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1996 Working Papers

  • WP 96-13 | Work Schedules, Wages, and Employment in a General Equilibrium Model with Team Production


    Terry Fitzgerald

    Abstract

    This paper provides a general equilibrium framework in which the number of working hours and the employment levels of heterogeneous workers is endogenously determined. This is done in an environment where production requires coordinating the work schedules of different worker types, a characteristic I refer to as team production. In particular, I assume that all workers on a production team must work the same hours. Output is produced by a large number of teams, where different teams may operate different numbers of hours. The model economy has two types of people, who differ in their preferences over leisure and in the labor services they provide. Firms offer tied wage-hours packages to workers, who choose among these packages. An interesting aspect of this economy is that wages are not linear in the number of working hours, although prices are linear over the traded commodities. I show that an employment tax on high-wage workers has substantially different effects on the employment and wages of low-wage and high-wage workers when team production is explicitly modeled compared to a case when it is not. Read More

  • WP FSRG 03-96 | The Founders' Intentions: Sources of the Payment Services Franchise of the Federal Reserve Banks


    Edward Stevens

    Abstract

    The reserve banks' check collection service was designed in 1913 to serve as "glue", attaching the new central bank to the commercial and financial markets through member banks. Successful creation and operation of the Federal Reserve System was thought to be more likely if the reserve banks could do more for member banks than lend occasionally and administer the reserve requirement tax. Initial drafts of the Federal Reserve Act would have allowed member banks to use required reserve deposits only for making interbank transfers. But correspondent banking relationships already provided interbank payment service, as well as check collection and other services, while offering a modest interest rate on interbank deposits. Nationwide check collection service was added to the bill in the latter days of the legislative process to show potential member banks that deposits maintained at the new regional reserve banks could play an integral part in the banking business. Read More

  • WP 96-21 | Marginal Tax Rates and Income Inequality in a Life-Cycle Model


    David Altig Charles T. Carlstrom

    Abstract

    In this paper, we perform computational counterfactual experiments to examine the quantitative impact of marginal tax rates on the distribution of income. Our methodology builds on previous simulation models developed by Auerbach and Kotlikoff and Fullerton and Rogers, and uses an algorithm that allows us to examine marginal tax rate structures in their literal form. We find that distortions associated with particular marginal tax rate structures have sizable effects on income inequality in a reasonably quantified life-cycle setting: In our baseline experiments, the change in steady-state income inequality under 1989 U.S. income tax rates vis-à-vis 1984 rates is about half as large as the change actually seen in the data over those two years, when measured in terms of a monetary metric derived from Gini coefficients. Read More

  • WP 96-15 | Growth Effects of a Flat Tax


    Steven Cassou Kevin Lansing

    Abstract

    This paper develops aquantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by Hall and Rabushka (1985, 1995). Using parameters calibrated to match the progressivity of the U.S. federal tax schedule and other features of the U.S. economy, we find that a revenue neutral flat tax can permanently increase per capita growth by 0.18 to 0.85 percentage points per year. Both features of a flat tax—the lower marginal tax rate and the full invest ment write-off-are important contributors to the growth gain. The strength of the growth effect depends on: (1) the elasticity of household labor supply, (2) capital’s share of output, and (3) the elasticity of the capital stock with respect to new investment. Read More

  • WP 96-14 | Welfare, Stabilization, or Growth: A Comparison of Different Fiscal Objectives


    Steven Cassou Kevin Lansing

    Abstract

    This paper investigates a variety of objectives that are commonly used to motivate government fiscal action. These include, welfare maximization, stabilization and growth maximization. The policies are compared on the basis of their implications for welfare, volatility and growth. We show that stabilization policies can produce welfare levels that are nearly identical to those of welfare maximization policies and that both welfare maximization and stabilization policies yield large welfare gains and modest growth losses relative to growth maximization policies. We also show that there are side issues to stabilization polices. In particular: (1) It is not possible to stabilize all macroeconomic variables simultaneously, even when the number of policy instruments is equal to the number of shocks; (2) stabilizing a particular variable requires increased volatility of some other variable; (3) stabilization requires some flexibility regarding the government’s budget constraint; and, (4) stabilization requires the government to respond in a precise and immediate way to exogenous shocks which hit the economy. Read More

