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1991 Working Papers

  • WP 91-22 | A Different Kind of Money Illusion: The Case of Long and Variable Lags


    Michael Bryan William Gavin

    Abstract

    An analysis of how the money supply process can affect the cross-covariance structure of inflation and monetary growth, showing that the Federal Reserve's change in emphasis to monetary targeting in late 1979 could have made the apparently long lag from money growth to inflation virtually disappear in the 1980s. Read More

  • WP 91-21 | Rising Inequality In A Salary Survey: Another Piece Of The Puzzle


    Erica Groshen

    Abstract

    Studies of wage inequality based solely on the Bureau of Labor Statistics' Current Population Survey have concluded that the recent rising trend has made family income less equally distributed. To investigate the sources of rising wage variance, this paper examines data from a private salary survey conducted for a panel of firms and occupations in Cleveland, Cincinnati, and Pittsburgh over a 33-year period. These data allow examination, for the first time, of the role of occupational distinctions and employer compensation practices in the recent rise in wage inequality. Read More

  • WP 91-20 | A Dynamic Analysis Of Recent Changes In The Rate Of Part-Time Employment


    Donald Williams

    Abstract

    The part-time employment rate has declined since the early 1980s, especially among females. This paper examines the decline over the 1980-1990 period, with a focus on the gender differential, using gross change data from the Bureau of Labor Statistics. Monthly transition rates between full-time employment, part-time employment, unemployment, and nonparticipation are estimated according to sex. Trend and cyclical analysis of the transition rates is conducted to identify the sources of part-time employment-rate trends and to explore gender differentials in them. The results suggest that the decline in the rate of parttime employment among females is not so much because unemployed females are more likely to move into full-time employment, but rather because females have become more likely to move from parttime to full-time employment and, most important, because they have become less likely to leave full-time employment once they get there. Read More

  • WP 91-19 | Estimating A Firm's Age-Productivity Profile Using The Present Value Of Workers' Earnings


    Laurence Kotlikoff Jagadeesh Gokhale

    Abstract

    In hiring new workers, risk-neutral employers equate the present expected value of each worker's compensation to the present expected value of his/her productivity, Data detailing how present expected compensation varies with the age of hire embed, therefore, information about how productivity varies with age. This paper infers age-productivity profiles using data on the present expected value of earnings of new hires of a Fortune 1000 firm. For each of the five occupation/sex groups considered, productivity falls with age, with productivity exceeding earnings for young workers and vice versa for older workers. Read More

  • WP 91-18 | Risk Aversion, Performance Pay, and the Principal-Agent Problem


    Joseph G. Haubrich

    Abstract

    This paper calculates numerical solutions to the principal-agent problem and compares the results to the stylized facts of CEO compensation. The numerical predictions come from parameterizing the models of Grossman and Hart and of Holmstrom and Milgrom. While the correct incentives for a CEO can greatly enhance a firm's performance, providing such incentives need not be expensive. For many parameter values, CEO compensation need only increase by about $10 for every $1,000 of additional shareholder value; for some values, the amount is 0.003 cents. The paper thus answers two challenges posed by Jensen: that principal-agent theory does not yield quantitative predictions, and that CEO compensation is insufficiently sensitive to firm performance. Read More

  • WP 91-17 | Inefficiency and Productivity Growth in Banking: A Comparison of Stochastic Econometric and Thick Frontier Methods


    Paul Bauer Allen Berger David Humphrey

    Abstract

    A comparison of alternative methods for estimating inefficiency and productivity growth in banking, showing that inefficiencies are sufficiently large to dominate scale economies and that measured technological progress has been small, or even negative, as a result of institutional events that occurred during 1977-88. Read More

  • WP 91-16 | The Sources and Nature of Long-Term Memory in the Business Cycle


    Joseph G. Haubrich Andrew Lo

    Abstract

    This paper examines the stochastic properties of aggregate macroeconomic time series from the standpoint of fractionally integrated models, focusing 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. We then derive the relation between properties of fractionally integrated macroeconomic time series and those of microeconomic data and discuss how fiscal policy may alter the stochastic behavior of the former. To implement these results empirically, we employ a test for fractionally integrated time series based on the Hurst-Mandelbrot rescaled range. This test, which is robust to short-term dependence, is applied to quarterly and annual real GNP to determine the sources and nature of long-term dependence in the business cycle. Read More

