Showing papers in "Journal of Money, Credit and Banking in 1984"
TL;DR: In this article, empirical studies designed to provide evidence on how market structure influences the performance of depository institutions are divided into two groups: those in one group estimate the relation between measures of bank market structure and performance; the other studies estimate the cost structure of the banking industry.
Abstract: THIS PAPER SURVEYS empirical studies designed to provide evidence on how market structure influences the performance of depository institutions. These studies are divided into two groups. Those in one group estimate the relation between measures of bank market structure and performance.' The other studies estimate the cost structure of the banking industry. The cost studies are designed to determine whether the type of market structure that is conducive to competitive pricing of banking services is also consistent with efficient production of banking services. These studies have been conducted to provide the regulatory authorities with an empirical basis for evaluating the influence of bank mergers on competition and on the cost structure of the banking industry.2 The studies of bank market structure have changed little in the past twenty years. Consequently, the survey of this literature does not trace its development over time.
587 citations
TL;DR: In this article, the authors focus on the effect of the length of the lag specification on the test results and investigate the extent to which rules of thumb, arbitrary lag specifications, and arbitrary lag specification can affect the results of Granger causality.
Abstract: ONE OF THE MOST WIDELY ACCEPrED RELATIONSHIPS IN macroeconomics is the positive relationship between the rate of growth of the money supply and the rate of growth of income. A diversity of opinion arises, however, with the attempt to identify a causal relationship between these variables. While Friedman and Schwartz (1963) initiated the empirical investigation of money/income causality, Sims (1972) made the most significant contribution to this literature with a practical application of the criterion developed by Granger (1969) for identifying a causal relationship. Since the appearance of Sims's approach, and an alternative one advanced by Sargent (1976), many researchers have applied these techniques to the investigation of the causal relationship between money and income. l With two exceptions, Hsiao (1981) and McMillin and Fackler (1984), these researchers have arbitrarily chosen the lengths of their distributed lags. The purpose of this paper is to test for Granger causality between money and income. This paper differs from previous work in that considerably more attention is focused on the effect of the lag specification on the test results. In particular, we investigate the extent to which rules of thumb, arbitrary lag specifications, and
397 citations
TL;DR: A review of the literature on micro bank modeling can be found in this article, where each major subproblem is outlined and the analysis used to deal with the issue is explicated.
Abstract: THIS PAPER REPORTS on the status of the literature on micro bank modeling and assesses our understanding of the banking firm's optimal behavior. This is no mean task, for much has been written on banking, broadly defined, over the past couple of decades. The review is developed in pieces. Each major subproblem is outlined and the analysis used to deal with the issue explicated. This is not the best way to summarize the development of a field, it should be immediately recognized. One would prefer to have a smooth continuum of development, moving the frontier of knowledge evenly through time and across subareas. Yet, this is rarely the way a field develops. More likely, individual questions attract attention and are the subjects of a substantial number of contributions. After a time, the field moves on to the new area of interest. The banking field is no exception. Before embarking upon the review, however, a couple of lines should be devoted to previous attempts. There have been essentially three. First, Pyle (1972) analyzes the uncertainty portfolio models at a time when little existed in the literature, and hence one finds the review a bit vague and sketchy. Baltensperger's contributions (1978, 1980) are the next serious and rather extensive reviews. The quality of these
396 citations
TL;DR: In this article, the authors calculate bank-specific estimates of the proper premium for FDIC deposit insurance and show that FDIC rates greatly exceed the fair value of the insurance derived from the BlackScholes (1972) option-pricing model.
Abstract: WHEN CONGRESS SET THE PREMIUM RATE for FDIC deposit insurance in the Banking Act of 1935 (which authorized a permanent federal insurance system), neither experience nor theory could offer much guidance regarding an appropriate fee structure. Although rates have since been periodically revised, the FDIC has yet to attempt to set the insurance rate at a 'ifair' level, that is, a level equal to administrative costs plus the ex ante value of the insurance. Such a premium is the rate that would be charged by competitive private insurers. However7 the Garn-St. Germain Act of 1982 directed the FDIC to consider the feasibility of a risk-based premium structure. In response the FDIC has suggested a trial system in which each insured bank will be placed in one of three risk-classes based on credit and interest-rate risk relative to capital, and a premium rate will be assigned to each group. Those rates will be determined in part by the loss experience of the entire banking system (FDIC 1983). Another approach to the determination of the appropriate insurance premium has been offered by Merton (1977) who suggested using the analogous relationship between deposit guarantees and put options to value FDIC insurance. In this paper, we follow Merton's suggestion and calculate bank-specific estimates of the proper premium for deposit insurance. For the banks in our sample, we find that FDIC rates greatly exceed estimates of the fair value of the insurance derived from the BlackScholes (1972) option-pricing model.
