Optimal water use: is anyone getting the right incentives in California?

This paper discusses ~he widespread inefficiency in water pricing today and uses the State of California as an example. After solving the Planner' s Problem I conclude that water for irrigation should cost more than for domestic use. The optimal price leveI can be calculated from a correct measure of the true marginal cost of supply.

Debt management in Brazil: evaluation of the Real Plan and challenges ahead

The Brazilian domestic debt has posed two challenges to policy-makers: it has grown very fast and its maturity is extremely short. This has prompted fears that a default or a compulsory lengthening scheme would be imposed. Here, we analyse the domestic public debt management experience in Brazil, searching for policy prescriptions for the next few years. After briefiy reviewing the recent domestic public debt history, we decompose the large rise in federal bonded debt during 1995-2000, searching for its macroeconomic causes. The main culprits are the extremely high interest payments-which, unti11998, were caused by the weak fiscal stance and the quasi-fixed exchange-rate regime; and since 1999, by the impact ofthe currency depreciation On the dollar-indexed and the externai debt-, and the accumulation of assets of doubtful value, much of which may have to be written off in the future. Simulation exercises of the net debt path for the near future underscore the importance of a tighter fiscal stance to prevent the debt-GDP ratio from growing further. Given the need to quickly lengthen the debt maturity, our main policy advice is to foster, and rely more on, infiation-linked bonds.

Public debt management, monetary policy and financial institutions

Despite the large size of the Brazilian debt market, as well the large diversity of its bonds, the picture that emerges is of a market that has not yet completed its transition from the role it performed during the megainflation years, namely that of providing a liquid asset that provided positive real returns. This unfinished transition is currently placing the market under severe stress, as fears of a possible default from the next administration grow larger. This paper analyzes several aspects pertaining to the management of the domestic public debt. The causes for the extremely large and fast growth ofthe domestic public debt during the seven-year period that President Cardoso are discussed in Section 2. Section 3 computes Value at Risk and Cash Flow at Risk measures for the domestic public debt. The rollover risk is introduced in a mean-variance framework in Section 4. Section 5 discusses a few issues pertaining to the overlap between debt management and monetary policy. Finally, Section 6 wraps up with policy discussion and policy recommendations.

Optimal provision of implicit and explicit incentives in asset management contracts

This paper investigates the importance of the fiow of funds as an implicit incetive provided by investors to portfolio managers in a two-period relationship. We show that the fiow of funds is a powerful incentive in an asset management contract. We build a binomial moral hazard model to explain the main trade-ofIs in the relationship between fiow, fees and performance. The main assumption is that efIort depend" on the combination of implicit and explicit incentives while the probability distrioutioll function of returns depends on efIort. In the case of full commitment, the investor's relevant trade-ofI is to give up expected return in the second period vis-à-vis to induce efIort in the first período The more concerned the investor is with today's payoff. the more willing he will be to give up expected return in the following periods. That is. in the second period, the investor penalizes observed low returns by withdrawing resources from non-performing portfolio managers. Besides, he pays performance fee when the observed excess return is positive. When commitment is not a plausible hypothesis, we consider that the investor also learns some symmetríc and imperfect information about the ability of the manager to generate positive excess returno In this case, observed returns reveal ability as well as efIort choices exerted by the portfolio manager. We show that implicit incentives can explain the fiow-performance relationship and, conversely, endogenous expected return determines incentives provision and define their optimal leveIs. We provide a numerical solution in Matlab that characterize these results.

Reservas internacionais e dívida soberana: uma análise de simulação sob a ótica da sustentabilidade da dívida

Este trabalho analisa, sob a ótica da sustentabilidade da dívida, os efeitos de se manter um elevado nível de reservas internacionais juntamente com um elevado estoque de dívida pública. Busca-se o nível ótimo de reservas para o Brasil através de uma ferramenta de gestão de risco, por simulações de Monte Carlo. Considerando as variáveis estocásticas que afetam a equação de acumulação da dívida, e entendendo a relação entre elas, pode-se estudar as propriedades estocásticas da dinâmica da dívida. Da mesma forma, podemos analisar o impacto fiscal de um determinado nível de reservas ao longo do tempo e verificar quais caminhos se mostram sustentáveis. Sob a ótica da sustentabilidade da dívida, a escolha que gera a melhor relação dívida líquida / PIB para o Brasil é aquela que utiliza o máximo das reservas internacionais para reduzir o endividamento local. No entanto, como há aspectos não capturados nesta análise, tais como os benefícios das reservas em prevenir crises e em funcionar como garantia para investimentos externos, sugere-se que as reservas não excedam os níveis reconhecidos pela literatura internacional que atendam a estes fins. A indicação final deste estudo é que as reservas internacionais funcionam como um instrumento de proteção ao país quando o endividamento e o custo dele não são tão expressivos, como são atualmente no Brasil.

