research and market analysis group...volume 5 number 1 supervisory information and the frequency of...

& O T H E R R E S E A R C H

w w w . n y. f r b . o r g / r m a g h o m e

Publications

FEDERAL RESERVE BANK OF NEW YORKRESEARCH AND MARKET ANALYSIS GROUP

1999

1 Introduction

2 Economic Policy Review

5 Current Issues in Economicsand Finance

8 Research Update

9 Staff Reports

16 Outside Journals

FEDERAL RESERVE BANK OF NEW YORK

RESEARCH AND MARKET ANALYSIS GROUP

JANUARY 2000

CONTENTS

www.ny.f rb.org/r mag home 1

The Federal Reserve Bank of New York’s

Research and Market Analysis Group

produces a wide variety of publications

and discussion papers of interest to

business and banking professionals,

policymakers, academics, and the general

public. This catalogue lists recent issues

in each of our research series:

l the Economic Policy Review

our policy-oriented flagship

publication

l Current Issues in Economics

and Finance

a newsletter-style publication focusing

on economic, financial, and regional

topics

l Second District Highlights

a regional supplement to Current

Issues covering financial and

economic developments in the

Federal Reserve System’s Second

District

l Staff Reports

technical papers presenting research

findings.

Members of the Research Group also

publish papers in many economic and

finance journals, conference volumes,

and scholarly books. A list of these

publications begins on page 16.

We invite you to visit our web site, where

you can obtain the publications and

papers in our research series.

INTRODUCTION

2 Publication s & Othe r Research 1999

The Economic Policy Review is apolicy-oriented research journal thatfocuses on macroeconomic, banking,and financial market topics.

EPR articles are available atwww.ny.frb.org/rmaghome.

Volume 5

Number 1

Supervisory Information and the Frequencyof Bank ExaminationsBeverly J. Hirtle and Jose A. Lopez

Bank supervisors need timely and reliableinformation about the financial conditionand risk profile of banks. A key source of thisinformation is the on-site, full-scope bankexamination. This article evaluates thefrequency with which supervisors examinebanks by assessing the decay rate of the privatesupervisory information gathered duringexaminations. It suggests that this informationceases to provide a useful picture of a bank’scurrent condition after six to twelve quarters.The decay rate appears to be faster in yearswhen the banking industry experiences finan-cial difficulties, and it is significantly faster fortroubled banks than for healthy ones. Thus, theanalysis suggests that the annual examinationfrequency currently mandated by law isreasonable, particularly during times offinancial stress for the banking industry.

Macro Markets and Financial SecurityStefano Athanasoulis, Robert Shiller,and Eric van Wincoop

Uncertainty about national income growthposes significant macroeconomic risk tohouseholds all over the world. To help reduceinvestors’ exposure, researchers have pro-posed a controversial new set of securitymarkets called macro markets. These inter-national markets would trade long-termclaims on the income of an entire country orregion. For example, in a macro market forthe United States, an investor could buy aclaim on the U.S. national income and thenreceive dividends equal to a fraction ofnational income for as long as the claim isheld. Although many barriers stand in theway of the markets’ development—includinginvestors’ focus on short-term portfolio per-formance, sizable start-up costs, and contractenforcement difficulties—the potentialbenefits of these markets are great.

Exchange Rates and Profit Margins:The Case of Japanese ExportersThomas Klitgaard

When exchange rates shift, exporters mustdecide whether it is more important to main-tain profit margins or to maintain stableexport prices. This examination of Japaneseexporters finds that these firms have taken amiddle course: By altering their profit mar-gins to some degree, the exporters moderatethe exchange-rate-induced changes in pricesseen by their foreign customers. The analysisfinds that in the three major exporting indus-tries—industrial machinery, electricalmachinery, and transportation equipment—a10 percent rise in the yen leads firms to lower

EconomicPolicy Review


profit margins on exports by 4 percent rela-tive to the margins on their sales in Japan.That is, the exporters pass on more thanhalf of any change in the yen to the priceseen by their foreign customers and absorbthe remainder by adjusting profit marginson foreign sales.

Number 2

Recent Banking Sector Reforms in JapanHiroshi Nakaso

The author, chief manager of the financialsystem division of the Bank of Japan, discussesthe Bank’s recent efforts to maintain thestability of Japan’s financial system.

Legal Structure, Financial Structure, and theMonetary Policy Transmission MechanismStephen G. Cecchetti

Among the many challenges facing the newEurosystem—the European Central Bankand the central banks of the eleven membersof the European Monetary Union—is thepossibility that participating countries willrespond differently to interest rate changes.This paper provides evidence that differ-ences in financial structure are the proxi-mate cause for these national asymmetriesin monetary policy transmission and thatthese differences in financial structure are aresult of differences in legal structure. Theauthor concludes that unless legal structuresare harmonized across Europe, the financialstructures and monetary transmissionmechanisms of the European Union countrieswill remain diverse.

How Important Is the Stock Market Effecton Consumption?Sydney Ludvigson and Charles Steindel

Many argue that the astonishing growth inAmericans’ stock portfolios in the 1990s hasbeen a major force behind the growth of con-sumer spending. This article reviews the rela-tionship between stock market movementsand consumption. Using various econometrictechniques and specifications, the authorsfind that the propensity to consume out ofaggregate household wealth has exhibitedinstability over the postwar period. They alsoshow that the dynamic response of con-sumption growth to an unexpected change inwealth is extremely short-lived, implying thatforecasts of consumption growth one ormore quarters ahead are not typicallyimproved by accounting for changes in exist-ing wealth. Finally, the impact effect of awealth shock on consumption growth, whilestatistically positive, is found to be uncertain.Although recent market gains have providedsupport for consumer spending, the authors’findings are too limited to encourage relianceon estimates of the stock market effect inmacroeconomic forecasts.

