Showing papers on "Stock and flow published in 2006"

Accounting Quality and Firm-Level Capital Investment

Abstract: This study examines how accounting quality relates to firm-level capital investment efficiency. Our first hypothesis is that higher quality accounting enhances investment efficiency by reducing information asymmetry between managers and outside suppliers of capital. Our second hypothesis is that this effect should be stronger in economies where financing is largely provided through arm's-length transactions compared with countries where creditors supply more capital. Our results are consistent with these hypotheses both across and within countries. They are robust to alternative econometric specifications, different measures of accounting quality and investment-cash flow sensitivity, and numerous control variables.

Firm-Specific Information and the Efficiency of Investment

Abstract: We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firm's expected future sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment.

Micro and Macro Data Integration: The Case of Capital

Abstract: Micro and macro data integration should be an objective of economic measurement as it is clearly advantageous to have internally consistent measurement at all levels of aggregation - firm, industry and aggregate. In spite of the apparently compelling arguments, there are few measures of business activity that achieve anything close to micro/macro data internal consistency. The measures of business activity that are arguably the worst on this dimension are capital stocks and flows. In this paper, we document, quantify and analyze the widely different approaches to the measurement of capital from the aggregate (top down) and micro (bottom up) perspectives. We find that recent developments in data collection permit improved integration of the top down and bottom up approaches. We develop a prototype hybrid method that exploits these data to improve micro/macro data internal consistency in a manner that could potentially lead to substantially improved measures of capital stocks and flows at the industry level. Wealso explore the properties of the micro distribution of investment. In spite of substantial data and associated measurement limitations, we show that the micro distributions of investment exhibit properties that are of interest to both micro and macro analysts of investment behavior. These findings help highlight some of the potential benefits of micro/macro data integration.

Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation

Abstract: Investment decisions are inherently forward-looking. The payoff of acquiring capital goods, particularly long-lived capital goods, is governed almost exclusively by events in the far future. Because the timing of the investment itself does not affect future payoffs, there are strong incentives to delay or accelerate investment to take advantage of predictable intertemporal variations in cost. For sufficiently long-lived capital goods, these incentives are so strong that the intertemporal elasticity of investment demand is nearly infinite. As a consequence, for a temporary tax change, the shadow price of long-lived capital goods must reflect the full tax subsidy regardless of the elasticity of investment supply. While price data provide no information on the elasticity of supply, they can reveal the extent to which adjustment costs are internal or external to the firm. In contrast, the elasticity of investment supply can be inferred from quantity data alone. The bonus depreciation allowance passed in 2002 and increased in 2003 presents an opportunity to test the sharp predictions of neoclassical investment theory. In the law, certain types of long-lived capital goods qualify for substantial tax subsides while others do not. The data show that investment in qualified properties was substantially higher than for unqualified property. The estimated elasticity of investment supply is high--between 10 and 20. Market prices do not react to the subsidy as the theory dictates. This suggests either that internal (unmeasured) adjustment costs play a significant role or that measurement problems in the price data effectively conceal the price changes. While the policy noticeably increased investment in types of capital that benefited substantially from bonus depreciation, the aggregate effects of the policy were modest. The analysis suggests that the policy may have increased output by roughly 0.1 percent to 0.2 percent and increased employment by roughly 100,000 to 200,000 jobs.

Comprehensive accounting in simple open economy macroeconomics with endogenous sterilization or flexible exchange rates

Abstract: This paper presents a stock-flow model of two economies (together comprising the whole world) that trade goods and financial assets with one another. The first part of the paper describes a single economy on a fixed exchange rate, with no private capital flows, in order to obtain simple analytic solutions that display the basic constraints and forces at work--notably, endogenous "sterilization." The second part describes a flexible exchange rate model, with two economies trading financial assets as well as merchandise. A final section adapts the two-country model to describe a fixed exchange rate regime. Our findings challenge established results, such as those of the Mundell- Fleming model.

