Showing papers by "Federal Reserve System published in 1991"

Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups

Abstract: This paper presents evidence suggesting that information and incentive problems in the capital market affect investment. We come to this conclusion by examining two sets of Japanese firms. The first set has close financial ties to large Japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm. The second set of firms has weaker links to a main bank and presumably faces greater problems raising capital. Investment is more sensitive to liquidity for the second set of firms than for the first set. The analysis also highlights the role of financial intermediaries in the investment process.

What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns

Abstract: This paper uses a log-linear asset pricing framework and a vector autoregressive model to break down movements in stock and bond returns into changes in expectations of future stock dividends, inflation, short-term real interest rates, and excess returns on stocks and bonds. In monthly postwar U.S. data, excess stock returns are found to be driven largely by news about future excess stock returns, while excess 10-year bond returns are driven largely by news about future inflation. Real interest rate changes have little impact on either stock or 10-year bond returns, although they do affect the short-term nominal interest rate and the slope of the term structure. These findings help to explain why postwar excess stock and bond returns have been almost uncorrelated.

Homework in Macroeconomics: Household Production and Aggregate Fluctuations

Abstract: This paper explores some macroeconomic implications of including household production in an otherwise standard real business cycle model. We calibrate the model on the basis of macroeconomic evidence and long-run considerations, simulate it, and examine its statistical properties. We find that introducing home production significantly improves the quantitative performance of the standard model along several dimensions. It also implies a very different interpretation of the nature of aggregate fluctuations.

Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending

Abstract: This paper seeks to test two tenets that underlie the current practice of antitrust analysis in banking. The first is the view that bank commercial loan markets are local in nature, and the second is the view that banks in more concentrated markets are more likely to engage in some form of noncompetitive behavior. Tests of both of these tenets are conducted using an extensive set of loan-specific survey information not previously employed to address these issues. Results consistent with the existence of local banking markets and the dominance of competitive differences as an explanation for observed differences in loan rates are found.

Sources of Intra-Industry Wage Dispersion: How Much Do Employers Matter?

Abstract: Observed human capital explains less than half of wage variation. In BLS Industry Wage Surveys, establishment-based wage differentials (controlling for occupation) account for 20–70 percent of intra-industry wage variation. This corresponds to a standard deviation in wages of 14 percent of the mean, almost as large as interindustry wage variation. Investigation suggests that establishment wage differentials are not random variations or returns to usual measures of human capital.

Forecasting Output with the Composite Leading Index: A Real-Time Analysis

Abstract: We examine the ability of the composite index of leading economic indicators to predict future movements in aggregate economic activity. Previous examinations of predictive performance have evaluated either the in-sample residual errors from a forecasting equation fitted to the entire sample of data or the out-of-sample forecast errors from an equation fitted to a subsample of the data. Unlike previous evaluations, we perform a real-time analysis, which uses the provisional and partially revised data for the leading index that were actually available historically, along with recursive out-of-sample forecasts. We find a substantial deterioration of forecasting performance in the real-time framework.

Risk-based capital and deposit insurance reform

Abstract: This paper analyzes the new risk-based capital (RBC) standards using data on U.S. banks from 1982 to 1989. The association between bank performance (including bankruptcy) and the RBC relative risk weights and compliance with the RBC standards are assessed. These associations suggest that RBC constitutes a significant improvement over the old capital standards, although both standards incorporate useful independent information. The data also indicate that relative to the old standards, the new standards are much more strict on large banks and are more stringent overall. As a result, banks representing more than one-fourth of all bank assets would have failed the new standards as of 1989.

Nonlinear transformations of integrated time series

Abstract: . In this paper we consider the effects of nonlinear transformations on integrated processes and unit root tests performed on such series. A test that is invariant to monotone data transformations is proposed. It is shown that series are generally not cointegrated with nonlinear transformations of themselves, but the same transformation applied to a pair of cointegrated series can result in cointegration between the transformed series.

Did the Debt Crisis Cause the Investment Crisis

Abstract: There is now a large literature that attributes the investment decline in heavily indebted countries to the effects of the international debt crisis which began in 1982. However, these countries also faced falling export prices and high world real interest rates in the early 1980s, and these shocks could have directly caused investment to decline. One way to test for debt effects is to see whether equations without any debt-related information can nevertheless forecast the investment declines that these countries experienced. This paper shows that such equations can forecast investment in many indebted countries, and thus casts doubt on many debt-related explanations for the investment declines.

Loan commitments and bank risk exposure

Abstract: Loan commitments increase a bank's risk by obligating it to issue future loans under terms it might otherwise refuse. However, moral hazard and adverse selection problems 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 either commitments generate little risk or that this risk is offset by the selection of safer borrowers to receive commitments.

Household saving in the u.s.

Abstract: In this paper the authors present evidence on household saving in the U.S. based on the panel data from the 1983 and 1986 waves of the Survey of Consumer Finances. Saving is measured in these surveys as the change in wealth over the three-year period. Using a variety of models, we are able to explain only about 7 percent of the variation in the level of saving. Demographic factors appear to be modestly useful in explaining saving. However, one fact is very clear from the patterns of correlation extracted so far: either the measurement error in the data is quite large, or idiosyncratic factors are very important in explaining saving behavior, or both.

