Publications and Other Research M. Bushman and Abbie J ... are most useful for tracking changes in ... Publications and Other Research– Publications and Other Research

Publicationsand Other Research

Federal Reserve Bank of New YorkResearch and Market Analysis Groupwww.newyorkfed.org/research

2003

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Federal Reserve Bank of New YorkResearch and Market Analysis Groupwww.newyorkfed.org/research

January 2004

Contents1 Introduction

2 Economic Policy Review

6 EPR Executive Summaries

7 Current Issues in Economicsand Finance

10 Research Update

11 Staff Reports

16 Outside Journals

22 Order Form

1INTRODUCTION

ECONOMIC POLICY REVIEW

CURRENT ISSUESSTAFF REPORTS

RESEARCH UPDATEOUTSIDE JOURNALS

IntroductionThe Federal Reserve Bank of New York’sResearch and Market Analysis Groupproduces a wide variety of publications anddiscussion papers of interest to business andbanking professionals, policymakers,academics, and the general public.

This catalogue lists recent issues in ourresearch series:

■ the Economic Policy Reviewa policy-oriented journal focusing oneconomic and financial market issues

■ Current Issues in Economics and Financeconcise studies of topical economic andfinancial issues

■ Second District Highlightsa regional supplement to Current Issues

■ Staff Reportstechnical papers intended for publicationin leading economic and finance journals.

The Research Group also offers two otherpublications of interest to readers:

■ EPR Executive Summariesonline versions of selected EconomicPolicy Review articles, in abridged form

■ Research Updatea quarterly newsletter providingsummaries of studies and listings of recentpublications in our research series.

Members of the Group also publish papersin many economic and finance journals,conference volumes, and scholarly books.A list of these publications begins on page 16.

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Economic PolicyReviewThe Economic Policy Review is a policy-oriented research journal that focuses onmacroeconomic, banking, and financialmarket topics.

EPR articles are available atwww.newyorkfed.org/research/epr.

Volume 9

Number 1, April 2003Special issue: “Corporate Governance:What Do We Know, and What Is Differentabout Banks?”

IntroductionHamid Mehran

Boards of Directors as an EndogenouslyDetermined Institution: A Survey of theEconomic LiteratureBenjamin E. Hermalin and Michael S. WeisbachThe authors identify the primary findings of theempirical literature on boards of directors.Typically, these studies have sought to answerone of the following questions: How are thecharacteristics of the board related toprofitability? How do these characteristics affectboards’ observable actions? What factors affectboard makeup and evolution? Across thesestudies, a number of regularities have emerged—notably, the fact that board composition does notseem to predict corporate performance, whileboard size has a negative relationship toperformance. The authors note, however, thatbecause there has been little theory toaccompany these studies, it is difficult tointerpret the empirical results, particularly withrespect to possible policy prescriptions.

Executive Equity Compensationand Incentives: A SurveyJohn E. Core, Wayne R. Guay,and David F. LarckerStock and option compensation and the levelof managerial equity incentives are aspects ofcorporate governance that are especiallycontroversial to shareholders, institutionalactivists, and government regulators. Similar tomuch of the corporate finance and corporategovernance literature, research on stock-basedcompensation and incentives has not onlygenerated useful insights, but also producedmany contradictory findings. Not surprisingly,many fundamental questions remain unan-swered. In this study, the authors synthesize thebroad literature on equity-based compensationand executive incentives and highlight topicsthat seem especially appropriate for futureresearch.

A Survey of Blockholdersand Corporate ControlClifford G. HoldernessThe author surveys the empirical literatureon large-percentage shareholders in publiccorporations, focusing on four key issues: theprevalence of blockholders; the motivation forblock ownership; the effect of blockholders onexecutive compensation, leverage, the incidenceof takeovers, and a wide range of corporatedecisions; and the effect of blockholders on firmvalue. A central finding of this study is thatthere is little reason for policymakers or smallinvestors to fear large-percentage shareholdersin general, especially when the blockholders areactive in firm management.

Transparency, Financial AccountingInformation, and Corporate GovernanceRobert M. Bushman and Abbie J. SmithAudited financial statements along withsupporting disclosures form the foundation ofthe firm-specific information set available toinvestors and regulators. In this article, theauthors discuss economics-based researchfocused on the properties of accounting systemsand the surrounding institutional environmentimportant to effective governance of firms. Theyprovide a framework for understanding theoperation of accounting information in aneconomy, discuss a broad range of importantresearch findings, present a conceptualframework for characterizing and measuringcorporate transparency at the country level,and isolate a number of future researchpossibilities.

The Corporate Governance of Banks Jonathan R. Macey and Maureen O’HaraThe study argues that commercial banks poseunique corporate governance problems formanagers and regulators as well as for claimantson the banks’ cash flows, such as investors anddepositors. The authors support the generalprinciple that fiduciary duties should be owedexclusively to shareholders. However, in thespecial case of banks, they contend that thescope of the fiduciary duties and obligations ofofficers and directors should be broadened toinclude creditors. In particular, the authors callon bank directors to take solvency risk explicitlyand systematically into account when makingdecisions or else face personal liability forfailure to do so.

Incentive Features in CEO Compensationin the Banking IndustryKose John and Yiming QianThis article examines the incentive features oftop-management compensation in the bankingindustry. Economic theory suggests that thecompensation structures for bank managementshould have low pay-performance sensitivitybecause of the high leverage of banks and thefact that banks are regulated institutions. Inaccordance with this school of thought, theauthors find that the pay-performance sensitivityfor bank CEOs is lower than it is for CEOs ofmanufacturing firms. This difference isattributable largely to the difference in debtratios. The authors also find that banks’ pay-performance sensitivity declines with bank size.