375 citations
TL;DR: The clearing house currency was an inconvertible paper money issued without the sanction of law, yet necessitated by conditions for which our banking laws did not provide as discussed by the authors, and it worked effectively and doubtlessly prevented multitudes of bankruptcies which otherwise would have occurred.
Abstract: "MOST OF THIS [clearinghouse] currency was illegal, but no one thought of prosecuting or interfering with its issuers.... As practically all of it bore the words 'payable only through the clearing house,' its holders could not demand payment for it in cash. In plain language, it was an inconvertible paper money issued without the sanction of law, . . . yet necessitated by conditions for which our banking laws did not provide.... When banks were being run upon and legal money had disappeared in hoards, in default of any legal means of relief it worked effectively and doubtlessly prevented multitudes of bankruptcies which otherwise would have occurred" (Andrew 1908b, p. 516).
223 citations
TL;DR: In this article, two distinct sets of issues are involved in the analysis of international banking; one set, the industrial organization issues, centers on the patterns of expansion of foreign branches and subsidiaries of banks headquartered in the United States, Great Britain, Japan, and a few other industrial countries and on the nature of the advantage that these branches and subsidiary have in relation to their host-country competitors.
Abstract: TWO DISTINCT SETS of issues are involved in the analysis of international banking; one set, the industrial organization issues, centers on the patterns of expansion of foreign branches and subsidiaries of banks headquartered in the United States, Great Britain, Japan, and a few other industrial countries and on the nature of the advantage that these branches and subsidiaries have in relation to their host-country competitors. The second set, the international finance issues, involves the role of banks in cross-border and cross-currency financial flows, both from their head offices and from their foreign branches and subsidiaries. Despite the attention to international banking, there are few uniquely international institutions; rather international banks are a subset of domestic banks with significant numbers of foreign branches and subsidiaries. Moreover, there are few uniquely international banking activities; although foreign exchange trading may seem to be one, in many countries most or all foreign exchange trading involves domestic banks with few if any foreign branches. The growth of foreign branches and subsidiaries of major banks occurred in two waves. The first occurred in the decades before World War I; when the war started,
183 citations
TL;DR: Carosio, Giovanni, and Ignazio Visco as discussed by the authors used time series models as predictors of inflation and showed that the time series model is more accurate than the real rate of interest.
Abstract: Carosio, Giovanni, and Ignazio Visco. "Nota sulla Costruzione di un Tasso di Interesse Reale." Estratto dal Bollettino della Banca d'Italia 32 (Ottobre-Dicembre 1977), 797-811 . Fama, Eugene F. "Short-term Interest Rates as Predictors of Inflation." American Economic Review 65 (June 1975), 269-82. Fama, Eugene F., and Andre Farber. "Money, Bonds and Foreign Exchange." American Economic Review 69 (September 1979), 639-49. Fischer, Stanley. "The Demand for Index Bonds." Journal of Political Economy 83 (June 1975), 509_34 Hartman, Richard, and John H. Makin. "Inflation Uncertainty and Interest Rates: Theory and Empirical Tests." National Bureau of Economic Research, Working Paper No. 906, June 1982. Hess, Patrick J., and James L. Bicksler. "Capital Asset Prices vs. Time Series Models as Predictors of Inflation." Journal of Financial Economics 2 (December 1975), 341-60. Mundell, Robert A. "Inflation and Real Interest." Journal of Political Economy 71 (June 1963), 280-83. Nelson, Charles R., and William G. Schwert. "Short-term Interest Rates as Predictors of Inflation: On Testing the Hypothesis that the Real Rate of Interest Is Constant." American Economic Review 67 (June 1977), 478-86. Papadia, Francesco. "Forward Exchange Rates as Predictors of Future Spot Rates and the Efficiency of the Foreign Exchange Market." Journal of Banking and Finance S (June 1981), 217-40. Papadia, Francesco, and Vittorio Basano. "EEC-DG II Inflationary Expectations Surveybased Inflationary Expectations for the EEC Countries." Economic Papers of the Commission of the European Communities, Directorate-General for Economic and Firlancial Affairs, No. 1, May 1981. Pearce, Douglas K. "Comparing Survey and Rational Measures of Expected Inflation: Forecast Performance and Interest Rate Effects." Journal of Money, Credit, and Banking 11 (November 1979), 447-56. Visco, Ignazio. "The Measurement and Analysis of Inflation Expectations: The Case of Italy." Economic Papers, Barik of Italy-Research Department (June 1979), 149-242. , ,
154 citations
TL;DR: In this paper, the authors defined an asset or liability's "effective maturity" as the maturity of a perfectly elastically supplied security with the same market-value elasticity as the bank balance sheet item under consideration.
