Mervyn A. King

Volatility and Links between National Stock Markets

The empirical objective of this study is to account for the time-variation the covariances between markets. Using data on sixteen national stock markets, we estimate a multivariate factor model in which the volatility of returns is induced by changing volatility in the orthogonal factors. Excess returns are assumed to depend both on innovations in observable economic variables and on unobservable factors. The risk premium on an asset is a near combination of the risk premia associated with factors. The main empirical finding is that only a small proportion of the time variation in the covariances between national stock markets can be accounted for by observable economic variables. Changes in correlations markets are given primarily by movements in unobservable variables. We also estimate the risk premia for each country, and are able to identify substantial movements in the required return on equity. Our results also suggest that, although inter-correlations between markets have risen since the 1987 stock market crash this is not necessarily evidence of a trend decrease.

Welfare Analysis of Tax Reforms Using Household Data

The paper discusses a methodology for calculating the distribution of gains and losses from a policy change using data for a large sample of households. Estimates are based on the equivalent income function, which is money metric utility defined over observable variables. This enables calculations to be standardised, and a computer program to compute the statistics presented in the paper is available for a general demand system. Equivalent income is related to measures of deadweight loss, and standard errors are computed for each of the welfare measures. An application to UK data for 5895 households is given which simulates a reform that involves eliminating housing subsidies.

An econometric model of tenure choice and demand for housing as a joint decision

Abstract This paper models a households choice of tenure and demand for housing services as a joint decision imposing the restriction that both discrete and continuous decisions are derived from a single preference ordering. The utility index for households is the translog form of the reciprocal indirect utility function allowing for random preferences. Each household chooses between the two main tenures, the owner-occupied and subsidised rental sectors, but households may be rationed in either or both of these sectors and refused admission, in which case they are assumed to enter the third sector, uncontrolled rental. The model is estimated on UK data for 5895 households.

Independence and Accountability

Why have central banks become more accountable and transparent in recent years? This paper considers a set of analytical models of monetary policy institutions to shed light on this. One conclusion it reaches is that uncertainty - regarding the central banks inflation preferences or about the underlying model of the world - can generate inflationary problems which transparency can help counteract. This offers one rationale for the current monetary policy framework in the UK. The paper also constructs a quantitative index of accountability. This suggests that transparency has been pursued most actively by central banks with little independence and a low accrued stock of credibility. Again, this chimes with UK experience. A shorter version of this paper is forthcoming in Toward more effective Monetary Policy - proceedings of the Seventh Internal Conference sponsored by the Bank of Japans Institute for Monetary and Economic Studies.

Pension wealth and household savings: Tests of robustness

A substantial literature exists on the impact of pension schemes, both public and private, on the level of household saving. Yet there is no clear consensus on the impact of pensions on private saving. In this paper we show how beliefs about this displacement effect are modified by prior beliefs both about variables which ntight be relevant in an equation for private savings and about the magnitude of the displacement effect. Using data for 8,279 Canadian households, and estimates of pension wealth (both private and social security) which we construct for each household in the sample, the estimated displacement effects are found to be relatively robust with respect to both types of prior belief.

A Dynamic Model of Investment and Endogenous Growth

Models of endogenous growth assume that private investment in either physical or human capital yields positive externalities to production possibilities as a whole. But what is the structure of such externalities? We present a model of learning by watchingwhich implies a nonlinear relationship between productivity growth and the investment rate. This results in multiple steady-state growth rates in a deterministic setting, and in a rich dynamic structure that generates both growth and cycles in a stochastic model (calibrated by reference to observable shocks to tax rates in the United Kingdom). Economies with identical structures can experience very different growth rates for long periods. The model exhibits path-dependence and history matters. Copyright 1993 by The editors of the Scandinavian Journal of Economics.

Corporate financial policy with personal and institutional investors

Abstract In this paper we present a simple general equilibrium model of the portfolio behavior of households and institutions, paying particular attention to the influence of differences in tax rates and attitudes toward risk. Under the plausible assumptions that households are more risk averse than institutions and possess a greater relative ‘tax preference’ for equity versus debt, we are able to characterize the equilibria which may result when debt is subject to bankruptcy risk.