product market imperfections and loan commitments i show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower s industry a bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank while it is individually rational for a firm to obtain a loan commitment all the firms in that industry taken together are made worse off by the existence of loan commitments a loan commitment is a contract guaranteeing future availability of credit to a borrower at a prespecified fixed or stochastic interest rate although bank loan commitments are an important financial instrument and there exists an extensive literature analyzing them the rationale for their existence is still a matter of research this paper provides an explanation for the existence of bank loan commitments to borrowers from industries in which there is imperfect competition in the product market it is shown that in such industries the option to acquire financing at predetermined rates enhances the borrower s strategic power and thus creates value for the individual borrower consider an industry with imperfect competition where firms face the problem of noncooperatively exploiting a product market opportunity the optimal product market strategy of a firm depends on the output of its rivals a firm with access to resources at a lower marginal cost than its competitors has a strategic advantage that it can exploit to gain a larger market share and profits it is shown here that a firm that does not have such a strategic advantage can create it by purchasing for a fixed initial fee an option to acquire a factor of production such as financing at favorable terms specifically by initially negotiating a bank loan commitment the firm can finance an expansion of output to meet a strategic contingency at more favorable terms than would be possible if the expansion had to be financed in the spot market the ability to exercise the commitment enables the firm to threaten its rivals strategically and moves the industry to an equilibrium more favorable to that firm thus creating value for the borrower it is shown below that it is optimal for all firms to acquire bank loan commitments altering the industry equilibrium in the process

bank forward lending in alternative funding environments this paper examines the effects of loan commitments on bank lending behavior in both deposit funding and liability management environments assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain the bank must choose its supply of commitments given this choice the bank becomes a passive lender to commitment holders our focus on forward credit markets sheds new light on the private bankers assertion that they do not directly determine their level of lending but merely accommodate the credit needs of their customers similarly the central banker s claimed inability to control monetary aggregates in the short run becomes understandable in a new context it is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system it is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments expected bank and banking system size

on competitive price adjustment for a storable good and abstention from trade the public good aspect of information is used to account for periods in which the aggregate level of trade is low it is shown that abstention from trade may occur when the uncertainty with respect to the market clearing price there is no auctioneer gets large relative to the cost of getting information about it and relative to the cost of postponing transactions in this case all agents are aware of bilateral pareto improving trading opportunities but these opportunities are not exploited

designing vat systems some efficiency considerations this paper undertakes a cross country analysis of the determinants of vat compliance using data from a sample of 17 oecd countries for 1987 an index of compliance is constructed and regressed against variables which represent characteristics of the countries and their vat rates it is found that a a higher vat rate is associated with lower compliance and this tradeoff limits the revenue maximizing vat rate to under 25 b compliance is substantially lower with multiple vat rates and c an extra dollar spent on administration raises revenue by 12 and longer experience with administering a vat also raises compliance several oecd countries are ranged along a frontier collecting about 8 of gdp through a vat but with rates of 14 to 22 on bases between 60 and 40 of gdp for these the base could only be broadened if the tax rate were lowered copyright 1996 by mit press

implicit delivery options and optimal delivery strategies for financial futures contracts abstract futures contract specification usually allow the short position some variation as to when where how much and what is to be delivered in this paper we derive the optimal delivery policy for the treasury bond futures contracts and find that our policy produces profits that are positive and statistically significant this indicates that future prices are too high in that the short position can earn profits by skillfully exercising his delivery options we find the actual delivery policies of market participants depart substantially from the optimal strategy the implications of these findings for futures traders and bond dealers are discussed

an economic rationale for the pricing structure of bank loan commitments abstract an economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing it is shown that under perfect information assessing both fees rather than just one permits optimal risk sharing when the borrower is privately informed about its probability of future commitment utilization commitment and usage fees can be used to induce borrowers to identify themselves by self selection through contract choice the equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper

optimal futures positions for large banking firms in this paper we extend earlier work on hedging models so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and cd s our model suggests that the optimal forward position is the sum of three ratios that should be estimated simultaneously using bank specific data the optimal hedge ratios are estimated in both the pre deregulation and deregulation subperiods our results show that previous studies of bank hedging with interest rate futures have greatly overstated a the volume of short futures positions that banks should take and b the degree of homogeneity of optimal hedge ratios across the banking system similarly deregulation has not uniformly affected the interest rate risk borne by different institutions as the financial futures markets have matured there has been increased interest in the use of these markets to hedge the risks faced by financial intermediaries the literature on hedging with financial futures has grown dramatically with studies by ederington 4 franckle 5 schweser cole and d antonio 17 arak and mccurdy 2 dew and martell 3 picou 13 ho and saunders 6 koppenhaver 8 and morgan and smith 9 10 with the exception of some of the more recent work most articles that have addressed the use of financial futures have described the hedging problem as a relatively simple risk management situation even studies that have focused on intermediaries have viewed the hedging problem as one dimensional the intermediary wants either to hedge a cash position in a security such as a t bill or to hedge an anticipated issue of a cd this viewpoint does not incorporate the complexity of the situation faced by intermediaries or other firms that may be subject to uncertainty from a variety of sources the more recent literature incorporates some of this additional uncertainty by considering quantity risk in lending partial takedown of loan commitments or deposits for which the intermediary acts as a rate setter seldom are both sources of uncertainty incorporated in the same model for example koppenhaver 8 allows for quantity uncertainty in deposits and in the rate that the intermediary will pay on cd s but not for uncertainty in loan rates or loan quantity morgan and smith 9 allow for uncertainty in loan quantity but not in deposit supply in this paper we extend koppenhaver s 8 model and that of morgan and smith 9 so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and cd s

on the optimal hedge of a nontraded cash position in this paper we focus on the optimal demand for futures contracts by an investor with a logarithmic utility function who attempts to hedge a nontraded cash position when the analysis is conducted in the cash commodity price space we show that the value function associated with the bernoulli investor program is not additively separable thus suggesting that this investor hedges against shifts in the opportunity set as represented by the commodity price by establishing the equivalence between the cash formulation of the problem and the wealth formulation we are able to analyze the problem in the wealth commodity price space in this space we show the additive separability of the value function when the futures settlement price process is perfectly locally correlated with the commodity price process the demand for futures in this instance is composed of a a mean variance term and b a minimum variance component that is a classic feature of models with nontraded assets since the first best nonmyopic optimum is attained however the deviation from a mean variance demand should not be interpreted as the expression of a nonmyopic behavior but rather as an attempt to restore a first best optimum on the other hand when the correlation between the futures price and the underlying commodity price is imperfect in general the value function does not separate additively the first best solution cannot be attained and the optimal futures trading strategy involves a hedging term against shifts in the opportunity set in the classic dynamic portfolio problem the investor selects a trading strategy in risky and riskless assets so as to maximize his or her expected lifetime utility in this environment where all assets can be freely traded the logarithmic investor behaves myopically to the extent that he or she ignores shifts in the opportunity set when making current choices samuelson 271 mossin 24 hakansson 16 merton 22 in particular in models with continuous trading it turns out that the value function corresponding to the investor s program is additively separable in wealth and state variables the implication is that his or her behavior will be myopic i e that his or her demand functions for assets will be of the pure meanvariance efficiency type and in particular will not include any dynamic hedging components that are characteristic of financial markets with shifting opportunities in this paper we investigate the structure of the bernoulli investor s demand functions in the situation where one asset cannot be freely traded in the market

