Working Papers
Stimulating discussion and critical comment on research in progress.
1990
- WP 90-19
- Tastes and Technology in A Two-Country Model of the Business Cycle: Explaining international Co-Movements
- This paper develops a two-country real business cycle model and confronts it with an extensive set of empirical observations. In particular, we examine the model’s consistency with the behavior of international as well as domestic variables, the cyclical behavior of relative prices and the model’s implications for economic aggregates at the sectoral level. This line of research is motivated by a desire to understand the international transmission of business cycles and changes in international competitiveness as reflected in the behavior of relative prices, such as real exchange rates and the terms of trade. We also hope to extend our understanding of business cycles in closed economies by studying a broader and different set of observations. (PDF)
- WP 90-18
- Prointegrative Subsidies and Their Effect on Housing Markets: Do Race-Based Loans Work?
- An analysis of the effects of race-based housing subsidies on racial composition and housing prices, examining their impacts in Shaker Heights, Ohio. (PDF)
- WP 90-17
- An Insider’s View of the Political Economy of the Too-Big-to-Fail Doctrine
- An explanation of the relationship between interbank exposure and the too big to fail doctrine, with an examination of the interbank exposure of U.S. banks between March 1984 and March 1990. (PDF)
- WP 90-16
- Some Problems of Infinite Regress in Social-Choice Models: A Category Theory Solution
- An analysis of the infinite regress that appears in the statement of Gauthier’s bargaining approach to social choice. the author shows how category theory provides the tools for constructing the appropriate bargaining models by furnishing a setting for the concepts of continuity, limits, and fixed points. (PDF)
- WP 90-15
- Loan Commitments and Bank Risk Exposure
- Loan commitments increase a bank’s risk by obligating it to issue future loans under terms that it might otherwise refuse. However, moral hazard and adverse selection problems potentially may result in these contracts being rationed or sorted. Depending on the relative risks of the borrowers who do and do not receive commitments, commitment loans could be safer or riskier on average than other loans. the empirical results indicate that commitment loans tend to have slightly better than average performance, suggesting that commitments generate little risk or that this risk is offset by the selection of safer borrowers. (PDF)
- WP 90-14
- Cointegration and Transformed Series
- An explanation of how to use nonparametric techniques to search for and test possible cointegrating transformations of time series. (PDF)
- WP 90-13
- What does the capital income tax distort?
- This paper decomposes the excess burden arising from capital income taxation into its static and intertemporal components. the analysis is based on a life-cycle model with a constant elasticity of substitution utility function in one durable and one nondurable good. Calculations indicate that for reasonable utility parameters, the static component of the excess burden is of the same order of magnitude as the intertemporal component. in the case of major durable goods such as housing, which have relatively low depreciation rates, the static component is large and may exceed the intertemporal component. This suggests that an additional tax on the purchase of new durable goods would significantly reduce the overall excess burden arising from a capital income tax. (PDF)
- WP 90-12
- The effect of subordinated debt and surety bonds on banks’ cost of capital and on the value of federal deposit insurance
- This paper examines two proposals to correct the risk-taking incentives embedded in the current deposit insurance system and to provide protection to the deposit insurance fund. the first would require banks to issue subordinated debt, and the second would require bank stockholders to post surety bonds. We use the cash-flow version of the Capital Asset Pricing Model to show how each proposal would affect the values and rates of return on uninsured deposits and equity. We then indicate the impact that each proposal would have on the values of the Federal Deposit insurance Corporation claim and on the bank, emphasizing the role of deposit insurance pricing. (PDF)
- WP 90-11
- Information and Voting Power in the Proxy Process
- We document shareholder support for wealth-decreasing changes in corporate governance in the form of antitakeover charter amendments. the enactment of these amendments is shown to be related to ownership structure. This gives rise to a sample selection bias that contaminates traditional event-study results and explains the discrepancy between our findings and those reported in previous studies. We also provide evidence that strategic behavior by managers plays a role in the adoption of these amendments. (PDF)
- WP 90-10
- Consumption and Fractional Differencing: Old and New Anomalies
- A calculation of the stochastic properties of consumption when income follows a fractional stochastic process, showing how this may explain excess-smoothness results noted in previous studies (PDF)
- WP 90-09
- Intervention and the foreign exchange risk premium: An empirical investigation of daily effects
- Currency markets have witnessed a sharp increase in government intervention since 1985. Many observers believe that this intervention promoted the dollar’s depreciation between 1985 and early 1987, and that intervention has since helped to stabilize dollar exchange rates. This paper tests for a systematic effect of daily dollar intervention on exchange rate risk premia. We test for both portfolio balance effects and signaling influences by using daily data on central bank intervention (in dollars) against both the yen and the West German mark. Following work by Dominguez (1989) and Loopesko (1984), we measure the daily risk premium in terms of the deviation from uncovered interest parity. However, we follow other empirical analyses of exchange rates and allow for generalized conditional autoregressive heteroscedasticity (GARCH). Some evidence is found for both the portfolio balance and signaling channels. (PDF)