Optimal two-sided tests for instrumental variables regression with heteroskedastic and autocorrelated errors

This paper considers two-sided tests for the parameter of an endogenous variable in an instrumental variable (IV) model with heteroskedastic and autocorrelated errors. We develop the nite-sample theory of weighted-average power (WAP) tests with normal errors and a known long-run variance. We introduce two weights which are invariant to orthogonal transformations of the instruments; e.g., changing the order in which the instruments appear. While tests using the MM1 weight can be severely biased, optimal tests based on the MM2 weight are naturally two-sided when errors are homoskedastic. We propose two boundary conditions that yield two-sided tests whether errors are homoskedastic or not. The locally unbiased (LU) condition is related to the power around the null hypothesis and is a weaker requirement than unbiasedness. The strongly unbiased (SU) condition is more restrictive than LU, but the associated WAP tests are easier to implement. Several tests are SU in nite samples or asymptotically, including tests robust to weak IV (such as the Anderson-Rubin, score, conditional quasi-likelihood ratio, and I. Andrews' (2015) PI-CLC tests) and two-sided tests which are optimal when the sample size is large and instruments are strong. We refer to the WAP-SU tests based on our weights as MM1-SU and MM2-SU tests. Dropping the restrictive assumptions of normality and known variance, the theory is shown to remain valid at the cost of asymptotic approximations. The MM2-SU test is optimal under the strong IV asymptotics, and outperforms other existing tests under the weak IV asymptotics.

Debt maturity determinants in Brazil: evidence from private and public corporate borrowings

This study provides an empirical investigation of the determinants of long-term debt maturity in Brazil. We built a unique database that includes privately placed debt and public debt for 308 publicly traded, non-financial Brazilian companies, from 2009 to 2013. We perform GMM panel analyses using as dependent variables the amount of long-term debt payable in more than one, three, and five years for total debt, BNDES (Brazilian Development Bank) debt and corporate bonds. The results show that the BNDES finances less risky firms, i.e., those that are larger, older, more tangible and more transparent. We also find support for information asymmetry theories, as companies with higher transparency levels have similar leverage levels relative to others but higher proportions of long-term debt in their capital structures. Regarding debt levels, we find that more levered companies are larger, less profitable, more tangible and have fewer growth opportunities. To our knowledge, this is the first paper to address the determinants of long-term debt maturity in Brazil that uses various specifications of long-term debt and that examines different types of debt.

Optimal unemployment insurance for couples

This work analyzes the optimal design of an unemployment insurance program for couples, whose joint search problem in the labor market differ significantly from the problem faced by single agents. We use a version of the sequential search model of the labor market adapted to married agents to compare optimal constant policies for single and married agents, as well as characterize the optimal constant policy when the agency faces single and married agents simultaneously. Our main result is that an agency that gives equal weights to single and married agents will want to give equal utility promises to both types of agents and spend more on the single agent.

Optimal monetary policy under administered prices

This work aims to analyze the interaction and the effects of administered prices in the economy, through a DSGE model and the derivation of optimal monetary policies. The model used is a standard New Keynesian DSGE model of a closed economy with two sectors companies. In the first sector, free prices, there is a continuum of firms, and in the second sector of administered prices, there is a single firm. In addition, the model has positive trend inflation in the steady state. The model results suggest that price movements in any sector will impact on both sectors, for two reasons. Firstly, the price dispersion causes productivity to be lower. As the dispersion of prices is a change in the relative price of any sector, relative to general prices in the economy, when a movement in the price of a sector is not followed by another, their relative weights will change, leading to an impact on productivity in both sectors. Second, the path followed by the administered price sector is considered in future inflation expectations, which is used by companies in the free sector to adjust its optimal price. When this path leads to an expectation of higher inflation, the free sector companies will choose a higher mark-up to accommodate this expectation, thus leading to higher inflation trend when there is imperfect competition in the free sector. Finally, the analysis of optimal policies proved inconclusive, certainly indicating that there is influence of the adjustment model of administered prices in the definition of optimal monetary policy, but a quantitative study is needed to define the degree of impact.