Banks’ Payments-Driven RevenuesLawrence J. Radecki

Although many people believe that the pay-ments area is a fairly minor business functionwithin the banking sector, an increasingshare of banks’ revenue comes from fee ser-vices. To understand the full scope of thepayments area, the author develops a broaddefinition of this business line and builds anestimate of payments-related earningsusing recent data disclosed in bank holding


Number 2 (continued)company annual reports. Countering theview that payments contribute little to netrevenue, the author finds that the paymentsarea is one of the core activities of commer-cial banks. According to his estimates, pay-ments services generate between one-thirdand two-fifths of the combined operatingrevenue for the twenty-five largest bankholding companies in the United States.

Number 3

In May 1999, the Federal Reserve Bank ofNew York sponsored the conference“Unequal Incomes, Unequal Outcomes?Economic Inequality and Measures ofWell-Being.” This special issue is dedicatedto the conference proceedings.

Papers include:

Poverty, Children’s Health, and Health CareUtilizationBarbara L. Wolfe

Economic Inequality and Social Differentialsin MortalityArline T. Geronimus

Public Health and the Public AgendaKevin Thurm

Housing Outcomes: An Assessmentof Long-Term TrendsJames A. Orr and Richard W. Peach

A Look at Real Housing Prices and Incomes:Some Implications for Housing Affordabilityand QualityJoseph Gyourko and Joseph Tracy

The Changing Relationship between Incomeand Crime VictimizationSteven D. Levitt

Economic Inequality and the Provisionof SchoolingThomas A. Downes and David N. Figlio

From John Lindsay to Rudy Giuliani:The Decline of the Local Safety Net?Edward L. Glaeser and Matthew E. Kahn

Earnings Inequality and Central-CityDevelopmentEdwin S. Mills

Social Indicators and the Study of InequalityMarcia K. Meyers and Irwin Garfinkel


tronic billing and payment, including cus-tomer resistance to change, unequal access totechnology, and consumer privacy concerns.

No. 2Second District House Prices: Why So Weak inthe 1990s?Matthew Higgins, Carol Osler,and Anjali Sridhar

Between 1990 and 1997, poor economic fun-damentals and a prolonged hangover fromexcessively rapid price growth in the 1980scaused house prices in the New York metro-politan area to grow much more slowly thanprices nationwide. These factors played asmaller role in the decline of upstate NewYork’s house prices relative to the nation’s.Second District Highlights series

No. 3Meet the New BorrowersSandra E. Black and Donald P. Morgan

Credit card lenders have been writing off loansat sharply higher rates since 1995, suggestingthat riskier borrowers are acquiring creditcards. What makes the new borrowers riskier—even more than their personal characteristicsand attitudes toward debt—is the fact that theycarry higher debt burdens and work in occupa-tions where income may be more cyclical.

No. 4Mortgage Refinancing and the Concentrationof Mortgage CouponsPaul Bennett, Frank Keane,and Patricia C. Mosser

Because of the concentrated distribution ofinterest rates on outstanding mortgages,modest interest rate declines in 1997 and

Current Issuesin Economicsand Finance

Current Issues in Economics andFinance is a newsletter-stylepublication offering concise andtimely analyses of economic andfinancial topics.

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

Both series are available atwww.ny.frb.org/rmaghome.

Volume 5

No. 1Paying Electronic Bills ElectronicallyLawrence J. Radecki and John Wenninger

Electronic billing and payment systems areabout to change the way many householdspay their monthly bills. These systems arelikely to increase consumer convenience andreduce billers’ costs. Several factors, however,could slow down the widespread use of elec-


No. 4 (continued)

1998 made refinancing a smart choice for arecord number of homeowners. In addition,the strong economy and the age of mort-gage loans likely contributed to the surge inrefinancing activity.

No. 5Are Stocks Overtaking Real Estatein Household Portfolios?Joseph Tracy, Henry Schneider,and Sewin Chan

The rapid growth of the stock market since1990 has encouraged the view that corporateequity holdings are becoming the primaryasset for a broad spectrum of Americanhouseholds. A closer look at the evidence,however, reveals that real estate continues toeclipse stocks as a share of most households’portfolios.

No. 6Is Upstate New York Showing Signsof a Turnaround?Richard Deitz and Mike De Mott

Upstate New York may have shown signs of aturnaround in 1997 and 1998, but its eco-nomic performance is still well below that ofthe nation and New York State as a whole.Second District Highlights series

No. 7Mercosur: Implications for Growthin Member CountriesMichelle Connolly and Jenessa Gunther

The South American customs union knownas Mercosur has contributed significantly toregional trade liberalization. But by encour-aging trade within the group at the expenseof trade with nonmembers, Mercosur maylimit member countries’ access to high-technology imports, an important stimulusto growth.

No. 8The Future of Financial Intermediationand Regulation: An OverviewStephen G. Cecchetti

On March 11, 1999, Stephen G. Cecchetti,Executive Vice President and Director ofResearch at the Federal Reserve Bank of NewYork, delivered these remarks at the sympo-sium A New Equilibrium in the CreditBusiness: The Future of Financial Systems—Regulation in the Twenty-First Century, spon-sored by the Oliver Wyman Institute and theInstitut für Kreditwesen, Universität Münster.

No. 9The Impact of Reduced Inflation Estimateson Real Output and Productivity GrowthCharles Steindel

Despite posting their strongest sustained per-formance in many years, recent measures ofoutput and productivity growth have still fallenshort of their 1960-73 averages. Could data-measurement problems affecting the pricingof some services account for the inability ofthese widely tracked U.S. growth indexes tomatch their earlier rates?

