Showing papers on "Liquidity risk published in 1986"

Liquidity Constraints, Fiscal Policy, and Consumption

Abstract: TAX POLICY AND TAX REFORM are important items on the current policy agenda. In evaluating alternative tax policies, decisionmakers must consider both their normative and positive impact; in particular, they must examine the effects of competing policies on the overall well-being of the taxpayers and on various indexes of economic activity, in both the short run and long run. Basic to understanding the impact of tax policy is analysis of the relationship between taxation and taxpayers' decisions about consumption, saving, and work effort. Such analysis is especially sensitive to assumptions made regarding individuals' abilities to use capital markets to transfer income across time. By the same token, we think that policy simulation models that ignore "liquidity constraints" result in flawed tax policy analysis. In this paper we analyze the impact of liquidity constraints on consumption functions and use the resulting view of aggregate demand to address two categories of tax and fiscal policy issues. The first issue is developing a tax system that least reduces taxpayer well-being for the amount of lifetime revenue extracted. Recent applications of theoretically based models of individual behavior have facili-

State Taxes and Reserve Requirements as Major Determinants of Yield Spreads among Money Market Instruments

Abstract: Empirical studies and much marketplace opinion have it that the spread between private money market rates and the U.S. Treasury bill rate of comparable maturity is due to differential default risk, liquidity risk, and relative supplies. This paper presents an argument and empirical evidence that the bulk of the systematic and medium-term differential between privates rates—in this case, domestic CDs, commercial paper, bankers' acceptances, and Eurodollar CDs—and the T-bill rate is due to the exemption of interest on Treasury securities from state and local taxation. In the case of Eurodollar CDs, the additional and major systematic factor explaining the spread ( vis a vis T-bills) is the exemption of Eurodollar CDs from the Federal Reserve's “tax” via reserve requirements. An empirical section confirms the role of standard default risk, liquidity risk, and market “absorption” variables in determining short-term deviations from tax-adjusted parity. The taxadjusted parity condition, however, remains the major systematic and medium-term determinant—certainly more important than has been suggested previously in the literature.