Showing papers by "Federal Reserve System published in 2002"
TL;DR: Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables as discussed by the authors, and weak instruments correspond to weak identification of some or all of the unknown parameters.
Abstract: Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables. In generalized method of moments (GMM), more generally, weak instruments correspond to weak identification of some or all of the unknown parameters. Weak identification leads to GMM statistics with nonnormal distributions, even in large samples, so that conventional IV or GMM inferences are misleading. Fortunately, various procedures are now available for detecting and handling weak instruments in the linear IV model and, to a lesser degree, in nonlinear GMM.
3,038 citations
TL;DR: This article proposed a new approach to test corporate governance theory using profit efficiency, or how close a firm's profits are to the benchmark of a best-practice firm facing the same exogenous conditions.
Abstract: Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We propose a new approach to test this theory using profit efficiency, or how close a firm’s profits are to the benchmark of a best-practice firm facing the same exogenous conditions. We are also the first to employ a simultaneous-equations model that accounts for reverse causality from performance to capital structure. We find that data on the US banking industry are consistent with the theory, and the results are statistically significant, economically significant, and robust.
1,012 citations
TL;DR: The authors found that bond raters are inherently more opaque than other types of firms, such as banks and insurance firms, and that uncertainty over the banks stems from certain assets, loans and trading assets in particular.
Abstract: The pattern of disagreement between bond raters suggests that banks and insurance firms are inherently more opaque than other types of firms. Moody's and S&P split more often over these financial intermediaries, and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from certain assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks' high leverage, which invites agency problems, compounds the uncertainty over their assets. These findings bear on both the existence and reform
800 citations
TL;DR: In this article, a new dataset consisting of six years of real-time exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements) was used to characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and Euro.
Abstract: Using a new dataset consisting of six years of real-time exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements), we characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and the Euro. In particular, we find that announcement surprises (that is, divergences between expectations and realizations, or 'news') produce conditional mean jumps; hence high-frequency exchange rate dynamics are linked to fundamentals. The details of the linkage are intriguing and include announcement timing and sign effects. The sign effect refers to the fact that the market reacts to news in an asymmetric fashion: bad news has greater impact than good news, which we relate to recent theoretical work on information processing and price discovery.
749 citations
TL;DR: The institutional memory hypothesis as mentioned in this paper suggests that deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards may explain the procyclicality of bank lending.
522 citations
TL;DR: In this article, the authors show that the technological gap explains the dynamics of investment in new technologies and the returns to human capital, consistent with the Nelson-Phelps conjecture, and support the view that at least some of the recent increase in productivity growth is sustainable.
466 citations
TL;DR: This article found that consolidation in the financial sector is beneficial up to a relatively small size, but there is little evidence that mergers yield economies of scope or gains in managerial efficiency, and they also found that the benefits of mergers depend on the country, industry and time period analyzed.
Abstract: In response to fundamental changes in regulation and technology, the financial industry is undergoing an unprecedented wave of consolidation. A growing body of empirical literature measures the efficiency gains from mergers and acquisitions; however there is little sense of how the results might depend on the country, industry and time period analyzed. In this paper we review critically works that cover the main sectors of the financial industry (commercial and investment banks, insurance and asset management companies) in the major industrialized countries over the last 20 years, searching for common patterns that transcend national and sectoral peculiarities. We find that consolidation in the financial sector is beneficial up to a relatively small size, but there is little evidence that mergers yield economies of scope or gains in managerial efficiency.
396 citations
TL;DR: In this paper, the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress.
380 citations
TL;DR: In this paper, a legislative bargaining model with endogenous grants is proposed to measure the flypaper effect, a nonequivalence between grant receipts and private income, and the model motivates instruments based on the political power of state congressional delegations.
