Working Paper 8408 top
Holding Company Interest-Rate Sensitivity: before and after October 1979
by Gary Whalen
Since October 1979, market interest-rate movements have been frequent and large. Over the same time period, for a variety of reasons, competition has intensified in both bank loan and deposit markets. These developments have changed the benefits and costs of various types of asset/liability management strategies or alternatively a financial institution's level of interest-rate risk exposure. In this study, the rate-sensitivity postures of a sample of holding companies are examined over the 1977 to 1983 interval to determine whether and how asset/liability management strategies changed after October 1979. In general, the evidence suggests that holding companies reduced their exposure to rate risk in the immediate post-October 1979 period. However, this change does not appear to have been permanent. the data show a reversal of this pattern at a number of companies in 1982 and 1983.
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Working Paper 8407 top
Monetary Policy Regimes: A Synthesis of the Monetary Control and Rational Expectations Literatures
by James G. Hoehn
The monetary control literature has attempted to explore the effects of alternative policies without succeeding in incorporating rational expectations or in integrating analysis of the money supply sector into a complete macroeconomic framework. the rational expectations approach, while reserving a place for the monetary control issues under the concepts of instrument (Sargent and Wallace 1975), automatic stabilizers (McCallum and Whitaker 1979), and structural reforms (Dotsey and King 1983), has not provided the needed integration. Extending earlier work by Hoehn (1979, 1983b) and McCallum and Hoehn (1982, 1983), this paper attempts to provide a synthesis of the concepts from the rational expectations and monetary control literatures, in the context of a relatively complete, if ad hoc, macroeconomic model.
It is concluded that, under the most plausible assumptions concerning the availability and use of information of various types by private agents and the monetary authorities, the monetary regime--defined as the conjunction of the open-market strategy and the institutional and regulatory framework--does matter for the distribution of output, as well as of money, interest rates, and prices. On the other hand, the rational expectations approach raises a number of problems and ambiguities regarding policy effects that require further theoretical research. Some recent efforts along these lines are critically evaluated.
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Working Paper 8406 top
Monetary Policy and Real Interest Rates: New Evidence from the Money Stock Announcements
by William T. Gavin and Nicholas V. Karamouzis
This paper presents new evidence on how asset prices respond to new information about the money stock. It shows that the information content of money stock announcements and the response of asset prices to new information in the announcements vary with changes in the monetary policy regime, the Federal Reserve operating procedures, and the reserve accounting rules. While previous studies have examined how asset prices respond to the money stock announcements under the interest-rate targeting procedure and the nonborrowed reserve procedure, we have included new evidence from the borrowed reserve targeting procedure under both lagged and contemporaneous reserve accounting rules. Looking at how both forward exchange rates and other asset prices respond to the announcements, we distinguish between periods when the asset-price response reflected a change in the real interest rate and those when it reflected a change in the inflation premium. Finally, we show that the new contemporaneous reserve accounting rules have greatly reduced the information content of the money stock announcements.
PDF file 586K
Working Paper 8405 top
Velocity: A Multi Variate Time-Series Approach
by Michael L. Bagshaw and William T. Gavin
The Federal Reserve announces targets for the monetary aggregates that are implicitly conditioned on an assumption about future velocity for each of the monetary aggregates. In this paper we present explicit models of velocity for constructing rigorous tests to determine whether the behavior of velocity has changed from what was expected when the targets were chosen. We use time-series methods to develop alternative forecasts of velocity. Multivariate time-series models of velocity that include information about past interest rates produce significantly better out-of-sample forecasts than do univariate methods. Using this multivariate time-series framework, we analyze the Federal Reserve's decisions to change, miss, and switch targets from 1980:IQ to l984:IIQ. For this period, we find that when the Federal Reserve deviated from its announced target, velocity deviated significantly from its predicted value.
PDF file 568K
Working Paper 8404 top
Dollar Intervention and the Deutschemark-Dollar Exchange Rate: A Daily Time-Series Model
by Owen F. Humpage
This paper develops a simultaneous time-series model to investigate the daily interactions between official exchange-market intervention and movements in the deutschemark-dollar exchange rate, from November 2, 1978, to October 31, 1979. the model is constructed using both morning-opening and afternoon-closing exchange-rate quotes, Using these two quotes, and making assumptions about the timing of intervention relative to the exchange-rate quotes, enables us to measure the causal relationships among contemporaneous variables, the results suggest that, over the period investigated, the Federal Reserve responded to exchange-rate movements in a manner consistent with a leaning-against-the-wind strategy, but that this intervention tended to accentuate slightly movements in the rate. This result seems to support claims that traders recognized intervention and traded against it.
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Working Paper 8403 top
Forecasting Using Contemporaneous Correlations
by Michael L. Bagshaw
In this paper, we present a forecasting technique that uses contemporaneous correlations for forecasting in a time series model when only a subset of the variables are available for the current period. This method potentially provides more accurate forecasts than the standard time series forecasting method, which does not use contemporaneous data. This procedure is illustrated with an example of forecasting the gross national product (GNP), given current N-i in a trivariate autoregressive moving average time series model, Results indicate that during the more stable economic period of 1976:IQ through 1979:IVQ, this method indeed provides forecasts with smaller root mean square errors than the standard forecasts. However, the results during the more turbulent i980s are mixed. This latter result indicates that the relationship between the contemporaneous error terms from N-i and GNP changed during this period. However, the results for the period i983:IIQ through 1984:IIQ indicate that the relationship may have returned to pre-1980 form. the forecast errors during this latter period had smaller root mean square errors when the contemporaneous errors were used.
PDF file 379K
Working Paper 8402 top
A Regional Economic Forecasting Procedure Applied to Texas
by James G. Hoehn
The presentation of a method for building a time series regional forecasting model for Texas that requires only ordinary least squares regressions to forecast the variables.
PDF file 633K
Working Paper 8401 top
Economic Estimates of Urban Infrastructure Needs
by Paul Gary Wyckoff
This paper, critical of commonly employed measures of capital spending needs, offers an alternative method for constructing needs estimates and tests the model using highway spending data for 10 midwestern urban counties.
PDF file 509K
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