonds was further enhanced by empirical evidence that net returns on a diversified portfolio of low grade bonds exceeded those on highgrade bonds while the volatility of their monthly returns was no greater 2 the frenzied pace of growth in the high yield debt market however has been accompanied by increasing concerns from various quarters 3 critics have char

estimating a fiscal reaction function the case of debt sustainability in brazil this article reviews recent trends in fiscal performance in brazil estimates fiscal reaction functions for the consolidated public sector and different levels of government and tests for the sustainability of the public debt dynamics the empirical analysis based on monthly data for the period 1995 2004 suggests that all levels of government react strongly to changes in indebtedness by adjusting their primary budget surplus targets in addition the central government appears to follow a spend and tax policy changes in revenue are affected strongly by expenditure about two thirds of changes in primary spending are offset by higher revenue over the longer term institutions are also found to matter for fiscal sustainability the responsiveness of the sub national fiscal stance to indebtedness as well as that of central government revenue to changes in primary spending appears to have become stronger after 1998 when ceilings on indebtedness were introduced

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

price discrimination in stackelberg competition we examine the effects of price discrimination in the stackelberg competition model for the linear demand case we show that the leader does not use any price discrimination at all rather the follower does all price discrimination the leader directs all of its first mover preemptive advantage to attract the highest value consumers who pay a uniformly high price we observe that profits and total welfare are larger and consumer surplus is smaller than those of the standard stackelberg competition model

does the law of one price hold in international financial markets evidence from tick data abstract this paper investigates the validity of the law of one price lop in international financial markets by examining the frequency size and duration of inter market price differentials for borrowing and lending services one way arbitrage using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency we find that the lop holds on average but numerous economically significant violations of the lop arise the duration of these violations is high enough to make it worthwhile searching for one way arbitrage opportunities in order to minimize borrowing costs and or maximize earnings on given funds we also document that such opportunities decline with the pace of the market and increase with market volatility

advance purchase discounts and monopoly allocation of capacity optimal pricing by a monopoly airline that faces capacity constraints during the peak demand period is studied the existence of capacity constraints means that in order to expand output the airline must divert demand from the peak period to the off peak period a particular advance purchase discount policy is shown to be the profit maximizing method of selling tickets if the advance purchase requirement were infeasible output and total surplus would both be lower jel l12 substantial discounts for air travel are generally available to travelers who are willing to purchase tickets a week or more in advance of the departure date this paper demonstrates why the imposition of an advance purchase requirement may be a profit maximizing strategy for a monopoly airline facing capacity constraints during times of peak demand 1 the practice of imposing an advance purchase requirement on discount tickets is also placed in a favorable light in terms of its impact on social

price discrimination in cournot nash oligopoly abstract the standard cournot nash oligopoly model is extended to encompass price discrimination where firms charge more than one price for the same product based on willingness to pay in the linear symmetric case the average price is not dependent on the extent of price discrimination

transactions costs and covered interest arbitrage theory and evidence the extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored it is shown that such deviations should be no greater than the lowest of the transactions costs in one of three markets the swap market or either of the two relevant securities markets this reconciles the theory with the data which show spreads of no more than a few basis points however the empirical results have no direct bearing on the conventional market efficiency hypothesis

fiscal adjustments and economic performing a comparative study the empirical relationship among fiscal contractions permanent improvement in public finances and short run economic performance is examined using a sample of 14 european countries over the last three decades the actual experience of policy making has taught that only the adjustments that relied heavily on primary expenditure cuts and were implemented over a relatively long time span were able to achieve a long lasting reduction of public liabilities indeed during these consolidations tax increase amounted to a small fraction of the total adjustment furthermore though they unfolded over a longer period with respect to the unsuccessful ones the overall budget cut was not larger as regards the macroeconomic impact successful episodes tended to be associated with improved economic performance during the adjustment period and in the following two years the economies experienced strong consumption and investment growth reduced unemployment better international competitiveness and falling interest

the size and composition of government expenditure abstract this paper tests several leading hypotheses on determinants of government expenditure the purpose is to avoid omitted variables bias by testing the prominent theories in a comprehensive specification to identify persistent puzzles for the current set of theories and to explore those puzzles in greater depth by looking at the composition of government expenditure and the level of government at which it takes place as well as its magnitude using government financial statistics data from the imf covering over 100 countries from 1970 2000 i look at cross sectional and inter temporal variation in government expenditure and both individual categories of expenditure such as defense education health care and different levels of government central and local among other results i find a new explanation for wagner s law widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in expenditures that a great deal of the expenditure associated with increased trade openness is not in categories that explicitly insure for risk and evidence that both political access and income inequality affect the extent of social insurance