No. 10Business-to-Business Electronic CommerceJohn Wenninger

To improve efficiency, some large retailers,suppliers, and distributors have begun toconduct business-to-business commerceelectronically. This practice could growrapidly if the Internet becomes the primarylow-cost network for such transactions.Before the Internet can fully supportbusiness-to-business commerce, however,companies must overcome severaltechnological and security obstacles.

No. 11Can New York City Bank on Wall Street?Jason Bram and James Orr

The securities industry is more importantthan ever to the New York City economy, anda protracted downturn in the industry’semployment could seriously hurt the over-all job picture. Increased stability in otherNew York City industries, however, couldhelp soften the economic effects of such adownturn.Second District Highlights series

No. 12Are Banks Still Important for FinancingLarge Businesses?Marc R. Saidenberg and Philip E. Strahan

As more corporations turn to the securitiesmarkets to meet their funding needs, the roleof banks as providers of credit to large busi-nesses seems increasingly uncertain. But alook at developments during the financialmarket turmoil last fall suggests that banksare still a critical source of liquidity at timesof economic stress.

No. 13A Decomposition of the Increased Stabilityof GDP GrowthMargaret M. McConnell, Patricia C. Mosser,and Gabriel Perez Quiros

Since 1984, the U.S. economy has grown at aremarkably steady pace. An analysis of thisincreased stability shows that every majorcomponent of GDP has exhibited smoothergrowth. However, two components—inven-tory investment and consumer spending—are responsible for the bulk of the decline inoverall volatility.

No. 14Two New Indexes Offer a Broad Viewof Economic Activity in the New York–New Jersey RegionJames Orr, Robert Rich, and Rae Rosen

The authors develop two coincident indexesthat provide a comprehensive measure ofeconomic activity in New Jersey, New YorkState, and New York City.Second District Highlights series

No. 15Credit Risk in Japan’s Corporate Bond MarketFrank Packer

From the fall of 1997 to the spring of 1999,yield spreads in Japan’s corporate bond mar-ket increased sharply. An analysis of thisrapid rise suggests that Japanese investors incorporate bonds may be paying closerattention to the credit risk of individualissuers. Such a shift in investor focus wouldrepresent a major change in the structure ofthis market.

No. 16Explaining the Recent Divergence in Payrolland Household Employment GrowthChinhui Juhn and Simon Potter

Each month, the government releases twoestimates of U.S. employment growth—one based on a survey of firms, the otheron a survey of households. Since 1994,these measures have diverged sharply.Evidence suggests that the household survey’sestimate has risen more slowly because itundercounts working-age adults who havefound employment during the currenteconomic expansion.



Research Update is a quarterlynewsletter designed to keep youinformed about the Research Group’scurrent work. The newsletter—whichcomplements this catalogue—offerssummaries of selected studies and alisting of recent articles and papers inour research series.

Research Update also reports on othernews within the Group, including:

l staff publication in outsidejournals,

l upcoming conferences at theFederal Reserve Bank ofNew York, and

l new publications and services.

You can obtain Research Update byvisiting www.ny.frb.org/rmaghome.

ResearchUpdate


The Staff Reports series featurestechnical research papers designedto stimulate discussion and elicitcomments. These papers areintended for eventual publicationin leading economic and financejournals.

The series is available only atwww.ny.frb.org/rmaghome.

Macroeconomics and Growth

No. 59Are Apparent Findings of Nonlinearity Dueto Structural Instability in EconomicTime Series?Gary Koop and Simon M. Potter

Many modeling issues and policy debates inmacroeconomics depend on whethermacroeconomic time series are best charac-terized as linear or nonlinear. This empiricalexercise using several macroeconomic timeseries shows that findings of threshold-typenonlinearities could be due to structuralinstability.

No. 61Nonlinear RiskMarcelle Chauvet and Simon M. Potter

The authors propose a flexible framework foranalyzing the joint time series properties ofthe level and volatility of expected excessstock returns. They find that a distinct busi-

ness cycle pattern exists in the conditionalexpectation and variance of the monthlyvalue-weighted excess returns.

No. 65Nonlinear Impulse Response FunctionsSimon M. Potter

The standard linear technique of impulseresponse function analysis is extended to thenonlinear case by defining a generalizedimpulse response function. Measures of per-sistence and asymmetry in response areconstructed for a wide class of time series.

No. 66Fluctuations in Confidence and AsymmetricBusiness CyclesSimon M. Potter

The asymmetries found in postwar U.S. out-put are inconsistent with the behavior of theU.S. economy during the Great Depression.This paper concludes that this asymmetrycan be attributed to a reduction in investorconfidence produced by misguided govern-ment intervention during the Depression,rather than to the success of postwarstabilization policy.

No. 71Structural Estimates of the U.S. SacrificeRatioStephen G. Cecchetti and Robert W. Rich

The authors investigate the statistical prop-erties of the U.S. sacrifice ratio—the cumulativeoutput loss arising from a permanentreduction in inflation. They derive estimatesof the sacrifice ratio from three structural

StaffReports

10 Publicat ion s & Othe r Research 1999

No. 71 (continued)

VAR models and then conduct Monte Carlosimulations to analyze their sampling distri-bution. The estimates are found to provide avery unreliable guide for assessing the outputcost of a disinflation policy.

No. 77Consumption, Aggregate Wealth,and Expected Stock ReturnsMartin Lettau and Sydney Ludvigson

This paper reviews the role of detrendedwealth in predicting stock returns. It findsthat trend deviations in wealth are strongpredictors of real stock returns and excessreturns over a Treasury bill rate.

