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1989 Working Papers

  • WP 89-18 | Altruism, Borrowing Constraints, and Social Security

    David Altig Steven Davis


    We show how intergenerational altruism and borrowing constraints shape the interest rate, savings, and welfare response to funded and unfunded social security programs. Borrowing constraints pin down the optimal timing of altruistic intergenerational transfers and thereby alter the implications of intergenerational altruism for fiscal policy. Regardless of whether parent-to-child altruistic transfer motives operate, borrowing constraints imply effects of social security programs that deviate greatly from the effects in Ricardian and traditional life-cycle environments. If, however, child-to-parent altruistic gift motives operate in at least some families, social security programs are neutral in their impact on the interest rate, though not necessarily in their impact on consumption. This interest-rate neutrality result holds regardless of whether borrowing constraints bind, . regardless of whether parent-to-child transfers operate, and regardless of whether exchange motives for intergenerational transfer are important. Read More

  • WP 89-17 | The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings

    David Altig Steven Davis


    We analyze the interest rate and savings effects of fiscal policy in an overlapping generations framework that accommodates two observations: (1) the interest rate on consumption loans exceeds the rate of return to household savings; and (2) private intergenerational transfers are widespread and primarily occur early in the life cycle of recipients. The wedge between borrowing and lending rates in our model arises from the asymmetric tax treatment of interest income and interest payments. Intergenerational transfers in our model are altruistically motivated. We prove the invariance of capital's steady-state marginal product to government expenditures, government debt, the labor income-tax schedules, and the tax rate on capital income when borrowing rates exceed lending rates and at least some families are altruistically connected. In contrast, under the same conditions we find that the tax treatment of interest payments has powerful effects on capital's marginal product. Read More

  • WP 89-16 | An Analysis of Bank Failures: 1984 To 1989

    James Thomson


    This paper models the regulatory decision to close a bank as a call option. A two-equation model of bank failure, which treats bank closings as regulatorily timed events, is constructed from the call option closure model and estimated for bank failures occurring from 1984 through 1989. The two-equation model is also compared with two single-equation models in terms of both in-sample and out-of-sample predictive accuracy. Read More

  • WP 89-15 | Regime Changes in Stock Returns

    Nan-Ting Chou Ramon DeGennaro


    This paper discriminates between three potential sources of instability in parameter estimates of stock return models. First, mean expected returns may vary with time. Second, return volatility may change. Third, observed returns may be affected by institutional factors as the trading mechanism evolves. To study this, we model stock returns as a stochastic function of a constant expected return and the financing costs resulting from an institutional feature, delayed delivery. We then use Goldfeld and Quandt's (1976) D-method of switching regression, deterministic switching based on time, to study the structural change in our model. We examine two eight-year sample periods and find that both contain a regime shift driven by an abrupt change in volatility. In addition, the switches occur during critical events affecting the economic environment: the first switch occurs during the turmoil of an international monetary crisis amid important Watergate developments, and the second is on the first trading day after the reappointment of Paul Volcker as chairman of the Federal Reserve Board. Read More

  • WP 89-14 | The Role of Banks in Influencing Regional Flows of Funds

    Katherine Samolyk


    A presentation of a theoretical model of regional banking using plausible information asymmetries to explain how local bank capital may affect the funding of regional investments, concluding that regional banking conditions can affect the efficiency of investment and the level of future aggregate output. Read More

  • WP 89-13 | Portfolio Risks and Bank Asset Choice

    Katherine Samolyk


    This paper investigates the effects of both credit risk and interest-rate risk on bank portfolio choices. It presents a model of banking that explains portfolio risks with informational asymmetries; depositors cannot observe the returns on bank loans and banks cannot observe depositors' liquidity needs. - Bank capital must cover possible losses due to loan default and high future deposit costs given the maturity imbalance of bank portfolios. We show how bank capital inadequacy may prevent a bank from investing in the optimal portfolio and how the efficiency of the bank's intermediation technology affects its choice of second-best portfolio. Read More

  • WP 89-12 | Enforcement of Pollution Regulations in a Declining Industry

    Mary Deily Wayne Gray


    A regulatory agency enforcing compliance in a declining industry might recognize that certain plants would close rather than comply, and that these closings would impose large costs on the local community. EPA enforcement activity in the U.S. steel industry is examined for evidence of this result. A three-equation system linking EPA enforcement decisions, company plant-closing decisions, and company compliance decisions is estimated. The results indicate that the EPA directed fewer enforcement actions toward plants with a high predicted probability of closing and plants that were major employers in their community; also, plants predicted to face relatively heavy enforcement were more likely to close. Read More