Credit rationing, concessionary lending, and debt maturity

Abstract: A firm raises capital for a two-period investment. While creditors observe the project status midstream, unobservable managerial perks may consume capital each period. When the firm is unfortunate early on, short-term financing results in either concessionary lending or costly liquidation. Rolling over short-term debt may be problematic because the high risk premium creditors demand when asset value is low relative to debt impares managerial motivation precisely when the incentive to defer perk consumption is weakest. Long-term financing may reduce total agency costs be enabling lenders to charge higher initial premia, in effect, shifting loan repayments to states in which incentive constraints are non-binding.

Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation

Abstract: Price movements are the channel through which market information is transmitted An increase in one price relative to others is the signal that directs resources and rations consumption In other words, markets operate through the distribution of prices

The limitations of market value accounting and a more realistic alternative

Abstract: Market value accounting (MVA) might improve market and regulatory discipline on financial institutions. Unfortunately, there are serious conceptual, measurement, and incentive problems with implementing MVA that have not received significant attention. These problems are suggested by the theory of asymmetric information and the role intermediaries play in solving information and monitoring problems. After analyzing the problems with MVA, we develop an alternative approach that applies MVA principles where they are most feasible and uses a statistical procedure where asymmetric information problems make MVA particularly problematic. An empirical analysis suggests that this procedure may substantially improve the distribution of regulatory discipline.

Econometric Aspects of the Variance-Bounds Tests: A Survey

Abstract: We survey the variance-bounds tests of asset-price volatility, stressing the econometric aspects of these tests. The first variance-bounds tests of the present-value relation reported apparently striking evidence of excess volatility of asset prices. The statistical significance of the results, however, was either marginal or, in the case of model-free tests, impossible to assess. Moreover, the tests were soon criticized for a number of biases. Various other tests of the present-value relations were later developed, avoiding in different degrees the econometric problems attending the first-generation tests also found excess volatility, though sometimes of borderline statistical significance. This finding of excess volatility is robust and is difficult to explain within the representative-consumer, frictionless-market model. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Differences in the measurement of wealth, wealth inequality and wealth composition obtained from alternative u.s. wealth surveys

Abstract: Since household wealth surveys have been widely used to study saving and other issues, it is important to examine the reliability of the various survey estimates of wealth. In this paper the authors assess the quality characteristics of the National Longitudinal Survey of Mature Men and the Retirement History Survey, as compared to the 1983 Survey of Consumer Finances. We find that the NLS and especially the RHS underreport wealth and wealth concentration. The underestimates of wealth held in the form of common stock, business equity, and investment real estate equity are substantial. The principal problem lies in underrepresentation of both tails of the wealth and income distributions, with the consequences of underrepresenting the upper tail being especially serious for wealth measurement. We examine several potential reasons for the underrepresentation.

Survey Evidence of Tighter Credit Conditions: What Does It Mean?

Abstract: Recent survey results from the Senior Loan Officer Opinion Survey indicate that, on net, many banks tightened their loan standards during 1990 and early 1991. This article investigates the implications of these results by comparing them to survey responses from previous periods.

Are Real Estate Specializing Depositories Viable? Evidence from Commercial Banks

Abstract: This study investigates whether depository institutions that concentrate on real estate lending are economically viable by examining the behavior of a sample of commercial banks that chose over the last decade to specialize in real estate lending. The results show that over the 1978–1988 period, the average real estate specializing bank earnings performance was on par with regular commercial banks, and those that were in the business for a longer period of time had higher returns with less risk than substantially more diversified commercial banks. Real estate banks has relatively lower loan losses and relatively higher proportions of lower risk, one- to four-family mortgage loans than regular commercial banks. Finally, it appears that real estate banks exhibited substantial flexibility in their ability to adjust their real estate loan holdings.

The Econometrics of Elasticities or the Elasticity of Econometrics: An Empirical Analysis of the Behavior of U.S. Imports

Abstract: Fifty years of econometric modeling of U.S. import demand assumes that trade elasticities are autonomous parameters, that both cross-price effects and simultaneity biases are absent, and that expenditures on domestic and foreign goods can be studied independently of each other. To relax these assumptions, the paper assembles a simultaneous model explaining bilateral U.S. import volumes and prices. Spending behaves according to the Rotterdam model which, by design, embodies all of the properties of utility maximization and does not treat trade elasticities as autonomous parameters. Pricing behaves according to the pricing-to-market hypothesis which recognizes exporters' incentives to discriminate across export markets. Parameter estimation relies on the Full Information Maximum Likelihood (FIML) approach and uses bilateral price data for 1965-1987. According to the evidence, treating trade elasticities as autonomous parameters and ignoring the statistical implications of simultaneity and optimization impart significant biases to the structural estimates and undermine our effectiveness in addressing questions relevant to economic interactions among nations.

Loan Loss Reserves

Abstract: Recent years have seen bank loan losses exceeded only by those of the Great Depression This experience, along with tax and regulatory changes, has triggered changes in the reserve account through which banks provide for such losses

The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings

Abstract: We analyze the interest rate and savings effects of fiscal policy in an overlapping generations framework that accommodates two observations: (1) the interest rate on consumption loans exceeds the rate of return to household savings; and (2) private intergenerational transfers are widespread and primarily occur early in the life cycle of recipients. The wedge between borrowing and lending rates in our model arises from the asymmetric tax treatment of interest income and interest payments. Intergenerational transfers in our model are altruistically motivated. We prove the invariance of capital's steady-state marginal product to government expenditures, government debt, the labor income-tax schedules, and the tax rate on capital income when borrowing rates exceed lending rates and at least some families are altruistically connected. In contrast, under the same conditions we find that the tax treatment of interest payments has powerful effects on capital's marginal product.