Search

Uncertainty is an economically important risk factor in the banking sector. Using a sample of Chinese listed commercial banks over the period 2005 − 2018, this research conducted pooled OLS and found evidence that economic uncertainty significantly increases bank risk and lowers profitability. Furthermore, we constructed a partial equilibrium model to explain how risk governance alters the risk-increasing effect and profit-decreasing effect of economic uncertainty on bank risk and profitability. Consistent with theory, empirical results suggested the effects of economic uncertainty on bank risk and performance tend to be considerably weaker when there exists a strong risk governance mechanism. These findings stand when subjected to several endogeneity and robustness checks. Risk governance plays a key role in weakening the detrimental consequences of economic uncertainty on banks and promoting a sustainable growth of the banking sector. A financial regulator entity should require banks to establish a sound risk governance system in order to mitigate financial systemic risk and safeguard overall financial stability. [ABSTRACT FROM AUTHOR]

Inflation expectations of firms affect their micro-decision-making behaviors and therefore impact the macro-economy. Thus, a deep understanding of how firms form inflation expectations benefits the achievement of central bank's policy objectives on macro-economic sustainability and development. In this paper, we focus on the inflation expectations of firms from surveys. Specifically, the Naïve Expectation, Adaptive Expectation, Rational Expectation, VAR, and Heterogeneous Static Expectation formation models are adopted to test the models being used by firms to form inflation expectations. Empirically, this paper reveals the heterogeneity between the formation mechanisms of households and firms. Then, empirical results reject the rational expectation hypothesis of firms' inflation expectations, which means that they are not perfectly rational. Finally, we find that the inflation perception is a non-negligible factor in forming firms' inflation expectations. Therefore, central banks' monetary policies that aiming to formulate firms' inflation perceptions can be a useful tool in regulating their inflation expectations, which are expected to benefit the stability of the macro-economy. [ABSTRACT FROM AUTHOR]

The rapid growth in defence expenditure in China raises the concern that investments in the defence sector crowd out investments in social sectors, i.e., the 'guns for butter' argument. This article resorts to the bubble testing method to study the trade-off between defence and utilities sectors in the Chinese capital market. Based upon the generalized sup Augmented Dickey-Fuller (GSADF) test, this paper captures and date stampings explosive behaviors in defence and utilities industries using stock indexes. Empirical results reveal bubbles for defence and utilities sectors in similar time periods, thus indicating that the factors driving explosive movements are alike for both sectors. However, bubbles in a certain sector do not necessarily crowd out investments in the other sector. Through testing bubbles in the ratio of stock indexes of two sectors, we find that the explosive episodes vanish. The results indicate that the crowding-out effect between defence and utilities sectors does not exist in the Chinese capital market. Increases in the military expenditure in China are necessary to safeguard the national security because of frequent geopolitical conflicts and terrorism. However, the defence to utilities ratio is increasing rapidly, implying the possibility that excessive growth in military expenditure may generate the 'guns for butter' problem, which can be detrimental to economic growth. [ABSTRACT FROM AUTHOR]