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Showing papers by "Federal Reserve System published in 1988"


ReportDOI
TL;DR: In this paper, the authors modify a textbook IS-UI model to permit a more balanced treatment of money and credit, and show that credit supply and demand shocks have independent effects on aggregate demand; the nature of the monetary transmission mechanism is also somewhat different.
Abstract: Standard models of aggregate demand treat money and credit asymmetrically; money is given a special status, while loans, bonds, and other debt instruments are lumped together in a "bond market" and suppressed by Walras' Law. This makes bank liabilities central to the monetary transmission mechanism, while giving no role to bank assets. We show how to modify a textbook IS-UI model so as to permit a more balanced treatment. As in Tobin (1969) and Brunner-Meltzer (1972), the key assumption is that loans and bonds are imperfect substitutes. In the modified model, credit supply and demand shocks have independent effects on aggregate demand; the nature of the monetary transmission mechanism is also somewhat different. The main policy implication is that the relative value of money and credit as policy indicators depends on the variances of shocks to money and credit demand. We present some evidence that money-demand shocks have become more important relative to credit-demand shocks during the 1980s.

1,883 citations


Posted Content
TL;DR: This article found that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral, whereas when risk is observable, the highest risk borrowers tend not to pledge.
Abstract: Most commercial loans are made on a secured basis, yet little is known about the relationship between collateral and credit risk. Several theoretical studies find that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral. In contrast, conventional wisdom holds that when risk is observable, the highest-risk borrowers tend to pledge collateral. An additional issue is whether secured loans (as opposed to secured borrowers) tend to be safer or riskier than unsecured loans. Empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers, riskier loans and riskier banks.

962 citations


Journal ArticleDOI
TL;DR: The standard empirical test of whether the Federal Reserve can influence interest rates is to regress interest rates on current and past (actual or unexpected) values of money growth This literature generally finds little support for the view that the Fed can influence short-term interest rates, except perhaps through the positive impact on inflation expectations of increases in money growth as mentioned in this paper.
Abstract: The standard empirical test of whether the Federal Reserve can influence interest rates is to regress interest rates on current and past (actual or unexpected) values of money growth This literature generally finds little support for the view that the Fed can influence interest rates, except perhaps through the positive impact on inflation expectations of increases in money growth Based on an exhaustive survey of the empirical studies on the impact of money growth on short-term interest rates, Reichenstein concludes that "the Fed appears to have little control over month-to-month changes in [short-term] interest rates"

563 citations


Journal ArticleDOI
TL;DR: This article analyzed the need for financial regulations in the implementation of central bank policy and found that financial regulations cannot readily be rationalized on the basis of macroeconomic benefits, and that financial regulation is sometimes justified on macroeconomic grounds.
Abstract: Financial deregulation is widely understood to have important economic benefits for microeconomic reasons Since Adam Smith, economists have provided arguments and evidence that unfettered private markets yield outcomes that are superior to public sector alternatives But financial regulations - specific rules and overall structures - are sometimes justified on macroeconomic grounds This paper analyzes the need for financial regulations in the implementation of central bank policy Dividing the actions of the Federal Reserve into monetary and banking policy, we find that financial regulations cannot readily be rationalized on the basis of macroeconomic benefits

347 citations


Journal ArticleDOI
TL;DR: The 1983 Survey of Consumer Finances (SCF) as discussed by the authors is the first U.S. survey since the 1963 Survey of Financial Characteristics of Consumers that offers hope of accurately measuring the entire wealth distribution.
Abstract: Because wealth estimates from survey data have usually fallen substantially short of independent aggregate estimates, survey data have not been seen as adequate for assessing questions dependent on a good representation of the entire distribution of wealth, such as estimates of wealth concentration. The 1983 Survey of Consumer Finances (SCF), which contains a supplementary sample of very high income households drawn from a tax-file sample frame, is the first U.S. survey since the 1963 Survey of Financial Characteristics of Consumers that offers hope of accurately measuring the entire wealth distribution. In this paper, we discuss the design of the survey, the critical issue of proper weighting to merge the supplementary sample with an area probability sample, and the role of imputation. We show that the use of ordinary area probability samples alone leads to probable bias in the measurement of highly concentrated assets such as stocks and bonds. We compare the SCF data with aggregates derived from the flow-of-funds accounts of the Federal Reserve Board. While methodological issues cloud exact comparisons, it appears overall that the SCF estimates are at least as credible as other aggregate measurements. Finally, we use the data to assess the change in concentration of wealth from 1963 to 1983. We estimate that the concentration of wealth in terms of households did not change significantly over this period.