Abstract: Contrary to simple theoretical predictions, existing evidence suggests that federal grants do not crowd out state government spending. A legislative bargaining model with endogenous grants documents a positive correlation between grant receipts and preferences for public goods; this correlation has likely biased existing work against measuring crowd-out. To correct for such endogeneity, the model motivates instruments based on the political power of state congressional delegations. Exploiting this exogenous variation in grants, the instrumental variables estimator reports crowd-out that is statistically and economically significant. This endogeneity may explain the flypaper effect, a nonequivalence between grant receipts and private income. (JEL D70, H40, H77)
379 citations
TL;DR: In this paper, the authors investigated the effect of the Internet on the international trade in services and found that a 10 percent increase in Internet penetration in a foreign country is associated with about a 1.7 percent increase of export growth and a 1 percent of import growth.
Abstract: The scope for growth of trade in services is vast. Although services currently make up over 60 percent of world production, they account for only about 20 percent of world trade. A primary reason why international trade in services has been limited is that the performance of many services necessitates physical contact between producers and consumers, a condition that renders service provision to distant locations infeasible. New technology, in particular, the Internet, provides a medium of exchange that overcomes such historical trading hurdles for many services, effectively reducing transport costs from infinity to virtually nothing. There is ample anecdotal evidence that the Internet is having just this sort of an effect on services trade. The accounting firm Netlink maintains the books for 6,000 employees in Reyanosa, Mexico, from their offices in Manhattan. Infosys of India provides softwareconsulting services to international clients, including Apple Computers, Lucent Technologies, and Microsoft. A medical-transcription company in South Africa, ITS, receives digital recordings from abroad electronically and returns a transcribed text file the next day. Still, the question remains as to whether electronic sharing of information is an important enough development to alter significantly the geography of service provision. Indeed, many services need to be tailored to the consumer’s needs and monitored for quality, and these are likely to be more effective if the provider is close by and speaks the same language. In addition, in the event of a dispute, resolution will be less complicated if both parties are subject to the same legal system. Finally, there may be security concerns with allowing foreign access to some documents or systems. Thus, for some services, especially those where familiarity, communication, and non-standardization contribute to quality, the Internet would not be expected to have a large impact on international trade. To determine whether the Internet has significantly affected international service provision in practice, we estimate a general model of services trade across countries and examine whether the inclusion of data on Internet penetration, as measured by the number of Internet hosts in a country, is statistically significant. Overall, our results offer evidence that the Internet is related to growth in services trade. After controlling for GDP and exchange-rate movements, we find that a 10-percent increase in Internet penetration in a foreign country is associated with about a 1.7-percentage-point increase in export growth and a 1.1-percentagepoint increase in import growth. The results are robust to a number of alternative specifications.
371 citations
TL;DR: This paper evaluated monetary policy during the 1970s through the lens of a forward-looking Taylor rule based on perceptions regarding the outlook for inflation and unemployment at the time policy decisions were made.
Abstract: The nature of monetary policy during the 1970s is evaluated through the lens of a forward-looking Taylor rule based on perceptions regarding the outlook for inflation and unemployment at the time policy decisions were made. The evidence suggests that policy during the 1970s was essentially indistinguishable from a systematic, activist, forward-looking approach such as is often identified with good policy advice in theoretical and econometric policy evaluation research. This points to the unpleasant possibility that the policy errors of the 1970s occurred despite the use of a seemingly desirable policy approach. Though the resulting activist policies could have appeared highly promising, they proved, in retrospect, counterproductive.
TL;DR: The authors identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem and discusses several potential solutions to the problem, including alterations to the expectations assumption, to the order of differencing implicit in the model, and to the underlying behavioral assumptions.
Abstract: A number of recent papers have developed dynamic macroeconomic models that incorporate rational expectations and optimizing foundations. While the theoretical motivation behind these models is sound, the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior can be seriously at odds with the data, for both inflation and real-side variables exhibit gradual and \"hump-shaped\" responses to real and monetary shocks. For models that are intended for monetary policy analysis, these dynamic shortcomings should be considered quite serious. When monetary policy has only short-run effects on real variables, the inability to approximately capture the short-run responses of inflation or real variables to policy shocks makes a model unsuitable for policy analysis. This paper identifies a simple feature common to many dynamic specifications for prices and real variables that causes the problem. The paper also discusses several potential solutions to the problem, including alterations to the expectations assumption, to the order of differencing implicit in the model, and to the underlying behavioral assumptions. (This abstract was borrowed from another version of this item.)