No. 79Explaining Inequality the World Round:Cohort Size, Kuznets Curves, and OpennessMatthew Higgins and Jeffrey G. Williamson

The authors decompose the sources ofinequality among countries into three centralparts: the demographic or cohort size effect,the so-called Kuznets Curve or demandeffects, and the commitment to globalizationor policy effects. The analysis suggests thatcohort size is the most important force indetermining inequality.

No. 83What Was behind the M2 Breakdown?Cara S. Lown, Stavros Peristiani,and Kenneth J. Robinson

The authors contend that capital constraintson depository institutions largely explainthe unusual pattern of M2 growth in theearly 1990s. Their work suggests that M2may contain useful information abouteconomic growth during periods whendepository institutions experience nomajor disturbances.

No. 87Nonlinear Time Series Modeling:An IntroductionSimon M. Potter

This study reviews recent developments inthree major types of nonlinear models:Markov Switching, Threshold Autoregression,and Smooth Transition Autoregression. Inaddition to describing Classical and Bayesianestimation techniques, it reviews parametrictests for nonlinearity in each model.

No. 88Does Talk Matter after All? Inflation Targetingand Central Bank BehaviorKenneth N. Kuttner and Adam S. Posen

Interpretations of inflation targeting varywidely, from “inflation-only targeting,” with-out regard for output, to mere “cheap talk”without effect. The authors characterize fiveof these interpretations and use a simplemodel to derive their implications for thebehavior of inflation and interest rates. Innone of the three countries analyzed—theUnited Kingdom, Canada, and NewZealand—is there evidence that policy leadsto a single-minded pursuit of the inflationtarget. The experiences of the UnitedKingdom and Canada are more consistentwith a “trust-building” interpretation ofinflation targeting.

No. 92What Inventory Behavior Tells Usabout Business CyclesMark Bils and James A. Kahn

This paper finds that the countercyclicalbehavior of inventory-sales ratios in manu-facturing is explained by marginal productioncosts that are more procyclical than conven-tionally measured. It argues that cyclicalvariation in marginal cost arises from costlyfluctuations in factor utilization that areusually mistaken for productivity changes.

Allowing for this extra marginal cost variationmakes price-cost markups more counter-cyclical, which in turn explains the behaviorof inventory-sales ratios.

International

No. 58Competitive Devaluations: A Welfare-BasedApproachGiancarlo Corsetti, Paolo Pesenti,Nouriel Roubini, and Cédric Tille

A three-country center-periphery model isused to examine the mechanism by whichexchange rate shocks are transmitted acrosscountries. The authors provide a choice-theoretic framework for the policy analysisand empirical assessment of competitivedevaluations.

No. 63Exchange Rates and Local Labor MarketsLinda S. Goldberg and Joseph Tracy

This paper documents the consequencesof real exchange rate movements for theemployment, hours, and hourly earnings ofworkers in manufacturing industries acrossstates. The importance and size of thesedollar-induced effects are found to varyconsiderably across industries and to bemore pronounced in some U.S. regions.

No. 67The Role of Consumption Substitutabilityin the International Transmission of ShocksCédric Tille

An expansionary shock that would be bene-ficial in a closed economy can have anadverse “beggar-thyself” effect in the countrywhere it takes place or an adverse “beggar-thy-neighbor” effect on a neighboringcountry. Such effects depend significantlyon the degree of substitutability between

goods produced in different countries andthe exact nature of the shocks.

No. 70Determinants of Currency Risk PremiumsJohn A. Carlson and C. L. Osler

A theoretical model of exchange rate deter-mination suggests that forward premiums arenegatively related to rationally expectedfuture exchange rate changes. The authorsprovide new empirical evidence supportingthe results of their model.

No. 72The Nature and Growth of VerticalSpecialization in World TradeDavid Hummels, Jun Ishii, and Kei-Mu Yi

Vertical specialization—the use of importedinputs to produce goods that are exported—has become an increasingly important part ofworld trade. Estimates show that vertical spe-cialization has grown approximately 40 per-cent in the last twenty-five years; today, itaccounts for roughly 30 percent of worldexports.

No. 80Purchasing Power Parity: Three Stakesthrough the Heart of the Unit Root NullMatthew Higgins and Egon Zakrajšek

Using three new tests, the authors find over-whelming evidence in favor of real exchangerate stationarity during the post–BrettonWoods era among developed economies andamong a larger group of “open” economies.

No. 81International Trade and Factor Mobility:An Empirical InvestigationLinda S. Goldberg and Michael W. Klein

Does foreign direct investment serve as acomplement to or a substitute for trade? Thisinvestigation shows that U.S. foreign direct


No. 81 (continued)

investment in Latin America has led to bothincreases and decreases in trade among coun-tries and across manufacturing industries.

No. 91Borders and Business CyclesTodd E. Clark and Eric van Wincoop

The authors document that the businesscycles of U.S. census regions are substantiallymore synchronized than those of EuropeanUnion countries. They find that the lowerlevel of trade between European countries—and to a lesser extent the higher degree ofspecialization—can explain most of the dif-ference. The lower level of monetary and fis-cal policy coordination among Europeancountries, however, does not play a role.

No. 94Can World Real Interest Rates ExplainBusiness Cycles in a Small Open Economy?William Blankenau, M. Ayhan Kose,and Kei-Mu Yi

This study reexamines the importance ofworld real interest rate shocks in a smallopen economy using an approach thatreverses the standard international real busi-ness cycle methodology. The study beginswith a standard model and then backs outthe interest rate shocks and other exogenousshocks that are consistent with the model’sobservable endogenous variables. Variancedecompositions are then used to examineeach shock’s importance. By applying thismethodology to Canada, the study finds thatworld real interest rate shocks can explain upto one-third of the fluctuations in output andmore than one-half of the fluctuations in netexports and net foreign assets.

