Domestic Assets Research Articles

The role of household debt and delinquency decisions in consumption-based asset pricing

I incorporate household debt and delinquency decisions into a standard model of lifecycle consumption-saving-investment. I also impose a punishment to the delinquent behavior by assuming that the percentage of endowment available is a linear function of the default decision. Theoretically such additional investor decisions are playing a relevant role in terms of completing markets. In practice, it enables me to derive an extended system of Euler equations which does not alter consumption-based fundamental asset pricing equation. It imposes the pricing kernel to account jointly for two additional first-order conditions. I perform empirical exercises aiming to price equity premium in United States from 1987:1 to 2018:1. I find significant elasticity of intertemporal substitution in consumption of the representative agent ranging from 0.24 to 0.55 and risk aversion from 1.82 to 3.51. This approach is also useful to account for the cross-section behavior of domestic assets. I can also use this framework to draw bounds for the household decisions on loan and delinquency and to propose a new rule of thumb relating preferences parameters and credit variables.

Savings Externalities and Wealth Inequality

Incomplete markets models imply heterogeneous household savings behaviour which in turn generates pecuniary externalities via the interest rate. Conditional on differences in the processes determining household earnings for distinct groups in the population, these savings externalities may contribute to inequality. Working with an open economy heterogenous agent model, where the interest rate only partially responds to domestic asset supply, we find that differences in the earnings processes of British households with university and non-university educated heads entail savings externalities that increase wealth inequality between the groups and within the group of the non-university educated households. We further find that while the inefficiency effects of these externalities are quantitatively small, the distributional effects are sizeable.

Examining the influence of moral suasion on sovereign debt default risk

In this paper, we verify whether moral suasion will reduce sovereign debt default risk. We specify the effect of portfolio home bias toward domestic assets on sovereign debt default by using the dynamic panel data model, which can be used to control for common global factors and country factors with fundamentals. In contrast to other studies, we use the Merton model (contingent claims analysis) to calculate the sovereign default risk because this constructed-indicator can reflect variations in credit risk and the market value of the balance sheet of a country. Our empirical results point out that periphery countries (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) indeed reduce sovereign debt default risk via portfolio home bias toward domestic equity and bonds. Core countries tend to reduce sovereign debt default risk via home sovereign bond holdings. However, in the aftermath of sovereign debt default, moral suasion will increase sovereign debt default risk in periphery countries.

Intermediary Leverage and Currency Risk Premium

I study how the cross-country intermediary heterogeneity drives currency risks and returns. I build a model in which intermediaries lever up and hold interest-free cash for liquidity. Liquidity is cheap in low-interest-rate countries, and intermediaries take on high leverage. Hence, intermediaries’ wealth declines sharply following a negative shock. Portfolio rebalancing toward domestic assets makes low-interest-rate currencies appreciate in bad times and require low returns. I validate the model implied relations among interest rate, bank leverage, portfolio rebalancing, exchange rate changes, and currency risk premia in the data.

HOME BIAS: EVIDENCE FROM THE STOCK EXCHANGE

This paper deals with issues connected to the home bias, which is a tendency of investors to keep more domestic assets versus foreign ones. We use annual data on the value of share trading of 68 stock exchanges in 68 countries for the period of 2003-2015 to find out if home bias exists given domestic and foreign shares are traded under the same regulatory framework, with the same transaction costs and rules for information availability applied; and if it does, then what factors are responsible for it. We find that the home bias increases in periods of crisis and becomes lower in periods of relative stability. In addition, home bias tends to be smaller in countries with better control of corruption and that are more open to investments. A Hausman-Taylor estimation confirms this result and suggests that countries with better institutional environments tend to have smaller home bias. Moreover, countries that are more open to investments have more foreign companies listed on their stock exchanges.

Step away from the zero lower bound: Small open economies in a world of secular stagnation

We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape has a beggar-thy-self effect, that may end up lowering welfare while eliminating underemployment. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation.

Banks and liquidity crises in emerging market economies

This paper presents and analyzes a simple banking model in which banks have access to international capital markets and domestic asset markets. The model generates two types of equilibria: a no-default equilibrium and a mixed equilibrium. In the no-default equilibrium, all banks are symmetric and always solvent, while in the mixed equilibrium, some banks can be internationally illiquid and default simultaneously. The latter equilibrium captures the basic features of banking crises after financial liberalization in emerging market economies. In this case, a large capital inflow leads to high asset price volatility and magnifies a banking crisis.