TL;DR: In this article, the authors exploit the distributional information contained in high-frequency intraday data in constructing a simple conditional moment estimator for stochastic volatility diffusions.
TL;DR: In this article, the authors study the impact of the preferential tax treatment of housing capital in a dynamic general equilibrium life-cycle economy populated by heterogeneous individuals, and they show that individuals at all income levels would rather live in a world where imputed rents are taxed or one where mortgage interest payments are not deductible.
TL;DR: In this article, the Blinder-Oaxaca (B-O) method is used to decompose the mean intergroup difference in a given variable into the portion attributable to differences in the distribution of one or more explanatory variables and the part due to the difference in the conditional expectation function.
Abstract: Many applications involve a decomposition of the mean intergroup difference in a given variable into the portion attributable to differences in the distribution of one or more explanatory variables and that due to differences in the conditional expectation function. This article notes two interrelated reasons why the Blinder–Oaxaca (B–O) method—the approach most commonly used in the literature—may yield misleading results. We suggest a natural solution that both provides a more reliable answer to the original problem and affords a richer examination of the sources of intergroup differences in the variable of interest. The conventional application of the B–O method requires a parametric assumption about the form of the conditional expectation function. Furthermore, it often uses estimates based on that functional form to extrapolate outside the range of the observed explanatory variables. We show that misspecification of the conditional expectation function is likely to result in nontrivial errors in infer...
TL;DR: In this article, the authors provide cross-country and time series evidence on both of these issues for the imports of twenty-five OECD countries and find that over the long run, PCP is more prevalent for many types of imported goods.
Abstract: Exchange rate regime optimality, as well as monetary policy effectiveness, depends on the tightness of the link between exchange rate movements and import prices. Recent debates hinge on whether producer-currency-pricing (PCP) or local currency pricing (LCP) of imports is more prevalent, and on whether exchange rate passthrough rates are endogenous to a country’s macroeconomic conditions. We provide cross-country and time series evidence on both of these issues for the imports of twenty-five OECD countries. Across the OECD and especially within manufacturing industries, there is compelling evidence of partial pass-through in the short-run– rejecting both PCP and LCP. Over the long run, PCP is more prevalent for many types of imported goods. Higher inflation and exchange rate volatility are weakly associated with higher pass-through of exchange rates into import prices. However, for OECD countries, the most important determinants of changes in pass-through over time are microeconomic and relate to the industry composition of a country’s import bundle.
TL;DR: The authors found that good practices and good policy appear to have played a more important role in explaining the post-1984 decline in the volatility of consumer price inflation than exogenous disturbances, suggesting that good luck is the most likely explanation.
Abstract: The volatility of U.S. real GDP growth since 1984 has been markedlylowerthanoverthepreviousquartercentury.Weutilizefrequency-domain and VAR methods to distinguish among competing explanations for this reduction: improvements in monetary policy, better business practices, and a fortuitous reduction in exogenous disturbances. We find that reduced innovation variances account for much of the decline in aggregate output volatility, suggesting that good luck is the most likely explanation. Good practices and good policy appear to have played a more important role in explaining the post-1984 decline in the volatility of consumer price inflation.
TL;DR: In this paper, the authors provide densities and finite sample critical values for the single-equation error correction statistic for testing cointegration, using Monte Carlo simulations and a computer program to calculate both critical values and p-values.
Abstract: Summary This paper provides densities and finite sample critical values for the singleequation error correction statistic for testing cointegration. Graphs and response surfaces summarize extensive Monte Carlo simulations and highlight simple dependencies of the statistic’s quantiles on the number of variables in the error correction model, the choice of deterministic components, and the sample size. The response surfaces provide a convenient way for calculating finite sample critical values at standard levels; and a computer program, freely available over the Internet, can be used to calculate both critical values and p-values. Two empirical applications illustrate these tools.
