A ‘Second-Best’ Rationale to Deflationary Monetary Policy in Japan [PDF]
Authors: Cargill, T. and Guerrero F. Abstract: The Bank of Japan permitted a ten-year period of deflation (1995-2005) which appears to have ended in 2006. The deflation, as well as the preceding disinflation, adversely affected the financial and real sectors of the economy that in turn, made it difficult to recover from the collapse of asset prices in 1990 and 1991. Various ad hoc explanations have been offered to account for the deflation period. This paper offers a second-best explanation based on a two-player policy game between the Bank of Japan and the banking system in which the banking system relies on an accommodative policy of forgiveness and forbearance by the Ministry of Finance to deal with weak balance sheets. The paper does not explicitly model the Ministry of Finance preference function but incorporates the Bank of Japan’s perceived willingness of the Ministry to accommodate the banking system in the Bank’s reaction function. The model suggests that in the context of established deflationary expectations and large amounts of debt, the Bank of Japan explicitly regarded the level of debt as exceeding the socially optimal level, that Ministry of Finance forgiveness and forbearance contributed to this excess, and lacking an instrument to reverse deflationary expectations, the Bank of Japan employed deflation as a disciplining instrument to limit real debt.
A Reassessment of the Problems with Interest Targeting: What Have We Learned from Japanese Monetary Policy? [PDF]
Authors: Cargill, T. and Guerrero F. Abstract: Interest rate targeting is widely used by central banks to pursue price stability; however, the variation in inflation policy outcomes between central banks such as the Federal Reserve and the Bank of Japan despite a common policy instrument framework suggests interest- targeting has limitations. Despite the variation in policy outcomes, the role of targeting was enhanced with the advent of Taylor rules in the 1990s and interest rate targeting dominates central bank attitudes to the exclusion of any other policy instrument framework. The recent Japanese experience confronts us with the need to reassess the relative merits of interest targeting. This paper frames the discussion of the various problems of the interest-targeting framework within a model that encompasses a number of important previous results and stresses that interest rate targeting may leave the price level indeterminate in various plausible circumstances. In a low, or even zero interest rate environment, such as the one that characterized Japan, Taylor-type rules may offer no solution to the indeterminacy problem. The paper then discusses various aspects of the BoJ’s decision to adhere to interest rate targeting despite its limitations.
Do Casinos Export Bankruptcy? [PDF]
Authors: Garrett, T. and Nichols, M. Abstract: This paper measures the extent to which destination resort casinos export bankruptcy back to visitors’ home states. Previous literature has alluded to this possibility, but to date studies have only examined the influence of local casinos on local bankruptcy. Using various survey data, we calculate the number of visits from each state to casino resort destinations in Nevada, New Jersey, and Mississippi. We find strong evidence that states having more residents who visit out-of-state casino resorts have higher bankruptcy filings. This effect is dominant in the south, suggesting that casinos located in wealthier regions are less likely to export bankruptcy.
Does Medical Diagnosis Data Clarify the Relation Between Prenatal Care and Delivery Outcomes [PDF]
Authors: Mukhopadhyay S. and Wendel J. Abstract: Studies indicating that prenatal care has minimal impact sparked additional work to assess whether this is a correct conclusion or a statistical artifact. Recent work highlights the importance of including medical diagnoses as regression variables, developing inclusive measures for health outcomes, and using provider-generated measures of prenatal care utilization. We explore these issues using administrative data provided by a tertiary care hospital and a prenatal care clinic. This data includes provider-generated utilization data, coded medical diagnoses, and variable direct costs for delivery-episode hospital care. Because all patients in this dataset obtained care from one set of providers in one urban area, the data set also minimizes heterogeneity due to variations in provider practice patterns and community services. We find that prenatal care exerts a significant beneficial impact on infant outcomes, and variable direct cost provides an inclusive outcomes measure when appropriate exogenous control variables are available. Estimated per-visit cost savings range from zero for patients with no diagnoses, to $10 for patients with one diagnosis, and $22 for patients with multiple diagnoses. The differences among these per-visit savings are significant, suggesting suboptimal allocation of clinic resources. Prenatal care utilization does not, however, increase with the number of diagnoses.
Does the Party in Power Matter for Economic Performance? [PDF]
Authors: Parker, E. Abstract: In this brief paper, I consider whether five common political beliefs have any basis in fact. Does the economy grow faster when Republicans are in charge? Does the size of the government actually keep expanding? If so, is this growth correlated with Democrats being in charge? Does bigger government lead to slower growth? Finally, is it accurate to characterize Democrats as the “tax and spend” party? While correlation is not causation and theoretical relationships are complex, the data on U.S. economic performance during the postwar period does not appear to support any of these beliefs, and in fact tends more to support the alternative hypotheses.
