Social welfare effects of annuitization in small open economies

This paper examines the dynamic impact of government purchases in a simple general equilibrium model with both durable and non-durable consumer goods as well as productive capital. The model generates perhaps surprising results. In particular, increases in government purchases are shown to cause reductions in real interest rates. The model thus provides a possible explanation for the observed behavior of real interest rates around wars.

Comment

Tax-Benefit Ratios and Rates of Return under OASI: 1974 Retirees and Entrants

1 The Global Interdependence of National Financial Markets.- 1.1 Many signs of increasing market integration.- 1.2 Previous integration studies demonstrate difficulties in measurement and interpretation.- 1.3 The aim is to measure the level of financial integration.- 1.4 Different forms of financial integration.- 1.5 Interest rate differential or capital flow as dependent variable?.- 1.6 What types of interest rate are relevant to an analysis of financial integration?.- 1.7 What interest rates are the leaders, as the influence of the US rate declines?.- 1.8 Why is the level of financial integration interesting in a macro-perspective?.- 1.9 What is the significance of the level of financial integration in a micro or corporate perspective?.- 1.10 Is the interest rate in a small open economy determined on foreign markets?.- 1.11 Growing uncertainty raises demands for higher risk premiums.- 1.12 The internationalization of trade.- 1.13 The internationalization of financing.- 1.14 The internationalization of production.- 1.15 Design of the analysis.- 1.16 Plan of the book.- 2 What Is Financial Integration, and Can It Be Measured?.- 2.1 Introduction.- 2.2 Are interest rates determined at home or abroad?.- 2.3 Capital flows and the links between markets.- 2.4 Exchange rate determinants and market expectations.- 2.5 Transaction costs and different types of risk premium.- 2.6 The link between risk and return.- 2.7 Financial integration and monetary autonomy - some measures and analytical approaches.- 2.8 Applied definition and the choice of model.- 2.9 Disintegration and monetary autonomy by way of controls.- 2.10 Problems of measurement and standardization.- 2.11 Collecting primary data.- 2.12 Concluding comment on the methodological problems.- 2.1 Fisher (Domestic) Effect.- 2.2 Variability in interest rates after tax.- 2.3 The International Fisher Effect.- 2.4 Model for determining the exchange rate.- 2.5 Example of a portfolio approach.- 2.6 The interest rate parity theory.- 2.7 Swedish industrial groups with a turnover exceeding SEK 1 billion in 1981.- 3 Results and Findings from Earlier Studies of Financial Integration.- 3.1 Introduction.- 3.2 Studies of the interest-sensitivity of capital flows.- 3.3 Equal expected returns as an indicator of direct financial integration.- 3.4 Observations from the literature - a summary.- 3.1 Adjusting portfolios in an open economy.- 4 Characteristic Features of the Financial Market in a Small Open Economy - the Case of Sweden.- 4.1 Introduction.- 4.2 Actors on the Swedish financial market.- 4.3 Rates of interest and administrative control mechanisms.- 4.4 Swedish exchange controls and their effect on segmentation.- 4.5 The Swedish krona - historical exchange rate patterns and the formation of expectations on the market.- 4.6 Specific measurement problems.- 4.1 Date of abolition of monetary policy regulations, 1978-85.- 4.2 Exchange rate index.- 4.3 Standard deviations in the forward and spot rates.- 4.4 Foreign exchange flows 1974-84.- 4.5 Current account reporting according to SCB.- 5 Fluctuations in Swedish Interest Rates - Historical Patterns.- 5.1 Introduction.- 5.2 Nominal and real Swedish interest rates 1974-84.- 5.3 Correlation between successive quotations of Swedish interest rates.- 5.4 The interest rate pattern and direct financial integration.- 6 Swedish Interest Rate Fluctuations in an International Perspective.- 6.1 Introduction.- 6.2 How Swedish nominal interest rates deviate from foreign interest rates.- 6.3 Deviations of Swedish real interest rates from foreign real interest rates.- 6.4 What does this initial comparison suggest about financial integration?.- 7 Swedish Interest Rate Dependence: A Correlation Analysis.- 7.1 Introduction.- 7.2 Covariation between Swedish and foreign real interest rates.- 7.3 Covariation between the Swedish nominal interest rate and the foreign rate.- 7.4 Covariation between the Swedish interest rate and the forward-covered foreign interest rate.- 7.5 The correlation analysis and direct financial integration.- 8 A Model-Based Analysis of Direct Financial Integration.- 8.1 Introduction.- 8.2 Analysis of deviations from the International Fisher Effect.- 8.3 Analysis of deviations from interest rate parity.- 8.4 The forward rate as an unbiased estimate of the future exchange rate.- 8.5 Presentation of the model.- 8.6 Analysis of the gap between Swedish and foreign discount rates.- 8.7 Analysis of the gap between Swedish and foreign interest rates on treasury discount notes.- 8.8 Analysis of the gap between Swedish and foreign prime rates.- 8.9 Analysis of the gap between the Swedish interest rate on government bonds/government notes and the corresponding foreign rate.- 8.10 Analysis of the gap between Swedish and foreign interest rates on industrial bonds.- 9 Interest Rate Autonomy and the Foreign Dependence of the Swedish Financial Market - A Summary.- Supplement 1 Mean and standard deviation in the international interest rates 1974-84.- Supplement 2 List of variables and abbreviations.