118 citations


Journal ArticleDOI
TL;DR: In this article, the authors examined the micromechanics of the U.S. funds market and showed that in a continuous market with asynchronous trading, regulatory constraints and accounting conventions that focus agents' attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices.
Abstract: The federal funds rate arguably is the most important interest rate in the U.S. capital market because it plays a central role in monetary policy and the term structure. This paper examines the micromechanics of the funds market. We show that in a continuous market with asynchronous trading, regulatory constraints and accounting conventions that focus agents' attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices. We also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate.

108 citations


Journal ArticleDOI
TL;DR: In this article, the authors employ new census vacancy rate data to analyze the price-adjustment mechanism for rental housing and explore the determinants of variation in natural vacancy rates across those metropolitan areas.
Abstract: This paper employs new census vacancy rate data to analyze the price-adjustment mechanism for rental housing. The study extends previous research on this topic, which provided conflicting evidence concerning the traditional theory of rental housing market adjustment (see Smith [10], [11]; DeLeeuw and Ekanem [2]; Eubank and Sirmans [4]; and Rosen and Smith [8]). Cross-section and time-series data are pooled to estimate natural vacancy rates for sixteen United States cities for the 1981–85 period. The analysis further explores the determinants of variation in natural vacancy rates across those metropolitan areas.

95 citations


Journal ArticleDOI
TL;DR: Tests of the hypothesis that geographic diversification affects bank risk are conducted on large samples of banking organizations (1976-1985) and focus on intrastate geographic diversity experience.

83 citations


Journal ArticleDOI
TL;DR: In this article, a semi-Markov model is used to characterize the steady state frequency of owner-occupied housing and simulate the impact of changes in housing tax policy, and the effect of household residence times.

79 citations


Journal ArticleDOI
TL;DR: In this article, a portfolio-balance model of the DM/S rate under rational expectations is specified, in which systematic risk-induced deviations from uncovered interest parity are allowed, which leads to a reduced from containing a potentially time-varying risk premium, which they approximate and estimate using an ARCH-in-mean approach.

50 citations


Journal ArticleDOI
TL;DR: In this paper, a comparative study of the levels of unit labor costs in the manufacturing sectors of several countries is presented, showing that the relative level of unit labour costs in United States and abroad have fluctuated significantly in recent years, due largely to movements in nominal exchange rates.
Abstract: This paper presents a comparative study of the levels of unit labor costs in the manufacturing sectors of several countries. We begin by surveying earlier estimates of relative productivity and unit labor cost levels and evaluating the various methodologies that have been used in previous studies. Empirical estimates of relative unit labor costs, based on output levels that are translated at purchasing power parity exchange rates, are then presented and compared to earlier estimates. The results show that the relative levels of unit labor costs in the United States and abroad have fluctuated significantly in recent years, due largely to movements in nominal exchange rates. In 1988, unit labor costs in the United States were below the average level of other industrialized countries, but were significantly above the level in a representative newly industrialized country, Korea. Insofar as unit labor costs serve as an indicator of international competitiveness, these results imply that the competitiveness of the U.S. manufacturing sector had improved significantly since 1985, at least with respect to other major industrialized countries.

Journal ArticleDOI
TL;DR: In this article, the authors explain why the risky notes of banks established during the Free Banking Era (1837-1863) were demanded even when relatively safe specie (gold and silver coin) was an alternative.

Posted Content
TL;DR: This paper argued that changes in commodity prices are good predictors of future aggregate price change and that commodity prices might well be a useful guide for monetary policy, possibly serving as an intermediate target or at least as an important indicator variable.
Abstract: Many analysts have advocated using commodity prices as a guide for monetary policy. The basic reasoning can be simply put: “Money creation is intended to promote price stability and is best guided by an index of prices set in real markets.” (Wall Street Journal, 1988). The rationale for stabilizing commodity prices can also be expressed in three propositions. First, inflation is a monetary phenomenon that should be eliminated. Second, commodity prices are determined in auction markets; they will therefore change quickly in response to monetary policy actions. Third, changes in commodity prices are good predictors of future aggregate price change. If all three propositions are accepted, then commodity prices might well be a useful guide for monetary policy, possibly serving as an intermediate target or at least as an important indicator variable.

Posted Content
TL;DR: In this paper, an intertemporal, rational expectations, asset-pricing model is employed to analyze the effect of government money and gold policy actions under a fixed money price of gold.
Abstract: This paper is intended as a positive analysis of temporary government policy actions under a gold standard. To understand a gold standard is to understand the private valuation of money and gold as assets, and how their asset values can be influenced by government money and gold policy actions under a fixed money price of gold. An intertemporal, rational expectations, asset-pricing model is employed to address these issues.

Journal ArticleDOI
TL;DR: The ontological basis for causality testing must be some empirically interpretable system leading one to specify a logically valid a priori law that can be shown to exist as discussed by the authors.

