Ratbek Dzhumashev

The equity premium puzzle and the ex post bias

This article argues that high historical excess returns to equity were the result of a severe ex post bias in the period from 1915 to ca 1960 because inflation surprises during this period drove a wedge between ex ante and ex post returns to bonds. Furthermore, it is shown that ex ante and ex post returns to stocks are identical in a steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.3–4.4% over the past 132 years.

A Growth Model with Income Tax Evasion: Some Implications for Australia†

We develop an endogenous growth model a la Barro (1990), augmented with income tax evasion. Unlike many traditional rational choice models of tax evasion, the numerical simulations of our model do not produce counter-intuitive results. Further, we show that: (i) accounting for evasion costs (while capturing the full risk associated with the tax evasion process) is important for obtaining realistic relationships between key model variables; (ii) productive government expenditures explicitly affect the economys tax evasion rate; (iii) Barros natural efficiency condition for setting the optimal statutory tax rate holds even in the presence of tax evasion; (iv) given realistic estimates of the public expenditure externality, the average marginal income tax rate in Australia is not too far away from the optimal one; and (v) differences in tax evasion opportunities aggravate inequality over time.

The Effect of Informal Networks on Corruption in Education: Evidence from the Household Survey Data in Bangladesh

Abstract Using the 2007 household survey data collected by Transparency International Bangladesh, we examine corruption in the education sector in Bangladesh. Our main findings are (i) the incidence of corruption and the amount of bribe increase with the level of red tape, (ii) poorer households, households with a less educated household head, and households with girls studying in school are more likely to be victims of corruption, (iii) households with higher social status are more likely to use informal networks to bypass the red tape or pay less amount of a bribe and, as a result, (iv) corruption is likely to be regressive.

Stock returns and economic growth

Theoretical considerations appear to support the conjecture that stock returns are positively related to growth in the long run. However, the empirical literature does not give unanimous support to the theory. Based on a stochastic general equilibrium model it is argued that the long-run relationship between stock returns and per capita income growth is ambiguous and depends on output volatility. Using a century of data for 20 Organization for Economic Co-operation and Development (OECD) countries it is shown that the relationship between stock returns and growth is positive over the period 1916–1951, in which output volatility was persistent. Outside this period no relationship between stock returns and growth is found. These findings are consistent with the predictions of the theoretical model.

The Role of Income Uncertainty in the Corruption–Growth Nexus

Abstract This paper analyses how corruption-induced income uncertainty affects the relationship between corruption and economic growth. The analysis reveals both the growth-enhancing and deteriorating effects of corruption that transmit through the income and productivity channels, and shows how income uncertainty caused by corruption interacts with both of these effects. In particular, it is found that an increase in bribe rates and the probability of corruption that reduces the burden of regulations generate counteracting effects on income and productivity, where both effects are further aggravated by corruption-induced income uncertainty. On the other hand, a higher burden of bribes imposed by extortive bureaucrats hampers growth unambiguously. However, in a highly corrupt environment, an increase in the incidence of extortive behaviour can be growth enhancing as it reduces income uncertainty, while if corruption levels are relatively low, then a further increase in the incidence of such behaviour deteriorates growth. These findings give us a new insight into why the overall growth effect of corruption is ambiguous.

The equity premium and the required stock returns in a Tobin's q model with a stochastic discount factor

Based on the production-based Capital Asset Pricing Model (CAPM) principle, this article shows that earnings per unit of capital and the output capital ratio are excellent measures of expected stock returns because they are only temporarily affected by earnings shocks but affected permanently by changes in required share returns. Evidence for the US suggests that the risk premium is currently about 2% and that the covariance between consumption growth and expected returns is substantially lower than previously thought of; thus, reducing the equity puzzle substantially.

Fiscal equalization and composition of subnational government spending: implications for regional convergence

ABSTRACT This study examines the impact of fiscal equalization payments on the composition of government spending under endogenous growth theory. Analytical conjectures stemming from the model are tested empirically. As an instrumental variable for within-province variations in provinces’ equalization entitlements, we use plausibly exogenous variations in the grant eligibility rule for the Canadian fiscal equalization system. We find that fiscal equalization payments have a significant negative effect on the share of productive expenditures and a significant positive effect on the share of unproductive government expenditures. Furthermore, the results show that fiscal equalization lowers the speed of cross-regional convergence in real gross domestic product per worker.

The Feldstein-Horioka hypothesis revisited

Abstract Feldstein-Horioka hypothesis states that if there is perfect capital mobility, low correlation between domestic investment and savings should be observed. However, empirical analysis failed to confirm the hypothesis. This study attempts to shed a new light on international capital mobility by incorporating the effect of the fiscal balance and the financial balance. Specifically, for a panel of 161 countries over the 1990–2013 period, the extended model is tested in comparison with the existing models of capital mobility. At the aggregate level, strong support is found for the extended model; while, at the region disaggregated level, compared to the existing models the hypothesis of capital mobility holds for a larger number of regions. Our model and estimates are additionally extended to account for the fact that the above mentioned relationships, are conditional on the country’s level of financial development.

Global financial crisis and international division of labour

While the most optimistic economists and media commentators are rushing to declare that the worst of the world economic crisis is over, those declarations not only may be premature but also overshadow the fundamental reasons and possible lasting consequences of the current global downturn. In contrast to the prevailing line of arguments of the current orthodoxy on the reasons for the crises, this paper provides an explanation for the current crisis in simple real, rather than financial market, terms. First, we show theoretically the relationship between financial bubbles with both consumption and deindustrialization. Then, by estimating models, based on cross-country panel data, we derive a worldwide trend linking industrialisation to an improving balance of payments and foreign debt position, while, deindustrialisation is found to be correlated with balance of payments deficit and foreign debt. This might be an indication that post-industrial economic development, as it has been evolving so far, is “no-through road”, for Western nations, reducing opportunities for employment and ultimately leading to decreases in standard of living.