We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.
To save content items to your account,
please confirm that you agree to abide by our usage policies.
If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account.
Find out more about saving content to .
To save content items to your Kindle, first ensure coreplatform@cambridge.org
is added to your Approved Personal Document E-mail List under your Personal Document Settings
on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part
of your Kindle email address below.
Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations.
‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi.
‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
A financial system channels funds from net savers to net spenders. But it does more than that, for the pie need not be fixed in size. Through its power of credit creation, the financial system can fuel economic expansion. The process is prone to fragility, however, and overshoot can end in crisis. A financial system encompasses financial intermediaries, which issue claims against themselves in order to provide funds to users (e.g., banks creating deposit accounts to make loans), and financial markets, which facilitate the direct exchange of claims between suppliers and users of funds (e.g., stocks and bonds). A diversity of channels for financing undertakings allows for the management and dispersion of risk. Interest rates and asset prices are determined in financial markets, with movement in the opposite direction of one another. Variation among the economies of Emerging East Asia is nowhere more stark than in the realm of finance. Hong Kong is home to the highest ratio of financial assets to GDP in the world while in the least developed economies of the region banking systems are rudimentary and capital markets little more than an idea.
Chapter 5 extends our framework to credit markets, which are not usually analyzed by scholars of the welfare state, yet fulfill many of the same income-smoothing functions. Much like in private insurance markets, more and better information allows for better risk classification, which enables lenders to tie interest rates more directly to default risk. This results in inequality because individuals with a higher risk of default are almost always lower income, and more information either raise their interest rates or cut them off from credit markets altogether. The welfare state matters, too, because generous social protection lowers default risk – something lenders take into account. Based on a data set containing the 39 million single-family loans that Freddie Mac purchased or guaranteed in the past two decades, we show that the interest rate spread markedly increased over time and we test, using a regression discontinuity design, whether information could have plausibly caused this increase. We also test whether social protection influences access to credit for different income groups and find that it does.
Over the past two generations a fundamental change has taken place in the scholarly understanding of the commercial world of late imperial China. Lasting from the Song (960–1279) to the end of the Qing dynasty (1644–1911), this millennium of Chinese history had long been judged a period of decline, its initial economic breakthroughs never fulfilling their promise. The commercial and technological innovations of the eleventh and twelfth centuries were thought to have given way to economic stagnation and cultural conservatism, as the enterprising peasantry and merchants of south China lost out to the prerogatives of Confucian scholar-officials and their state-sponsored culture in the Ming (1368–1644) and Qing dynasties. Tested by a highly competitive examination regime and thereafter sheltered by a host of privileges, these scholar-officials acquired and retained an unrivalled hegemony that was cultural, political, and, some would add, economic. When China suffered a severe economic downturn during the nineteenth and twentieth centuries, the once-admired stability of the Qing regime was criticized for its backwardness, and the late imperial economy of these scholar-officials’ rule was condemned for its stagnation.
Increased credit availability facilitates land acquisition, but higher land values also hinder it. We investigate the impact of credit availability on land values, after regulatory changes in the lending system. We build an index of increased credit availability using Federal Reserve and Federal Deposit Insurance Corporation data. County-level panel fixed effects estimations are performed controlling for land value determinants, credit availability, and county-level macroeconomic factors. We find that estimating the effects of credit availability separately masks its total effect. Results show a 0.1 change in the index for increased credit availability is associated with 1.64–1.96% increase in land values.
Monetarism was at the core of the ideological and policy wars of the 1980s, and of the strategy of the Conservative government headed by Margaret Thatcher. The UK had the highest rate of inflation in the industrialized world. By the 1970s, inflation was tearing the British social fabric apart: especially in its interactions with a government-imposed prices and wages policy. The British policy-making community could not agree whether money should be an overall objective of policy, or simply a target for an indicator that might be a temporary expression of how far the objective was being met, or an instrument for the conduct of policy in pursuit of the target. The Bank was initially quite sceptical about monetary targeting and hostile to monetarism. It believed that proposals for monetary base control ignored the structure of the British banking system, the knowledge of whose complexities and intricacies formed the core of the Bank of England’s professional competence. The keystone of the UK government’s approach was to target a range for £M3 growth as part of a Medium Term Financial Strategy. Meanwhile the Bank felt that it was shut out of policy formulation.
In practice, the early 1980s UK policy involved sporadically – but surprisingly often – responding to exchange rate movements, even when the exchange rate was specifically not designated as either a policy goal or an instrument, as well as raising interest rates as a way to cool down inflation but also economic growth. The 1981 budget, the most controversial of the Thatcher years, was accompanied by the attempt to take the pressure off manufacturing industry by lowering interest rates. The Bank responded to a surge in broad monetary aggregates by overfunding, that is, selling more than the amount of long-term debt (mainly gilts and National Savings instruments) required to finance the government. In 1983, a new Governor, Robin Leigh-Pemberton, who seemed more aligned with Thatcher’s view, came to the Bank of England, replacing Gordon Richardson, whose relationship with the Prime Minister had been strained. In the same year, a new Chancellor the Exchequer, Nigel Lawson, began a slow move away from monetarism and the application of monetary targets. The exchange rate came to play an increasing role in policy.