valuation and optimal exercise of the wild card option in the treasury bond futures market the chicago board of trade treasury bond futures contract allows the short position several delivery options as to when and with which bond the contract will be settled the timing option allows the short position to choose any business day in the delivery month to make delivery in addition the contract settlement price is locked in at 2 00 p m when the futures market closes despite the facts that the short position need not declare an intent to settle the contract until 8 00 p m and that trading in treasury bonds can occur all day in dealer markets if bond prices change significantly between 2 00 and 8 00 p m the short has the option of settling the contract at a favorable 2 00 p m price this phenomenon which recurs on every trading day of the delivery month creates a sequence of 6 hour put options for the short position which has been dubbed the wild card option this paper presents a valuation model for the wild card option and computes estimates of the value of that option as well as rules for its optimal exercise the treasury bond futures contract on the chicago board of trade gives several delivery options to the short position the quality option which allows the short to deliver any of several eligible delivery bonds has already been studied fairly extensively because many bonds are eligible to be delivered against the futures contract and the conversion factors used to adjust for the bond actually delivered do not perfectly reflect relative price differences the short side trader will choose to deliver the cheapest eligible bond kilcollin 71 presents a discussion and analysis of conversion factors and their effects on the optimal delivery bond gay and manaster 4 present a theoretical valuation model for the quality option when two classes of commodities with uncertain end of period spot prices may be delivered garbade and silber 3 provide a similar analysis and estimate parameters of the valuation formula for a variety of agricultural commodity futures kane and marcus 6 have used monte carlo simulations to value the quality option in the treasury bond futures market in contrast the various timing options embedded in the delivery process have received comparatively little attention one of the most important of these is the so called wild card option the wild card option arises because the futures market closes each trading day at 2 p m central standard time which locks in the futures settlement price for the rest of the day while the short trader has until 8 p m of each trading day in the delivery month to declare an intent to deliver

the time pattern of hedging and the volatility of futures prices the paper proposes a multi period model of hedging which allows for a futures position to be revised within the cash market holding period within this framework we assess the robustness of the two period theory of hedging when generalized to many periods we characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts mark to market daily finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices in the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting an agent commits himself now to a future purchase or sale of a good whose cash price later is uncertain this risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized in the present paper we formulate a multi period model of hedging which allows for the futures position to be revised within the cash market holding period the resulting analysis captures an important institutional reality that is absent in a two trade date model namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held this is due to the requirement that futures accounts mark to market daily within this framework we address a number of issues first we assess the robustness of the two period theory of hedging when generalized to many periods second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger finally we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices while the literature on asset demand in a multiperiod setting is large futures markets are specifically treated in a limited number of studies grauer and litzenberger 1976 are concerned principally with characterizing the relation of spot and futures prices in a market for a storable periodically produced commodity they offer a rationale for positive stock holding in markets where spot price exceeds the futures price richard and sundaresan 1980 are also concerned primarily with characterizing price behaviour since they posit identical consumers in equilibrium individual holdings of futures are zero there is no hedging activity in the sense that we understand it breeden 1980b analyzes the optimal futures position sizes in a multiperiod setting his framework is more general than ours in that his is a multi good multi asset model where preferences

a nonlinear mixed integer multiperiod firm model abstract we formulate and test an advanced multiperiod model for strategic firm planning this has not been previously considered as a mixed integer nonlinear problem minlp our approach is to show the differences between a linear and a nonlinear mixed integer approach the key property of our model is the simplicity and efficiency of generating optimal firm strategies a cornerstone for managerial acceptance our purpose is to maximize the discounted value of net income and return on investment roi our model has been tested on some major finnish firms and it seems to give reliable results with the data of our sample firm for this paper optimal roi and optimal net income presuppose different strategies when optimizing roi the model balances between cash and fixed assets while optimizing net income results in an intensive investment program even if our sample firm is but one case the results are indicative of some fundamental principles governing managerial decision making

the determinants of bank interest margins theory and empirical evidence this paper has developed a model of bank margins or spreads in which the bank is viewed as a risk averse dealer it was demonstrated that an interest spread or margin would always exist and that this was the result of transactions uncertainty faced by the bank moreover it was shown that this pure spread depended on four factors the degree of managerial risk aversion the size of transactions undertaken by the bank bank market structure and the variance of interest rates the model implied that liability and asset structures had to be analyzed together since they were directly interrelated through transactions uncertainty it was shown that because of this transactions uncertainty hedging behavior was perfectly rational within an expected utility maximizing framework extending the model from a structure with one kind of loan and deposit to loans and deposits with many maturities should lead to further interesting insights into margin determination especially as portfolio effects may become apparent

money as a unit of account we develop a theory that rationalizes the use of a dominant unit of account in an economy agents enter into non contingent contracts with a variety of business partners trade unfolds sequentially in credit chains and is subject to random matching by using a dominant unit of account agents can lower their exposure to relative price risk avoid costly default and create more total surplus we discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account and the optimal choice of currency areas when there is variation in the intensity of trade within and across regions

exploring and controlling a bank s interest risk sensitivity analysis of an asset and liability co ordination model abstract for exploration and control of a bank s interest risk an asset and liability co ordination model is used that has been developed in close co operation with a big german commercial bank this model is capable of analyzing the sensitivity of a bank s interest surplus to sudden and unforeseen changes of the interest rate scenario furthermore a model based iterative procedure is suggested for control of interest risk by bank management a pragmatic approach is employed mainly in reference to the generation of alternative future interest rate scenarios the data required by the model are restricted to those that are usually available to commercial banks

an analysis of bank loan rate indexation this paper examines the economic rationale for the use of bank loan commitments and the effect on the allocation of bank credit of indexing the loan rate offered through the commitment to the prime a simple model of the loan market is constructed and used to examine the effect changes in loan demand and the cost of bank funds have on the allocation of bank credit under indexation it is shown that indexing implies changes in the relative cost of borrowing for certain groups of bank customers for nonprime customers an increase in the cost of bank funds results in a decline in the relative cost of borrowing under commitments the pattern of commitment use is found to be consistent with the predictions of the model recent surveys have found that the majority of commercial and industrial loans are made under pre existing loan commitments these surveys also find that for most commercial and industrial loans the interest rate is tied or indexed to the prime rate although indexing loan rates is widespread there has been little theoretical or empirical work on the effect of this pricing scheme on the allocation of bank credit the paucity of research in this area is surprising considering the frequency with which indexed contracts are used and the current controversy surrounding the use of the prime as an index 2 the purpose of this paper is to provide an analysis of the effect of indexed loan rates on the intertemporal allocation of bank credit a simple model of the loan market is constructed and used to examine the effect changes in the cost of bank funds and changes in loan demand have on the allocation of credit under indexation use of this model demonstrates that indexed contracts do not result in an efficient allocation in the sense that the resulting allocation does not replicate the allocation obtained with complete contingent contracts finally the model is tested empirically using data on commitment use from the quarterly survey of the terms of commercial bank lending it is shown that indexing