fiscal decentralization and economic growth a cross country study abstract we use a panel data set of 46 countries over the 1970 1989 period to investigate the relationship between fiscal decentralization and economic growth we find a negative relationship between fiscal decentralization and growth in developing countries but none in developed countries several explanations are offered for our findings

default risk cannot explain the muni puzzle evidence from municipal bonds that are secured by u s treasury obligations fama 1977 and miller 1977 predict that one minus the corporate tax rate will equate after tax yields from comparable taxable and tax exempt bonds empirical evidence shows that long term tax exempt yields are higher than theory predicts two popular explanations for this empirical puzzle are that relative to taxable bonds municipal bonds bear more default risk and include costly call options i study u s government secured municipal bond yields which are effectively default free and nonmalleable these municipal yields display the same tendency to be too high i conclude that differential default risk and call options do not explain the municipal bond puzzle article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

electoral manipulation via voter friendly spending theory and evidence abstract we present a model of the political budget cycle in which incumbents try to influence voters by changing the composition of government spending rather than overall spending or revenues rational voters may support an incumbent who targets them with spending before the election even though such spending may be due to opportunistic manipulation because it may also reflect sincere preference of the incumbent for types of spending voters favor classifying expenditures into those which are likely targeted to voters and those that are not we provide evidence supporting our model in data on local public finances for all colombian municipalities our findings indicate both a pre electoral increase in targeted expenditures combined with a contraction of other types of expenditure and a voter response to targeting

tax subsidized underpricing the market for build america bonds build america bonds babs were issued by municipalities for 20 months as a part of the 2009 fiscal package unlike traditional tax exempt municipals babs are taxable to the holder but the treasury rebates 35 of the coupon to the issuer the stated purpose was to provide municipalities access to a more liquid market including foreign tax exempt and tax deferred investors we find babs do not exhibit greater liquidity than traditional municipals babs are more underpriced initially particularly for interdealer trades babs also show a substitution from underwriter fees toward more underpricing suggesting that the underpricing is a strategic response to the tax subsidy

the composition of public expenditure and economic growth abstract noting that the literature has focused on the link between the level of public expenditure and growth we derive conditions under which a change in the composition of expenditure leads to a higher steady state growth rate of the economy the conditions depend not just on the physical productivity of the different components of public expenditure but also on the initial shares using data from 43 developing countries over 20 years we show that an increase in the share of current expenditure has positive and statistically significant growth effects by contrast the relationship between the capital component of public expenditure and per capita growth is negative thus seemingly productive expenditures when used in excess could become unproductive these results imply that developing country governments have been misallocating public expenditures in favor of capital expenditures at the expense of current expenditures

tax distortions and bond issue pricing abstract original issue premium oip bonds are the norm in the us tax exempt market but very rare in the taxable market a tax subsidy helps explain this disparity unlike bonds issued at par or discount the price of oip bonds can fall and yet remain above par providing secondary market buyers with more tax exempt coupon and less taxable market discount gain the subsidy for oip bonds explains additional previously undocumented empirical facts in a calibration exercise the subsidy s expected cost to the u s treasury is estimated at 1 7 billion per year

a simple model of the taxable and tax exempt yield curves i examine the anomalous behavior of the taxable and tax exempt yield curves long municipal yields appear too high relative to the equivalent after tax yield that can be earned in treasury or corporate bonds i discuss existing explanations of the problem and propose a simple model that relates the yields of taxable bonds to the yield curve for par tax exempts the ratio of the tax exempt yield to the taxable yield increases with maturity in the model so it is consistent with observed phenomena such as inverted yield curves for taxables and contemporaneous rising yield curves for tax exempts statistical and descriptive comparisons between the yields predicted by the model and observed yields on par bonds that the model has some promise in explaining the apparent anomalies in the behaviors of the two yield curves article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tax induced intra year patterns in bonds yields the ratio of the yields on short term tax exempt and taxable bonds exhibits a sawtooth pattern that is consistent with the impacts of tax deferments from dates on which interest payments are received to dates on which the resulting tax payments are paid the effect of the tax deferment at turns of calendar years does not differ appreciably from the effect at the turn of any other tax quarter investors with tax payment schedules that differ from that of the investor that is indifferent between investing in taxable and tax exempt bolnds may benefit from tax related timing strategies for investing in these bonds issuers may benefit from tax related timing strategies for scheduling interest payments

fiscal competition and the pattern of public spending much attention has been given to the impact of fiscal competition on the level of public expenditure but relatively little to the impact on its composition using a broadly familiar and reasonably rich model of fiscal competition in the presence of mobile capital this paper establishes a systematic bias in public spending patterns starting from the non cooperative equilibrium and holding tax rates constant welfare would be improved by a coordinated reduction in the provision of local public inputs and a corresponding increase in the public provision of local public goods benefiting immobile consumers c 1997 elsevier science s a