the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

exchange rate pass through in south africa panel evidence from individual goods and services abstract this study estimates pass through for south africa using samples of final goods and services and homogenous imports estimated pass through to consumer goods prices is low roughly 16 per cent in the two years following an exchange rate change surprisingly it is somewhat higher for services deviations from long run ppp appear to disappear relatively quickly with a half life of about 16 months for imports pass through estimates are much higher averaging around 60 per cent but with wide source country variation finally there is virtually no support for a simple linear trend change in either pass through or in reversion to ppp during the sample

equilibrium loan pricing under the bank client relationship abstract we determine the loan interest rate policy of a lender who is better informed about a client than other potential lenders the informational advantage possessed by the informed lender derives from the durability of information acquired as a result of an extant relationship given heterogeneous potential loan rate offers to the client by competitive lenders and client search costs the incumbent lender s policy of loan interest rate offers is examined we show that the optimal loan rate will exceed the incumbent lender s cost of funds and will exceed the average offer of competing lenders the potential lenders will offer loan rates that are exceeded by their cost of funds implying immediate losses in order to attract the client and to thereby earn expected profits in the future finally we show that the expected remaining duration of a lender client relationship is decreasing in the existing length of the relationship thus clients that have been with a particular lender longer will be more likely to leave and establish a relationship with another lender

pricing exports a cross country study abstract this paper applies cointegration and error correction analysis to estimate the long run steady state and short run dynamic relationships between the exchange rate and export prices in industrial and newly industrializing economies the data coherent analysis allowing the endogeneity of domestic cost and the exchange rate shows that the exchange rate has smaller effects on the export price than previous studies would indicate it contradicts some widely accepted relationships e g smaller more open countries have greater coefficients of pass through the results also exhibit important differences among the usa japan and germany in their export pricing behavior jel f30 f31

climate trade and water a grand coalition the paper argues first that the climate trade and water communities should leave aside their prejudices and it provides clear evidence that the three communities confront the same vested interests when trying to solve their common problem of free riding then it argues that such strong similarities speak in favour of sister world regimes in these three domains these sister regimes should first share the key principles of non discrimination national treatment and most favored nation embodied in the wto second by contrast the climate and water communities should review the other wto rules in order to adapt them to their specific demands when needed interestingly when doing so these two communities may provide much needed inspiration for improving some rules of the current trade regime finally the climate and water regimes may also adopt provisions on pricing that are not needed by the trade regime which deals mostly with well functioning markets

political economy aspects of climate change mitigation efforts regardless of the policies used to mitigate climate change a positive and relatively high price of carbon will have to be established with slow convergence across regions leading to huge rents up to capture way beyond those that have been fought over in the general agreement on tariffs and trade gatt based international trading system the paper explores the political economy feasibility and desirability implications of the two main alternatives a carbon tax and a cap and trade cat system having the same concerns cat systems in the eu and the us have accounted for different outcomes in each case likely leakages under foreseeable carbon prices are estimated to be small and not of an order of magnitude justifying the special allowances sought across a wide spectrum of industries the experience of the eu and us reviewed here suggests that mitigation is likely to continue to be carried out under a cat provided permits are distributed for free to the lobbies whose support is necessary to get adoption of mitigation policies this quota mechanism long used to allocate scarcity in the international trading system both nationally and internationally would end up with the most powerful receiving the quotas rents giving them the leverage and resources to maintain allocation schemes favourable to them

does antidumping use contribute to trade liberalization in developing countries some supporters of antidumping have argued that this procedure serves as a kind of safety valve for protectionist pressure in this paper we investigate whether there is empirical evidence that the use of antidumping actions has contributed to ongoing tariff reductions over the period 1988 to 2004 in a sample of 23 developing countries some of which have become aggressive users of antidumping in recent years the evidence is not supportive of the safety valve argument for these countries instead evidence suggests that past use of antidumping may have led to less rather than more trade liberalization

