Journal of Finance and Economics (original) (raw)

Papers by Journal of Finance and Economics

The objective is to provide the empirical evidence regarding the relationships between foreign ex... more The objective is to provide the empirical evidence regarding the relationships between foreign exchange reserves and inflation for four West African countries namely Cote d'Ivoire, Senegal, Ghana and Nigeria. A comparison of empirical evidence is obtained from the Autoregressive distributive lag model (ARDL) proposed by Pesaran, Shin and Smith (2001) using annual data running the period of 1972 to 2014. The empirical result shows that the relationship between the change in foreign exchange reserves and inflation rate is positive for the countries cited above in long run but the overall short run estimation of our model is insignificant at the conventional level. This means that rise in foreign exchange reserves leads to increase the rate of inflation. Regarding our investigation results, the study suggests that governments of these countries cited above should pay more attention to foreign exchange system management by enlarging open market operations. Moreover, they can use sterilization or other policy instruments to reduce foreign exchange reserves to stabilize domestic economy. According our overall empirical results, we propose the following suggestions. First, the central bank expands the base money supply channels and offers a variety of sterilization methods. Second, reinforce coordination of monetary and fiscal policy, and adopt comprehensive measures to promote the international payments balance. As West African countries' economy is growing rapidly, exchange reserves will still growth and the inflation is an urgent issue too. Therefore, it's still very important for these countries to reduce the negative effect of the excessive foreign exchange reserves.

Before the Great Recession the policy was not to interfere with increases in asset values, and if... more Before the Great Recession the policy was not to interfere with increases in asset values, and if any resulting asset bubble crashes led to financial instability, then policies would be enacted to help the recovery. The crash that led to the recent financial crisis changed the mind of many researchers as they more thoroughly investigated the present and the past crises concluding that more attention needs to be paid to financial stability. This involved microprudential policies, meaning policies that would stabilize financial firms, as well as experimentation with macroprudential policies whose purpose is to stabilize a specific sector. By stabilizing a sector, the hope is that no spill over would take place to destabilize the financial system.

The goal of this paper is to model the dynamics of an economy belonging to a monetary union, when... more The goal of this paper is to model the dynamics of an economy belonging to a monetary union, when the possibility of leaving that union arises. For this, we extend the Drazen-Helpman (1990) model, introducing a new component of the interest rate, i.e. the "spread", that allows for bridging the interest rates' dynamics inside the union with the anticipated future outside the union. In the context of the neoclassical Ramsey infinite horizon model, with optimizing individuals and competitive markets, the spread, differently from inflation, affects the real side of the economy as a sort of distortionary taxation on investments. This implies that a country belonging to the monetary union but characterized by weak public finances will suffer from lower capital accumulation, lower output, and lower consumption levels than the ones achievable by the steady state "golden rule". In reality, we will show that Pareto-optimality requires either to embrace the path to a fiscal union or to break-up. In this paper the focus is on the break-up option, when public debt becomes unsustainable. We analyse the dynamics of the economy before and after the break-up, with specific attention to interest rates, capital accumulation and exchange rate. We derive that the nominal interest rate will not change around the break-up event, thanks to the " bridging " property of the spread. The real interest rate instead will decrease, and consumption will jump down, allowing for higher investments necessary to reconstitute the optimal stock of capital. The exchange rate will overshoot initially and then will appreciate, converging toward the new equilibrium level.

We conduct a survey to examine the impact of individual risk preferences on better car replacemen... more We conduct a survey to examine the impact of individual risk preferences on better car replacement decision in the insurance market. The survey consists of a lottery choice task and an insurance questionnaire. Our results strongly support contentions that consumers are significantly influenced by their risk attitudes and the insurance premium. Further, we find that female consumers are more influenced by their degree of risk aversion than male consumers when making such insurance decision. Moreover, our results show that when the level of risk aversion is controlled, the individual risk preferences have different magnitudes of impact on insurance decision making. JEL Classifications: C91, G22

