Implementing fisher Black's simple discounting rule

We propose a simple implementation of Black’s (1988) elegant rule for discounting uncertain future cash flows. Black’s rule avoids the thorny problem of estimating an appropriate risk-adjusted discount rate. Instead, the rule calls for discounting conditional mean cash flows at appropriate riskless interest rates. Our contribution in this article is to describe and illustrate a method of estimating the conditional mean cash flows called for in Black’s rule. The method is quite flexible with respect to the types of information available concerning the distributions of future cash flows. We argue that this approach to computing present values offers a theoretically sound and generally feasible addition to the toolbox of financial managers.

Direct and Indirect Measures of Capacity Utilization: A Nonparametric Analysis of U.S. Manufacturing

We measure the capacity output of a firm as the maximum amount producible by a firm given a specific quantity of the quasi-fixed input and an overall expenditure constraint for its choice of variable inputs. We compute this indirect capacity utilization measure for the total manufacturing sector in the US as well as for a number of disaggregated industries, for the period 1970-2001. We find considerable variation in capacity utilization rates both across industries and over years within industries. Our results suggest that the expenditure constraint was binding, especially in periods of high interest rates.

Interbank Markets under Currency Boards

This paper analyzes interbank markets under currency boards. Under such an environment, problematic endogeneity issues common to other monetary regimes do not arise. Using daily data from the interbank markets in Bulgaria and Lithuania we show, that contrary to the existing literature, overnight interest rates tend to decrease towards the end of the reserve holding period. Empirical results are supported by a finite horizon heterogeneous agents model showing that interest rates tend to decrease in the case of excess aggregate reserves in the banking system. Results contrast with Quir'os and Mendiz'abal (2006) who find that interest rates should be increasing regardless of the outstanding aggregate liquidity in the market. We also show that responsiveness of banks to interest rate changes diminishes as the end of reserve holding period approaches. Under certain circumstances this could lead to multiple equilibria with increasing or decreasing interest rates.

Automatic Stabilizer Feature of Fixed Exchange Rate Regimes in Emerging Markets

This paper shows that countries characterized by a financial accelerator mechanism may reverse the usual finding of the literature -- flexible exchange rate regimes do a worse job of insulating open economies from external shocks. I obtain this result with a calibrated small open economy model that endogenizes foreign interest rates by linking them to the banking sector's foreign currency leverage. This relationship renders exchange rate policy more important compared to the usual exogeneity assumption. I find empirical support for this prediction using the Local Projections method. Finally, 2nd order approximation to the model finds larger welfare losses under flexible regimes.

Financial Liberalization and Inflationary Dynamics in the Context of a Small Open Economy

The paper develops a short-run model of a small open financially repressed economy characterized by unorganized money markets, capital good imports, capital mobility, wage indexation, and flexible exchange rates. The analysis shows that financial liberalization, in the form of an increased rate of interest on deposits and tight monetary policy, unambiguously and unconditionally causes deflation. Moreover, the results do not depend on the degree of capital mobility and structure of wage setting. The paper recommends that a small open developing economy should deregulate interest rates and tighten monetary policy if reducing inflation is a priority. The pre-requisite for such a policy, however, requires the establishment of a flexible exchange rate regime.

The effects of obesity in critical illness

Obesity continues to cripple the United States in terms of increasing health care expenditures and its rising rate of prevalence in epidemic proportions. The comorbidities associated with obesity have continued to represent some of the most deadly chronic health diseases. The most vulnerable subpopulation, the critically ill, suffers from not only the comorbid conditions but also the complications encountered within their specialized care. Taking into account the rising prevalence rates of obesity and critical care patients, it has come to the attention of many researchers to measure the trends associated with these two health conditions. Hospital mortality was found to be lower in higher BMI groups whereas there was no difference between BMI groups for ICU mortality. Length of stay and mechanical ventilation were both higher for obese rather than non-obese patients. The most prevalent disease states among the obese critically injured was cardiovascular and pulmonary disease. In conclusion, obesity is not independently associated with increased ICU mortality, but the comorbidities linked to obesity prove a greater threat to vitality.^