Is Corporate Governance Differentfor Bank Holding Companies?RenéeAdams and Hamid MehranThe authors analyze a range of corporategovernance variables as they pertain to a sampleof bank holding companies (BHCs) andmanufacturing firms. They find that BHCs havelarger boards and that the percentage of outsidedirectors on these boards is significantly higher;also, BHC boards have more committees andmeet slightly more frequently. Conversely, theproportion of CEO stock option pay to salaryplus bonuses as well as the percentage andmarket value of direct equity holdings aresmaller for bank holding companies. Further-more, fewer institutions hold shares of BHCsrelative to shares of manufacturing firms, andthe institutions hold a smaller percentage of aBHC’s equity. These observed differences invariables suggest that governance structures areindustry-specific. The differences, the authorsargue, might be due to differences in theinvestment opportunities of the firms in thetwo industries as well as to the presence ofregulation in the banking industry.

EPR Executive Summary available

3INTRODUCTION




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Number 2, June 2003“Policies to Promote Affordable Housing.”Selected papers from a conferencecosponsored by the Federal Reserve Bankof New York and New York University’sFurman Center for Real Estate and UrbanPolicy, February 7, 2002.

Opening RemarksWilliam J. McDonough

State of New York City’s Housingand Neighborhoods: An Overviewof Recent TrendsMichael H. Schill and Glynis Daniels

The Impact of Building Restrictionson Housing AffordabilityEdward L. Glaeser and Joseph Gyourko

Government Regulation and Changesin the Affordable Housing StockC. Tsuriel Somerville and Christopher J. Mayer

Housing Production Subsidies andNeighborhood Revitalization: New York City’sTen-Year Capital Plan for HousingIngrid Gould Ellen, Michael H. Schill,Amy Ellen Schwartz, and Ioan Voicu

Effects of Homeownership on Children:The Role of Neighborhood Characteristicsand Family Income Joseph M. Harkness and Sandra J. Newman

The Impacts of New Neighborhoods on PoorFamilies: Evaluating the Policy Implicationsof the Moving to Opportunity DemonstrationJohn Goering

Comparing the Costs of Federal HousingAssistance ProgramsDenise DiPasquale, Dennis Fricke,and Daniel Garcia-Diaz

The Twenty-Fifth Anniversary of theCommunity Reinvestment Act:Past Accomplishments and FutureRegulatory ChallengesWilliam C. Apgar and Mark Duda

Preservation FirstRonay Menschel

The Building Blocks for Private Investmentin New York City’s Underserved CommunitiesRichard Roberts

Number 3, September 2003

Part 1“Economic Statistics: New Needs for theTwenty-First Century.” Selected papers froma conference cosponsored by the FederalReserve Bank of New York, the Conferenceon Research in Income and Wealth, and theNational Association for Business Economics,July 11, 2002.

Opening RemarksJamie B. Stewart, Jr.

Price Hedonics: A Critical ReviewCharles R. Hulten

Remarks on the Measurement, Valuation,and Reporting of Intangible AssetsBaruch Lev

Productivity Measurement Issues in ServicesIndustries: “Baumol’s Disease” Has Been CuredJack E. Triplett and Barry P. Bosworth

5INTRODUCTION




Part 2

ArticlesWhat Market Risk Capital ReportingTells Us about Bank RiskBeverly J. HirtleIn recent years, financial market supervisors andthe financial services industry have increasinglyemphasized the role of public disclosure inensuring the efficient and prudent operation offinancial institutions. This article examines themarket risk capital figures reported to bankregulators by U.S. bank holding companies withlarge trading operations to assess the extent towhich such disclosure provides marketparticipants with meaningful information aboutrisk. It argues that when one looks across banks,market risk capital figures provide littleadditional information about the extent of aninstitution’s market risk exposure beyond whatis conveyed by simply knowing the relative sizeof its trading account. In contrast, when oneexamines individual banks over time, thesefigures appear to provide information not avail-able from other data in regulatory reports. Thesefindings suggest that market risk capital figuresare most useful for tracking changes in individ-ual banks’ market risk exposures over time.


Formulating the Imputed Cost of EquityCapital for Priced Services at FederalReserve BanksEdward J. Green, Jose A. Lopez,and Zhenyu WangAccording to the 1980 Monetary Control Act,the Federal Reserve Banks must establish feesfor their priced services to recover all operatingcosts as well as the imputed costs of capital andtaxes that would be incurred by a profit-makingfirm. Since 2002, the Federal Reserve has madefundamental changes to the calculations used toset the imputed costs. This article describes andanalyzes the current approach, which is basedon a simple average of three methods as appliedto a peer group of bank holding companies. Themethods estimate the cost of equity capital fromthree perspectives—the historical average ofcomparable accounting earnings, the discountedvalue of expected future cash flows, and theequilibrium price of investment risk as per thecapital asset pricing model. The authors showthat the current approach also provides stableand sensible estimates of the cost of equitycapital over the past twenty years.

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Measuring Treasury Market LiquidityMichael J. FlemingSecurities liquidity is important to those whotransact in markets, those who monitor marketconditions, and those who analyze marketdevelopments. This article estimates andevaluates a comprehensive set of liquiditymeasures for the U.S. Treasury securities market.The author finds that the commonly used bid-ask spread—the difference between bid and offerprices—is a useful measure for assessing andtracking liquidity. The spread is highlycorrelated with a more sophisticated price

impact measure and is correlated with episodesof reported poor liquidity in the expectedmanner. The author also finds that othermeasures correlate less strongly with episodes ofpoor liquidity and with the bid-ask spread andprice impact measures, indicating that they areonly modest proxies for market liquidity.Trading volume and trading frequency, inparticular, are found to be weak proxies formarket liquidity, as both high and low levels oftrading activity are associated with periods ofpoor liquidity.


EPR Executive Summaries

Visit our website for concise summaries of Economic Policy Review articles.

