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No. 340

JULY 2005





Estimating the size of Underground Economy in Indonesia

Sasmito H. Wibowo *
Subhash C. Sharma**

The size of the underground economy in Indonesia is estimated from 1976 to 1999 by using the currency demand model. We observe that during these years, on average the underground economy is about a quarter of the reported GDP. We further note that during transitions, whether transition in tax law, economy, or in politics, the size of the underground economy changes significantly. During normal time, the size tend to be lower than the average. Specifically, during the major overhaul of Indonesia's tax law in 1986 and in 1998's recession the size of the unreported economic activities increased significantly.

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Impact of Government Agricultural Policy Changes on Groundnut supply Response Function in Niger

S.O. Abang, O. E. Akpan, E. Ele
O. Atangba*


The 1980 decade and beyond has witnessed strong appeals for the reversals of agricultural policies that were based on market intervention. This study is designed to find out the impact of this policy shift on the groundnut supply function in Niger using time series data that span the periods 1976-1989 and 1990-2000. The Cobb-Douglas functional form provided the lead equation for the analysis. Estimates of the own price, cross price and input price elasticities for the short and long run periods were similar even though their values were higher in the earlier period than the latter. Overall, the results showed that the policy shift has tended not to affect groundnut supply significantly because the farmers were not responsive to the policy change. Some of the reasons advanced for the poor response to this policy shift are the relatively high cost of purchasing the critical input (fertilizer) and the extremely small farm holdings of the farmers. On this basis, the study advocates for a fertilizer cost reduction policy to enable the farmers benefit from the new policy.

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Sustainability of Self-Help Groups: The Case of Krishna District, Andhra Pradesh  

D. Pulla Rao*

The importance of SHGs arises rom the fact that the poor are ill served by the formal institutional agencies (viz., banks, RRBs, and even cooperatives). These institutions refrain from lending to the poor because of the high transaction costs involved in lending to them. SHGs also assume importance in view of the fact that money lenders subject the poor to severe exploitation by charging exorbitant interest charges. By forming into SHGs the poor can get over these two problems. In as much as the poor borrow and repay money to banks as a group, the cost of lending decreases. Since the members of SHGs are of homogenous economic class and since peer monitoring is the rule in the groups, loans advanced will be recovered promptly. This makes SHGs sustainable and the ever increasing number of SHGs has much to do with this fact. NABARD's role in the expanding number of SHGs is not to be belittled either.

SHGs have grown from strength to strength, particularly in Andhra Pradesh. The performance of the groups is not, however, uniform across all districts. Our study covering 46 randomly selected SHGs of Krishna district of the state shows that 32 of them have been dissolved soon after they were set up. This raises the issue of sustainability of the groups. However, wherever, the SHGs are functioning well, they benefited the most disadvantaged -the poor, the lowly placed in social hierarchy. SHGs are giving them a new identity in the society. Saying on a monthly basis, which was unknown to women is now a reality. The hitherto untapped entrepreneurial skills of women are to the fore.

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Optimal Bank Interest Margin, Capital Regulation and Deposit Insurance under a Cap Valuation 

Jyh-Hong Lin* , Peirchyi Lii
and **
Chuen-Ping Chang


This paper derives the bank's optimal interest margin and relates it to the regulatory parameters under a cap valuation. This valuation helps the bank handle the volatilities so characteristic of lending markets. We find that the bank's interest margin is an increasing (decreasing) function of the capital-to-deposits ratio, the deposit insurance premium, and the actual number of days during the cap period if both the bank's marginal equity effect and the risk effect are positive (negative). The bank's optimal interest margin is an increasing (decreasing) function of the strike price if its marginal equity with expiration at the end of the period is negative (positive). Our findings demonstrate the important effects that regulatory parameters and cap pricing have on the bank's optimal interest margin. 

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US Tariff Policy and the Smooth-Hawley Tariff Act of 1930

Kishore G. Kulkarni*
Christopher Evans**


This paper takes a historical view of changes in tariff policy of US. It summarizes main changes in US tariff since 1789 and concentrates specifically on the Hawley-Smoot Act. Historically, while US tariff rates have been pretty small (less than 12%), in Great Depression era they reached to the highest level. Some economists refer to this act as Holy-Smoke Act and further point out that this increase in tariff was one of the prime reasons for Great Depression to get prolonged. The paper discusses the reasons behind the Hawley-Smoot tax and the consequences of it.

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 Growth of Derivatives in the Indian Stock Market: Hedging V/S Speculation  

Dheeraj Misra* and Sangeeta D. Misra**

This paper aims at anlyzing the growth of derivatives market in the Indian stock market and to find out whether in the Indian stock market investors trade in derivative products for hedging or for speculation. The total turnover of derivative products was Rs. 4,39,863 crores in 2002-03 as against Rs. 1,01,925 crores in 2001-02 and Rs. 2365 crores during 2000-01. The trading volumes indicate that near month contracts are more popular than not-so- near month contracts; futures are more popular than options; contracts on securities are more popular than those on indexes; and call options are more popular than put options. The results show that investors generally use futures contracts and call options for speculative purposes and they invest in put option contracts for hedging. The results also show the popularity of straddle strategy in the Indian stock market.

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 A Study for Insolvency in the life Insurance Industry of Taiwan 

James C. Hao*
Lin- Yhi Chou**


The study employs factor analysis and logistic regression (FAST approach) to estimate the probabilities of insolvency of Taiwan's life insurers. Our findings show that changes in the fixed asset ratio, changes in the liquid asset ratio, and changes in loan ratio are important factors for Taiwanese life insurers' insolvency. Therefore, the commissioner should focus on these financial ratios. This study presents that almost 10 percent of life insurers in Taiwan have a problem of insolvency.

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 Cointegration and Market Integration: An Analysis of Tea Markets in India

Vijay Intodia*

Tea growers and traders are facing crisis due to falling exports and slow down in the consumption growth leading to surplus supply and falling prices in the market. Thus it is imperative that different tea markets are efficient and integrated so as to minimise the market surplus. The paper analyses the extent of market efficiency and spatial market integration of tea markets in India using cointegration and error correction methodology. Results showed that eastern markets of the country were integrated. There was no integration found in the markets of the southern India. Although eastern markets were integrated but it took a long time i.e. four weeks for the complete transfer of the price signals. Therefore there seemed to be inefficient markets in the tea sector. Analyses have important policy implications as domestic market is having a oversupply situation where volatility in prices has been a major concern for the industry.

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 Aspects of Linkage between Environment and Economic Development

G. Mohapatra*, P. Mishra**
A. K. Giri***

This paper surveys a selected number of studies that deals with theoretical and empirical contributions on the linkages between environment aqd economic development. It reviews the different issues relevant for modeling atld estimating the above-mentioned economic relationship. The survey throws light on different aspects of linkage, which provides guidelines for many important aspects of empirical research on the area of environmental economics.

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 Forecasting Volatility Using Spreadsheet Tools

Samir Kamat* and Rakesh Sah**

Extensive research has been done on stock price volatility. One of the results of this research is that volatility changes over time. However, because of its mathematical and statistical complexity the results are beyond the reach of most users. This paper gives investors and classroom users the option of using four forecasting models using Excel spreadsheets. The paper starts with the simpler historical volatility model and moves on to the more complex single exponential smoothing model, the first order autoregressive error model, and the generalized autoregressive conditional heteroskedasticity model.

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