Implicit Interest Research Articles

Implicit Inflation and Interest Rates in Discounting Personal Injury Economic Losses: Rejoinder

Implicit Inflation and Interest Rates in Discounting Personal Injury Economic Losses: Rejoinder

Estimation and testing of the term structure of the forward premium under rational expectations

The implicit interest rates embodied in forward premiums of different maturity times are modeled as an unrestricted vector autoregression. Under rational expectations the term structure of these forward premia can be conditioned on different sets of information at different time periods. The various parameter restrictions implied by these hypotheses are tested by means of Wald and likelihood ratio test statistics. The rational expectations model is rejected for all three currencies considered when conditioned on current and past sets of information.

Are Checking Accounts in American Banks Permissible Under Islamic Laws?

The purpose of this note is to stimulate the thought of Muslim scholarsabout a neglected aspect of American banking business. namely thepayment of interest on demand deposits (checking accounts).Demand deposits represent funds that commercial banks use toextend loans to the public and purchase interest-bearing securities. Therevenues from these activities are a major source of income forcommercial banks. Consequently, fierce competition exists amongbanks to attract such funds: However, competition for these fonds. untilrecently, could not take the form of an explicit interest rate because theAmerican banking laws prohibit the payments of explicit interest rateson demand deposits .. Existing laws have relaxed this prohibition forsome forms of demand deposits (e.g. Negotiable Orders of WitndrawalsNOW accounts), though the prohibition still holds in the case of what iscommonly called in the banking jargon regular checking accounts, i.e ..checking accounts that do not explicitly yield interest to the holders.Because of the intensity of competition among commercial banks toattract public deposits. and in the presense of the legal prohibitionagainst explicit interest payments on regular checking accounts bankshave devised alternative outlets to compete for the checking accountsfunds. Perhaps the most obvious alternative is for a bank to reduce (orremit) charges to depositors for the use of bank payments services belowthe cost to the bank of providing those services. Others take the form offor example, providing a wide range of cash management services atvery nominal fees and occasional gifts. In economic literature these arecalled implicit interest rates, and many recent empirical studies haveestablished the fact that commercial hanks in the U.S. do in fact pay highimplicit interest rates on non-interest bearing demand deposits ofapproximately equal value to the rate which would be explicitly paid inthe abscence of the legal prohibition ...

Implicit interest rates, usury and isolotion in backward agriculture

The unusually high interest rates in many backward agricultural regions have been a source of some puzzlement to economists. Adding to this puzzle is the fact that these rates can take on a wide range of values, often within the same region. One important question is why arbitrage between sectors does not lead to more homogeneous and lower interest rates. The traditional answer to this is in terms of lender's risk. It is argued that moneylenders in backward regions face a great risk of default and, once this is taken into account, the effective interest rate turns out to be no higher than its counterpart in the organised sector. Consequently, there is no real room for arbitrage and the high interest rates are equilibrium prices. While this explanation may be of use in some situations, it is in general inadequate and can even be misleading. The reason (which novelists describing rural India have repeatedly written about) is that in these financial transactions the lender's risk frequently ranges from minimal to non-existent, because the personalised relation between the borrower and the lender enables the latter to extract the defaulted loan in the form of asset transfers from the borrower. In a somewhat stylised manner these deals could be thought of as follows. A peasant takes a loan from his employer, keeping some of his assets, like land, a standing crop or even the promise of labour services, as security or collateral. A collateral price is then fixed. This is the conversion price used to calculate the amount of collateral that has to be relinquished to the lender given a certain amount of default. Clearly the lower the collateral price the larger the quantity of collateral that the peasant has to forfeit. Hence the underpricing of collateral amounts to the charging of an implicit interest. A widespread feature of rural credit markets—reported in many diverse studies (Bardhan and Rudra, 1978; Myint, 1964; Raj, 1981; Roth, 1979; and Sivakumar, 1978, to mention just a few)—is the 'underpricing' of collateral. An interesting attempt to bring collateral explicitly into a model of usury was made by Bhaduri (1977; see also 1983) who argued that one of the reasons why landlords raise interest rates is, in fact, to encourage default and to claim ownership of the asset kept as collateral. A sharp contrast to the lender's risk model, this hypothesis has deservedly received much attention.1

