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Recently, the theory of banking regulation has undergone important changes. This has
been the consequence of a number of compounding effects that have been occurring in the
financial sector. First among these is ongoing financial innovation, which has caused a virtual
revolution in both financial instruments and markets. As a result, the markets and institutions that
must be regulated have changed substantially over time. At the same time, regulation has
evolved, as the regulators have learned the lessons from the recent spat of banking crises. As a
consequence of these experiences, regulation has become more sophisticated, with the
introduction of capital requirements and more complex restrictions on operating procedures.
(114 KB, 27 pages)
02-2 Joseph P. Hughes, William W. Lang, Loretta J. Mester, Choon-Geol Moon, and Michael S. Pagano, "Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation, and Financial Performance"
consolidation is a global phenomenon that may enhance stakeholders’ value
if managers do not sacrifice value to build empires. We find strong evidence of
managerial entrenchment at U.S. bank holding companies that have higher levels
of managerial ownership, better growth opportunities, poorer financial
performance, and smaller asset size. At banks without entrenched management,
both asset acquisitions and sales are associated with improved performance. At
banks with entrenched management, sales are related to smaller improvements
while acquisitions are associated with worse performance. Consistent with scale
economies, an increase in assets by internal growth is associated with better
performance at most banks.
(137 KB, 43 pages)
This paper uses a real-time data set to analyze data revisions and to test the
robustness of published econometric results. The data set consists of vintages,
or snapshots, of the major macroeconomic data available at quarterly intervals
in real time. The paper illustrates why such data may matter, examines the
properties of several of the variables in the data set across vintages, and
examines key empirical papers in macroeconomics, investigating their robustness
to different vintages.
(205 KB, 44 pages)
discusses changes in the financial sector that threaten traditional
check-cashing outlets (CCOs). Specifically, the paper focuses on four
developments that may radically alter the check-cashing industry over the
coming decade: the growing use of electronic payments, the deployment of
automated check-cashing machines, the rise of payday lending, and the
development of "bank/CCO hybrids."
(652 KB, 24 pages)
02-5 Aubhik Khan and B. Ravikumar, "Enduring Relationships in an Economy with Capital"
02-6 Satyajit Chatterjee, Dean Corbae,
Makoto Nakajima, and Jose-Victor Rios-Rull, " A Quantitative Theory of
Unsecured Consumer Credit with Risk of Default"
Superseded by Working Paper No. 05-18
(1.10 MB, 87 pages)
In the late 1980s
James Stock and Mark Watson developed an alternative coincident index for the
U.S. economy. They used the Kalman filter to estimate a latent dynamic factor
for the national economy and designated the common factor as the coincident
index. This paper uses the Stock/Watson methodology to estimate a consistent
set of coincident indexes for the 50 states. The indexes are consistent in the
following sense. (1) The input variables for estimating the common factor are
the same for each state. (2) The timing of the coincident indexes is set to
coincide with the same observable variable in each state (nonfarm employment).
(3) And the trend of the index for each state is set to the trend of real gross
state product in the state. The final indexes are available on the web.
(452 KB, 74 pages)
analysis uses data from the March Current Population Survey to estimate
state-level cross-section/time-series models of the effects of unemployment on
alternative poverty indexes. The indexes include the official headcount rate
and alternatives based on improved identification and aggregation procedures.
The estimated effects turn critically on the measurement approaches, both for
the total sample population and for selected sub-groups. For some broader,
distribution-sensitive indexes, the declines in unemployment of the last decade
had no significant impact on poverty. The findings thus provide important
lessons for researchers exploring the links between economic conditions and
poverty and for policymakers developing strategies to reduce poverty.
(196 KB, 39 pages)
02-9/R Yaron Leitner, "Financial
Networks: Contagion, Commitment, and Private-Sector Bailouts"
(A revision is forthcoming in the Journal of Finance.)
The author develops a model of financial networks where linkages not only
spread contagion, but also induce private-sector bailouts in which liquid banks
bail out illiquid banks because of the threat of contagion. Introducing this
bailout possibility, the author shows that linkages may be optimal ex-ante
because they allow banks to obtain some mutual insurance even though formal
commitments are impossible. However, in some cases (for example, when liquidity
is concentrated among a small group of banks), the whole network may collapse.