Early-Stage Globalization and Corporate Debt Maturity: The Case of South Korea, 1980-94 [PDF]
Authors: Guerrero, F. Abstract: Using data from publicly traded South Korean corporations for the period 1980-94, this paper finds evidence that increases in financial liberalization that accompanied the more general process of financial globalization have significantly reduced the maturity structure of corporate debt contracts, thus lending partial empirical support to the idea that financial liberalization can be well described as “short-term pain, long-term gain”. This effect of financial liberalization on corporate debt maturity is robust to changes in econometric specification, and does not seem to be counteracted by opposing forces that tended to lengthen the maturity of corporate debt during the same period.
Efficiency and Technology Gap in China's Agriculture: A Regional META-Frontier Analysis [PDF]
Authors: Chen, Z. and Song, S. Abstract: This paper utilizes a unique county-level dataset to examine technical efficiency and technology gap in China’s agriculture. We classify the counties into four regions with distinctive levels of economic development, and hence production technologies. A meta-frontier analysis is applied to the counties. We find that although the eastern counties have the highest efficiency scores with respect to the regional frontier but the northeastern region leads in terms of agricultural production technology nationwide. Meanwhile, the mean efficiency of the northeastern counties is particularly low, suggesting technology and knowledge diffusion within region might help to improve production efficiency and thus output.
Explaining the Variation in Tax Structures in the MENA Region [PDF]
Authors: Tosun, M. Abstract: This paper examines the tax structures of the Middle East and North Africa (MENA) countries by focusing on the quality of governance and demographic changes as two influential factors in region’s economies. The objective of is to determine whether these factors can explain the variation in the tax structures of these countries. Results from regressions on the MENA countries and the ones based on a larger sample of 61 countries show that these factors affected the level of taxation, measured by the tax ratio, more strongly than they affected the tax composition. While the quality of governance seems to have affected the tax structures in the MENA countries more than in other comparable Non-OECD countries, demographics seems to have played a bigger role in determining the tax structures in other Non-OECD countries. However, neither of these factors explained changes in the income tax share satisfactorily. One key result is that the increase in the quality of governance has decreased the reliance on domestic taxes on goods and services. The paper provides a discussion on the policy implications of these results.
Externalities from International Labor Migration: Efficacy of a Brain Drain Tax in the Euro-Mediterranean Region [PDF]
Authors: Tosun, M. Abstract: This paper uses a two-region, two-period overlapping generations model with international labor mobility to examine the efficacy of using tax policy to internalize the externalities created by international labor migration. While a brain drain tax has a substantial limiting effect on labor migration and a small negative effect on per worker growth, it is found to be a viable solution to the negative externality problem. It is also found that the brain-drain tax can raise substantial tax revenue for the SMCs which could be used to enhance human capital in the region.
Fiscal Centralization and Decentralization in Russia and China [PDF]
Authors: Parker, E. and Thornton, J. Abstract: In this paper we review the fiscal evolution of China and Russia, asking how the process of creating a separate, tax-financed public sector in the two countries differed. We observe that the size of China's budget sector was consistently smaller than in Russia and that budget decentralization was consistently greater. We see both pros and cons in China's decentralization. Local governments that were allowed to keep marginal increases in local tax revenue had incentives to pursue growth-supporting policies, including support for foreign investment and export-oriented production. However, in the absence of financial markets, there were barriers to investment outside the local region, resulting in inefficient use of capital and protectionism. Fiscal deficits and rapid expansion of credit have threatened stability in both countries, but China has proved more successful than Russia in managing macroeconomic policies. Finally, we argue that Russia's status as a petro-state makes management of the public sector particularly difficult. In Russia, recentralization has been associated with expansion of state ownership of enterprises and production by territorial governments, state ministries, state banks, and the natural monopolies.
Local Decentralization and Economic Growth: Evidence from U.S. Metropolitan and Non-Metropolitan Regions [PDF]
Authors: Hammond, G. and Tosun, M. Abstract: This paper extends the recent empirical literature on the relationship between local decentralization and growth using data from both metropolitan and non-metropolitan regions in the U.S. The analysis utilizes both metropolitan and non-metropolitan regions, and thus avoids the possible selection bias present in previous research. The results for non-metropolitan regions indicate a relatively weak or negative relationship between the local decentralization measures and local economic growth compared to a positive relationship suggested by a recent study on metropolitan regions. Results for the non-metro regions also suggest that there are different impacts across population and income than we observe for metropolitan regions.