Our online publication—EPR Executive Summaries—condenses many of the articles publishedin the Review. Readers of the summaries will find timely, policy-oriented studies that are easyto absorb, with links to key charts, related articles, and other resources.

The summaries make the technical research of New York Fed economists more accessible topolicymakers, educators, business and financial leaders, and others. The series is designed tofoster a fuller understanding of our research among those who are in a position to put ourideas and findings to work.

Summaries, in html format, are available for various articles published in 2003 and 2002.

www.newyorkfed.org/research/epr/executive_summary.html

7INTRODUCTION




Current Issuesin Economicsand FinanceCurrent Issues in Economics and Financeoffers concise studies of topical economicand financial issues.

Second District Highlights—a regionalsupplement to Current Issues—coversimportant financial and economicdevelopments in the Federal ReserveSystem’s Second District.

Both series are available in html and pdfformats at www.newyorkfed.org/research/current_issues.

Volume 9

No. 1, January 2003The Impact of Exchange Rate Movementson U.S. Foreign DebtCédric TilleIn 2001, the United States’ net debt to the restof the world jumped to $2.3 trillion, a leveldouble that recorded in 1999. Much of theincrease reflects the new borrowing undertakenby the country to finance its mounting currentaccount deficit. A third of the change, however,can be traced to a simple accounting effect—theimpact of a rising dollar on the value of U.S.assets held abroad.

No. 2, February 2003 New York City’s Economy beforeand after September 11Jason BramAn analysis of employment and income trendssuggests that the economic impact of theSeptember 11 attack on New York City wassomewhat less severe than originally thought.The attack created sizable job and income losses,but the city’s current downturn appears to stemlargely from other, cyclical factors—namely, thenational economy and the financial markets.Second District Highlights

No. 3, March 2003Governing the Financial or Bank HoldingCompany: How Legal Infrastructure CanFacilitate Consolidated Risk ManagementThomas C. Baxter, Jr.On October 25, 2002, Thomas C. Baxter, Jr.,General Counsel and Executive Vice Presidentof the Federal Reserve Bank of New York,presented these remarks at the Puerto RicoBankers Association conference “FinancialTransparency and Corporate Governance ofFinancial Institutions after the Sarbanes-OxleyAct of 2002” in San Juan, Puerto Rico.

No. 4, April 2003Now and Then: The Evolutionof Loan Quality for U.S. BanksKevin J. Stiroh and Christopher MetliAlthough loan quality in the U.S. bankingindustry deteriorated in recent years, acomparison with the banking crisis of the late1980s and early 1990s suggests that the industryis in a far better position today than it was adecade ago. The percentage of troubled loans islower, loan quality problems are confinedprincipally to large-bank commercial andindustrial lending, and credit weakness isconcentrated in a small number of borrowerindustries.

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No. 5, May 2003Social Security and the Consumer PriceIndex for the Elderly Bart Hobijn and David LagakosSome argue that social security benefits shouldbe adjusted using a price index that reflects thespending habits of the elderly rather than thoseof workers. This study suggests that if such anindex were adopted today, over the next fortyyears benefit levels would increase and thesocial security trust fund could become insolventup to five years sooner than projected.

No. 6, June 2003The Repurchase Agreement Refined:GCF RepoMichael J. Fleming and Kenneth D. GarbadeOne of the largest and most important of themoney markets is the market for repurchaseagreements. In a repurchase agreement, aborrower of money effectively agrees to providesecurities as collateral to the lender to mitigatecredit risk. GCF Repo is a recent innovation inthis market that reduces transaction costs,enhances liquidity, and facilitates the efficientuse of collateral.

No. 7, July 2003Job Declines in New York–New JerseyRegion to Slow in 2003; Modest GrowthSeen for 2004James Orr and Rae RosenEmployment in the New York–New Jerseyregion will decline in 2003—but only slightly—and the region’s economy is poised to reboundin 2004 with 1 percent growth, or a gain of128,000 jobs. Continued expansion in thenational economy and sustained vigor in thefinancial markets, however, will be essentialto a favorable employment outlook.Second District Highlights

No. 8, August 2003Has Structural Change Contributedto a Jobless Recovery?Erica L. Groshen and Simon PotterThe current recovery has seen steady growth inoutput but no corresponding rise in employ-ment. A look at layoff trends and industry jobgains and losses in 2001-03 suggests thatstructural change—the permanent relocation ofworkers from some industries to others—mayhelp explain the stalled growth in jobs.

No. 9, September 2003What Moves Sovereign Bond Markets? The Effects of Economic News on U.S.and German YieldsLinda Goldberg and Deborah LeonardEconomic announcements are an importantsource of information, containing news thatspills over internationally across markets,affecting yields. An analysis of the U.S. andGerman sovereign bond markets finds that thelargest moves in yields are associated with U.S.announcements on labor market conditions, realGDP growth, and consumer sentiment.

No. 10, October 2003Taking the Pulse of the Tech Sector:A Coincident Index of High-Tech ActivityBart Hobijn, Kevin J. Stiroh,and Alexis AntoniadesA new index of the U.S. high-tech sector—drawing upon a range of technology-specificdata—has the potential to offer a more timelyassessment of economic activity than has beenpossible to date. The index suggests that whilethe tech sector has rebounded from its poorperformance in the 2000-01 “tech bust,” it hasnot resumed its rapid expansion of the late 1990s.

9INTRODUCTION




No. 11, November 2003Coping with Terms-of-Trade Shocksin Developing CountriesChristian Broda and Cédric TilleSharp swings in a developing country’s termsof trade—the price of its exports relative to theprice of its imports—can seriously disrupt outputgrowth. An analysis of the effects of a declinein export prices in seventy-five developingeconomies suggests that countries with a flexibleexchange rate will experience a much mildercontraction in output than their counterpartswith fixed exchange rate regimes.