Implied Hazard Rates Analysis Through Brazilian Corporate Debt

No Brasil, o mercado de crédito corporativo ainda é sub-aproveitado. A maioria dos participantes não exploram e não operam no mercado secundário, especialmente no caso de debêntures. Apesar disso, há inúmeras ferramentas que poderiam ajudar os participantes do mercado a analisar o risco de crédito e encorajá-los a operar esses riscos no mercado secundário. Essa dissertação introduz um modelo livre de arbitragem que extrai a Perda Esperada Neutra ao Risco Implícita nos preços de mercado. É uma forma reduzida do modelo proposto por Duffie and Singleton (1999) e modela a estrutura a termo das taxas de juros através de uma Função Constante por Partes. Através do modelo, foi possível analisar a Curva de Perda Esperada Neutra ao Risco Implícita através dos diferentes instrumentos de emissores corporativos brasileiros, utilizando Títulos de Dívida, Swaps de Crédito e Debêntures. Foi possível comparar as diferentes curvas e decidir, em cada caso analisado, qual a melhor alternativa para se tomar o risco de crédito da empresa, via Títulos de Dívida, Debêntures ou Swaps de Crédito.

Deregulation and The 2007-2008 Housing/Debt Crisis Analysis of the Housing/Debt Crisis of 2007-2008 and its impact on the Financial Strength and Vulnerability of the United States and Global Economy

One looming question has persisted in the minds of economists the world over in the aftermath of the 2007-2008 American Housing and Debt Crisis: How did it begin and who is responsible for making this happen? Another two-part question is: What measures were implemented to help end the crisis and what changes are being implemented to ensure that it will never happen again? Many speculate that the major contributing factor was the repeal of the Glass-Steagall Act in 1999 that prompted a virtual feeding frenzy among the banking community when new calls from Capitol Hill encouraged home ownership in America as well as the secondary mortgage market which skyrocketed thereafter. The Glass-Steagall Act will be among many of the topics explored in this paper along with the events leading up to the 2007-2008 housing/debt crisis as well as the aftermath.

Optimal Mirrleesian taxation in non-competitive labor markets

We study optimal labor income taxation in non-competitive labor markets. Firms offer screening contracts to workers who have private information about their productivity. A planner endowed with a Paretian social welfare function tries to induce allocations that maximize its objective. We provide necessary and sufficient conditions for implementation of constrained efficient allocations using tax schedules. All allocations that are implementable by a tax schedule display negative marginal tax rates for almost all workers. Not all allocations that are implementable in a competitive setting are implementable in this noncompetitive environment.

Credit ratings and government bonds evidence before, during and after the european debt crisis

Neste projeto, investigamos se as agências de rating e as taxas de juro de longo prazo da dívida soberana tiveram uma influência recíproca antes, durante e após a crise da dívida soberana Europeia. Esta análise é realizada, estimando a relação existente entre os ratings da dívida soberana ou taxas de juro e factores macroeconomicos e estruturais, através de uma diferente aplicação de metodologias utilizadas para este efeito. Os resultados obtidos demonstram que, no período da crise soberana, os ratings e as taxas de juros tiveram um mútuo impacto, sugerindo que as descidas dos ratings podem ter conduzido a profecias auto-realizáveis, levando países relativamente estáveis a um eventual incumprimento

Non-asymptotic confidence bounds for the optimal value of a stochastic program

We discuss a general approach to building non-asymptotic confidence bounds for stochastic optimization problems. Our principal contribution is the observation that a Sample Average Approximation of a problem supplies upper and lower bounds for the optimal value of the problem which are essentially better than the quality of the corresponding optimal solutions. At the same time, such bounds are more reliable than “standard” confidence bounds obtained through the asymptotic approach. We also discuss bounding the optimal value of MinMax Stochastic Optimization and stochastically constrained problems. We conclude with a small simulation study illustrating the numerical behavior of the proposed bounds.