Much of the recent immigration literature has sought to understand immigrants’ economic adjustment, as measured by their earnings. The economic framework for this type of analysis was set out in Chiswick (1978) (1979). The early studies, based primarily on cross-sectional data, established an important empirical regularity: immigrant earnings improved rapidly at first and then at a slower rate with duration of residence in the host country.
There has been some questioning of this type of result. Using data from the 1970 U.S. Census, Chiswick (1980) was the first to raise the question as to whether the cross-sectional estimates were biased estimates of the longitudinal adjustment process, and concluded there was no obvious significant bias. The cross-section may provide biased estimates of the longitudinal effects if there is selectivity in the return migration of immigrants, or if there are changes over time in the unmeasured dimensions of the quality of immigrants. In particular, the cross-section provides upward biased estimates if the least successful of immigrants have a greater propensity to remigrate or if more recent immigrant cohorts have lower unmeasured dimensions of ability relevant for the labor market. Borjas (1985) has argued that a decline over time in unmeasured dimensions of immigrant quality is responsible for the observed positive effect of duration on immigrant earnings in cross-sectional data, and that there is no assimilation effect. This interpretation has been disputed by Chiswick (1986) and Duleep and Regets (1996, 1997), among others.
Bank interest rates have been the focus of recent (October 1999) policy attention by the Brazilian Central Bank. In a highly publicised report [see Banco Central do Brasil (1999)], this institution showed a great concern for the high levels of the bank loan interest rates observed in the country. This report concluded that high default levels as well as high operating costs are amongst the main culprits for the high bank interest margin seen in the country. On average, loan default and operating cost accounted for 35% and 22% of bank spread, respectively, for a sample of 17 Brazilian banks.
The economic and policy relevance of such topic is beyond any questioning. However, the Central Bank report lacks a more formal approach to support their main conclusions. The decomposition of the bank interest margin among different factors is based on accounting identities rather than on a bank profit maximization model.
It is obvious to any business person that economic decisions often depend critically on the nature and extent of market risk. Clearly a decision to invest in new capital will depend not only on projections of market demand, but also on the degree to which future demand is uncertain. Indeed, much of corporate finance theory, as taught in business schools, deals with methods for properly taking risk into account when making capital budgeting decisions. Yet most econometric models of aggregate economic activity ignore the role of risk, or deal with it only implicitly. The point of this paper is that a more explicit treatment of risk may help to better explain and forecast economic fluctuations, and especially movements in investment spending.
Consider, for example, the recessions of 1975 and 1980. The sharp jumps in world energy prices that occured in 1974 and 1979-80 clearly contributed to those recessions, and they did so in a number of ways. First, they caused a reduction in the real national incomes of oil importing countries. Second, they led to "adjustment effects" -- inflation and a further drop in real income and output resulting from the rigidities that prevented wages and non-energy prices from coming into equilibrium quickly.
