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Ebook Housing Wealth, Credit Conditions and Consumption

Submitted by wulan on Fri, 01/22/2010 - 05:32

There is widespread concern among central banks about the influence of house prices on consumption, and much current debate on how monetary policy should react to asset price fluctuations in the context of liberalised credit markets (see Rajan (2005) and associated papers from the Jackson Hole symposium). Housing markets and their consumption interactions have, in recent years, become a very active research area. Nevertheless there is disagreement about the role of housing wealth in explaining consumption.

Unfortunately, much of the empirical literature, both macro and micro, is marred by poor controls for the common drivers both of house prices and consumption, including income, income growth expectations, interest rates, credit supply conditions, other assets and indicators of income uncertainty (such as the changes in the unemployment rate). For example, the easing of credit supply conditions is usually followed by a house price boom. Failure to control for the direct effect of such easing on consumption can result in over estimates of the effect of housing wealth or collateral on consumption. Our review of the literature in Section 2 illustrates these points; and in Sections 4 and 5, we provide specific evidence through comparisons of well-specified empirical models with those omitting relevant controls.

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Ebook Optimal Minimum Wage Policy in Competitive Labor Markets

Submitted by wulan on Mon, 03/15/2010 - 05:23

The minimum wage is a widely used but controversial policy tool. A minimum wage can increase low-skilled workers’ wages at the expense of other factors of production such as higher skilled workers or capital and hence can be potentially useful for redistribution. However, it may also lead to involuntary unemployment, thereby worsening the welfare of workers who lose their jobs. A large empirical literature has studied the extent to which the minimum wage affects the wages and employment of low-skilled workers (see e.g., Card and Krueger (1995), Brown (1999), or Neumark and Wascher (2006) for extensive surveys). The normative literature on the minimum wage, however, is much less extensive.

This paper provides a normative analysis of optimal minimum wage policy in a conventional competitive labor market model, using the standard social welfare framework adopted in the optimal tax theory literature. Our goal is to use this framework to illuminate the trade-offs involved when a government sets a minimum wage, and to shed light on the appropriateness of a minimum wage in the presence of optimal taxes and transfers.

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Ebook Excessive Risk Taking and The Maturity Structure of Debt

Submitted by puput on Fri, 08/13/2010 - 06:54

The Asset substitution problem is one of the widely discussed agency problems in finance. Jensen and Meckling (1976) argue that in presence of debt, limited liability introduce convexity in the equity and consequently gives incentives to equity holders to increase their claim value at the expense of debt holders, by taking excessive risk. Several tools have been proposed to overcome this problem. One of the most popular of these tools is short term debt. Barnea and al (1980) for example suggest that shorter debt maturity will be used as risk increases. If the early literature, mainly concerned with a qualitative analysis, has demonstrated the efficiency of finite maturity debt in reducing equity holders risk shifting incentives, little attention have been devoted to the quantitative effect of finite maturity debt on asset substitution. In fact, although short term debt clearly reduces equity holders’ risk shifting incentives, it also induces a greater default risk for the firm. It is therefore not clear what is the overall effect of short term debt on the firm value.

The literature provides a series of papers that address the issue of quantifying the impact of asset substitution in presence of short term debt essentially in a framework where the capital structure decision involves trading off the tax benefits of leverage, financial distress costs and the agency costs associated with risk shifting incentives. Leland (1998) propose a model of asset substitution where equity holders can continuously choose a high or a low volatility level for the firm’s assets once debt is in place. He then studies the impact of equity holders’ ex post risk flexibility on the firm’s optimal capital structure and finds that agency costs restrict leverage, debt maturity and increase yield spreads. Similarly, Ericsson (2000) provides a quantitative illustration of how the capital structure decision is influenced by the potential for asset substitution. He shows that by ruling out asset substitution, a firm could afford to take on an additional 20% of leverage and use distinctly longer term debt maturity, but still bears a significant loss.

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