Microeconomics

No. 64U.S. Wages in General Equilibrium:The Effects of Prices, Technology,and Factor Supplies, 1963-1991James Harrigan and Rita A. Balaban

Why has wage inequality in the United Statesincreased in the past two decades? By esti-mating the general equilibrium relationshipbetween prices, factor supplies, and wagesand technology, this paper finds that bothrelative factor supply and relative pricechanges play an important role in explainingthe growing gap in wages between high-skilled and low-skilled workers.

No. 74Importing Equality? The Effects of IncreasedCompetition on the Gender Wage GapSandra E. Black and Elizabeth Brainerd

How does increased product market competi-tion affect the ability of firms to discriminate?This study finds that increased competitionresulting from globalization has forced compa-nies to reduce costly discrimination againstwomen.

No. 75Sunk Costs, Contestability, and the LatentContract MarketChris Stefanadis

The idea that an industry with sunk costsmay be contestable even in the absence oflong-term contracts has received little atten-tion in formal economic theory yet remainspopular among monopolists facing antitrustsuits. The author employs an infinitelyrepeated game to illustrate the argumentformally.


Banking and Finance

No. 60Do Investors Mistake a Good Companyfor a Good Investment?Peter Antunovich and David S. Laster

If investors confused a firm’s quality with itsinvestment attractiveness, would shares ofwell-run companies be bid up too high andsubsequently earn negative abnormalreturns? The opposite is found to be true:The magnitude of the abnormal returns foradmired firms and the returns’ persistenceover five years suggest that these firms arenot overpriced.

No. 62Banks’ Payments-Driven RevenuesLawrence J. Radecki

The amount of fee income earned by thebanking sector suggests that the significanceof payments services has been greatlyunderstated. According to this study, pay-ments services account for one-third to two-fifths of the combined operating revenues ofthe largest banks—a finding that establishesthese services as a core activity ofcommercial banks.

No. 68Looking beyond the CEO: ExecutiveCompensation at BanksRebecca S. Demsetz and Marc R. Saidenberg

The literature on executive compensation atbanks has generally assumed that a singleelasticity can adequately describe the sensi-tivity of executive pay to performance. Theauthors challenge this assumption and findthat the structure of compensation, and tosome extent the sensitivity of pay to perfor-mance, vary across firms of different sizesand across executives with differentresponsibilities.

No. 69Bank Loan Sales: A New Look at theMotivations for Secondary Market ActivityRebecca S. Demsetz

This paper clarifies the benefits of an activesecondary market that allows banks totransfer loans from their own books to thebooks of other institutions. In addition, itoffers predictions about the future of thissecondary market in a world of rapid con-solidation and disappearing barriers togeographical expansion.

No. 73Liquidity in U.S. Fixed Income Markets:A Comparison of the Bid-Ask Spread inCorporate, Government, and MunicipalBond MarketsSugato Chakravarty and Asani Sarkar

Using newly available transactions data, theauthors examine the determinants of therealized bid-ask spread in the U.S. corporate,municipal, and government bond markets forthe years 1995-97. They find that liquidity isan important determinant of the realizedbid-ask spread in all three markets.

No. 76The Term Structure of Announcement EffectsMichael J. Fleming and Eli M. Remolona

How do U.S. Treasury yields of differentmaturities respond to macroeconomicannouncements? The announcements arefound to evoke the sharpest reactions fromthe intermediate-term maturities. Differenttypes of announcements are also foundto generate different patterns ofannouncement effects.


No. 78Are There “Bank Effects” in Borrowers’ Costsof Funds? Evidence from a Matched Sampleof Borrowers and BanksR. Glenn Hubbard, Kenneth N. Kuttner,and Darius N. Palia

The authors use a large, matched sample ofindividual loans, borrowers, and banks tomeasure the effects of banks’ financial condi-tions on loan interest rates while controllingfor firm characteristics. They find that the costof borrowing from low-capital banks tends tobe higher than the cost of borrowing fromwell-capitalized banks, and that the differenceis more pronounced for smaller firms.

No. 82Heat Waves, Meteor Showers, and TradingVolume: An Analysis of Volatility Spilloversin the U.S. Treasury MarketMichael J. Fleming and Jose A. Lopez

The authors examine the U.S. Treasury secu-rities market for volatility spillovers acrossthe three main trading centers of Tokyo,London, and New York. They find thatvolatility spills over into Tokyo and Londonfrom New York but not into New York fromTokyo or London. In addition, lagged tradingvolume is found to affect volatility signifi-cantly in the London and Tokyo markets.

No. 84A General Equilibrium Analysisof Check FloatJames McAndrews and William Roberds

This analysis of check “float”—the time lagbetween the receipt and clearing of a check—supports the view that float is a significantfactor behind the continued popularity ofcheck payment. The analysis confirms recentdata indicating that the average value of floatper check is small.

No. 85Payment Intermediation and the Originsof BankingJames McAndrews and William Roberds

Like banks today, the medieval banks of con-tinental Europe facilitated trade by serving aspayment intermediaries. The authors showthat early banks—by standing between thebuyer and seller on a centralized basis—could enforce future contracts and effec-tively internalize the offsetting nature of aneconomy’s universe of trades.

No. 86Settlement Risk under Grossand Net SettlementCharles M. Kahn, James McAndrews,and William Roberds

By modeling how the trading economygenerates demand for payments services,the authors discover advantages of netsettlement that have not been widelyexplored. In particular, net settlementsystems avert certain gridlock situations andcan economize on collateral requirementsand minimize trading delays.