No. 12, December 2003After the Refinancing Boom: WillConsumers Scale Back Their Spending?Margaret M. McConnell, Richard W. Peach,and Alex Al-HaschimiConcerns are rising that the recent surge in homeequity withdrawal has left consumers in a weakenedfinancial position that will, over time, prompta retrenchment in spending. However, a look athousehold assets and liabilities suggests thatconsumers have used the withdrawn funds torestructure their balance sheets and reduce theirdebt service burden. As a result, householdsmay be in a better position to spend in the yearsahead.

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Research UpdateResearch Update is a quarterly newsletterdesigned to keep you informed about theResearch Group’s current work. Thenewsletter—which complements thiscatalogue—offers summaries of selectedstudies and listings of recent articles andpapers in our research series.

Research Update also reports on other newswithin the Group, including:

■ staff publication in outside journals,

■ upcoming conferences at the FederalReserve Bank of New York,

■ calls for papers, and

■ new publications and services.

You can subscribe to Research Updateby using the enclosed order form. Thepublication is also available in html and pdfformats at www.newyorkfed.org/research/research_update.

11INTRODUCTION




Staff ReportsThe Staff Reports series features technicalresearch papers designed to stimulatediscussion and elicit comments. Thesepapers are intended for eventual publicationin leading economic and finance journals.

The series is available only atwww.newyorkfed.org/research/staff_reports.

Macroeconomics and Growth

No. 159, January 2003Tracking the New Economy: Using GrowthTheory to Detect Changes in TrendProductivityJames A. Kahn and Robert Rich The authors propose a methodology that drawson growth theory to identify variables other thanproductivity—namely, consumption and laborcompensation—to estimate trend productivitygrowth. They treat that trend as a commonfactor with two “regimes,” high- and low-growth. The authors find evidence of a switch inthe mid-1990s to a higher long-term growthregime, as well as a switch in the early 1970s inthe other direction. In addition, the study findsthat productivity data alone provide insufficientevidence of regime changes; corroboratingevidence from other data is crucial in identifyingchanges in trend growth. The authors argue thattheir methodology would also detect trendchanges in real time: For the 1990s, it wouldhave detected a switch within two years of itsoccurrence, according to subsequent data.

No. 169, June 2003Cross-Country Technology Adoption:Making the Theories Face the FactsDiego Comin and Bart Hobijn The authors document the common patternsobserved in the diffusion of more than twentytechnologies across twenty-three of the world’sleading industrial economies from 1788 to 2001.Their results suggest a pattern of trickle-downdiffusion that is remarkably robust across tech-nologies. Most of the technologies consideredoriginate in advanced economies and areadopted there first; they then trickle down tocountries that lag economically. The study alsoshows that the most important determinants of acountry’s speed in adopting technologies are itshuman capital endowment, type of government,degree of openness to trade, and adoption ofpredecessor technologies. The overall rate ofdiffusion has increased markedly since WorldWar II because of the convergence of thesevariables across countries.

No. 171, August 2003An Investigation of the Gains fromCommitment in Monetary PolicyErnst Schaumburg and Andrea TambalottiThis study proposes a simple framework foranalyzing a continuum of monetary policy rulescharacterized by differing degrees of credibility,in which commitment and discretion becomespecial cases of what the authors call quasicommitment. The monetary policy authority isassumed to formulate optimal commitmentplans, to be tempted to renege on them, and tosuccumb to this temptation with a constantexogenous probability known to the privatesector. By interpreting this probability as acontinuous measure of the (lack of) credibility ofthe monetary policy authority, the authorsinvestigate the welfare effect of a marginalincrease in credibility. Their main finding is thatin a simple model of the monetary transmissionmechanism, most of the gains from commitmentaccrue at relatively low levels of credibility.

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No. 174, October 2003What Explains the Stock Market’s Reactionto Federal Reserve Policy?Ben S. Bernanke and Kenneth N. KuttnerThis paper analyzes the impact of changes in thefederal funds rate target on equity prices, withthe aim of both estimating the size of the typicalreaction and understanding the reasons for thereaction. On average, a typical unanticipated25-basis-point rate cut is associated with aroughly 1 percent increase in broad stockmarket indexes. The response varies acrossindustries in a pattern consistent with the capitalasset pricing model. Policy’s impact on expectedfuture stock returns accounts for the largestshare of the stock price response, while thedirect effect of the real risk-free interest rateis small.

Microeconomics

No. 168, May 2003Using Home Maintenance and Repairsto Smooth Variable EarningsJoseph Gyourko and Joseph TracyRecent research indicates that the markedincrease in U.S. income inequality over the pasttwenty-five years has not been matched by asimilar increase in consumption inequality. Thispaper examines the role of saving/dissaving in ahouse as a vehicle for consumption smoothing.Data from the American Housing Survey showthat expenditures on home maintenance andrepairs are economically significant, amountingto roughly $1,750 per household each year. Thisfigure is comparable to the labor literatureestimates that put households’ average annualtransitory income variance at about $2,200. Theauthors’ calculations show a significant elasticityof maintenance and repair expenditures totransitory income shocks. The elasticities arehigher for less well educated households, whichare more likely to be liquidity constrained thantheir better educated counterparts.

No. 173, October 2003Inflation Inequality in the United StatesBart Hobijn and David LagakosInflation is often assumed to affect everyone thesame way. However, differences in spendingpatterns across households and differences inprice increases across goods and services lead tounequal levels of inflation. This paper measuresthe degree of inflation inequality across U.S. house-holds from 1987 to 2001. Its results suggest thatinflation experiences vary significantly, withmost of the differences traceable to changes inthe relative prices of education, health care, andgasoline. Cost-of-living increases are found to begenerally higher for the elderly, largely becauseof their health care expenditures, and the cost ofliving for poor households is most sensitive tofluctuations in gasoline prices. It also finds thathouseholds experiencing high inflation in oneyear do not generally do so in the next year.