Posted Content
TL;DR: In this paper, a reduced-form price equation associated with the expectations-augmented Phillips curve model is proposed, where prices are set as a markup over labor costs, the latter being determined by expected inflation and the degree of demand pressure.
Abstract: What determines inflation? Several theoretical models of the inflation process have been advanced in the literature, and these models typically yield different predictions about the role of certain variables in determining prices. To illustrate, consider, for example, the expectations-augmented Phillips curve model. This model generally assumes prices are set as a markup over labor costs, the latter being determined by expected inflation and the degree of demand pressure. It is assumed further that expected inflation is a function of past price history, and demand pressure can be measured by the excess of real growth over potential (termed the output gap). Thus, in the reduced-form price equation associated with the Phillips curve model, past prices and the output gap (or another demand pressure variable) play a key role in determining the price level. This model thus implies that by monitoring the behavior of these two variables one could assess the outlook for inflation. Another example is provided by the price equation associated with the traditional monetarist model. In this equation, lagged money growth is the predominant force in price determination. Thus, depending upon the nature of the price structure chosen different determinants of inflation have been suggested in the literature.

Journal ArticleDOI
TL;DR: In this article, the problem is formulated as a model pooling procedure (equivalent to non-recursive Kalman filtering) where a baseline quarterly model forecast is modified through add-factors or constant adjustments.
Abstract: This paper shows how monthly data and forecasts can be used in a systematic way to improve the predictive accuracy of a quarterly macroeconometric model. The problem is formulated as a model pooling procedure (equivalent to non-recursive Kalman filtering) where a baseline quarterly model forecast is modified through ‘add-factors’ or ‘constant adjustments’. The procedure ‘automatically’ constructs these adjustments in a covariance-minimizing fashion to reflect the revised expectation of the quarterly model's forecast errors, conditional on the monthly information set. Results obtained using Federal Reserve Board models indicate the potential for significant reduction in forecast error variance through application of these procedures.

Journal ArticleDOI
TL;DR: In this article, the authors show that the production, aggregation, and estimation theories that lead to a stochastic-coefficients production function are more general than those leading to a fixed coefficients production function.
Abstract: In this article, we show that the production, aggregation, and estimation theories that lead to a stochastic-coefficients production function are more general than those leading to a fixed-coefficients production function Estimates of productivity changes implied by these two types of Cobb–Douglas production functions are compared for several US manufacturing sectors for the period 1955–1982 All of the estimates of the stochastic-coefficients Cobb–Douglas function have the right algebraic sign for all industries considered, whereas some of the estimates of its fixed-coefficients counterpart have the wrong sign

Journal ArticleDOI
TL;DR: In this article, the authors investigated scale economies in compliance costs for regulations Z (Truth in Lending) and B (Equal Credit Opportunity) at commercial banks and found that there are large economies of scale at the lowest output levels, in terms of the volume of consumer credit accounts.
Abstract: This study investigates scale economies in compliance costs for Regulations Z (Truth in Lending) and B (Equal Credit Opportunity) at commercial banks. The major finding of the study is that there are large economies of scale at the lowest output levels, in terms of the volume of consumer credit accounts. This suggests that Regulations Z and B impose a competitive disadvantage on banks with small consumer credit portfolios. However, scale economies decrease rapidly. Thus, the costs of complying with consumer protection regulations do not appear to be a factor that would lead to much greater concentration in consumer lending at banks.

Journal ArticleDOI
TL;DR: The resulting aggregate pooled forecast is identical to the forecast which would be obtained by simply pooling two forecasts at the aggregate level, while the disaggregated forecast maintains the aggregation identity required by the problem.
Abstract: The most common approach to combining forecasts at different levels of aggregation has been to sum (or average) the more disaggregated forecast, and take a weighted average of the aggregate forecasts. This paper develops a simple method for obtaining minimum variance pooled forecasts at the disaggregated level. The major advantage that this method has over the common approach is that it provides pooled forecasts at both the aggregated and disaggregated level. As will be shown, the resulting aggregate pooled forecast is identical to the forecast which would be obtained by simply pooling two forecasts at the aggregate level, while the disaggregated forecast maintains the aggregation identity required by the problem.

Journal ArticleDOI
TL;DR: This paper found that the stochastic structure of the percentage changes in both the Franc/DM and Lira/DM rates is well described by a low order autoregression with ARCH disturbances.
Abstract: Using tests for unit roots, serial correlation, and conditional heteroskedasticity, we find that the stochastic structure of the percentage changes in both the Franc/DM and Lira/DM rates is well described by a low order autoregression with ARCH disturbances. While this assertion is not rejected in either the Pre-EMS or the EMS period, we present evidence indicating a structural shift between sub-periods. In particular, while ARCH is present in each sub-period, its explicit parameterization changes dramatically.