toward a theory of competitive price adjustment in his 1959 essay toward a theory of price adjustment arrow argued that there exists a logical gap in the usual formulations of the theory of perfectly competitive economy namely that there is no place for a rational decision with respect to prices as there is with respect to quantities see also koopmans 1957 this gap is especially felt in macroeconomics where the basic framework is that of perfect competition and many results depend on the existence of some lag in the adjustment of prices here i propose a first step toward a theory of price adjustment in a competitive environment i shall consider here a simple exchange economy with no money the application to the question of the real effects of changes in the money supply is discussed in a separate paper eden 1980 the main cost of adjustment considered here is the cost of information about changes in aggregate excess demand the question is who will gather and pay for the information this public good problem is analysed in a model in which the artificial entity of the auctioneer is replaced by firms sellers who seek information about excess demand and announce the prices of their products the public good aspect of the problem emerges when there is a unique optimal price which would be announced on the basis of old information shared by all participants then if a single firm buys new information and announces a different price all firms which are aware of this revised price will rightly think that it is based on updated information and will therefore follow the lead in this case the announced price transmits all the relevant new information to all firms and the firm that updates the information therefore provides that public good which in the walrasian model is provided by the auctioneer 2 the question is which firm will undertake the function of the auctioneer the solution suggested here is that all firms will adopt a mixed strategy in which they undertake this function with a certain probability it is shown however that there is always a positive probability that the prices advertised in a particular market will not be based on updated information since otherwise there would be no incentive to buy information in the second section i describe the process of advertising prices for the case in which the aggregate demand that sellers in a particular market face is exogenously given and infinitely elastic i then discuss the type of framework required to justify such demand curves and show that in general the walrasian price is not the average of advertised prices

the information content of quantity signals and downward inflexible prices it is shown that nonmarket clearing prices can persist in noncooperative nash competition among firms when the dis semination of information depends critically on the flexibility of pr ices the key to this explanation is that the value of the informatio n revealed by quantity signals when prices are fixed can be greater t han the short run profit obtained by an instantaneous price adjustmen t copyright 1987 by the editors of the scandinavian journal of economics

acquisition and dissemination of information in imperfectly competitive markets i introduction does the market mechanism always generate incentives for the acquisition and dissemination of information about market conditions the efficiency of prices in aggregating and disseminating information has been extensively studied in competitive models of financial markets 1 an important result is the so called information paradox described by grossman and stiglitz 1980 according to which a revealing competitive equilibrium may fail to exist when the costs of acquiring information are small information problems are however as prevalent in product markets as they are in financial markets firms continually act to acquire information on market conditions such information is generally not solely of firm specific value but also of relevance to other firms hence there is a problem in how incentives for information acquisition among firms interact considering this problem naturally leads us to consider situations of imperfect competition rather than the competitive markets which might be more relevant for financial markets whether or not prices fully reflect the state of the market also has implications for macroeconomic models built on the presumption that prices do not fully adjust to all potentially available information recent attempts to explain why prices would not fully adjust to market conditions have focused on explicit costs either of acquiring information about market conditions see e g eden 1981 or adjusting prices see rotemberg 1986 we show here that information problems have significant effects on price adjustment due to the role prices play in disseminating information to illustrate the effects of strategic information transmission on the information content of prices we consider a static stackelberg model with two price setting firms producing a differentiated good this is the simplest conceivable setting where the price of one firm the leader may be used as an informative signal by another firm the follower and thus create a strategic problem of information dissemination to focus on the strategic interaction in the acquisition of information we disregard the explicit costs of adjusting prices once firms are assumed to possess market power it is possible that a firm will try to influence the information revealed by its actions and hence the information content of its prices in an attempt to distort the information being disseminated a firm may bias its price decision which may not only affect profits but also its decisions regarding information acquisition we consider here an information problem created by demand conditions which are subject to random shocks we endogenize the information structure by allowing both firms to acquire information on demand conditions prior to any price decisions information costs are fixed and possibly zero in so far as the leader s price decision is based on private information the follower may be able to infer information about demand for its good from the price chosen by the leader if the follower attempts to infer information from the price of the leader the leader has an incentive to mislead the follower by its choice of price 2 if the follower is rational it understands the leader s incentives and in the unique separating equilibrium is able to unravel the bias and correctly infer the information because the leader is rationally expected to bias its price relative to the price chosen if the firms shared the private information it cannot choose the unbiased price to avoid this bias the leader essentially has to be able to announce its information credibly at the same time as its price an action for which there is no obvious mechanism hence when information is private the leader has a biased price but the follower still infers the private information correctly considering pure strategy equilibria of the information acquisition game in the case of costless information we find that a pure strategy nash equilibrium need not exist although if one does exist only the leader acquires information

toward a theory of bank loan commitments abstract the characteristics of fixed and variable rate bank loan commitments are analyzed in a contingent claims framework and valuation expressions are derived for these commitments the valuation expressions are used to present estimates of the impact of interest rate uncertainty on the liability assumed by a bank issuing loan commitments finally a simple two period asymmetric information model is employed to explain the recent trend among bankers to substitute variable rate commitments for their fixed rate counterparts