No. 89Assessing the Impact of Short-SaleConstraints on the Gains fromInternational DiversificationZhenyu Wang, Asani Sarkar, and Kai Li

This paper examines the impact of short-saleconstraints on the magnitude of the interna-tional diversification benefit for U.S. investorsover the 1976-98 period. The diversificationbenefit is measured as the increase in expectedreturns when switching from a U.S. equityindex portfolio to an international portfoliowith equal variance. Although short-saleconstraints reduce the diversification benefitoverall, the paper finds that the reduction inemerging markets is relatively small.


No. 90Borrower Risk and the Price and NonpriceTerms of Bank LoansPhilip E. Strahan

The author shows that both the price andnonprice terms of bank loans reflect borrowerrisk. Riskier borrowers pay more for loans. Inaddition, small loans, secured loans, andloans with relatively short maturities carryhigher interest rates than other loans, sug-gesting that banks use price and nonpriceterms as complements when dealing withborrower risk. To validate this interpretation,the author also shows that observably riskierfirms face tighter nonprice terms in theirloan contracts.

No. 93Resurrecting the (C)CAPM: A Cross-SectionalTest When Risk Premia Are Time-VaryingMartin Lettau and Sydney Ludvigson

The CAPM and the consumption CAPM(referred to jointly as the (C)CAPM)—twotheoretically based asset-pricing models—are widely considered to be empirical fail-ures. Nevertheless, unlike many other stud-ies’ empirical tests of the (C)CAPM, the testsin this paper specify the pricing kernel as aconditional linear factor model, as would beexpected if risk premia varied over time. As aresult, this paper demonstrates that suchconditional linear factor models can explaina substantial fraction of the cross-sectionalvariation in portfolio returns and that themodels perform about as well as the three-factor Fama-French model on portfoliossorted by size and book-to-market ratios.

No. 95Bond Market Discipline of Banks:Is the Market Tough Enough?Donald P. Morgan and Kevin J. Stiroh

The authors investigate the disciplinary roleof the bond market by using bond spreads,ratings, and bank portfolio data on morethan 4,100 new bonds issued between 1993and 1998—including almost 600 issued bybanks and bank holding companies. Theyfind that the bond market prices observablemeasures of risk, such as bond ratings, thesame way for banks and nonbanks, suggest-ing that public measures of bank risk arepriced efficiently. Investors also look beyondbond ratings, with the spreads on bank issuesdepending on the underlying portfolio ofloans and other assets. However, the authorsfind signs of slippage in the disciplinarymechanism, as the bond market appearsrelatively soft on bigger banks and less trans-parent banks that it considers either too largeto fail or too difficult to understand.



These publications are availablefrom the authors. Please e-mailrequests to them [email protected].

Paul Bennett

“Portfolio Theory and Bank Lending:Avoiding Concentrations of Credit Riskthrough Strategic Diversification.” Journalof Lending and Credit Risk Management 81,no. 11: 64-7.

“Rational Bias in Macroeconomic Forecasts,”with David Laster and In Sun Geoum.Quarterly Journal of Economics 114, no. 1(February): 293-318.

Paul Bennett, Richard Peach,and Stavros Peristiani

“Implied Mortgage Refinancing Thresholds.”Real Estate Economics, forthcoming.

Sandra Black

“Do Better Schools Matter? ParentalValuation of Elementary Education.”Quarterly Journal of Economics 114, no. 2(May): 577-600.

“Investigating the Link between Competitionand Discrimination.” Monthly Labor Review,December.

Richard Deitz

“Income Variability, Uncertainty, andHousing Tenure Choice,” with John Robst andKim Marie McGoldrick. Regional Science andUrban Economics 29, no. 2 (March): 219-29.

Arturo Estrella

“Rethinking the Role of NAIRU in MonetaryPolicy: Implications of Model Formulationand Uncertainty,” with Frederic S. Mishkin.In John B. Taylor, ed., Monetary Policy Rules.Chicago: NBER conference volume. Chicago:University of Chicago Press.

Michael Fleming

“Price Formation and Liquidity in the U.S.Treasury Market: The Response to PublicInformation,” with Eli M. Remolona. Journalof Finance 54, no. 5 (October): 1901-15.

“U.S. Treasury and Agency Securities,” withFrank J. Fabozzi. In Frank J. Fabozzi, ed., TheHandbook of Fixed Income Securities. 6th ed.New York: McGraw-Hill, forthcoming.

“What Moves Bond Prices?” with Eli M.Remolona. Journal of Portfolio Management25, no. 4: 28-38.

Linda Goldberg

“Investment, Pass-Through, and ExchangeRates: A Cross-Country Comparison,” withJosé Campa. International Economic Review40, no. 2 (May): 287-314.

OutsideJournals

Linda Goldberg and Joseph Tracy

“Exchange Rates and Employment Instability:Evidence from Matched CPS Data,” withStephanie Aaronson. American EconomicReview 89, no. 2 (May): 204-10. Papers andProceedings of the 111th Annual Meeting ofthe American Economic Association.

“Exchange Rates and Local Labor Markets.”In Robert Feenstra, ed., Trade and Wages.Chicago: NBER and University of ChicagoPress, forthcoming. [NBER Working Paperno. 6985, February 1999]

James Harrigan

“Estimation of Cross-Country Differences inIndustry Production Functions.” Journal ofInternational Economics 47, no. 2 (April):267-93.

Andrew Haughwout

“New Estimates of the Impact of EDA PublicWorks Program Investments.” EconomicDevelopment Quarterly 13, no. 4 (November):371-82.

“Regional Fiscal Cooperation in MetropolitanAreas: An Exploration.” Journal of PolicyAnalysis and Management 18, no. 4 (fall):579-600.

“State Infrastructure and the Geography ofEmployment.” Growth and Change 30 (fall):549-66.