Long-Term Inflation Outcomes after Hyperinflation: Theory and Evidence [PDF]
Authors: Guerrero, F. Abstract: This paper does two things. First, it shows both anecdotal and cross-country evidence that indicates that countries that have experienced hyperinflation display significantly lower long-term rates of inflation than countries that lack the same experience. Secondly, it presents a model to rationalize the main empirical finding. There is more than one mechanism through which the long-term effects of hyperinflation may have an impact on long-term inflation outcomes. The suggested explanation this paper offers is that hyperinflations act by reducing the social costs of increasing the collection of conventional, distortionary taxes relative to the collection of the inflation tax.
Managing a 401(k) Account: An Experiment on Asset Allocation [PDF]
Authors: Sundali, J. and Guerrero, F. Abstract: The study reports the results of an asset allocation experiment in which subjects managed an endowment of money over a 20 "year" time period. While grounded in theory, the study takes an applied look at the ability of subjects to efficiently and effectively make asset allocation decisions similar to those found in 401(k) accounts. The main conclusions are as follows. First, efficient portfolios are more easily created when the set of assets to choose from is carefully constructed. Thus, financial engineers should be given the responsibility for choosing the assets available to plan participants and ensuring that combinations of these assets will fall on the efficient frontier. If followed, this advice would likely significantly reduce the amount of individual company stock offered in Defined Contribution (DC) plans in place of well-constructed low cost index funds from multiple asset classes. Second, if the assets selected for inclusion in DC plans allow the investor to easily create portfolios on the efficient frontier, then the challenge for the investor is not how to get onto the frontier but where to locate on it. The simplistic surveys that are commonly used by DC plan providers to determine risk tolerance and to recommend asset allocations are woefully inadequate for this task. More sophisticated and theoretically driven instruments must be created to educate investors on the risks and the benefits available at different points along the efficient frontier.
Mobility of the Chinese Urban Poor - A Case Study of Hefei City [PDF]
Authors: Peng, Z., Zhu, Y. and Song, S. Abstract: In a rapid economic development environment with rising income, escalating motorization, and growing urbanization, it is natural for government policies to focus on solving congestion related problems caused by the increased car ownership and usage. The mobility needs of the urban poor have been traditionally neglected in policy and in practice, particularly in developing countries. This paper addresses the mobility challenges the urban poor are facing based on a household travel survey in the City of Hefei in China. It first presents travel behaviors, transportation costs and commuting problems of the urban poor. It then discusses the urban transportation policy implications and examines the prevailing trends of urban transportation policies and plans in Chinese cities. Policy recommendations are suggested to improve the mobility needs of the urban poor.
Teaching Convergence: A Contribution [PDF]
Authors: Guerrero, F. Abstract: The issue of convergence has been hotly debated since the mid 1980s. Only recently certain consensus has arisen around some of the most fundamental issues. It seems hardly surprising, then, to find a large variation in how those issues are taught to undergraduates. This paper is an attempt at clarifying the different concepts of convergence, and their relation to both the neoclassical model of growth and available cross-country evidence. Evidence on some of the contradictory ways in which the issues are taught is provided, a simple way to teach the relevant concepts of convergence by means of numerical examples is presented, and relevant examples drawn from historical evidence are shown. Also, the implications of the neoclassical growth model are presented in a slightly different, but clearer way, and some of the difficulties to interpret the cross-country empirical evidence are reviewed.
Tenders with Different Risk Preferences in Construction Industry [PDF]
Authors: Tang, F., Zong, W. and Song, S. Abstract: Underlying the fact that different tenderers have different preferences on risk-taking, this study investigates the different tenderers' behaviors in one-shot construction bid auctions. Our model extends the preconditions of previous assumption that all tenderers are characterized by neutral risk-taking in the original tendering model for lowest-price sealed tender. A general tendering model for the lowest-price sealed tender is established to explain the behavior of tenderers during the tendering. The results indicate that construction estimate is affected by the degree of uncertainties in the construction industry. Therefore, in a lowest-price sealed tender, risk-averse tenders would tender a higher price and conversely risk-seeking tenderers would tender a lower price when risk-neutral tenderers would tender a middle price. However, the risk-seeking tenderers are more likely to win the bid.
The Impact of Institutional Characteristics on the Use and Effectiveness of Rainy Day Funds: A Pilot Study of Municipal Governments in West Virginia [PDF]
Authors: Daugherty M., Stalebrink, O. and Tosun, M. Abstract: This research focuses on enhancing the understanding of the use of “rainy day funds” to deal with municipal fiscal shortfalls. It is a pilot study, examining the largest 15 cities in West Virginia. Analysis of data from state reports and interviews with finance directors are used to determine whether, how, and to the degree the cities studied use various reserve fund mechanisms. While almost every city was found to have fiscal reserves, there was great variation in the methods used and amounts in how it was done – some cities followed predictable patterns found elsewhere while others did not.