In several countries, some healthcare providers combine public service with practice in their own... more In several countries, some healthcare providers combine public service with practice in their own facilities (dual-job practitioners). According to the existing literature, they are viewed as cream-skimming profitable (low-severity) public patients to the benefit of private practice, causing cost of treatment in the public sector to increase. If true, this is particularly problematic when public provider payment is prospective. However, two facts seem to be neglected. First, cream skimming involves effort and thus does not occur in all circumstances. Second, public providers might have an incentive to select patients too, resulting in dumping of the least profitable (high-severity) patients on the private sector. Thus, average cost of treatment in public hospitals does not have to increase, and might even decrease. This paper derives the conditions under which both creaming and dumping are predicted to occur. JEL Classifications: I11, I18

This paper analyzes the impact of international remittances on household investment and poverty u... more This paper analyzes the impact of international remittances on household investment and poverty using panel data (2000 and 2007) from the Indonesian Family Life Survey (IFLS). Using a three-stage conditional logit model with instrumental variables to control for selection and endogeneity, it finds that households receiving remittances in 2007 spend more at the margin on one key consumption good (food) and more at the margin on one important investment good (education) compared to what they would have spent on these goods without the receipt of remittances. Using a bivariate probit model with random effects to control for selection and simultaneity, the paper also finds that households receiving remittances are less likely to be poor compared to a situation in which they did not receive remittances. These findings are important because they show that households can use remittances to help build human capital and to reduce poverty in remittance-receiving countries.

Disaster management problems often pose the same types of challenges that environmental governanc... more Disaster management problems often pose the same types of challenges that environmental governance problems do; they involve decision-makers at various levels and can transcend political boundaries. We conduct a benefit-cost analysis of a disaster adaptation strategy in Otsuchi, which was undertaken shortly after the 2011 Tohoku earthquake and tsunami devastated the region. Results indicate that present value net benefits from the planned seawall are positive, even if expected damages are low, provided that the wall is capable of reducing damage by at least 50%. A hybrid method of governance may, however, be effective at increasing the benefit-cost ratio. JEL Classifications: D61, Q5

In this study, we use the quantile regression and the back propagation neural network to construc... more In this study, we use the quantile regression and the back propagation neural network to construct a credit rating model for companies listed in Taiwan Stock Exchange and Over-The-Counter. The data we use is from 1997 to 2013 in Taiwan. The data in the period from 1997 to 2005 is in sample and the data in the period from 2006 to 2013 is out of sample. TCRI established by TEJ is used as a dependent variable to analyze the relationship between 12 financial ratios and credit rating. Our results show that the average forecasting correction rate based on the propagation neural network, which is about 70%, is higher than that based on the quantile regression, which is about 60%. However, investors and financial institution are mainly concerned about the companies facing bankruptcy so they are more interested in which companies bear higher risk. In this case, the quantile regression can provide higher forecasting correction rate for low-credit-ranking companies, which is about 80%, than that provided by the back propagation neural network, which is about 55%. JEL Classifications: C52, C21

The mining industry has traditionally been a major recipient of foreign direct investment in sub-... more The mining industry has traditionally been a major recipient of foreign direct investment in sub-Saharan Africa and has commonly been an important foreign exchange earner for the region. The purpose of this study is to empirically determine the factors that have influence FDI flows in Ghana from 1983 to 2012, using co-integration analysis. The major empirical and methodological contribution of this study is the use of co-integration approach to determine FDI inflows to the mining sector in Ghana. The results of the study registered exchange rate, inflation and openness of trade to be significant in the long run. Natural resources were designated to have a negative long-run relationship between FDI inflows. GDP was used as a proxy for market size and economic liberalization were also registered to be insignificant. In the short run all the variables were found to be insignificant except natural resources which contributed negatively and significant to the mining sector. One economic task facing Ghana, therefore, is how to articulate the necessary policies that can attract the right kind of FDI in the mining sector. JEL Classifications: F3, F21

The aim of this paper is to study the effects of economic openness and globalization on the struc... more The aim of this paper is to study the effects of economic openness and globalization on the structure of provincial government expenditures in Argentina. In particular, we are interested in the effects on social expenditures and its components, as an expression of the welfare state. Much of the existing literature has examined this relationship at the country level. This work contributes to this literature by extending analysis to the subnational sector. A dynamic panel data model is estimated using GMM – both in Differences and in Systems for the 24 jurisdictions of Argentina (23 provinces and the city of Buenos Aires) over the period 1993-2010. The paper includes a measure of globalization adapted from the KOF index proposed by Dreher (2006) which is estimated at the level of sub-national governments. Results indicate that economic openness and globalization have a negative impact on the participation of social expenditures. This is the expected result taking into account the " efficiency " effect versus the " compensation " effect.