TL;DR: The authors used a near vector autoregressive model of the U.S. economy to examine where the asymmetry might originate and found that monetary policy alone alone cannot explain the asymmetric response.
Abstract: Rising oil prices appear to retard aggregate U.S. economic activity by more than falling oil prices stimulate it. Past research suggests adjustment costs, financial stress, and/or monetary policy may be possible explanations for the asymmetric response. This paper uses a near vector autoregressive model of the U.S. economy to examine where the asymmetry might originate. The analysis uses counterfactual experiments to determine that monetary policy alone cannot account for the asymmetry.
TL;DR: In this paper, the authors evaluate the empirical success of a variety of financial market instruments in predicting the future path of monetary policy and find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months.
Abstract: A number of recent articles have used different financial market instruments to measure near-term expectations of the federal funds rate and the high-frequency changes in these instruments around Federal Open Market Committee announcements to measure monetary policy shocks. This article evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy. All of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered. Among financial market instruments, we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months. For longer horizons, the predictive power of many of the instruments we consider is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions tha...
TL;DR: This article examined the role of personal wealth on small business loan turndowns, given the firm applied for credit, across demographic groups and found that greater personal wealth is associated with a lower probability of loan denial, but personal wealth plays only a modest role in explaining the differences in African American and white-owned denial rates.
Abstract: Extant literature finds large differences in loan denials between small firms owned by whites and other demographic groups. However, none of this literature focuses on the business owner's personal wealth, despite it being a potentially important part of the small business lending decision. We use newly available data to examine the role of personal wealth on small business loan turndowns, given the firm applied for credit, across demographic groups. We also provide a quantitative assessment of the impact of differences in personal wealth, as well as in the endowments of other key variables in the lending decision, on the differences in denial rates across race. We find that greater personal wealth is associated with a lower probability of loan denial. But personal wealth plays only a modest role in explaining the differences in African American- and white-owned denial rates. Differences in credit history explain most of the endowment effect between African Americans and whites. In contrast, variation in personal wealth accounts for a more substantial part of the difference in denial rates between Hispanic-/Asian-owned businesses and white-owned firms. However, even after controlling for personal wealth, large differences in denial rates across demographic groups remain.
TL;DR: In this paper, the authors analyze the dynamics of the stock return correlations of a sample of US large and complex banking organizations (LCBOs) over 1988-1999, and find a significant positive trend in stock return correlation.
Abstract: The creation of a number of very large and sometimes increasingly complex financial institutions, resulting in part from the on-going consolidation of the financial system, has raised concerns that the degree of systemic risk in the financial system may have increased. We argue that firm inter-dependencies, as measured by correlations of stock returns, provide an indicator of systemic risk potential. We analyze the dynamics of the stock return correlations of a sample of US large and complex banking organizations (LCBOs) over 1988–1999, and find a significant positive trend in stock return correlations. This finding is consistent with the view that the systemic risk potential in the financial sector appears to have increased over the last decade. In addition, we relate firms' return correlations to their consolidation activity by estimating measures of the consolidation elasticity of correlation. Consolidation at the sample LCBOs appears to have contributed to LCBOs inter-dependencies. However, consolidation elasticities of correlation exhibit substantial time variation, and likely declined in the latter part of the decade. Thus, factors other than consolidation have also been responsible for the upward trend in return correlations.
TL;DR: In this article, the authors use a very standard life-cycle growth model, in which individuals have a labor-leisure choice in each period of their lives, to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income.
TL;DR: This article developed a dynamic, stochastic, general equilibrium model of personal bankruptcy to investigate the trade-off between the consumption smoothing role of bankruptcy and the interest rate and deadweight costs it imposes.
TL;DR: This article showed that plants located in areas where an industry concentrates are larger, on average, than plants in the same industry outside such areas, and that the connection between size and concentration is stronger than what we would expect to find if plants were randomly distributed like darts on a dartboard.