Abstract: THE RECENT YEARS' increase in interest rate volatility has intensified concern over the exposure of commercial banks to interest rate or "funding" risk. Since the effect of interest rate changes on the equity value of a bank depends on the maturity or duration of the bank's assets and liabilities, assessing an individual bank's interest rate risk exposure requires information about the maturity composition of its portfolio. It is difficult, however, to assess a bank's risk exposure from balance sheet data because several important asset and liability items have theoretically ambiguous effective maturities. In a frictionless market, a security's effective maturity will equal its stated maturity (or time to repricing). With market imperfections (e.g., depositors' transaction or information costs), however, the equilibrium cost of some deposit items may respond sluggishly or incompletely to market rate changes (see Hester and Pierce 1975 or Flannery 1982). Such liabilities' market values (discounted at market rates) would therefore fluctuate with the level of interest rates. These liabilities are sometimes called "core deposits," which manifest "sticky" responses to market rate changes. We define an asset or liability's "effective maturity" as the maturity of a fixed rate, perfectly elastically supplied security with the same market-value elasticity as the bank balance sheet item under consideration. Naturally, a balance sheet item's effective maturity is the relevant determinant of its contribution to the bank's overall interest rate risk sensitivity.
151 citations
TL;DR: In this article, the authors link the timing of the initial speculative attack to the magnitude of the expected devaluation and to the length of the transitional period off loating, and the implication of the analysis is that there exist devaluations so sharp and transition periods so short that acrisis must occur the moment the market first learns that the current exchange parity will eventually be altered.
Abstract: The collapse of a fixed exchange rate is typically marked by a sudden balance-of-payments crisis in which"speculators" fleeing from the domestic currency acquire a large portion of the central bank's foreign exchange holdings.Faced with such an attack, the central bank often withdraws temporarily from the foreign exchange market, allowing the exchange rate to float freely before devaluing and returning to a fixed-rate regime. This paper links the timing of the initial speculative attack to the magnitude of the expected devaluation and to the length of the transitional period off loating. An implication of the analysis is that there exist devaluations so sharp and transition periods so short that acrisis must occur the moment the market first learns that the current exchange parity will eventually be altered. For sufficiently long transition periods, the floating exchange rate"overshoots" its new peg before appreciating back toward it;for shorter periods, the rate depreciates monotonically to its new fixed level. Accordingly, the central bank's return tothe foreign exchange market can occasion a capital outflow or a capital inflow.
118 citations
TL;DR: In this paper, the authors used a Box-Cox (hereafter B-C) generalized functional form methodology to directly test the assumption of an underlying Cobb-Douglas production function.
Abstract: THIS PAPER ADDRESSES four issues that arise in the estimation of economies of scale in the commercial banking industry. First, a common assumption underlying many of the studies of economies of scale in banking is the assumption of a Cobb-Douglas production function with exogenous input prices. The use of a Cobb-Douglas production function facilitates the estimation of the output elasticity of cost. However, there does not appear to be any other reason, a priori, for such an assumption. This paper utilizes a Box-Cox (hereafter B-C) generalized functional form methodology to directly test the assumption of an underlying Cobb-Douglas production function. Second, if the assumption of a Cobb-Douglas production function is inappropriate as a description of the production process of the financial firm, estimates of the output elasticity may be biased. The sensitivity of the estimates of this elasticity to the choice of functional form can also be examined through the use of a generalized functional form methodology. Third, no general consensus has been reached regarding the appropriate definition of bank output. Thus, a diversity of measures of bank output have been employed in previous estimates of economies of scale in banking. The sensitivity of the estimated output elasticity of cost to the selection of several alternative measures of output is examined through the use of the generalized functional form methodology. Finally, the B-C estimates of the cost function for commercial banks can be used
115 citations
TL;DR: A fixed exchange rate is a specific case of an active crawling peg where the pre-announced rate of change in the exchange rate was zero as discussed by the authors, which is the case in many countries in Latin America.