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

globalisation pass through and the optimal policy response to exchange rates abstract in this paper we examine how monetary policy should respond to nominal exchange rates in a new keynesian open economy model that allows for a non trivial role for sterilised intervention the paper develops the argument against the backdrop of the evolving policy making environment of asian economies sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare we show that the gains to sterilised intervention are greater when goods market integration is low and exchange rate pass through is high however increased financial internationalisation reduces the effectiveness of sterilised intervention as the international policy trilemma becomes more relevant unsterilised intervention may also have a role to play although the potential welfare gains from this are generally smaller most central banks in asia have actively used sterilised foreign exchange intervention as a policy tool to smooth exchange rates but over time declining exchange rate pass through and the increasing international integration of financial and goods markets will tend to reduce the efficacy of sterilised intervention given the limited effectiveness of unsterilised intervention our model implies that the role of exchange rate movements in the optimal setting of monetary policy in asia is decreasing

investment bank reputation and the price and quality of underwriting services the relation between investment bank reputation and the price and quality of bond underwriting services is studied here after controlling for endogeneity in issuerunderwriter matching i find that reputable banks obtain lower yields and charge higher fees but issuers net proceeds are higher these relations are pronounced in the junk bond category in which reputable banks underwriting criteria are most stringent these findings suggest that banks underwriting decisions reflect reputation concerns and are thus informative of issue quality they also suggest that economic rents are earned on reputation and thereby provide continued incentives for underwriters to maintain reputation in capital markets investment banks play the important role of bridging firms that need capital with investors that seek investment opportunities intermediation services are valuable first because the banks specialization in the sales and marketing of securities helps lower the issuers transactional costs of borrowing but perhaps more importantly investment banks can provide value through their role in lowering the issuers informational cost of capital this role arises from the information asymmetry that typically exists between insiders the issuing firms and outsiders the investors in security issuance events such an information gap as akerlof demonstrated in his classic 1970 paper at best causes investors to discount the securities and at worst can threaten the existence of the market investment banks standing between the insiders and the outsiders seem to be in the perfect position to reduce information asymmetry and lower the cost of capital that issuers would otherwise have to pay but how does an investment bank solve its own information problem visa vis the investor one solution is the reputation capital at stake for the intermediary a key difference between investment banks and ordinary issuers lily hua fang is from finance area insead this paper is based on a chapter of my dissertation i am indebted to my advisors gary gorton robert holthausen andrew metrick david musto and ayako yasuda for their guidance and support i owe special thanks to an anonymous referee whose insightful comments helped me improve the paper greatly i also want to thank franklin allen john core petra todd jay ritter and robert stambaugh the editor for valuable feedback comments and suggestions from seminar participants at boston college insead

a model of exchange rate pass through abstract exchange rate pass through is the phenomenon whereby changes in the value of foreign exchange are reflected in changes in import prices this paper presents a partial equilibrium model in which firms are price setters who anticipate exchange rate changes in equilibrium firms strategies incorporate expectations about the exchange rate consistently and are best responses to the strategies of all others in the world market it is shown that exchange rate changes give rise to import price changes but the degree of exchange rate pass through depends upon domestic and foreign market structures and the exchange rate regime in general exchange rate pass through is higher if the home market is monopolistic or if the foreign market is competitive

does corporate lending by banks and finance companies differ evidence on specialization in private debt contracting this paper establishes empirically the existence of specialization in private market corporate lending adding a new dimension to the public versus private debt distinctions now common in the literature comparing corporate loans made by banks and by finance companies we find that the two types of intermediaries are equally likely to finance information problematic firms however finance companies tend to serve observably riskier borrowers particularly more leveraged borrowers evidence supports both regulatory and reputation based explanations for this specialization in passing we shed light on various theories of debt contracting and intermediation and present facts about finance companies

optimal borrowing and bank lending policies an interactive approach abstract in recent years the literature on bank lending has greatly expanded to cover such issues as the role of different lending systems alternative funding environments and interest rate polities in this paper we consider these issues from an interactive borrower bank perspective the borrower makes his borrowing decisions as a function of interest rates given his credit requirements which are assumed to vary over time and the available lending systems the bank determines its funding lending and investment polities which are dynamic determined over time and assuming optimal behavior on behalf of its borrowers determines interest rates on loans credit balances and other deposits the analysis of the bank s model provides interesting insights into lending and funding policies and shows that fixed term lending arrangements may generate additional costs to the financial system while the overdraft system does not and therefore is more efficient in this environment

scale economies the value of time and the demand for money longitudinal evidence from firms compustat data on 12 000 firms for the years 1961 92 indicate that large firms hold less cash as a percentage of sale than small ones whether comparisons are made within or across industries the clasticity of cash balance with respect to sales is about 0 8 firms headquartered in counties with high wages hold more money for a given level of sales a finding consistent with the idea that time can substitute for mony in the provision of transactions services the estimates are consistent with both scale economies in the holding of money and secular declines in velocity