  • WP 91-15 | On the Econometrics of World Business Cycles


    Finn Kydland

    Abstract

    Over the past 10 or 15 years, academic interest in business cycles has recovered to a level not matched perhaps since the 1930s. In his editorial statement in the first issue of Econometric8 in 1933, Ragnar Frisch not only introduced a new word, econometrics, which he defined as quantitative economic theory, but also listed business cycle theory among four fields of particular interest to econometricians. This inclusion reflected the views not only of Frisch, but also of Hayek (1931). Tinbergen (1935), and others. This interest waned, however, in the 1950s and 1960s. A major factor leading to its reawakening was the paper by Robert Lucas (1977) on "Understanding Business Cycles." Perhaps this course of events was not surprising. A prerequisite for making much progress in this field was dynamic general equilibrium theory. By the 1970s, the basic theory had been developed, and neoclassical growth theory evolved as the dominant framework for business cycle analysis. Read More

  • WP 91-14 | Local Banking Markets and Firm Location


    Paul Bauer Brian Cromwell

    Abstract

    A study of the effects of bank structure and profitability on the births of new firms, arguing that local credit markets potentially affect firm location decisions. Read More

  • WP 91-13 | Zero Inflation: Transition Costs and Shoe-Leather Benefits


    Charles T. Carlstrom William Gavin

    Abstract

    A comparison showing that the transition costs of indexing inflation (a major obstacle to monetary policy reform) are approximately equal to the minor shoe-leather benefits of having price stability. Read More

  • WP 91-12 | Troubled Savings and Loan Institutions: Voluntary Restructuring Under Insolvency


    Ramon DeGennaro Larry Lang James Thomson

    Abstract

    Regulatory agencies are unwilling or unable to close thrift institutions immediately upon insolvency. Instead, they have progressively reduced the thrift capital requirement, refrained from enforcing that requirement, and allowed thrifts to hold more nonmortgage loans in the hope that the industry would recover. According to this study, only 13 percent of the largest 300 firms eventually recovered between the end of 1979 and the end of 1989. When the thrift crisis surfaced in the early 1980s, the firms that ultimately recovered operated in a fashion similar to those that eventually failed. But in the mid-1980s, recovered thrifts pursued a risk-minimizing strategy, while nonrecovered thrifts pursued a risky, high-growth strategy. We find no evidence that managers of unsuccessful firms consumed more perquisites than their successful counterparts. Read More

  • WP 91-11 | Optimal Bank Portfolio Choice Under Fixed-Rate Deposit Insurance


    Anlong Li

    Abstract

    This paper analyzes the optimal investment decisions of insured banks under fixed-rate deposit insurance. In the presence of charter value, trade-offs exist between preserving the charter and exploiting deposit insurance. Allowing banks to dynamically revise their asset portfolios has a significant impact on both the investment decisions and the fair cost of deposit insurance. The optimal bank portfolio problem can be solved analytically for constant charter value. The corresponding deposit insurance is shown to be a put option that matures sooner than the audit date. An efficient numerical procedure is also developed to handle more general situations. Read More

  • WP 91-10 | On Flexibility, Capital Structure, and Investment Decisions for the Insured Bank


    Peter Ritchken James Thomson Ramon DeGennaro Anlong Li

    Abstract

    Most models of deposit insurance assume that the volatility of a bank's assets is exogenously provided. Although this framework allows the impact of volatility on bankruptcy costs and deposit insurance subsidies to be explored, it is static and does not incorporate the fact that equityholders can respond to market events by adjusting previous investment and leverage decisions. This paper presents a dynamic model of a bank that allows for such behavior. The flexibility of being able to respond dynamically to market information has value to equityholders. The impact and value of this flexibility option are explored under a regime in which flat-rate deposit insurance is provided. Read More

  • WP 91-09 | The Risk Premium in Forward Foreign Exchange Markets and G-3 Central Bank Intervention: Evidence of Daily Effects, 1985-1990