  • WP 96-12 | Rounding in Earnings Data


    Mark E. Schweitzer Eric Severance-Lossin

    Abstract

    Earnings data are often reported in round numbers. In fact, in the March 1995 Current Population Survey (CPS), 71% of all full-time earnings responses are some multiple of $1,000. Rounding is typically ignored in analyses of earnings data, which effectively treats it as noise in the data. Our GMM estimates of a simple model of rounding indicate that this behavior is highly systematic and correlated with the respondents’ earnings level. We find that the systematic nature of rounding can affect some commonly used statistics based on earnings data. The statistics we investigate in this analysis are inequality summary measures, earnings quantiles, kernel density estimates, and frequency plots of wage adjustments. We find that rounding alters most of these statistics substantially, that is, by more than the typical level of annual changes or reported standard errors. Read More

  • WP 96-11 | Sectoral Wage Convergence: A Nonparametric Distributional Analysis


    Mark E. Schweitzer Max Dupuy

    Abstract

    The large shift of U.S. employment from goods producers to service producers has generated concern over future income distribution, because of perceived large relative pay differences. This paper applies a nonparametric density overlap statistic to compare the sectors? distribution of full-time, weekly wages at all wage levels. To counter problematic features of Current Population Survey data--sampling variation at infrequent wage rates and extensive rounding at common wage rates--we employ nonparametric density-estimation procedures to isolate the underlying shapes of the densities. The validity and accuracy of these two approaches when combined is supported by Monte Carlo simulations. Standard errors and confidence intervals indicate that our results are statistically significant. Read More

  • WP 96-20 | Neighborhood Information and Home Mortgage Lending


    Robert Avery Patricia Beeson Mark Sniderman

    Abstract

    In this paper, we empirically examine how information about a neighborhood affects the level of lending activity in it. Specifically, do lenders deny mortgage applications at higher rates in neighborhoods where they have little experience in evaluating applications, and/or in neighborhoods where the lending community in general has little experience? The analysis uses data collected under the Home Mortgage Disclosure Act (HMDA) for 1990 and 1991 to construct denial rates for each lender in each census tract, controlling for applicant characteristics observed in the HMDA data. We then estimate the relationship between these lender-tract denial rates and both the number of applications processed by the lender in that neighborhood and the number of applications processed by all lenders in that neighborhood, controlling for other characteristics of the census tract and for the lender. Read More

  • WP 96-19 | Performance and Asset Management Effects of Bank Acquisitions


    Ben R. Craig João dos Santos

    Abstract

    This paper studies the effects of acquisitions on both acquired and acquiring banks. Through the us of overlap, von Mises, and other distance statistics, we confirm that, prior to the acquisition, the acquirer generally performs better than the bank it acquired. Following the acquisition, the performance of the two banks starts to converge, mainly due to improvements in the acquired institution. During this process, the acquired is transformed in such a way that it becomes a replica of its acquirer, a result that confirms a strong policy integration among banks that are part of a bank holding company. These post-acquisition effects hint at an explanation for the abnormal returns usually observed at the time of the acquisition announcement, and provide some insight on the dominant motivations for the consolidation taking place in the banking industry. Read More

  • WP 96-18 | Consequences of Means Testing Social Security: Evidence from the SSI Program


    David Neumark Elizabeth Powers

    Abstract

    We attempt to draw inferences about the potential behavioral responses to means testing Social Security by examining the effects of the Supplementary Security Income (SSI) program for the aged on wealth accumulation and employment. Part of the SSI program provides payments to the poor elderly, thus operating as a means-tested public retirement program. The federal government sets eligibility criteria and benefit levels for the federal component of the program, but many states supplement federal SSI benefits substantially. Read More

  • WP 96-10 | Commercial Banks in the Securities Business: A Review


    João dos Santos

    Abstract

    This paper analyzes the potential effects of commercial banks' expansion into the securities business, taking into account the underlying conditions assumed by the modern literature to explain the existence of financial intermediaries. The analysis focuses on the gains claimed to emerge with that expansion, particularly the gains due to information advantages and economies of scope, and on the costs claimed to arise with it, namely, those due to conflicts of interest and risk considerations. In addition, the paper discusses how these effects depend on the location of the securities unit within the bank's organizational structure, and it presents the securities powers of commercial banks in the OECD countries. Read More