Ozone and fine particulate matter association with CVD and COPD emergency room visits in Harris County, Texas: Spatiotemporal analysis

This study represents a secondary analysis of the merging of emergency room visits and daily ozone and PM2.5. Although the adverse health effects of ozone and fine particulate matter have been documented in the literature, evidence regarding the health risks of these two pollutants in Harris County, Texas, is limited. Harris County (Houston) has sufficiently unique characteristics that analysis of these relationships in this setting and with the ozone and industry issues in Houston is informative. The objective of this study was to investigate the association between the joint exposure to ozone and fine particulate matter, and emergency room diagnoses of chronic obstructive pulmonary disease and cardiovascular disease in Harris County, Texas, from 2004 to 2009, with zero and one day lags. ^ The study variables were daily emergency room visits for Harris County, Texas, from 2004 to 2009, temperature, relative humidity, east wind component, north wind component, ozone, and fine particulate matter. Information about each patient's age, race, and gender was also included. The two dichotomous outcomes were emergency room visits diagnoses for chronic obstructive pulmonary disease and cardiovascular disease. Estimates of ozone and PM2.5 were interpolated using kriging, in which estimates of the two pollutants were predicted from monitoring data for every case residence zip code for every day of the six years, over 3 million estimates (one of each pollutant for each case in the database). ^ Logistic regressions were conducted to estimate odds ratios of the two outcomes. Three analyses were conducted: one for all records, another for visits during the four months of April and September of 2005 and 2009, and a third one for visits from zip codes that are close to PM2.5 monitoring stations (east area of Harris County). The last two analyses were designed to investigate special temporal and spatial characteristics of the associations. ^ The dataset included all ER visits surveyed by Safety Net from 2004 to 2009, exceeding 3 million visits for all causes. There were 95,765 COPD and 96,596 CVD cases during this six year period. A 1-μg/m3 increase in PM2.5 on the same day was associated with a 1.0% increase in the odds of chronic obstructive pulmonary disease emergency room diagnoses, a 0.4% increase in the odds of cardiovascular disease emergency room diagnoses, and a 0.2% increase in the odds of cardiovascular disease emergency room diagnoses on the following day. A 1-ppb increase in ozone was associated with a 0.1% increase in the odds of chronic obstructive pulmonary disease emergency room diagnoses on the same day. These four percentages add up to 1.7% of ER visits. That is, over the period of six years, one unit increase for both ozone and PM2.5 (joint increase), resulted in about 55,286 (3,252,102 * 0.017) extra ER visits for CVD or COPD, or 9,214 extra ER visits per year. ^ After adjustment for age, race, gender, day of the week, temperature, relative humidity, east wind component, north wind component, and wind speed, there were statistically significant associations between emergency room chronic obstructive pulmonary disease diagnosis in Harris County, Texas, with joint exposure to ozone and fine particulate matter for the same day; and between emergency room cardiovascular disease diagnosis and exposure to PM2.5 of the same day and the previous day. ^ Despite the small association between the two air pollutants and the health outcomes, this study points to important findings. Namely, the need to identify reasons for the increase of CVD and COPD ER visits over the course of the project, the statistical association between humidity (or whatever other variables for which it may serve as a surrogate) and CVD and COPD cases, and the confirmatory finding that males and blacks have higher odds for the two outcomes, as consistent with other studies. ^ An important finding of this research suggests that the number and distribution of PM2.5 monitors in Harris County - although not evenly spaced geographically—are adequate to detect significant association between exposure and the two outcomes. In addition, this study points to other potential factors that contribute to the rising incidence rates of CVD and COPD ER visits in Harris County such as population increases, patient history, life style, and other pollutants. Finally, results of validation, using a subset of the data demonstrate the robustness of the models.^

