School of Economics and Finance · Te Kura Ohaoha Pūtea: Working Paper Series

Permanent URI for this collectionhttps://ir.wgtn.ac.nz/handle/123456789/21216

The School of Economics and Finance has an active research environment with very strong links to business, government and financial institutions in Wellington and wider New Zealand.

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Open Access
The 1960 Tsunami in Hawaii: Long Term Consequences of a Coastal Disaster
(Te Herenga Waka—Victoria University of Wellington, 2012) Lynham, J; Noy, I; Page, J
Research on the economic and human toll of natural disasters focuses on the short-term, often ignoring the important long-term impacts of these catastrophic events. The main reason for the lack of empirical research on the long-term is the inherent and unavoidable difficulty in identifying any long-term impacts and attributing them to the disaster. On the 23rd of May 1960, a devastating tsunami struck the city of Hilo on the island of Hawaii. Remarkably, there was no significant injury or damage elsewhere in the Hawaiian Islands. This tsunami provides a unique natural experiment as the tsunami was unexpected, and the other Hawaiian Islands, which were not hit by the tsunami, provide an ideal control group that enables us to precisely identify the counter-factual. We use a newly developed synthetic control methodology formalized in Abadie et al. (2010) to measure the long-term impacts of the tsunami. We find that while wages did not decline noticeably, population and employment trends shifted. Fifteen years after the event, unemployment was still 32% higher and population was still 9% lower than it would have been had the tsunami not occurred. We also find a corresponding decrease in the number of employers and sugar production in the county.
Open Access
Accounting for productivity growth in a small open economy: Sector-specific technological change and relative prices of trade
(Te Herenga Waka—Victoria University of Wellington, 2017) Cao, Shutao
Many economies experienced a slowdown of measured productivity in the 2000s, coinciding with the commodity price boom. We use a multisector growth model for a small open economy to quantify the contribution of sector-specific technology and relative prices of trade to productivity slowdown. We show that the effective aggregate total factor productivity consists of two components: the weighted average of sector-specific technology, and the weighted averaged of domestic-export price ratios which reflect export costs. This extends the Domar aggregation result of Hulten (1978). When calibrated to the Canadian data, the model suggests that productivity slowdown was mainly attributed to two sectors: commodity; machinery and equipment. Cross-country data show that, in two thirds of countries that experienced productivity slowdown, slower productivity growth in sectors serving domestic market was a dominant factor, while in the other one third, reduced domestic-export price ratio played a major role.
Open Access
Analytic Valuation of GMDB Options with Utility Based Asset Allocation
(Te Herenga Waka—Victoria University of Wellington, 2020) Ulm, Eric
A number of analytic solutions have been found for Variable Annuity Guaranteed Minimum Death Benefit (GMDB) option values under a variety of mortality laws. To date, the solutions are for Risk-Neutral valuation only. Where policyholder decisions are allowed, it is assumed that they act to maximize the risk-neutral value of the GMDB. We examine situations where the asset allocation decisions are made to maximize expected utility rather than option value. We find analytic solutions for both return of premium and ratchet options at small values of bequest motive for a number of mortality laws.
Open Access
Approximations to viability kernels for sustainable macroeconomic policies
(Te Herenga Waka—Victoria University of Wellington, 2011) Krawczyk, Jacek B; Pharo, Alastair; Simpson, Mark
Maintaining an open economy within certain bounds on inflation, output gap and exchange rate can help sustainable economic development. Macroeconomics proposes monetary-policy models that describe evolution of the above quantities. We use one such model, constituted by a four-metastate one-control system, to compute viability kernel approximations that one can use to assist the central bank to establish "sustainable" policies. We propose a simple heuristic algorithm that leads to kernel approximations for this and similar models.
Open Access
Are professors worth it? The value-added and costs of tutorial instructors
(Te Herenga Waka—Victoria University of Wellington, 2018) Feld, Jan; Salamanca, Nicolás; Zölitz, Ulf
A substantial share of university instruction happens in tutorial sessions— small group instruction given parallel to lectures. In this paper, we study whether instructors with a higher academic rank teach tutorials more effectively in a setting where students are randomly assigned to tutorial groups. We find this to be largely not the case. Academic rank is unrelated to students’ current and future performance and only weakly positively related to students’ course evaluations. Building on these results, we discuss different staffing scenarios that show that universities can substantially reduce costs by increasingly relying on lower-ranked instructors for tutorial teaching.