This study aims to answer three very basic questions regarding the capital structure of firms by ... more This study aims to answer three very basic questions regarding the capital structure of firms by testing the predictions made by the trade-off theory of capital structure. It employs a variety of data specification to test the relationship of financial leverage with profits, growth and firm size and takes help from existing literature for and against the trade-off model. It aims at testing the relatively aged literature, which widely disregarded the trade-off model with later studies that suggested that adequate data structure does report this theory to be empirically valid. The variety of specifications of data does lead the author to the general result that although most of the predictions of the trade-off model hold true empirically, the results of estimation on profits and leverage still hold that the model only had limited validity empirically.

This paper studies the evolution of the degree of Asian business cycle synchronization and assess... more This paper studies the evolution of the degree of Asian business cycle synchronization and assesses the impact of global and regional shocks on output interdependence across Asia since the 1990s. We employ a dynamic factor model to decompose output fluctuations into a global factor common to all countries in our sample, regional factors that capture any remaining common fluctuations across countries within each region, and an idiosyncratic component that captures country-specific characteristics. In particular, we categorize the 19 countries in our sample into four groups-non-Asia, East Asia, South Asia and Southeast Asia, thereby accounting for heterogeneous dynamics of sub-regional co-movement. Results show that, over the past two decades, global shocks and regional shocks are playing a critical role in determining Asian output synchronization. As the process of globalization has picked up, both shocks increasingly explain the co-movement of output, which leads to a higher degree of business cycle synchronicity across Asia. JEL Classifications: C11, E3

This study empirically examines the effect of remittances on private real savings for a sample of... more This study empirically examines the effect of remittances on private real savings for a sample of Asian economies using crosscountry time-series data. Our findings consistently show that remittance inflows in Asian countries are positively and statistically significantly correlated with their private real savings. Our findings also reveal economic growth, real deposit interest rate and credit provided by the banking sector as other significant determinants of private real savings. Some policy implications are drawn.

A firm is said to be judgment-proof if it can cause an accident and then skirt its environmental ... more A firm is said to be judgment-proof if it can cause an accident and then skirt its environmental liabilities by pleading bankruptcy. Judgment-proofness is a public-policy problem because it saddles society with uncompensated liability and stifles the firm's incentive to undertake due care. We employ a simple lending model that incorporates moral hazard to compare three instruments designed to remedy the judgment-proof problem; namely, environmental bonds, mandatory liability insurance and liability. Incentives are unambiguously stronger under liability than they are under either bonds or mandatory insurance. Credit is more rationed and the span of potentially damaging projects is lower under bonds and mandatory insurance than they are under liability. The relative impact of these instruments on social welfare ambiguously depends on entrepreneurial wealth.

We investigated the association between internal control quality (ICQ) and earnings persistence (... more We investigated the association between internal control quality (ICQ) and earnings persistence (EP) in the Chinese capital market. Specifically, we examined how ICQ exerts an influence on EP, using data from listed A-share corporations in the Shanghai Stock Exchange and the Shenzhen Stock Exchange, from 2008 to 2011. We assumed that a more favorable internal control environment could prevent managers and employees from exploiting company resources or embezzling company property, preventing managers from using opportunistic earnings management (accrual-based or real earnings management) and motivating them to strive for the corporation. The company would thus be more likely to operate efficiently and effectively, resulting in higher EP. Consistent with this assumption, our findings suggest that firms with better ICQ have less real activities manipulation, and that a lesser extent of real earnings management results in higher EP.

This article examines whether and to what extent non-scheduled and scheduled political events con... more This article examines whether and to what extent non-scheduled and scheduled political events concerning the European fiscal governance have influenced the volatility of the euro risk premium. In particular, this study estimates how political behavior by the European Commission, the Economic and Financial Affairs Council, and the European Council has impacted the volatility of a time-varying risk premium of the euro vis-à-vis the US dollar and the Swiss franc. Analyzing daily data, the empirical results point to crucial shortcomings of the legal framework of European fiscal governance, which are detectable even in this legal framework's early years.

