1993 Quarter 1 | Vol. 29, No. 1
Generational Accounts and Lifetime
Tax Rates, 1900-1991
by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff
Unlike the federal budget, which typically measures receipts and expenditures for one year at a time, generational accounts and lifetime tax rates focus on long-term intergenerational wealth redistribution. The accounts show that future generations can expect to pay, on average, more than twice as much to the government as current (1991) newborns if living generations continue to be treated as they are under current policy. Lifetime tax rates on successive generations have increased from 22 percent for Americans born in 1900 to about 34 percent for those born in 1991. Under the baseline economic assumptions presented here, future generations are slated to see that figure rise to more than 70 percent on average.
PDF file 750K
Has the Long-Run Velocity of
M2 Shifted? Evidence from the P* Model
by Jeffrey J. Hallman and Richard G. Anderson
The P-Star (P*) model forecasts inflation by exploiting the stability of M2 velocity and the tendency of the real economy to operate near its potential. While originally offered as a link between inflation and money growth, inverting the model provides a test of one of its primary assumptions: the constancy of M2's long-run velocity, or V-Star (V*). If V* has increased during the last three years, predictions of inflation from the original P* model should be inferior to predictions from a model that incorporates the new, higher V*. In fact, the deceleration of inflation through 1992:IIIQ was quite close to the original model's prediction, and simulations of the model under a variety of hypotheses regarding changes in V* provide relatively little support for a dramatic shift in that measure.
PDF file 540K
Examining the Microfoundations
of Market Incentives for Asset-Backed Lending
by Charles T. Carlstrom and Katherine A. Samolyk
Many view the proliferation of securitization as a response to competitive or regulatory pressures. But to what extent would assetbacked lending occur in a less regulated environment? This paper addresses the extent to which models of credit intermediation have been able to formalize some of the market-based forces driving this phenomenon. The authors examine four papers that model some of the dimensions of asset-backed markets. An underlying theme is that under certain conditions, the very information costs that make financial markets important as conduits of credit can also create nonregulatory incentives for asset-backed lending as an efficient funding mode.
PDF file 590K
1993 Quarter 2 | Vol. 29, No. 2top
Temporarily suspending indexation of the personal income-tax code is often suggested as a means for raising federal revenues. Here, the authors argue that this method of taxation is inefficient in that it is inferior to direct increases in marginal tax rates. They conclude that attempts to use bracket creep in future deficit-reduction efforts should be viewed with appropriate skepticism.
PDF file 425K
Cyclical Movements of the Labor
Input and Its Implicit Real Wage
by Finn E. Kydland and Edward C. Prescott
The standard measure of the labor input in aggregate production is the sum of employment hours over all individuals. The validity of this measure for cyclical purposes requires that the composition of the work force by skill and ability remain approximately unchanged over the cycle. Here, the authors investigate the accuracy of aggregate hours as a cyclical measure of the labor force and find that it is much more cyclically volatile than the labor input. Using data for almost 5,000 men and women in the Panel Study of Income Dynamics, they conclude that the labor input's real wage is strongly procyclical, but that average compensation per hour is not.
PDF file 450K
Money and Interest Rates under
a Reserves Operating Target
by Robert B. Avery and Myron L. Kwast
This study examines the short-run dynamic relationships between nonborrowed reserves, the federal funds rate, and transaction accounts using daily data from 1979 through 1982. Separate models are estimated for each day of the week, and simulation experiments are performed. The results suggest that the funds rate responded quite rapidly to a change in nonborrowed reserves, but that the short-run nonborrowed reserves multiplier for transaction accounts was only about 18 percent of its theoretical maximum. In addition, the Federal Reserve appeared to accommodate about 65 percent of a permanent shock to money, and lagged reserve requirements seemed to delay depository institutions' response to a money shock.
PDF file 520K
1993 Quarter 3 | Vol. 29, No. 3top
Capital Requirements and Shifts
in Commercial Bank Portfolios
by Joseph G. Haubrich and Paul Wachtel
Since 1989, U.S. commercial banks have shifted their portfolios away from commercial loans toward government securities. Using data for individual banks, the authors document this shift and test for whether it can be attributed to the imposition of risk-based capital requirements. Their results indicate that these requirements may indeed account for part of the portfolio shift.
PDF file 620K
FDICIA's Emergency Liquidity
by Walker F. Todd
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) made a potentially significant change in the standards for Federal Reserve discount window access by nonbanks. In exploring the background of this issue, the author contends that although most of the legislation retrenched the federal financial safety net for undercapitalized insured depository institutions, the provision effectively expanded the safety net for uninsured nonbanks, irrespective of their capital or net worth positions.
PDF file 430K
Efficiency and Technical Progress
in Check Processing
by Paul W. Bauer
Cost functions can provide valuable insights into the efficiency and technological constraints faced by firms. Using panel data for 47 Federal Reserve offices from 1983:IQ to 1990:IVQ, the author examines the cost of providing check-processing services by estimating a multiproduct cost function using an econometric frontier approach. The article demonstrates how the Federal Reserve's unit cost measures of performance can be decomposed into separate effects related to differences in cost efficiency, output mix, input prices, and environmental variables to provide a much richer understanding of the sources of relative office performance. Estimates of technical progress are also presented.
PDF file 615K
1993 Quarter 4 | Vol. 29, No. 4top
Required Clearing Balances
by E.J. Stevens
More than 20 percent of the funds that banks have on deposit with the Federal Reserve Banks are required clearing balances, not required reserve balances. Since 1981, when they first earned a market return, clearing balances have become widespread among banks of all sizes. Here, the author takes a look at the reasons for the popularity of this relatively new phenomenon as well as its impact on the setting and measuring of monetary policy.
PDF file 650K
The Consumer Price Index as
a Measure of Inflation
by Michael F. Bryan and Stephen G. Cecchetti
One problem associated with using the Consumer Price Index as a focal point in monetary policy deliberations is the likelihood that it is a biased measure of inflation. The authors use a simple statistical framework in this paper to estimate a price index that is immune to some of these weighting biases. By computing the common inflation element in a broad cross-section of consumer price changes, they find evidence of a positive weighting bias between 1967 and 1981, and an insignificant bias in the years since then.
PDF file 455K
The Inaccuracy of Newspaper
Reports of U.S. Foreign Exchange Intervention
by William P. Osterberg and Rebecca Wetmore Humes
This paper presents a comparison of official data on U.S. foreign exchange intervention with newspaper reports. The authors find that the series are systematically different, which calls into question the ability of intervention to signal monetary policy accurately. Alternatively, this divergence may reflect the fact that not all market participants have equally accurate information about exchange market intervention.
PDF file 420K
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