Open Access
At the very edge of a storm: The impact of a distant cyclone on Atoll Islands
(Te Herenga Waka—Victoria University of Wellington, 2016) Taupo, Tauisi; Noy, Ilan
The intensity of cyclones in the Pacific is predicted to increase and sea levels are predicted to rise, so a small atoll nation like Tuvalu can serve as the ‘canary in the mine’ pointing to the new risks that are emerging because of climatic change. In Tuvalu, households are acutely vulnerable to storm surges caused by cyclones even if the cyclone itself passes very far away (in this case about a 1000km). Based on a survey we conducted in Tuvalu, we quantify the impacts of cyclone Pam (March 2015) on households, and the determinants of these impacts in terms of hazard, exposure, vulnerability and responsiveness. Lastly, we constructed hypothetical policy scenarios, and calculated the estimated loss and damage they would have been associated with – a first step in building careful assessments of the feasibility of various disaster risk reduction policies.
Open Access
Attorney fees in repeated relationships
(Te Herenga Waka—Victoria University of Wellington, 2016) Graham, Brad; Robles, Jack
We investigate contracts between a law firm and a corporate client involved in a repeated relationship. In contrast to the previous literature pertaining to one-time interactions between clients and attorneys, we find that the contingent fee is not the best arrangement. Rather, the contingent fee is dominated by a contract which, we argue, an outside observer could not distinguish from simple hourly fee contract. This contract includes an hourly fee equal to the law firm’s opportunity cost, a lump sum, and a retention function. The lump sum payment is independent of the number of hours worked by the law firm and the outcome of the case. The repeated nature of the relationship allows the client to create a contract where the desire to maintain the relationship induces the law firm to exert the optimal level of effort in the current case.
Open Access
Banking crises and sudden stops: What could IMF do to assist?
(Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying
Along the studies suggesting IMF to promote private capital flows, this paper sheds light on the links of banking crisis and sudden stops and provides suggestions which are flexible and more specific for countries in various situations of sudden stops. In this overlapping generation framework in an open economy with international credit markets, both the default risks of firms’ loan repayment, and the possibilities of bank runs are considered. As a result, there are good and bad equilibriums, depending on whether bank runs would occur in the lifetime. In the four bad equilibrium discussed in the paper, sudden stops may be unnecessary or unavoidable coinside with the expectation of bank runs, which may or may not occur as expected. There are bad equilibriums in which sudden stops are unnecessary. These are the cases when IMF’s assistance could prevent sudden stops, and the repayment to IMF’s short-term lending facilities can be guaranteed. In the bad equilibriums when bank runs are unavoidable and when sudden stops cannot be prevented and may last for a long period of time, it could be very costly to assist countries in such equilibrium without certain policies becoming effective. Assisting several countries under this circumstances all together could jeopardize IMF’s situation. These findings are consistent with those in [Eichengreen, Guptam and Mody (2006)], and the suggestions for countries in various situations are more specific.
Open Access
Banking crises, sudden stops, and the effectiveness of short-term lending
(Te Herenga Waka—Victoria University of Wellington, 2013) Chang, Chia-Ying
This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.
Open Access
Basic understanding of social inequality dynamics
(Te Herenga Waka—Victoria University of Wellington, 2015) Krawczyk, Jacek B; Townsend, Wilbur
We provide an introduction to a model of social inequality dynamics. Because capital is distributed less equally than labour, we propose that that one of the main forces driving income inequality is the ratio of factor shares. In this paper we give an easy proof to show that this ratio is driven by the output elasticity of capital.
Open Access
Behavioural economics perspectives: Implications for policy and financial literacy
(Te Herenga Waka—Victoria University of Wellington, 2012) Altman, Morris
This paper summarizes and highlights different approaches to behavioural economics. It includes a discussion of the differences between the “old” behavioural economics school, led by scholars like Herbert Simon, and the “new” behavioural economics, which builds on the work of Daniel Kahneman and Amos Tversky and is best exemplified by Richard Thaler and Cass Sunstein’s recent book, Nudge. These important currents in behavioural economics are also contrasted with the conventional economic wisdom. The focus of this comparative analysis is to examine the implications of these different approaches in behavioural economics for financial literacy.
