KREDIT und KAPITAL - Issue 4/1982

For all its efficiency compared to other countries, for a long time now the German economy has exhibited clear symptoms of structural weaknesses, especially in the financial field. One grave feature is the inadequate net assets for firms, which have dropped within 16 years from nearly 30 % of the balance-sheet total to about 20 %. The chief cause of inadequate net asset formation is too low earnings of the firms. They diminish a firm's capability of strengthening its capital basis out of its own resources and they impair the chances of procuring risk capital on the market. The earnings of firms have been reduced not only by foreign trade factors, particularly the two jumps in petroleum prices and the inadequate manner in which the domestic distribution process coped with them, but also by the rising burden of taxation, including all types of levy.

A second weak point is the increase in short-term indebtedness relative to the total borrowings of firms, in which connection importance attaches to interest-rate considerations, which under certain circumstances make it seem advisable to borrow short-term funds at high rates in the hope of being able later on to consolidate debts on more favourable terms for longer periods. This, however, introduced additional uncertainties into the financing structure. Low net assets and the declining proportion of long-term borrowings made many firms more sensitive to interest-rate changes, which play an important role especially in phases of steeply rising interest rates, but which has also become a problem on account of market fluctuations of interest rates in both directions over the course of the years. Those fluctuations are, above all, an expression of greater disequilibria at home and in the rest of the world, that is, of the higher Inflation rates, balance-of-payments disequilibria, greater instability of exchange rates, and growing deficits in government budgets. Smaller interest-rate fluctuations, and hence less uncertainty in the planning data of firms, can be achieved, if the mentioned disequilibria at home and relative to the rest of the world can be diminished.

The remedy for the financial weaknesses lies, of course, in improving the earning capabilities of firms. Without sufficient earnings there can be neither adequate self-financing nor enough incentive to provide risk capital. Over and above this, the continuing development of our economy calls for innovative, risk investments, which cannot be financed mainly with borrowed funds. But since these problems will hardly be able to be solved by self-financing within the firms alone, the question of Provision of risk capital presents itself, for which terms and conditions would have to be improved. This means primarily: stimulation of share issues and the foundation of (or conversion into) public companies. In this connection it should be examined whether it is possible in the field of taxation and with respect to issuing costs to remove some of the existing obstacles, and whether it is generally advisable to subject profits retained by firms for internal financing of investments, and hence of jobs, to the same high tax rates as individual high-bracket income, which now serves as a yardstick for the height of the corporate income tax rate and the marginal personal income tax rates

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Tietzel, Manfred
âWhat can be rationally expected of the "Theory of Rational Expectations"? â

The "theory of rational expectations" can provide no adequate explanation of the thesis of the impuissance of all discretionary economic policy, to demonstrate which it was - presumably - developed.

Its premisses are unrealistic and it can therefore only show how the situation that is to be explained possibly, but not actually, arises. Certain information that would be necessary for rational formation of expectations can be procured under certain circumstances; formation of uniform expectations by all economic entities, being merely coincidental and not systematic, is possible but highly improbable, for it cannot be presupposed that expectations will be formed in accordance with a single "true structural model" and it cannot be assumed that information is distributed evenly.

One of the merits of the theory is that it brings indirect cognitive progress in that, considered in the light of the theory, rival expectation hypotheses could be thoroughly criticized and that it drew attention to the important role of theoretical knowledge for the formation of expectations.

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Loef, Hans E.

âThe Demand for Money in an Open Economy : Germany 1970 - 1979â

In an open economy with no restrictions, or only minor ones, on international capital flows and currency holdings it seems plausible to include in the list of the opportunity costs for holding money besides the domestic interest rates and the expected inflation rate foreign opportunity costs as well. Foreign bonds and foreign currencies can be considered as the most appropriate candidates to represent foreign alternatives to domestic money holdings. Currency substitution permits residents to keep foreign currencies while individuals abroad can hold domestic money. Expected exchange rates and foreign interest rates therefore influence the demand for domestic real money in an open economy. Empirical investigations for Germany 1970 to 1979 with quarterly data provide strong evidence for these theoretical propositions. Of special concern for the paper presented is - besides the influence of foreign interest rates - the negative impact of the expected inflation rate and the positive (negative) influence of an expected appreciation (depreciation) of the home currency relative to foreign currencies on the demand for domestic real money.

