Kamatlábak és árszint kis, nyitott gazdaságban = Interest rates and price levels in a small open economy

A tanulmány azt vizsgálja, hogy a különböző kamatlábaknak milyen hatásai vannak az árszintre, illetve a nominális árakra egy nyitott elsősorban kis, nyitott gazdaságban szabad tőkeáramlás mellett. Míg a zárt gazdaságban csupán a nominális és reálkamatláb megkülönböztetése a lényeges, nyitott gazdaságban a kamatlábak vizsgálatakor meg kell fontolnunk a kamatlábparitás kérdését is. Tisztáznunk kell a reálkamatláb összetevőit, amelyben fontos szerepet kap mind az árfolyam-begyűrűzés (pass-through), mind pedig a kockázati prémium mértéke. A kamatlábhatások vizsgálatakor először azt a mechanizmust elemezzük, amely által a kamatláb befolyásolja a tartós jószágok költségét (explicit vagy implicit bérleti díját). Másodszor az exportszektor termelési döntése és a hazai kamatláb viszonyára vonatkozó mechanizmust vizsgáljuk. Belátjuk, hogy az exportáló szektor döntései függetlenek lehetnek a belföldi kamatlábaktól. Harmadszor bizonyos árazási viselkedéseket tanulmányozunk. Bebizonyítjuk, hogy a kamatláb olyan növelése, ami nem változtat a jelenlegi árfolyamon, árszintnövelő az importőr ország számára. Megfogalmazható az a nézet, hogy ha van is a kamatlábaknak keresleti hatása a zárt gazdaságban, a kis, nyitott gazdaságban ez vélhetőleg sokkal gyengébb. _____ The study examines what effects various interest rates have on the price level and nomi-nal prices in an open (primarily small) economy with free flows of capital. A closed economy calls for a distinction only between nominal and real rates of interest, but in an open economy, questions of interest-rate parity have to be considered as well. It is nec-essary to clarify the factors behind the real interest rate important for price-level pass-through and for the scale of risk premium. Analysis of interest-rate effects begins with the mechanism whereby the interest rate influences the cost of fixed assets (explicit or implicit rents). Secondly, the mechanism behind the relation of export-sector production decisions and domestic interest rates is examined. It emerges that decisions of the export sector are independent of domestic interest rates. Thirdly, certain types of pricing behav-iour are studied. It is shown that a rise in the interest rate that does not alter the present exchange rate is a price-raising factor for the importing country. It can be assumed that if the interest rate has a demand effect in a closed economy, this will presumably be much weaker in a small open economy.

Diversification and value-at-risk

A pervasive and puzzling feature of banks’ Value-at-Risk (VaR) is its abnormally high level, which leads to excessive regulatory capital. A possible explanation for the tendency of commercial banks to overstate their VaR is that they incompletely account for the diversification effect among broad risk categories (e.g., equity, interest rate, commodity, credit spread, and foreign exchange). By underestimating the diversification effect, bank’s proprietary VaR models produce overly prudent market risk assessments. In this paper, we examine empirically the validity of this hypothesis using actual VaR data from major US commercial banks. In contrast to the VaR diversification hypothesis, we find that US banks show no sign of systematic underestimation of the diversification effect. In particular, diversification effects used by banks is very close to (and quite often larger than) our empirical diversification estimates. A direct implication of this finding is that individual VaRs for each broad risk category, just like aggregate VaRs, are biased risk assessments.

Form prevailing over substance?

The decision of the Court of Appeal in Kellas-Sharpe v PSAL Ltd [2012] QCA 371 considered a not unusual provision in a loan agreement, being a provision whereby a lender agrees to accept a lower or concessional rate of interest in circumstances of prompt payment by the borrower. The loan agreement in question provided for the borrower to pay a standard rate of interest of 7.5% per month. However, if the borrower was not in default, the lender agreed to accept interest at a concessional rate of interest of 4% per month. The issue for determination by the Court of Appeal (McMurdo P, Gotterson JA and Fryberg J) was whether the clause was subject to the equitable jurisdiction to relieve against penalties, and, if so, if the interest rate provision should be treated as a penalty making the interest rate provision void. In mounting this argument, the borrower was seeking to overturn a long line of authority which has repeatedly upheld the semantic distinction between an increase in the rate of interest (which attracts the doctrine concerning penalties) and an incentive to the borrower by way of a reduction in the interest rate for prompt payment (which does not attract the doctrine)...

Financial Markets, Institutions and Money [3rd ed.]

