Working Paper 9219 top
Cross-Lender Variation In Home Mortgage Lending
by Robert B. Avery, Patricia E. Beeson, and Mark S. Sniderman
A lender-specific analysis of differences in minority and low-income mortgage loan originations using new applicant-level data gathered under the Home Mortgage Disclosure Act of 1975.
PDF file 1,945K
Working Paper 9218 top
The Determinants Of Airport Hub Locations, Service, And Competition
by Neil Bania, Paul W. Bauer, and Thomas J. Zlatoper
Although the airline industry has been studied extensively since passage of the Airline Deregulation Act of 1978, relatively little effort has gone into examining how hub location affects the level of service and degree of competition found at airports in the system. To help close this gap, we investigate the geographic distribution of airline hub operations, the level of service, and the extent of competition at 112 major U.S. airports, extending previous work by Bauer (1987) and Butler and Huston (1989). Our key innovation is that we derive our measures of service and competition from indicator matrices that describe each airline's route system.
PDF file 1,245K
Working Paper 9217 top
Commitment As Irreversible Investment
by Joseph G. Haubrich and Joseph A. Ritter
Considering time inconsistency as a problem of irreversible investment brings some neglected points to the fore. Making a policy choice in real time and under current conditions emphasizes the importance of the timing of commitment, the regret over past decisions, and the option value of not committing. This paper applies these concepts to monetary policy, banking regulation, and capital taxation.
PDF file 995K
Working Paper 9216 top
U.S. Air Passenger Service: A Taxonomy Of Route Networks, Hub Locations, And Competition
by Neil Bania, Paul W. Bauer, and Thomas J. Zlatoper
In this paper, we analyze the service provided by the 13 largest U.S. passenger airlines to the 100 most populous U.S. metropolitan areas in 1989. We classify the route systems by their nature and geographical extent using a variety of measures based on route-level data. We then identify individual airline hub locations and derive and calculate several measures of the extent of competition both on individual routes and at the airports in our sample. The results show the wide diversity of route networks that existed in the airline industry in 1989--a phenomenon that may help to explain the failure of several major carriers since then.
PDF file 1,205K
Working Paper 9215 top
Do Hostile Takeovers Reduce Extramarginal Wage Payments?
by Jagadeesh Gokhale, Erica L. Groshen, and David Neumark
Hostile takeovers may have significant implications for long-term employment contracts if they facilitate the opportunistic expropriation of extramarginal wage payments. We test the expropriation hypothesis by studying the relationship between proxies for extramarginal wage payments and subsequent hostile takeover activity. This paper improves on existing research by using firm- and establishment-level data from a salary survey of employers. In addition, we observe characteristics of wage and employment structures both before and after the occurrence of a hostile takeover and hence can see whether the data are consistent with reductions in extramarginal wage payments following such takeovers. Results from this ex post experiment provide evidence consistent with the hypothesis that hostile takeovers result in reductions of extramarginal wage payments to more-tenured workers, mostly through cutbacks in senior positions at firms with relatively steep wage profiles.
PDF file 1,295K
Working Paper 9214 top
On Markovian Representations Of The Term Structure
by Peter Ritchken and L. Sankarasubramanian
The linkages between term structures separated by finite time periods can be complex. Indeed, in general, the dynamics of the term structure could depend on the entire set of information revealed since the earlier date. This path dependence, which causes difficulties in pricing interest rate claims, is usually eliminated by making specific assumptions on investment behavior or on the evolution of interest rates. In contrast, this article identifies the class of volatility structures that permits the path dependence to be captured by a single sufficient statistic. An equilibrium framework is provided where beliefs and technologies are restricted so that the resulting term structures have volatilities that belong to the restricted class. The models themselves can be characterized by a parsimonious set of parameters and can be initialized to an observed term structure without the introduction of ad-hoc time-varying parameters. Furthermore, since the dynamics of the resulting term structures are two-state Markovian, simple pricing mechanisms can be developed for interest rate claims.
PDF file 1,075K
Working Paper 9213 top
Relative Price Movements In Dynamic General Equilibrium Models Of International Trade
by David K. Backus, Patrick J. Kehoe, and Finn E. Kydland
We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models.
PDF file 1,530K
Working Paper 9212 top
The Efficiency And Welfare Effects Of Tax Reform: Are Fewer Tax Brackets Better Than More?
by David Altig and Charles T. Carlstrom
Using the well-known dynamic fiscal policy framework pioneered by Auerbach and Kotlikoff, we examine the efficiency and welfare implications of shifting from a linear marginal tax rate structure to a discrete rate structure characterized by two regions of flat tax rates of 15 and 28 percent. For a wide range of parameter values, we find that there is no sequence of lump-sum transfers that the (model) government can feasibly implement to make the shift from the linear to the discrete structure Pareto-improving. We conclude that the worldwide trend toward replacing rate structures having many small steps between tax rates with structures characterized by just a few large jumps is not easily accounted for by efficiency arguments. In the process of our analysis, we introduce a simple algorithm for solving dynamic fiscal policy models that include "kinks" in individual budget surfaces due to discrete tax codes. In addition to providing a relatively straightforward way of extending Auerbach-Kotlikoff-type models to this class of problems, our approach has the side benefit of facilitating the interpretation of our results.
PDF file 1,400K
Working Paper 9211 top
Dynamics Of The Trade Balance And The Terms Of Trade: The S-Curve
by David K. Backus, Patrick J. Kehoe, and Finn E. Kydland
We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document these same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that the general equilibrium perspective is essential: The relation between the trade balance and the terms of trade depends critically on the source of fluctuations.
