The Term Structure of Interest Rates, Real Activity and Inflation

This paper examines, both theoretically and empirically, the relationship between the slope of the yield curve and future changes in real activity and inflation. It argues that the existence of sticky prices allows current and expected future monetary shocks to affect the slope of both the nominal and the real yield curves. Changes in real money balances brought about by monetary policy cause a strong liquidity effect at the short end of the yield curve. This results in changes in real output in the short/medium term which eventually get translated into changes in prices. The empirical results show that the spread between the 10 year Treasury bond and the 180 day bank bill predict the rate of change, over the subsequent one to two years, of a number of measures of real activity. Over both longer and shorter forecast horizons the spread has little predictive power. On the inflation front, the 10 year-180 day yield spread provides significant information about changes in inflation over the medium term (that is between one year and two and three years). Yield spreads between shorter dated securities are found to contain little information concerning future changes in inflation. This supports the view that at the shorter end of the yield curve changes in nominal rates often reflect changes in real rates.

Resource Convergence and Intra-industry Trade

Models of international trade based on desire for variety, increasing returns and monopolistic competition predict that the more similar are nations’ resource endowments the more important should be intra-industry trade. This prediction is tested using resource data for 22 OECD nations over the period 1965 to 1985. The results provide strong support for the theory. In the time domain they suggest that resource convergence has been responsible for the growth in the importance of intra-industry trade and in cross sections they suggest that the more similar are two countries’ resource endowments the more extensive is bilateral intra-industry trade.

The Impact of Financial Intermediaries on Resource Allocation and Economic Growth

This paper examines the links between economic growth and the nature of a country’s financial system. It is argued that long-run growth has its roots in resource accumulation, and in particular in knowledge accumulation. The financial system plays an important role in influencing both the amount and type of resource accumulation which actually takes place. In particular, financial market regulation distorts the incentives of financial intermediaries which, in turn, distorts the type of resource accumulation that takes place. It is also argued that the size of the gains derived from the development of the financial sector rests heavily on the ability of intermediaries to effectively screen and monitor lending proposals. Finally, the paper explores some of the implications of Australia’s financial market liberalisation.

Loan Rate Stickiness: Theory and Evidence

Financial deregulation in the 1980s saw the lifting of regulations on interest rates charged by banks. In general, lending rates now respond more quickly to changes in banks’ cost of funds than they did in the regulated period. However, lending rates still do not always move one for one with changes in banks’ marginal cost of raising funds. This paper canvasses four theoretical explanations, other than collusive behaviour, for loan rate stickiness. These theories are based on equilibrium credit rationing, switching costs, implicit risk sharing and consumer irrationality. Using regression analysis, we also examine the degree of stickiness of Australian interest rates on secured and unsecured personal loans, credit cards, small and large business overdrafts, and housing loans. We find significant differences in the degree of interest rate stickiness among the different rates, even after allowing for lags in adjustment. The rate on credit cards is found to be the most sticky, followed by personal loan rates, the housing loan rate and the small business overdraft rate. The large business overdraft rate is found to adjust one for one with banks’ marginal cost of funds. We briefly examine the behaviour of selected U.S., U.K. and Canadian interest rates. The general order and magnitude of interest rate stickiness is similar to that found for Australia. Although it is not possible to empirically discriminate between the different theories of loan rate stickiness, we interpret the results as providing strong evidence for the switching cost explanation. In addition, implicit risk sharing probably plays an important role in the stickiness of the housing loan rate.

Australia's Prosperous 2000s: Housing and the Mining Boom

The 2000s was a particularly eventful decade for both the international and Australian economies. There were: two recessions in many countries; the largest international financial crisis since the Great Depression; the ongoing rapid development of Asia; asset booms and busts; and, Australia experienced the longest sustained increase in commodity prices and the terms of trade in the nation's history. This paper provides an overview of the Australian economy's performance in the decade. Several key topics are elaborated on, including the development of Asia and implications for Australia, policy frameworks, and the opportunities and challenges facing the Australian economy, with a particular focus on the expansion of household balance sheets and the rapid growth in the mining economy.Australian macroeconomy; economic performance; household balance sheets; terms of trade; monetary policy; fiscal policy

The Evolution of Corporate Financial Structure: 1973–1990

Increases in corporate debt in a variety of countries over the past decade have renewed interest in the relationship between leverage and the macro-economy. In general, the theoretical work on these links has outpaced the empirical research. This paper is an initial attempt to examine changes in corporate financial structure in Australia over the past two decades. It explores the evolution of debt-asset ratios, interest cover ratios, dividend pay-out ratios and the ratio of trade credit to total debt, for a sample of 110 Australian firms, over the years 1973 to 1990. It examines changes in the across firm distribution of the ratios as well as changes in the average ratios. It also examines the relationship between the cyclicality of industry output and earnings on the one hand and the evolution of financial structure on the other.