a stochastic monopsony theory of the business cycle two distinct regimes contractions and expansions are generated in a model in which goods markets clear and all individuals are optimizing strict wage and price takers have fully rational expectations and are heterogeneous in both preferences and resource endowments involuntary unemployment asymmetric monetary policy effectiveness and a changing relationship between real wages and employment over the business cycle are the result of optimizing behavior by monopsonistic wage setting and price taking firms faced with price uncertainty an upward sloped supply of employees and efficiency wage behavior disequilibrium and involuntary unemployment can occur at the level of the individual firm s labor market jel e32 e52 j41 j42 i introduction for many economists three stylized facts are central to any plausible theory of the business cycle 1 friedman and schwartz 1963 and romer and romer 1994 concluded that monetary shocks have output employment and unemployment effects at least some of the time and such effects are asymmetric with respect to the state of the economy 2 unemployment is subject to fluctuations associated with recessions and expansions and in some recessions has been very high 1 3 the relationship between real wages and employment appears to be time period sensitive as reported by abraham and haltiwanger 1995 although first proposed by keynes modern economists such as benassy 2002 argue that at least some unemployment is best characterized as involuntary and indicates a state of disequilibrium in this article we consider a plausible alternative to disequilibrium explanations of these elements of the business cycle based on goods market imperfections such as those by benassy 2002 and dixon and rankin 1995 who considered monopoly power by firms in the goods market and benassy 1995 who assumed monopoly power by unions in the labor market we assume that the goods market is characterized by competitive market clearing but firms have some monopsony power as reflected in an upward sloped or bounded supply of labor to the firm and the ability to set the optimal wage before knowing the price they will receive for their output which is assumed to be stochastic and making their employment decision these modifications are embedded in an otherwise conventional general equilibrium model in which all agents firms and consumers workers capitalists are fully optimizing and form totally rational expectations and labor may exhibit efficiency wage behavior 2 this is not a representative agent model and cannot be reduced to such individuals are heterogeneous in both their endowments and preferences firms may be heterogeneous with respect to their production technology and the interests of firm owners are distinct from those of their employees the latter is essential to generate the changing regimes that produce predictions that correspond to the stylized facts monetary shocks affect output prices employment and unemployment in an asymmetrical manner consistent with the traditional business cycle the key to understanding these effects is the labor market if the expected quantity of money is generated then the competitive market clearing real wage will result lower than expected quantities of money generate a deficiency of aggregate demand lower than expected output prices and real wages above the competitive wage real wages above the competitive wage are associated with excess supply of labor and involuntary unemployment independent of that associated with efficiency wage behavior this contractionary regime will persist as long as the low quantities of money persist even though all agents have fully rational expectations are optimizing and the goods market clears in this regime increases in the quantity of money increase prices employment and output and employment varies negatively with the real wage efficiency wage behavior may decrease effort as the real wage rate is decreased

valuation of capped variable rate loan commitments abstract the early exercise of capped variable rate loan commitments is formalized as the first passage time to a critical boundary in a compound option model as early exercised commitment puts are american style options numerical procedures are used to obtain simulated values it appears from the latter that the value of the early exercise premium is nontrivial and increasing with the terms to option expiry put values are also sensitive to the volatility of credit market rates as these affect the variance of the borrower s indebtedness value

coordination failure multiple equilibria and economic institutions models of coordination failure have equilibria that are not first best because of externalities usually these models display multiple equilibria we provide an example of how the existence of some economic institutions and government policies can be explained as mechanisms for internalizing externalities and selecting the best equilibrium in these settings the example we analyse is that of nominal wage and debt contracts nominal contracts can improve on the underinvestment equilibrium by implementing pareto improving transfers between agents if there are multiple underinvestment equilibria then monetary policy can have real effects because the monetary authority can choose a money supply rule to coordinate beliefs and thereby select the best equilibrium

the macroeconomics of the great depression a comparative approach recently research on the causes of the great depression has shifted from a heavy emphasis on events in the united states to a broader more comparative approach that examines the interwar experiences of many countries simultaneously in this lecture i survey the current state of our knowledge about the depression from a comparative perspective on the aggregate demand side of the economy comparative analysis has greatly strengthened the empirical case for monetary shocks as a major driving force of the depression an interesting possibility suggested by this analysis is that the worldwide monetary collapse that began in 1931 may be interpreted as a jump from one nash equilibrium to another on the aggregate supply side comparative empirical studies provide support for both induced financial crisis and sticky nominal wages as mechanisms by which nominal shocks had real effects still unresolved is why nominal wages did not adjust more quickly in the face of mass unemployment this abstract was borrowed from another version of this item

predetermined wages and prices and the impact of expansionary government policy this paper characterizes the monetary equilibria of an economy with commodity and labour contracts if government policy is not too variable there may exist an equilibrium with predetermined wages and prices in this equilibrium observed changes in the money supply to finance government purchases have persistent real effects the paper also provides theoretical support for an inverse relationship between the degree of indexation in contracts and the persistence of policy effects

a dynamic bank portfolio planning model with multiple scenarios multiple goals and changing priorities abstract the paper discusses a practical application of a two stage linear goal programming model to the management of the domestic and foreign currency denominated assets and liabilities of a large bank in finland the planning horizon includes three one year planning periods a number of alternative scenarios are used to describe uncertainty concerning future developments in these periods the scenarios are related to general economic conditions as well as the state of the domestic and foreign financial markets the bank is assumed to have multiple conflicting goals with different and changing priorities the goals deal with expected profits risk liquidity capital adequacy growth customer relationships and several other aspects of the bank s operations

competitive price adjustment to changes in the money supply in a competitive environment in which ex ante identical sellers set prices the market price cannot always be based on updated information since otherwise there will be no incentive to gather information about changes in demand this result is applied to the case in which changes in the money supply are the only source of uncertainty it is shown that if the possible changes in the money supply are not large the economy will exhibit a positive relationship between money and output but no involuntary unemployment if the possible changes in the money supply are large the economy will exhibit a positive relationship between money and employment allowing for involuntary unemployment

characteristics of households in the informal sector of an emerging economy using the case study of trinidad and tobago we investigate the socio economic demographic and attitudinal characteristics of households that participate in the informal sector of an emerging economy and their perception of the risk of detection by tax authorities while doing so data are gathered from a cross sectional field survey covering 570 households results using multinomial logit and ordered probit models suggest that households are motivated to participate in the informal sector when members spend little time in formal sector activity believe that taxes are too high and their incomes are too low have dependents to support and believe that the resulting tax evasion will go undetected their perception of the risk of detection by the tax authority is determined largely by the income they earn in the formal sector and the extent of government bureaucracy prevailing there

valuation capital structure and shareholder unanimity for depository financial intermediaries the theory of corporate finance is not directly applicable to financial intermediary decision making the lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm first when intermediaries accept deposit financing they must produce services such as liquidity and convenience at considerable expense for real resources second the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid in this paper a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

delivery uncertainty and the efficiency of futures markets this paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets examining soybean futures contracts we show that delivery basis risk has important implications for market efficiency tests as suming no delivery basis risk the market efficiency hypothesis is rejected however fu tures prices contain signiflcant time varying expected delivery basis and time varying ex pected delivery risk premiums once these expected delivery basis and delivery risk premiums are accounted for the apparent inefficiency is eliminated equilibrium spot prices also contain signiflcant time varying expected delivery risk premiums

an interest rate risk management model for commercial banks abstract this paper develops a goal programming model to assist a commercial bank in managing its exposure to interest rate risk the bank s objective is to immunize its equity position against innovations in interest rates while maximizing its market value to accomplish this task a duration gap framework is developed that does not require interest rate forecasts as decision variables the model includes assets liabilities and off balance sheet derivative securities the focus is on a protective put strategy that uses options on interest rate futures but to provide contrast a short interest rate futures position is examined as well application of the model to an illustrative environment indicates that for larger interest rate changes the option strategy provides better protection against interest rate risk than the short futures position

