Comparative Study on Static Term Structure of Interest Rates

The term structure of interest rates has been a hot topic in the financial sector. With the accelerating process of interest rate liberalization, to seek a representative benchmark interest rate of the market is basis for the fixed income products pricing. This paper using Nelson-Siegel-Svensson model and polynomial spline model fitting analysis is carried out on bond transaction data of Shanghai stock exchange in China, through analysis and comparison of the two models, to choose the appropriate method to fit the term structure of interest rates

Banks’ option to lend, interest rate sensitivity, and credit availability

Interest rate risk is a major concern for banks because of the nominal nature of their assets and the asset-liability maturity mismatch. This paper proposes a new way to derive a bank’s interest rate sensitivity, by examining separately the effects of interest rate changes on existing loans (loans-in-place) and potential loans (loans-in-process). A potential loan is shown to be equivalent to an American option to lend, and is valued using option theory. An increase in interest rates usually has a negative effect on existing loans. However, if both deposit and lending rates rise by the same amount, the value of a potential loan generally increases. Hence a bank’s lending slack (ratio of loans-in-process to loans-in-place) will determine its overall interest rate risk. Empirical evidence indicates that low-slack banks indeed have significantly more interest rate risk than high-slack banks. The model also makes predictions regarding the effect of deposit and lending rate parameters on bank credit availability. Empirical tests with quarterly data are generally supportive of these predictions.interest rate risk; option to lend; bank’s lending capacity; maturity intermediation

The Paradox of Risk Balancing: Do Risk-reducing Policies Lead to More Risk for Farmers?

The study presents stochastic optimal control/dynamic programming (SOC/DP) to derive the optimal debt level and consumption in farm models concerning two sources of uncertainty: the return on assets and interest rate. The SOC/DP analytic framework is used to analyze the impacts of risk-reducing farm policies on farm’s financial and risk adjustments. The results show the violations of the risk-balancing concept, which theorizes that risk-reducing farm policies may lead to increases in financial leverage, total risk, and the expected returns. Also, this study examines the extent to which the estimates of the optimal debt level are biased when interest rate risk is ignored.Stochastic Optimal Control/Dynamic Programming, Financial Leverage, Uncertainty, Risk Balancing, Agricultural and Food Policy, Risk and Uncertainty,

Comparative Advantage and Long-Run Growth

We construct a dynamic, two-country model of trade and growth in which endogenous technological progress results from the profit-maximizing behavior of entrepreneurs. We study the role that the external trading environment and that trade and industrial policies play in the determination of long-run growth rates. We find that cross-country differences in efficiency at R&D versus manufacturing (i.e. comparative advantage) bear importantly on the growth effects of economic structure and commercial policies. Our analysis allows for both natural and acquired comparative advantage, and we discuss the primitive determinants of the latter.

Structural Change and Patterns of International Trade

This paper focuses on economists' understanding of the basic determinants of trade patterns and, in particular, on the manner in which these underlying factors change over time and are affected by various policies. A brief survey contrasts the determinants of the structure of trade emphasized by the Ricardian, Heckscher-Ohlin, and imperfect competition models and discusses how well the predictions of these various theories are supported by empirical evidence. The main conclusion of the survey is that trade economists have been reasonably successful in explaining the structure of trade at any point in time but much less successful in understanding how the determinants of the patterns of trade change over time. This inability to explain how the basic determinants of the structure of trade change over time can lead both to poor predictions and bad policy advice. Given the increased interest in long-term shifts in trading structures, it is argued that trade economists should enlarge their analytical framework by endogenizing to a greater extent the basic economic factors determining these shifts. They must also recognize the endogenous nature of trade policies in their models, if they are to carry out their predictive and evaluative roles in the best possible manner.

Welfare effects of intellectual property in a north-south model of endogenous growth with comparative advantage

This paper develops a model for analyzing the costs and benefits of intellectual property enforcement in LDCs. The North is more productive than the South and is the only source of innovator. There are two types of goods, and each bloc has a comparative advantage in producing a specific type of good. If comparative advantage is strong enough, even under piracy there are goods that the South will not produce. Piracy will then lead to a reallocation of innovative activity in favor of these goods. That may harm consumers (including consumers in the South) to the extent that these goods have smaller dynamic learning externalities than the other goods, and that their share in consumption is small. Thus, whether or not piracy is in the interest of the South depends on how important are the goods for which it has a comparative advantage to its consumers, and what the growth potential of these goods is. While, all else equal, the North tends to lose more (or gain less) from piracy than the South, because monopoly profits eventually accrue to the North, the South may lose more than the North if there is a strong enough home bias in favor of the goods for which it has a comparative advantage

The Composition of Government Expenditure in an Overlapping Generations Model

This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) in an overlapping generations model, in which individuals live for two ‘periods’ and expenditure is financed on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of tax rates and expenditure levels. The choice of expenditure composition can thus be made conditional on acceptance of the social contract. Two decision mechanisms regarding the choice of government expenditure are considered. The first is positive and involves majority voting and the second is normative and involves maximizing a social welfare function. In each case the ratio of the transfer payment to public goods expenditure depends, among other things, on the ratio of median to mean income. A reduction in the skewness of the income distribution is associated with a reduction in this ratio, at a decreasing rate.Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions

The Impact of Thin-Capitalization Rules on Multinationals’ Financing and Investment Decisions

This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.corporate income tax, multinationals, leverage, Thin-Capitalization rules, firm-level data

FARM FINANCIAL STRUCTURE DECISIONS UNDER DIFFERENT INTERTEMPORAL RISK BEHAVIORAL CONSTRUCTS

An alternative unconstrained expected-utility maximization model of farm debt is developed using the location-scale parameter condition that incorporates the empirically validated hypotheses of decreasing absolute and constant relative risk aversion. Simulation-optimization results based on the old and new model versions provide interesting implications for various levels of risk aversion and initial equity investments.Risk and Uncertainty,