"The financial system is a key influencer of the health and efficiency of an economy. The role of the financial system is to gather money from people and businesses that currently have more money than they need and transfer it to those that can use it for either business or consumer expenditures. This flow of funds through financial markets and institutions in the Australian economy is huge (in the billions of dollars), affecting business profits, the rate of inflation, interest rates and the production of goods and services. In general, the larger the flow of funds and the more efficient the financial system, the greater the economic output and welfare in the economy. It is not possible to have a modern, complex economy such as that in Australia, without an efficient and sound financial system. The global financial crisis (GFC) of late 2007–09 (and the ensuing European debt crisis), where the global financial market was on the brink of collapse with only significant government intervention stopping a catastrophic global failure of the market, illustrated the importance of the financial system. Financial Markets, Institutions and Money 3rd edition introduces students to the financial system, its operations, and participants. The text offers a fresh, succinct analysis of the financial markets and discusses how the many participants in the financial system interrelate. This includes coverage of regulators, regulations and the role of the Reserve Bank of Australia, that ensure the system’s smooth running, which is essential to a modern economy. The text has been significantly revised to take into account changes in the financial world."---publisher website Table of Contents 1. The financial system - an overview 2. The Monetary Authorities 3. The Reserve Bank of Australia and interest rates 4. The level of interest rates 5. Mathematics of finance 6. Bond Prices and interest rate risk 7. The Structure of Interest Rates 8. Money Markets 9. Bond Markets 10. Equity Markets

Climate change and financial regulation : challenges for the financial sector post the Global Financial Crisis

Regulation has played a significant role in shaping the financial services sector in Australia over the past few decades. Regulatory changes have included the establishment of the Australian Prudential Regulation Authority (APRA), floating the Australian dollar, allowing foreign financial institutions to operate domestically, the introduction of the superannuation guarantee charge, and the removal of interest rate controls. As the economy emerges from the worst financial crisis since the great depression, a new force of change that is recognised as one of the most significant sources of risk and opportunity facing the business community in the foreseeable future is that of climate change. Climate change is expected to be a significant change agent in the financial services sector as extreme weather patterns, sea level rises, and atmospheric changes impact on asset values (both investment and lending), project finance, and risk products. The financial services industry will be particularly affected by these developments, both as a provider of financial products (capital, credit, investment, advice, and insurance), and also through its powerful influence on the economy in terms of capital allocation. In addition, industry constituents will be heavily impacted by government regulation in this area (reporting, emissions trading and environmental policies), with respect to their own business practices and also those of their clients. This study reports the results of interviews conducted with senior members of the finance sector working in the sustainability area to gauge their perceptions of the challenges facing the sector with respect to climate change. Our results confirm that that regulatory intervention will be critical to climate change response gaining traction and momentum. In particular, regulatory certainty will promote engagement, particularly in relation to the Carbon Pollution Reduction Scheme (CPRS), with other developments needed in terms of information disclosure, performance and remuneration, and incentive programs. Accordingly, the significant potential risks and opportunities that climate change presents to the sector, and the broader economy, will in part be managed/realised only if a swift and significant regulatory response is achieved.

A Tradable Permit System in an Intertemporal Economy

It is known that in an intertemporal competitive economy, a tradable permit system may not achieve efficiency without setting appropriate permit interest rates (i.e., rewards for holding permits). To find the rates, however, we need to know in advance the path of efficient permit prices, which is difficult to obtain. This study intends to solve this problem in two ways. First, we analyze a special case in which the permit interest rates are given by a simple rule. For example, if the marginal abatement cost of pollution emission is constant, then the appropriate rate is to equal the monetary interest rate. As is the case for global warming, if the damage is caused in the future far beyond the planning period of the environmental program, the appropriate rate coincides with the marginal self-recovery of environmental stock under certain conditions. As a second approach, we propose a tradable permit system with a permit bank, as a mechanism by which the permit interest rates are generated endogenously without governmental intervention other than the issuance of permits. However, we also show that this approach raises the problem of indeterminacy of the equilibrium. © 2013 Springer Science+Business Media Dordrecht.

Risk Minimizing Option Pricing in a Semi-Markov Modulated Market

We address risk minimizing option pricing in a semi-Markov modulated market where the floating interest rate depends on a finite state semi-Markov process. The growth rate and the volatility of the stock also depend on the semi-Markov process. Using the Föllmer–Schweizer decomposition we find the locally risk minimizing price for European options and the corresponding hedging strategy. We develop suitable numerical methods for computing option prices.