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Using an optimizing model we derive the optimal monetary and exchange rate policy for a small stochastic open economy with imperfect competition and short run price rigidity. The optimal monetary policy has an exact closed-form solution and is obtained using the utility function of the representative home agent as welfare criterion. The optimal policy depends on the source of stochastic disturbances affecting the economy, much as in the literature pioneered by Optimal monetary policy reacts to domestic and foreign disturbances. If the intertemporal elasticity of substitution in consumption is less than one, as is likely to be the case empirically, the optimal exchange rate policy implies a dirty float: interest rate shocks from abroad are met partially by adjusting home interest rates, and partially by allowing the exchange rate to move. This optimal pattern may help rationalize the observed fear of floating.

Monetary policy spillover to small open economies: Is the transmission different under low interest rates?

The purpose of this study is to formulate the monetary model of the economic growth in a small open economy (small open economy) with a free exchange rate system (flexible exchange rate system) and capital mobility is not perfect (imperfect capital mobility), as well as the factors that influence economic growth, exchange rates and interest rates with monetary approach (mathematically and empirically).This study uses a structural analysis approach to vector autoregresion with monthly data Indonesia in 2010-2014. The empirical results reveal that changes in the money supply is a significant negative effect on economic growth 0.1008 Indonesia. Moreover, economic growth is affected by the magnitude of the previous period of economic growth significantly by 0.391825, where the magnitude of the effect is determined by the strength of the exchange rate in response to changes in interest rates Indonesia, the greater the exchange rate response to changes in interest rates, the weakening influence of the period of economic growth prior to economic growth. For a small open economy (small open economy) with a free exchange rate system (flexible exchange rate system), then the value of the rupiah per dollar exchange rate is influenced significantly by the amount of money in circulation (0.063318), the exchange rate value of the last period (0.746), and the interest rate the previous period (0.3424), the interest rate two previous periods (-0.305848).For situations of capital mobility is not perfect, then the variable interest rate is treated as endogenous variables, the empirical results show that the level of BI rate significantly influenced only by the BI rate the previous month (1.4526) and the interest rate of the previous two months (0.524)

A simple portfolio model is used to investigate the effects of personal taxes on real investment incentives in a small open economy with large and small firms. When shares in large firms can be traded internationally and their rate of return is exogenously determined on international equity markets, a tax on the return on riskless bonds will induce a portfolio shift from bonds to shares in large firms. This shift reduces the impact of the bond tax on the required rate of return on shares in domestically owned small firms, provided that returns on shares in small and large firms are positively correlated. The total impact of the bond tax may even change from a negative to a counter-intuitive positive one if the “beta” between the returns on small and large firms is above unity. A personal tax on equity returns does in general have an ambiguous impact on the pre-tax rate of return requirement of domestically owned firms. An exogenous rate of return on large company shares is shown to enhance the possibility for the equity tax to reduce the required pre-tax rate of return in small domestic firms. A sufficient condition for a negative relationship is again that the “beta” between the returns in small and large firms is above unity.

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.

Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.

Trends and cycles in small open economies: making the case for a general equilibrium approach

Trends and Cycles in Small Open Economies: Making the Case for a General Equilibrium Approach

Central Bank Digital Currency with Adjustable Interest Rate in Small Open Economies

Following the sanctions suggested by WTO, the developed nations have been advocating that trade in commodities using child labour in many developing nations is unfair, and be banned. They, therefore, advocate the use of restrictive trade policies by the rest of the world or by the developing countries themselves to restrict the use of child labour in the exporting of their products. Had it not be a fact that the use of child labour is conditioned the economic compulsions of poor parents in developing countries, this position would have been acceptable as fair on ethical and normative grounds. In the present chapter, we have considered a competitive two-sector general equilibrium model of a small open less-developed economy, which exports child labour-intensive products to examine the effectiveness of two kinds of trade restrictive policies on the incidence of child labour: (i) in one case, rest of the world imposes trade restrictions on the exported product of the small open economy, which is produced using child labour and (ii) in the second other case, the policy of protectionism in import competing sector has been taken into consideration. In both cases, we have separately investigated the impact on demand for and supply of child labour, as well as on equilibrium level of employment. One interesting result of our work suggests that restrictive trade policy may fail to reduce the perverseness of the incidence of child labour supply. In fact, the first three propositions derived from our model indicate that due to the imposition of trade restriction on the exported product of the small open economy by the rest of the world, (a) capital owners shall gain, while both adult and child workers shall be adversely affected, but (b) the incidence of child labour supply may or may not be perversely affected, when the adult worker’s utility function is assumed to be additive separable in nature and (c) may in fact increase the supply of child labour unambiguously when the adult worker’s utility function is assumed to be Cob–Douglas in nature. This result, thus, challenges the popular view in favour of imposing trade sanctions on the import of those goods from the developed countries which are produced using child labour.