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1984 Working Papers

  • WP 84-08 | Holding Company Interest-Rate Sensitivity: Before and After October 1979

    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. Read More

  • WP 84-07 | Monetary Monetary Policy Regimes: A Synthesis of the Monetary Control and Rational Expectations Literatures

    James 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. Read More

  • WP 84-06 | Monetary Policy and Real Interest Rates: New Evidence from the Money Stock Announcements

    William Gavin Nicholas 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. Read More

  • WP 84-05 | Velocity: A Multivariate Time-Series Approach

    Michael Bagshaw William 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. Read More

  • WP 84-04 | Dollar Intervention and the Deutschemark-Dollar Exchange Rate: A Daily Time-Series Model

    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 deutsche mark-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. Read More

  • WP 84-03 | Forecasting Using Contemporaneous Correlations

    Michael 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. Read More

  • WP 84-02 | A Regional Economic Forecasting Procedure Applied to Texas

    James Hoehn


    A method for building a time series regional forecasting model is proposed and implemented for the state of Texas. The forecasting ability of this method is subjected to a number of diagnostic tests and is found to be useful. The method places little reliance on economic theory, is available to any regional economist with know1edge of ordinary 1east squares regression analysis, and provides insights into the regional economic process. This paper complements "Some Time Series Methods of Forecasting the Texas Economy," by Hoehn, Gruben, and Fomby, Working Paper No. 8402, Federal Reserve Bank of Dallas. Read More

  • WP 84-01 | Economic Estimates of Urban Infrastructure Needs

    Paul Wyckoff


    This paper criticizes commonly employed measures of capital-spending needs and offers an alternative method for constructing needs estimates. The usual technical estimate of needs compares an inventory of current conditions with some "ideal" level of capital stock, and is inadequate because of the arbitrary (and sometimes unrealistic) benchmarks that are employed in its construction. The a1ternative economic measure proposed here is based on a model of city spending decisions. Using these estimated parameters, this method provides a measure of the typical or average spending patterns of policymakers, and controls for the particular circumstances faced by each city. It is suggested that this standard for capital - spending needs wi11 be more re1evant to administrators and decision-makers who must reconcile capital-stock deterioration with tight budgets. Read More