Based on a behavioral stock-flow housing market model in which the expectation formation behavior of boundedly rational and heterogeneous investors may generate endogenous boom-bust cycles, we explore whether central banks can stabilize housing markets via the interest rate. Using a mix of analytical and numerical tools, we find that the ability of central banks to tame housing markets by increasing the base (target) interest rate, thereby softening the demand pressure on house prices, is rather limited. However, central banks can greatly improve the stability of housing markets by dynamically adjusting the interest rate with respect to mispricing in the housing market.
In this paper we show that Portugal benefitted from comparatively low-interest rates from the 13th century onwards, well before the generalised drop in interest rates in Europe. Contrary to the thesis that frontier economies struggle with high-interest rates and scarcity of capital, we find that the country's low and stable interest rates can be explained by its wide availability of land, combined with monetary stability and a favourable institutional network. These conclusions are built upon an entirely new dataset of interest rates and returns on capital for Portugal in the period 1230–1500.
The application of exchange rate target zones modeling to interest rates allows interpreting the puzzles that emerged with the public debt euro area crisis, namely the nonlinear behavior of the interest rates and the fact that some stand-alone countries, not belonging to the euro area, have not been subject to speculative attacks in spite of equally large public debt-to-gross domestic product (GDP) ratios. As a matter of fact, this model shows that in the case of a noncredible upper threshold for the interest rate (that may be due to both the lack of room for increasing further the required government primary surplus and/or the absence of a monetary authority acting as a lender of last resort), the resulting public debt unsustainability determines an interest rate nonlinearity and makes the crisis possible for public debt levels that would be stable in the presence of a credible interest rate target.
Over the last 20 years, the extent of defined benefit provision has declined substantially in the United Kingdom. Whilst most of the focus has been on deficits relating to past benefit accrual, the increasing cost of future benefit accrual is also important. There are two reasons for this. First, the change in the cost of defined benefit accrual represents the difference in the earnings for employees with membership of a defined benefit scheme and those with membership of a defined contribution scheme. Second, the current cost of defined benefit accrual gives an indication of the cost of an adequate pension. As such, it can be compared with levels of contribution to defined contribution schemes to determine whether these are adequate. I therefore look at how the cost of pensions has changed relative to the cost of non-pensions earnings. I also look at the main components of the change in pensions cost – those relating to benefits payable, discount rates and longevity – to analyse their relative importance. I find that the cost of employing a member of defined benefit pension scheme has consistently outpaced the cost of employing someone in a defined contribution arrangement. I also find that the current cost of accrual is significantly higher than the average level of payments to defined contribution schemes.
This is the third and last subpart of a long paper in which we consider stochastic interpolation for the Wilkie asset model, considering both Brownian bridges and Ornstein–Uhlenbeck (OU) bridges. In Part 3A, we developed certain properties for both these types of stochastic bridge, and in Part 3B we investigated retail prices and wages. In this paper, we investigate the remainder of many of our data series, relating to shares and interest rates. We conclude that, regardless of the form of the annual model, the monthly data within each year can be modelled by Brownian bridges, usually on the logarithm of the principal variable. But in no case is a simple Brownian bridge enough, and all series have their own peculiarities. Overall, however, our modelling produces simulations that are realistic in comparison with the known data. Many of our findings would apply to any similar model used for simulation over time. Our results have considerable importance for financial economics. We reconcile the conflict between the long-term mean-reverting modelling of Schiller and the short-term random walk modelling of Fama. This conclusion therefore has very wide significance.
The agricultural sector has operated in a period of high real interest rates for over half a decade. Some are concerned that this has limited capital availability and stagnated the historic capital for labor substitution occurring in the sector. This study proposes new procedures for estimating the aggregate production function of United States agriculture. Improvements include incorporation of total returns and revised measures of both durable and nondurable capital inputs. Results indicate increasing capital productivity has occurred, but encouraging further capital substitution may not benefit agricultural producers.
Periodically, events occur in the domestic and global economies that remind agricultural economists that macroeconomics matter. This was evident in the early 1980s when the Federal Reserve responded to double-digit inflation by driving interest rates to post-World War II period highs. The Asian financial crisis in the late 1990s, rising oil prices this past decade, and current stress in domestic and overseas financial markets serve to remind us again that externalities can have an effect on the economic performance and financial strength of U.S. agriculture. These effects are transmitted through interest rates, inflation, unemployment, real gross domestic product, and exchange rates.
We examine the relationship between prices and interest rates for seven advanced economies in the period up to 1913, emphasising the UK. There is a significant long-run positive relationship between prices and interest rates for the core commodity standard countries. Keynes ([1930] 1971) labelled this positive relationship the ‘Gibson Paradox’. A number of theories have been put forward as possible explanations of the paradox but they do not fit the long-run pattern of the relationship. We find that a formal model in the spirit of Wicksell (1907) and Keynes ([1930] 1971) offers an explanation for the paradox: where the need to stabilise the banking sector's reserve ratio, in the presence of an uncertain ‘natural’ rate, can lead to persistent deviations of the market rate of interest from its ‘natural’ level and consequently long-run swings in the price level.