Open Access
A boosted HP filter for business cycle analysis: evidence from New Zealand’s small open economy
(Te Herenga Waka—Victoria University of Wellington, 2022) Hall, Viv B; Thomson, Peter
We investigate whether the boosted HP filter (bHP) proposed by Phillips and Shi (2021) might be preferred for New Zealand trend and growth cycle analysis, relative to using the standard HP filter (HP1600). We do this for a representative range of quarterly macroeconomic time series typically used in small theoretical and empirical macroeconomic models, and address the following questions. Tradition dictates that business cycle periodicities lie between 6 and 32 quarters (e.g. Baxter and King, 1999) (BK). In the context of more recent business cycle durations, should periodicities up to 40 quarters or more now be considered? Phillips and Shi (2021) propose two stopping rules for selecting a bHP trend. Does it matter which is applied? We propose other trend selection criteria based on the cut-off frequency and sharpness of the trend filter. Are stylised business cycle facts from bHP filtering materially different to those produced from HP1600? In particular, does bHP filtering lead to New Zealand growth cycles which are noticeably different from those associated with HP1600 or BK filtering? HP1600 is commonly used as an omnibus filter across all key macroeconomic variables. Does the greater flexibility of bHP filtering provide better alternatives? We conclude that the 6 to 32 quarter business cycle periodicity is sufficient to reflect New Zealand growth cycles and determine stylised business cycle facts and, for our representative 13-variable macroeconomic data set, using a bHP filter (2HP1600) as an omnibus filter is preferable to using the HP1600 filter.
Open Access
Can a home country benefit from FDI? A theoretical analysis
(Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying
The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.
Open Access
Can implied forward mortgage rates predict future mortgage rates - recent New Zealand experience
(Te Herenga Waka—Victoria University of Wellington, 2011) Tripe, David; Xia, Bingru; Roberts, Leigh
Retail mortgage rate data for the last 13 years in New Zealand indicates that implied forward mortgage rates have only limited power to predict later spot mortgage rates. The low correlation of the forward rates and the future spot rates may in part arise from thin futures and forward markets in interest rates in New Zealand for anything longer than short term contracts. While the pattern of mortgage yield curves has varied substantially over those 13 years, the accumulated or future value of a putative deposit of one dollar with a bank offering the same term rates as the mortgage rates shows relatively little variation over this period. In the wake of the uncertainties following the global financial crisis, the relatively stable pattern of these accumulated values probably provides the best means of prediction of New Zealand mortgage yield curves, at least in the short term. The framework used for dealing with data in this paper could be applied to yield curves based on further families of interest rates; to exchange rates; to analyses of run-off data, as in cohort and longevity analysis; and for claims payments run-off in insurance, as well as in many other contexts.
Open Access
Capital Controls in Brazil: Stemming a Tide with a Signal?
(Te Herenga Waka—Victoria University of Wellington, 2012) Jinjarak, Y; Noy, I; Zheng, H
Controls on capital inflows have been experiencing a period akin to a renaissance since the beginning of the global financial crisis in 2008, with several prominent countries choosing to impose controls; e.g., Thailand, Korea, Peru, Indonesia, and Brazil. We focus on the case of Brazil, a country that instituted five changes in its capital account regime in 2008-2011, and ask what the impacts of these policy changes were. Using the Abadie et al. (2010) synthetic control methodology, we construct counterfactuals (i.e., Brazil with no capital account policy change) for each policy change event. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls are relaxed as was done in the immediate aftermath of the Lehman bankruptcy in 2008 and in January 2011 by the newly inaugurated government of Dilma Rousseff. We hypothesize that price-based capital controls’ only perceptible effect are to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. Brazil’s left-of-center government was widely perceived as ambivalent to markets. An imposition of controls was not perceived as ‘news’ and thus had no impact. A willingness to remove controls was perceived, however, as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.
Open Access
Capital controls, capital flows, and banking crises
(Te Herenga Waka—Victoria University of Wellington, 2013) Chang, Chia-Ying
Capital controls have been adopted by emerging economies to change the volume and the composition of capital flows and to protect the economy from sudden stops. The effectiveness measured by empirical studies has remained inconclusive, due to the limitation of the available data. This paper adopts a theoretical model to examine whether capital controls could achieve these goals effectively. Consequently, this paper finds that capital controls on outflows and inflows may not achieve the goals on changing the volume and the composition of capital flows and on protecting the economy from banking crises and sudden stops. To be more specific, controls on capital outflows and inflows could change the volume of capital flows at the time when the controls are imposed. However, the ability of capital controls on changing composition of capital flows and to protect the country from banking crises and sudden stops is limited, regardless of symmetric or asymmetric controls across countries. It is concluded that capital controls may not be the way to protect the economy from sudden stops. It is overcoming the liquidity problems and offering affordable rates, rather than competitive rates, that are crucial to protect the economy from crises and sudden stops.