Abstract: As OF FEBRUARY 28, 1983, ninety-four countries are classified as having a fixed exchange rate regime: 38 are pegged to the U.S. dollar, 13 to the French franc, 14 to the Special Drawing Right, and 24 to different baskets of currencies. The choice of a fixed exchange rate peg implies a specific monetary discipline, namely monetary growth equal to the growth rate of the currency (or currencies) to which a country is pegged. Monetary policy is thus subject to an exchange rate rule rather than to either a monetary growth rule or alternatively to discretionary policy. A fixed exchange rate is a specific case of an active crawling peg where the preannounced rate of change in the exchange rate is zero. Active crawling peg rules whereby the exchange rate is adjusted downward by a preannounced amount over a specified period of time have been practiced in various places, particularly in Latin America. Recent experiments include Argentina beginning December 1978, Brazil during the 1980 calendar year, Chile from February 1978 to June 1979, Jamaica from May 1978 to May 1979, Portugal from August 1977 to June 1979, and Uruguay beginning October 1978.1 At times, the prean-
TL;DR: In this article, the authors examined several alternative dynamic specifications, including a generalized partial adjustment framework and the error-correction model, and the empirical results showed that these models exhibit greater structural stability after 1973 than the standard partial adjustment specification, and they also yield relatively small errors in post-sample dynamic simulations.
Abstract: The partial-adjustment approach to the specification of the short-run demand for money has dominated the literature for more than a decade. There are three basic problems with this approach. First, the same lag structure is imposed on all variables, and each independent variable enters only as a current value. In contrast a rational individual would respond to different variables (income, interest rates, prices) with quite different lags. Second, when the general price levelis subject to gradual adjustment hut can move quickly in response to supply shocks, the influence of these supply shocks should enter with a negative sign. Third, the estimated equation for real balances may not be a money demand equation at all, but rather its coefficients may represent a shifting mixture of demand and supply responses.The empirical work examines several alternative dynamic specifications, including a generalized partial adjustment framework and the error-correction model. Both of the latter specifications exhibit greater structural stability after 1973 than the standard partial adjustment specification, and the generalized partial adjustment model also yields relatively small errors in post-sample dynamic simulations. Shifts in coefficients as the sample period is extended after 1973 are consistent with the interpretation that the real balance equation no longer traces out structural demand parameters, hut rather a mixture of demand and supply responses.(This abstract was borrowed from another version of this item.)
TL;DR: In this paper, a multivariate flexible accelerator model for inventory investment is proposed and tested with data on finished goods inventories from the manufacturing sector of the U.S. economy.
Abstract: INVENTORY INVESTMENT has long been an important area of inquiry for empirical work in macroeconomics. This is due in large measure to the fact that inventory investment is a major source of fluctuations in aggregate output. Empirical work on inventories, however, has been dominated by the use of simple, univariate flexible accelerators. 1 The major objective of this paper is to propose and test a multivariate flexible accelerator model for inventory investment. The model is tested with data on finished goods inventories from the manufacturing sector of the U.S. economy. There are two reasons for undertaking such a task. First, at a theoretical level, a univariate flexible accelerator model asserts that investment in, say, finished goods inventories is proportional to the gap between the desired and actual stocks of finished goods. Such a model presumes that decisions by firms on finished goods inventories are made independently of decisions on other stocks. But, theory suggests that when firms make simultaneous decisions on a variety of stocks, which includes not only finished goods but also goods-in-process inventories, the size of the work force, etc., decisions on finished goods will interact with decisions on
TL;DR: In this paper, the authors investigated how purchasing power risks affect the determination of exchange rates in a fairly general optimizing model and used techniques developed in the finance literature which build on Merton's (1973) asset-pricing model.