Money is the life-blood of any modern market-oriented economy. The level of money supply-the quan... more Money is the life-blood of any modern market-oriented economy. The level of money supply-the quantity and velocity of money circulated in such an economy would determine its health. The central issue in managing the economy is to understand how money supply is determined. The history of modern monetary economics actually has witnessed the emergence of two opposing views pertaining to the role of central bank in controlling the supply of money in an economy. A group of economists, known as monetarists, under the influence of Milton Friedman, contended that money supply in an economy is exogenously determined. Post Keynesian however holds the view that money supply is endogenously rather than exogenously determined. Examining the theory of endogenous money as well as empirical work, the present paper has found that money supply in several countries is endogenously determined.

The financial stability and smooth function of the financial system constitute issues of high int... more The financial stability and smooth function of the financial system constitute issues of high interest, particularly after the outbreak of financial crises. The current crisis generally proved that dysfunctions in the banking system cause systemic risk and turbulence in the economic environment and vice versa; the deterioration of the macroeconomic environment affects financial institutions. Our study has two objectives: the first is to identifying the effects of the macroeconomic environment on the smooth functioning of the Greek banking system and, specifically, to what extent the deterioration of economic conditions affects the credit risk of Greek banks. The second objective is to developing a macro stress-testing framework to assess the stability of the Greek banking system and the credit risk of Greek banks in particular in the context of a hypothetical deterioration of the macroeconomic environment.

The European sovereign debt crisis entered into the stage of contagion in the late 2010 as it spr... more The European sovereign debt crisis entered into the stage of contagion in the late 2010 as it spread first from Greece to Ireland, and then to Portugal and Spain. The European sovereign debt crisis truly resulted from a combination of various factors, some as more precipitating causes while others as more fundamental or deep-rooted causes. They include easy credit expansion during the 2003-2007 period, the global financial crisis and subsequent global recession of 2008-2012, fiscal and trade imbalances of the European countries involved in the crisis, and inherent structural problem of the EMU. From the experience of the European sovereign debt crisis, we could confirm some early warning indicators of a crisis such growth of domestic private credit and public borrowing, worsening government balances as well as external balances. Long-term interest rate spreads and an increase in fees charged by investment banks for bond issuance would be precipitating or concurrent warning indicators for a crisis. Implication from the European sovereign debt crisis for the euro area or potential economic and financial integration of East Asia is not necessarily to disband, break up or abandon a monetary union. Instead, a better alternative is to remedy problems and shortcomings exposed by the current crisis and to move toward a deeper integration. JEL Classifications: F34, H12

The 2x2x2 Heckscher-Ohlin model predicts that trade openness causes the skill premium to increase... more The 2x2x2 Heckscher-Ohlin model predicts that trade openness causes the skill premium to increase in the skill abundant developed countries, and to decrease in the skill scarce developing countries, after trade openness. Empirical evidence, however, shows that the skill premium declined in some developing countries, while others experienced an increase in wage inequality. This paper develops a North-South model, where firms produce a low-skilled and a high-skilled intensive good. The production of a unit of either good involves a continuum of L-tasks and H-tasks. The L-tasks can be performed by low-skilled workers only, and the H-tasks can be performed by high-skilled workers only. The Northern firms can produce the task in their headquarters, or offshore the task to the South. The results suggest there is a threshold skill abundance level in the South, above which countries experience an increase in the skill premium after an improvement in the offshoring technology, and below which countries experience a decrease in the skill premium. In this context, the North offshores the H-tasks to countries that are relatively more abundant in high-skilled labor, and L-tasks to countries that are relatively more abundant in low-skilled labor. Therefore, countries that become the hosts of L-tasks experience a decrease in the skill premium, because there will be higher demand for their low-skilled workers, while those that become the hosts of the H-tasks will experience an increase in the skill premium, because there will be higher demand for their high-skilled workers. This accounts for the asymmetric patterns of skill premia in the South. JEL Classifications: F16, J31, O34