Showing papers by "Federal Reserve System published in 1990"

The Federal Funds Rate and the Channels of Monetary Transnission

Abstract: First, we show that the interest rate on Federal funds is extremely informative about future movements of real macroeconomic variables, more so than monetary aggregates or other interest rates. Next, we argue that the reason for this forecasting is that the funds rate sensitively records shocks to the supply of (not the demand for) bank reserves, i.e. the funds rate is a good indicator of monetary policy actions. Finally, using innovations to the fuels rate as a measure of changes in monetary policy, we present evidence consistent with the view that monetary policy works at least in part through "credit" (that is, bank loans) as well as through "money" (that is, bank deposits) - even though bank loans fail to Granger-cause real variables.

Chapter 8 The demand for money

Abstract: Publisher Summary The relation between the demand for money balances and its determinants is a fundamental building block in most theories of macroeconomic behavior. The demand for money is a critical component in the formulation of monetary policy, and a stable demand function for money has long been perceived as a prerequisite for the use of monetary aggregates in the conduct of policy. The repeated breakdown of existing empirical models in the face of newly emerging data has fostered a vast industry devoted to examining and improving the demand for money function. This process has been aided by a growing arsenal of econometric techniques that has permitted more sophisticated examinations of dynamics, functional forms, and expectations. These techniques have also provided researchers with a wide variety of diagnostic tests to evaluate the adequacy of particular specifications. The chapter reviews underlying theoretical models to re-examine measurement and specification issues such as the definition of money and the appropriate scale and opportunity cost variables. It discusses the estimation issues, criticisms, and modifications in the partial adjustment model.

On the power of Dickey-Fuller tests against fractional alternatives

Abstract: We examine the properties of Dickey-Fuller unit root tests under fractionally-integrated alternatives and find that these tests have quite low power

On the Predictive Power of Interest Rates and Interest Rate Spreads

Abstract: A number of interest rates and interest rate spreads have been found to be useful in prediction the course of the economy. We compare the predictive power of some of these suggested interest rate variables for nine indicators of real activity and the inflation rate. Our results are consistent with those of Stock and Watson (1989) and Friedman and Kuttner (1989), who found that the spread between the commercial paper rate and the Treasury bill rate has been a particularly good predictor. We present evidence that this spread is informative not so much because it is a measure of default risk (which has been the usual presumption), but because it is an indicator of the stance of monetary policy; for example, during the "credit crunches" of the l960s aid the 1970s, the commercial paper -- Treasury bill spread typically rose significantly. We also show that, possibly because of charges in monetary policy operating procedures aid in financial markets, this spread appears r to be a less reliable predictor than it used to be.

The Cost of Annuities: Implications for Saving Behavior and Bequests

Abstract: The fact that most elderly U S individuals maintain a flat age-wealth profile, rather than buy individual life annuities, contradicts the standard life-cycle consumption model Average expected yields on individual life annuities in the United States during 1968–1983 were lower by 421–613 percent, or 243–435 percent after allowing for adverse selection, than yields on plausible alternative investments Simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive At older ages the combination of such yield differentials and a bequest motive can do so It is common experience that as we grow older and nearer to eternity we become more, not less, anxious about money [Derek Brewer, Chaucer and His World, p 213]

Decomposing TFP growth in the presence of cost inefficiency, nonconstant returns to scale, and technological progress

Abstract: A thorough understanding of changes in productivity measures is important to economists and policymakers, because productivity growth is a major source of economic growth. This article explores the relationship between changes in total factor productivity (TFP) growth, defined using an index number approach, and changes in returns to scale, cost efficiency, and technology. Several decompositions are developed, using alternatively production and cost frontiers. The last decomposition developed also allows for multiple outputs.

Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries

Abstract: Each of the main explanations of procyclical labor productivity, or short-run increasing returns to labor (SRIRL), is closely associated with a competing theory of the business cycle: Real business cycle theorists attribute SRIRL to procyclical technological shocks, proponents of recent theories based on non-convexities believe that SRIRL reflects true increasing returns, and Keynesians favor a labor hoarding explanation. Thus evidence on the sources of SRIRL may be important for discriminating among alternative theories of the cycle. This paper studies the sources of SRIRL in a sample of ten interwar U.S. manufacturing industries. Our main findings are that SRIRL was common in the interwar period and that the pattern of SRIRL across industries was similar to that observed in the postwar period. we argue that, under the presumption that the Depression was not caused by large negative technological shocks, these findings are inconsistent with the technological shocks hypothesis and provide evidence against real business cycle theory in general. we propose tests for discriminating between the increasing returns and labor hoarding explanations but find that our conclusions differ by industry.

Evidence on q and investment for Japanese firms

Abstract: This paper presents estimates of q from April 1974 to March 1988 for 580 Japanese manufacturing firms. The estimates appear reasonable in several respects. First, the level of q for most firms is just above one. Interestingly, the large jump in the price earnings ratio in 1986 (which had led many to question the rationality of share prices) is not present in q . Second, taxes have important effects on the level of q . Third, the measurement error in q , at least prior to the recent stock market boom, appears to be small. Despite the plausibility of the q estimates, the basic and most tractable model relating investment and q does not fare well. The model's estimated parameters are implausible and unstable, and liquidity, which should be irrelevant, also seems to play an important role in influencing investment.

Public Policy and Economic Growth: Developing Neoclassical Implications

Abstract: Why do the countries of the world display considerable disparity in long term growth rates? This paper examines the hypothesis that the answer lies in differences in national public policies which affect the incentives that individuals have to accumulate capital in both its physical and human forms. Our analysis shows that these incentive effects can induce large difference in long run growth rates. Since many of the key tax rates are difficult to measure, our procedure is an indirect one We work within a calibrated, two sector endogenous growth model, which has its origins in the microeconomic literature on human capital formation. We show that national taxation can substantially affect long run growth rates. In particular, for small open economies with substantial capital mobility, national taxation can readily lead to "development traps" (in which countries stagnate or regress) or to "growth miracles" (in which countries shift from little growth to rapid expansion) This influence of taxation on the rate of economic growth has important welfare implications: in basic endogenous growth models, the welfare cost of a 10 % increase in the rate of income tax can be 40 times larger than in the basic neoclassical model.

PC-GIVE and David Hendry's Econometric Methodology

Abstract: This paper summarizes David Hendry's empirical econometric methodology, unifying discussions in many of his and his co-authors' papers. Then, we describe how Hendry'S suite of computer programs PC-GIVE helps users implement that methodology. Finally, we illustrate that methodology and the programs with three empirical examples: post-war narrow money demand in the United Kingdom, nominal income determination in the United Kingdom from Friedman and Schwartz (1982), and consumers' expenditure in Venezuela. These examples help clarify the methodology'S central concepts, which include cointegration, error-correction, general-to-simple modelling, dynamic specification, model evaluation and testing, parameter constancy, and exogeneity.

The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison

Abstract: Recent research has provided strong circumstantial evidence for the proposition that sustained deflation -- the result of a mismanaged international gold standard -- was a major cause of the Great Depression of the 1930s. Less clear is the mechanism by which deflation led to depression. In this paper we consider several channels, including effects operating through real wages and through interest rates. Our focus, however, is on the disruptive effect of deflation on the financial system, particularly the banking system. Theory suggests that falling prices, by reducing the net worth of banks and borrowers, can affect flows of credit and thus real activity. Using annual data for twenty-four countries, we confirm that countries which (for historical or institutional reasons) were more vulnerable to severe banking panics also suffered much worse depressions, as did countries which remained on the gold standard. We also find that there may have been a feedback loop through which banking panics, particularly those in the United States, intensified the worldwide deflation.