PDF file 1,390K
Working Paper 9210 top
Debt, Collateral, And U.S. Manufacturing Investment: 1954-1980
by William P. Osterberg
I perform an empirical analysis of Euler equations for the firm's choices of capital, labor, hours, and debt. Financial structure has real effects , since taxes favor debt. However, the cost of debt increases with the debt-to-collateral ratio, and capital is part of collateral. The data, for U.S. manufacturing investment from 1954 to 1980, show that the debt-to-collateral ratio moves opposite to the direction suggested by tax rates. However, excluding the Euler equation for debt implies the correct sign for the relation between investment and the debt-to-collateral ratio. I also find structural instability in the Euler equations for debt and capital.
PDF file 1,700K
Working Paper 9209 top
Capital Forbearance And Thrifts: An Ex Post Examination Of Regulatory Gambling
by Ramon P. DeGennaro and James B. Thomson
This paper estimates the losses embedded in the capital positions of the 996 FSLIC-insured savings and loan institutions that did not meet capital standards at the end of the 1970s. We compare the estimated cost of resolving the insolvencies of these institutions at the end of the 1970s with the actual failure-resolution costs for those that were closed by July 3 1, 1992, and the projected resolution costs for the remaining thrifts that are likely to be closed. Our results show that even when one considers only the direct costs associated with delayed closure of economically failed thrifts, these costs significantly exceed reasonable estimates of the cost of prompt failure resolution.
PDF file 1,615K
Working Paper 9208 top
Generational Accounting: The Case Of Italy
by Daniele Franco, Jagadeesh Gokhale, Luigi Guiso, Laurence J. Kotlikoff, and Nicola Sartor
An examination of the generational imbalance in current Italian fiscal policy, showing that unless dramatic steps are taken soon, future generations' net tax bill will be four or more times the amount that today's newborns are slated to pay.
PDF file 1,865K
Working Paper 9207 top
New Results On The Impact Of Central-Bank Intervention On Deviations From Uncovered Interest Parity
by Owen F. Humpage and William P. Osterberg
Germany, Japan, and the United States continue to view foreign exchange intervention as an effective instrument, although the mechanism through which it operates is unclear. In this paper, we use official data on daily dollar intervention to examine its impact on exchange-rate risk premia through both the portfolio-balance and expectations channels. We define the risk premium in terms of deviation from uncovered interest parity and model its behavior using generalized autoregressive conditional heteroscedasticity. Our evidence of portfolio-balance and expectations effects is inconsistent across subperiods of different exchange-rate-policy regimes. Also, unlike Dominguez (1990) and Loopesko (1984), we find no evidence that coordination of intervention improves its efficacy.
PDF file 1,135K
Working Paper 9206 top
Social Security And Medicare Policy From The Perspective Of Generational Accounting
by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff
An application of the generational accounting method of fiscal policy analysis to projected spending paths for Social Security and Medicare suggesting that, under realistic assumptions for these programs, future generations as well as current young Americans could bear a significantly larger share of the burden of government spending than previously thought.
PDF file 940K
Working Paper 9205 top
The Gold Standard As A Rule
by Michael D. Bordo and Finn E. Kydland
In this paper, we show that the monetary rule followed by a number of key countries before 1914 represented a commitment technology preventing the monetary authorities from changing planned future policy. The experiences of these major countries suggest that the gold standard was intended as a contingent rule. By that, we mean that the authorities could temporarily abandon the fixed price of gold during a wartime emergency on the understanding that convertibility at the original price of gold would be restored when the emergency passed.
PDF file 2,250K
Working Paper 9204 top
Bank Performance and Regional Economic Growth: Evidence of a Regional Credit Channel
by Katherine A. Samolyk
This paper examines the relationship between bank performance and economic growth at the state level. We develop a regional credit view to explain how, due to information costs, regional banking conditions can influence local economic activity by affecting a region's ability to fund local investments. The model suggests that local banking-sector problems may constrain economic activity in financially distressed regions, whereas no such link need be evident in financially sound regions. We test the empirical relevance of this credit view for the 1983-1990 period using state-level data and find evidence of a regional financial channel to output. Specifically, local banking-sector conditions explain more of real personal income growth in states whose share of nonperforming loans is above the national share.
PDF file 1,015K
Working Paper 9203 top
Post-Louvre Intervention: Did Target Zones Stabilize The Dollar?
by Richard T. Baillie and Owen F. Humpage
An investigation of whether the G-3 nations (Germany, Japan, and the U.S.) successfully maintained target zones following the G-7's February 1987 Louvre meeting. Using daily, official intervention data and simultaneous-equation techniques, the authors determine that the G-3 reacted in a manner consistent with maintaining target zones, but find scant evidence that the intervention successfully influenced subsequent exchange-rate movements.
PDF file 1,655K
Working Paper 9202 top
Wagner's Hypothesis: A Local Perspective
by Randall W. Eberts and Timothy J. Gronberg
Wagner's hypothesis of an expanding public sector as an economy develops is tested using pooled time-series cross-sectional data for U.S. states from 1964 to 1986. Comparing government size among fiscal jurisdictions within a single nation reduces the problems of data comparability and of controlling for cultural and institutional differences that plague the more common international tests of this theory. Our results are inconsistent with Wagner's hypothesis, yielding a negative relationship between public-sector size and output. However, some empirical support is found in the protective services and public welfare components of government activity.
PDF file 1,040K
Working Paper 9201 top
Binomial Approximation In Financial Models: Computational Simplicity And Convergence
by Anlong Li
An exploration of the potential of transformation and other schemes in approximating diffusions (including those with boundaries) commonly seen in financial models. Convergence results are established for valuing both European and American contingent claims.
PDF file 1,485K
1991 1992 1993
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