Money Supply Determinants in Nepal: A Macro Analysis

<p>This paper analyzes the major money supply determinants in Nepal in the past 10 years from FY 2004/05 - FY 20014/15. In this study monetary base is determined by two explanatory variables (i.e. NFA and NDC) and are called the 'proximate' determinants of the base money. Among the explanatory variables, the net foreign asset (NFA) is found as better determinant than net domestic assets (NDA) in Nepalese economy. For the analysis of determinants of money multiplier (MM), the three explanatory variables i.e., reserve to total deposits ratio (r), time deposits to demand deposits ratio (t) and currency to demand deposits ratio (c) have been used. The model applied in this study shows that explanatory variable of time deposits to demand deposits ratio is the best determinant of money multiplier. The reserve money (RM) is analyzed as the best determinant of money supply, net foreign assets (NFA) is the major determinant of reserve money and time deposits to demand deposits ratio is the significant determinant of money multiplier.</p><p> <strong><em>Economic Literature</em></strong><em>, </em>Vol. XIII August 2016, page 55-60</p>

Testing the stability of money demand function in Lesotho

This paper adopts the autoregressive distributed lag (ARDL) bounds testing and error correction model (ECM) approach to co-integration to test the stability of demand for real money balances (M2) in Lesotho from 1980 to 2015. The results provide strong evidence for the presence of a stable long run relationship among M2, real gross domestic product (GDP), consumer price index (CPI), real interest rate spread and real exchange rate. The empirical evidence shows that in the long run, real GDP and real exchange rate are positively related to demand for real broad money balances while CPI and real interest rate spread negatively affect the demand for real broad money balances in Lesotho. The short run findings also show that real GDP and the inflation (captured by CPI) positively and negatively affect the demand for real broad money balances in Lesotho, respectively. The income elasticity of real money demand is greater than unity in the long run while it is close to unity in the short run. The implication could be a heightened demand for foreign interest earning assets in the long run due to a lack of suitable alternative domestic financial assets. This necessitates government action to promote an increase in the availability of alternative domestic assets.

Rebalancing in China: A Taxation Approach

The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment and maintain a high level of welfare. To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for State-Owned Enterprises (SOEs) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (public and private). In this model, firms' credit cost is a key channel because it impacts both firms' investment and household consumption (through returns on savings). These consumption and investment reforms bring welfare benefits to households, and the results are close to direct welfare maximization. In this framework, the rebalancing of the domestic demand does not require the readjustment of the external financial position because the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption.

Cross-Border Asset Pledgeability for Enhanced Financial Stability

Even with the sizable Foreign Exchange (FX) holdings and good credit ratings of its top assets, Asia remains vulnerable to various shocks. This paper highlights the limited crossborder asset pledgeability as a significant factor for the lingering vulnerability in Asia. The dichotomy in asset holdings between pledgeable FX and non-pledgeable domestic assets in major economies in Asia has been the source of increasing stabilization costs as well as weakened market momentum in the region. Specifically, the peculiar feature of asset holdings in Asia reflects seriously deficient cross-border asset pledgeability that is left unaddressed. Asset pledgeability contributes toward financial stability via three channels: 1) capital market development by recognizing the role of collateral, 2) increased shock absorption capacity via collateral management, 3) and the newly activated safe asset provision. Therefore, it is crucial to go beyond the usual market development strategy and expand the overall asset pledgeability in the region that has remained unduly depressed.

Determinants of Learning Achievements: Empirical Analysis of Seven Schools in Cambodian Primary School

This paper examines the determinants of learning achievements in Cambodian primary schools. Both student factors and family factors are evaluated. The student factors consist of student age, enrollment age, frequency of homework completion, and number of questions to ask in class. The family factors include the father’s educational background, domestic assets, and the student’s commute time to school. The school factors are confirmed to influence the learning achievements, but the results are unclear as to what school factors have a concrete influence.

International Diversification for Brazilian Investors through Domestic Assets

We develop this study in order to analyze the benefits of international diversification through domestic assets for Brazilian investors. The sample contains three types of assets: the Brazilian Depositary Receipts (BDRs), the Brazilian investment funds that have part of their portfolios comprised of investments in foreign companies and stocks listed in the Brazilian capital market. Additionally, portfolios with ten different combinations of these assets were elaborated. We analyzed the data using correlation coefficients, risk-adjusted return and volatility measures. The results indicated that portfolios mainly comprised of BDRs presented the lowest correlation with the Brazilian market index, as well as the highest Sharpe ratio. The portfolios with the lowest volatility of returns were those majoritarily comprised of investment funds. This study contributes to the literature by analyzing some possible benefits of international diversification from the perspective of investors in an emerging country, since studies on this subject usually involve domestic investors from developed markets, especially from the United States.