Money and Capital as Competing Media of Exchange

Abstract: We construct a model in which capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

Does china save and invest too much

Abstract: China's current saving and investment levels are extraordinary--both in terms of its own history, but also by comparison with the current and historical experience of high-saving countries like Japan. The International Monetary Fund's 2005 World Economic Outlook places China's gross saving at 50 percent of GDP with gross capital formation, not far behind, at 45 percent of GDP (IMF 2005: 96-97). High levels of saving and investment are usually seen as a good thing. For a developing economy, such as China, a high level of domestic saving and investment means that residents are forgoing current consumption in order to add to the capital stock, thereby increasing growth and labor productivity. For a developed economy like the United States, while absolute levels of saving and investment may not match those in developing economies, a high level of saving and investment would mean that residents are financing most of the increase in the capital stock and are thereby positioning themselves to benefit from future returns earned by the enlarged capital stock. The reality for the United States over the past half-decade--a sharp rise in imports of foreign savings--means that returns from growth in the capital stock are increasingly earmarked for payment to foreign investors. Despite the satisfaction with which most commentators view its high levels of saving and investment, particularly since 2002, China has displayed increasing signs of overinvestment. As used here, the term overinvestment refers to a capital stock either too large or too poorly allocated to generate positive returns at the margin. Misallocated capital and excess capacity in the domestic sector implies a rapid increase in nonperforming loans, which are largely held by China's state banks. Excess capacity in the tradable goods sector implies a tendency to undervalue the exchange rate in order to maintain the growth of demand for exportables. The problem with currency undervaluation is that it results in excessive domestic growth of liquidity, which combined with an inability to diversify savings abroad, results in excessive speculation in the nontradable goods sector such as real estate and land. The Chinese government stepped in during 2003 to slow credit creation. The sharp drop in China's loan growth from a peak of nearly 25 percent year-over-year annually in 2003 to about 13 percent in 2005 and early 2006 has created a cash-flow crisis. The response by enterprises in the tradable goods sector has been to boost sales abroad while curtailing foreign purchases. China's overall trade surplus reached a record $102 billion in 2005, a 23 percent increase over 2004. This explosion of China's trade surplus has been concentrated on the United States, resulting in trade tensions and calls for China to revalue its currency. However, the real problem lies with China's reluctance to allow its huge saving flows to move abroad and thereby to provide a Chinese population that is rapidly accumulating wealth with adequate choices on where to store that wealth. China's government has undertaken the wealth storage role for the nation by investing heavily in U.S. government securities, mortgage-backed securities, and European bonds. The half-trillion dollars (an extraordinary one-third of GDP) it has acquired in foreign exchange reserves since 2002, while intervening to prevent the appreciation of its currency, represents a government decision to accumulate wealth in the form of claims on U.S. and European governments and financial intermediaries while subsidizing its tradable goods sector with an undervalued exchange rate. China is suppressing demand growth at home while stimulating it in advanced countries by accommodating borrowing and demand growth abroad. In short, part of the explanation for low real interest rates worldwide is global excess capacity. In China, if savers could earn high real returns on capital investment at home, financial capital would flow from the United States to China, not the other way around. …

The Relation between Stock Prices and Money Supply in Pakistan: AnInvestigation

Abstract: This paper examines the causal relationship between money supply and stock prices. The analysis indicates a long-run relationship between stock prices and money supply. The analysis further indicates unidirectional causality from Money Supply to KSE 100 Index both in the short run and in the long run. This implies that the stock market is not efficient with respect to M2 and past information regarding monetary assets can be helpful to predict movements in stock prices.

