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No. 347

APRIL 2007

Vol LXXXVII

ISSN 0019-5170

Contents



 

An Appraisal of the Existing Measurements of Poverty and the Evolution of A Formula for Measuring Real Poverty

Rex. O. Aruofor



Poverty levels in Nigeria have remained high despite various past initiatives by Government and the international community to alleviate it. Indeed, poverty rate, according to the Federal Office of Statistics (FOS) census survey, increased from 28.1% in 1980 to 65% in 1996. The above statistics appear nebulous as it is unclear how it was derived, or what measure of poverty it represents. Several indicators have been evolved to measure poverty, among which are the poverty line by the World Bank, the Human Development Index, as introduced by the United Nations, the human Poverty Index and a host of others, for example the level of food energy consumed by a country, and the level of food security and state of infrastructure. While most of .these measures are indicative of the state of poverty, they are not a true measure of poverty. They are either static or not directly correlated to poverty, whose measurement has remained elusive. In the above regard, they are not operational as they do not lend themselves to rigorous analysis. It is believed that not until the root causes of poverty are known, a realistic measure of poverty cannot be obtained and policy initiatives to alleviate poverty, will be misplaced. This paper evolves an alternative definition for poverty, and traces the root causes of poverty to inflation rate, population growth rate and the lopsided or disparity in the distribution of wealth among the nations of the World, which is entrenched in their respective exchange rates. A formula for measuring poverty is thus evolved in this paper and used to estimate poverty and poverty rate in Nigeria.
 

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Export Competitiveness in India and USA A Comparative Analysis

R. S. Tiwari  

Present paper examines the competitiveness of export in India and USA. By applying the constant-market share model, India's various traditional and the non-traditional export-products are found to be more competitive vis-a-vis the nest of the world. This holds true in the developed, developing and the world as well. The impact of factors, such as, labour cost advantages and the export promotional measures has been held for the observed state of competitiveness. In sharp contrast to above in USA, the competitiveness of various traditional and the non-traditional export-products has been found to be unfavourable vis-a-vis the rest of the world. From the policy view point, technological upgradation and broadening of marketing network, besides the adoption of cost reducing measures are suggested to be undertaken for making the export from USA internationally competitive vis-a- vis the rest of the world.
 

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Changing Patterns of Stock Volatility in India

Sangeeta Chakravarty
 

This paper defines the stock volatility its causes and effects. As volatility is not directly observable variable, the most popular approach to obtain volatility estimate is by using the statistical models that have been proposed in ARCH and stochastic volatility literature. The paper investigates the nature and extent of stock return volatility in India during 1985 March-2005 July, as Indian economy faces many economic and institutional changes last twenty years. The conditional variance of the return series is estimated by LARCH model to study volatility. The LARCH parameter estimate shows strong persistence in variance. The structural change analysis results show that there is no seasonality in the volatility but domestic and political event played a significant effect on volatility. The results are not very much changed even after controlling these event and persistence still exists.

Conditional standard errors are estimated from LARCH model, its plot shows that the effect of shocks does not die out very quickly which is expected as the sum of the two parameters of the LARCH model is nearly one. The results confirm that there are some events that causes sudden shift in stock volatility, the most volatile period appears to be the one that followed immediately after initiation of reforms in 1991. The cause of this volatility may be attributed more to exaggerated expectations rather than economic reforms as such.
 

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A Re-look at the Long-Run Stability of the Money Multiplier in India.

Vineet Virmani
 

Results on long-run stability of Ml and M3 money multipliers in India are presented after the BoP crisis. Allowing for in-sample regime switching it is found that M3 money multiplier can be characterized by a one-time regime shift around the beginning of 1997, the time when money markets reform first begun in a big way, with issuance of ad hoe 14-day on tap T-Bills giving way to Ways and Means Advances. Results on the stability of Ml multiplier are less clear and relationship, if it exists, is statistically weak.
 

