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Federal Reserve Bank of New YorkResearch and Statistics Group ■ www.newyorkfed.org/research

PUBLICATIONS

AND OTHER RESEARCH2 0 0 5

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Federal Reserve Bank of New YorkResearch and Statistics Groupwww.newyorkfed.org/research

January 2006

SR GsSPgg gContents1 Introduction

2 Economic Policy Review

5 EPR Executive Summaries

6 Current Issues in Economicsand Finance

9 Research Update

10 Staff Reports

20 Outside Journals

27 Order Form

SR GsSPgg gIntroductionThe Federal Reserve Bank of New York’sResearch and Statistics Group produces awide variety of publications and discussionpapers of interest to business and bankingprofessionals, policymakers, academics,and the general public.

This catalogue lists recent issues in ourresearch series:

■ the Economic Policy Reviewa policy-oriented journal focusing oneconomic and financial market issues

■ Current Issues in Economics and Financeconcise studies of topical economic andfinancial issues

■ Second District Highlightsa regional supplement to Current Issues

■ Staff Reportstechnical papers intended for publication inleading economic and finance journals.

The Research Group also offers two otherpublications of interest to readers:

■ EPR Executive Summariesonline versions of selected EconomicPolicy Review articles, in abridged form

■ Research Updatea quarterly newsletter providing summariesof studies and listings of recent publicationsin our research series.

Members of the Group also publish papersin many economic and finance journals,conference volumes, and scholarly books.A list of these publications begins on page 20.

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ECONOMICPOLICY REVIEW The Economic Policy Review is a policy-oriented research journal that focuses onmacroeconomic, banking, and financialmarket topics.

EPR articles are available at www.newyorkfed.org/research/epr.

Volume 11

Number 1, August 2005“Labor Market Developments in the United Statesand Canada since 2000,” proceedings ofa conference cosponsored by the CanadianConsulate General in New York, the Centrefor the Study of Living Standards, the FederalReserve Bank of New York, and the New YorkAssociation for Business Economics,December 2, 2004.

Conference Overview and Summary of Papers

Erica L. Groshen, Zahir Lalani,and David Murchison

The Weak Jobs Recovery: Whatever Happenedto “the Great American Jobs Machine”?

Richard B. Freeman and William M. Rodgers III

Commentary

Lars Osberg

Are Good Jobs Disappearing in Canada?

René Morissette and Anick Johnson

Commentary

Erica L. Groshen

The Recession of 2001 and UnemploymentInsurance Financing

Wayne Vroman

Commentary

Timothy C. Sargent

Number 2, December 2005“Urban Dynamics in New York City,” proceedingsof a conference sponsored by the Federal ReserveBank of New York, April 22, 2005.

Conference Overview and Summary of Papers

Erica L. Groshen and Giorgio Topa

Urban Colossus: Why Is New York America’sLargest City?

Edward L. Glaeser

Commentary

J. Vernon Henderson

The Geography of Entrepreneurshipin the New York Metropolitan Area

Stuart S. Rosenthal and William C. Strange

Commentary

Robert Inman

Exogenous Shocks and the Dynamicsof City Growth: Evidence from New York

Andrew F. Haughwout and Bess Rabin

EPR Executive Summary available

Commentary

Stephen L. Ross

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The Promised City: Openness andImmigration in the Making ofa World Metropolis

Kenneth T. Jackson

Immigration Trends in the New YorkMetropolitan Area

George J. Borjas

Commentary

Stephen J. Trejo

Trajectories for the Immigrant SecondGeneration in New York City

John Mollenkopf

Commentary

Douglas S. Massey

Immigration, Health, and New York City:Early Results Based on the U.S.New Immigrant Cohort of 2003

Guillermina Jasso, Douglas S. Massey,Mark R. Rosenzweig, and James P. Smith

Commentary

Adriana Lleras-Muney

Public Education in the Dynamic City:Lessons from New York City

Amy Ellen Schwartz and Leanna Stiefel

Commentary

Dalton Conley

Forthcoming

Trading Risk, Market Liquidity,and Convergence Trading in theInterest Rate Swap Spread

John Kambhu

While trading activity is generally thought to playa central role in the self-stabilizing behavior ofmarkets, the risks in trading on occasion canaffect market liquidity and heighten asset pricevolatility. This article examines empiricalevidence on the limits of arbitrage in the interestrate swap market. Specifically, it analyzes howthe risk associated with convergence trading—in which speculators trade on the expectationthat asset prices will converge to normal, orfundamental, levels—can affect market liquidityand amplify shocks in asset prices. These effectsare considered in terms of the behavior of theinterest rate swap spread and the volume of repocontracts. The author finds both stabilizing anddestabilizing forces attributable to leveragedtrading activity. Although the swap spread tendsto converge to its fundamental level, it does somore slowly when traders are weakened bylosses; moreover, higher trading risk can causethe spread to diverge from its fundamental level.In addition, repo volume falls when convergencetrading risk is higher, and reflects shocks thatdestabilize the swap spread. The behavior of repovolume in particular points to how trading riskaffects market liquidity and asset price volatility.


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Local or State? Evidence on Bank MarketSize Using Branch Prices

Paul Edelstein and Donald P. Morgan

With the elimination of state laws againstbranching, banks can now compete across states.They are no longer limited to competing in localmarkets, defined by the Federal Reserve asmetropolitan statistical areas or small groups ofrural counties. Accordingly, a “local or state?”debate over market size is taking place amongresearchers, with some arguing that bankingmarkets are statewide and others contending thatthey remain local. This article contributes to thedebate with a novel, arguably better, indicator ofmarket size: bank branch prices, as opposed tobank deposit rates. The pattern of branch pricedata suggests that banking markets are notnecessarily local. The authors find that branchprices in ten northeastern states over the 1990sare more closely correlated with bankconcentration at the state level than at the locallevel, consistent with the “state-market”argument. However, they caution that therelationship is not completely robust; it dependspartly on how the data are parsed. Further studyusing a larger set of branch price data will helpsettle the debate more definitively.


The Evolution of Repo ContractingConventions in the 1980s

Kenneth D. Garbade

Contracting conventions for repurchaseagreements, or repos, changed significantly inthe 1980s. The growth of the repo market, newuses for repos, and the emergence of new andpreviously unappreciated risks prompted marketparticipants to revise their contracting conventions.This article describes the evolution of theconventions during that period, focusing on threekey developments: the recognition of accruedinterest on repo securities, a change in theapplication of federal bankruptcy law to repos,and the accelerated growth of a new form ofrepo—tri-party repo. The author argues that theemergence of tri-party repo owed to the efforts ofindividual market participants acting in their owneconomic self-interest. By comparison, recognitionof accrued interest and the change in bankruptcylaw were effected by participants takingcollective action and seeking legislative relief,respectively, because uncoordinated, individualsolutions would have been more costly. Thesedevelopments offer important insights into howmarkets operate: contracting conventions that areefficient in one market environment may have tobe revised when the environment changes, andinstitutional arrangements can change in anynumber of ways.


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EPR Executive Summaries

Visit our website for concise summaries of Economic Policy Review articles.

Our online publication EPR Executive Summaries condenses many of the articles publishedin the Review. Readers of the summaries will find timely, policy-oriented discussionsthat are easy to absorb.

The summaries make the technical research of New York Fed economists more accessible topolicymakers, educators, business and financial leaders, and others. The series is designed tofoster a fuller understanding of our research among those who are in a position to put ourideas and findings to work.

Summaries, in html format, are available for many articles published since 2002.

www.newyorkfed.org/research/epr/executive_summary.html

Current Issuesin Economicsand FinanceCurrent Issues in Economics and Financeoffers concise studies of topical economicand financial issues.

Second District Highlights—a regionalsupplement to Current Issues—coversimportant financial and economicdevelopments in the Federal ReserveSystem’s Second District.

Both series are available in html and pdfformats at www.newyorkfed.org/research/current_issues.