International Migration with Heterogeneous Agents: Theory and Evidence

Abstract: International migration is characterized by two puzzling facts: First, only a small share of the population tends to migrate although substantial and persisting income differences across countries exist Second, net migration rates tend to cease over time despite persisting income differences This paper addresses these issues in a migration model with heterogeneous agents that features temporary migration In equilibrium a positive relation exists between the stock of migrants and the income differential, while the net migration flow becomes zero Consequently, existing empirical migration models, estimating net migration flows instead of stocks, may be misspecified This suspicion appears to be confirmed by our empirical investigation of the cointegration relationships of German migration stocks and flows since 1967 We find that (i) panel-unit root tests reject the hypothesis that migration flows and the explanatory variables are integrated of the same order, while migration stocks and the explanatory variables are all I(1) variables, and (ii) the hypothesis of cointegration cannot be rejected for the stock model

Housing: An Analysis of Ownership and Investment Based on the Household Savings Survey

Abstract: In 2001, Statistics New Zealand conducted a major survey of the assets and liabilities of New Zealanders called the Household Savings Survey (HSS). This paper presents the results of an analysis of ownership and investment in housing based on the results of that survey. International comparisons suggest that the rates of home ownership, investment in property and housing debt levels in New Zealand are broadly comparable with those in Australia and the United States and with a wider set of countries. An exception is that younger age groups in New Zealand hold more investment property than their counterparts in the USA and Australia. In New Zealand almost one in ten couples owned rental property in 2001, while one in five owned some form of investment property. We examine the factors that govern tenure choice and gearing. Of note is the fact that 44% of couples and 56% of individual home owners have debt free residential properties. Households' balance sheets reflect the importance of housing for both assets and liabilities. We complement the analysis of the cross-sectional unit record data from the HSS with an analysis of housing taken from the households' aggregate balance sheets from 1978 to 2004 from the Reserve Bank of New Zealand. We use these data to form a measure of household saving based on the stock of net equity. We then adjust this measure of savings for changes in house prices, and find that this adjustment explains almost two thirds of the difference between the stock and flow measure of household savings, the latter taken from the Household Income and Outlay Accounts. Furthermore we find that from 1980 to 2005 the annual average rate of household saving based on these estimates from household balance sheets was 12.4% of personal disposable income, after removing the effect of changes in house price. Arguably this is a preferable measure of household saving to the widely cited negative rates of household saving based on national income accounts. We further use the balance sheet data to estimate the extent to which households have apparently withdrawn equity from their housing assets for investment in other forms or consumption. We find that on average a rise of one dollar in housing net equity is associated with 10 cents of apparent equity withdrawal.

Another look at the linear q model: an empirical analysis of aggregate business capital spending with maintenance expenditures

Abstract: The paper revisits the empirical investment literature, which has established that aggregate business fixed investment is not found to be related linearly to marginal or average Tobin's q. The theoretical background is extended here by developing a supply-side model where the depreciation rate of private capital is determined endogenously. The firm can either invest in ‘new’ capital, which adds directly to the existing capital stock at the presence of convex adjustment costs, or extend the durability of installed capital through maintenance expenditure, which affects its depreciation rate. The model shows that Tobin's q is then a positively related sufficient statistic for both components of aggregate capital expenditures. This central implication is tested empirically using aggregate time-series survey data from Canada on ‘new’ investment and maintenance expenditures covering the period 1956–93. The estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model. Le texte examine la litterature empirique sur l'investissement qui a etabli que le niveau d'investissement agrege des entreprises en capital fixe n'est pas relie de facon lineaire au coefficient moyen ou marginal q de Tobin. On enrichit l'arriere plan theorique en developpant un modele d'offre dans lequel le taux de depreciation du capital prive est determine de facon endogene. L'entreprise peut soit investir dans du capital ≪nouveau ≫ (ce qui ajoute directement au stock de capital existant) soit allonger la vie du capital en place par des depenses de maintenance qui modifient le taux de depreciation. Le modele montre que le coefficient q de Tobin est alors positivement relie aux deux composantes des depenses agregees en capital. Cette implication importante est mise au test empiriquement en utilisant les series chronologiques en provenance des enquetes de Statistiques Canada sur les nouveaux investissements et les depenses de maintenance pour la periode 1956–93. Les relations estimees produisent des parametres plausibles et significatifs pour les parametres structurels du modele q.