International

No. 172, September 2003Tariffs and the Great Depression RevisitedMario J. Crucini and James KahnDrawing on recent business cycle research onthe Great Depression, the authors return to anargument they advanced in a 1996 Journal ofMonetary Economics article: Features of theHawley-Smoot tariffs could have done more todecrease economic activity than is customarilybelieved, although not enough to account forthe severe decline of the early 1930s. In thisstudy, the authors reformulate their argument ina business cycle accounting framework thatapportions fluctuations between three types of“wedges”: (productive) inefficiency, theconsumption-leisure margin, and intertemporalinefficiency. Tariff increases in their modelcorrespond primarily to productive inefficiencyin a prototype one-sector model. Moreover, thewedge implied by tariffs during the Depressioncorrelates well with the overall measure ofproductive inefficiency. By failing to produce alabor wedge of any consequence, their modeloffers persuasive evidence that factors otherthan tariffs also contributed significantly to theseverity of the Depression.

13INTRODUCTION




Banking and FinanceNo. 158, January 2003Fifteen Minutes of Fame? The MarketImpact of Internet Stock PicksPeter Antunovich and Asani SarkarThe authors examine 120 Nasdaq and over-the-counter “buy” recommendations by Internetsites from April 1999 to June 2001. The stockpicks show substantial short- and long-run priceand liquidity gains, although no new infor-mation is revealed about them. For example,liquidity one year after the pick day remainshigher for these stocks than for a samplematched according to size, book-to-marketvalue, and liquidity in the preceding year. Aftercontrolling for fundamental and microstructurefactors, the study also finds that stocks withlower initial liquidity have greater improvementsin liquidity on the pick day, while stocks withlower initial liquidity and higher pick-dayliquidity have higher pick-day excess returns.These results suggest that stocks have multipleliquidity equilibria, and that the stock picks, bycoordinating uninformed trading activity, pushinitially illiquid stocks to a higher liquidityequilibrium.

No. 160, February 2003Endogenous Deposit DollarizationChristian Broda and Eduardo Levy YeyatiThis paper explores sources of depositdollarization unrelated to standard moral hazardarguments. The authors develop a model inwhich banks choose the optimal currencycomposition of their liabilities. They argue thatthe equal treatment of peso and dollar claims inthe event of bank default can induce banks toattract dollar deposits above the sociallydesirable level. The distortion arises becausedollar deposits are the only source of defaultrisk in the model, but dollar depositors share theburden of the default with peso depositors. Theincentive to dollarize is reinforced by commonbanking system safety nets, such as deposit andbank insurance. These findings suggest thatregulators in bicurrency economies wouldpotentially benefit by departing from thecurrency-blind benchmark and differentiatingamong currencies in a way that preventsundesirable currency mismatches.

No. 164, March 2003An Empirical Analysis of Stockand Bond Market LiquidityTarun Chordia, Asani Sarkar,and Avanidhar SubrahmanyamThis paper explores liquidity movements instock and Treasury bond markets over morethan 1,800 trading days. Cross-market dynamicsin liquidity are estimated using a vector auto-regressive model for liquidity, returns, volatility,and order flow. The paper finds that a shock toquoted spreads in one market affects spreads inboth markets, and that return volatility is animportant driver of liquidity. Innovations tostock and bond market liquidity and volatilityprove to be significantly correlated, suggestingthat common factors drive liquidity and volatilityin both markets. Monetary expansion increasesequity market liquidity during financial crises,and unexpected increases (decreases) in thefederal funds rate lead to decreases (increases)in liquidity and increases (decreases) in stockand bond volatility. Finally, flows to the stockand government bond sectors play an importantrole in forecasting stock and bond liquidity.

No. 165, April 2003The Execution of Monetary Policy:A Tale of Two Central BanksLeonardo Bartolini and Alessandro PratiThe Eurosystem and the Federal Reserve followdifferent approaches to the execution of mone-tary policy. The Eurosystem largely delegates todepository institutions the task of stabilizingtheir liquidity at high frequency, while theFederal Reserve intervenes daily to fine-tunebanking system liquidity. The authors review theeffect of these approaches on the high-frequencybehavior of very short-term interest rates. Theyalso examine interest rate behavior after the Y2Kdate change and September 11—events requiringthe two central banks to deviate from their stylesof liquidity management. They find that, despitedifferences in operational frameworks, certainelements of the central banks’ daily interventionhave caused very short-term interest rates tobehave similarly in the euro area and theUnited States. Significantly, during periods ofanticipated or actual crisis, the two banks haveacted very much alike in managing interbankmarket liquidity in response to shocks.

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No. 166, May 2003The Impact of CEO Turnoveron Equity VolatilityMatthew J. Clayton, Jay C. Hartzell,and Joshua V. RosenbergThe authors develop three hypotheses abouthow changes in CEOs affect stock price volatilityand test them using a sample of 872 turnoversover the 1979-95 period. They find thatvolatility increases following turnover, evenwhen the CEO leaves voluntarily and is replacedinternally. In addition, forced turnovers increasevolatility more than voluntary turnovers do, afinding consistent with the view that forceddepartures imply a higher probability of largestrategy changes. For voluntary departures,external successions increase volatility morethan internal successions do. The authorsattribute this volatility difference to increaseduncertainty over the successor CEO’s managerialskills. They also document a greater stock priceresponse to earnings announcements followingchief executive officer turnover, consistent withmore informative signals of value driving theincreased volatility.

