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1992 Working Papers

  • WP 92-19 | Cross-Lender Variation In Home Mortgage Lending

    Robert Avery Patricia Beeson Mark Sniderman


    The Community Reinvestment Act of 1977 (CRA) requires depository institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. Despite the clear focus of CRA and other fair credit and housing legislation on individual lender responsibilities, consumer finance studies generally do not concede any differences in the mortgage lending activities of individual lenders; they consider variance among either individuals or neighborhoods. Virtually all of the studies draw inferences about the practices of some prototypical lender from data pooled across many lenders. Our strategy is to examine differences among individual lenders in the rates at which they receive applications fiom, and originate mortgage loans to, minority and low-income applicants. More specifically, we use the new applicant-level data gathered under the Home Mortgage Disclosure Act of 1975 -A) to examine differences in minority and low-income mortgage loan originations across the more than 8,600 U.S. lenders who received applications for single-family home purchase loans in 1990. Read More

  • WP 92-18 | The Determinants of Airport Hub Locations, Service, and Competition

    Neil Bania Paul Bauer Thomas Zlatoper


    Although the airline industry has been studied extensively since passage of the Airline Deregulation Act of 1978, relatively little effort has gone into examining how hub location affects the level of service and degree of competition found at airports in the system. To help close'this gap, we investigate the geographic distribution of airline hub operations, the level of service, and the extent of competition at 112 major U.S. airports, extending previous work by Bauer (1987) and Butler and Huston (1989). Our key innovation is that we derive our measures of service and competition from indicator matrices that describe each airline's route system. Read More

  • WP 92-17 | Commitment As Irreversible Investment

    Joseph G. Haubrich Joseph Ritter


    Considering time inconsistency as a problem of irreversible investment brings some neglected points to the fore. Making a policy choice in real time and under current conditions emphasizes the importance of the timing of commitment, the regret over past decisions, and the option value of not committing. This paper applies these concepts to monetary policy, banking regulation, and capital taxation. Read More

  • WP 92-16 | U.S. Air Passenger Service: A Taxonomy of Route Networks, Hub Locations, and Competition

    Neil Bania Paul Bauer Thomas Zlatoper


    In this paper, we analyze the service provided by the 13 largest U.S. passenger airlines to the 100 most populous U.S. metropolitan areas in 1989. We classify the route systems by their nature and geographical extent using a variety of measures based on route-level data. We then identify individual airline hub locations and derive and calculate several measures of the extent of competition both on individual routes and at the airports in our sample. The results show the wide diversity of route networks that existed in the airline industry in 1989--a phenomenon that may help to explain the failure of several major carriers since then. Read More

  • WP 92-15 | Do Hostile Takeovers Reduce Extramarginal Wage Payments?

    Jagadeesh Gokhale Erica Groshen David Neumark


    Hostile takeovers may have significant implications for long-term employment contracts if they facilitate the opportunistic expropriation of extramarginal wage payments. We test the expropriation hypothesis by studying the relationship between proxies for extramarginal wage payments and subsequent hostile takeover activity. This paper improves on existing research by using firm- and establishment-level data from a salary survey of employers. In addition, we observe characteristics of wage and employment structures both before and after the occurrence of a hostile takeover and hence can see whether the data are consistent with reductions in extramarginal wage payments following such takeovers. Results from this ex post experiment provide evidence consistent with the hypothesis that hostile takeovers result in reductions of extramarginal wage payments to more-tenured workers, mostly through cutbacks in senior positions at firms with relatively steep wage profiles. Read More

  • WP 92-14 | On Markovian Representations Of The Term Structure

    Peter Ritchken L Sankarasubramanian


    The linkages between term structures separated by finite time periods can be complex. Indeed, in general, the dynamics of the term structure could depend on the entire set of information revealed since the earlier date. This path dependence, which causes difficulties in pricing interest rate claims, is usually eliminated by making specific assumptions on investment behavior or on the evolution of interest rates. In contrast, this article identifies the class of volatility structures that permits the path dependence to be captured by a single sufficient statistic. An equilibrium framework is provided where beliefs and technologies are restricted so that the resulting term structures have volatilities that belong to the restricted class. The models themselves can be characterized by a parsimonious set of parameters and can be initialized to an observed term structure without the introduction of ad-hoc time-varying parameters. Furthermore, since the dynamics of the resulting term structures are two-state Markovian, simple pricing mechanisms can be developed for interest rate claims. Read More

  • WP 92-13 | Relative Price Movements In Dynamic General Equilibrium Models Of International Trade

    David Backus Patrick Kehoe Finn Kydland


    We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models. Read More

  • WP 92-12 | The Efficiency and Welfare Effects of Tax Reform: Are Fewer Tax Brackets Better Than More?