Abstract: MOST RECENT RESEARCH on the theory of exchange rate determination treats the exchange rate as the relative price of two assets: domestic money and foreign money. The value of an asset depends on the distribution of its return. However, most of the research has dealt with models in which there is no uncertainty. The present paper focuses on questions that cannot be addressed in a world of certainty, because in such a world an asset is never risky. It investigates how purchasing power risks affect the determination of exchange rates. This investigation is pursued in a fairly general optimizing model. The present research is related to some recent work in international economics and in financial economics. It follows the approach of Obstfeld (1981) and Stockman (1980) in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals. As in Calvo and Rodriguez (1977), Stockman (1980), and others, the fact that holdings of foreign monies are useful to domestic individuals is taken into account. Finally, the paper uses techniques developed in papers in the finance literature which build on Merton's (1973) asset-pricing model and use a concept of equilibrium developed in
TL;DR: In this article, the authors take an approach that takes account of the different degrees of "moneyness" possessed by the various monetary assets, and produce quantitative estimates of the degree of substitutability of other monetary assets for money in the context of a flexible functional form model.
Abstract: IN RECENT YEARS considerable effort has been directed towards establishing the nature of the relationship between "money" and "nearmonies" but with mixed success. The approaches vary from multi-interest-rate single equation studies to the careful simultaneous equations studies summarized (and amended) by Feige and Pearce (1977) and extended recently by Donovan (1978), Offenbacher (1979), and Barnett (1980). The empirical results also vary, with numerous studies favoring only one interest rate (see the surveys in Fisher 1978, 1983), some claiming that a variety of entities are close substitutes for money (e.g., Chetty 1969), and others showing that weak substitution or even complementarity may be the result of the measurement of elasticities of substitution between money and a number of other assets (e.g., Feige and Pearce 1977, Offenbacher 1979, and Barnett 1980). The debate seems to have overshadowed a second and equally intriguing issue which centers on the establishment of an acceptable definition of money. The basic idea of this study is to take an approach that takes account of the different degrees of "moneyness" possessed by the various monetary assets. This paper produces quantitative estimates of the degree of substitutability of other monetary assets for money in the context of a flexible functional form model (with a
TL;DR: In this article, the authors extended the analysis of the Livingston data by examining the forecasts of common stock prices made by the individual survey participants, and explored the characteristics of these forecasts.
Abstract: THE LIVINGSTON SURVEY of economists forecasts of key economic variables has served as the data source for a number of studies investigating the forrnation and effects of expectations. Much of this work has utilized the price level predictions from the survey to proxy anticipated inflation.l This measure of expected inflation has also been analyzed by several researchers to see if it conforrns to the notion of rational expectations, with differing conclusions .2 This paper extends the analysis of the Livingston data by examining the forecasts of common stock prices made by the individual survey participants. Since predicted movements in stock prices may play an important role in portfolio decisions and, according to Tobin's q model, real investment decisions, it seems useful to explore the characteristics of these forecasts. The paper addresses two main issues. First, are the stock price predictions in accord with rational expectation forrnation? Second, how are the respondents' expectations of stock price movements related to their forecasts of inflation and real
TL;DR: In this article, the authors introduce both a short rate and a long rate into a simple dynamic macroeconomic model and show how arbitrage by participants in the asset markets will bring the instantaneous rates of return on assets of varying maturity into equality.
Abstract: MOST FORMAL MACROECONOMIC MODELS treat all assets as being of common maturity. Typically, this is assumed to be either extremely (infinitesimally) short (a short-term bill) or infinitely long (a perpetuity). In reality, of course, there is a whole spectrum of assets in existence, having varying times to maturity. Moreover, different agents in the markets are concerned with rates of return extending over different time horizons. Participants in asset markets can typically adjust their portfolios virtually instantaneously, so that some short-run rate of return is appropriate as an argument of the relevant asset demand functions. On the other hand, investors in physical equipment are typically locked into some longterm financial arrangement, in which case it is some long-term rate that is the appropriate argument of the investment function. Provided that the financial markets operate efficiently, arbitrage by participants in the asset markets will bring the instantaneous rates of return on assets of varying maturities into equality. l In this paper, we introduce both a short rate and a long rate into a simple dynamic macroeconomic model. The framework we employ is the familiar Blinder-Solow ( 1973) model. It is shown how, through arbitrage, the current long rate at any point
TL;DR: The authors argued that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation, shifts due to the adoption of a reserve aggregates operating procedure.