No. 167, May 2003Evaluating the Riskiness of InitialPublic Offerings: 1980-2000Stavros PeristianiThis paper considers whether IPOs havebecome more perilous to investors over time.The author employs two approaches toinvestigate the post-issuance riskiness of IPOsover the 1980-2000 period. First, he comparesthe stock price volatility for issuing andnonissuing firms. Second, he uses a qualitativemodel to estimate the likelihood that new issueswill survive in the aftermarket. Both method-ologies show that the riskiness of IPOs relativeto a nonissuing peer group has increasedroughly 30 percent in the 1990s. Although theproliferation of Internet companies in thisperiod helps account for the increased risk, thestudy reveals a more gradual shift in risk thatcannot be fully explained by the high-techbubble. Specifically, companies taken public bytop-tier underwriters or funded by venturecapital exhibit higher relative volatility and alower likelihood of survival.

No. 170, July 2003Stock Market Reaction to FinancialStatement Certification by BankHolding Company CEOsBeverly J. HirtleIn 2002, the Securities and ExchangeCommission (SEC) mandated that CEOs of large,publicly traded firms certify the accuracy oftheir financial statements. This paper investi-gates whether certification has had a measurableeffect on the stock market valuation of the forty-two bank holding companies (BHCs) subject tothe order. It finds that the firms had a positiveaverage abnormal return of 30 to 60 basis pointson certification day—a result driven primarily byBHCs that certified in advance of the SEC’sdeadline. Characteristics associated with greateropaqueness are systematically associated withthese certification-day abnormal returns. Inaddition, average abnormal returns for not-yet-certifying BHCs were positive, though notstatistically significant, on the day the first twoBHCs certified, lending weak support to the ideathat early certification may have signaled toinvestors that other BHCs were likely to certify.These results suggest that the certificationrequirement provided relevant information toinvestors and was thus an effective public policytool, at least in the banking sector.

No. 175, October 2003Cross-Country Differences in MonetaryPolicy Execution and Money MarketRates’ VolatilityLeonardo Bartolini and Alessandro PratiThe volatility patterns of overnight interest ratesdiffer across industrial countries in ways thatexisting models, designed to replicate thefeatures of the U.S. federal funds market, cannotexplain. The authors present an equilibriummodel of the overnight interbank market thatmatches these different patterns by incorporatingdifferences in policy execution by the world’smain central banks, including differences incentral banks’ management of marginal lendingand deposit facilities in response to shocks. Theirmodel is consistent with central banks’ observedpractice of rationing access to marginal facilitieswhen the objective of stabilizing short-terminterest rates conflicts with another high-frequencyobjective, such as targeting exchange rates.

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No. 176, December 2003Are Banks Really Special? New Evidencefrom the FDIC-Induced Failureof Healthy BanksAdam B. AshcraftThe Federal Deposit Insurance Corporation(FDIC) used cross-guarantees to close thirty-eight subsidiaries of First RepublicBankCorporation in 1988 and eighteen subsidiaries ofFirst City Bancorporation in 1992 when leadbanks from each of these Texas-based bankholding companies were declared insolvent. Theauthor uses this exogenous failure of otherwisehealthy subsidiary banks as a natural experimentfor studying the impact of bank failure on local-area real economic activity. He finds that theclosings of the subsidiaries were associated witha significant decline in bank lending that led toa permanent reduction in real county income ofabout 3 percent.

Quantitative MethodsNo. 161, February 2003Modeling Uncertainty: Predictive Accuracyas a Proxy for Predictive ConfidenceRobert Rich and Joseph TracyThe authors evaluate current strategies for theempirical modeling of forecast behavior. Theyfocus on the reliability of using proxies fromtime series models of heteroskedasticity todescribe changes in predictive confidence.To do so, they examine the relationship betweenex-post inflation forecast errors and ex-antemeasures of inflation uncertainty using datafrom the Survey of Professional Forecasters. Theresults provide little evidence of a strong linkbetween observed heteroskedasticity in theconsensus forecast errors and forecast uncer-tainty. Instead, they indicate a significant linkbetween observed heteroskedasticity in theconsensus forecast errors and forecast disper-sion. The authors conclude that conventionalmodel-based measures of uncertainty may becapturing not the degree of confidence thatindividuals attach to their forecasts, but thedegree of disagreement across individuals.

No. 162, March 2003 Nonparametric Pricing of MultivariateContingent ClaimsJoshua V. RosenbergThe author derives and implements anonparametric, arbitrage-free technique formultivariate contingent claim pricing. Usingresults from the method of copulas, he showsthat the multivariate risk-neutral density can bewritten as a product of marginal risk-neutraldensities and a risk-neutral dependence function.He then develops a pricing technique usingnonparametrically estimated marginal risk-neutral densities and a nonparametric depend-ence function to estimate the joint risk-neutraldensity of euro-dollar and yen-dollar returns.The study compares the nonparametric risk-neutral density with density based on a lognormaldependence function and nonparametricmarginals. The nonparametric euro-yen densityhas greater volatility, skewness, and kurtosisthan the density based on a lognormal function.For euro-yen futures options, the nonparametricmodel’s pricing accuracy is superior to that of thelognormal model.

No. 163, March 2003Forecasting in Large Macroeconomic PanelsUsing Bayesian Model AveragingGary Koop and Simon PotterThis paper considers the problem of forecastingin large macroeconomic panels using Bayesianmodel averaging. It describes practical methodsfor implementing Bayesian model averaging withfactor models; the methods involve algorithmsthat simulate from the space defined by allpossible models. The authors explain how thesealgorithms can be used to select the model withthe highest marginal likelihood (or highest valueof an information criterion). They use thesemethods to forecast GDP and inflation, relyingon quarterly U.S. data on 162 time series. Modelscontaining factors outperform autoregressivemodels in forecasting GDP and inflation, butonly narrowly and at short horizons. Theauthors attribute this finding to the presence ofstructural instability and the fact that lags of thedependent variable seem to contain most of theinformation relevant for forecasting.