    David Altig Charles T. Carlstrom


    Using the well-known dynamic fiscal policy framework pioneered by Auerbach and Kotlikoff, we examine the efficiency and welfare implications of shifting from a linear marginal tax rate structure to a discrete rate structure characterized by two regions of flat tax rates of 15 and 28 percent. For a wide range of parameter values, we find that there is no sequence of lump-sum transfers that the (model) government can feasibly implement to make the shift from the linear to the discrete structure Pareto-improving. We conclude that the worldwide trend toward replacing rate structures having many small steps between tax rates with structures characterized by just a few large jumps is not easily accounted for by efficiency arguments. In the process of our analysis, we introduce a simple algorithm for solving dynamic fiscal policy models that include "kinks" in individual budget surfaces due to discrete tax codes. In addition to providing a relatively straightforward way of extending Auerbach-Kotlikoff-type models to this class of problems, our approach has the side benefit of facilitating the interpretation of our results. Read More

  • WP 92-11 | Dynamics Of The Trade Balance And The Terms Of Trade: The S-Curve

    David Backus Patrick Kehoe Finn Kydland


    We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document these same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that the general equilibrium perspective is essential: The relation between the trade balance and the terms of trade depends critically on the source of fluctuations. Read More

  • WP 92-10 | Debt, Collateral, And U.S. Manufacturing Investment: 1954-1980

    William Osterberg


    I perform an empirical analysis of Euler equations for the firm's choices of capital, labor, hours, and debt. Financial structure has real effects , since taxes favor debt. However, the cost of debt increases with the debt-to-collateral ratio, and capital is part of collateral. The data, for U.S. manufacturing investment from 1954 to 1980, show that the debt-to-collateral ratio moves opposite to the direction suggested by tax rates. However, excluding the Euler equation for debt implies the correct sign for the relation between investment and the debt-to-collateral ratio. I also find structural instability in the Euler equations for debt and capital. Read More

  • WP 92-09 | Capital Forbearance And Thrifts: An Ex Post Examination Of Regulatory Gambling

    Ramon DeGennaro James Thomson


    This paper estimates the losses embedded in the capital positions of the 996 FSLIC-insured savings and loan institutions that did not meet capital standards at the end of the 1970s. We compare the estimated cost of resolving the insolvencies of these institutions at the end of the 1970s with the actual failure-resolution costs for those that were closed by July 3 1, 1992, and the projected resolution costs for the remaining thrifts that are likely to be closed. Our results show that even when one considers only the direct costs associated with delayed closure of economically failed thrifts, these costs significantly exceed reasonable estimates of the cost of prompt failure resolution. Read More

  • WP 92-08 | Generational Accounting: The Case of Italy

    Daniele Franco Jagadeesh Gokhale Luigi Guiso Laurence Kotlikoff Nicola Sartor


    This paper considers the implications of the current course of Italian fiscal policy for existing and future generations of Italians. Italy has a very high debt-to-GDP ratio as well as a significant Social Security program. These aspects of fiscal policy would, by themselves, raise concerns about the size of the burden to be passed on to future generations. But the concern is compounded by the demographic transition under way in Italy. Like the United States, Japan, and most other western European nations, Italy is "aging" due to its low fertility rate. Unless this rate increases, the proportion of Italians aged 60 and over will rise during the next four decades from 20 percent to almost 30 percent. At the same time, the absolute size of the Italian population will fall by 27 percent. The implication of this aging process is that there will be relatively few young and middle-aged workers in future years to share the burden of the Italian government's massive implicit and explicit liabilities. Read More

  • WP 92-07 | New Results on the Impact of Central-Bank Intervention on Deviations from Uncovered Interest Parity