Abstract: This paper shows that plants located in areas where an industry concentrates are larger, on average, than plants in the same industry outside such areas. In some sectors, such as manufacturing, the differences are substantial. The connection between size and concentration is stronger than what we would expect to find if plants were randomly distributed like darts on a dartboard.
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TL;DR: In this article, the authors provided updated estimates of the proximate sources of growth using a growth accounting framework that focuses on information technology and found that the acceleration in labor productivity after 1995 was driven by the greater use of IT capital goods and the more rapid efficiency gains in the production of these goods.
Abstract: Productivity growth in the U.S. economy jumped during the second half of the 1990s, a resurgence that many analysts linked to developments in information technology (IT). However, shortly after this consensus emerged, demand for IT products fell sharply, leading to a debate about the connection between IT and productivity and about the sustainability of the faster growth. ; This article contributes to this debate in two ways. First, the authors provide updated estimates of the proximate sources of growth using a growth accounting framework that focuses on information technology. Their results confirm that the acceleration in labor productivity after 1995 was driven by the greater use of IT capital goods and the more rapid efficiency gains in the production of these goods. Second, to assess whether the pickup in productivity growth is sustainable, the authors analyze the steady-state properties of a multisector growth model. This exercise generates a range for labor productivity growth of 2 percent to 2 3/4 percent per year, which suggests that much-and possibly all-of the resurgence is sustainable. ; The analysis also highlights that future increases in output will depend on the pace of technological advance in the semiconductor industry and on the extent to which products embodying these advances diffuse through the economy.
TL;DR: This article measured the impact of the surprise component of Federal Reserve policy decisions on the expected future trajectory of interest rates using the prices of federal funds futures contracts, and showed how this information can be used to identify the effects of a monetary policy shock in a standard VAR.
TL;DR: The authors showed that the lagged interest rate is not a fundamental component of the U.S. policy rule, and that its significance arises from the omission of serially correlated variables from the policy rule.
Abstract: Many researchers have found that the lagged interest rate enters estimated monetary policy rules with overwhelming significance. However, a recent paper by Rudebusch (2002) argues that the lagged interest rate is not a fundamental component of the U.S. policy rule, and that its significance arises from the omission of serially correlated variables from the policy rule. This paper demonstrates that, contrary to Rudebusch's claims, these two hypotheses can be directly distinguished in the estimation of the policy rule. Our findings indicate that while serially correlated omitted variables may be present, the lagged interest rate enters the policy rule on its own right and plays an important role in describing the behavior of the federal funds rate.
TL;DR: In this article, the authors investigate the importance of including aggregate measures of off-balance-sheet (OBS) activities, and find that economic cost and production cost X-efficiency increases with the inclusion of the OBS measure.
Abstract: The distribution free and stochastic frontier estimation methods
are used to derive bank specific measures of cost and profit Xefficiency.
This is done to investigate the importance of including
aggregate measures of off-balance-sheet (OBS) activities. The results
indicate that economic cost and production cost X-efficiency
estimates increase with the inclusion of the OBS measure. Profit Xefficiency
estimates are largely unaffected. Further, the composition
of banksO OBS activities appears to help explain interbank
differences in cost and profit X-efficiency estimates, whereas bank
size and the mix between on- and off-balance-sheet banking activities
are largely uncorrelated with the X-efficiency estimates.
TL;DR: The authors used a nested multinomial logit model to model bank reach and bank nationality, and found that these firms frequently use host nation banks for cash management services, and that bank reach may be strongly influenced by this choice of bank nationality.
Abstract: We model two dimensions of bank globalization – bank nationality (a bank from the firm’s host nation, its home nation, or a third nation) and bank reach (a global, regional, or local bank) using a two-stage nested multinomial logit model. Our data set includes over 2000 foreign affiliates of multinational corporations operating in 20 European nations and over 250 banks that serve them. We find that these firms frequently use host nation banks for cash management services, and that bank reach may be strongly influenced by this choice of bank nationality. Our results suggest limits to the degree of future bank globalization.