Masanori Amano

Credit rationing of a Bayesian bank with simple screening technologies

Abstract This paper deals with credit rationing in bank loan markets. The bank is assumed to act as a Bayesian statistician to improve its subjective distribution of the default rate and its ability to identify risky loan applicants. Credit rationing arises as a result of profit maximization of the bank, which takes into account the expected amount of overall default as well as loans demanded by identified defaulters who are denied credit. The comparative statics depend, among other things, on the relative size of prior and sample means of the default rate, and on the form of the banks information cost function.

Estimating the ‘Missing Equations’ for Developing Countries

This chapter will discuss how annual nominal income change is divided between output change and the price (level) change. The concept is phrased alternatively as the nominal income elasticities of output (eo) and the price level (ep), respectively, where eo+ep=1, as is shown later on. Also, the elasticities of positive fraction correspond to the intermediate situations between the two cases with which Friedman (1970) closed his macro models: quantity theory and income-expenditure theory. Quantity theory and income-expenditure theory are represented by eo = 0 and eo = 1, respectively. Here, one cannot fail to mention the concept of eo and ep in Keynes (1936, chs 20 and 21).

A Quest for the ‘Missing Equations’ in OECD Countries

This chapter searches for the determinants of nominal income elasticities of total output and the price level in the postwar time series of some OECD countries. The elasticities indicate how annual changes in nominal GDP are divided between output changes and price level changes. This concept was described by Gordon (2009, ch 7) as one of unresolved questions in macroeconomics, since the time of Keynes (1936, chs 20, 21) and Friedman (1970, 1971). Friedman (1970) presented two macroeconomic models, one quantity theory and another income-expenditure theory, where the former system is closed by the assumption that total output is constant, and the latter by the assumption that the price level is constant. Friedman called either assumption a ‘missing equation’, but the term missing equation could be generalized to imply the equation involving intermediate situations between the two theories, which determines the proportions of output and price changes which accompany nominal income changes, because, as Friedman wrote in Gordon (1974, p. 45), ‘the chief defect that this model [in Friedman (1971)] shares in common with the other two [that is the above two models] is that none of the three [models] has anything to say about the factors that determine the proportions in which a change in nominal income will, in the short-run, be divided between price change and output change …’

Has Growth Been Led by Investment or Exports? Prewar and Postwar US, UK, and Japan

The recent few decades have seen a large volume of literature on econometric, cross-country quests for factors promoting growth rates of (per capita) real GDP in a wide range of countries. Though the empirical research is still going on, it is now widely recognized that domestic investment and the volume of exports (both usually in per capita terms or as proportions of GDP) are the two most robust factors promoting economic growth, irrespective of other variables included as possible candidates for growth promoters (Levine and Renelt (1992); some may assert that it will be a sum of exports and imports that affects a country’s economic growth; however, we are concerned with two major demand factors that may affect economic growth; and also Levin and Renelt (1992, p. 953) note in their crosscountry regressions that the results are essentially the same whether one uses exports, imports, or their sum, as the trade volume). Hence it will be a natural development in research agenda to inquire which of the two growth promoters, exports or investment, was more forceful in raising the growth rate in historical contexts of various countries.

Financial Structure and Economic Growth: Evidence from the USA, the UK, and Japan

The past few decades have seen a considerable body of literature dealing with causality relationships between economic growth and financial development for a variety of countries, both developed and developing. In addition to the early classic work of Gurley and Shaw (1960), Goldsmith (1969), and McKinnon (1973), the econometric work of Kormendi and Meguire (1985) and Barro (1991) brought to light the important roles of financial development in raising growth rates of the economies. King and Levine (1993a, b) face more directly the role of financial development in growth processes. More recent work along this line, in addition, underlines the direct financial routes along with indirect ones in explaining the influence of financial development on economic growth; see Levine and Zervos (1998) and Rajan and Zingale (1998). As is well and usefully summarized in Demirguc-Kunt and Levine (2001, particularly chs 1, 3, and 5), this group of work showed in cross-country regression frameworks that it is mainly the total volume of finance and not the proportion of direct/indirect financial routes that is important for the subsequent growth performance of the countries. Beck and Levine (2002), using a panel data as well as cross-country regression, derive a conclusion similar to that of the above book that financial development, but not financial structure, positively affects the growth of industry and the economy.

The NAIRU, Potential Output, and the Kalman Filter: A Survey and Method of Estimation

The concepts of NAIRU (non-accelerating inflation rate of unemployment) and potential output have received increasing attention recently as the rate of inflation has occupied a higher position in monetary policy discussion. This seems particularly true as more central banks of various economies regard inflation as a main targeting variable in their policy operations (Bernanke and Mishkin (1997)). For, if the central bank can correctly forecast the future course of the NAIRU and if it can steer the economy to that position, then the policy authority can obtain a stable rate of inflation. In addition, if it can control the growth of money supply, at least in the medium-term horizon, the rate of inflation of the economy would be controlled at a low and stable level.

The ‘Missing Equations’ for Postwar USA, UK, and Japan

Searching for factors which determine the proportion of output change in nominal income change, and the proportion of price change in nominal income change, has been regarded as one of the unresolved questions in macro-economics. (See Nobay and Johnson 1977; Gordon 2009, ch 7.) In the papers which were intended to describe monetary theory in the monetarist tradition, M. Friedman (1970, 1971) and Gordon (1974) presented frameworks for monetary analysis which describe the quantity theory and the income-expenditure theory. The two frameworks differ in the last equation, which solves the variables of the systems determinately. The difference between the two frameworks described by Friedman was that one made output (national income) fixed for quantity theory, while the other made the price level fixed for income-expenditure theory.

The NAIRU, Potential Output, and Okun’s Law: Postwar USA, UK, and Japan

In the previous chapter we estimated the NAIRU (non-accelerating inflation rate of unemployment, which is synonymous with the natural rate of unemployment)1 and potential output for postwar Japan using annual data. In that chapter, we left the following three points for future work. These are (i) to examine the relative merits of using, as a generator of inflation, either the GDP deflator, the consumer price index, or the wholesale price index; since potential output is a concept relating to GDP, a reasonable choice would be the first one, but one may need a formal criterion for comparing among the three indexes, (ii) to endogenously estimate error variances of an observation equation and a transition equation (or transition equations) of Kalman filter models,2 and (iii) to handle the quarterly data, which will facilitate the work mentioned in point (ii).

Was It Investment or Exports That Led Economic Growth? 13 Developing Country Experiences

In a paper which dealt with the strength of various explanatory variables in cross-country growth regressions, Levine and Renelt (1992) found the (domestic) investment-output ratio to be the most robust variable in explaining the growth of per capita output of developed and developing countries. They also found that the trade amount-output ratio usually affects the investment-output ratio. Combining these two points suggests that the next task would be to examine which is the more forceful variable, between investment and exports, in causing country’s per capita output to grow faster.

Finance and Growth: VARs with Cointegration for the USA, the UK, and Japan

A considerable literature has been developed so far, trying to find the effects of financial development on the real aspects of economic development and, particularly, on the growth of per capita real GDP, since the seminal work of Gurley and Shaw (1955, 1960). They argue that by offering more extensive sorts of saving instruments to households, the development of financial institutions (FIs) can increase saving flow from households and raise firms’ investment volume, with broader menus of loan packages and with risk reduction through the economy of scale and risk-pooling. The development can also enhance the quality (profitability) of investment by specialized screening techniques of FIs. In summary, the development of FIs occurs in advance of, and assists, the development of real economic activity through those avenues.