Theory of discounting and monetary policy：贴现和货币政策理论.pptVIP

From our theory, we should adjust policy measures to adapt to the level of resource bases. This means we should stimulate economy when resource is abundant and slow down economy when resource is scarce. WACC WACC is the standard method we have learned in the classes. So we will discuss more Definition of WACC: WACC is the weighted average of the cost of debt and the cost of equity. Cost of debt is the bond yield. Can we define the cost of equity as the dividend yield? It will make the definition of the cost of equity consistent with that of the cost of debt. Potential problem Price change of equity. But bond price change as well, especially long bond. Mortgage rate Do mortgage rates based on WACC? What is mortgage rate right now? What is WACC for banks? Why such big difference between mortgage rate and WACC? What is capital? Capital is long term funding. But bank cash flows are mainly short term funding. This illustrate the importance of duration in funding processes. There is a continuation from short term to long term funding. No chasm between them Banking industry illustrate this clearly. Theory of discounting and monetary policy The concept of a “discount rate” is central to economic analysis … Because of this centrality, the choice of an appropriate discount rate is one of the most critical problems in all of economics. And yet, to be perfectly honest, a great deal of uncertainty beclouds this very issue. … The most critical single problem with discounting future benefits and cost is that no consensus now exists, or for that matter has ever existed, about what actual rate of interest to use. (Weitzman, 2001, p. 260) The main problem in the theory of discounting is that “an economist who knows the literature well” is “able to justify any reasonable social discount rate by some internally consistent story”. Some puzzles (Puzzle 1) The borrowing rates for banks are very low. But the credit card interest rates that banks can charge their custom