James Kahn

“The Design of Bank Loan Contracts,” withGary Gorton. Review of Financial Studies,forthcoming.

“What Inventory Behavior Tells Us aboutBusiness Cycles,” with Mark Bils. AmericanEconomic Review, forthcoming.

Kenneth Kuttner and Cara Lown

“Government Debt, the Composition of BankPortfolios, and the Transmission of MonetaryPolicy.” In K. Alec Chrystal, ed., GovernmentDebt Structure and Monetary Conditions.London: Bank of England.

Martin Lettau

“Can Habit Formation Be Reconciled withBusiness Cycle Facts?” with Harald Uhlig.Review of Economic Dynamics, forthcoming.

“Cross-Variable Restrictions in EulerEquations and Risk Premia.” AppliedEconomics Letters, forthcoming.

“Rules of Thumb versus DynamicProgramming,” with Harald Uhlig. AmericanEconomic Review 89, no. 1 (March): 148-74.

Cara Lown

“The Information in the High-Yield BondSpread for the Business Cycle: Evidence andSome Implications,” with Mark Gertler. OxfordReview of Economic Policy, forthcoming.

Sydney Ludvigson

“Consumption and Credit: A Model of Time-Varying Credit Constraints.” Review ofEconomics and Statistics 81, no. 3: 434-47.

Jim Mahoney

“The Performance of Investment Newsletters,”with Jeffrey F. Jaffe. Journal of FinancialEconomics 53, no. 2 (August): 289-307.


Jamie McAndrews

“Arrangements for Access to PaymentCredit.” Journal of Money, Credit, andBanking 31, no. 3 (Part 2): 671-3.

Comment on “Demandable Debt as a Meansof Payment: Checks versus Banknotes.”Journal of Money, Credit, and Banking 31,no. 3 (Part 2): 526-8.

“E-Money and Payment System Risk.”Contemporary Economic Policy 17, no. 3:348-57.

“General Equilibrium Analysis of CheckFloat,” with William Roberds. Journal ofFinancial Intermediation, December.

“Opening the ‘Black Box’ of NetworkExternalities in Network Adoption,” withRobert Kauffman and Yu-Ming Wang.Information Systems Research, forthcoming.

Hamid Mehran

“CEO Ownership, Leasing, and DebtFinancing,” with Robert Taggart andDavid Yermack. Financial ManagementJournal 28: 5-14.

Don Morgan

“Capital Market Frictions and DepositConstraints at Banks,” with Jith Jayaratne.Journal of Money, Credit, and Banking,forthcoming.

Carol Osler

“Methodical Madness: Technical Analysis andthe Irrationality of Exchange-Rate Forecasts,”with P. H. Kevin Chang. Economic Journal109, no. 458 (October): 636-61.

“Rational Speculators and Exchange RateVolatility,” with John A. Carlson. EuropeanEconomic Review, forthcoming.

Frank Packer

“Credit Ratings and Spreads in the SamuraiBond Market.” In Masahiko Aoki and GarySaxonhouse, eds., Finance, Governance, andCompetition in Japan. Oxford: OxfordUniversity Press, forthcoming.

“The Disposal of Bad Loans in Japan: TheCase of the CCPC.” In Takeo Hoshi andHugh Patrick, eds., Crisis and Change in theJapanese Financial System. Norwell, Mass.:Kluwer Academic Publishers, forthcoming.

Sangkyun Park

“Effects of the Affiliation of Banking andCommerce on the Firm’s Investment and theBank’s Risk.” Journal of Banking and Finance,forthcoming.

“Effects of Risk-Based Capital Requirementsand Asymmetric Information on Banks’Portfolio Decisions.” Journal of RegulatoryEconomics 16, no. 2 (September): 135-50.

“What Does the PE Ratio Mean?” Journal ofInvesting, forthcoming.

Sangkyun Park and Anthony Rodrigues

“Is Aggregate Consumer BorrowingConsistent with the Permanent IncomeHypothesis?” Manchester School, forthcoming.


Paolo Pesenti

“The Asian Crisis: An Overview of theEmpirical Evidence and Policy Debate,” withGiancarlo Corsetti and Nouriel Roubini. InPierre Richard Agenor, Marcus Miller, DavidVines, and Axel Weber, eds., The AsianFinancial Crisis: Causes, Contagion, andConsequences, 127-66. Cambridge:Cambridge University Press.

“Could the Ins Hurt the Outs? A WelfareAnalysis of International Fiscal Links,” withGiancarlo Corsetti. In Andrew HughesHallett, Michael M. Hutchison, and Svend E.Hougaard Jensen, eds., Fiscal Aspects ofEuropean Monetary Integration, 320-33.Cambridge: Cambridge University Press.

“Paper Tigers? A Model of the Asian Crisis,”with Giancarlo Corsetti and Nouriel Roubini.European Economic Review 43, no. 7 (June):1211-36.

“Stability, Asymmetry, and Discontinuity: TheLaunch of European Monetary Union,” withGiancarlo Corsetti. Brookings Papers onEconomic Activity, forthcoming.

“What Caused the Asian Currency andFinancial Crisis?” with Giancarlo Corsetti andNouriel Roubini. Japan and the WorldEconomy 11, no. 3 (October): 305-73.

Paolo Pesenti and Cédric Tille

“Competitive Devaluations: Toward a Welfare-Based Approach,” with Giancarlo Corsetti andNouriel Roubini. Journal of InternationalEconomics, forthcoming. [NBER WorkingPaper no. 6889, January 1999]

Simon Potter

“Bayes Factors and Nonlinearity: Evidencefrom Economic Time Series,” with Gary Koop.Journal of Econometrics 88, no. 1 (February):251-81.