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Angehrn, Beda

âThe Eurodollar Market and the Money Supplyâ

The present article analyses the role of the Eurodollar market from the standpoint of money supply theory. First a suitably extended money supply model is set up as a basis and then a relatively general portfolio model. The analysis shows that fundamentally the Eurodollar market is of an expansive nature. At the same time, it becomes clear what economic interrelationships play a decisive role in that expansive effect. With regard to monetary policy, the analysis makes it clear that for all the expansive nature of the Eurodollar market the central banks have lost control over the money supply and that minimum reserve requirements for Eurodollar deposits would not necessarily eliminate the expansive character of the Eurodollar market.

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Fausten, Dietrich K.

âThe Role of Exchange Rates A Reconciliation of Alternative Viewsâ

The contra distinction between alternative views of the exchange rate as the relative price of national outputs, determined in commodity markets, and as the relative price of national monies, determined in asset markets, is critically examined. In a correctly specified stock adjustment model nominal exchange rates are influenced by both real and monetary disturbances. Consequently, any suggestion that these views constitute mutually exclusive alternatives must be rejected. On the other hand, the differential adjustment speeds in asset and commodity markets suggest the predominance of asset market considerations for the short-run determination of exchange rate behaviour.

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Neumann, Manfred J. M.

âPhillips-Illusions: A Commentâ

The comment deals with the assertion by Holtfrerich (1982) that the transition from fixed to flexible exchange rates induced an increase in the short-run Phillips-trade-off. This assertion is shown to be unfounded on both, theoretical as well as empirical grounds.

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Wilhelm, Jochen

âThe Preparedness of the Banks to Assume Risks in the Credit Businessâ

The conditions under which banks are prepared to assume risks in the credit business is a controversial issue in the scientific literature on banking. The predominant theses are the thesis of risk-covering by way of the interest rate - this theory can be substantiated theoretically - and the thesis of standardization of risks - this thesis is based on observation of credit business practice. This article first presents theoretical justifications for the risk-covering hypothesis and shows that its consequences are irreconcilable with the available empirical knowledge. In contrast, the study develops the hypothesis that basically banks are interested in avoiding risks. In justification of such conduct theoretical arguments are advanced, which are founded on the risk sensitivity that is typical of banks. Some possible objections are discussed, which might be based on empirically observed facts such as credit losses and interest rate differentiation.

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Reports

Poniachek, Harvey

âAn Assessment of European-American Monetary Relationsâ

European-American international monetary relations are in a state of transition; they are inadequate, controversial, and lack both a common purpose and formal system or institutional framework for policy coordination.

At present, a significant divergence has emerged between U.S. and European attitudes towards narrowly defined international monetary cooperation (i. e., exchange and interest rates). Views about broadly defined financial relations (i. e., global monetary and financial structure, operation, environment) are, however, less divergent. Moreover, there is a significant inconsistency between American foreign policy and international monetary/financial policy vis-a-vis Europe, particularly in the narrowly defined monetary relations.

The trans-Atlantic controversy concerning foreign exchange and interest rates remains unresolved, and the disparity between European-American monetary relations is expected to continue in the future. Efforts aimed at eliminating this gap or promoting common interests are neither likely nor warranted. Therefore, the forthcoming Western Economic Summit is not expected to resolve the U.S.-European controversy.

Finally, the outcome of the French Presidential elections has introduced substantial uncertainty into the European Community and diminished the prospects of the European Monetary System and its global impact. Currency issues could pose very difficult problems for the Europeans and create a zone of monetary instability with significant effects on intra-European flows of trade and investment. Against this background, the reemergence of the U.S. dollar is well underway and the question of Atlantic monetary cooperation has become relatively insignificant for U. S. policy makers.

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KREDIT und KAPITAL - Issue 4/1982

Contents

Articles

Reports

Book Reviews

Summaries