On the Relationship between Market Power and Bank Risk Taking

We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market power is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market power, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem.

The long run relationship between stock prices and goods prices: new evidence from panel cointegration

We examine the long run relationship between stock prices and goods prices to gauge whether stock market investment can hedge against inflation. Data from sixteen OECD countries over the period 1970-2006 are used. We account for different inflation regimes with the use of sub-sample regressions, whilst maintaining the power of tests in small sample sizes by combining time-series data across our sample countries in a panel unit root and panel cointegration econometric framework. The evidence supports a positive long-run relationship between goods prices and stock prices with the estimated goods price coefficient being in line with the generalized Fisher hypothesis.

Inequality, Happiness and Relative Concerns: What Actually is their Relationship?

This paper briefly and informally surveys different theoretical models of relative concerns and their relation to inequality. Models of inequity aversion in common use in experimental economics imply a negative relation between inequality and happiness. In contrast, empirical studies on happiness typically employ models of relative concerns that assume that increases in others’ income always have a negative effect on own happiness. However, in these latter models, the relation between inequality and happiness can be positive. One possible solution is a rivalry model where a distinction is made between endowment and reward inequality which have respectively a negative and positive effect on happiness. These different models and their contrasting results may clarify why the empirical relationship between inequality and happiness has been difficult to establish.

Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship

In this paper we empirically examine the relationship between the real exchange rate and real interest rate differentials using recent econometric methods robust to potential structural breaks. Generally, our study provides evidence of this relationship in the long-run context. More specifically, we first focus on the UK-US relationship, and interestingly find limited evidence of this long-run relationship using traditional methods. But when an approach robust to endogenously determined structural breaks is employed, we find evidence that the real interest rate differential is an important determinant of the real exchange rate. Secondly, in order to investigate the relevance of structural shifts in a more global context, we carry out multiple country analysis. While providing evidence of this long-run relationship, European data suggest that the presence of structural breaks is not very common across countries and is indeed country-specific.