The author also characterizes the optimal network size and apply the results to
joint liability arrangements and payment systems.
(463 KB, 49 pages)
While residents receive similar benefits from many local public
expenditures, only about one-third of all households have children in the
public schools. In this paper the authors argue that capitalization of school
spending into house prices can encourage residents to support spending on
schools, even if the residents themselves will never have children in the
schools. To examine this hypothesis, the authors take advantage of differences
across communities in the extent of house price capitalization based on the
availability of land or population density. They show that fiscal variables and
amenities are capitalized to a much greater extent in Massachusetts cities and
towns with little available land and that these localities also spend more on
schools. Next, the authors use data from school districts in 49 states to show
that per pupil spending is positively related to population density, a proxy
for the availability of land. Consistent with a model tying house price
capitalization to school spending, the authors show that the positive
correlation between density and spending persists only in locations with high
homeownership rates. Communities with a higher percentage of residents above 65
years old have increased school expenditures only in places with high
population densities, and this correlation grows for the percentage of elderly
above 75 or 85 years old who have a shorter expected duration in their house.
The positive relationship between percentage elderly and school spending is
confined to central cities and suburbs of large metropolitan areas and does not
exist in places where land for new construction may be easier to obtain. These
results support models in which house price capitalization encourages more
efficient provision of public services and provide an explanation for why some
elderly residents might support local spending on schools.
(463 KB, 50 pages)
Since the adoption of flexible exchange rates in the early 1970s,
real exchange rates have been much more volatile than they were under Bretton
Woods. However, the literature showed that the volatilities of most other
macroeconomic variables have not been affected by the change in exchange-rate
regime. This poses a puzzle for standard international business cycle models.
In this paper, the authors study this puzzle by developing a two-country,
two-sector model with nominal rigidities featuring deviations from the law of
one price because a fraction of firms set prices in buyers' currencies. The
authors show that a model with such building blocks can improve the match
between the model and the data across exchange-rate regimes. By partially
insulating goods markets across countries and thus mitigating the international
expenditure-switching effect, local currency pricing considerably dampens the
responses of net exports to shocks hitting the economies therefore helping to
account for the puzzle.
(601 KB, 38 pages)
The authors use hedonic rent and wage equations to
measure the compensating differentials that obtain in central cities with
franchises of the National Football League. They use repeated observations of
cities over time and thereby obtain identification of the NFL effect through
franchise expansion and movement. The authors find that rents are roughly 8
percent higher and wages are 4 percent lower in cities with franchises, though
the latter of these two effects is not significant. Thus, professional sports
franchises appear to be a public good by adding to the quality-of-life in
cities. The authors' findings suggest that once the quality-of-life benefits
are included in the calculus, the seemingly large public expenditure on new
stadiums appears to be a good investment for cities and their residents.
(351 KB, 40 pages)
Using survey data on
expectations, the authors examine whether the post-war data are consistent with
theories of a self-fulfilling inflation episode during the 1970s. Among
commonly cited factors, oil and fiscal shocks do not appear to have triggered
an increase in expected inflation that was subsequently validated by monetary
policy. However, the evidence suggests that, prior to 1979, the Fed
accommodated temporary shocks to expected inflation, which then led to
permanent increases in actual inflation. The authors do not find this behavior
in the post-1979 data.
(923 KB, 45 pages)
This study documents a substantial decline in
employment volatility at business-cycle frequencies over the postwar period
using state-industry level data. The distribution of total employment
volatilities at the state level has become less disperse over time, and mean
volatility has fallen. Similar results are obtained using employment data on
one-digit sectors across states: All sectors have seen a decline in employment
volatility over the postwar period, and state-sectors are more alike in terms
of volatility levels. A key source of the decline in volatility appears to be
widespread (across states and industries) decreases in the size of shocks
hitting employment levels. Shifts in the demographic factors, and industrial
structures of state economies have had little or no impact. Neither have
inter-state employment shifts, such as migrations from the Frostbelt to the
Sunbelt. The sources of the smaller employment shocks are unclear, although the
evidence points to macroeconomic phenomena.