Competitive Implicit Interest Payments in Commercial Banking

Competitive Implicit Interest Payments in Commercial Banking

Consulting with family businesses: What to look for, what to look out for

In summary, consultants should be wary of consultation with family businesses. Here's some other advice for consultants, with implicit interest of course to family members and others who work with them. 1. 1. Expect contact by people who have pain but no power, and expect only one out of ten of those contacts to turn into a more formal consultation activity. 2. 2. Recognize the deep complexities of the family business, the multiple rivalries, the difficulties of family secrets, and the displacements of hostilities from generation to generation; be especially careful about establishing individual trusting ties before trying to bring the family together, as in a family therapy model. 3. 3. Recognize that many of the people caught up in the conflict have only minimal commitment to each other, to the family, and to the organization; they are held together by some expected gain for their own children or because they can't give up an advantage they already have. This makes it difficult to establish a sense of common purpose, except in the narrowest sense. 4. 4. Weigh family ties carefully. A sufficiently intense wish on the part of the family to remain together as a family with a strong sense of family pride is an optimum condition for inviting them to consider how to go about resolving some of their differences. Where commitments are weak, it may be wiser to appeal to methods that should loosen the painful ties that bind the family members together and allow them to go their respective ways free of those burdens. 5. 5. The Gordian knot in such situations is usually the pain of the single dominant son, who most often can resolve that pain only with psychotherapeutic help. With that, it may be possible also to bring son and father — or sons and father — together to resolve some of their other differences, but as long as one or more of the sons is in a double-bind situation, movement is unlikely. 6. 6. Don't be overoptimistic about your chances for success. It is easier for the family members to split and run than to sit together to resolve their problems. In most instances there are many outside distractions and not enough centripetal force to hold them together for problem-solving efforts. Issues of intense rivalry over years cannot be surmounted unless somehow the consultant finds' leverage that makes it most important for all involved to resolve the problems at hand. 7. 7. Don't be disappointed if you fail.

A note on the implicit interest rate on demand deposits

This paper examines the significance of several estimated measures of the implicit interest rate on demand deposits in an annual demand-for-money function. The evidence demonstrates that the coefficient estimates of the implicit interest rate are not positive and statistically significant as predicted due to the scarcity of data points and the high collinearity with other opportunity cost variables.

Comment and further evidence on ‘implicit interest on demand deposits’

in a recent article, (1979) has made an interesting contribution to the literature concerning the payment of implicit interest on demand deposits by banks. usefully distinguishes between three competing propositions. The first, called the hypothesis' describes the commonly held view that banks pay no interest (explicit or implicit) on demand deposits. The second position is the traditional hypothesis'. This proposition holds that banks pay some implicit interst on demand deposits, although the amount paid is less (50'~o is Startz estimate) than what would be paid if the legal prohibition on the payment of interest was lifted. The third view, that banks pay a rate of implicit interest fully equal to the rate which would be paid in the absence of the legal prohibition, is called the 'competitive hypothesis'. As notes, most work (implicitly) accepts the traditional hypothesis. Startz, though, supports the modified traditional view, while Klein (1974) provides evidence in favor of the competitive hypothesis [see however, Carlson and Frew (1978) for some penetrating criticisms of Klein's work]. The issue of whether banks pay implicit interest and if so, how much they pay, is gaining in importance. There appears to be growing momentum in Congress to pass legislation ending the legal sanction about paying interest on demand deposits. The legislation would either directly repeal the prohibition or else indirectly accomplish the same goal by legalizing the nation~wide offering of interest bearing NOW (negotiable orders of withdrawals) or ATS (automatic funds transfer service) accounts, if the traditional hypotheses, or, to a lesser degree, the modified traditional hypotheses is true, the regulatory changes being considered by Congress would have a large. negative impact on the banking system because competition would force banks to incur substantial amounts as explicit interest. The specter of widespread banking failures and increased riskiness to the public brought

The sensitivity of the London clearing bank profits to changes in Bank rate: 1951–1970