Volatility of short term capital flows, financial anarchy and private investment in emerging markets

Abstract: Using micro-level panel data, the paper analyses the impacts of short-term capital flow volatility on new fixed investment spending of publicly traded real sector firms in three major emerging markets that are Argentina, Mexico and Turkey. The empirical results including comprehensive sensitivity tests suggest that increasing volatility of capital inflows has an economically and statistically significant negative effect on new investment spending of private firms. Accordingly, a 10 per cent increase in capital flow volatility reduces fixed investment spending in the range of 1-1.7, 2.3-15.1, and 1 per cent in Argentina, Mexico and Turkey respectively.

The Non-Superneutrality of Money and its Distributional Effects when Agents are Heterogeneous and Capital Markets are Imperfect

Abstract: In this paper we develop an OLG model with heterogeneous agents, money and bequests, introducing occupational choice and financing constraints when capital markets are imperfect. We show how, under appropriate conditions, all the moments of the distribution are affected by changes in money growth. More precisely, if capital markets are imperfect and heterogeneous agents are liquidity constrained, investment in fixed capital is not efficient and aggregate wages and profits depend on the availability of loanable funds. An increase in money growth may imply a more efficient aggregate investment. Therefore aggregate product and wealth positively depend on an acceleration in money growth.

Pensions and Saving: New International Panel Data Evidence

Abstract: This paper contributes to the empirical literature on pensions and saving by studying the influence of funded pension systems on the gross national saving rate using a sample of 48 developed and developing countries over the 1980-2004 period. To the best of our knowledge, this updated database –which builds on the one assembled by Lopez Murphy and Musalem (2004)- is the largest on pension funds stocks and flows. Our panel data econometric results suggest that a one-dollar increase in pension saving increases national saving by between 0 and 20 cents. The structure of the system in terms of mandatory participation and portfolio composition does not affect the results, but the maturity of the system does seem to be a robust driver of national saving, inducing an increase of the saving rate of 0.3-0.5 percentage points for each additional year of existence. Reforming countries does not seem to have attained higher saving rates than others. Concerning other saving drivers, the old age dependency ratio and the urbanization ratio (even though the latter loses significance in some regressions) were negatively correlated with saving, while GDP growth, inflation, the terms of trade, and the current account displayed a positive sign. In terms of saving projections, the rather declining trend in pension saving implies that this is unlikely to boost the national saving rate, but the rising old age dependency ratio might cause, over a 25-year time horizon, a fall in the saving rate of 2.1 and 3.3 percentage points in OECD and non-OECD countries, respectively.

Capital Accumulation in Less Developed Countries: Does Stock Market Matter?

Abstract: Our panel data analysis ) of a sample of 31 less developed countries) shows that the stock market capitalization as a percentage of GDP - an important indicator of stock market development - has no relationship with the growth rates of gross fixed capital formation. Our time series analysis ) of 15 countries shows that in at least 10 cases we observe no positive long-run relationship between the stock market turnover ratio and the growth of capital accumulation. Interestingly the countries experiencing the developmental function of stock market are by and large civil law origin countries with alleged poor shareholder protection.

Environmental transfers against global warming: a credit-based program

Abstract: This paper investigates the impacts of institutionalising a credit-based transfer program between developing and developed countries. Such a program is expected to become an essence of the Clean Development Mechanism in the Kyoto protocol. The provisions of financial and technological transfers are incorporated simultaneously into a dynamic game model of global stock pollution, where the efficiency in emission abatement is also described as a stock variable. Our numerical simulation indicates that a credit-based transfer program can be more beneficial for a recipient country as well as for a donor country, than a non-credit-based transfer program.

Robust Water Accounting: What Is It?

Abstract: Robust knowledge of stocks and flows are pivotal elements of effective resource management. Water accounts have historically been developed to meet the needs of water managers and policy makers. It is now necessary for the scope of water accounts to be widened to meet the needs of variety of stakeholders, including irrigators who need accounts to inform their investment decisions. The need for a robust and integrated accounting system is well established. In the National Water Initiative the Australian governments demonstrated their commitment to its formation. Unfortunately, whilst policies have evolved significantly in terms of creating water accounts, measurement systems do not yet deliver such precision. In practice, accounting for all flows is very difficult. Water accounts are based on a limited set of hydrometric data which are prone to measurement error. Where measured flows are not available, for components such as losses in channels, there is a reliance on a series of assumptions about system behaviour. Overall, there are significant sources of uncertainty that inhibit the usefulness of any system for reporting water resources. There has been surprisingly little research into the problem of understanding and reducing the uncertainty relating to accounting for water. This paper highlights the uncertainties associated with water accounts and identifies a range of statistical tools available to quantify and combine the uncertainties. Further, we draw from accepted accounting principles and approaches to develop a system for recording and reporting water resources which incorporates uncertainty and which provides useful information with respect to this precious resource.