Volume 11

No. 1, January 2005

The Predictive Abilities of the New York Fed’sEmpire State Manufacturing SurveyRichard Deitz and Charles Steindel

Business surveys often give early signals of thedirection and magnitude of economic activity.One release, the relatively new Empire StateManufacturing Survey, is demonstrating an abilityto provide information ahead of U.S. productionand employment trends. In fact, the predictivepower of this survey appears to be at least equalto that of two established manufacturing surveys.Second District Highlights

No. 2, February 2005

The Treasury Auction Process: Objectives,Structure, and Recent AdaptationsKenneth D. Garbade and Jeffrey F. Ingber

Treasury auctions are designed to minimize thecost of financing the national debt by promotingbroad, competitive bidding and liquid secondarymarket trading. A review of the auction process—from the announcement of a new issue to thedelivery of securities—reveals how theseobjectives have been met. Also highlighted arechanges in the auction process that stem fromrecent advances in information-processingtechnologies and risk management techniques.

No. 3, March 2005

What Financing Data Reveal aboutDealer LeverageTobias Adrian and Michael J. FlemingThe Federal Reserve collects data on thefinancing activities of the primary governmentsecurities dealers. Some market analysts arguethat the data show a considerable rise in dealerleverage in recent years. However, a close readingof the data suggests that dealer borrowing involvingfixed-income securities has grown only modestly.Moreover, the increase that has occurred is notclearly associated with greater risk taking.

No. 4, April 2005

Are We Underestimating the Gains fromGlobalization for the United States?Christian Broda and David Weinstein

Over the last three decades, trade has more thantripled the variety of international goods availableto U.S. consumers. Although an increased choiceof goods clearly enhances consumer well-being,standard national measures of welfare and pricesdo not assign a value to variety growth. Thisanalysis—the first effort to measure such gains—finds that the value to consumers of globalvariety growth in the 1972-2001 period wasroughly $260 billion.

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No. 5, May 2005

Improving Business Payments by AskingWhat Corporations Really WantSandy Krieger and Michele Braun

A recent study led by the New York Fed shedslight on the changes in the payment process thatlarge corporations would most like to see. Thestudy’s results, summarized in this article, suggestthat corporate treasurers and cash managerswould particularly value enhancements thatdecrease unauthorized and insufficiently fundedpayments, streamline data formats, improve bankservices and information posting, and reducecross-border payment uncertainties.

No. 6, June 2005

New York City Immigrants: The 1990s WaveRae Rosen, Susan Wieler, and Joseph Pereira

Fueled by a steady influx of immigrants,New York City’s population turnover in the 1990swas almost double the average for the nation’s100 largest cities. A close look at the city’s newforeign-born residents suggests that they are avery diverse group, showing marked differencesin education level, English language fluency, andother characteristics that help determine labormarket skills and performance.Second District Highlights

No. 7, July 2005

Trends in Federal Funds Rate VolatilitySpence Hilton

The behavior of the fed funds rate—a keymonetary policy target and a benchmark forshort-term interest rates—is closely watched bymany market participants. After a decade markedby periodic bouts of high volatility in the fundsrate, volatility has declined sharply since 2001.An analysis of the major factors influencing therate’s behavior shows that some of the forcesbehind the current fall in volatility first emergedin response to the earlier increases.

No. 8, August 2005

U.S. Jobs Gained and Lost through Trade:A Net MeasureErica L. Groshen, Bart Hobijn,and Margaret M. McConnell

Recent concerns about the transfer of U.S.services jobs to overseas workers have deepenedlong-standing fears about the effects of trade onthe domestic labor market. But a balanced viewof the impact of trade requires that we considerjobs created through the production of U.S.exports as well as jobs lost to imports. A newmeasure of the jobs gained and lost in internationaltrade flows suggests that the net number of U.S.jobs lost is relatively small—2.4 percent of totalU.S. employment as of 2003.

No. 9, September 2005

Explaining Settlement FailsMichael J. Fleming and Kenneth D. Garbade

The Federal Reserve now makes available currentand historical data on trades in U.S. Treasury andother securities that fail to settle as scheduled. Ananalysis of the data reveals substantial variation inthe frequency of fails over the 1990-2004 period.It also suggests that surges in fails sometimesresult from operational disruptions, but oftenreflect market participants’ insufficient incentiveto avoid failing.

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No. 10, October 2005

The Evolution of Commuting Patternsin the New York City Metro AreaJason Bram and Alisdair McKay

Has the migration of jobs to the suburbs changedthe commuting patterns in the New York Citymetro area? An analysis of current commutingtrends suggests that Manhattan remains theregion’s undisputed employment center and thatworkers are actually traveling farther to their jobs.Two factors appear to account for the longercommutes: the dispersion of people and jobs anda greater tolerance for long-distance travel amongemployers and employees.Second District Highlights

No. 11, November 2005

Intraday Trading in the OvernightFederal Funds MarketLeonardo Bartolini, Svenja Gudell,Spence Hilton, and Krista SchwarzTransaction-level data for the federal fundsmarket provide a rare look at the intradaybehavior of trade volume and prices. An analysisof the data reveals that trade volume exhibitslarge swings over the course of the day whileprices remain fairly stable, with rate volatilityrising sharply only in the late afternoon. Theanalysis underscores the important role playedby institutional deadlines—most notably, the closeof trading—in driving movements in this market.

No. 12, December 2005

The Income Implications of RisingU.S. International LiabilitiesMatthew Higgins, Thomas Klitgaard,and Cédric Tille

Although the United States has seen its netliabilities surge in recent years, its investmentincome balance has remained positive—largelybecause U.S. firms operating abroad earn a higherrate of return than do foreign firms operating here.The continuing buildup in liabilities, however,should soon push the U.S. income balance belowzero. In that event, net income flows will begin toboost the nation’s current account deficit insteadof reducing it.

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Research UpdateResearch Update is a quarterly newsletterdesigned to keep you informed about theResearch and Statistics Group’s current work.The newsletter—which complements thiscatalogue—offers summaries of selectedstudies and listings of recent articles andpapers in our research series.

Research Update also reports on other newswithin the Group, including:

■ staff publication in outside journals,

■ presentations by economists at academicconferences and industry gatherings,

■ upcoming conferences at the FederalReserve Bank of New York,

■ calls for papers, and

■ new publications and services.

You can subscribe to Research Updateby using the enclosed order form. Thepublication is also available in html and pdfformats at www.newyorkfed.org/research/research_update.

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Staff Reports The Staff Reports series features technicalresearch papers designed to stimulatediscussion and elicit comments. These papersare intended for eventual publication inleading economic and finance journals.

The series is available only at www.newyorkfed.org/research/staff_reports.

Macroeconomics and Growth

No. 198, January 2005

Comparing Forecast-Based and Backward-Looking Taylor Rules: A “Global” AnalysisStefano Eusepi

This paper examines the performance of forecast-based nonlinear Taylor rules in a class of simplemicrofunded models. It shows that even if thepolicy rule leads to a locally determinate (andstable) inflation target, there exist other learnable“global” equilibria such as cycles and sunspots.Moreover, under learning dynamics, the economycan fall into a liquidity trap. By contrast, morebackward-looking and “active” Taylor rulesguarantee that the unique learnable equilibriumis the inflation target. This result is robust todifferent specifications of the role of money,price stickiness, and the trading environment.


Central Bank Transparency underModel UncertaintyStefano Eusepi

Eusepi explores the effects of central banktransparency on the performance of optimalinflation targeting rules. He assumes that both thecentral bank and the private sector face uncertaintyabout the “correct” model of the economy andhave to learn. A transparent central bank canreduce one source of uncertainty for privateagents by communicating its policy rule to thepublic. The paper shows that central banktransparency plays a crucial role in stabilizingthe agents’ learning process and expectations.By contrast, lack of transparency can lead toexpectations-driven fluctuations that havedestabilizing effects on the economy, even whenthe central bank has adopted optimal policies.