Jean-Laurent Rosenthal, a distinguished economic historian, and R. Bin Wong, an eminent world historian and specialist on imperial China, have collaborated in this effort to shed light on the causes of the eighteenth-century economic divergence of China and Europe. This book has many of the virtues one would expect from such a collaboration – keen insights into comparative history, explicit models of economic relationships, and novel ideas regarding causation. Yet it also has some defects that reflect this combination: at some points in their argument, the logic of models seems to outweigh historical facts. At other points, details of history that don't fit the models, such as the history of productivity gains in agriculture in imperial China, are neglected. I shall start with the virtues of their arguments, and then discuss some particulars that lead me to question their view.
D'après la théorie quantitative de la monnaie, une expansion de la masse monétaire devrait avoir pour effets à la fois une baisse des taux d'intérêt et une augmentation du prix des biens et services. La corrélation négative attendue entre ces deux dernières variables étant contredite par la corrélation positive observée initialement par Gibson - et confirmée par les travaux ultérieurs - Keynes évoque le « paradoxe de Gibson ». I. Fisher a proposé une explication de ce « paradoxe » fondée sur la lenteur des ajustements des taux d'intérêt au taux d'inflation. Cependant, F.R.Macaulay a montré que, lorsque l'influence de l'inflation sur les taux d'intérêt remonte loin dans le passé, il existe une relation nécessaire entre le niveau des prix et la moyenne pondérée des taux d'inflation passés calculée par Fisher. Dès lors, on peut se demander si la corrélation positive entre le niveau des prix et le taux d'intérêt est le résultat d'un comportement fishérien des agents, ou au contraire, si les résultats de Fisher ne sont qu'une conséquence triviale de la corrélation constatée entre le niveau des prix et le taux d'intérêt. Toute¬fois, la critique de Macaulay perd sa pertinence lorsque les ajustements sont rapides (i.e. la mémoire du passé est courte), comme pendant les hyperin¬flations ou encore la période d'après la seconde guerre mondiale. Par rap¬port à ce débat, le mérite de la théorie Héréditaire et Relativiste (HR) d'Allais est de tenter une réconciliation, avec l'hypothèse du « taux d'inté¬rêt psychologique » i. Dépendant des variations passées des prix et de la production, ce taux s'égalise au « taux d'oubli » et représente la tendance générale des taux d'intérêt du marché. Lorsque la mémoire est longue (i.e. taux d'oubli faible), le taux i est nécessairement lié au niveau des prix, et rend donc compte de la corrélation positive - pouvant être plus ou moins stable en raison de l'influence de la production - entre le taux d'intérêt du marché et le niveau des prix. Cependant, lorsque la mémoire est courte (i.e. taux d'oubli élevé), la théorie HR implique à la fois la disparition de la corrélation entre le taux d'intérêt et le niveau des prix et l'émergence d'une corrélation positive entre le taux d'intérêt et le taux de variation courant des prix, comme cela est aussi souvent observé.
This paper develops a two-sector small open economy model to analyze the effects of the currency denomination of debt on default risk and interest rates in emerging market economies. Default risk is determined endogenously and depends on the incentives for repayment. The economy can borrow using tradable-denominated nonindexed bonds or bonds whose return is indexed to the domestic price index, which are used as proxies for foreign currency and domestic currency debt, respectively. The model predicts that foreign currency debt leads to lower default risk for high output levels and domestic currency debt reduces the default risk for low output levels. Although the effect of debt denomination on default risk changes with the output level, the default rate of the economy and average interest rates decline as domestic currency borrowing increases. In addition, domestic currency borrowing is found to reduce the countercyclicality of interest rates and the trade balance.
The development of stochastic investment models for actuarial and investment applications has become an important area of interest to actuaries. This paper reports the application of some techniques of modern time series and econometric analysis to Australian inflation, share market and interest rate data. It considers unit roots, cointegration and state space models. Some of the results from this analysis are not reflected in the published stochastic investment models.
This paper focusses on some practical issues that can arise when developing methodologies for calculating benchmark figures for extreme market events, particularly in the context of the Financial Services Authority's ICAS regime. The paper limits discussion to equity and interest rate risks. Whilst not intended to constitute formal guidance, it is hoped that the material contained within the paper will be useful to practitioners. The paper acknowledges the role of prior beliefs in the choice of data to be used for modelling and its influence upon the ensuing results.
The behavior of the real interest rate in a general equilibrium
multisector model with irreversible investment is examined. It is
shown that in such a model purely sectoral shocks can lead to
substantial variation in the real interest rate and other aggregate
time series. A source of variation in aggregate time series
that is not found in one-sector models is thus examined, and the
implications of this source of variation for the behavior of the
interest rate are highlighted. Such a model seems to better capture the
relationship among the real interest and output or investment than
the standard one-sector stochastic growth model. It is also shown
that, because of a desire to smooth consumption, with irreversible
investment a rise in uncertainty concerning the future return to
capital tends to lead to more current investment and a lower
real interest rate.