The views expressed in these papers are solely those of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of Philadelphia or Federal Reserve System.

02-1: An Overall Perspective on Banking Regulation by Xavier Freixas and Anthony M. Santomero

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.

02-2: Do Bankers Sacrifice Value to Build Empires? Managerial Incentives, Industry Consolidation, and Financial Performance by Joseph P. Hughes, William W. Lang, Loretta J. Mester, Choon-Geol Moon, and Michael S. Pagano

Bank 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.

02-3: Is Macroeconomic Research Robust to Alternative Data Sets? by Dean Croushore and Tom Stark

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.

02-4: Check-Cashing Outlets in a Changing Financial System by John P. Caskey

This paper 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."

02-5: Enduring Relationships in an Economy with Capital by Aubhik Khan and B. Ravikumar

02-6: A Quantitative Theory of Unsecured Consumer Credit with Risk of Default by Satyajit Chatterjee, Dean Corbae, Makoto Nakajima, and Jose-Victor Rios-Rull

Superseded by Working Paper No. 05-18.

02-7/R: Consistent Economic Indexes for the 50 States by Theodore M. Crone

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.

Superseded by Working Paper No. 04-9

02-8: The Impact of Unemployment on Alternative Poverty Measures by Robert H. DeFina

The 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 subgroups. 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.

02-9/R: Financial Networks: Contagion, Commitment, and Private-Sector Bailouts by Yaron Leitner 

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.

02-10: Why Do Households Without Children Support Local Public Schools? Linking House Price Capitalization to School Spending by Christian A. L. Hilber and Christopher J. Mayer

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.

02-11: Why Are Business Cycles Alike Across Exchange-Rate Regimes? by Luca Dedola and Sylvain Leduc

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.

02-12/R: Compensating Differentials and the Social Benefits of the NFL by Gerald Carlino and N. Edward Coulson

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.

02-13/R: Self-Fulfilling Expectations and the Inflation of the 1970s: Evidence from the Livingston Survey by Sylvain Leduc, Keith Sill, and Tom Stark

Using survey data on expectations, the authors examine whether the postwar 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.

02-14: The Cyclical Behavior of State Employment During the Postwar Period by Gerald Carlino, Robert DeFina, and Keith Sill

Superseded by Working Paper No. 04-21/R

02-15/R: Forecasting Coin Demand by Dean Croushore and Tom Stark

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.

02-16: The Returns to Speaking a Second Language by Albert Saiz and Elena Zoido

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.

02-17: Democracy to the Road: The Political Economy of Potholes by Albert Saiz

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.

02-18: Technology Flows Matrix Estimation Revisited by F. M. Scherer

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 byproduct of existing surveys, without a costly effort extracting microdata from a large sample of individual invention patents.

02-19: Optimal Monetary Policy by Aubhik Khan, Robert King, and Alexander L. Wolman

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.

02-20: Inventories and the Business Cycle: An Equilibrium Analysis of (S,s) Policies by Aubhik Khan and Julia K. Thomas

Superseded by Working Paper No. 04-11.

02-21: The Development and Regulation of Consumer Credit Reporting in America by Robert M. Hunt

Superseded by Working Paper 05-13.

02-22: Collateral and Competition by Mitchell Berlin and Alexander W. Butler

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.