  • WP 89-11 | Factor-Adjustment Costs at the Industry Level

    Mary Deily Dennis Jansen


    Recent theoretical and econometric developments allow estimation of dynamic cost functions that include optimal adjustment of quasi-fixed factors. Such a cost function is estimated for the U.S. steel industry for the years 1954-1985 to investigate the cost of adjusting blue- and white-collar labor stocks, and to examine the importance of the specification of the adjustment-cost function. Read More

  • WP 89-10 | Structure, Conduct, and Performance in the Local Public Sector

    Randall Eberts Timothy Gronberg


    An examination of the relationship between the number of local governments within local labor markets and their expenditures, finding empirical support in both suburbs and central cities for the connection between the structure of the local public service market and its performance. Read More

  • WP 89-09 | Public Infrastructure and Regional Economic Development: A Simultaneous Equations Approach

    Kevin Duffy-Deno Randall Eberts


    An analysis of how central-bank exchange-market intervention can affect both the level of exchange rates and the risk premium in asset returns, showing how the risk premium is related to the conditional variances of intervention and other exogenous processes. Read More

  • WP 89-08 | Intervention and the Risk Premium in Foreign Exchange Rates

    William Osterberg


    The shift from a fixed-exchange-rate regime to a flexible regime, in which central-bank exchange-market intervention has been hlghly visible, has renewed interest in studying the effects of intervention. In separate work started by Engle (1982), new techniques have been developed to analyze risk premia in asset returns and particularly in exchange rates. We utilize a framework developed by Hodrick (1989) to show how central-bank intervention can affect both the level of exchange rates and the risk premium. We assume specific foms for preferences and for the stochastic processes of the exogenous variables and show how the risk premium is related to the conditional variances of intervention and the other exogenous processes. This approach differs from previous analyses of intervention by explicitly relating intervention to the risk premium. This lays the groundwork for future tests of the theory's implications for the intervention/risk premium relationship. Read More

  • WP 89-07 | The Structure of Supervision and Pay in Hospitals

    Erica Groshen Alan Krueger


    An examination of the intensity of supervision in the workplace and its effect on the pay of nonsupervisory employees through the use a wage survey of the hospital industry. Read More

  • WP 89-06 | Do Wage Differences Among Employers Last?

    Erica Groshen


    Recent interest in efficiency wage and insider/outsider models of wage determination has drawn attention to employer-based wage differences. Alternatively, these differences may simply reflect temporary, randm errors by wage-setters. This paper provides strong evidence against the possibility that employer wage variations are temporary or randm, along with additional verification of the existence of substantial employer wage differences within and between industries. Read More

  • WP 89-05 | Modeling Large Commercial-Bank Failures: A Simultaneous-Equation Analysis

    Asli Demirgüç-Kunt


    The development of a model of large-bank failures that studies insolvency and failure simultaneously and that recognizes economic, political, and bureaucratic constraints faced by regulators. Read More

  • WP 89-04 | Dedicated Taxes and Rent Capture by Public Employees

    Brian Cromwell


    A test of whether the enactment of a dedicated tax leads to higher payroll and wages for public employees, by means of survey results from the local mass-transit industry. Read More

  • WP 89-03 | Predicting De Novo Branch Entry into Rural Markets

    Gary Whalen


    An investigation of the probability of de novo branch entry into rural banking markets in Ohio and Pennsylvania to determine whether potential competition is an effective disciplinary force in bank-market expansion. Read More

  • WP 89-02 | A Two-Sector Implicit Contracting Model with Procyclical Quits and Involuntary Layoffs

    Charles T. Carlstrom


    An explanation of involuntary unemployment and procyclical quits based on models of implicit contracts and on-the-job search. Read More

  • WP 89-01 | The Effects of Disinflationary Policies on Monetary Velocity

    William Gavin William Dewald


    Is the recent decline in monetary velocity the result of deregulation or disinflation? Studies of this issue using recent U.S. data generally attribute the decline to deregulation. We examine the experience in the United States back to 1907 and the recent experience, the past 30 years, in a group of 39 countries. Our results show a systematic relation between unexpected changes in the money-income relationship and changes in the trends of inflation rates. Read More