No. 203, March 2005

A Search for a Structural Phillips CurveTimothy Cogley and Argia M. Sbordone

The New Keynesian Phillips curve (NKPC), amodel of price setting with nominal rigidities,implies that the dynamics of inflation are wellexplained by the evolution of real marginal costs.This paper analyzes whether this relationship isstructurally invariant. The authors estimate anunrestricted time-series model for inflation, unitlabor costs, and other variables, and presentevidence that their joint dynamics are wellrepresented by a vector autoregression (VAR)with drifting coefficients and volatilities. Theythen apply a two-step minimum distanceestimator to estimate deep parameters of theNKPC. Given estimates of the unrestricted VAR,Cogley and Sbordone estimate parameters of theNKPC by minimizing a quadratic function of therestrictions that this theoretical model imposes onthe reduced form. Their results suggest that onecan reconcile a constant-parameter NKPC withthe drifting-parameter VAR—evidence that theprice-setting model is structurally invariant.

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No. 204, March 2005

Do Expected Future Marginal CostsDrive Inflation Dynamics?Argia M. Sbordone

This paper discusses a more general interpretationof the two-step minimum distance estimationprocedure proposed in earlier work by Sbordone.The estimator is again applied to a version of theNew Keynesian Phillips curve, in which inflationdynamics are driven by the expected evolution ofmarginal costs. The paper clarifies econometricissues, addresses concerns about uncertainty andmodel misspecification raised in recent studies,and assesses the robustness of previous results.While confirming the importance of forward-looking terms in accounting for inflationdynamics, Sbordone suggests how themethodology can be applied to extend theanalysis of inflation to a multivariate setting.

No. 205, March 2005

The Politics of Central Bank Independence:A Theory of Pandering and Learningin Government Gauti Eggertsson and Eric Le Borgne

The authors propose a theory to explain why,and under what circumstances, a politicianendogenously gives up rent and delegates policytasks to an independent agency. Applied tomonetary policy, this theory 1) formalizes therationale for delegation and 2) does not rely onthe inflation bias that underlies most existingtheories of central bank independence. Delegationtrades off the cost of having a possibly incompetenttechnocrat with a long-term job contract againstthe benefit of having a technocrat who 1) investsmore effort into the specialized policy task and2) has less incentive than a politician to pander topublic opinion. Eggertsson and Le Borgne’s keytheoretical predictions are broadly consistent withthe data.

No. 206, April 2005

Shock Identification of MacroeconomicForecasts Based on Daily PanelsMarlene Amstad and Andreas M. Fischer

This paper proposes a new procedure for shockidentification of macroeconomic forecasts basedon factor analysis. The authors’ identificationscheme for information shocks relies on datareduction techniques for daily panels and therecognition that macroeconomic releases exhibita high level of clustering. This informationclustering facilitates the interpretation of forecastinnovations as real or nominal informationshocks. An empirical application is provided forSwiss inflation. Amstad and Fischer show that themonetary policy shocks generate an asymmetricresponse to inflation, that the pass-through forconsumer price index inflation is weak, and thatthe information shocks to inflation are notsynchronized.

No. 208, May 2005

Who Is Afraid of the Friedman Rule?Joydeep Bhattacharya, Joseph Haslag,Antoine Martin, and Rajesh Singh

The authors explore the connection betweenoptimal monetary policy and heterogeneityamong agents. They utilize a standard monetaryeconomy with two types of agents that differ inthe marginal utility they derive from real moneybalances—a framework that produces anondegenerate stationary distribution of moneyholdings. Without type-specific fiscal policy, theauthors show that the zero-nominal-interest-ratepolicy (the Friedman rule) does not maximizetype-specific welfare; further, it may notmaximize aggregate ex ante social welfare.Indeed, one or, more surprisingly, both types ofagents may benefit if the central bank deviatesfrom the Friedman rule.

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No. 214, July 2005

The Cost of Business Cyclesfor Unskilled WorkersToshihiko Mukoyama and Ay egül ahin

This paper reconsiders the cost of business cyclesunder incomplete markets. It focuses on theheterogeneity in the cost of business cyclesamong agents with different skill levels.Unskilled workers are subject to a much largerrisk of unemployment during recessions than areskilled workers. Moreover, unskilled workers earnless income, which limits their ability to self-insure. The authors examine how this heterogeneityin unemployment risk and income translates intoheterogeneity in the cost of business cycles. Theyfind that the welfare cost of business cycles forunskilled workers is much higher than that forskilled workers.

No. 217, August 2005

Reconciling Bagehot with the Fed’s Responseto September 11Antoine Martin

The nineteenth-century economist Walter Bagehotmaintained that in order to prevent bank panics,a central bank should provide liquidity to themarket at a very high interest rate. Thisrecommendation seems to be in sharp contrastwith the policy adopted by the Federal Reserveafter September 11 when, for a few days, thefederal funds rate was very close to zero. Thispaper shows that Bagehot’s recommendationcan be reconciled with the Fed’s policy if onerecognizes that Bagehot had in mind a commoditymoney regime in which the amount of reservesavailable is limited. A high price for this liquidityallows banks that need it most to self-select. Incontrast, the Fed has the virtually unlimitedability to expand the money supply temporarily.


Assessing High House Prices: Bubbles,Fundamentals, and MisperceptionsCharles Himmelberg, Christopher Mayer,and Todd Sinai

Conventional metrics used to judge the level ofhousing prices can be misleading because theyfail to account for both the time-series patternof real long-term interest rates and predictabledifferences in the long-run growth rates of houseprices across local markets. The authors constructmeasures of the annual cost of single-familyhousing for forty-six metropolitan areas in theUnited States over the past twenty-five years andcompare them with local rents and incomes. Theirmeasures show that during the 1980s, houseslooked most overvalued in cities that subsequentlyexperienced the largest house price declines. Fromthe trough of 1995 to 2004, the cost of owningrose somewhat relative to the cost of renting, butnot, in most cities, to levels that made houseslook overvalued.


The Tobin Effect and the Friedman RuleJoydeep Bhattacharya, Joseph Haslag,and Antoine Martin

This study addresses whether the Friedman rulecan be optimal in an economy in which the Tobineffect is operative. The authors present anoverlapping generations economy with capital inwhich limited communication and stochasticrelocation create an endogenous transaction rolefor fiat money. With logarithmic utility, the “anti-Tobin” effect is operative, and the Friedman ruleis optimal (that is, stationary-welfare-maximizing)regardless of whether or not there is long-rungrowth. Under the constant relative risk aversionform of preferences, the authors show that anoperative “anti-Tobin” effect is a sufficientcondition for the Friedman rule to be optimal.Also, contrary to models with linear storagetechnologies, the authors’ model shows that zeroinflation is not optimal.

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Optimality of the Friedman Rule inan Overlapping Generations Modelwith Spatial SeparationJoseph Haslag and Antoine Martin

Haslag and Martin examine models with spatialseparation and limited communication that haveshown some promise toward resolving thedisparity between theory and practice concerningoptimal monetary policy; these models suggestthat the Friedman rule may not be optimal. Theauthors show that intergenerational transfers playa key role in this result, that the Friedman rule isa necessary condition for an efficient allocationin equilibrium, and that the rule is chosenwhenever agents can implement mutuallybeneficial arrangements. The study concludesthat in order for these models to resolve theaforementioned disparity, they must answer thefollowing question: Where do the frictions thatprevent agents from implementing mutuallybeneficial arrangements come from?


Time-Varying Pass-Through from ImportPrices to Consumer Prices: Evidence froman Event Study with Real-Time DataMarlene Amstad and Andreas M. Fischer

This paper analyzes the pass-through from importprices to CPI inflation in real time. The authors’strategy follows an event-study approach thatcompares inflation forecasts before and afterimport price releases. Inflation forecasts aremodeled using a dynamic factor procedure thatrelies on daily panels of Swiss data. Amstad andFischer find strong evidence that monthly importprice releases provide important information forCPI inflation forecasts, and that the behavior ofupdated forecasts is consistent with a time-varyingpass-through. The robustness of this latter resultis supported by an alternative CPI measure thatexcludes price components subject to administeredpricing as well as by panels capturing differencelevels of information breadth. Finally, the authors’empirical findings cast doubt on a prominent rolefor sticky prices in the low pass-through findings.