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Optimal Loan Rate with Behavioral Biases under Capital Regulation : An Option-Based Optimization
 

Meng-Bo Yin,* Jyh-Horng Lin**
and
Hung Yu Li***
 

Human Influence and decision making is subject to behavioral biases. This paper develops an option-based banking firm model that integrates the bias premium considerations of the cognition-oriented theory with the bias belief considerations and loan rate-setting behavioral mode of the motivation-oriented theory: After studying the comparative static results under this integrated mechanism, we show that the bank's optimal loan rate is a decreasing function of its rival's likelihood of success and an increasing function of the capital-to-deposits ratio under strategic substitutes when the bank realizes a good state of the world. The strategic assumption in our comparative static results captures the bias premium of the cognition theory and the realization assumption reflects the bias belief of the motivation theory. Our findings provide alternative explanations for bank loan rate under behavioral biases.

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Going-Concern Value of Bank Spread Management and Hedging Behavior Under Risk-Adjusted Deposit Insurance Pricing
Trade and Potentials

* Chuen-Ping Chang
and
Jyh-Horng Lin



We present a potential reform of risk-adjusted deposit insurance pricing with forward contracts We show that bank spread management itself may provide the Federal Deposit Insurance Corporation's (FDIC's) protection from credit and interest rate risks even though the bank's spread decisions are made prior to the realization of those tow risks. But if the bank's spread decisions are made subsequent to the realization of the credit and/or interest rate risks, the forward contracts may serve the FDIC for microhedging and/or macrohedging purposes. Further, a decrease in the capital-to-deposits ratio decreases the FDIC's going-concern insurance premium market value. Our results suggest the view that capital regulation and bank spread management can also be important in influencing the FDIC's hedging decisions.

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Causal Nexus Between Budget Deficit and Trade Deficit in India

S. Varalakshmi*
and
S. Parasuraman**  

Budget deficit and trade deficit reflect the true economic position of the country. India, one of the developing countries in the world has been facing budget deficit and trade deficit since first five year plan. The present study makes an attempt to find out the causal nexus between budget deficit, trade deficit and Gross National Product (GNP) in India. The study employs the data of Indian Economy for the period of 29 years from 1975 to 2004. In the analysis, econometrics techniques of Dickey-Fuller Unit Root Test, Johansen's Mulitvariate Co-integration (VAR) technique and Vector Error Correction Model (VECM) are employed. The study finds that the variables at levels show no co-integration, while the variables at log values show co-integration and changes in budget deficit Granger causes the change in trade deficit. Besides, the study finds bi-directional causal relationship between budget deficit and GNP.

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Technology Transfer in International Joint Ventures

Ruchi Sharma
and
T. V. S. Ramamohan Rao
 

Information asymmetry and adverse selection are intrinsic to technology transfer across national boundaries. The MNCs therefore offer informal knowledge in the use of technology, in addition to formal technological details, to their joint venture partners. They also share in the capital investments to elicit greater commitment. Theoretical explanation of the channels through which such sharing affects the contract parameters is however inadequate. In particular, the existing models are mostly deterministic and do not account for hidden action on the part of the foreign firms and the associated uncertainty. The principal-agent model offers a more suitable framework for analysis. Utilizing the framework of the principal agent model this study argues that such policies reduce the variance associated with the risk and thereby neutralize deficiencies due to information asymmetry. This enables the MNCs to set uniform contract parameters for all the foreign firms. They will counter the deficiencies due to information asymmetry by offering firm specific informal knowledge.

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Services Liberalisation of the W. T. O. and Preferential Trade Agreements

R S. Nigam

In the WTO mandate, trade in services has been accorded high priority. With the induction of high dose of information technology in day-to-day world wide dealings in almost all sorts of economic value-additions and simultaneous growth the regionalism in the shape of preferential trade agreements, the question of dismantling barriers to services trade has been attracting the attention of economic researchers, social scientists and business professionals in recent times. This article attempts to present a detailed review of the work recently done by the Research and Statistics wing of the WTO in this area; although no official responsibility for the views expressed has been owned. This review article is directed towards our policy makers who have to handle a variety of issues in negotiating free trade area agreements and economic and business collaborations on regional and sub-regional levels.
 

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