Risk-based capital and deposit insurance reform

Abstract: Risk-based capital (RBC) is an important component of deposit insurance reform. This paper provides an empirical analysis of the new 1992 RBC bank standards, applying them to data on virtually all U.S. banks from 1982 to 1989. The data reveal strong associations between several measures of future bank performance (including bankruptcy) and the RBC relative risk weights. These associations suggest that the weights constitute a significant improvement over the old capital standards, although there are several instances in which the weights for specific categories appear to be out of line with the performance results. Tests of the informational value of passing or failing the new and old capital standards show that both have independent information, but that the new RBC standards better predict future bank performance problems. The data also indicate that, in contrast to the old standards, the RBC capital burden falls much more heavily on large banks. As a result, banks representing more than one-fourth of all bank assets would have failed the new RBC standards as of 1989. The new standards are also more stringent overall. More banks would have failed the new standards than the old ones, with larger average capital deficiencies.

The Korean Banking System and Foreign Influence

Abstract: 1. The Financial System in Korea 2. Foreign Banks in Korea 3. Financial Liberalisation and Future Strategic Options for Foreign Banks 4. Internationalisation of the Korean Capital Markets 5. Merchant Banks in Korea 6. Leasing Operations in Korea 7. A Comparative Analysis: The Financial Systems of Korea and Taiwan 8. Summary, Conclusions.

Geographic diversification in banking, market share changes, and the viability of small independent banks

Abstract: The prospect of unlimited nationwide banking raises a question about the viability of small independent banks in competition with large, geographically diversified banking organizations. This study addresses the issue of small bank viability by focusing on the relative performance of independent banks and bank holding company subsidiaries in a regime of intrastate banking, where “performance” is measured by the cumulative change in a bank's local market share over time. Two regression equations of the same general form are estimated using the same sample of independent and affiliated banks, albeit for different time periods to distinguish between the short-term and long-term effects of affiliation. Regression results indicate that affiliation with a geographically diversified bank holding company generally provides no significant long-term competitive advantage (in terms of market share accumulation) for holding company subsidiaries over independent banks. The only exception is a modest benefit afforded to banks with relatively small pre-acquisition market shares that are acquired by larger bank holding companies as initial entry vehicles into new markets.

Maintaining Price Stability: A Proposal

Abstract: The Neal Resolution would make price stability the dominant goal of monetary policy. This paper proposes giving the Fed and Fed-watchers a measure of whether ongoing policy is consistent with this goal.

The value of youth: equalizing age differentials in marriages.

Abstract: The objective of this paper is to present a model of constrained utility-maximizing behaviour which is able to explain serveral features of marriage. The model predicts that individuals meet in the...

The Seasonal Cycle in U.S. Manufacturing

Abstract: This paper examines the seasonal cycle in the manufacturing sector of the U.S. economy. we present estimates of the seasonal patterns in monthly data for 2-digit industries, and we demonstrate the similarity of the seasonal cycle and the business cycle in manufacturing with respect to several key stylized facts about business cycles. The results are an important addition to those in Barsky and Miron (1989) because the monthly data for manufacturing display interesting seasonal fluctuations that are hidden in the quarterly data examined by Barsky and Miron. The most significant is a sharp slowdown in July followed by a significant rebound in August. We argue that this event is not easily explained by technology or preference shifts but instead results from synergies across economic agents.

In Support of Price Stability

Abstract: Rep. Stephen Neal of North Carolina has introduced House Joint Resolution 409, directing the Federal Reserve to reduce inflation to zero within five years and maintain price stability thereafter. On February 6, Mr. Block and three other Federal Reserve Bank presidents testified in support of the Resolution before the Subcommittee on Domestic Monetary Policy of the U.S. House of Representatives Committee on Banking, Finance, and Urban Affairs. Following is Mr. Black's testimony.

Fisherian and Wicksellian Price-Stabilization Models in the History of Monetary Thought

Abstract: Central bankers charged with the responsibility for stabilizing the general level of prices need to know at least two things. First, what causes prices to deviate from their desired fixed target level? Secondly, what policy rule or response most effectively corrects those deviations and restores prices to target?