  • WP 96-09 | On the Political Economy of Income Redistribution and Crime


    Ayse Imrohoroglu Antonio Merlo Peter Rupert

    Abstract

    In this paper, we consider a general equilibrium model in which heterogeneous agents specialize either in legitimate market activities or in criminal activities, and majority rule determines the share of income redistributed and the expenditures devoted to the apprehension of criminals. We calibrate our model to the U.S. economy in 1990, and conduct simulation exercises to evaluate the effectiveness of expenditures on police protection and income redistribution at reducing crime. We find that while expenditures on police protection reduce crime, it is possible for the crime rate to increase with redistribution. We also show that economies which adopt relatively more generous redistribution policies may have either higher or lower crime rates than economies with relatively less generous redistribution policies, depending on the characteristics of their wage distribution and on the efficiency of their apprehension technology. Read More

  • WP 96-16 | Monitored Finance, Liquidity, and Institutional Investment Choice


    Andrew Winton

    Abstract

    When agency problems require that an financial institution monitor the firms that it finances, the private information that it gathers about these firms harms the institution's own liquidity. Dollar for dollar, debt is less risky and thus less sensitive to firm-specific information than equity, so holding debt improves the institution's liquidity. If only partial monitoring is necessary, lowered risk may reduce the institution's incentive to monitor, further improving its liquidity. However, if a firm's initial prospects are poor, debt with reduced monitoring may lead to excessive liquidation; here, if feasible, the firm's manager prefers equity with reduced monitoring. The preference for debt finance should be most pronounced for firms with limited access to public securities markets. Thus, the model predicts that debt or similar claims will dominate the portfolios of institutions that specialize in providing monitored finance. Read More

  • WP FSRG 02-96 | Money in the Twenty-First Century


    Jerry Jordan Edward Stevens

    Abstract

    What implications do 21st century monetary innovations bring for holdings of central bank money and standards of value? Emerging technologies such as cyber cash, e-cash,and smart cards can be expected to reduce demand for central bank money, but the theoretical framework for monetary policy has not changed. The authors stress three points in this paper: 1) money innovations tend to reduce the demand for central bank money, but it remains to be seen whether the predictability of that demand, and thus the reliability of monetary policy, will decline in the coming century; 2) in principle,monetary authorities can continue to determine the price level as long as final settlement of tax and other obligations takes place using central bank liabilities; and 3) the viability of competing currencies and standards of value is gaining steam as a lively field of research. Read More

  • WP 96-08 | U.S. Intervention: Assessing the Probability of Success


    Owen F. Humpage

    Abstract

    This paper estimates the unconditional and conditional probabilities that U.S. interventions successfully smooth short-term mark-dollar and yen-dollar exchange rates. The sample period extends from February 1987 to February 1990. Assuming a binomial distribution, the number of observed successes usually is greater than one would expect to see randomly. Results from a logit model suggest that coordinated intervention has a higher probability of success than unilateral intervention. The probability of success also increases with the dollar amount of an intervention. Other conditioning variables are not significant. The paper presents a reaction function, with adjustments for the incidentally truncated nature of intervention data. Predicted values serve as instruments for intervention in the logit models. Read More

  • WP FSRG 01-96 | Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments


    Paul Bauer Gary Ferrier

    Abstract

    This paper uses a stochastic cost frontier to examine the scale economies, cost efficiencies, and technological change of three payment instruments--check, automated clearinghouse (ACH) transfers, and Fedwire processing--provided by the Federal Reserve over the period 1990-94. We find the evidence of substantial scale economies and cost inefficiencies in the ACH and Fedwire services. Check processing also exhibits substantial cost inefficiency, but constant returns to scale. Technological progress is found to be sizable for ACH and Fedwire; check processing is found to have experienced technological "regress," probably because of a decrease in processing volume over the sample period. Read More

  • WP 96-07 | Macro- and Microeconomic Consequences of Wage Rigidity


    Erica Groshen Mark E. Schweitzer

    Abstract

    This article reviews a well-established macroeconomic literature -- wage rigidity -- from the perspective of human resource managers and economic researchers. As we demonstrate, human resource policies can subtly alter the rigidity of wages. Fortunately, the potential existence and impact of wage rigidities has long been an active area of economic research whose results can be used to guide human resource managers' policy reviews. Read More