is relationship lending still a mixed blessing a review of advantages and disadvantages for lenders and borrowers relationship lending is a common lending technology that is assumed to bring several benefits to small medium enterprises smes and to financial institutions that adopt it notably it could reduce information asymmetries permitting banks to offer better credit terms to the borrower however it also entails some costs for both sides the empirical evidence so far has not been conclusive in determining under what conditions relationship lending can be beneficial or harmful most of the studies suggest that smes that engage in relationship lending benefit from more credit availability especially during a financial crisis and lower interest rates this occurs when they are served by small banks are geographically close to the lender when the bank is adequately decentralized and when it is the dominant creditor of the firm however under certain circumstances banks can extract rents from the borrower or be captured by him in addition the consequences and the future of relationship lending will be remarkably affected by the level of competition among banks their ownership structure the regulatory framework and the business model that banks will have to adopt accordingly

the degree and determinants of exchange rate pass through market structure non tariff barriers and multinational corporations this study investigates the exchange rate pass through for australian imports of manufactures pass through elasticities are estimated for total manufactures and forty product categories by applying an econometric procedure which avoids the pitfalls in previous studies to a carefully assembled data set the determinants of pass through are analyzed by relating the pass through elasticities to variables representing foreign control nontariff barriers product characteristics and market structure the author finds that pass through is incomplete for most products with significant variation across products unlike previous studies he finds that most of the variation in pass through is explained by the presence of multinational corporations and nontariff barriers copyright 1996 by royal economic society

exchange rates and prices an empirical analysis the effects of exchange rates on domestic prices are investigated in the context of a semistructural model of exchange rate determination in which both exchange rates and prices are determined endogenously the author assumes and imposes for the estimation that the exchange rate is cointegrated with its fundamentals the central result of the paper is that exchange rates have relatively small effects on national price levels for the g7 countries the effects are largest for the united kingdom followed by the united states and canada they are strongest when prices are measured by the producer price index copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

inflation and relative price variability in the short and long run new evidence from the united states this paper presents new evidence that a positive association exists between inflation and relative prices and relative inflation rates in very disaggregated data for the united states over the period 1975 through 1992 there is also evidence that the response of relative prices and relative inflation rates to inflation varies inversely with the information content of a given shock to inflation the relationship is studied from two cross sectional perspectives using individual price series collected from forty eight u s cities evidence on the persistence of the effects of inflation on relative prices is also presented results here demonstrate the absence of a long run relationship between inflation and relative price dispersion i e the two series are not cointegrated finally results from vector autoregressions further imply the effect is smaller than indicated by typical estimates copyright 1996 by ohio state university press

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

information reusability competition and bank asset quality this paper explains the recent decline in bank asset quality using the notion of information reusability banks are viewed as information processors they exist because of their advantage in extracting the surplus associated with the reusability of borrower specific information it is shown that a bank s incentive to screen loan applicants and hence maintain the quality of its assets depends on the surplus this screening can produce which in turn depends on information reusability two recent changes in banks operating environment are increased competitition and greater temporal volatility in borrower credit risks the former has directly reduced banks informational surplus while the latter has impaired information reusability hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets it is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality

exchange rate pass through when market share matters the authors investigate the pass through from exchange rates to import prices when firms future demands depend on their current market shares they show that profit maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily i e the pass through may be perverse and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates they present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of u s import prices copyright 1989 by american economic association

exchange rate pass through abstract the resilience of trade balances of the major industrialized economies to changes in their exchange rates has evoked interest in the exchange rate pass through relationship so far there has not been a comprehensive survey of this literature the paper aims to fill this gap in two ways first it pieces together the theoretical literature on exchange rate pass through second it provides a critical survey of the empirical literature on exchange rate pass through emphasis is placed on the data and methodology employed in previous work this is done in order to guide future work in this growing area of research

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

building an incentive compatible safety net abstract bank safety nets originally proposed as a means of stabilizing financial systems have become an important destabilizing influence government protection of bank debts encourages banks to undertake excessive risk particularly in response to adverse shocks to asset values reforms that would remove the destabilizing moral hazard consequences of government protection are considered both from the perspective of economic desirability and political feasibility requiring banks to maintain a minimal proportion of subordinated debt finance and restricting the means by which government recapitalization of insolvent banks occurs are the central features of promising reforms to the safety net

cointegration and exchange rate dynamics abstract we utilize systems methods of estimation which impose the unit root structure to estimate both the long run equilibrium relationship the cointegrating vector and the short run dynamics of an open economy macroeconomic model in which the exchange rate and the domestic price level are endogenously determined for the united states the model is estimated over the flexible exchange rate period and over two sub periods chosen by structural change tests on the exchange rate both rational and theories consistent expectations are utilized the models with theories consistent expectations outperform those with rational expectations