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Outside JournalsMembers of the Research and MarketAnalysis Group publish in a wide range ofeconomic and finance journals, conferencevolumes, and scholarly books.

Published in 2003


Arturo Estrella“Monetary Policy Shifts and the Stability ofMonetary Policy Models,” with Jeffrey Fuhrer.Review of Economics and Statistics 85, no. 1(February): 94-104.

Arturo Estrella and Anthony Rodrigues“How Stable Is the Predictive Power of the YieldCurve? Evidence from Germany and the UnitedStates,” with Sebastian Schich. Review ofEconomics and Statistics 85, no. 3 (August): 629-44.

Bart Hobijn“Another View of Investment: Forty Years Later,”with Jess Benhabib. In Philippe Aghion, RomanFrydman, Joseph Stiglitz, and Michael Woodford,eds., Knowledge, Information, and Expectationsin Modern Macroeconomics: In Honor of EdmundS. Phelps, 522-45. Princeton, N.J.: PrincetonUniversity Press.

James Kahn and Robert Rich“Distinguishing Trends from Cycles inProductivity.” Monetary Policy in a ChangingEnvironment, BIS Papers no. 19, October: 443-61.

James McAndrews“Settlement Risk under Gross and NetSettlement,” with Charles Kahn and WilliamRoberds. Journal of Money, Credit, andBanking 35, no. 4 (August): 591-608.

Jonathan McCarthy“Capital Overhangs: Has Investment SpendingSuffered from a Hangover?” Business Economics 38,no. 4 (October): 20-7.

Paolo Pesenti“Monetary Rules for Small, Open, EmergingEconomies,” with Douglas Laxton. Journal ofMonetary Economics 50, no. 5 (July): 1109-46.

Til Schuermann“Risk Measurement, Risk Management, andCapital Adequacy of Financial Conglomerates,”with Andrew Kuritzkes and Scott Weiner.In Richard Herring and Robert Litan, eds.,Brookings-Wharton Papers on Financial Services2003, 141-93.

Kevin Stiroh“Growth and Innovation in the New Economy.”In Derek C. Jones, ed., New Economy Handbook,723-51. San Diego, Calif.: Academic Press.

“Lessons for Canada from the U.S. GrowthResurgence,” with Dale W. Jorgenson andMun S. Ho. International Productivity Monitor,no. 6 (spring): 3-18.

“Lessons from the U.S. Growth Resurgence,”with Dale W. Jorgenson and Mun S. Ho. Journalof Policy Modeling 25, no. 5 (July): 453-70.

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Review of Technological Innovation andEconomic Performance, edited by Benn Steil,David G. Victor, and Richard G. Nelson. Journalof Economics 79, no. 1 (May): 100-4.

Kei-Mu YiReview of Barriers to Riches, by Stephen L.Parente and Edward C. Prescott. Journal ofInternational Economics 60, no. 1 (May): 223-8.

International

Leonardo Bartolini“The Overnight Interbank Market: Evidencefrom the G-7 and the Euro Zone,” withAlessandro Prati and Giuseppe Bertola. Journalof Banking and Finance 27, no. 10 (October):2045-83.

James Harrigan“Is Japan’s Trade (Still) Different?” withRohit Vanjani. Journal of the Japanese andInternational Economies 17, no. 4 (December):507-19.

“Specialization and the Volume of Trade: Do theData Obey the Laws?” In E. Kwan Choi andJames Harrigan, eds., Handbook of InternationalTrade, 85-118. Oxford: Blackwell.

Amartya Lahiri“Delaying the Inevitable: Interest Rate Defenseand Balance of Payments Crises,” with Carlos Végh.Journal of Political Economy 111, no. 2 (April):404-24.

Paolo Pesenti“The Global Economy Model,” with TamimBayoumi. In World Economic Outlook: Growthand Institutions, 145. Washington, D.C.:International Monetary Fund.

Cédric Tille“Exchange Rate Pass-Through and the WelfareEffects of the Euro,” with Michael B. Devereuxand Charles Engel. International EconomicReview 44, no. 1 (February): 223-42.

Kei-Mu Yi“Can Vertical Specialization Explain the Growthof World Trade?”Journal of Political Economy 111,no. 1 (February): 52-102.

Microeconomics

James McAndrews“ATM Network Pricing: A Review of theLiterature.” Review of Network Economics 2,no. 2 (spring): 146-58.

Chris Stefanadis“Self-Regulation, Innovation, and the FinancialIndustry.”Journal of Regulatory Economics 23,no. 1 (January): 5-25.

“Sunk Costs, Contestability, and the LatentContract Market.”Journal of Economics andManagement Strategy 12, no. 1 (spring): 119-38.

George Zanjani“The Production and Regulation of Insurance:Limiting Opportunism in Proprietary andNonproprietary Organizations,” with TomasPhilipson. In Bjorn Lindgren, ed., IndividualDecisions for Health, 194-206. London:Routledge.

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Banking and Finance

Adam Ashcraft and Donald Morgan“Using Loan Rates to Measure and RegulateBank Risk: Findings and an Immodest Proposal.”Journal of Financial Services Research 24, no. 2-3(October/December): 181-200.

Leonardo Bartolini“The Execution of Monetary Policy: A Taleof Two Central Banks,” with Alessandro Prati.Economic Policy 18, no. 37 (October): 435-67.

Morten Bech“The Intraday Liquidity Management Game,”with Rod Garratt. Journal of Economic Theory109, no. 2 (April): 198-219.

João Santos“Alternative Forms of Mixing Banking withCommerce: Evidence from American History,”with Joseph Haubrich. Financial Markets,Institutions, and Instruments 12, no. 2 (May):121-64.

“The Paradox of Priority,” with StanleyLonghofer. Financial Management 32,no. 1 (spring): 69-81.