Measurement of Capital Stock: The PIM and the Equivalent Proportional Depreciation Approach

Abstract: Estimation of capital stock appropriate for productivity analyses is a tricky problem. PIM can at best be considered a passable estimate of the asset value of capital goods or the wealth stock. An alternative to the PIM is the OHSM. For a uniform exponential growth of investment there exist equivalent proportional rates of depreciation (EPD) of capital stock for both the OHSM and the PIM. Use of the formulae for EPD can help in obtaining acceptable estimates of capital stock using data on gross fixed capital formation when estimates are not available from authentic sources. Moreover, EPD can be derived by using suitable assumptions to estimate service capital appropriate for use as an argument of the production function.

Investment behavior of u.s. firms over heterogeneous capital goods: a snapshot

Abstract: Previous research has shown that the composition of investment and capital can matter for investment dynamics and productivity. However, very little is known about the composition of investment at the micro level. The goal of this note is to help fill this knowledge gap by assessing the nature of the cross-firm variation in investment composition using micro data from the 1998 Annual Capital Expenditure Survey (ACES), a sample of roughly 30,000 firms drawn from the private, nonfarm economy. The data reveal substantial variation that can be characterized by heterogeneous lumpiness of investment in the asset-type dimension. The data also show that some of the variation in investment composition is due to the state of firms’ total investment; specifically, computers account for a significantly larger share of firms’ incremental investment than of lumpy investment.

Micro and Macro Data Integration: The Case of Capital

Abstract: Micro and macro data integration should be an objective of economic measurement as it is clearly advantageous to have internally consistent measurement at all levels of aggregation – firm, industry and aggregate. In spite of the apparently compelling arguments, there are few measures of business activity that achieve anything close to micro/macro data internal consistency. The measures of business activity that are arguably the worst on this dimension are capital stocks and flows. In this paper, we document, quantify and analyze the widely different approaches to the measurement of capital from the aggregate (top down) and micro (bottom up) perspectives. We find that recent developments in data collection permit improved integration of the top down and bottom up approaches. We develop a prototype hybrid method that exploits these data to improve micro/macro data internal consistency in a manner that could potentially lead to substantially improved measures of capital stocks and flows at the industry level. We also explore the properties of the micro distribution of investment. In spite of substantial data and associated measurement limitations, we show that the micro distributions of investment exhibit properties that are of interest to both micro and macro analysts of investment behavior. These findings help highlight some of the potential benefits of micro/macro data integration.(This abstract was borrowed from another version of this item.)

The Financial Accounting Model from a System Dynamics' Perspective

Abstract: This paper explores the foundation of the financial accounting model. We examine the properties of the accounting equation as the principal algorithm for the design and the development of a System Dynamics model. Key to the perspective is the foundational requirement that resolves the temporal conflict that resides in a stock and flow model. Through formal analysis the accounting equation is redefined as a cybernetic model by expressing the temporal and dynamic properties of its terms. Articulated in that form the accounting equation is enabled to be defined as a dynamic stock and flow model expressing the two dimensions of the double-entry accounting system. With that formal foundation it is argued that the accounting model is capable to simulate financial dynamics as well as be integrated with models that express operational and world dynamics. Thus we prove that it is possible to design and build a dynamic business model that can meet requirements of management accounting (ex ante, before the fact) as well as financial accounting (ex post, after the fact). We conclude that the dynamic accounting model can be made relevant for strategic planning and control purposes and be integrated within a System Dynamics model designed for such purposes.