- WP 90-08
- Sticky prices, money, and business fluctuations
- Can nominal contracts create monetary nonneutrality if they arise endogenously in general equilibrium? Yes, if (1) agents have complete information about the money stock and (2) shocks to the system are purely redistributive and private information, precluding conventional insurance markets. Without contracts, money is neutral toward aggregate quantities. However, risk-sharing between suppliers and demanders creates an incentive for both parties to use nominal contracts. in particular, if an increase in the money growth rate signals a rise in the dispersion of shocks to demanders’ wealth, then prices adjust only partially to monetary shocks and money is positively associated with output. (PDF)
- WP 90-07
- Optimal Financial Structure and Bank Capital Requirements: An Empirical Investigation
- This paper presents an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book value of liabilities’ and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987. Many theoretical models of bank behavior assume that bank capital requirements will be binding, and empirical research has generally shown that almost all- banks will meet capital guidelines. However, if the optimal leverage ratios differ among banks, then banks’ responses to changes in capital requirements or to changes in factors that influence their optimal leverage ratio may vary in a cross section. the theoretical framework is a variant of the one developed in Bradley, Jarrell , and Kim (1984) . the optimal’ leverage ratio balances the tax advantage of debt with the costs of bankruptcy. in addition to considering nondebt tax shields and tax rates as determinants of the optimal ratio, we analyze the simultaneity between leverage and investment in municipal securities (munis). Previous research indicates that banks utilize munis to’ minimize tax liabilities. (PDF)
- WP 90-06
- Inflation and the Personal Tax Code: Assessing Indexation
- A reexamination of the potential costs of anticipated inflation in view of the inflation indexing system established during the 1980s. (PDF)
- WP 90-05
- In Defense of Zero Inflation
- An argument supporting zero inflation as the sole objective of monetary policy, with particular emphasis on the Bank of Canada’s commitment to an explicit, low inflation target. (PDF)
- WP 90-04
- Cross-Sectional Analysis of Public infrastructure and Regional Productivity Growth
- An analysis of the relationship between local public capital stock and regional manufacturing output, inputs, and productivity between 1965 and 1977. Results show that the effect of public capital stock on regional productivity, although limited, cannot be dismissed, and that public infrastructure appears to be a major factor in explaining growth rates of inputs. (PDF)
- WP 90-03
- Failed Delivery and Daily Treasury Bill Returns
- If the seller of a Treasury bill does not provide timely and correct delivery instructions to the clearing bank, the bank does not deliver the security. Further, the seller is not paid until this "failed delivery" is rectified. Since the purchase price is not changed, these "fails" generate interest-free loans from the seller to the buyer. This paper studies the effect of failed delivery on Treasury-bill prices. We find that investors bid prices to a premium to reflect the possibility of obtaining the interest-free loans that fails represent. This premium is a function of the opportunity cost of the fail. We also find that the bid-ask spread varies directly with the length of the fail. We rule out the possibility that our results are due to liquidity premiums, or to a general weekly pattern in short-term interest rates or the bid-ask spread. (PDF)
- WP 90-02
- On the Choice of the Exchange-Rate Regimes
- This paper utilizes recent research developments in portfolio balance theory and in real exchange-rate instability to synthesize, update, and test the optimum currency area (OCA) theory. Four hypotheses, capturing the central features of the OCA theory, are advanced and tested in a multinomial-logit setup. the empirical results establish the linkage between a fixed rate and financial integration, trade integration, plus inflation convergence. the Mundell-Fleming ranking of regime is refuted in a fundamental way. these findings are applied to a discussion of European monetary integration, in relation to both its final objective and its intermediate procedure. (PDF)
- WP 90-01
- The Determinants of Commercial Bank Holdings of Municipal Securities: 1985-1988
- This paper presents an empirical analysis of commercial bank holdings of municipal securities (munis) from June 1985 through December 1988, using the FFIEC’s Reports of Condition and income. While motivated by previous analyses suggesting that a shift from munis to taxable securities is a primary determinant of the overall impact of the Tax Reform Act of 1986 on bank profitability, this paper does not directly analyze the impact of that legislation. However, the paper modifies the specification of muni demand employed in previous analyses to consider roles for state pledging requirements, realization of capital gains or losses, and the simultaneous provision for loan losses. the results provide some support for including state pledging requirements, realization of capital gains and losses, and the loan loss provisions in analyses of muni holdings. (PDF)