Nuorten männiköiden kehitys - taimikonhoito ja ensiharvennus

The aim of this study was to investigate the effects of location, site type, regeneration method and precommercial thinning on the characteristics and development of young, even-aged, pure Scots pine stands. In addition, the effects of timing and intensity of first commercial thinning on the yield and profitability during the rotation period were also studied. The stand characteristics and external quality of young Scots pine stands and stand-level growth models were based on extensive inventory data of the Finnish Forest Research Institute for young Scots pine stands (3 measurement times, 192 stands). The effect of precommercial thinning on stand development was examined on the basis of long-term experiments (13 stands, 169 plots). The effect of timing and intensity of the first commercial thinning on yield and profitability were based on measurements made in first commercial thinnings (27 stands of Metsähallitus), and the further stand development was modeled using the MOTTI simulator. The thesis was based on four articles and a summary. Stand level growth models were developed for young, even-aged Scots pine stands. The models reliably predicted the development up until the first commercial thinning stage. The stand density of young Scots pine stands in Finland was moderately low compared to the target values. In addition, the external quality of pines was low on average. The low stand density and poor external quality will result in the need for quality tree selection in thinnings, if high quality sawn timber is required. In Northern Finland, only 20% of the dominant trees were classified as normal. This will lead to the situation where external quality will remain relatively poor up until the end of rotation. Early and light precommercial thinning (Hdom 3 m, to a density of 3000 trees per hectare) increased the thinning removal by 40% compared to late and more intensive precommercial thinning (at 7 meters to a density of 2000 trees per hectare). A model for the effect of precommercial thinning on merchantable thinning removal at the first commercial thinning was developed for forest management planning purposes. When the recommended time of first commercial thinning was delayed from a dominant height of 12 m to 16 m, or by ten years, the yield of merchantable wood was doubled. Simultaneously, the current value of the stumpage revenues (with 4% interest rate) was increased on the average by 65% (330 € per hectare). Variation in stumpage prices or interest rates did not have any effect on the final results. Without exception, delaying the first commercial thinning by ten years seemed to be the most profitable method. This presupposes that precommercial thinning has been carried out at the right time and that tree quality aspects do not be specially considered. Furthermore, the wood yield and economic outcome from the entire rotation were similar regardless of whether the first thinning was performed at the time currently recommended or ten years later.

Essays on Banking Crises

This thesis aims at finding the role of deposit insurance scheme and central bank (CB) in keeping the banking system safe. The thesis also studies the factors associated with long-lasting banking crises. The first essay analyzes the effect of using explicit deposit insurance scheme (EDIS), instead of using implicit deposit insurance scheme (IDIS), on banking crises. The panel data for the period of 1980-2003 includes all countries for which the data on EDIS or IDIS exist. 70% of the countries in the sample are less developed countries (LDCs). About 55% of the countries adopting EDIS also come from LDCs. The major finding is that the using of EDIS increases the crisis probability at a strong significance level. This probability is greater if the EDIS is inefficiently designed allowing higher scope of moral hazard problem. Specifically, the probability is greater if the EDIS provides higher coverage to deposits and if it is less powerful from the legal point of view. This study also finds that the less developed a country is to handle EDIS, the higher the chance of banking crisis. Once the underdevelopment of an economy handling the EDIS is controlled, the EDIS separately is no longer a significant factor of banking crises. The second essay aims at determining whether a country s powerful CB can lessen the instability of the banking sector by minimizing the likelihood of a banking crisis. The data used include indicators of the CB s autonomy for a set of countries over the period of 1980-89. The study finds that in aggregate a more powerful CB lessens the probability of banking crisis. When the CB s authority is disentangled with respect to its responsibilities, the study finds that the longer tenure of CB s chief executive officer and the greater power of CB in assigning interest rate on government loans are necessary for reducing the probability of banking crisis. The study also finds that the probability of crisis reduces more if an autonomous CB can perform its duties in a country with stronger law and order tradition. The costs of long-lasting banking crises are high because both the depositors and the investors lose confidence in the banking system. For a rapid recovery of a crisis, the government very often undertakes one or more crisis resolution policy (CRP) measures. The third essay examines the CRP and other explanatory variables correlated with the durations of banking crises. The major finding is that the CRP measure allowing the regulation forbearance to keep the insolvent banks operative and the public debt relief program are respectively strongly and weakly significant to increase the durations of crises. Some other explanatory variables, which were found by previous studies to be related with the probability of crises to occur, are also correlated with the durations of crises.

The transfer problem and the intertemporal terms of trade

In this paper the effects of a transfer on the intertemporal terms of trade are examined in the context of a simple two-country, two-period model. When intertemporal trade occurs because the two economies have different rates of time preference, a transfer improves the terms of trade of the paying country. Alternatively, when trade occurs owing to international differences in the endowments of goods over the two periods, the effect of a transfer depends on (a) the relationship between the interest rate and the rates of time preference of the two countries and (b) the relationship between their elasticities of intertemporal consumption substitution.