  • WP 96-06 | Commitment as Investment Under Uncertainty


    Joseph Ritter Joseph G. Haubrich

    Abstract

    Irreversible investment and the techniques associated with pricing real options have led to significant advances many areas. We broaden this range of applications, showing how the techniques can apply to many policy problems in finance, macroeconomics, and trade policy. With small changes, standard techniques can handle a wide range of strategic problems related to policy. The decision to commit is like the decision to make an irreversible investment. Explicitly considering and correctly valuing the option to wait makes discretion relatively more attractive, implies that greater uncertainty increases the gain to discretion and results in policy that displays hysteresis. Read More

  • WP 96-05 | Endogenous Money Supply and the Business Cycle


    William Gavin Finn Kydland

    Abstract

    This paper documents changes in the cyclical behavior of nominal data series that appear after 1979:IIIQ, when the Federal Reserve implemented a policy to end the acceleration of inflation. Such changes were not apparent in real variables. A business cycle model with impulses to technology and a role for money is used to show how alternative money supply rules are expected to affect observed business cycle facts. In this model, changes in the money supply rules have almost no effect on the cyclical behavior of real variables, yet have a significant impact on the cyclical nature of nominal variables. Computational experiments with alternative policy rules suggest that the change in monetary policy in 1979 may account for the sort of instability observed in the U.S. data. Read More

  • WP 96-04 | Bank Deposit Rate Clustering: Theory and Empirical Evidence


    Charles Kahn George Pennacchi Ben Sopranzetti

    Abstract

    The market prices of stocks and other assets tend to cluster on round fractions. A similar clustering is found in the interest rates paid on retail bank deposits. However, the theoretical rationales given for asset-price clustering are incompatible with the clustering of retail deposit rates. This paper proposes a theory based on depositors? limited recall. It shows that when banks exploit this phenomenon, deposit rates will tend to be set at round fractions and will be relatively "sticky" at these levels. The implications of this theoretical model are tested using money market deposit account and retail certificate of deposit interest-rate data from a sample of more than 500 banks. Read More

  • WP 96-03 | Demographic Change, Generational Accounts and National Saving in the United States


    Jagadeesh Gokhale

    Abstract

    The recently developed method of generational accounting facilitates detailed measurement of fiscal policy's impact on the intergenerational distribution of resources. Earlier studies for the United States, using the Social Security Administration's intermediate population projections, concluded that current U.S. fiscal policy embodies a significant generational imbalance. This paper examines the sensitivity of that imbalance to alternative population projections. In addition, following a framework for data organization suggested by the life-cycle hypothesis of consumer behavior, it analyzes the impact of the ongoing and projected demographic transition on national saving. The paper finds that the conclusion of imbalance is robust over a wide range of U.S. population projections involving alternative assumptions about fertility, mortality, and immigration. It also finds that the ongoing demographic transition may have contributed significantly to the decline in national saving during the 1980s. However, projected changes in the population's age structure are not expected to generate a rebound in national saving. Read More

  • WP 96-02 | Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    An analysis of the quantitative effects of agency costs in a real business cycle model, showing that these costs can explain why output growth displays positive autocorrelation at short horizons. Read More

  • WP 96-01 | Dynamic Commitment and Imperfect Policy Rules


    Joseph G. Haubrich Joseph Ritter

    Abstract

    Examining the dynamics of commitment highlights some neglected features of time inconsistency. We modify the rules-versus-discretion question in three ways: 1) A government that does not commit today retains the option to do so tomorrow; 2) the government's commitment capability is restricted to some class of simple rules; and 3) the government’s ability to make irrevocable commitments is restricted. Read More

  • WP 96-17 | Inflation and Financial Market Performance


    John Boyd Ross Levine Bruce Smith

    Abstract

    In this paper we investigate the empirical association between inflation and the functioning of an economy's financial system. We find substantial evidence that inflation is negatively correlated with financial market performance, and, in addition, we find that the relationship between inflation and financial development exhibits significant non-linearities. Read More