Working Papers
January 1, 0001
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1993
February 1, 1993
Asset Pricing in the International Economy
Description: This paper presents a statistical and economic interpretation of the low and often economically implausible risk aversion estimates obtained for fixed income assets throughout the finance literature. For a statistical interpretation, Monte Carlo simulations are used to demonstrate that specification errors introduce a serious downward bias in parameter estimates derived from the standard asset pricing model. For an economic interpretation, an international version of the asset pricing model is presented. The model suggests that by reducing the effect of country specific disturbances, an international measure of consumption growth yields more accurate risk aversion estimates than a national measure. The results of asset pricing tests suggest that risk aversion estimates derived from models constructed for the international measures are economically plausible and close to each other across eight industrialized economies. These results are robust for several asset returns.
February 1, 1993
A Comparative Analysis of the Structure of Tax Systems in Industrial Countries
Description: A methodology for computing effective average tax rates on factor incomes and consumption using OECD data from national accounts and revenue statistics is described and applied to construct time series of tax rates for the group of seven largest industrialized countries. These tax rates are compared with estimates of effective marginal tax rates obtained in other studies. The stylized facts that distinguish tax systems across countries are documented, and the co-movements between the tax rates and savings, investment, net exports, unemployment, and hours worked are also examined. The results of this analysis illustrate some of the potential implications of tax policies currently under consideration and suggest that the proposed tax rates are useful approximations to those faced by representative agents in dynamic macroeconomic models.
February 1, 1993
Auctions: Theory and Possible Applications to Economies in Transition
Description: A major effort is taking place in many parts of the world to establish market-oriented institutions, a development that is particularly evident in the context of the transforming economies in Eastern Europe and the republics of the former Soviet Union. Against this background, this paper assesses various auction techniques to price and allocate government securities, refinance credit, foreign exchange, and state assets in the context of privatization programs. Before making our recommendations on the appropriate format for auctioning these items, the paper explains basic auction formats and assesses the advantages and disadvantages of these formats drawing on the existing, and mostly theoretical, literature.
Notes: Assesses various auction techniques to price and allocate government securities, refinance credit, foreign exchange, and state assets in the context of privatization programs. Also published in Staff Papers, Vol. 40, No. 3, September 1993.
February 1, 1993
Capital and Trade As Engines of Growth in France: An Application of Johansen's Cointegration Methodology
Description: An aggregate production function is estimated with recent cointegrating techniques that are particularly appropriate for estimating long-run relationships. The empirical results suggest that the growth of output in France has been spurred by increased trade integration within the European Community and by the accumulation not only of business sector capital—the only measure of capital included in most empirical studies—but also by the accumulation of government infrastructure capital, residential capital, and R&D capital. Calculations of potential output indicate that trade and capital—broadly defined—account for all of the growth in the French economy during the last two decades.
Notes: Also published in Staff Papers, Vol. 40, No. 3, September 1993.
February 1, 1993
Portfolio Performance of the SDR and Reserve Currencies: Tests Using the ArCH Methodology
Description: In managing their foreign exchange exposure, international investors, including central banks, often compare actual portfolios with hypothetical portfolios that have been calculated using certain assumptions regarding the statistical properties of interest rates and exchange rates. One of these assumptions is that the variability of returns on various currency assets is time invariant. This assumption is tested in this paper using autoregressive conditional heteroskedastic (ARCH) models. Using weekly aata for the period February 1982 to December 1991 for major reserve currencies, including the SDR, we find evidence that the variances of returns do vary over time (i.e., they do not exhibit stationarity) and that ARCH models that specify changing variances are superior to models that assume constant variance. By incorrectly assuming constant variability of returns, currency-asset allocations are not necessarily optimal and the measures of riskiness of a fixed-income portfolio may not be accurate. Furthermore, the error introduced by incorrectly assuming stationarity is smaller with the SDR than with any other national currency in the portfolio to be managed.
Notes: Also published in Staff Papers, Vol. 40, No. 3, September 1993.
February 1, 1993
Poverty, Demographic Characteristics, and Public Policy in Cis Countries
Description: The demographic characteristics of different regions in the former Soviet Union influence the nature of poverty in the newly successor independent states of the FSU. Despite a common policy inheritance, major adjustments are needed in the major social protection instruments to reflect differences in demographics along with a changing resource base.
February 1, 1993
Alternative Social Security Systems in CIS Countries
Description: In the USSR in 1990, social security reforms led to the imposition of a uniform system of benefits in a large and demographically diverse country. This required inter-regional transfers, which are now no longer feasible with the demise of the USSR. Relatively high contribution rates also pose a problem for a nascent commercialized sector. The paper argues that benefit levels in some former Soviet Union countries are now unsustainable. The price shock associated with the “transition” to a market economy should lead to a consideration of a “mix” of policies, including a basic benefit in kind. While funded systems may eventually reduce contribution rates, there are implementation difficulties in the medium term.
February 1, 1993
Resource Allocation During the Transition to a Market Economy: Policy Implications of Supply Bottlenecks and Adjustment Costs
Description: The paper discusses the case against a laissez faire approach to resource allocation and develops a model of supply bottlenecks. It argues that: (1) once budget constraints are hardened and credit markets begin to function appropriately, externalities associated with production bottlenecks and adjustment costs--other considerations aside--provide a case for subsidizing the costs of critical inputs for the state sector but not the new private sector; (2) the optimal subsidy declines as the private sector grows; and (3) the subsidy should be “financed” by taxing wage income in the state sector, which will strengthen incentives for workers to move.
February 1, 1993
Taxes and the Price Level: A Further Examination of the PPP Hypothesis
Description: The effects of taxation on the general price level have traditionally been regarded as reflecting monetary policy, rather than fiscal factors. This view abstracted from the possible endogeneity of monetary expansion with respect to tax hikes, and from the effects which taxation may have on the reserve price of entrepreneurial labor. An analysis of Purchasing Power Parity data for 51 countries from stage IV of the ICP project supports the hypothesis that domestic indirect taxes tend to raise the general price level. In contrast to the accepted view, other prices do not seem to decline to offset the effect of such taxes on the price of tradables. The paper also presents some new evidence on the other factors which cause national price levels to diverge from PPP.