The paper provides estimates of the long-run, tax-adjusted, user cost elasticity of capital (UCE) in a small open economy, exploiting three sources of variation in Canadian tax policy: across provinces, industries, and years. Estimates of the UCE with Canadian data are less prone to the endogeneity problems arising from the effects of tax policy changes on the interest rate or on the price of capital equipment. Reductions in the federal corporate income tax rate during the early 2000s for service industries but not for manufacturing, which already benefited from a preferential tax rate, contribute to the identification of the UCE. To capture the long-run relationship between the capital stock and the user cost of capital, an error correction model (ECM) is estimated. Supplementary results are obtained from a distributed lag model in first differences (DLM). With the ECM, our baseline UCE for machinery and equipment (M&E) is -1.312. The corresponding semi-elasticity of the stock of M&E with respect to the METR is about -0.2, suggesting, for example, that a 5 percentage point reduction in the METR, say from 15 to 10 percent, would in the long run generate an increase of 1.0 percent in the stock of M&E. The UCE for non-residential construction is statistically insignificantly different from zero.
Germán Gutiérrez, Callum Jones, and Mr. Thomas Philippon
We combine a structural model with cross-sectional micro data to identify the causes and
consequences of rising concentration in the US economy. Using asset prices and industry
data, we estimate realized and anticipated shocks that drive entry and concentration. We
validate our approach by showing that the model-implied entry shocks correlate with
independently constructed measures of entry regulations and M&As. We conclude that entry
costs have risen in the U.S. over the past 20 years and have depressed capital and
consumption by about seven percent.
This paper presents and discusses the estimates of the present value of corporate profits
in the United States from 1984 to 2018. To value the expected income stream, it uses
the long-range forecasts of professional forecasters for pre-tax corporate earnings and
long-term Treasury note yields, sourced from the Blue Chip Economic Indicators
survey. The appraised value of corporate earnings can point in real time at periods
where market prices are deviating from valuations implied by expected earnings and
interest rates. Market participants' forecasts seem to interpret most of the earnings
fluctuations as permanent, underestimating the cyclical fluctuations The over-reaction
to transitory shocks and changes in long-term outlook leads to swings in the valuation,
in line with swings in the observed market prices.
Following renewed academic and policy interest in the destination-based principle for taxing profits—particularly through a destination-based cash flow tax (DBCFT)—this paper studies other forms of efficient destination-based taxes. Specifically, it analyzes the Destination-Based Allowance for Corporate Equity (DBACE) and Allowance for Corporate Capital (DBACC). It describes adjustments that are required to turn an origin into a destination-based versions of these taxes. These include adjustments to capital and equity, which are additional to the border adjustments needed under a DBCFT. The paper finds that the DBACC and DBACE reduce profit shifting and tax competition, but cannot fully eliminate them, with the DBACE more sensitve than the DBACC. Overall, given the potential major political cost of switching from an origin to a destination-based tax system, we conclude that advantages of the DBCFT are likely to outweigh the transitional advantages of the DBACE/DBACC.
A prolonged low-interest-rate environment presents a significant challenge to banks and is
likely to entail major changes to their business models over the long-run. Lower returns to
maturity transformation in the face of flatter yield curves and an inability to offer deposit
rates significantly below zero combine to compress bank earnings in this environment.
Smaller, deposit-funded, less diversified banks are hurt most, increasing consolidation
pressures and reach-for-yield incentives, presenting new financial stability
challenges.To the extent that such an economic environment reflects a new, steady-state
with lower equilibrium growth driven by population aging and slower productivity
growth, lower credit demand is likely to drive banking toward provision of fee-based,
ECB President Draghi’s Jackson Hole speech in August 2014 arguably marked a new phase of unconventional monetary policies (UMPs) in the euro area. This paper examines the market impact and tranmission channels of this new wave of UMPs using a modified event study framework. They are found to have a more prominent impact on inflation expectations and exchange rates compared to the earlier UMP announcements. The impact on bank equity, however, is less significant in part due to narrowing profit margin in a low interest rate environment; and the marginal effect on sovereign spread compression has diminished. By extracting components of monetary policy shocks from the yield curve, we find that the traditional signaling channel of the monetary policy transmission continued to play an important role, but the portfolio rebalancing channel became more important in the new phase. Spillovers to non-euro area EU countries (the Czech Republic, Denmark, Poland, and Sweden) are transmitted mainly through the portfolio rebalancing channel, largely affecting sovereign yields and exchange rates.
Most tax systems create a tax bias toward debt finance. Such debt bias increases leverage and may negatively affect financial stability. This paper models and estimates debt bias in the financial sector, and present novel estimates for investment banks and non-bank financial intermediaries such as finance and insurance companies. We find debt bias to be pervasive, explaining as much as 10 percent of total leverage for regular banks and 20 percent for investment banks, with the effects most pronounced before the global financial crisis. Going forward, debt bias is likely to once again gain prominence as a key driver of leverage decisions, underscoring the importance of policy reform at this juncture.
The recent plunge in oil prices has brought into question the generally accepted view that lower
oil prices are good for the United States and the global economy. In this paper, using a quarterly
multi-country econometric model, we first show that a fall in oil prices tends relatively quickly to
lower interest rates and inflation in most countries, and increase global real equity prices. The
effects on real output are positive, although they take longer to materialize (around four quarters
after the shock). We then re-examine the effects of low oil prices on the U.S. economy over
different sub-periods using monthly observations on real oil prices, real equity prices and real
dividends. We confirm the perverse positive relationship between oil and equity prices over the
period since the 2008 financial crisis highlighted in the recent literature, but show that this
relationship has been unstable when considered over the longer time period of 1946–2016. In
contrast, we find a stable negative relationship between oil prices and real dividends which we
argue is a better proxy for economic activity (as compared to equity prices). On the supply side,
the effects of lower oil prices differ widely across the different oil producers, and could be
perverse initially, as some of the major oil producers try to compensate their loss of revenues by
raising production. Taking demand and supply adjustments to oil price changes as a whole, we
conclude that oil markets equilibrate but rather slowly, with large episodic swings between low
and high oil prices.