Crisis in Japan and the Way Out: A Counterargument to Pessimistic Views

This paper focuses on a review of the present state of, and outlook for the Japanese economy. The paper is composed of three parts. The first describes the interrelation between the crisis-ridden East Asian economies and Japan. I argue that Japan did not cause the Asian currency crisis. The second part describes the current state of the Japanese economy after the bubble burst. I also discuss the medium- and long-term challenges that face the Japanese economy. The third part concentrates on the issue of the "liquidity trap" Japan is experiencing. I argue that the yen's exchange rate is more likely to appreciate than depreciate by pumping liquidity into the economy while interest rates cannot be lowered any further, and therefore a "helicopter money" policy is the only way to induce a positive inflation rate and escape from the liquidity trap.

Imperfect Competition and Costly Screening in the Credit Market under Conditions of Asymmetric Information

This article provides an analysis of how banks determine levels of information production when they are in imperfect competition and there is a condition of information asymmetry between borrowers and banks. Specifically, the study concentrates on information production activities of banks in duopoly where they simultaneously determine intensity of pre-loan screening as well as interest rates. The preliminary model of this paper illustrates that due to strategic complementarities between banks, banking competition can result in inferior equilibrium out of multiple equilibria and insufficient information production. Policymakers must take into account the possible adverse effects of competition-enhancing policies on information production activities.

Crowding-out and Crowding-in Effects of Government Bonds Market on Private Sector Investment (Japanese Case Study)

This paper reviews the relationship between public sector investment and private sector investment through government expenditures financed by government bonds in the Japanese economy. This study hypothesizes that deficit financing by bond issues does not crowd out private sector investment, and this finance method may crowd in. Thus the government increases bond issues and sells them in the domestic and international financial markets. This method does not affect interest rates because they are insensitive to government expenditures and they depend on interest rates levels in the international financial market more than in the domestic financial market because of globalization and integration among financial markets.

An empirical analysis of the money demand function in India

This paper empirically analyzes India’s money demand function during the period of 1980 to 2007 using monthly data and the period of 1976 to 2007 using annual data. Cointegration test results indicated that when money supply is represented by M1 and M2, a cointegrating vector is detected among real money balances, interest rates, and output. In contrast, it was found that when money supply is represented by M3, there is no long-run equilibrium relationship in the　money demand function. Moreover, when the money demand function was estimated using　dynamic OLS, the sign onditions of the coefficients of output and interest rates were found to be　consistent with theoretical rationale, and statistical significance was confirmed when money supply was represented by either M1 or M2. Consequently, though India’s central bank presently uses M3 as an indicator of future price movements, it is thought appropriate to focus on M1 or M2, rather than M3, in managing monetary policy.

Infrastructure Finance in Developing Countries by State and Multilateral Development Banks

Infrastructure concession is an alternative widely used by governments to increase investment. In the case of the road sector, the main characteristics of the concessions are: long-term projects, high investments in the early years of the contract and high risks. A viability analysis must be carried out for each concession and consider the characteristics of the project. When the infrastructure is located in a developing country, political and market growth uncertainties should be add in the concession project analysis, as well as economic instability, because they present greater risks. This paper is an analysis of state bank participation in road infrastructure finance in developing countries. For this purpose, we studied road infrastructure financing and its associated risks, and also the features of developing countries. Furthermore, we considered the issue of state banks and multilateral development banks that perform an important role by offering better credit lines than the private banks, in terms of cost, interest and grace period. Based on this study, we analyzed the Brazilian Development Bank - BNDES – and their credit supply to road infrastructure concessions. The results show that BNDES is the main financing agent for long-term investment in the sector, offering loans with low interest rates in Brazilian currency. From this research we argue that a single state bank should not alone support the increasing demand for finance in Brazil. Therefore, we conclude that there is a need to expand the supply of credit in Brazil, by strengthening private banks in the long-term lending market.

