Ronald A. Ratti

Monetary policy, oil price shocks, and the Japanese economy

Abstract Hamilton’s [J. Monetary Econ. 38 (1996) 215] measure of oil price shock is statistically significant in explaining real activity in Japan and also has a statistically significant impact on the stance of Japanese monetary policy. It is estimated that the call money rate was higher by 2.0 percentage points due to the first major oil price shock in the mid 1970s and was higher by about 2.5 percentage points due to the second major oil price shock in 1979–1980. It is found that between 30 and 50 percent of the negative impact of oil price shocks on Japanese output is attributable to monetary tightening induced by oil price shocks. This result continues to hold when the effects of domestic fiscal policy, US monetary policy, and exchange rate regime are recognized.

Long-run neutrality, high inflation, and bank insolvencies in Argentina and Brazil

Using long, low frequency data on money and output over 1884-1996 for Argentina and over 1912-1995 for Brazil, it is found that money is long-run neutral but not long-run superneutral with regard to real output. A rise in money growth is associated with a decline in output - the opposite of the Tobin effect. The introduction of dummy variables for 1930s or to capture recent periods of financial disruption associated with bank insolvencies does not restore long-run superneutrality for either country. However, results indicate that bank insolvency episodes have a distinct and negative influence on output.

Bank Attitude Toward Risk, Implicit Rates of Interest, and the Behavior of an Index of Risk Aversion for Commercial Banks

This paper presents an analysis of a quasi-risk-averse bank facing uncertainty with respect to demand deposit flows and default risk on loans. On the basis of a formal model, testable hypotheses of bank attitude toward risk and the qualitative behavior of the index of relative risk aversion for commercial banks are developed. Through the use of data on the member banks of the Tenth Federal Reserve District, the empirical tests that were conducted indicated that banks are strongly risk-averse and that their index of relative risk aversion is increasing in profits. These results suggest that favorable (unfavorable) environmental changes will generate income effects that will result in proportionately less (more) risk taking by banks.

Oil price shocks and volatility in Australian stock returns

This paper examines the effect of oil shocks on return and volatility in the sectors of ‎Australian stock market and finds significant effects for most sectors. For the overall market ‎index, an increase in oil price return significantly reduces return, and an increase in oil price ‎return volatility significantly reduces volatility. An advantage of looking at sector returns ‎rather than a general index of stock returns is that sectors may well differ markedly in how ‎they respond to oil price shocks. The energy and material sectors (as expected) and the ‎financial sector (surprisingly) are out of step (in different ways) with results for the other ‎sectors and for the overall index. A rise in oil price increases returns in the energy and material ‎sectors and an increase in oil price return volatility increases stock return volatility in the ‎financial sector. Explanation for the negative (positive) association between oil return (oil ‎return volatility) and returns (volatility of returns) in the financial sector must be based on the ‎association via lending to and/or holdings of corporate bonds issued by firms with significant ‎exposure to oil price fluctuations and their speculative positions in oil related instruments. ‎

Oil Price Shocks, Firm Uncertainty, And Investment

It is found that an oil price shock in interaction with a firm’s stock price volatility has a ‎negative effect on investment by that firm, both in the short and long-term. In the presence of ‎this interaction term, linear variables in oil price shocks are not statistically significant. There is ‎evidence that for the short-term effects of the interaction variable, the particular magnitude of an ‎oil price shock may not be as important as the fact that there is an oil price shock. For the long-‎term effects, however, the magnitude of the oil price shock does matter. Over a longer horizon, ‎oil price shocks depress investment more at firms facing greater uncertainty. An increase in firm ‎stock price volatility continues to reduce the link between sales growth and investment in the ‎presence of oil price shocks as in Bloom et al. (2007).‎

Time-Varying Effect of Oil Market Shocks on the Stock Market

A mixture innovation time-varying parameter VAR model is used to examine the impact of structural oil price shocks on U.S. stock market return. Time variation is evident in both the coefficients and the variance-covariance matrix. The standard deviations of the demand side structural shocks reached forty year peaks during the global financial crisis and have remained high since. In the real stock return equation the coefficient of global real economic activity has declined since the late 1990s and that of oil-market specific demand oil shock has been lower since the early 1990s than before. The structural oil shocks account for 25.7% of the long-run variation in real stock returns overall, with substantial change in levels and sources of contribution over time. The contribution of shocks to global real economic activity to real stock return variation rose sharply to 22% in 2009 (and remains 17% over 2009-2012). The contribution of oil-market specific demand price shocks rose unevenly from 5% in the mid-1970s to about 15% in 2007, with a subsequent decline. The contribution of oil supply shocks has trended downward from 17% to 5% over 1973-2012.

Variation in the real exchange rate as a source of currency substitution

Abstract This paper presents a ‘shopping cost’ money service model in which it is shown that the real exchange rate influences the desired ratio of domestic-to-foreign-currency bank deposits. Empirically, it is found that if the real exchange rate value of the Canadian dollar falls then US dollar deposits of Canadians rise relative to Canadian M2. This relationship is found to be cointegrated. Dynamic adjustment analyzed using an error correction model indicates a cyclical adjustment. The results provide evidence that variation in the real exchange rate is a source of currency substitution and reinforces the argument that demand side factors influence the money stock. (JEL E41).

On a general equilibrium model of the incidence of the corporation tax under uncertainty

Abstract This paper addresses two issues. First, we demonstrate that when there is uncertainty in a general equilibrium model of a large country the usual rule for the auctioneer, that of searching for a set of relative prices at which excess demand in each market is zero, is no longer appropriate. It is suggested that the setting of expected demand to expected supply in each market would be a convenient generalization. Secondly, results on the incidence of the corporation income tax when there is uncertainty in the corporate sector, and alternatively when there is uncertainty in the noncorporate sector, are presented.

Effects of Unanticipated Monetary Policy on Aggregate Japanese Output: The Role of Positive and Negative Shock

In this paper, evidence is presented for Japan that an asymmetry exists between the effects of positive and negative money shocks on output. This result held over different lag lengths in the monetary variables, for different specifications of the call money rate equation, and when monetary policy was measured by the monetary base or by M2 + CD. Unanticipated money, unlike positive and negative shocks, was statistically insignificant in explaining output. Results reinforce findings for the United States that an asymmetry between the effects of unexpected expansionary and contractionary monetary policy may constitute an empirical regularity requiring further investigation.

THE INCIDENCE OF THE CORPORATION INCOME TAX: A LONG-RUN, SPECIFIC FACTOR MODEL*

conclusive issue. Harberger [10] concludes that capital bears 100% of the burden of the corporation income tax in the U.S. using a two-sector, two-factor, neo-classical general equilibrium model. The adjustments comprising inter-industry capital flows in the Harberger model, equating net sectoral rates of return, have to be sufficiently long-run in order to allow for the capital flows to take place. Krzyzaniak and Musgrave [12], using an econometric approach, however, have claimed that the corporation income tax is probably more than shifted, i.e. the owners of capital gain with respect to the after-tax income. Their analysis is essentially shortrun, without a necessity for the capital-flow adjustment mechanism. Based on the techniques of multiple regression, their study analyzes the effect of the corporation income