Can U.S. Monetary Policy Fall (Again)into an Expectation Trap?Roc Armenter and Martin Bodenstein

The authors provide a tractable model to studymonetary policy under discretion. They restricttheir analysis to Markov equilibria. The studyfinds that for all parametrizations with anequilibrium inflation rate of about 2 percent, thereis a second equilibrium with an inflation rate justabove 10 percent. Thus, the model cansimultaneously account for the low and highinflation episodes in the United States. Theauthors carefully characterize the set of Markovequilibria along the parameter space and findtheir results to be robust, suggesting thatexpectation traps are more than just a theoreticalcuriosity.


Great Expectations and the Endof the DepressionGauti B. Eggertsson

This study argues that the U.S. economy’srecovery from the Great Depression was drivenby a shift in expectations brought about by thepolicy actions of President Franklin DelanoRoosevelt. On the monetary policy side,Roosevelt abolished the gold standard and—evenmore important—announced the policy objectiveof inflating the price level to pre-depressionlevels. On the fiscal policy side, Rooseveltexpanded real and deficit spending. Together,these actions made his policy objective credible;they violated prevailing policy dogmas andintroduced a policy regime change such as thatdescribed in work by Sargent and by Temin andWigmore. The economic consequences ofRoosevelt’s policies are evaluated in a dynamicstochastic general equilibrium model with stickyprices and rational expectations.

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Optimal Monetary and Fiscal Policy underDiscretion in the New Keynesian Model: A Technical Appendix to “Great Expectationsand the End of the Depression”Gauti B. Eggertsson

This paper details the microfoundations of themodel presented in Staff Report no. 234, “GreatExpectations and the End of the Depression.” Itdefines the Markov perfect equilibrium formallyin the nonlinear model, discusses in some detailthe approximation method used and the order ofaccuracy of this approximation, and gives proofsof two propositions not proved in that study. Inaddition, this paper states a proposition thatshows the equivalence between the linearquadratic approximation in the aforementionedStaff Report and a first-order approximation tothe exact nonlinear conditions of the governmentin the Markov perfect equilibrium defined here.


A Review of Core Inflation andan Evaluation of Its MeasuresRobert Rich and Charles Steindel

Viewing stabilization of either consumer priceindex (CPI) inflation or personal consumptionexpenditure (PCE) inflation as a central goal ofU.S. monetary policy, the authors evaluate avariety of candidate core inflation measures.Almost all candidate measures demonstrate theability to track the mean rate of aggregateinflation and movements in its underlying trend.In the within-sample analysis, core measuresderived through exponential smoothing, incombination with simple measures of economicslack, have substantial explanatory content forchanges in aggregate inflation several years inadvance. In the out-of-sample analysis, however,no measure performs consistently well inforecasting inflation. Taken together, the findingsshow that there is no individual measure of coreinflation that can be considered superior to othermeasures.

International


Vehicle Currency Use in International TradeLinda S. Goldberg and Cédric Tille

The forces motivating the choice of currency ininternational trade transactions have long beendebated. The authors introduce a model designedto contrast the contribution of macroeconomicvariability with that of industry-specific featuresin the selection of an invoice currency. They showthat producers in industries with high demandelasticities are more likely than producers in otherindustries to display herding in their choice ofcurrency. This industry-related force is moreinfluential than local macroeconomic performancein determining producers’ choices. Drawing ondata for twenty-four countries, the authorsdocument that the dollar is widely used for mosttransactions involving the United States as well asfor international trade flows not directly involvingthe United States.

No. 201, February 2005

Productivity Spillovers, Terms of Trade,and the “Home Market Effect”Giancarlo Corsetti, Philippe Martin,and Paolo Pesenti

The authors analyze the welfare implications ofinternational spillovers related to productivitygains, changes in market size, or governmentspending. They introduce trade costs andendogenous varieties in a two-country generalequilibrium model with monopolistic competition,drawing a distinction between productivity gainsfrom manufacturing efficiency and those relatedto firms’ lower cost of entry or productdifferentiation. Their model suggests thatcountries with lower manufacturing costs havehigher GDP but supply a smaller number ofgoods at a lower international price. Countrieswith lower entry and differentiation costs alsohave higher GDP, but supply a larger array ofgoods at improved terms of trade. Higherdomestic demand has macroeconomicimplications that are similar to those of areduction in firms’ entry costs.

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No. 209, May 2005

The Simple Geometry of Transmission andStabilization in Closed and Open EconomiesGiancarlo Corsetti and Paolo Pesenti

This paper provides an introduction to the recentliterature on macroeconomic stabilization inclosed and open economies. Corsetti and Pesentipresent a stylized theoretical framework,illustrating its main properties with the help of anintuitive graphical apparatus. Among the issuesdiscussed are optimal monetary policy and thewelfare gains from macroeconomic stabilization,the international transmission of real andmonetary shocks and the role of exchange ratepass-through, and the design of optimal exchangerate regimes and monetary coordination amonginterdependent economies.


Exchange Rate Pass-Through to ImportPrices in the Euro AreaJosé Manuel Campa, Linda S. Goldberg,and José M. González-Mínguez

This study presents an empirical analysis oftransmission rates from exchange rate movementsto import prices across countries and productcategories in the euro area over the past fifteenyears. The results show that exchange rate pass-through to import prices in the short run is high,although incomplete, and that it differs acrossindustries and countries; in the long run, exchangerate pass-through is higher and close to 1. Theauthors do not find compelling evidence that theeuro’s introduction caused a structural change inexchange rate pass-through. Although someestimated point elasticities have declined,structural breaks in exchange rate pass-throughinto import prices are evident only in a limitedsample of manufacturing industries.


Trade Invoicing in the Accession Countries:Are They Suited to the Euro?Linda S. Goldberg

Countries aspiring to join the euro area—theso-called accession countries—are increasinglybinding their economic activity, external andinternal, to the euro-area countries. Thisphenomenon is observed in the currencyinvoicing of international trade transactions,where accession countries have reduced their useof the U.S. dollar in invoicing such transactions.The optimal invoicing choice for an accessioncountry depends on its composition of trade andon correlations between fluctuations in home andtrade-partner macroeconomic variables. Goldbergfinds that the exporters in some accessioncountries may be pricing too much of their tradein euros rather than in U.S. dollars, even in theirtrade transactions with the euro-area and otherEuropean Union countries, and may be taking onexcessive risk in international markets.


Financial Integration and the Wealth Effectof Exchange Rate FluctuationsCédric Tille

Tille first presents a detailed decomposition ofthe U.S. balance sheet, which exhibits substantialleverage in terms of currencies and across assetcategories. He then incorporates these features ofinternational financial integration in a simplegeneral equilibrium model and analyzes how theyaffect the international transmission of monetaryshocks. The author finds that financial integrationis a central component of the model, with thevaluation gains from an exchange rate depreciationleading to a welfare effect that is at least as largeas that stemming from nominal rigidities alonebut possibly much larger. He characterizes howinterdependence is affected by the compositionof the portfolio across asset categories and howstructural features of the model interact withfinancial integration.

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Does the Time Inconsistency ProblemMake Flexible Exchange Rates LookWorse Than You Think?Roc Armenter and Martin Bodenstein

Lack of commitment in monetary policy leads tothe well-known Barro-Gordon inflation bias. Inthis paper, Armenter and Bodenstein argue thattwo phenomena associated with the timeinconsistency problem have been overlooked inthe exchange rate debate. The authors show that,absent commitment, independent monetary policycan also induce expectation traps—that is, welfare-ranked multiple equilibria—and perverse policyresponses to real shocks—that is, an equilibriumpolicy response that is welfare inferior to policyinaction. Both possibilities imply highermacroeconomic volatility under flexible exchangerates than under fixed exchange rates.