Abstract: In October 1979 the Federal Reserve shifted from an interest rate oriented operating procedure to a reserves oriented procedure. It is argued in this paper that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation, shifts due to the adoption-of a reserve aggregates operating procedure. This result is derived by comparing rational expectations equilibria in a simple theoretical model under alternative policy rules. This allows the variance of interest rates to be explicitly expressed as a function of the policy rule.
TL;DR: In this paper, it is argued that a functional form that focuses attention on the ability of the growth rate of nominal money to predict the inflation rate is a useful way of summarizing empirical evidence on the existence of a stable money demand function.
Abstract: THE QUESTION OF which functional forms of money demand regression equations are useful for empirical work is addressed here. Specifically, it is argued that a functional form that focuses attention on the ability of the growth rate of nominal money to predict the inflation rate is a useful way of summarizing empirical evidence on the existence of a stable money demand function. The results of estimating and simulating this functional form as well as standard functional forms are presented in the final part of this paper. A typical equation expressing the public's demand for real money balances (m) is as follows:
TL;DR: Schafer and Ladd as mentioned in this paper found that discrimination in home financing is based far more on an individual's race than on the location of the property, and that although the redlining debate has turned on the issue of geographic discrimination, the underlying reality is one of racial discrimination, and individuals are more often the targets than are neighborhoods.
Abstract: This book substitutes rigorous and systematic analysis for the undocumented claims that have characterized the debate on "redlining"--the denial of mortgage money to poorer neighborhoods. In addition, Schafer and Ladd discuss discrimination against individuals, appraisal practices, and the likelihood of default, analyze recent policy decisions, and recommend a range of new policies. The thorough documentation that supports this analysis was obtained through an examination of individual mortgage applications--denials as well as approvals--in New York and California, the only two states in which such data is available, its disclosure mandated under state law.One of the book's major findings is that discrimination in home financing is based far more on an individual's race than on the location of the property--that although the redlining debate has turned on the issue of geographic discrimination, the underlying reality is one of racial discrimination, and individuals are more often the targets than are neighborhoods.After an introductory chapter, "Discrimination in Mortgage Lending" takes up default risk in mortgage lending, appraisal practices, the flow of funds, lending decision models, the decision to lend in California, mortgage credit terms in California, the decision to lend in New York, mortgage credit terms in New York, a summary of results, and recommendations.
TL;DR: In this paper, the authors identify the source of efficiency improvement as productivity gains proper, which is consistent with some recent evidence in Tschoegl (1982) suggesting the possible existence of diseconomies of scale.
Abstract: in the coefficient of assets from 1.14 or 1.22 to 0.66 is not entirely due to economies of scale or a change in the mix of activities. Our results agree with Revell (1980) in identifying the source of efficiency improvement as productivity gains proper. Second, the sample group uses its offices more intensively than do the top 150 in either 1967 or 1979. This sample group has 14.29 employees per office versus 9.81 in 1967 and 7.69 in 1979 for the top 150 banks. Finally, it is noteworthy that the smaller banks used fewer branches and employees relative to their assets than did the 1979 top 150. This is consistent with some recent evidence in Tschoegl (1982) suggesting the possible existence of diseconomies of scale. It is also consistent with the findings of Benston, et al. (1982) for a sample of United States banks that, where possible, the banks expanded output by opening more offices as well as through output growth in each office and that this results in operating cost scale diseconomies.
TL;DR: In this article, the authors focus on the nature of the bias in credit allocation that nonprice rationing induces; and how does this bias affect the performance of credit allocation in less developed countries.
Abstract: PLANNING AUTHORITIES in less developed countries (LDCs) often regard financial market intervention as an efficient way to induce gr()wth and structural change. Elaborate regimes of interest ceilings and subsidies have been used to promote industrialization, exporting, geographic decentralization, and other national priorities. Some of these programs have doubtless achieved their intended objectives. However, with inflation frequently exceeding controlled interest rates, they have also tended to generate an excess demand for loans. Legally prohibited from price discrimination, creditors have been obliged to allocate their portfolios according to various "rationing" criteria, and loan applicants whom creditors find relatively unappealing have been forced to rely heavily on self-finance or the unregulated curb markets. McKinnon (1973) and Shaw (1973) have argued that such rationing regimes lead to serious factor misallocations, inappropriate technology choices, and unnecessarily low growth rates. In the past decade their perspective has been formalized with macro models of "financially repressed" economies, and numerous supportive empirical studies have been reported (Fry (1982) surveys the literature). Surprisingly, however, several fundamental micro issues have received little attention: what is the nature of the bias in credit allocation that nonprice rationing induces; and how does
TL;DR: In this article, the authors explore the implications of this modified inforrnation structure for relative price variability within a partial infornation framework in the context of the "islands" paradigm, where the component of the general price level which is confused with relative price movements is smaller than the same component in an economy where all prices are freely deterrnined by the market.