Open Access
Changes in New Zealand’s Business Insolvency Rates after the GFC
(Te Herenga Waka—Victoria University of Wellington, 2019) Hall, Viv; McDermott, John
We examine the question of whether the rate of business insolvencies in New Zealand is related to overall macroeconomic conditions. In particular, our interest is in whether the rate of business insolvencies changed in the wake of the Global Financial Crisis (GFC). We find that there was a large increase in insolvencies in New Zealand following the onset of the GFC in 2008. We also find that the timing of the change did not occur uniformly over the country but occurred at different times in four key regional centres. Sharply rising relative costs were the most important macroeconomic factor influencing corporate insolvencies in New Zealand, Auckland, Waikato and Wellington, but have been immaterial in determining New Zealand’s total personal insolvencies. It is employment growth and house price inflation that have been significant in explaining total personal insolvencies.
Open Access
Comparing the direct human impact of natural disasters for two (surprisingly similar) cases — the Christchurch earthquake and Bangkok flood of 2011
(Te Herenga Waka—Victoria University of Wellington, 2015) Noy, Ilan
The standard way in which disaster damages are measured involves examining separately the number of fatalities, of injuries, of people otherwise affected, and the financial damage that natural disasters cause. Here, we implement a novel way to aggregate these separate measures of disaster impact and apply it to two recent catastrophic events: the Christchurch (New Zealand) earthquakes and the Greater Bangkok (Thailand) floods of 2011. This new measure, which is similar to the World Health Organization’s calculation of Disability Adjusted Life Years (DALYs) lost from the burden of diseases and injuries, is described in detail in Noy (2014). It allows us to conclude that New Zealand lost 180 thousand lifeyears as a result of the 2011 events, and Thailand lost 2,644 thousand years. In per capita terms, the loss is similar, with both countries losing about 15 days per person due to the 2011 catastrophic events in these two countries. We also compare these events to other potentially similar events.
Restricted
Consistent estimation of breakpoints in time series, with application to wavelet analysis of Citigroup returns
(Te Herenga Waka—Victoria University of Wellington, 2014) Roberts, Leigh
Simple and intuitive non-parametric methods are provided for estimating variance change points for time series data. Only slight alterations to existing open-source computer code applying CUSUM methods for estimating breakpoints are required to apply our proposed techniques. Our approach, apparently new in this context, is first to define two artificial time series of double the length of the original by reflective continuations of the original. We then search for breakpoints forwards and backwards through each of these symmetric extensions to the original time series. A novel feature of this paper is that we are able to identify common breakpoints for multiple time series, even when they collect data at different frequencies. In particular, our methods facilitate the reconciliation of breakpoint outputs from the two standard wavelet filters. Simulation results in this paper indicate that our methods produce accurate results for time series exhibiting both long and short term correlation; and we illustrate by an application to Citigroup stock returns for the last thirty years.
Open Access
Cooperative organizations as an engine of equitable rural economic development
(Te Herenga Waka—Victoria University of Wellington, 2014) Altman, Morris
Cooperatives represent an alternative to large-scale corporate farms and plantations as well as to independent unaffiliated small private farms. This paper presents a comparative modeling narrative on cooperative organizational forms’ potential impact on equitable rural development. This speaks to issues of both increasing the size of the economic pie and how this income is distributed. The case is made the cooperatives can potentially generate higher rates of growth and more equitable growth, even in competitive economic environments. An important type of cooperative that is focused upon is one based on the linking of smaller farms into a cooperative. Economies economics of scale and scope as well in transaction costs can be captured by the cooperatives. Given cooperative governance, one would also expect higher levels of x-efficiency. Overall, cooperatives can generate relative high incomes to cooperative members, whilst remaining competitive with the traditional privately owned large farms. Critical to the success of the cooperative, is a set rules and regulation that place them on a level playing field with the privately owned farm. In addition, the implementation and practice of cooperative principles is key to the success of the cooperative farm and rural cooperatives, more generally speaking.