    Richard Baillie William Osterberg

    Abstract

    Evidence that forward rates for foreign exchange are not unbiased forecasts of future spot rates suggests a time-varying risk premium. However, there is little evidence that the forecast error is related to fundamentals, although most investigations have lacked high-frequency data. In this paper, we use daily exchange-rate and official Federal Reserve intervention data to test for an impact of intervention on the forecast error. This paper extends recent analyses of daily changes in exchange rates by Baillie and Bollersev (1989) and Hsieh (1989) to the daily forward-rate forecast errors for the dm/US$ and yen/US$ rates. We estimate an MA(21) process and utilize GARCH with a conditional student-t distribution. We find that 1) U.S. purchases of dollars on day t-1 affect the day t forecast error (f,-E,[~,+~l), 2) there are day-of-the-week effects in the conditional variance, and 3) for the yen/US$ rate, there is GARCH-in-mean. These findings provide some support for considering intervention as a channel through which fundamentals influence risk premia. Read More

  • WP 91-08 | Bracket Creep in the Age of Indexing: Have We Solved the Problem?


    David Altig Charles T. Carlstrom

    Abstract

    Indexation of the personal tax code for price-level changes represents one of the most significant elements of U.S. tax legislation in the 1980s. However, because the indexation provisions do not adjust personal tax-rate schedules contemporaneously, bracket indexation remains incomplete. This paper argues that, even ignoring the remaining problems associated with capital-income measurement, depreciation provisions, and so on, the potential distortionary costs of inflation/tax-system interactions remain high. Read More

  • WP 91-07 | Generational Accounting: A New Approach for Understanding the Effects of Fiscal Policy on Saving


    Alan Auerbach Jagadeesh Gokhale Laurence Kotlikoff

    Abstract

    An application of generational accounting to fiscal policies that feature intergenerational redistribution. The authors consider different policies, only some of which show up as a change in the deficit, and explore their impact on the net national saving rate. Read More

  • WP 91-06 | Principal-Agent Problems in Commercial-Bank Failure Decisions


    Asli Demirgüç-Kunt

    Abstract

    The author develops a model that examines the regulator's role in the bank failure decision process, with attention given to the regulator's constraints and incentives. Read More

  • WP 91-05 | Magnification Effects and Acyclical Real Wages


    Charles T. Carlstrom Edward Gamber

    Abstract

    An analysis of a one-period, two-sector model in which firms must pay a fixed cost of hiring. The authors show that this type of model results in more employment variability and less-procyclical wages than do models without fixed hiring costs. Read More

  • WP 91-04 | On the Valuation of Deposit Institutions


    Asli Demirgüç-Kunt

    Abstract

    The author develops an empirical model to value a financial institution's capital for regulatory purposes, which when estimated for a sample of failed and nonfailed institutions, reveals the need for a market-value accounting approach to capital. Read More

  • WP 91-03 | Generational Accounts: A Meaningful Alternative to Deficit Accounting


    Alan Auerbach Jagadeesh Gokhale Laurence Kotlikoff

    Abstract

    This paper presents a set of generational accounts that can be used to assess the fiscal burden that current generations are placing on future generations. The generational accounts indicate, in present value, the net amount that current and future generations are projected to pay to the government now and in the future. These accounts can be understood in terms of the government's intertemporal (long-run) budget constraint. This constraint requires that the sum of generational accounts of all current and future generations plus existing government net wealth be sufficient to finance the present value of current and future government consumption. Read More

  • WP 91-02 | Inflation, Personal Taxes, and Real Output: A Dynamic Analysis


    David Altig Charles T. Carlstrom

    Abstract

    An examination, using the overlapping-generations approach, of how the interactions between inflation and the nominal taxation of capital income affect the cyclical behavior of the U.S. economy. Read More

  • WP 91-01 | Risk-Based Capital and Deposit Insurance Reform


    Robert Avery Allen Berger

    Abstract

    Risk-based capital (RBC) is an important component of deposit insurance reform. This paper provides an empirical analysis of the new 1992 RBC bank standards, applying them to data on virtually all U.S. banks from 1982 to 1989. The data reveal strong associations between several measures of future bank performance (including bankruptcy) and the RBC relative risk weights. These associations suggest that the weights constitute a significant improvement over the old capital standards, although there are several instances in which the weights for specific categories appear to be out of line with the performance results. Tests of the informational value of passing or failing the new and old capital standards show that both have independent information, but that the new RBC standards better predict future bank performance problems. Read More