Establishing Credibility: EvolvingPerceptions of the European Central BankLinda S. Goldberg and Michael W. Klein

Goldberg and Klein present a novel empiricalframework that uses high-frequency data to testfor persistent variation in market perceptions ofcentral bank inflation aversion. Tests of the effectof news announcements on the slope of yieldcurves in the euro area and on the euro-dollarexchange rate suggest that the market’s perceptionof the policy stance of the European Central Bankduring its first six years of operation evolvedsignificantly, with a belief in the Bank’s inflationaversion increasing in the wake of its monetarytightening. In contrast, tests based on theresponse of the slope of the U.S. yield curve tonews offer no comparable evidence of any changein market perceptions of the inflation aversion ofthe Federal Reserve.

Microeconomics

No. 212, June 2005

Propensity Score Matching, a Distance-BasedMeasure of Migration, and the Wage Growthof Young MenJohn C. Ham, Xianghong Li, and Patricia B. Reagan

This paper estimates the effect of U.S. internalmigration on real wage growth between themovers’ first and second jobs. Ham, Li, andReagan develop an economic model to 1) assessthe appropriateness of matching as an econometricmethod for studying migration and 2) choose theconditioning variables used in the matchingprocedure. The authors find a significant effect ofmigration on the wage growth of college graduatesof 10 percent and a marginally significant effectfor high-school dropouts of -12 percent. If theauthors use a measure of migration based onmoving across either county lines or state lines,the significant effects of migration for collegegraduates and dropouts disappear.

No. 213, June 2005

Selection Bias, Demographic Effects,and Ability Effects in Common ValueAuction ExperimentsMarco Casari, John C. Ham, and John H. Kagel

The authors find clear demographic and abilityeffects on bidding in common value auctions:inexperienced women are much more susceptibleto the winner’s curse than are men, but they catchup quickly; economics and business majorssubstantially overbid relative to other majors; andthose with superior SAT/ACT scores are muchless susceptible to the winner’s curse. There arestrong selection effects in bid estimates for bothinexperienced and experienced subjects that arenot identified using standard econometric techniques,but rather through the authors’ experimentaldesign effects. Ignoring these selection effects ismost misleading for inexperienced bidders, becausethe unbiased estimates of the bid function indicatemuch faster learning and adjustment to thewinner’s curse for individual bidders than do thebiased estimates.

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Barriers to Network-Specific InnovationAntoine Martin and Michael J. Orlando

The authors examine incentives for network-specific investment and the implications fornetwork governance. They model an environmentin which participants that make payments over anetwork can invest in a technology that reducesthe marginal cost of using the network. A networkeffect results in multiple equilibria; either all agentsinvest and network usage is high or no agentsinvest and network usage is low. When commitmentis feasible, the high-use equilibrium can beimplemented; however, when commitment isinfeasible, fixed costs associated with use of thenetwork-specific technology result in a holdupproblem that implements the low-investmentequilibrium. Thus, governance structures necessaryto achieve commitment will be preferred to thosenecessary merely to achieve coordination.

Banking and Finance

No. 207, April 2005

The Joint Dynamics of Liquidity, Returns,and Volatility across Small and Large FirmsTarun Chordia, Asani Sarkar,and Avanidhar Subrahmanyam

This paper explores liquidity spillovers in market-capitalization-based portfolios of NYSE stocks.Return, volatility, and liquidity dynamics acrossthe small- and large-cap sectors are modeled byway of a vector autoregression model, using datathat span more than 3,000 trading days. Theauthors find that volatility and liquidityinnovations in one sector are informative inpredicting liquidity shifts in the other. Impulseresponses indicate the existence of persistentliquidity, return, and volatility spillovers acrossthe small- and large-cap sectors. Lead and lagpatterns across small- and large-cap stocks arestronger when spreads in the large-cap sector arewider. Consistent with the notion that privateinformational trading in large-cap stocks istransmitted to other stocks with a lag, order flowsin the large-cap decile predict both transaction-price-based and mid-quote returns of small-capdeciles when large-cap spreads are high.

No. 210, June 2005

Banks, Markets, and EfficiencyFalko Fecht and Antoine Martin

This study addresses the question whether theincreased financial market access of householdsimproves welfare in a financial system wherethere is intense bank competition for privatehouseholds’ funds. The authors use a model inwhich the degree of liquidity insurance offered tohouseholds through banks’ deposit contracts isrestrained by household financial market access;however, they also assume spatial monopolisticcompetition among banks. Fecht and Martin’sresults suggest that in Germany’s bank-dominatedfinancial system, characterized by intensecompetition for households’ deposits, improvedfinancial market access might reduce welfarebecause it only reduces risk sharing. In contrast,in the U.S. banking system, where there is lesscompetition for households’ deposits, a high levelof household financial market participation mightbe beneficial.

No. 211, June 2005

The Impact of Network Size on BankBranch PerformanceBeverly J. Hirtle

Despite recent innovations that might havereduced banks’ reliance on brick-and-mortarbranches for distributing retail financial services,the number of U.S. bank branches has continuedto increase steadily over time. Furthermore, anincreasing percentage of these branches are heldby banks with large branch networks. This paperassesses the implications of these developmentsby examining a series of simple branchperformance measures and asking how thesemeasures vary, on average, across institutionswith different branch network sizes. Based onbank-average deposits per branch, small businessloans per branch, and net deposit funding costs,mid-sized branch networks may be at acompetitive disadvantage relative to both largerand smaller branch networks.

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How and Why Do Small Firms ManageInterest Rate Risk? Evidence fromCommercial LoansJames Vickery

This paper studies fixed-rate and adjustable-rateloans to see how small firms manage theirexposure to interest rate risk. Its main findingsare that credit-constrained firms consistentlyfavor fixed-rate loans, which minimize theirexposure to rising interest rates; that firms adjusttheir exposure depending on how interest rateshocks covary with industry output; and that thetime-series share of fixed-rate bank loans moveswith interest rates in a manner consistent withrecent evidence on debt market timing. Theauthor concludes that the “fixed versusadjustable” dimension of financial contractinghelps small U.S. firms ameliorate interest raterisk, and discusses implications for riskmanagement theories and the credit channelof monetary policy.


Arbitrage Pricing TheoryGur Huberman and Zhenyu Wang

Focusing on capital asset returns governed by afactor structure, the Arbitrage Pricing Theory(APT) is a one-period model, in which preclusionof arbitrage over static portfolios of these assetsleads to a linear relation between the expectedreturn and its covariance with the factors. TheAPT, however, does not preclude arbitrage overdynamic portfolios. Consequently, applying themodel to evaluate managed portfolios iscontradictory to the no-arbitrage spirit of themodel. An empirical test of the APT entails aprocedure to identify features of the underlyingfactor structure rather than merely a collection ofmean-variance efficient factor portfolios thatsatisfies the linear relation.


Too Big to Fail after All These YearsDonald P. Morgan and Kevin J. Stiroh

The naming of eleven banks as “too big to fail”(TBTF) in 1984 led bond raters to raise theirratings on new bond issues of TBTF banks abouta notch relative to those of other, unnamed banks.The relationship between bond spreads andratings for the TBTF banks tended to flatten afterthat event, suggesting that investors were evenmore optimistic than raters about the probabilityof support for those banks. The spread-ratingrelationship in the 1990s remained flatter forTBTF banks (or their descendants) even after thepassage of the Federal Deposit Insurance CorporationImprovement Act of 1991, suggesting thatinvestors still see those banks as TBTF. Untilinvestors are disabused of such beliefs, investordiscipline of big banks will be less than complete.


Why Is the U.S. Treasury ContemplatingBecoming a Lender of Last Resortfor Treasury Securities?Kenneth D. Garbade and John E. Kambhu

The U.S. Treasury announced in August 2005 thatit is exploring whether to provide a backstopsecurities lending facility for U.S. Treasurysecurities. This paper examines the conceptualbasis for such a facility by analogizing the marketfor borrowing and lending Treasury securitieswith the market for borrowing and lending moneyprior to the founding of the Federal ReserveSystem in 1914. An inelastic supply of Treasurysecurities has led to several recent episodes ofchronic settlement fails. A backstop lendingfacility would mitigate the fails problem byallowing the Treasury to act as a lender of lastresort of Treasury securities during periods ofunusual market stress.