liquidity crisis relationship lending and corporate finance abstract this paper investigates the consequences of the liquidity shocks in wholesale funding markets during the 2007 2009 financial crisis on bank lending and corporate financing we show that banks that relied more heavily on wholesale funding contracted lending more severely than banks that relied more on insured deposits we then examine the effects of loan contraction on the financial positions of publicly traded firms we find that both during and after the crisis the change in leverage of bank dependent firms is less than that of firms with access to public debt markets in addition bank dependent firms rely more on cash than net equity issuance to finance operations we also find that firms with established bank lending relationships weather the crisis better such firms are able to attain higher levels of leverage during the crisis add to their cash holdings secure new bank credit and achieve higher profitability as a result

lobbying vs administered protection abstract import competing industries in many democracies can pursue import relief via administered protection ap procedures or can lobby politicians directly in this paper an industry chooses the option that maximizes expected profits both the ap and lobbying processes required a fixed resource cost and have an associated subjective probability of success we show that policy reforms that decrease the probability of success under administered protection or lobbying may reduce expected national welfare when both processes are potentially profitable

does the source of capital affect capital structure prior work on leverage implicitly assumes capital availability depends solely on firm characteristics however market frictions that make capital structure relevant may also be associated with a firm s source of capital examining this intuition we find firms that have access to the public bond markets as measured by having a debt rating have significantly more leverage although firms with a rating are fundamentally different these differences do not explain our findings even after controlling for firm characteristics that determine observed capital structure and instrumenting for the possible endogeneity of having a rating firms with access have 35 more debt copyright 2006 oxford university press

implementing carbon tariffs a fool s errand some governments are considering taxes on imports based on carbon content from countries that have not introduced climate change policies such carbon border taxes appeal to domestic industries facing higher charges for their own carbon emissions this research demonstrates that there are enormous practical difficulties surrounding such plans various policies are evaluated according to world trade organization compliance administrative plausibility help in meeting environmental goals and ability to deal with domestic pressures the steel industry is used as a case study in this analysis all considered policies arguably fail to meet at least one of these constraints bringing into question the plausibility that a carbon border tax can be practical policy

estimating long run economic equilibria with stochastic trends an asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems we study in detail the single equation ecm seecm approach of hendry our theoretical results lead to prescriptions for empirical work such as specifying seecm s nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates simulations support these prescriptions and point to problems of overfitting not encountered in the semiparametric approach of phillips and hansen 1990

exchange rates domestic prices and central bank actions recent u s experience central banks that are primarily concerned with the behavior of prices will use monetary policy to try to insulate prices from exchange rate changes prices then appear unresponsive to changes in the exchange rate the observed relationships between prices and the exchange rate will reflect central bank actions instead of the underlying relationship between exchange rates and prices this paper explicitly recognizes the role that policy plays in determining the observable relationships between exchange rates and prices and in so doing it illustrates how the underlying relationships can be unraveled using three different empirical approaches we examine the recent experience of the united states we find that the prices of various nondurable goods and even of some services respond modestly to the exchange rate and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered these findings are consistent with the hypothesis that the federal reserve acts to mitigate the effects of exchange rate fluctuations on domestic prices the dramatic swings in currency values that characterize the current floating exchange rate period continue to inspire new research into their consequences for prices this paper examines those consequences for u s domestic prices the use of domestic price data is central to understanding the transmission of depreciation to inflation and it distinguishes this research from the many related studies that focus on the prices of imports and exports in examining the link between the exchange rate and domestic prices we emphasize the role of the central bank we note that a central bank that is primarily concerned with prices will act to insulate them from currency fluctuations if successful the central bank s actions will dampen the responses of prices to changes in the exchange rate and the underlying response will be partially masked as a consequence we provide empirical evidence of this dampening effect in the united states the prices of many u s nondurable goods and even of some services respond modestly to the exchange rate and their responses emerge most clearly when the role of monetary policy is explicitly considered our results also provide insight into the interpretation of some related studies of trade and

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association

international comparisons of pricing to market behavior this paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using u s u k german and japanese industry level data given the industries sampled more price discrimination across destinations is observed in the u k german and japanese data for industries that match across source countries however behavior is very similar across source countries furthermore destination specific price adjustment on exports to the united states from germany and japan is similar to price adjustment observed on shipments to other destinations most variation in the data appears to be related to industry copyright 1993 by american economic association