Commercial banks tend to make profits which are not associated with efficiency in resource use. Since the output of bank deposits is subject to government control, the industry tends to generate a surplus over competitive profits, and this is particularly so when a collective agreement prevents the payment of interest on demand deposits, or the implicit interest payment is below the competitive rate and lags behind the changes in the rate of earnings on bank assets. In 1967, the National Board for Prices and Incomes reported that the London clearing bank profits had been ‘… excessive in the sense that they have accrued in part simply from a high average level of Bank Rate…’. 1 The report referred to an ‘endowment element’ in the profits which originated from the clearers' collective agreement on nonpayment of interest on demand deposits: although the bank charges on demand deposits were being netted for an offsetting allowance, a surplus was generated because ‘… the rate of offsetting allowance does not a...

Implicit interest on demand deposits

Traditionally, monetary theory assumes money bears zero interest. More recently, it has been recognized that banks implicitly pay interest through providing free services. In this paper, the implicit interest rate is estimated from two different sources. Implicit interest appears to be about one-half of what a competitive rate would be in the absence of the prohibition against explicit interest.

Explicit and Implicit Demand Deposit Interest: Substitutes or Complements from the Bank's Point of View?

NUMEROUS WRITERS [1, 2, 4, 6, 7, 10] have pointed out that, when the government puts a binding ceiling on demand deposit interest, banks may react by paying in the form of services rendered at prices below cost. Perhaps the most important such service is check clearing. If explicit and implicit interest are in fact alternatives to each other, such that when one increases the other decreases, they may loosely be termed substitutes from the bank's point of view. The purpose of this paper is to examine the conditions under which banks would view explicit interest and implicit interest in the form of check-clearing services as substitutes . That is, we investigate the conditions under which an increase (decrease) in the binding ceiling on the explicit demand deposit interest rate would cause an increase (decrease) in the check-clearing service charge and hence a decrease (increase) in the rate of implicit interest. There are two principal results. First, an increase in the explicit rate may actually cause a decrease in the check-clearing charge; iis is more likely to happen (1) if the ratio of checks to deposit balances is stongly negatively affected by the explicit rate, and (2) if the rate on savings accounts is itself not subject to a binding ceiling and consumers have stong substitutability between savings and checking accounts. Secondly, if ie exogenous rise in the explicit rate induces a rise in the check-clearing charge, ie latter rise may

Die Ulpian-Tafel

The great antiquity ofUlptan’s Table, which dates from about 220 A.D., gives it a very prominent place in the history of mortality tables, but it has received rather scanty treatment in actuarial literature. There has been some uncertainty whether it was intended to represent what we know as the expectation of life or the present value of a life annuity under an implicit interest assumption. Greater uncertainty has been expressed concerning the extent to which the values might have been based upon observation of an actual life group. The present paper exhibits a relationship, which does not seem to have been noticed before, indicating thatUlpian’s Table is a refinement of another table described byUlpian’s contemporary,Aemilius Macer, and that to this extent, at least, the values are not arbitrary. Arguments are presented in support of the belief that the values originally represented the expectation of life. Some exposition of the background of Roman law is given with quotations from the sources, including the Latin text ofMacer’s statement ofUlpian’s Table together with a translation and notes. These appear in Appendix A. Mortality rates are derived from age 25 upward on the assumption thatMakeham’s Law holds. The mathematical theory used to develop such mortality rates is given in Appendix B.

Opportunity Costs and Models of Schooling in the Nineteenth Century

The study of schooling in the nineteenth century United States lends itself well to a discussion of many of the issues involved in the economics of education. The two main components of schooling costs are foregone earnings (opportunity costs of students while attending school) and direct resource costs (operating costs and implicit interest and depreciation). The first section of this paper will look at the problems of estimating foregone earnings. The proper definition and estimation of these reveals the necessity of studying urban and rural areas separately, particularly in the nineteenth century United States. Next a summary of the results of state-by-state estimates of school costs is presented. Then a model to explain the differences among states in the amount of education will be developed and empirical results obtained from testing the model will be discussed. The nineteenth century is a particularly good period in which to study factors affecting differences in education across states. The state-by-state differences were substantial, and when studying state observations, we can feel confident that these observations are from distinct, independent units. The population was less mobile than in more recent times, in terms of both ability to move to different states or regions, and access to information about conditions elsewhere. Also very important is the fact that there was much less intervention by the Federal Government into state education

Managing the emotional aspects of peptic ulcer and ulcerative colitis.