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Money Market IntegrationLeonardo Bartolini, Spence Hilton,and Alessandro Prati

Bartolini, Hilton, and Prati use transaction-leveldata and detailed modeling of the high-frequencybehavior of federal funds–Eurodollar yield spreadsto provide evidence of strong integration betweenthe federal funds and Eurodollar markets, the twocore components of the dollar money market.Their results contrast with previous researchindicating that these two markets are segmented,showing them to be well integrated even at high(intraday) frequency. The authors documentseveral patterns in the behavior of federalfunds–Eurodollar spreads, including liquidityeffects from trading volume on the volatility ofyield spreads. Their analysis supports the viewthat targeting federal funds rates alone issufficient to stabilize rates in the (much larger)dollar money market as a whole.


The Return to Retail and the Performanceof U.S. BanksBeverly J. Hirtle and Kevin J. Stiroh

The U.S. banking industry is experiencing arenewed focus on retail banking, a trend oftenattributed to the stability and profitability of retailactivities. This paper examines the impact ofbanks’ retail intensity on performance from 1997to 2004 by developing three complementarydefinitions of retail intensity (retail loan share,retail deposit share, and branches per dollar ofassets) and comparing these measures with bothequity market and accounting measures ofperformance. The authors find that an increasedfocus on retail banking across U.S. banks islinked to significantly lower equity market andaccounting returns for all banks but lowervolatility for only the largest banking companies.They conclude that retail banking may be arelatively stable activity, but it is also a low-return one.

Quantitative Methods

No. 202, March 2005

Reexamining the Consumption-WealthRelationship: The Role of Model UncertaintyGary Koop, Simon M. Potter,and Rodney W. Strachan

Lettau and Ludvigson’s influential work on theconsumption-wealth relationship finds that whileconsumption responds to permanent changes inwealth in the expected manner, most changes aretransitory with no effect on consumption. Thispaper investigates the robustness of these resultsto model uncertainty using Bayesian modelaveraging and finds that uncertainty exists.Whether this uncertainty has important implicationsdepends on the weight the researcher places oneconomic theory. If Koop, Potter, and Strachanwork with Lettau and Ludvigson’s exact model,their findings are very similar. However, workingwith a broader set of models, they find that theexact magnitude of the role of permanent shocksis difficult to estimate precisely.


One-Sided Test for an Unknown Breakpoint:Theory, Computation, and Applicationto Monetary TheoryArturo Estrella and Anthony P. Rodrigues

The econometrics literature contains a variety oftwo-sided tests for unknown breakpoints in time-series models with one or more parameters. Thispaper derives an analogous one-sided test thattakes into account the direction of the change fora single parameter. In particular, the authorspropose a sup t statistic, which is distributed as anormalized Brownian bridge. The method isillustrated by testing whether the reaction ofmonetary policy to inflation has increasedsince 1959.

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OutsideJournalsMembers of the Research and StatisticsGroup publish in a wide range of economicand finance journals, conference volumes,and scholarly books.

Published in 2005


Arturo Estrella“Productivity, Monetary Policy, and FinancialIndicators.” In Investigating the Relationshipbetween the Financial and Real Economy, 166-76. BIS Papers, no. 22, April.

“Why Does the Yield Curve Predict Output andInflation?” Economic Journal 115, no. 505 (July):722-44.

“The Yield Curve and Recessions.” InternationalEconomy, summer: 8-9, 38.

Stefano Eusepi“Did the Great Inflation Occur despite PolicymakerCommitment to a Taylor Rule?” with JamesBullard. Review of Economic Dynamics 8, no. 2(April): 324-59.

Andrew Haughwout“Evidence from Real Estate Markets of the Long-Term Impact of 9/11 on the New York CityEconomy.” In Howard Chernick, ed., ResilientCity: The Economic Impact of 9/11, 97-121.New York: Russell Sage Foundation.

Charles Himmelberg“Do Stock Price Bubbles Influence CorporateInvestment?” with Simon Gilchrist and GurHuberman. Journal of Monetary Economics 52,no. 4 (May): 805-27.

Amartya Lahiri“A Two-Country Model of Endogenous Growth,”with Roger E. Farmer. Review of EconomicDynamics 8, no. 1 (January): 68-88.

Antoine Martin“Heterogeneity, Redistribution, and the FriedmanRule,” with Joydeep Bhattacharya and Joseph H.Haslag. International Economic Review 46, no. 2(May): 437-54.

Argia Sbordone“Do Expected Future Marginal Costs DriveInflation Dynamics?” Journal of MonetaryEconomics 52, no. 6 (September): 1183-97.

Charles Steindel“Future Public Debt Accumulation and Saving inthe United States.” In Daniele Franco, ed., PublicDebt. Rome: Bank of Italy.

Kevin Stiroh“Growth of U.S. Industries and Investments inInformation Technology and Higher Education,”with Dale W. Jorgenson and Mun S. Ho. In CarolCorrado, John Haltiwanger, and Daniel Sichel, eds.,Measuring Capital in the New Economy, 403-72.NBER conference volume. Chicago: Universityof Chicago Press.

Information Technology and the American GrowthResurgence, with Dale W. Jorgenson and Mun S. Ho.Vol. 3 of Productivity. Cambridge, Mass.: MIT Press.

International

Christian Broda“Happy News from the Dismal Science: ReassessingJapanese Fiscal Policy and Sustainability,” withDavid E. Weinstein. In Takatoshi Ito, HughPatrick, and David E. Weinstein, eds., RevivingJapan’s Economy: Problems and Prescriptions,39-78. Cambridge, Mass.: MIT Press.

Linda Goldberg“Exchange Rate Pass-Through into Import Prices,”with José Manuel Campa. Review of Economicsand Statistics 87, no. 4 (November): 679-90.

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James Harrigan “Distance, Time, and Specialization: LeanRetailing in General Equilibrium,” with Carolyn L.Evans. American Economic Review 95, no. 1(March): 292-313.

“Lost Decade in Translation: Did the UnitedStates Learn from Japan’s Post-Bubble Mistakes?”with Kenneth N. Kuttner. In Takatoshi Ito, HughPatrick, and David E. Weinstein, eds., RevivingJapan’s Economy: Problems and Prescriptions,79-106. Cambridge, Mass.: MIT Press.

“Tight Clothing: How the MFA Affects AsianApparel Exports,” with Carolyn L. Evans.In Takatoshi Ito and Andrew K. Rose, eds.,International Trade in East Asia, 367-90. NBERconference volume. Chicago: University ofChicago Press.

Paolo Pesenti “International Dimensions of Optimal MonetaryPolicy,” with Giancarlo Corsetti. Journal ofMonetary Economics 52, no. 2 (March): 281-305.

Cédric Tille “The Welfare Effect of International AssetMarkets Integration under Nominal Rigidities.”Journal of International Economics 65, no. 1(January): 221-47.

Microeconomics

Ay egül ahin“Online Software Distribution without EnforcingCopy Protection as a Strategic Weapon,” withKemal Altinkemer and Junwei Guan. InformationSystems and E-Business Management 3, no. 4(December): 343-61.

“Repeated Moral Hazard with Persistence,” withToshihiko Mukoyama. Economic Theory 25, no. 4(June): 831-54.

Banking and Finance

Adam Ashcraft “Are Banks Really Special? New Evidence fromthe FDIC-Induced Failure of Healthy Banks.”American Economic Review 95, no. 5(December): 1712-30.

Morten Bech “Gridlock Resolution and Bank Failures inInterbank Payment Systems,” with KimmoSoramaki. In Harry Leinonen, ed., Liquidity,Risks, and Speed in Payment and SettlementSystems–A Simulation Approach, 151-77.Helsinki: Bank of Finland.

“Systemic Risk in a Netting System Revisited,”with Kimmo Soramaki. In Harry Leinonen, ed.,Liquidity, Risks, and Speed in Payment andSettlement Systems–A Simulation Approach,277-98. Helsinki: Bank of Finland.

Michele Braun “Opportunities to Improve Payments Services:Results from a Federal Survey of LargeCorporations,” with Sandy Krieger. Associationfor Financial Professionals AFP Exchange 25,no.1 (January-February): 28-9.