On Fiscal Austerity and National Debt: A Retrospective Approach to the Public Finances of Greece

The growth considerations of fiscal policy reflecting budgetary imbalances, public debt evolution and methods of government finance, as well as the policy ensuing dynamic effects of the transition path toward equilibrium positions continue to be the dominant issues in international macroeconomics. Of paramount importance in both theoretical advances and empirical strategies is the crucial issue of fiscal austerity, and particularly its self-defeating attributes, as a means to correcting budget deficits while maintaining the sustainability of national debt, in conjunction to the worldwide impact of financial recession along with the procyclicality bias of the fiscal authorities, fraught with political-economy vagaries emerging in the process, which challenged many of the founding tenets of the traditional macrofinancial policy mix in smoothing aggregate demand and supporting a solid recovery trajectory with viable output growth rates and employment prospects. The core purpose of the present policy paper, reflecting upon the continuously traumatic Greek experience with persistently large imbalances in the general accounts of public finances, is to work as a notional bridge, by reconciling descriptive analyses with prescriptive methodologies, and as such produce a somewhat convenient basis for theoretical advances in the research field of appropriately defined fiscalist rules and effectively designed debt stabilisation policies. In accomplishing such a hybrid task, it adopts an over-simplistic arithmetic exercise underlying the stock-flow adjustment of pertinent policy variables and then, through a macro-financial approach to assessing the rate of interest impact and wealth effects of governmental sovereign finance, under conditions of both (im)perfect substitutability between domestic and foreign assets, for private capital accumulation and aggregate output productivity, it advances the relevant policy issues by recourse to a formal growth-modelling analysis of the equilibrium fundamentals aimed at addressing internalexternal imbalances, arising from varying budgetary constraints and accordingly adaptable debt stabilisation rules, hence ensuring the corresponding solvency constraint, and thereby underpinning the newer steady-state economy that helps enhance a rather modified index characterising the fiscal-growth nexus. Such a fiscal policy rationale on the output growth-debt dynamics interplay, although open to several alternative interpretations upon structural functional modifications, might prove both theoretically informative and technically consistent, perhaps optimistically, for conducting a conclusive policy design enriched with a robust flavour of practical applicability.

Mapping the Legal Landscape: Chinese State-Owned Companies in Australia

Australia has always relied heavily upon foreign sources of investment and financing and has in the past tended to draw mainly upon British, American and Japanese investment. In recent decades, Chinese state-owned enterprises (SOEs) have played an increasingly important role in the Australian economy with a rising level of investment taking place. Chinese SOEs have been more heavily involved in investments into larger Australian investment projects, such as in mining and infrastructure. Australia has seen an increase in the number of Chinese state-owned companies acquiring substantial domestic assets; this may continue following the ratification of the China-Australia Free Trade Agreement in 2015. Although Chinese SOEs operating in foreign countries such as Australia are required to comply with local corporate governance laws and principles, they also retain their unique Chinese corporate governance values and culture which they have inherited through their parent companies and from China itself. In Australia, there has been an ongoing debate over Chinese investment, with the business community being particularly supportive of such investment. Driven largely by the business community, this debate has been relatively narrow and has not explored the likely impact of Chinese SOEs and their subsidiaries upon the shape of corporate governance in countries in which they invest. This article seeks to examine the legal contours of Chinese-controlled investment in Australia with a view to acquiring a more informed understanding of the impact of Chinese SOEs upon the Australian legal landscape.