Asymptotic analysis of option pricing in a Markov modulated market

We address asymptotic analysis of option pricing in a regime switching market where the risk free interest rate, growth rate and the volatility of the stocks depend on a finite state Markov chain. We study two variations of the chain namely, when the chain is moving very fast compared to the underlying asset price and when it is moving very slow. Using quadratic hedging and asymptotic expansion, we derive corrections on the locally risk minimizing option price.

The channels of monetary policy triggered by central bank actions and statements in the Australian equity market

Owing to the discrete disclosure practices of the Reserve Bank of Australia, this paper provides new evidence on the channels of monetary policy triggered by central bank actions (monetary policy announcements) and statements (explanatory minutes releases), in the Australian equity market. Both monetary policy announcements and explanatory minutes releases are shown to have a significant and comparable impact on the returns and volatility of the Australian equity market. Further, distinct from US and European studies that find strong evidence of the interest rate, bank loan and balance sheet channels and no evidence of the exchange rate channel following central bank actions, this paper finds that monetary policy impacts the Australian equity market via the exchange rate, interest rate and bank loan channels of monetary policy, with only weak evidence of the balance sheet channel of monetary policy. These channels are found to be operating irrespective of the trigger (monetary policy announcements or explanatory minutes releases), though results are somewhat weaker when examining the explanatory minutes releases. These results have important implications for central bank officials and financial market participants alike: by confirming a comparable avenue to affect monetary policy; and providing an explication of its impact on the Australian equity market.

Monetary Policy Implementation in the Interbank Market

The liquidity crisis that swept through the financial markets in 2007 triggered multi-billion losses and forced buyouts of some large banks. The resulting credit crunch is sometimes compared to the great recession in the early twentieth century. But the crisis also serves as a reminder of the significance of the interbank market and of proper central bank policy in this market. This thesis deals with implementation of monetary policy in the interbank market and examines how central bank tools affect commercial banks' decisions. I answer the following questions: • What is the relationship between the policy setup and interbank interest rate volatility? (averaging reserve requirement reduces the volatility) • What can explain a weak relationship between market liquidity and the interest rate? (high reserve requirement buffer) • What determines banks' decisions on when to satisfy the reserve requirement? (market frictions) • How did the liquidity crisis that began in 2007 affect interbank market behaviour? (resulted in higher credit risk and trading frictions as well as expected liquidity shortage)

A Cointegration Approach to Topics in Empirical Macroeconomics (summary section only)

Mikael Juselius’ doctoral dissertation covers a range of significant issues in modern macroeconomics by empirically testing a number of important theoretical hypotheses. The first essay presents indirect evidence within the framework of the cointegrated VAR model on the elasticity of substitution between capital and labor by using Finnish manufacturing data. Instead of estimating the elasticity of substitution by using the first order conditions, he develops a new approach that utilizes a CES production function in a model with a 3-stage decision process: investment in the long run, wage bargaining in the medium run and price and employment decisions in the short run. He estimates the elasticity of substitution to be below one. The second essay tests the restrictions implied by the core equations of the New Keynesian Model (NKM) in a vector autoregressive model (VAR) by using both Euro area and U.S. data. Both the new Keynesian Phillips curve and the aggregate demand curve are estimated and tested. The restrictions implied by the core equations of the NKM are rejected on both U.S. and Euro area data. These results are important for further research. The third essay is methodologically similar to essay 2, but it concentrates on Finnish macro data by adopting a theoretical framework of an open economy. Juselius’ results suggests that the open economy NKM framework is too stylized to provide an adequate explanation for Finnish inflation. The final essay provides a macroeconometric model of Finnish inflation and associated explanatory variables and it estimates the relative importance of different inflation theories. His main finding is that Finnish inflation is primarily determined by excess demand in the product market and by changes in the long-term interest rate. This study is part of the research agenda carried out by the Research Unit of Economic Structure and Growth (RUESG). The aim of RUESG it to conduct theoretical and empirical research with respect to important issues in industrial economics, real option theory, game theory, organization theory, theory of financial systems as well as to study problems in labor markets, macroeconomics, natural resources, taxation and time series econometrics. RUESG was established at the beginning of 1995 and is one of the National Centers of Excellence in research selected by the Academy of Finland. It is financed jointly by the Academy of Finland, the University of Helsinki, the Yrjö Jahnsson Foundation, Bank of Finland and the Nokia Group. This support is gratefully acknowledged.

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.