2001 Quarter 1 | Vol. 37, No. 1
Sharing with a Risk-Neutral Agent
by Joseph G. Haubrich
In the standard solution to the principal agent problem, a risk-neutral agent bears all the risk.The author shows that, in fact,multiple solutions exist,and often the risk-neutral agent is not the sole bearer of risk.As risk aversion approaches zero, the unique risk-averse solution converges to the risk-neutral solution,wherein the agent bears the least amount of risk. Even a small degree of risk aversion can result in agents bearing significantly less risk than the standard solution suggests.
PDF file 117K
Monetary Policy and Self-Fulfilling
Expectations: The Danger of Forecasts
by Charles T. Carlstrom and Timothy S. Fuerst
What rule should a central bank interested in inflation stability follow? Because monetary policy tends to work with lags, it is attempting to use inflation forecasts to generate policy advice.This article, however, suggests that the use of forecasts to drive policy is potentially destabilizing.The problem with forecast-based policy is that the economy becomes vulnerable to what economists term "sunspot" fluctuations. These welfare-reducing fluctuations can be avoided by using a policy that puts greater weight on past, realized inflation rates rather than forecasted, future rates.
PDF file 140K
2001 Quarter 2 | Vol. 37, No. 2top
Unitary Thrifts: A Performance Analysis
by James B. Thomson
Title IV of the Gramm-Leach-Bliley Act of 1999 closed the unitary thrift holding company loophole, which allowed a limited commingling of banking and commerce. This paper examines whether eliminating this loophole was beneficial by empirically comparing the performance of thrifts in unitary thrift holding companies (UTHCs) with other thrifts and UTHCs owned by nondepository institutions with those owned by banks. Important differences between these two types of thrifts are found. UTHC thrifts tend to outperform the other thrifts during the sample period studied and appear to be less risky possibly because the UTHC thrifts appear to have more diversified revenue streams, loan and asset portfolios, and funding sources than do other thrifts. No evidence is found to suggest that limited commingling of banking and commerce, in the form of the UTHC loophole, poses undue risks to the federal financial safety net.
PDF file 117K
The Sources and Nature of Long-Term Memory
in Aggregate Output
by Joseph G. Haubrich and Andrew W. Lo
This paper examines the stochastic properties of aggregate macroeconomic time series from the standpoint of fractionally integrated models and focuses on the persistence of economic shocks. We develop a simple macroeconomic model that exhibits long-range dependence, a consequence of aggregation in the presence of real business cycles. To implement these results empirically, we employ a test for fractionally integrated time series based on the Hurst-Mandelbrot rescaled range. This test is robust to short-range dependence and is applied to quarterly and annual real GDP to determine the sources and nature of long-range dependence in the business cycle.
PDF file 169K
2001 Quarter 3 | Vol. 37, No. 3top
Theories of Bank Loan Commitments
by O. Emre Ergungor
A loan commitment is an agreement by which a bank promises to lend to a customer at prespecified terms while retaining the right to renege on its promise if the borrowers creditworthiness deteriorates. The contract also specifies the various fees that must be paid over the life of the commitment. Loan commitments are widely used in the economy. Parallel to their widespread use, a rich literature has evolved to explain why they exist, how they are priced, and how they affect the risk of the bank and the deposit insurer. This article summarizes what we have learned on these issues. Its main insight is that loan commitments are an optimal tool for risk sharing and for resolving informational problems. The author also points out some issues that the current literature leaves unexplained..
PDF file 111K
A Simple Model of Money and Banking
by David Andolfatto and Ed Nosal
This article presents a simple environment that has banks creating and lending out money. The authors define money to be any object that circulates widely as a means of payment and a bank to be an agency that simultaneously issues money and monitors investments. While their framework allows private nonbank liabilities to serve as the economys medium of exchange, they demonstrate that the cost-minimizing structure has a bank creating liquid funds. In practice, the vast bulk of the money supply consists of private debt instruments issued by banks. Thus, their model goes some way in addressing the questions of why private money takes the form it does, and why private money is typically supplied by banks.
PDF file 94K
2001 Quarter 4 | Vol. 37, No. 4*top
Estimates of Scale and Cost
Efficiency for Federal Reserve Currency Operations
by James Bohn, Diana Hancock, and Paul Bauer
Meeting the currency demands of depository institutions, businesses, and consumers costs the Federal Reserve more than half a billion dollars each year, yet, very little research has been devoted to understanding what factors affect such costs. The authors estimate a cost function in order to obtain estimates of scale and cost efficiency for this service. They find that as in other paper-based technologies, such as checks, scale economies are achieved at a relatively low level of output, implying that currency services are not a natural monopoly. They also provide estimates of facility-specific marginal costs and returns to scale measures that could be used to improve resource allocations. Lastly, they find that the average processing facility operates at more 80 percent of the efficiency of the "best practice" facility, comparable to cost efficiency estimates that have been reported elsewhere for private-sector financial institutions.
PDF file 266K
Monetary Policy and Asset Prices with Imperfect
by Charles T. Carlstrom and Timothy S. Fuerst
The Modigliani-Miller theorem is fundamental to the theory of corporate finance. One of the theorem's immediate implications is that there is no reason for the monetary authority to respond to asset prices. This article posits a world in which the Modigliani-Miller theorem does not hold. The authors assume that the amount of an entrepreneur's external financing is limited by the amount of collateral she holds. They examine the implications for the monetary authority in such an environment.
PDF file 216K
The Employment of Nations A Primer
by Richard Rogerson
This paper examines low-frequency movements in employment in a cross section of industrialized countries for the period 1960-95, using both aggregate and disaggregated data. It documents nine stylized facts about cross-country variations in employment.
PDF file 243K
*This is the last issue of Economic Review published.
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