EXPLORING FRONTIERS OF LIVELIHOOD CAPITALS AMONG TRIBALS: EXPERIENCE FROM ODISHA

INTRODUCTION:In the present development discourse, the debate over livelihood has been considered as an alternative paradigm for developing and underdeveloped countries. The discussion on livelihood gained public recognition in research, academic as well as in planning. Generally, livelihood concern as how people make living, by making enough food on the table, fulfills basic necessity for a good life like shelter, clothing etc. But theoretically, it means gaining a living through the capability, activities and assets. A livelihood is socially and environmentally sustainable which can cope with and recover from stress and shocks, maintains and enhance it capability and assets and provide sustainable livelihood opportunity for the next generation and which contributes net benefit to other livelihoods at local and global levels and in the short and long term (Chambers and Conway, 1992). Ellis (2000) in his study highlight that natural, social, human, financial and physical capitals or assets, activities and access to these together three determined the individual or household livelihood (Mishra, 2009). Further Department for International Development (DFID) in his Sustainable Livelihood Framework guidance note suggests five foremost capitals to livelihood analysis and they are presented as assets pentagon. Chambers and Conway further divide assets and capitals into two types one is tangible assets and intangible assets. Intangible assets it includes resources and stores; like saving, credit, gold, jewelry, land, water, forest, tools, domestic assets, occupational assets, livestock etc and in intangible assets it includes claims and access; like demand and appeals for rights, issues etc. So, the individual or household livelihood is based on the maximum utilization of both the tangible and intangible capitals in their activities to satisfy their needs. The development of capitals in villages, communities, groups, households, and individuals, is not only responsibility of individual but also other stakeholders; like government and non-government organizations. As livelihood framework has been designed to address the issues faced by the rural and underdeveloped people. So, government, voluntary, nongovernment organizations and donor agencies have been continuously introducing different plan, policies and programs for the rural and disadvantage people like tribals for to make their livelihood sustainable. All stakeholders are engaging themselves in infrastructural, educational, occupational, social as such development for betterment these people.The livelihood structure and capital among the rural or disadvantaged people of India, particularly among tribals are largely confined to their socio-cultural, ecological and geographical settings. Agriculture, forest product and forest food collection are constituted major livelihood source and river, land, forest, community living, culture, traditional knowledge, homogeneity are such called as assets or capitals of livelihood generation among the tribals. These ways of livelihood generation among them make them sustainable from generation to generation. But, in order to integrate them into mainstream society, secure their livelihood and to overcome them from poverty trap government and other stakeholders has implemented various programmes, plans, policies and projects in the tribal and backward regions. But, the development services are not reaching nearer to the beneficiaries nor any improvement has been marked in capitals and other services development in these areas. In this context, the present study makes a modest attempt to explain livelihood assets or capitals among the tribals in backward district of Odisha.LITERATURE REVIEW:Chamber and Conway (1992) discuss on capability, equity and sustainability as the base of sustainable livelihood. To focus on the future human needs it suggests sustainability of environment as well as social aspects for the sustainability of livelihood. …

Globalisation, money, taxes – past and present

The article is devoted to changes that have taken place in the world economy and in the econo- mics, starting with the Great Depression of the 1930s to the contemporary Global Crisis. The author pays special attention to the phenomenon of free movement of capital across borders, which lead to weakening of the importance and role of the state.

The demand for safe assets in emerging economies and global imbalances: New empirical evidence

AbstractRecent economic theory has singled out mismatches between the supply and the demand of safe financial assets in emerging countries as drivers of international capital flows and, ultimately, global current account imbalances. This paper assesses empirically the contribution of such “search for safe assets” to the size and composition of emerging economies’ international asset portfolios. Excess demand for safe assets in financially less‐developed countries would imply that these countries hold disproportionately high shares of their total portfolios in foreign assets. Moreover, financially less‐developed countries would hold disproportionately high shares of their foreign portfolios in financially developed countries, which are the major producers of ostensibly safe assets. This paper finds little empirical support for these predictions. Financially less‐developed countries allocate a larger proportion of their total holdings to domestic assets. Even when focusing on their foreign portfolios, there is no evidence of a general bias towards the assets of financially developed countries. Overall, asset mismatches do not appear to explain the asset allocation of financially less‐developed countries.

Penny wise and pound foolish? On the income from Germany’s foreign investments

Recently, Germany’s current account surpluses have been a cause of concern both in the public debate as well as in policy circles. Although accumulating net foreign assets appears reasonable against the background of population ageing, one of the criticisms that has been voiced repeatedly in this regard is that Germany’s savings are being squandered abroad. In order to disentangle the dynamics of the German investment income balance, we apply a novel decomposition framework to a rich German dataset spanning 11 different asset classes between 1999 and 2014. First, we show that Germany gained a yield privilege in this time period and that it would not have been more profitable to invest German savings in domestic assets. Second, the accumulation of net foreign assets accounted for 60% of the rise in the investment income balance. Third, the global decline in interest rates in the aftermath of the global financial crisis led to an appreciable dent in net investment income receipts, which leaves scope for a risk sharing interpretation.

When the music stops: the UKSC judgment in Akers, applying the bona fide purchaser rule and offshore trusts

This case note examines the effect of the recent Supreme Court decision Akers v Samba Financial Group [2017] UKSC 6. The authors explore the reasoning of the Court, particularly in relation to bona fide purchaser rule and its effect on offshore trusts and section 127 of the Insolvency Act 1986. It will conclude that the Supreme Court was correct on the facts to limit the remedies available through equity and the insolvency act when assets held on trust are disposed. The appellants were incorrect in positing that a disposition had occurred. Further, the court affirms ‘the Samba principle’ wherein equity applies in personam to foreign and domestic assets. The decision highlights tensions inherent within trusts and insolvency law which Akers provides remedy to through the bona fide purchaser rule.