Abstract: RECENT LITERATURE that explains relative price variability within a partial inforrnation multimarkets framework typically assumes that prices in all markets are deterrnined by market clearing. 1 However, in many countries a certain number of prices is either directly set by the government or regulated by it. In Israel, for example, the government is directly involved in setting the prices of some basic foodstuffs, fuels, electricity, public transportation, and a number of other items.2 Adjustments in the prices of these goods are made at discrete intervals and are widely and instantaneously disseminated by the media. As a result individuals in all markets have up-to-date inforrnation on that component of the general price level which is set by the government. In terrns of the "islands" paradigm this means that the component of the general price level which is confused with relative price movements is smaller than the same component in an economy in which all prices are freely deterrnined by the market. The purpose of this article is to explore the implications of this modified inforrnation structure for relative price variability within a partial inforrnation framework
TL;DR: The history of fractional reserve banks in the grain trade can be traced back to the early 1860s when warehousemen in Chicago's grain trade were required to keep 100 percent reserves.
Abstract: FRACTIONAL RESERVE BANKS, namely, enterprises being legally liable to pay some substance on demand while regularly having too little on hand to satisfy all their obligations, are commonly associated exclusively with money. Conceivably, fractional reserve banks can deal in substances other than money. As it happens, Chicago's warehousemen of the 1860s practiced fractional reserve banking not in dollars or sterling but in grain. l These warehousemen operated in the style of a conventional financial intermediary, borrowing short through demand deposits in order to lend long. The natural evolution of fractional reserve banking in grain in nineteenth-century Chicago was interrupted, however. Ever more stringent laws, the result of repeated campaigns against "fraudulent receipts," eventually forced Chicago's warehousemen to keep 100 percent reserves. Consequently, the organization of the grain trade past and present not only provides information about the development of fractional reserve banking in general but reveals the effects of a rare experiment in outlawing fractional reserve banking.
TL;DR: In this article, the desirability of wage indexation in an open economy subject to economic disturbances which change the terms of trade and raise the prices of imported goods is examined, and two indexation rules are considered, the traditional form of indexation to the consumer price index and indexation for domestic goods alone, the latter proposed as a means of limiting the influence of import prices on the economy.
Abstract: This paper examines the desirability of wage indexation in an open economy subject to economic disturbances which change the terms of trade and raise the prices of imported goods. Two indexation rules are considered, the traditional form of indexation to the consumer price index and indexation to the price of domestic goods alone, the latter proposed as a means of limiting the influence of import prices on the economy. The effects of the rules are shown to depend upon how the terms of trade rather than import prices alone respond to disturbances, since changes in the terms of trade determine what adjustments are required in the two real wages faced by firms and labor.
TL;DR: In the United States, the velocity of money has been the subject of a great deal of recent interest-rate and income-earning research as discussed by the authors, with a focus on the long-run structural changes in velocity movements.
Abstract: SECULAR MOVEMENTS in the velocity of money in the United States have been puzzling. After declining since the Civil War, velocity (defined as the ratio of gross national product to currency plus demand deposits at commercial banks) has steadily increased since World War II. By the late 1970s it had increased threefold over its 1946 value, largely negating the decline of the previous seventy-five years. Other definitions have also reversed their long-run patterns. The substantial decline in the ratio of gross national product to money holdings inclusive of time deposits at commercial banks ended in the postwar period as this ratio first rose and then held relatively steady through the 1970s. Since these trends hold for virtually all sectors of the economy (Selden 1961), research has sought aggregate explanations. Commonly, the behavior of velocity is inferred from time-series studies postulating a stable relationship between the demand for money and aggregate income and interest rates (Boorrnan and Havrilesky 1972; Goldfeld 1973; Laidler 1969). These studies generally place responsibility for the rise in velocity on some combination of a relatively low income elasticity of the demand for money and a relatively large interest rate elasticity. Despite its acceptance, such an approach is unsatisfying since it neglects the role of long-run structural changes in explaining velocity movements. Thus the literature