Liquidity Trap Prevention and Escape: A Simple Proposition

Liquidity traps occur when the natural nominal interest rate becomes negative. In a model with capital price dynamics explicitly considered, we find that shocks in the future can cause current and lasting liquidity traps. We propose that the central bank can prevent or fix liquidity traps by appending to its inflation-targeting monetary policy with a prioritized promise to defend a lower bound of nominal capital price. (JEL E31, E43, E44, E52, E58, E61, G12) Keywords: Liquidity traps; Zero interest bound; Asset Prices; Lower capital price boundLiquidity traps; Zero interest bound; Asset Prices; Lower capital price bound

Baby Boom, Asset Market Meltdown and Liquidity Trap

A so-called “asset market meltdown hypothesis” predicts that baby boomers’ large savings will drive asset market booms that will eventually collapse because of the boomers’ large retirement dissavings. As good news to baby boomers, our analysis shows that this meltdown hypothesis is fundamentally flawed; and baby-boom-driven asset market booms may not necessarily collapse. However, bad news is that, in the case where meltdowns are about to happen, forward-looking baby boomers’ attempts to escape them will be futile and may lead the economy into a “liquidity trap”. (JEL E21, E22, E44, G12)baby boom; asset market meltdown; liquidity trap; investment elasticity

Open Capital Account: Concrete Wealth or Paper Wealth

Empirical evidence shows that capital inflows are often used by developing countries to finance excessive consumption. The existing literature explains these phenomena as resulting from institutional imperfections. In contrast, we argue that they can be fundamental outcomes of open capital account, under which ineffectiveness in using foreign savings for investments tends to result in capital inflows being channeled to consumption through wealth effect. Our analysis shows that, while risk aversion causes low investment elasticity and hence reduces the total benefit of capital account liberalization for society over time, it nevertheless tends to increase the benefit enjoyed by current generations and hence drive consumption booms. We show that the proportion of capital inflows used for financing consumption is negatively correlated with investment elasticity. We show that a positive yet uncertain future productivity shock is likely to cause consumption booms because of sluggish investment reactions. Our analysis shows that, the greater the expected future productivity is; or the greater the uncertainty is; the stronger the consumption booms will be. (JEL F21 F32 F41 F43)open capital account; wealth effect; consumption boom; investment elasticity

Tourism's Forward and Backward Linkages

This paper proposes “linkage analysis” as a complement to the traditional “tourism impact analysis” to examine tourism’s economic imprints on a destination’s economy. Although related, the two methods are not the same. The starting point of tourism “impact analysis” is “final demand”; impact analysis measures the direct and indirect impacts of tourist spending on the local economy. By contrast, the starting point of “linkage analysis” is the tourism sector; the analysis examines the strengths of the inter-sectoral forward (FL) and backward (BL) relationships between the tourism sector and the non-tourism industries in the rest of the economy. The FL measures the relative importance of the tourism sector as supplier to the other (non-tourism) industries in the economy whereas the BL measures its relative importance as demander. Directly applying conventional linkage analysis to tourism is not straightforward because tourism is not a defined industry. Thus we develop a methodology to calculate tourism’s forward and backward linkages using information from national, regional, or local input-output tables and demonstrate its utility by applying it to Hawaii.

Impacts of Institutional Arrangements on the Profitability and Profit Efficiency of Organic Rice in Thailand

This study assesses the performance of organic small farmers in Thailand under different institutional arrangements and over time. It was found that while organic farmers were significantly more profitable and profit efficient than conventional farmers, the level of profitability varies under different intermediaries. Farmers organized by NGOs on degraded marginal land showed a pattern of increasing profit and profit efficiency over time, after the transition period. On the other hand, farmers organized by a private sector firm on newly opened forest land exhibited a pattern of stable profit and increasing yields over time. The results showed that farmers under non-profit NGOs received the highest level of profit, followed by farmers under the private firm and finally the for-profit NGO. These findings suggest that while organic agriculture can increase the economic performance of small farmers, institutional arrangement is an important factor in realizing the broader benefits of organic agriculture for poverty reduction

Economic Impacts of Shutting Down Hawaii’s Sugar Industry

The purpose of this publication is to assess the economic repercussions of a complete shutdown of Hawaii’s sugarcane cultivation and processing industry. The sugar industry has gone through another dramatic transformation in the past decade, following previous decades of decline. The possibility of a complete demise of Hawaii’s sugar industry has been a major concern in the state

Profitability of Organic Agriculture in a Transition Economy: the Case of Organic Contract Rice Farming in Lao PDR

Poverty is prevalent among smallholder farmers in transition economies where market failures prevail and where the capacity of the public sector is limited. This study assesses the potential of organic contract farming as a private sector institutional arrangement to reduce rural poverty. Contract farming appears to facilitate market linkages for smallholder farmers to produce organic rice for export markets while providing necessary technical supports. Using an endogenous switching regression model to assess the profitability of organic contract farms and conventional farms in Lao PDR, it was found that organic farmers under contract earn significantly higher profit than conventional farms. The findings also showed that organic contract farming tends to provide the greatest increase in income to farmers with below average performance. These findings suggest that contract farming can be an effective mechanism to facilitate the development of organic agriculture and an effective tool to improve the profitability and raise incomes of small farmers, thereby reducing poverty in rural areas with limited market development

Rice contract farming in Cambodia: Empowering farmers to move beyond the contract toward independence

From the farmer's perspective, contract farming provides stable market access, credits, extension services, infrastructure and other benefits, but has drawbacks such as limiting the flexibility of farming and marketing. Based on a survey of rice contract farming for export in Cambodia, this paper uses simple mean comparison, propensity score matching comparison, and switching regression comparison to assess the impact of contract farming on farmers' performance. Farmers with larger family sizes, younger and more educated household heads, less asset value, and those with farm locations closer to the highway are more likely to join the contract. The results provide evidence that contract farming of non-certified organic rice has a positive impact on farmers' profitability. They also suggest that progressive farmers living near the highway tend to join the contract first, but leave contract farming early, while farmers in more remote areas remain under contract. It appears that the sample former-contract farmers' profitability did not decline after leaving contract farming as they further intensified their farming systems to produce for the less chemical conscious market. Thus, contract farming may be involved in the process of helping subsistence farmers develop into independent commercial farmers. This study provides empirical evidence that contract farming of safe food in remote areas where land is less contaminated could be an effective private-sector led poverty reduction strategy. However, since contract farming in this case is not inclusive of the poorest farmers, public sector support is required to lower the transaction costs of working with them

Accounting for Employee Stock Options: An Economics Perspective

Instead of relying on accounting principles and illustrative accounting examples, this paper examines the rationale for ESO expensing from an economics perspective and has the following findings. In principle, while ESO expensing is justified under ESOs’ expense-postponing function, it is not under the employee-stimulating function. In practice, ESOs’ risk-sharing function poses a fundamental difficulty for option price models to estimate ESOs’ fair value; and mandatory ESO expensing would deter the use of ESO granting as an employee incentive mechanism. We suggest using the reservation wage as an alternative expensing method to achieve the goal of ESO expensing without its disturbance on ESO granting.options; employee stock options; ESO expensing; accounting