Journal ArticleDOI
TL;DR: In this article, the authors simulated the effect of state-of-the-art check clearing patterns on the number of handlings for multiple-bank payments (transit items) and the conversion of some multiplebank payments into single-bank transactions (on-us items).
Abstract: Interstate banking will improve the efficiency of the payments system. This will occur because the number of handlings for multiple-bank payments (transit items) will fall and because some multiple-bank payments will be transformed into single-bank payments (on-us items). These effects are simulated using data on the current cross-section relationship between banking structure and check clearing patterns in a multinomial logit model. The Federal Reserve, which currently processes almost one-third of all checks, is predicted to lose 43 to 60 percent of its market share. The annual impact is expected to be gradual, however, since interstate banking will be phased in and because of offsetting growth in the total check clearing market.

Book ChapterDOI
TL;DR: In this paper, the authors argue that the rest of the world will absorb the reduction of the US trade deficit is a matter of accounting: because this deficit is the trade surplus of the rest-of-the world, eliminating one means eliminating the other.
Abstract: That the rest of the world will absorb the reduction of the US trade deficit is a matter of accounting: because this deficit is the trade surplus of the rest of the world, eliminating one means eliminating the other. What is not so evident is which countries will absorb this reduction, an issue of growing interest in view of the significant re-allocation of productive factors that are likely to emerge. That the US trade deficit will improve in response to a real depreciation of the dollar is not in doubt. What is not so clear is how long it will take, an important question given the constraints that external imbalances impose on the design of macroeconomic policy.

Journal ArticleDOI
TL;DR: In this article, the authors show that Shiller's smoothness restrictions on the lag coefficients in a distributed lag model imply a singular normal prior distribution, and that the posterior mean for this prior is different from Shiller estimator.

Posted Content
TL;DR: Bank profitability as measured by return on assets and return on equity declined in the Fifth Federal Reserve Disntrict in 1987 due largely to increased loan and lease loss provisions as discussed by the authors, which should come as no surprise because of the well-publicized additions to reserves against Third World debt made by large banks both within and outside the District.
Abstract: Bank profitability as measured by return on assets and return on equity declined in the Fifth Federal Reserve Disntrict in 1987 due largely to increased loan and lease loss provisions. Nationwide the profitability decline was considerably larger because the average loss provision greatly exceeded that in the Fifth District. These results should come as no surprise because of the well-publicized additions to reserves against Third World debt made by large banks both within and outside the District.

Journal ArticleDOI
TL;DR: This article showed that nominal interest rate pegging leads to instability in an IS-LM model with a vertical long-run Phillips curve and backward-looking inflation expectations, but does not lead to price level and output indeterminacy in a model with staggered contracts.
Abstract: Nominal interest rate pegging leads to instability in an IS-LM model with a vertical long-run Phillips curve and backward-looking inflation expectations. However, it does not lead to instability in several large multicountry econometric models, apparently primarily because these models have nonvertical long-run Phillips curves. Nominal interest rate pegging leads to price level and output indeterminacy in a model with staggered contracts and rational expectations. However, when a class of money supply rules with interest rate smoothing is introduced, and interest rate pegging is viewed as the limit of interest rate smoothing, the price level and output are determinate.


Posted Content
TL;DR: The development of rational expectations models of the business cycle has been the central issue on the macroeconomic research agenda since the influential analyses of Robert Lucas as discussed by the authors, focusing on the extent to which the rational expectations perspective has generated a new understanding of economic fluctuations.
Abstract: Development of rational expectations models of the business cycle has been the central issue on the macroeconomic research agenda since the influential analyses of Robert Lucas. In this essay, we review these developments, focusing on the extent to which the rational expectations perspective has generated a new understanding of economic fluctuations.

Journal ArticleDOI
TL;DR: This article developed tests of the goodness of fit of specific time series models which are powerful against alternatives that imply different long-run impulse responses, and with postwar quarterly data, these tests favor models in which innovations are largely temporary over models that innovations persist.
Abstract: Suppose that real GNP falls 1 percent lower than one would have expected from its past history. How much should one change one's forecast of GNP for ten or twenty quarters ahead? That is the question which has recently been addressed by Campbell and Mankiw [1987] and Clark [1987]. Both of these papers estimate a parsimonious representation of the time series and then compute the implied long-run response of GNP to an innovation. While Clark estimates that the long-run impact of an innovation is less than two-thirds of the initial impact, Campbell and Mankiw present evidence that shocks persist and even grow over time. The goal of this paper is to develop tests of the goodness of fit of specific time series models which are powerful against alternatives that imply different long-run impulse responses. With postwar quarterly data these tests favor models in which innovations are largely temporary over models in which innovations persist.