“Coincident and Leading Indicators of theStock Market,” with Marcelle Chauvet.Journal of Empirical Finance, forthcoming.

“Dynamic Asymmetries in U.S. Unemploy-ment,” with Gary Koop. Journal of Businessand Economic Statistics 17, no. 3: 298-312.

“Nonlinearity, Structural Breaks, or Outliersin Economic Time Series?” with Gary Koop.In William Barnett et al., eds., Nonlinearityand Econometrics. Cambridge: CambridgeUniversity Press.

“Nonlinear Time Series Modelling: AnIntroduction.” Journal of Economic Surveys13, no. 5: 505-28.

Lawrence Radecki

“Competition in Shifting Product andGeographic Markets.” Antitrust Bulletin,forthcoming.

Marc Saidenberg

“Diversification, Organization, andEfficiency: Evidence from Bank HoldingCompanies,” with Peter G. Klein. In Patrick T.Harker and Stavros A. Zenios, eds.,Performance of Financial Institutions.Cambridge: Cambridge University Press,forthcoming.

“Evaluating Credit Risk Models,” with Jose A.Lopez. Journal of Banking and Finance,forthcoming.


Asani Sarkar

“The Effect of Dual Trading on Market Depthin the S&P 500 Futures Market,” withHun Park. Research in Finance 17.

“Market Liquidity and Trader Welfare inMultiple Dealer Markets: Evidence from DualTrading Restrictions,” with Peter Locke andLifan Wu. Journal of Financial andQuantitative Analysis 34, no. 1: 57-88.

Kevin Stiroh

“Information Technology and Growth,” withDale W. Jorgenson. American EconomicReview 89, no. 2 (May): 109-15. Papers andProceedings of the 111th Annual Meeting ofthe American Economic Association.

“Is There a New Economy?” Challenge 42,no. 4 (July-August): 82-101.

“Measuring Input Substitution in Thrifts:Morishima, Allen-Uzawa, and Cross-PriceElasticities.” Journal of Economics andBusiness 51, no. 2 (March-April): 145-57.

Philip Strahan

“The Consolidation of the Financial ServicesIndustry: Causes, Consequences, andImplications for the Future,” with Allen N.Berger and Rebecca S. Demsetz. Journal ofBanking and Finance 23, nos. 2-4: 135-94.

“Financial Consolidation: Implications forSmall Financial Institutions and TheirCustomers,” with Allen N. Berger andRebecca S. Demsetz. Filene ResearchInstitute and Center for Credit UnionResearch monograph, forthcoming.

“The Small Business Lending Relationship.”In Jackson L. Blanton, Alicia Williams, andSherrie L. W. Rhine, eds., Business Access toCapital and Credit, 515-23. Proceedings of aFederal Reserve System Research Conference,March 8-9, 1999.

“What Drives Deregulation? Economics andPolitics of the Relaxation of Bank BranchingRestrictions,” with Randall S. Kroszner.Quarterly Journal of Economics 114, no. 4:1437-67.

“What Will Technology Do to FinancialStructure?” with Frederic S. Mishkin. InRobert E. Litan and Anthony M. Santomero,eds., Brookings-Wharton Papers on FinancialServices, 249-87. Washington, D.C.: BrookingsInstitution.

Cédric Tille

“Le chômage en Suisse: Analyse de la décen-nie écoulée et examen de la récente embel-lie” (Unemployment in Switzerland: Analysisof the past decade with a focus on the recentimprovement). Analyses et Prévisions. CréaInstitute, University of Lausanne, fall.

“Exchange Rate Pass-Through and theWelfare Effect of the Euro,” with MichaelDevereux and Charles Engel. NBER WorkingPaper no. 7382, October.

“The Role of Consumption Substitutability inthe International Transmission of Shocks.”Journal of International Economics,forthcoming.


Joseph Tracy

“The Effect of Collective BargainingLegislation on Strikes and Wages,” with PeterCramton and Morley Gunderson. Review ofEconomics and Statistics 81, no. 3: 475-87.

“Impacts of Strike Replacement Bans inCanada,” with Peter Cramton and MorleyGunderson. Labor Law Journal 50: 173-9.

“Quality of Life and EnvironmentalComparisons,” with Joseph Gyourko andMatthew Kahn. In Paul Cheshire and EdwinMills, eds., Applied Urban Economics, 1413-54. Vol. 3 of Handbook of Regional and UrbanEconomics. Amsterdam: North-Holland.

Eric van Wincoop

“Capital Flows to Emerging Markets:Liberalization, Overshooting, and Volatility,”with Philippe Bacchetta. In SebastianEdwards, ed., Capital Flows to EmergingMarkets. NBER conference volume,forthcoming.

“Do Borders Matter? Evidence from JapaneseRegional Net Capital Flows.” InternationalEconomic Review, forthcoming.

“Growth Uncertainty and Risksharing,” withStefano Athanasoulis. Journal of MonetaryEconomics, forthcoming.

“How Big Are Potential Gains from Inter-national Risksharing?” Journal of InternationalEconomics 47, no. 1 (February): 109-35.

“Intranational versus International Saving-Investment Comovements.” In Greg Hess andEric van Wincoop, eds., IntranationalMacroeconomics. Cambridge: CambridgeUniversity Press, forthcoming.

“A Method for Solving Multi-Region Models.”Economics Letters, forthcoming.

“Trade in Nominal Assets and NetInternational Capital Flows,” with PhilippeBacchetta. Journal of International Moneyand Finance, forthcoming.

Kei-Mu Yi

“Can World Real Interest Rates ExplainBusiness Cycles in a Small Open Economy?”with William Blankenau and M. Ayhan Kose.Journal of Economic Dynamics and Control,forthcoming.


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