disequilibrium dynamics with inventories and anticipatory price setting this paper studies the sequence of short run quantity constrained equilibria of a model with a single storable output labor and money the durability of output gives rise to inventory fluctuations which influence the course of the equilibria attained one special feature of interest is the assumption that prices are not at the level which would equilibrate all markets if there were no stochastic shocks to the economy with prices frozen at this level the nature of the realized shocks determines the type of disequilibrium realized and the unintended component of inventory change the analysis concentrates on two questions what is the statistical nature of the process governing the real wage output employment and inventories and is it possible to test this model against the alternative hypothesis that prices are continually flexible even after the shocks have disturbed the system we find that although these theories are similar in their qualitative structure tests can be developed we also show how the frequencies of different types of quantity constrained equilibria vary with the stochastic specification this may shed some insight on why it is commonly believed that some types of disequilibrium phenomena have not been observed this abstract was borrowed from another version of this item

locational price spreads and the pricing of contracts for difference evidence from the nordic market in electricity markets not only does the risk of substantial price variations over time exist but so does the risk of price variations over space as prices between locations can differ due to transmission congestion to manage this risk contracts for difference cfds i e forwards on the spread between a particular area price and the unconstrained system price were introduced at the scandinavian electricity exchange nord pool at the end of 2000 we empirically investigate the pricing of these cfds over the period 2001 through 2006 and find that cfd prices contain significant risk premia their sign and magnitude however differ substantially between areas and delivery periods because areas are subject to transmission congestion to a varying extent while the relation between risk premia and time to maturity is not uniform for cfds there is a negative relation for implied area and system forwards which can be explained by the relative hedging demand of market participants in addition we find that risk premia of cfds and implied area forwards vary systematically with the variance and skewness of the underlying spot prices this confirms both implications of the bessembinder and lemmon bessembinder h lemmon m l 2002 equilibrium pricing and optimal hedging in electricity forward markets journal of finance 57 1347 1382 model

loan commitments investment decisions and the signalling equilibrium abstract this paper analyzes the use of loan commitments to finance future risky investment projects when the capital market is informed of a firm s project quality having a loan commitment would lead the firm to overinvest if banks are competitively rational the cost of this overinvestment would be borne by the firm making the loan commitment contract unattractive when the project quality is private information firms will signal their project qualities through purchasing loan commitments this signal is credible because purchasing a loan commitment poses overinvestment cost to the firm this paper establishes and characterizes this dissipative signalling equilibrium

bank funding risks risk aversion and the choice of futures hedging instrument currently theories of financial futures hedging are based on either a portfolio choice approach or a duration approach this article presents an alternative a firm theoretic model of bank behavior with financial futures assuming the bank is uncertain about cash cd interest rates and the quantity of cds it needs in the future expressions for the optimal futures hedge are derived under constant absolute risk aversion and constant relative risk aversion the performance of these two strategies is estimated from 19811983 using either the recently developed cd futures contract or the t bill futures contract these results are also compared with the performance of a portfolio choice strategy and a routine hedging strategy the analysis indicates that the cd futures market can serve a hedging purpose that is not served by the previously established t bill futures market the emergence and rapid growth of interest rate futures markets suggest that

fixed versus variable rate loans this paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each the results indicate that the payoff functions are quite different and dependent upon the project financed the appropriate conditions for the allocation of loan terms to a set of borrowers are then developed finally the analysis derives the optimal portfolio frontier and risk return trade off for the banking firm here it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk

labor contracts and the role of monetary policy in an overlapping generations model abstract this paper characterizes labor contracts in a dynamic economy subject to both real and nominal shocks in this environment we compare alternative means of trading labor services spot markets fixed nominal wage contracts and price contingent contracts the welfare ordering of these market structures is shown to depend on the relative variability of the real and nominal shocks and the costs of contingent contracts the paper also investigates the role of monetary policy and the neutrality of feedback rules finally we demonstrate that the optimal policy is nonstochastic

bank loan commitments and interest rate volatility bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained the partial takedown phenomenon which is both distinctive and vexatious is considered in detail finally estimates of the value of u s bank loan commitments and their sensitivity to interest rate changes are provided

hedging performance and basis risk in stock index futures in early 1982 trading began at three different exchanges in futures contracts based on stock indexes stock index futures were an immediate success and quickly led to a proliferation of new futures and options markets tied to various indexes one reason for this success was that index futures greatly extended the range of investment and risk management strategies available to investors by offering them for the first time the possibility of unbundling the market and nonmarket components of risk and return in their portfolios many portfolio management and other hedging applications in investment banking and security trading have been described elsewhere1 ranging from use by a passive fund manager to reduce risk over a long time horizon to use by an underwriter to hedge the market risk exposure in a stock offering for one or two days in considering the potential applications of index futures it is clear that in nearly every case a cross hedge is involved that is the stock position that is being hedged is different from the underlying portfolio for the index contract 2 this means that return and risk for an index futures hedge will depend upon the behavior of the basis i e the difference between the futures price and the cash price hedging a position in stock will necessarily expose it to some measure of basis risk risk that the change in the futures price over time will not track exactly the value of the cash position basis risk can arise from a number of different sources and is a more significant problem for stock index contracts than for other financial futures like treasury bills and bonds 3 the most apparent cause of basis risk is the nonmarket component of return on the cash stock position since the index contract is tied to the behavior of an underlying stock market index nonmarket risk cannot be hedged this is the essential problem of a cross hedge however basis risk can be present even when the hedge involves a position in the index portfolio itself and there is no nonmarket risk for one thing returns to the index portfolio include dividends while the index and the index future only track the capital value of the portfolio any risk associated with dividends on the portfolio will become basis risk in a hedged position still dividends are fairly low and also quite stable so this may not be a terribly important shortcoming

modeling the banking firm a survey this paper reports on the status of the literature on micro bank modeling and assesses our understanding of the banking firm s optimal behavior this is no mean task for much has been written on banking broadly defined over the past couple of decades the review is developed in pieces each major subproblem is outlined and the analysis used to deal with the issue explicated this is not the best way to summarize the development of a field it should be immediately recognized one would prefer to have a smooth continuum of development moving the frontier of knowledge evenly through time and across subareas yet this is rarely the way a field develops more likely individual questions attract attention and are the subjects of a substantial number of contributions after a time the field moves on to the new area of interest the banking field is no exception before embarking upon the review however a couple of lines should be devoted to previous attempts there have been essentially three first pyle 1972 analyzes the uncertainty portfolio models at a time when little existed in the literature and hence one finds the review a bit vague and sketchy baltensperger s contributions 1978 1980 are the next serious and rather extensive reviews the quality of these