Most patients with peptic ulcer are greatly reassured by their doctor's implicit or explicit interest in their emotional state. The patient who sees his life as a series of challenges to overcome can be helped to put his peptic ulcer in the same frame of reference. Reassurance is also a vital element in managing patients with ulcerative colitis, whose dependence on their physician is a characteristic of their disease.

Capital Formation by Expenditures on Formal Education, 1880 and 1890

This study has been concerned with the estimation and analysis of expenditures on formal education. The United States has always been considered a world leader the educational attainment of the mass of its populace. These beliefs are confirmed at the aggregate level as it is shown that $314 million and $515 million of explicit and implicit expenditures were made on all levels of formal schooling 1880 and 1890, respectively, current prices. The 1880 estimate is 3.3 percent of Gallman's GNP estimate, and 19 percent of gross capital formation; and the 1890 estimate is 4.2 percent of GNP and 20 percent of gross capital formation. However, a major contention of this work is that exclusive attention to the impressive aggregate commitment to schooling the United States neglects the fact that there were huge state-by-state and regional variations this commitment. Much of this thesis has been devoted to developing an economically sound framework for calculating the costs of schooling. Then data from the censuses, various wage surveys, and Reports of the Commissioner of Education were applied to the framework to obtain cost estimates on a state-by-state basis. The two main components of schooling costs which were estimated were earnings (opportunity costs of students while attending school), and direct resource costs of schooling (operating costs as well as implicit interest and depreciation). Data were available for education cities of over 7500 1880 and over 8000 1890; and all education not carried out these cities was placed the rural category. Elementary school students aged 10 and older were assumed to be potentially the workforce had they not been school. To the individual, the earnings sacrificed because of school attendance are the major cost influencing his decision whether or not to enroll. It is this cost which has been measured here. Hence, the input of time into the production of human capital made by students who attended when they could not have been earning income by spending their time working elsewhere has not been valued. Opportunity costs are defined as what income was foregone rather than what time was put in by the students. Opportunity costs were included for a state's agricultural sector only where the length of the school year relative to the number of days when work was available on the farms implied that students were foregoing earnings while attending school. However, the earnings aspect of costs of schooling still comprised 58.2 percent of total costs 1880 and 56.8 percent of total costs 1890.

A CASH‐FLOW CONCEPT OF PROFIT*

THE TRADITIONAL THEORY of the firm is based on the assumption that the firm acts in the stockholders' interests and that the stockholders are interested in profit, so that the objective of the firm is to maximize profit. There have been many theoretical discussions of the concept of profit but there is no consensus of opinion as to the precise definition of this theoretical construct.' Nevertheless the theory of the firm has been based on the assumption of profit maximization, and profit has been thought of (loosely) as the difference between the revenue received from the product sold and the payments made to the productive factors which together produced that product. This concept of profit has been difficult to apply to investment decisions, and wealth maximization and cash-flow concepts have been developed in connection with this problem. This paper presents a cash-flow concept of profit which is associated with the cash-flow theory of stock value. This concept of profit has three desirable properties which make it more useful than the traditional concept. (1) It can be used in decisionmaking within the firm since profit maximization is in the stockholders' interest. (2) The profit of the firm coincides with the stockholders' income in each time-period. (3) Past profit can be measured from market values so that it is an objective measure of performance. Net cash flows are defined in Section II as the cash flows between the firm and its stockholders. The value of the stock is then the present value of the future net cash flows. In Section III cash-flow profit is defined as the increase in the stock value plus the net cash flow of the period. If the expectations for the period are observed and those for the future are unchanged, a normal profit is made on the initial stock value (investment). If expectations change, pure profits arise. The cash-flow concept is then compared to the traditional concept. Section IV is concerned with the handling of depreciation, a concept which is not required in cash-flow analysis. It is shown that depreciation expenses understate capital costs unless implicit interest is charged on the book value of net worth. It follows in Section V that the traditional