Astrid Dick “Mergers and Lending Relationships: Discussion.”Comment on “Information Asymmetries and theEffects of Banking Mergers on Firm-BankRelationships,” by Steven Drucker; “SMEs andBank Lending Relationships: The Impact ofMergers,” by Hans Degryse, Nancy Masschelein,and Janet Mitchell; and “The Effect of BankMergers on Loan Prices: Evidence from the U.S.,”by Isil Erel. In The Art of the Loan in the 21stCentury: Producing, Pricing, and RegulatingCredit, 171-6. Proceedings of the Federal ReserveBank of Chicago’s 41st Annual Conference onBank Structure and Competition.

Michael Fleming “U.S. Treasury and Agency Securities,” withFrank J. Fabozzi. In Frank J. Fabozzi, ed.,Handbook of Fixed Income Securities, 7th ed.,229-50. New York: McGraw-Hill.

Michael Fleming and Kenneth Garbade“Anomalous Bidding in Short-Term TreasuryBill Auctions,” with Frank Keane. Journal ofFinancial Research 28, no. 2 (summer): 165-76.

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Antoine Martin “Recent Evolution of Large-Value PaymentSystems: Balancing Liquidity and Risk.” FederalReserve Bank of Kansas City Economic Review 90,no. 1 (first quarter): 33-57.

James McAndrews “Money Is Privacy,” with Charles M. Kahn andWilliam Roberds. International EconomicReview 46, no. 2 (May): 377-99.

Hamid Mehran “Regulatory Incentives and Consolidation:The Case of Commercial Bank Mergers and theCommunity Reinvestment Act,” with RaphaelBostic, Anna L. Paulson, and Marc Saidenberg.B.E. Journals in Economic Analysis and Policy 5,no. 1 (March): 1-27.

João Santos “Allocating Bank Regulatory Powers: Lender ofLast Resort, Deposit Insurance, and Supervision,”with Charles M. Kahn. European EconomicReview 49, no. 8 (November): 2107-36.

“Banking and Commerce: A Liquidity Approach,”with Joseph Haubrich. Journal of Banking andFinance 29, no. 2 (February): 271-94.

Asani Sarkar“An Empirical Analysis of Stock and BondMarket Liquidity,” with Tarun Chordia andAvanidhar Subrahmanyam. Review of FinancialStudies 18, no. 1 (spring): 85-129.

Til Schuermann“Capital Regulation for Position Risk in Banks,Securities Firms, and Insurance Companies,” withRichard Herring. In Hal S. Scott, ed., CapitalAdequacy beyond Basel: Banking, Securities, andInsurance, 15-86. Oxford: Oxford University Press.

“Deposit Insurance and Risk Management ofthe U.S. Banking System: What Is the LossDistribution Faced by the FDIC?” with AndrewKuritzkes and Scott M. Weiner. Journal ofFinancial Services Research 27, no. 3(September): 217-42.

“A Review of Recent Books on Credit Risk.”Journal of Applied Econometrics 20, no. 1(January-February): 123-30.

Zhenyu Wang “A Shrinkage Approach to Model Uncertaintyand Asset Allocation.” Review of FinancialStudies 18, no. 2 (summer): 673-705.

George Zanjani “Insurance, Self-Protection, and the Economicsof Terrorism,” with Darius Lakdawalla. Journalof Public Economics 89, no. 9-10 (September):1891-905.


Simon Potter “Forecasting Recessions Using the Yield Curve,”with Marcelle Chauvet. Journal of Forecasting 24,no. 2 (March): 77-103.

Robert Rich, Jason Bram, Andrew Haughwout,and James Orr“Using Regional Economic Indexes to ForecastTax Bases: Evidence from New York,” with RaeRosen and Rebecca Sela. Review of Economicsand Statistics 87, no. 4 (November): 627-34.

Forthcoming


Adam Ashcraft“New Evidence on the Lending Channel.”Journal of Money, Credit, and Banking.

Leonardo Bartolini“Cross-Country Differences in Monetary PolicyExecution and Money Market Rates’ Volatility,”with Alessandro Prati. European EconomicReview.

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Gauti EggertssonComment on “Macroeconomic Policy in theEuropean Monetary Union,” by Matthew B.Canzoneri, Robert E. Cumby, and Behzad T.Diba. In Richard Clarida, Jeffrey Frankel, andFrancesco Giavazzi, eds., International Seminaron Macroeconomics. NBER conference volume.Cambridge, Mass.: MIT Press.

“The Deflation Bias and Committing to BeingIrresponsible.” Journal of Money, Credit, andBanking.

“Optimal Monetary and Fiscal Policy in aLiquidity Trap,” with Michael Woodford. InRichard Clarida, Jeffrey Frankel, and FrancescoGiavazzi, eds., International Seminar onMacroeconomics. NBER conference volume.Cambridge, Mass.: MIT Press.

Stefano Eusepi “The Design of Monetary and Fiscal Policy:A Global Perspective,” with Jess Benhabib.Journal of Economic Theory.

Bart Hobijn“Inflation-Inequality in the United States,” withDavid Lagakos. Review of Income and Wealth.

Bart Hobijn and Andrea Tambalotti“Menu Costs at Work: Restaurant Prices and theIntroduction of the Euro,” with Federico Ravenna.Quarterly Journal of Economics.

James Kahn“Tariffs and the Great Depression Revisited,” withMario J. Crucini. In Timothy Kehoe, ed., GreatDepressions of the Twentieth Century. FederalReserve Bank of Minneapolis.

Amartya Lahiri“Recursive Preferences and Balanced Growth,”with Roger E. Farmer. Journal of EconomicTheory.

Antoine Martin“Suboptimality of the Friedman Rule inTownsend’s Turnpike and Limited CommunicationModels of Money: Do Finite Lives and InitialDates Matter?” with Joydeep Bhattacharya andJoseph H. Haslag. Journal of Economic Dynamicsand Control.

Jonathan McCarthy “Has the Response of Investment to FinancialMarket Signals Changed?” In Per GunnarBerglund and Leanne J. Ussher, eds., RecentDevelopments in Macroeconomics. EasternEconomic Association conference volume.Routledge.

“Pass-Through of Exchange Rates and ImportPrices to Domestic Inflation in Some IndustrializedEconomies.” Eastern Economic Journal.

James Orr and Giorgio Topa“Challenges Facing the New York MetropolitanArea Economy.” In Anthony E. Shorris, ed.,Beyond Post-9/11: A Colloquium on the Future ofthe Port Authority of New York and New Jersey.

Paolo Pesenti Comment on “A Bayesian Look at New OpenEconomy Macroeconomics,” by Thomas Lubikand Frank Schorfheide. In Mark Gertler andKenneth Rogoff, eds., NBER MacroeconomicsAnnual 2005. NBER conference volume.Cambridge, Mass.: MIT Press.

Charles Steindel “Owners’ Equivalent Rent and the Cost ofLiving.” Business Economics.

Kevin Stiroh“Potential Growth of the U.S. Economy: Will theProductivity Resurgence Continue?” with Dale W.Jorgenson and Mun S. Ho. Business Economics.

“Reassessing the Impact of IT in the ProductionFunction: A Meta-Analysis.” Annals ofEconomics and Statistics.

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Andrea Tambalotti “An Investigation of the Gains from Commitmentin Monetary Policy,” with Ernst Schaumburg.Journal of Monetary Economics.

International

Christian Broda “Endogenous Financial Dollarization,” withEduardo Levy Yeyati. Journal of Money, Credit,and Banking.

Review of Managing Currency Crises inEmerging Markets, edited by Michael Dooley andJeffrey Frankel. Journal of Economic Literature.

James Harrigan “Timeliness and Agglomeration,” with Anthony J.Venables. Journal of Urban Economics.

Antoine Martin “Endogenous Multiple Currencies.” Journal ofMoney, Credit, and Banking.