Exploring users inter-temporal preferences for measuring transport social equity effects

There exist different ways for defining a welfare function. Traditionally, welfare economic theory foundation is based on the Net Present Value (NPV) calculation where the time dependent preferences of considered agents are taken into account. However, the time preferences, remains a controversial subject. Currently, the traditional approach employs a unique discount rate for various agents. Nevertheless, this way of discounting appears inconsistent with sustainable development. New research work suggests that the discount rate may not be a homogeneous value. The discount rates may change following the individual’s preferences. A significant body of evidence suggests that people do not behave following a constant discount rate. In fact, UK Government has quickly recognized the power of the arguments for time-varying rates, as it has done in its official guidance to Ministries on the appraisal of investments and policies. Other authors deal with not just time preference but with uncertainty about future income (precautionary saving). In a situation in which economic growth rates are similar across time periods, the rationale for declining social optimal discount rates is driven by the preferences of the individuals in the economy, rather than expectations of growth. However, these approaches have been mainly focused on long-term policies where intergenerational risks may appear. The traditional cost-benefit analysis (CBA) uses a unique discount rate derived from market interest rates or investment rates of return for discounting the costs and benefits of all social agents included in the CBA. However, recent literature showed that a more adequate measure of social benefit is possible by using different discount rates including inter-temporal preferences rate of users, private investment discount rate and intertemporal preferences rate of government. Actually, the costs of opportunity may differ amongst individuals, firms, governments, or society in general, as do the returns on savings. In general, the firms or operators require an investment rate linked to the current return on savings, while the discount rate of consumers-users depends on their time preferences with respect of the current and the future consumption, as well as society can take into account the intergenerational well-being, adopting a lower discount rate for today’s generation. Time discount rate of social actors (users, operators, government and society) places a lower value in a future gain, but the uncertainty about future income strongly determines the individual preferences. These time and uncertainty depends on preferences and should be integrated into a transport policy formulation that may have significant social impacts. The discount rate of a user cannot be the same than the operator’s discount rate. The preferences of both are different. In addition, another school of thought suggests that people, such as a social group, may have different attitudes towards future costs and benefits. Particularly, the users have different discount rates related to their income. Some research work tried to modify user discount rates using a compensating weight which represents the inverse of household income level. The inter-temporal preferences are a proxy of the willingness to pay during the time. Its consideration is important in order to make acceptable or not a policy or investment

Choques de oferta e política monetária na economia brasileira: Uma análise do impacto dos preços das commodities na inflação entre 2002 e 2014

Há mais de uma década o controle dos níveis de preço na economia brasileira é realizado dentro do escopo do Regime de Metas de Inflação, que utiliza modelos macroeconômicos como instrumentos para guiar as tomadas de decisões sobre política monetária. Após um período de relativo êxito (2006 - 2009), nos últimos anos apesar dos esforços das autoridades monetárias na aplicação das políticas de contenção da inflação, seguindo os mandamentos do regime de metas, esta tem se mostrado resistente, provocando um debate em torno de fatores que podem estar ocasionando tal comportamento. Na literatura internacional, alguns trabalhos têm creditado aos choques de oferta, especialmente aos desencadeados pela variação dos preços das commodities, uma participação significativa na inflação, principalmente em economias onde os produtos primários figuram como maioria na pauta exportadora. Na literatura nacional, já existem alguns trabalhos que apontam nesta mesma direção. Sendo assim, buscou-se, como objetivo principal para o presente estudo, avaliar como os choques de oferta, mais especificamente os choques originados pelos preços das commodities, têm impactado na inflação brasileira e como e com que eficiência a política monetária do país tem reagido. Para tanto, foi estimado um modelo semiestrutural contendo uma curva de Phillips, uma curva IS e duas versões da Função de Reação do Banco Central, de modo a verificar como as decisões de política monetária são tomadas. O método de estimação empregado foi o de Autorregressão Vetorial com Correção de Erro (VEC) na sua versão estrutural, que permite uma avaliação dinâmica das relações de interdependência entre as variáveis do modelo proposto. Por meio da estimação da curva de Phillips foi possível observar que os choques de oferta, tanto das commodities como da produtividade do trabalho e do câmbio, não impactam a inflação imediatamente, porém sua relevância é crescente ao longo do tempo chegando a prevalecer sobre o efeito autorregressivo (indexação) verificado. Estes choques também se apresentaram importantes para o comportamento da expectativa de inflação, produzindo assim, uma indicação de que seus impactos tendem a se espalhar pelos demais setores da economia. Através dos resultados da curva IS constatou-se a forte inter-relação entre o hiato do produto e a taxa de juros, o que indica que a política monetária, por meio da fixação de tal taxa, influencia fortemente a demanda agregada. Já por meio da estimação da primeira função de reação, foi possível perceber que há uma relação contemporânea relevante entre o desvio da expectativa de inflação em relação à meta e a taxa Selic, ao passo que a relação contemporânea do hiato do produto sobre a taxa Selic se mostrou pequena. Por fim, os resultados obtidos com a segunda função de reação, confirmaram que as autoridades monetárias reagem mais fortemente aos sinais inflacionários da economia do que às movimentações que acontecem na atividade econômica e mostraram que uma elevação nos preços das commodities, em si, não provoca diretamente um aumento na taxa básica de juros da economia.