intra day tests of the efficiency of the treasury bill futures market in this paper we use intra day prices to examine the efficiency of the treasury bill futures market the use of intra day data allows us to carefully match in time trades in the futures and cash markets by matching trades and allowing delays between observing apparent inefficiencies and the trade we are examining realistic trading strategies we find profitable arbitrage swaps and a preferred strategy for initial purchase these profits do not depend on an assumption of an equilibrium model hence these tests are direct tests of efficiency rather than a joint test of efficiency and equilibrium t his paper examines the efficiency of the treasury bill futures market this subject has been examined before by capozza and cornell 1979 cornell 1981 lang and rasche 1978 rendleman and carabini 1979 vignola and dale 1979 poole 1978 and puglisi 1978 there are a number of reasons why this paper makes an important contribution to the literature the first reason is that by using trade by trade futures prices we can make more realistic assumptions about the pnces at which trades could have taken place this paper uses intra day prices to examine efficiency prior studies at best used closing prices to examine apparent inefficiencies and assumed that transactions took place at these closing prices there are two problems with this procedure first simultaneous transactions cannot actually occur at closing prices there is almost an hour difference between the closing of the chicago futures and new york spot markets thus when the closing spot market price is observed the futures market has been closed for about an hour closing prices could be used to judge apparent discrepancies however it would be necessary to execute trades at the open making decisions based on closing prices and then assuming trades can take place at these prices is an approximation which could significantly affect results in addition using only closing prices ignores any intra day trades which could lead to profits in this study we match in time intra day prices in the spot and futures market these matched prices are used to identify apparently profitable trading rules we then assume trades take place at prices which are observed later in the day this is a test of a trading rule which an investor could actually follow as we discuss later in the paper our results differ from prior studies these differences are primarily due to using intra day prices and carefully matching times so that information used to initiate trades would actually be available to the investor at the time of the trade the second reason is that we examine more complex trading strategies than those which have been employed in other studies the random walk literature provides a useful analogy the original random walk studies simply correlated past and future prices or returns later studies examined filter rules and other more complicated trading rules in this study we employ alternative trading rules of increased complexity to test for the existence of trading profits finally we explicitly examine the consequence of t bills futures contracts being futures rather than forward contracts futures contracts unlike forward contracts involve flows every settlement day the intermediate cash flows on futures contracts can affect the profitability of any strategy the only prior study that even considered this effect is the one by rendleman and carabini 1979 they used the theoretical model of cox ingersoll and ross 1981 to try to estimate whether the difference between forward and futures prices was likely to be large enough to affect the payoff from alternative trading strategies this is a useful first attempt however ultimately the effect of daily settlement or marking to the market has to be examined directly as part of trading strategies to see if it affects the outcome of these strategies there are other problems with prior studies these involve gross estimates of prices and averaging data in a way that can mask inefficiencies since these problems are discussed in some detail in rendleman and carabini there is no reason to review them further here probably no area in finance has received more attention than the efficiency literature the reader may well wonder why even given the approximareceived for publication august 23 1982 revision accepted for publication may 20 1983 new york university new york university and baruch college respectively the authors would like to thank the center for the study of futures markets at columbia business school for financial support

financial planning where the firm s demand for funds is nonstationary and stochastic the incentive for a firm to engage in planning prearranging for its future financing derives from the interaction of uncertainty concerning the amount and timing of future needs and the cost of negotiating and terminating contracts in capital markets three conditions on relative costs and probability distributions are identified under which no financial slack should be raised if those conditions are not met then under one set of reasonable assumptions the optimum amount of slack will be more than the largest possible future need the model allows for surprises which can cause upward or downward in contrast to eoq models revisions in the future regarding the optimal level of slack to continue to carry

bank regulation and monetary policy the depository institutions deregulation and monetary control act 1980 and the garn st germain depository institutions act 1982 are the two most significant pieces of bank legislation since the 193os their significance stems from the fact that they have sought to roll back a number of the regulations and restrictions imposed on bank activity and competition in the 1933 80 period among the important provisions of these acts are a gradual elimination of regulation q ceilings on time and savings deposits by march 1986 the amelioration of state imposed usury ceilings on loans the nationwide provision of interest bearing transaction type accounts negotiable order of withdrawal now and super now accounts permission for thritts to expand into bank like products such as commercial and industrial loans consumer loans and credit cards and the development of new types of savings accounts such as mmdas l in addition to legislative deregulation we have also witnessed homemade deregulation as banks have sought to exploit often with great success loopholes in the bank holding

a general framework for measuring vat compliance rates summary measures of value added tax vat compliance rates are valuable for identifying problem areas in vat implementation they are also essential for meaningful crosscountry and crosstime comparisons of vat compliance we present a comprehensive and general framework for calculating vat compliance rates at both the economy wide and detailed sectoral levels unlike existing measures of vat compliance our framework isolates a compliance measure from the effects on vat receipts of detailed features of vat systems as actually implemented by tax authorities these features include multiple vat rates exemptions registration rates refund limitations informal activity taxation of domestic nonresidents and undeclared imports we implement our comprehensive vat compliance measure for vietnam a country with a complex vat system our estimate of vietnam s vat compliance rate is about 13 percentage points higher than that calculated by the most popular measure of compliance collection efficiency ce our m

optimal hedging in futures markets with multiple delivery specifications nearly all futures contracts allow delivery of any of several qualities of the underlying asset consequently the price of the futures contract is associated more with the price of the expected cheapest deliverable variety than with the price of the par delivery variety the delivery specifications introduce a delivery risk for every hedger in the market we derive the optimal hedging strategies in these markets their hedging effectiveness is evaluated for wheat futures contracts in chicago hedging optimally would have significantly reduced the variance of the rates of return on hedges while yielding similar mean returns nearly all futures contracts on commodities and financial assets allow the seller to deliver any of several qualities of the underlying asset the contracts specify discounts or premiums for delivering a nonpar quality but the realized price differences can be significantly different consequently the futures price on a delivery date converges to the spot price of the quality that is cheapest to deliver rather than the spot price of the par delivery quality since it is uncertain which quality will be the cheapest to deliver this introduces a delivery risk for every hedger in the market gay and manaster 9 and kane and marcus 13 find that hedgers in the treasury bond futures market have neither hedged nor exploited the delivery specifications in an optimal way 1 this paper addresses how to hedge optimally in futures markets with multiple delivery specifications 2 we derive the optimal hedging strategies and evaluate their hedging effectiveness futures markets are hedging markets working 20 they enable traders to hedge the risk of unexpected changes in the spot price of their asset the hedging effectiveness of futures markets is therefore an important issue earlier studies include ederington 3 figlewski 5 and koppenhaver 16 among others this study also differs from those studies in that we evaluate an ex ante hedging

a general model of the banking firm under conditions of monopoly uncertainty and recourse abstract we develop a stochastic programming model of the monopolistic competition banking firm it assumes the bank faces a downward sloping loan demand curve and is a price taker in securities markets uncertainty and liquidity requirements are incorporated bank decisions are made within a two stage framework where realized disturbances that violate constraints can be rectified ex post at a cost the results are 1 optimal loan and deposit rates are positive functions of the recourse penalty 2 asset liability decisions are interdependent and elastically supplied deposits lower the loan rate 3 the effect of uncertainty depends upon the penalty rate level