Unravelling upbuilding pedogenesis in tephra and loess sequences in New Zealand using tephrochronology

The genesis of soils developed in either tephra or loess on stable sites differs markedly from that of soils developed on rock because classical topdown processes operate in conjuction with geological processes whereby material is added to the land surface so that the soils form by upbuilding pedogenesis. Understanding the genesis of such soils (typically Andisols and Alfisols, respectively) often requires a stratigraphic approach combined with an appreciation of buried soil horizons and polygenesis. In New Zealand, calendrically-dated tephras provide an advantage for assessing rates of upbuilding through chronostratigraphy. Many Andisol profiles form by upbuilding pedogenesis as younger tephra materials are deposited on top of older ones. The resultant profile character reflects interplay between the rate at which tephras are added to the land surface and topdown processes that produce andic materials and horizons. In loess terrains, upbuilding pedogenesis since c. 25,000 years ago is associated with maximum rates of loess accumulation c. 3 10 mm per century, sufficiently slow for soil-forming processes to continue to operate as the land surface gradually rises. Thus, Alfisol subsoil features are only weakly developed and Bw or B(x) horizons typically are formed. In contrast, topdown pedogenesis is associated with minimal or zero loess accumulation, the land surface elevation remains essentially constant, and subsoil features become more strongly developed and Bg, Bt, or Bx horizons typically are formed

Why social scientists should engage with natural scientists

It has become part of the mantra of contemporary science policy that the resolution of besetting problems calls for the active engagement of a wide range of sciences. The paper reviews some of the key challenges for those striving for a more impactful social science by engaging strategically with natural scientists. It argues that effective engagement depends upon overcoming basic assumptions that have structured past interactions: particularly, the casting of social science in an end-of-pipe role in relation to scientific and technological developments. These structurings arise from epistemological assumptions about the underlying permanence of the natural world and the role of science in uncovering its fundamental order and properties. While the impermanence of the social world has always put the social sciences on shakier foundations, twenty-first century concerns about the instability of the natural world pose different epistemological assumptions that summon a more equal, immediate and intense interaction between field and intervention oriented social and natural scientists. The paper examines a major research programme that has exemplified these alternative epistemological assumptions. Drawing on a survey of researchers and other sources it seeks to draw out the lessons for social/natural science cross-disciplinary engagement

Internal ratings, the business cycle, and capital requirements: some evidence from an emerging market economy

The concept of risk-based capital requirements enjoys widespread support. Effective implementation, however, requires that risk be measured accurately both across borrowers and across time. Under the New Capital Accord, the cornerstone of this risk measurement process is the rating of the borrower. In this paper we use the ratings assigned by individual Mexican banks to examine how measured credit risk for these banks has changed since the financial crisis in the mid 1990s. We then examine the implications of these changes for regulatory capital under the proposed changes to the Basel Capital Accord. We find that measured risk increased after the crisis and then fell as the recovery took hold. In turn, despite the limitations of the data, we find that the proposed internal ratings approach would have generated large swings in regulatory capital requirements over the second half of the 1990s, with required capital increasing significantly in the aftermath of the crisis, and then falling as the economy recovered. Looking forward, if movements in actual bank capital were to show this same cyclical variation, then business cycle fluctuations may be amplified by developments in the banking industry.Risk management ; Banks and banking

Current Issues of E.U. Competition Law: The New Competition Enforcement Regime, The Symposium on European Competition Law

On May 1, 2004, two major reforms of the EC competition enforcement regime are expected to enter into force: the modernization of antitrust enforcement, based on Regulation 1/2003,1 and the review of the European merger control system. In this contribution, I will outline the main principles underlying these reforms. In Part I, I will focus on the instruments the Commission intends to adopt early in 2004 in order to guarantee the efficient functioning of Regulation 1/2003, the so-called modernization package. Subsequently, in Part II, I will present the guiding principles of the future merger control in Europe, as they result from the modifications to the current merger control regulation that the Council agreed upon in November 2003. In addition to these two major reforms, the Commission also is reviewing the Technology Transfer Block Exemption Regulation. In Part III, I will describe the main features of that draft regulation that is also supposed to enter into force on May 1, 2004