Asani Sarkar“A Comparison of Trading Costs in U.S.Corporate, Municipal, and Treasury BondMarkets,” with Sugato Chakravarty. Journalof Fixed Income 13, no. 1 (June): 39-48.

“Diversification Benefits of Emerging MarketsSubject to Portfolio Constraints,” with Kai Liand Zhenyu Wang. Journal of EmpiricalFinance 10, no. 1-2 (February): 57-80.

Kevin Stiroh“Competitive Dynamics of Deregulation:Evidence from U.S. Banking,” with Philip E.Strahan. Journal of Money, Credit, andBanking 35, no. 5 (October): 801-28.

“Efficiency and Scale Economies in UniversalBanks: Evidence from Switzerland,” withBertrand Rime. Journal of Banking andFinance 27, no. 11 (November): 2121-50.

Quantitative Methods

Arturo Estrella“Critical Values and P-Values of Bessel ProcessDistributions: Computation and Application toStructural Break Tests.” Econometric Theory 19,no. 6 (December): 1128-43.

Simon Potter“Bayesian Analysis of Endogenous DelayThreshold Models,” with Gary Koop. Journalof Business and Economic Statistics 21, no. 1(January): 93-103.

Joshua Rosenberg“Nonparametric Pricing of MultivariateContingent Claims.” Journal of Derivatives 10,no. 3 (spring): 9-26.

Forthcoming


Adam Ashcraft“New Evidence on the Lending Channel.”Journal of Money, Credit, and Banking.

Bart Hobijn“Cross-Country Technology Adoption: Makingthe Theories Face the Facts,” with Diego Comin.Journal of Monetary Economics.

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Robert Rich and Joseph Tracy“Uncertainty and Labor Contract Durations.”Review of Economics and Statistics.

International

Tobias Adrian“The Degree of Openness and the Costs of Fixingthe Exchange Rate,” with Daniel Gros. EconomicLetters.

Christian Broda“Terms of Trade and Exchange Rate Regimes inDeveloping Countries.” Journal of InternationalEconomics.

Cédric Tille“The Welfare Effect of International AssetMarkets Integration under Nominal Rigidities.”Journal of International Economics.

Microeconomics

Andrew Haughwout“Land Taxation in New York City: A GeneralEquilibrium Analysis.” In Amy Schwartz, ed.,City Taxes, City Spending: Essays in Honor ofDick Netzer. London: Edward Elgar.

“Local Revenue Hills: Evidence from Four U.S.Cities,” with Robert Inman, Steven Craig, andThomas Luce. Review of Economics andStatistics.

“Trade and Tax Policy: Lessons from AmericanRegions.” In Tax Policy. Proceedings of a Bankof Italy Public Finance Workshop.

Giorgio Topa“Religious Intermarriage and Socializationin the United States,” with Alberto Bisin andThierry Verdier. Journal of Political Economy.

Joseph Tracy“Unions, Bargaining, and Strikes,” withPeter Cramton. In John T. Addison and ClausSchnabel, eds., International Handbook of TradeUnions. Cheltenham, England: Edward Elgar.

Banking and Finance

Arturo Estrella“The Cyclical Behavior of Optimal BankCapital.” Journal of Banking and Finance.

Beverly Hirtle“Stock Repurchases and Bank HoldingCompany Performance.” Journal ofFinancial Intermediation.

James McAndrews“To Surcharge or Not to Surcharge: AnEmpirical Investigation of ATM Pricing,” withTimothy Hannan, Elizabeth Kiser, and RobinPrager. Review of Economics and Statistics.

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Hamid Mehran“Organizational Form, Taxes, Ownership, andCEO Compensation: Evidence from SmallBusinesses,” with Rebel Cole. Journal ofFinancial Economics.

Donald Morgan“The Credit Cycle and the Business Cycle: NewFindings from the Senior Loan Officer OpinionSurvey,” with Cara Lown. Journal of Money,Credit, and Banking.

Stavros Peristiani“Modeling the Instability of Mortgage-BackedPrepayments.” Journal of Fixed Income.

“The Role of Bank Advisors in Mergers andAcquisitions,” with Linda Allen, Julapa Jagtiani,and Anthony Saunders. Journal of Money,Credit, and Banking.

Joshua Rosenberg“The Impact of CEO Turnover on EquityVolatility,” with Matthew J. Clayton andJay C. Hartzell. Journal of Business.

João Santos“Allocating Lending of Last Resort andSupervision in the Euro Area,” with CharlesKahn. In Volbert Alexander, Jacques Mélitz, andGeorge M. von Furstenberg, eds., MonetaryUnion: Why, How, and What Follows? Oxford:Oxford University Press.

“Banking and Commerce: A LiquidityApproach,” with Joseph Haubrich. Journalof Banking and Finance.

Til Schuermann“Capital Regulation for Position Risk in Banks,Securities Firms, and Insurance Companies,”with Richard Herring. In Hal Scott, ed., CapitalAdequacy: Law, Regulation, and Implementation.Oxford: Oxford University Press.

“The New Basel Accord and Questions forResearch,” with Marc Saidenberg. In BentonGup, ed., The New Capital Basel Accord.Cincinnati, Ohio: South-Western.

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Kevin Stiroh“Diversification in Banking: Is NoninterestIncome the Answer?” Journal of Money, Credit,and Banking.

“Do Community Banks Benefit fromDiversification?” Journal of Financial Services Research.

Quantitative Methods

Simon Potter“Forecasting Recessions Using the Yield Curve,”with Marcelle Chauvet. Journal of Forecasting.

Til Schuermann“Modeling Regional Interdependencies Usinga Global Vector Error-Correcting MacroeconometricModel,” with M. Hashem Pesaran and Scott Weiner.Journal of Business and Economic Statistics.

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