Paolo Pesenti“Smooth Landing or Crash? Model-BasedScenarios of Global Current AccountRebalancing,” with Hamid Faruqee, DouglasLaxton, and Dirk Muir. In Richard Clarida, ed.,G7 Current Account Sustainability. Chicago:University of Chicago Press.

Cédric Tille “On the Distributional Effects of Exchange RateFluctuations.” Journal of International Moneyand Finance.

Microeconomics

Erica Groshen“Real and Nominal Wage Rigidity: Analysisof Micro-Data from Thirteen Countries,” withWilliam Dickens, Steinar Holden, Julian Messina,Mark Schweitzer, Jarkko Turunen, and Melanie Ward-Warmedinger. Journal of Economic Perspectives.

Andrew Haughwout “Trade and Tax Policy: Lessons from AmericanRegions.” In Tax Policy. Proceedings of a Bankof Italy Public Finance Workshop.

Rebecca Hellerstein“Identification of Supply Models of Retailer andManufacturer Oligopoly Pricing,” with SofiaVillas-Boas. Economics Letters.

Jonathan McCarthy “Inventory Dynamics and Business Cycles: WhatHas Changed?” with Egon Zakrajšek. Journal ofMoney, Credit, and Banking.

Andrea Moro “Persistent Distortionary Policies with AsymmetricInformation,” with Matthew F. Mitchell.American Economic Review.

Ay egül ahin“Costs of Business Cycles for UnskilledWorkers,” with Toshihiko Mukoyama.Journal of Monetary Economics.

“Specialization and Human Capital in SearchEquilibrium,” with Toshihiko Mukoyama. Journalof the European Economic Association. Papers andProceedings of the 20th Annual Congress of theEuropean Economic Association.

Giorgio Topa“Dynamic Properties of Local Interaction Models,”with Timothy G. Conley. In Lawrence Blume, ed.,The Economy as an Evolving Complex System III.Santa Fe Institute Studies on the Science ofComplexity. New York: Oxford University Press.

SR GsSPgg gBanking and Finance

Adam Ashcraft“Borrowers’ Financial Constraints and theTransmission of Monetary Policy: Evidencefrom Financial Conglomerates,” with MurilloCampello. Journal of Monetary Economics.

Nicola CetorelliComment on “Inflation and Financial MarketPerformance: What Have We Learned in the LastTen Years?” by John Boyd and Bruce Champ.Journal of Money, Credit, and Banking.

“Finance as a Barrier to Entry: Bank Competitionand Industry Structure in Local U.S. Markets,”with Philip E. Strahan. Journal of Finance.

Astrid Dick“Market Size, Service Quality, and Competitionin Banking.” Journal of Money, Credit, and Banking.

“Nationwide Branching and Its Impact on MarketStructure, Quality, and Bank Performance.”Journal of Business.

Charles Himmelberg“Assessing High House Prices: Bubbles,Fundamentals, and Misperceptions,” withChristopher Mayer and Todd Sinai. Journalof Economic Perspectives.

Beverly Hirtle “Stock Market Reaction to Financial StatementCertification by Bank Holding Company CEOs.”Journal of Money, Credit, and Banking.

Antoine Martin “Currency Competition: A Partial Vindication ofHayek,” with Stacey Schreft. Journal of MonetaryEconomics.

“Liquidity Provision vs. Deposit Insurance:Preventing Bank Panics without Moral Hazard.”Economic Theory.

James McAndrews “To Surcharge or Not to Surcharge: An EmpiricalInvestigation of ATM Pricing,” with TimothyHannan, Elizabeth Kiser, and Robin Prager.Review of Economics and Statistics.

Hamid Mehran “Organizational Form, Taxes, Ownership, andCEO Compensation: Evidence from SmallBusinesses,” with Rebel Cole. Journal ofFinancial Economics.

Donald Morgan “Bank Integration and Business Volatility,” withBertrand Rime and Philip E. Strahan. QuarterlyJournal of Economics.

“The Credit Cycle and the Business Cycle:New Findings Using the Loan Officer OpinionSurvey,” with Cara Lown. Journal of Money,Credit, and Banking.

“Whether and Why Banks Are Opaque.”Proceedings of the Federal Reserve Bankof Chicago’s Annual Conference on BankStructure and Competition.

Joshua Rosenberg“The Impact of CEO Turnover on EquityVolatility,” with Matthew Clayton and JayHartzell. Journal of Business.

Joshua Rosenberg and Til Schuermann “A General Approach to Integrated RiskManagement with Skewed, Fat-Tailed Risks.”Journal of Financial Economics.

João Santos“American Keiretsu and Universal Banks:Investing, Voting, and Sitting on Nonfinancials’Corporate Boards,” with Adrienne Rumble.Journal of Financial Economics.

“Identifying the Effect of Managerial Controlon Firm Performance,” with Renée B. Adams.Journal of Accounting and Economics.

“Protecting Banks from Liquidity Shocks:The Role of Deposit Insurance and Lendingof Last Resort.” Journal of Economic Surveys.

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João Santos (continued)“Who Should Act as Lender of Last Resort?An Incomplete Contracts Model: Comment,”with Charles M. Kahn. Journal of Money,Credit, and Banking.

“Why Firm Access to the Bond Market Differsover the Business Cycle: A Theory and SomeEvidence.” Journal of Banking and Finance.

Asani Sarkar“Derivatives,” with Arkadev Chatterjea.In Kaushik Basu, ed., Oxford Companionto Economics in India. London: OxfordUniversity Press.

“Fifteen Minutes of Fame? The Market Impactof Internet Stock Picks,” with Peter Antunovich.Journal of Business.

Til Schuermann“Global Business Cycles and Credit Risk,” withM. Hashem Pesaran and Björn-Jakob Treutler. InMark Carey and René M. Stulz, eds., The Risks ofFinancial Institutions. NBER conference volume.Chicago: University of Chicago Press.

“How Do Banks Manage Liquidity Risk?Evidence from the Equity and Deposit Markets inthe Fall of 1998,” with Evan Gatev and Philip E.Strahan. In Mark Carey and René M. Stulz, eds.,The Risks of Financial Institutions. NBERconference volume. Chicago: University ofChicago Press.

“Macroeconomic Dynamics and Credit Risk:A Global Perspective,” with M. Hashem Pesaran,Björn-Jakob Treutler, and Scott M. Weiner.Journal of Money, Credit, and Banking.

Kevin Stiroh“The Darkside of Diversification: The Caseof U.S. Financial Holding Companies,” withAdrienne Rumble. Journal of Banking andFinance.

“A Portfolio View of Banking with Interest andNoninterest Assets.” Journal of Money, Credit,and Banking.

“Revenue Shifts and Performance of U.S. BankingCompanies.” In The Evolving Financial Systemand Public Policy. Proceedings of a Bank ofCanada conference.

Joseph Tracy“Using Home Maintenance and Repairs to SmoothVariable Earnings,” with Joseph Gyourko. Reviewof Economics and Statistics.

James Vickery“Weather Insurance in Semi-Arid India,” withXavier Gine, Helene Lilleor, and Robert Townsend.In Ullrich Hess, ed., Risk Management inDeveloping Countries.

Zhenyu Wang“Analysis of Large Cross Sections of SecurityReturns,” with Ravi Jagannathan and GeorgiosSkoulakis. In Yacine Ait-Sahalia and Lars Hansen,eds., Handbook of Financial Econometrics.Elsevier Science Ltd.

“Arbitrage Pricing Theory,” with Gur Huberman.In Lawrence Blume and Steven Durlauf, eds.,The New Palgrave Dictionary of Economics.London: Palgrave Macmillan.


Simon Potter“The Vector Floor and Ceiling Model,” with GaryKoop. In Costas Milas, Philip Rothman, and DickVan Dijk, eds., Nonlinear Time-Series Analysis ofBusiness Cycles. Contributions to EconomicAnalysis, no. 276. Elsevier.

Til Schuermann “Confidence Intervals for Probabilities ofDefault,” with Samuel Hanson. Journal ofBanking and Finance.

Giorgio Topa“Estimating Dynamic Local Interactions Models,”with Timothy G. Conley. Journal of Econometrics.

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