values of 3 % for the time preference, 1 % growth rate for population and 5 % land rent share, the steady state ratio is 2. 5. aging and a declining population suggest a much lower ratio, as compared with the high growth era ( iwata and hattori ( 2003 ) ). growth. in addition, the mispricing of option values attached to land and mortgage loans may lead to an asset price bubble and aggravate the effect of an asset price bubble burst. 10. land itself can be put to many different uses, such as residential, non - residential and commercial use. lax zoning regulation creates the possibility of land being converted to more intensive and profitable use. in this case, the price of land consists of the fundamental price and the option value of conversion to more profitable use. the option value resembles a convertible bond ( kanoh and murase ( 1999 ) ). if the option premium is overpriced under the perception of ever - rising land value, the option value for convertible use of land may give rise to accelerated land prices ; it has in fact been observed that residential land prices follow the acceleration of commercial use land prices. the price of commercial land in japan's major cities has risen more than 10 % recently. 11. from the perspective of option theory, housing loans are more complicated financial instruments than at first might appear. they incorporate call options in the case of prepayment ( to buy the asset ), as well as put options in the case of bankruptcy ( to sell the asset ). 5 profs. pavlov and wachter ( 2006 ) have pointed out the possibility of the underpricing of default risk in all non - recourse asset - backed mortgage loans, due to inappropriate deposit insurance schemes and the asymmetry of information. the underpricing of default risk or distorted put option values may lead to inflated asset prices and cause far deeper asset market crashes. moreover, default risk is easily underestimated against a backdrop of rising house prices. in addition, there is a risk that in the process of securitizing mortgage loans such as cdos, the default risk can be further underpriced by rating agencies in the assessment of correlation of default risks among the bundle of different mortgage loans. the use of mark - tomodel instead of mark - to - market in complex structured products may also lead to the widescale underpricing. inflation and asset price bubble 12. on the

your worry levels are rising, let me hasten to add that this dystopian nightmare is not a fatality. it is certainly not beyond human ingenuity to envisage pre - emptive measures to temper the worst excesses that can push us in that direction. tonight, i shall focus my remarks on inequality, not because i have a ready - made solution – nobody has – but to stimulate debate on what is often seen as a taboo subject in polite society. rising inequality is a time bomb ticking away across the world and indeed here in mauritius 14. growing inequality is rapidly developing into a fault line that we ignore at our peril. last month, addressing a conference on the challenges of job - rich and inclusive growth on the eve of the imf - world bank annual meetings, christine lagarde, the imf managing director, echoed recent oxfam research findings : 4 … the world ’ s richest 85 individuals control as much wealth as the world ’ s poorest 3. 5 billion people. 5 15. thomas piketty, in his massive tome, capital in the twenty - first century 6, the 21st century sequel to karl marx ’ s great work, adds to the large body of evidence on rising concentration of income and wealth. piketty argues that generally wealth grows faster than economic output. slower economic growth has increased the weight of wealth in society, leading to higher inequality, which could pose risks to economic and political stability. we are living in an increasingly divided world where many africans risk their lives on shaky boats to escape poverty and conflict while the super - rich chase their next billion to improve their ranking in the forbes list 7. even here in mauritius, some of our top income - earners are being paid over two hundred times the wage of their office cleaners, and ten times more than the surgeons in our hospitals. is that the society we want to perpetuate? is that a society that is just and sustainable? the time bomb of growing inequality is ticking away. 16. we are a country trying hard to escape from the middle income trap. but we have no chance of doing that if we do not focus on the risks inherent in jobless growth, persistent high unemployment, and the widening divide between the haves and the have - nots. 17. over the last decade, the gini coefficient points to growing inequality, worsening from 0. 371 in 2001 / 02 to 0. 413 in 2012. just over the last