(359 KB, 39 pages)
Shortages of coins in 1999 and
2000 motivated the authors to develop models for forecasting coin demand. A
variety of models were developed, tested, and used in realtime forecasting.
This paper describes the models that were developed and examines the forecast
errors from the models both in quasi-ex-ante forecasting exercises and in
realtime use. Tests for forecast efficiency are run on each model. Real-time
forecasts are examined. The authors conclude with suggestions for further
refinements of the models.
(729 KB, 52 pages)
Does speaking a foreign language have an impact on earnings? The
authors use a variety of empirical strategies to address this issue for a
representative sample of U.S. college graduates. OLS regressions with a
complete set of controls to minimize concerns about omitted variable biases,
propensity score methods, and panel data techniques all lead to similar
conclusions. The hourly earnings of those who speak a foreign language are more
than 2 percent higher than the earnings of those who do not. The authors obtain
higher and more imprecise point estimates using state high school graduation
and college entry and graduation requirements as instrumental variables.
(509 KB, 48 pages)
Are dictatorships more prone to build and maintain roads? This
paper identifies a puzzling fact: countries that are more democratic tend to
have roads in worse conditions than less democratic countries. Using lagged
values of a democracy index to instrument for democracy in 1980 yields higher
estimates of the magnitude of the association between democracy and bad roads.
Instruments based on climate, population, and education yield similar results.
The evidence points to a negative causal relationship from democracy to road
quality. The author also finds that changes to a more democratic government are
associated with slower growth of the road network. The author advances four
nonmutually exclusive hypotheses that can explain the results and find support
for one of them: dictatorships prefer a better highway network ready for
external and internal military intervention.
(935 KB, 33 pages)
During the early 1980s the author estimated a highly disaggregated matrix of
technology flows from U.S. industries that performed research and development
(R&D) to industries expected to use the R&D outcomes. The results,
extended to analyze how technology flows affected productivity growth in the
1960s and 1970s, are reported in Scherer (1982a, 1982b, and 1984). In this
paper the author returns to the scene of the crime two decades later to see
whether the desired matrix of technology flows could have been obtained using
publicly available information, or information that could be gleaned as a
by-product of existing surveys, without a costly effort extracting micro-data
from a large sample of individual invention patents.
(305 KB, 47 pages)
Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two broad sets of frictions — costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods — the authors find optimal monetary policy is governed by two familar principles.
First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive. Second, as various shocks occur to the real and monetary sectors, the price level should be largely stabilized, as suggested by Irving Fisher, albeit around a deflationary trend path. (In modern language, there is only small “base drift” for the price level path as various shocks arise). Since expected inflation is roughly constant through time, the nominal interest rate must therefore vary with the Fisherian determinants of the real interest rate, i.e., with expected growth or contraction of real economic activity.
Although the monetary authority has substantial leverage
over real activity in the authors' model economy, it chooses real allocations
that closely resemble those that would occur if prices were flexible. In their
benchmark model, the authors also find some tendency for the monetary authority
to smooth nominal and real interest rates.
(1.41 MB, 56 pages)
02-20 Aubhik Khan and Julia K. Thomas, "Inventories and
the Business Cycle: An Equilibrium Analysis of (S,s) Policies"
Superseded by Working Paper No. 04-11.
(484 KB, 45 pages)
02-21 Robert M.
Hunt, " The Development and Regulation of Consumer Credit Reporting in
Superseded by Working Paper 05-13
(611 KB, 57 pages)
The authors examine the effects of changes in competitive
conditions on the structure of loan contracts. In particular, they present
conditions in which greater loan market competition reduces the stringency of
contractual collateral requirements, a prediction that is consistent with
anecdotal evidence from loan markets. The authors also analyze the interaction
between the degree of competition and the efficiency of contractual
renegotiation. Insufficiently competitive markets may lead to bargaining
difficulties that reduce the efficiency of renegotiable contracts. At low
levels of competition negotiable contracts remain feasible only if collateral
levels are inefficiently low.
(442 KB, 41 pages)