O nexo causal entre crédito rural e crescimento do produto agropecuário na economia brasileira

O nexo causal entre desenvolvimento financeiro e crescimento econômico vem ganhando destaque na literatura desde o início dos anos 1990. As principais linhas teóricas nessa área buscam demonstrar qual a significância da relação e o sentido da causalidade, se houver. Causalidade unidirecional no sentido do desenvolvimento financeiro para o crescimento econômico, bicausalidade entre ambos, e causalidade reversa, no sentido do crescimento para o desenvolvimento financeiro, são as principais hipóteses testadas nas pesquisas empíricas. O presente trabalho de tese tem por objetivo avaliar o nexo causal entre crédito (como um indicador do desenvolvimento financeiro) e crescimento no setor agropecuário brasileiro. O crédito rural como proporção do PIB agropecuário cresceu substancialmente desde meados da década de 90, passando de 15,44% em 1996 para 65,24% em 2014. Ao longo do período 1969-2014, a razão média anual entre crédito rural e PIB agropecuário foi de 43,87%. No mesmo período, o produto agropecuário cresceu em média 3,76% ao ano. Questiona-se se no mercado rural o crédito causa o crescimento agropecuário, se ocorre causalidade reversa ou se se opera a hipótese de bicausalidade. Para avaliar o nexo causal entre essas duas variáveis econômica foram empregados quatro procedimentos metodológicos: teste de causalidade de Granger em uma representação VAR com a abordagem de Toda e Yamamoto, teste de causalidade de Granger em um modelo FMOLS (Fully Modified OLS), teste de causalidade de Granger em um modelo ARDL (Autoregressive-Distributed Lag) e teste de causalidade de Granger no domínio da frequência, com o uso do método de Breitung e Candelon. Os resultados mostram de forma uniforme a presença de causalidade unidirecional do crédito rural para o crescimento do produto agropecuário. Causalidade reversa, no sentido do crescimento agropecuário para o crédito rural, não foi detectada de forma significativa em nenhum dos quatro métodos empregados. A não detecção de bicausalidade pode ser uma evidência do impacto da forte política de subsídio governamental ao crédito rural. A decisão do Governo quanto ao montante anual de crédito rural disponível a taxas de juros subsidiadas pode estar impedindo que o desempenho do setor, medido pela sua taxa de crescimento, exerça uma influência significativa na dinâmica do crédito rural. Os resultados também abrem a possibilidade a testar a hipótese de exogeneidade do crédito rural, o que seria uma extensão direta dos resultados obtidos.