difference systems in financial futures markets many financial futures markets allow substitutions for the par grade of security at delivery substitutes are deliverable at premiums or discounts differences in commodities parlance to the futures price the rule that establishes these differences is called a difference system this paper characterizes financial futures market equilibrium with yield based difference systems and investigates particular systems in use the major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security in order to increase deliverable supply many financial futures markets allow the delivery of a variety of grades issues of securities in fulfillment of a financial futures contract the par grade of security on which the futures contract is based is deliverable at the futures price various other grades of securities are deliverable at premiums or discounts to the futures price in commodities parlance these premiums and discounts are called differences and the rule that establishes the set of premiums and discounts is called a difference system see hoffman 2 chapter xv for an excellent discussion of difference systems in commodity futures contracts there are two types of difference systems currently in use in financial futures markets both are based on security yields the first is called variable rate or yield maintenance pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted by the yield of the par security selling at the futures price the second is called fixed rate or factor pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted at the yield of the par security selling at par this paper first characterizes financial futures market equilibrium with yieldbased difference systems and then investigates theoretically and empirically the particular characteristics of factor pricing and yield maintenance pricing the major finding is that currently used differences systems produce financial futures prices which systematically understate the spot market price of the par security vice president chicago mercantile exchange this research was conducted while the author was economist financial studies section board of governors of the federal reserve system the opinions in this paper are those of the author and do not necessarily reflect the opinions of the board

forward market equilibrium economists have long been interested in the functioning of forward futures markets keynes and hicks were the first to write persuasively in support of the theory of normal backwardation this theory says the futures price is biased downward relative to the expected future spot price as a means of compensating speculators for taking long futures positions 12 8 in this theory speculators are viewed as providing insurance to hedgers who desire to take short futures positions to reduce the riskiness of their commodity holdings in addition to normal backwardation there are theories of unbiasedness and normal contango the unbiasedness theory says that the futures price equals the expected spot price while the normal contango theory says that the futures price exceeds the expected spot price 4 19 21 however the controversy over the three theories has not been entirely resolved it has been suggested 4 19 that each of the three theories could be applicable at various points during the planting harvesting processing cycle of a crop as the net hedging demand shifts from a large number of hedgers who desire to be short in the futures market to a large number of individuals who are long hedgers nonetheless the traditional theories of futures markets have been criticized because they are not grounded in a general equilibrium model where participants tastes endowments and beliefs interact so as to generate a market equilibrium incorporating both speculative and non speculative transactions 9 it is the purpose of this paper to provide a framework within which normal contango normal backwardation and unbiasedness can each occur for commodities which have certain well specified characteristics independent of the relative numbers of participants on each side of the futures market in the spirit of 9 we consider the major source of uncertainty to be technological in nature quantity risk and argue that the commonly used definitions of hedger one who sells forward some fraction of his crop yield and speculator are not very useful for economic analysis instead the more generally applicable concept of hedger as one who trades mean income for reductions in risk in the rothschild stiglitz sense 17 is supported because it

nominal wage price rigidity as a rational expectations equilibrium most recent studies of macroeconomic behavior fall into one of two categories the first often called the equilibrium business cycle approach stems from the fundamental contribution of robert e lucas 1972 and related work by thomas sargent and neil wallace 1975 and many others these studies espouse the view that a positive correlation between output and the stock of paper assets can arise if households are unable to identify the source and therefore the permanence of price movements employment and output responses in this view are driven by the intertemporal substitution effect especially the substitution of current leisure for future consumption since cyclical fluctuations in employment are large relative to the corresponding real wage movements substantial wage elasticity of labor supply is required to validate these models the equilibrium approach to business cycles implies certain restrictions on the conduct of monetary policy in particular rational expectations undermine the ability of the monetary authority to influence economic activity in a systematic manner see sargent wallace for an example sticky wages and prices are the cornerstone of an alternative description of macroeconomic behavior rooted vaguely in keynes and more firmly in the dual decision hypothesis of robert clower 1984 this approach studies equilibria with quantity rationing see edmond malinvaud 1977 the rationing story lacks a precise specification of the source of price stickiness offering very little guidance about the eventual causes of price change considerable efforts were made in the 1970 s to fill this lacuna in keynesian macroeconomics beginning with work by martin n baily 1974 and others the implicit contracts literature focused on the incomplete insurability of human capital unable to find insurance against fluctuations in labor income elsewhere workers demand insurance from those best placed to observe labor income their own employers both wage inflexibility and layoffs then can be viewed as an outcome of a joint insurance employment relationship between workers and firms see azariadis 1975 critics like george akerlof and hajime miyazaki 1980 soon discovered that the original contracting models could not produce layoffs without prohibiting severance pay or otherwise limiting the terms of the contract others pointed out that these models were determinedly microeconomic offering few insights into the stickiness of nominal wages or the effectiveness of stabilization policy two quite distinct lines of research developed out of the original implicit contract ideas one focuses on asymmetric information and implementability see the qje 1983 symposium for original work and the review article by oliver hart 1983 as a means of driving a wedge between the ex post marginal rates of substitution of the contractants under some technical assumptions the outcome is involuntary underemployment or unemployment we are most concerned here with the other line of research which sought to fit labor or tdiscussants guillermo calvo columbia university jo anna gray washington state university

a model of imperfect competition with keynesian features the recent literature on the reappraisal of keynes has viewed keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities one problem with this approach is that it lacks a theory of price determination in particular of why prices are fixed in the present paper we show that a number of keynesian features arise in a model in which prices are fully flexible but where agents have some monopoly power one advantage of this approach is that it provides a theory of the determination of both prices and quantities

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

price and hedging policy the case of an intertemporarily risk averse bank abstract in a two period framework we analyze the behavior of a maturity transforming intertemporarily risk averse bank in the presence of a stochastic inter bank rate and futures markets we show that the separation property holds but that loan and deposit price decisions show non linear dependence

managing interest rate risk in banking institutions abstract this paper develops and employs a multiperiod goal programming model to examine the normative effects of changing interest rates on the rearrangements of depository bank balance sheets and associated profits a two stage state preference framework allows a dynamic interpretation of the model s prescribed decisions as well as a natural incorporation of profit sensitivity to interest rate risk the model includes on and off the balance sheet decision variables experimental results indicate that constraining the latter decision can seriously curtail the bank s ability to achieve its profit objectives

a goal programming model for bank assets and liabilities management abstract assets and liabilities management is one of the most important issues in bank strategic planning in the past this problem has often been addressed through conventional mathematical programming i e linear programming however bank management typically involves several conflicting goals such as the maximisation of returns minimisation of risk expansion of deposits and loans etc the complexity of this problem can be captured more adequately by multiobjective mathematical programming this paper discusses the construction and application at the commercial bank of greece of a goal programming model that takes into account the essential institutional financial legal and bank policy considerations

a computational approach to pricing a bank credit line abstract using trended brownian motion to characterize borrower cash needs over time we are able to derive a probability density function for the time to depletion of a bank credit line as well as the likelihoods for the time to exhausting the sources of liquidity that fund the loan armed with these analytic results we solve for the credit line mark up rate and the configuration of stored liquidity that maximizes the bank s intertemporal expected profits from the loan the optimality conditions produce a system of integral differential equations whose solutions we then simulate over a host of scenarios