Panel Cointegration Estimates of the Effect of Interest Rates, Capital Goods Prices, and Taxes on the Capital Stock

Abstract: The effect of interest rates, capital goods prices, and taxes on the capital stock is an issue of central importance in economics, with implications for monetary policy, business cycle models, tax policy, economic development, growth, and other areas. For more than 30 years it has been difficult to obtain precise estimates of these effects, and there is little consensus in the profession on their magnitude, despite their importance for both theory and policy. In this paper, we therefore turn to panel data, specifically a newly constructed data set with more than 50 years of firm-level data on the capital stock and with detailed industry-specific data on the interest rate, the price of investment goods, and tax parameters. Using this rich panel data set, we implement recently developed tests for cointegration in panel data. These tests allow us to determine whether the long-run implications of Jorgensonian neoclassical, q, irreversibility, and (s,S) theories are supported by the data. Using the same data, we then use recently developed panel cointegration estimators to assess the quantitative effect of the interest rate, capital goods prices, and taxes on the capital stock.

Pensions and saving: new international panel data evidence

Abstract: This paper contributes to the empirical literature on pensions and saving by studying the influence of funded pension systems on the gross national saving rate using a sample of 48 developed and developing countries over the 1980-2004 period. To the best of our knowledge, this updated database –which builds on the one assembled by Lopez Murphy and Musalem (2004)is the largest on pension funds stocks and flows. Our panel data econometric results suggest that a one-dollar increase in pension saving increases national saving by between 0 and 20 cents. The structure of the system in terms of mandatory participation and portfolio composition does not affect the results, but the maturity of the system does seem to be a robust driver of national saving, inducing an increase of the saving rate of 0.3-0.5 percentage points for each additional year of existence. Reforming countries does not seem to have attained higher saving rates than others. Concerning other saving drivers, the old age dependency ratio and the urbanization ratio (even though the latter loses significance in some regressions) were negatively correlated with saving, while GDP growth, inflation, the terms of trade, and the current account displayed a positive sign. In terms of saving projections, the rather declining trend in pension saving implies that this is unlikely to boost the national saving rate, but the rising old age dependency ratio might cause, over a 25-year time horizon, a fall in the saving rate of 2.1 and 3.3 percentage points in OECD and non-OECD countries, respectively. (*) Bebczuk is Professor of Economics, Universidad Nacional de La Plata, Argentina; Musalem is Chief Economist, Centro para la Estabilidad Financiera, Argentina. The paper was originally prepared as a background policy paper for the 2007 World Economic Prospects report, World Bank. The authors wish to acknowledge the World Bank financial support.

Public Capital and Private Investment, a Real Option Approach

Abstract: In this paper, we extend the usual models of irreversible investment underuncertainty by introducing the stock of public capital as an input for the privatesector. Public investment takes place in a stochastic environment. Public capital thenincreases the productivity of private capital which is assumed to be fully irreversible.In our model, the government has an intertemporal budget constraint, i.e. taxes arecollected each period to fund the public debt. We provide a partial equilibriumanalysis, as it is standard in models of irreversible investment under uncertainty. Evenunder uncertainty, the optimal tax rate is then constant and does not depend on thesize of uncertainty, it is exactly the same as the one that would prevail in adeterministic world. We show that the government has an insurance role since itremoves part of the uncertainty faced by the firm.

Dimensions Stocks and Flows

Abstract: This paper aims to clarify the conceptions of dimensions, stocks and flows, and their role in economic theory. Surely, almost every textbook in economics stresses the importance of them. Nonetheless, it is undeniable that some standard economic models ignore them and violate the rule as to time and dimensions. First, we define main concepts adopted in this paper; time dimensions, stocks and flows, and unit of measurement of economic quantities. Second, we try to apply them to some of familiar economic theory, namely the wages-fund theory, theory of consumer behavior, production functions and distribution. Finally, we analyze IS-LM. We ascertain the defect of some of modern economic theories in the light of dimension and time conceptions and see that, even if they contain no errors mathematically, they often mistake formal consistency for the truth in economic theory, and in some cases, they commit self-contradiction.