    Owen F. Humpage William Osterberg


    Germany, Japan, and the United States continue to view foreign exchange intervention as an effective instrument, although the mechanism through which it operates is unclear. In this paper, we use official data on daily dollar intervention to examine itsimpact on exchange-rate risk premia through both the portfolio-balance and expectations channels. We define the risk premium in terms of deviation from uncovered interest parity and model its behavior using generalized autoregressive conditional heteroscedasticity. Our evidence of portfolio-balance and expectations effects is inconsistent across subperiods of different exchange-rate-policy regimes. Also, unlike Dominguez (1990) and Loopesko (1984), we find no evidence that coordination of intervention improves its efficacy. Read More

  • WP 92-06 | Social Security and Medicare Policy from the Perspective of General Accounting

    Alan Auerbach Jagadeesh Gokhale Laurence Kotlikoff


    Our previous study (Auerbach, Gokhale, and Kotlikoff [1991]) introduced the concept of generational accounting, a method of determining how the burden of fiscal policy falls on different generations. It found that U.S. fiscal policy is out of balance in terms of projected generational burdens. This means that either current generations will bear a larger share (than we project under current law) of the burden of the government's spending, or that future generations will have to pay, on average, at least 21 percent more on a growth-adjusted basis than will those generations who have just been born. Read More

  • WP 92-05 | The Gold Standard As A Rule

    Michael Bordo Finn Kydland


    In this paper, we show that the monetary rule followed by a number of key countries before 1914 represented a commitment technology preventing the monetary authorities from changing planned future policy. The experiences of these major countries suggest that the gold standard was intended as a contingent rule. By that, we mean that the authorities could temporarily abandon the fixed price of gold during a wartime emergency on the understanding that convertibility at the original price of gold would be restored when the emergency passed. Read More

  • WP 92-04 | Bank Performance and Regional Economic Growth: Evidence of a Regional Credit Channel

    Katherine Samolyk


    This paper examines the relationship between bank performance and economic growth at the state level. We develop a regional credit view to explain how, due to information costs, regional banking conditions can influence local economic activity by affecting a region's ability to fund local investments. The model suggests that local banking-sector problems may constrain economic activity in financially distressed regions, whereas no such link need be evident in financially sound regions. We test the empirical relevance of this credit view for the 1983-1990 period using state-level data and find evidence of a regional financial channel to output. Specifically, local banking-sector conditions explain more of real personal income growth in states whose share of nonperforrning loans is above the national share. Read More

  • WP 92-03 | Post-Louvre Intervention: Did Target Zones Stabilize the Dollar?

    Richard Baillie Owen F. Humpage


    At their Louvre meeting in February 1987, the Group of Seven (G7) countries agreed to stabilize dollar exchange rates. Over the next two years, central banks frequently bought and sold dollars in a manner broadly consistent with attempting to maintain target zones, and dollar exchange rates appeared more stable than they previously had been. Read More

  • WP 92-02 | Wagner's Hypothesis: A Local Perspective

    Randall Eberts Timothy Gronberg


    Wagner's hypothesis of an expanding public sector as an economy develops is tested using pooled time-series cross-sectional data for U.S. states from 1964 to 1986. Comparing government size among fiscal jurisdictions within a single nation reduces the problems of data comparability and of controlling for cultural and institutional differences that plague the more common international tests of this theory. Our results are inconsistent with Wagner's hypothesis, yielding a negative relationship between public-sector size and output. However, some empirical support is found in the protective services and public welfare components of government activity. Read More

  • WP 92-01 | Binomial Approximation in Financial Models: Computational Simplicity and Convergence

    Anlong Li


    This paper explores the potential of transformation and other schemes in constructing a sequence of simple binomial processes that weakly converges to the desired diffusion limit. Convergence results are established for valuing both European and American contingent claims when the underlying asset prices are approximated by simple binomial processes. We also demonstrate how to construct reflecting and absorbing binomial processes to approximate diffusions with boundaries. Numerical examples show that the proposed simple approximations not only converge, but also give more accurate results than existing methods, such as that of Nelson and Ramaswamy (19901, especially for longer maturities. Read More