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

increasing returns and the foundations of unemployment theory current approaches to macroeconomic theory divide roughly into two basic schools of thought one approach typically associated with rational expectations views the economy as basically at or near walrasian market clearing equilibrium in which case it becomes very difficult to explain away convincingly the undeniable persistence at times of involuntary unemployment another approach views the underemployed economy as being in a state of temporary fixed price disequilibrium in which case aside from having to repress suspicions that the essence of effective demand failure might not have to do with prices fixed at wrong values there is a lot of rationalising to be done about why profitable adjustments are so slow this paper argues that something like an internally consistent theory of steady state involuntary unemployment is possible and even plausible the cornerstone of this third approach is increasing returns to scale which blocks unemployed agents from breaking out of a low level equilibrium trap unless there is overall coordination or stimulation a simple model is presented which contains the basic ideas

predetermined prices and the allocation of social risks we propose a walrasian explanation for the existence of fixed prices i e of trades in which either the price or the quantity exchanged does not reflect all publicly available information such trades result in a rigid price system that facilitates the sharing of social risks they may also cause allocative distortions that increase the equilibrium price of insurance above its actuarially fair level we demonstrate that the market for noncontingent claims is active only when this insurance gain outweighs the cost of allocative distortions fixed price equilibria are constrained optima i e they cannot be dominated by an appropriately constrained central planner

dynamic exchange rate equilibria with uncertain government policy in this paper we link two exchange rate literatures by showing how threats of asset controls yields determinate exchange rates in general equilibrium models with otherwise perfect capital markets and by showing how for certain sequences of threats exchange rate determination may be well explained by monetary variables we find that in general there exists no natural exchange rate and market rates may be sensitive to changed perceptions about future exchange rate intervention

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

intertemporal commodity futures hedging and the production decision this paper deals with the producer s optimal use of commodity futures in hedging the framework for analysis is an intertemporal consumption and investment model the producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval during the period he faces both price and output uncertainties in applying stochastic dynamic programming methods this paper shows the effect of these risks on his consumption behavior further the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions finally implications of these results on the futures markets are discussed this paper studies a normative model of the farmer s optimal hedging strategy and consumption behavior in a continuous time framework recent papers for example berck 3 rolfo 18 stoll 21 have analyzed the farmer s hedging strategies in a one period context these papers have provided interesting insights into the farmer s production decisions and the optimal design of futures contracts and markets however in a one period model some rather restrictive conditions are imposed on the individual s behavior for example in these models an individual is assumed to ignore any information arrival process as a result the individual is assumed to adjust neither consumption behavior nor hedging positions to the changing state of the world during the production period these conditions can be relaxed in a continuous time framework in an intertemporal context the farmer s hedging problem may be viewed as follows since the farm income at harvest depends on both the spot price and the output in bushels the farmer is subject to both price and output uncertainties during the production period 1 when the farmer can hedge only in the commodity futures market he cannot eliminate both the price and output uncertainties by any hedging strategy 2 as the farm income represents a significant portion of his wealth he must necessarily hold an undiversified portfolio during the production period therefore in essence the farmer must solve for his investment consumption behavior and his hedging strategy facing the nonmarketable asset problem mayers 14 in a multiperiod framework in this context one can see intuitively the major difference between a one

fixed rate loan commitments take down risk and the dynamics of hedging with futures this paper develops a normative model to analyze the hedging and fee pricing decisions of a financial institution supplying fixed rate loan commitments to its customers in supplying fixed rate loan commitments the financial institution hereafter referred to as bank is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts while most pre vious loan commitment models have analyzed the interest rate or price risk the bank faces in supplying fixed rate loan commitments they either have ignored or assumed away the loan take down or quantity risk l in general by making a formal fixed rate loan commitment the bank exposes itself to both a price and a quantity risk specifically a formal loan com mitment prespecifies the maximum size of the loan the purpose of the loan of ten project specific as well as the interest rate and fee to be paid by the borrower 14 15 however while a formal loan commitment imposes a contractual re quirement on the bank to supply funds up to a maximum amount at an agreed rate of interest the expected size of the loan to be taken down is often uncertain the reason is that for project specific lines of credit the amount taken down will depend on the future state s of the world that are revealed to the borrower at the end of the commitment period as well as on the limitations and constraints im posed on the use of funds in the loan commitment contract for example construction delays and other market imperfections that hamper a planned invest

a comment on bank funding risks risk aversion and the choice of futures hedging instrument in a recent article koppenhaver 1985 presents what he calls an alternative to the portfolio choice approach to hedging based on a firmtheoretic model of bank behavior with financial futures the central purpose of koppenhaver s paper is to demonstrate the importance of taking into account both price and quantity risk in a bank s hedging decision however koppenhaver also claims that his firm theoretic approach is distinct from the standard portfolio choice approach ederington 1979 as applied to the hedging problem faced by a bank koppenhaver s paper has taken on increased importance due to the publication of empirical studies morgan shome and smith 1988 hereafter mss which apply his model to evaluating the hedging performance of various banks we will demonstrate here that there is no meaningful distinction between the portfolio choice approach and the firm theoretic approach presented by koppenhaver in fact we will show that the alleged distinction between the two emphasized by koppenhaver can actually be traced to an apparent misunderstanding of the properties of covariances koppenhaver postulates a model of a banking firm where the bank earns revenues from loans which are funded with either certificates of deposit or deposits koppenhaver assumes that the cd interest rate is random while the interest rates on loans and on deposits are known with certainty the bank may use futures markets to hedge the risk of the random cd rate koppenhaver then derives the quantity of futures contracts which maximizes the expected utility of profits for the bank under the alternative assumptions of constant absolute or constant relative risk aversion it is important to note that in this formulation there are only two random variables the futures contract interest rate at the end of the period rx and the random cd interest rate rb in part of this paper koppenhaver also introduces a random deposit flow while a basic purpose of koppenhaver s paper is to jointly model quantity and price uncertainty the random deposit flow as he points out is not an essential part of his analysis of the uniqueness of the firm theoretic approach koppenhaver directly compares the optimal hedge in his firm theoretic model with that which derives from a portfolio choice model see his equations 11 and 12 his conclusion is the solutions in equations 11 and 12 are equal only

basis risk partial takedown and hedging by financial intermediaries in this paper we provide a model of futures market equilibrium in which both financial intermediaries and their customers are able to hedge both quantity and price risk the interplay between alternative loan commitment arrangements and hedging decisions is examined in some detail as an example we show conditions under which futures contracts can be used in conjunction with a particular loan pricing scheme to replicate another pricing mechanism by considering both input and output price uncertainty we argue that due to the built in hedge on their balance sheets the equilibrium hedge ratios for both firms and intermediaries is less than one that is a partial hedge this generalization also allows us to provide counterexamples to some commonly held beliefs concerning futures trading for example that hedgers would always want to avoid basis risk