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

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

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

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

Currency Manipulation versus Current Account Manipulation

It is said that a country’s currency peg can become currency manipulation representing protracted government intervention in the foreign exchange market that gives it unfair competitive advantage in international trade yet prevents effective balance of payments in its trade partners. Regarding this widespread fallacy, this paper explains why currency peg is not currency manipulation even when it keeps a country’s currency undervalued. We clarify that 1) government is inherently a major player in the financial market and hence “no protracted intervention” is a meaningless guideline for designating currency manipulation; 2) exchange rate flexibility is neither a sufficient nor a necessary condition for fixing current account imbalance and hence currency peg would not prevent effective current account adjustments; and 3) as far as causing “unfair” trade advantage is concerned, currency peg is less guilty than the attempt to prevent or fix current account imbalance; and obligating a country to adjust its currency to accommodate its trade partners’ current account management would unfairly impair this country’s trade advantage.currency manipulation; current account; exchange rate; RMB controversies

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

Fundamental Paper Wealth and Monetary Policy

This paper articulates three insights regarding asset prices and monetary policy: (1) Asset price appreciation due to monetary expansion, despite its “paper” wealth nature, tends to make current consumers as a whole wealthier; (2) the wealth effect of monetary policy (on consumption) is negatively correlated with Tobin’s q effect (on investment), which positively depends on investment elasticity; and (3) the soundness of asset market performances does not depend on whether they are fundamental or not, but on their compatibility with the AD-AS balance in the long run. These basic insights and their implications reveal some limitations of monetary policy as a stabilization policy, clarify some misperceptions on fundamental asset prices, and provide a rationale for monetary policy to react directly to asset market performances.Fundamental Paper Wealth, Wealth Effect, Bubbles, Monetary Policy

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.

Asset Prices and Monetary Policy: Some Notes

Three issues regarding asset prices and monetary policy are clarified. First, increases in asset prices due to monetary expansion, despite their “paper” wealth nature, tend to make current consumers as a whole wealthier. Second, the weaker (stronger) effect of monetary policy on investment through the Tobin’s q effect is, the stronger (weaker) monetary effect on consumption through the wealth effect. Third, from the perspective of macroeconomic stability, the soundness of asset market performances does not depend on whether they are fundamental or not, but on their compatibility with the AD-AS balance in the long run.asset prices; monetary policy; paper wealth; wealth effect; Tobin's q; bubbles

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