implementing efficient allocations in a model of financial intermediation abstract in a finite trader version of the diamond and dybvig j polit econ 91 1983 401 model the ex ante efficient allocation is implementable by a direct mechanism i e each trader announces the type of his own ex post preference in which truthful revelation is the strictly dominant strategy for each trader when the model is modified by formalizing the sequential service constraint cf wallace fed reserve bank minneapolis quart rev 12 1988 3 the truth telling equilibrium implements the symmetric ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies

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

harvests and business cycles in nineteenth century america most major american industrial business cycles from around 1880 to the first world war were caused by fluctuations in the size of the cotton harvest due to economically exogenous factors such as weather wheat and corn harvests did not affect industrial production nor did the cotton harvest before the late 1870s the unique effect of the cotton harvest in this period can be explained as an essentially monetary phenomenon the result of interactions between harvests international gold flows and high powered money demand under america s goldstandard regime of 1879 1914

inventory control with product returns the impact of imperfect information product returns are characterized by considerable uncertainty on time and quantity in the literature on inventory management for product return environments best forecasts of future returns are associated with methods that use the most information regarding product return history in practice however data is often scarce and unreliable while forecasts based on historical data reliable or not are never perfect in this paper we therefore investigate the impact of imperfect information with respect to the return process on inventory management performance we show that in the case of imperfect information the most informed method does not necessarily lead to best performance the results have relevant implications regarding investments in product return information systems

who borrows from the lender of last resort understanding why banks borrow from the lender of last resort lolr during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions we document a strong divergence among banks take up of lolr assistance during the nancial crisis in the euro area as banks which borrowed heavily also used increasingly risky collateral we propose four explanations for this divergence

how to set price and quality in a supply chain of virtual products under bi criteria and risk consideration abstract virtual products are characterized by ample production capacity zero lead time and no holding costs we consider a two echelon supply chain of a virtual product consisting of a single manufacturer and a single retailer who face random demand demand depends on both price and quality of the product and its stochastic nature exposes the supply chain members to financial risk each party adopts profit criteria that reflect his or her attitude toward this risk including the use of bi criteria by formulating a model that follows a stackelberg game and using the stochastic dominance property we show that one can analytically obtain equilibrium by assuming certain common structures of the demand function and of the risk attitudes the contribution of this study is fourfold i analyzing multiplicative and additive demand forms and comparing the properties of the decisions under the two forms ii showing that under the multiplicative demand form the pricing strategies are not affected by the parties attitudes toward risk whereas the manufacturer s decision on quality investment is affected by his risk attitude iii showing that under the additive demand form the manufacturer s utility function and the demand uncertainty affect pricing and investment strategies and iv suggesting a method to construct the efficient set of decisions and the non dominated set of profit criterion values

quality and competition in recent years the practitioner literature in operations management has seen a dramatic surge in articles on quality management it reflects the increased emphasis on quality by u s firms which has been attributed largely to increased competition faced by them the question of how quality is influenced by competitive intensity however has not received much attention either in the practitioner or the academic research literatures the notion of competitive intensity itself has not been defined precisely in this paper we develop formal models of oligopolistic competition to investigate whether equilibrium levels of quality increase as competition intensifies we consider three different competitive settings i asymmetric duopolistic competition where the dominant firm s intrinsic demand potential decreases ii a symmetric duopoly where the firms are precluded from cooperating in setting quality levels and iii symmetric oligopolistic competition where the number of firms increases we find that the relation between equilibrium quality and competitive intensity depends on what is understood by increased competition and in addition the relation is contingent on the values of parameters describing the cost and demand structure for the industry

measuring the liquidity effect this paper measures the effect on the federal funds rate of an open market operation the paper deals with simultaneous equations bias by developing a proxy for the errors the federal reserve makes in forecasting the extent to which treasury operations will add or drain reserves available to private banks these errors induce fluctuations in bank reserves which have measurable consequences for the federal funds rate the paper estimates that a reduction in nonborrowed reserves of 30 million if sustained for an entire fourteen day reserve maintenance period will cause the federal funds rate to rise by ten basis points copyright 1997 by american economic association

identifying the effects of a lender of last resort on financial markets lessons from the founding of the fed abstract we use the founding of the federal reserve to identify the effects of a lender of last resort we examine stock return and interest rate volatility during september and october when markets were vulnerable because of financial stringency from the harvest stock volatility fell by 40 and interest rate volatility by more than 70 following the monetary regime change the drop is insignificant if major panic years are omitted from the analysis however because business cycle downturns occurred in the same year as financial crises our results suggest that the existence of the federal reserve reduced liquidity risk

impact of uncertainty in the quality of returns on the profitability of a single period refurbishing operation this paper investigates how the profitability of reuse activities is affected by uncertainty regarding the quality of returned products specifically we examine a reverse supply chain consisting of two collection sites and a refurbishing site which faces stochastic demand for refurbished products in a single period setting the quality of returns refurbishing yield becomes known only after the transportation of the products to the refurbishing site we prove that the expected profit function has a unique optimal solution procurement and production quantities and we derive the conditions under which it is optimal to use only one of the collection sites the analysis is supported by numerical results which provide insights regarding the effect of the uncertain yields at the two collection sites and their correlation on optimal decisions and system profitability

managing product returns to achieve supply chain sustainability an exploratory study and research propositions abstract the aim of this article is to develop research propositions for product returns management using the institutional theory int as the foundation for the study the paper culminates with a research model based on this theoretical perspective to examine the input and output of product returns management as part of a comprehensive sustainability effort the study is exploratory in nature based on five case studies of participating manufacturers in the automotive and electrical and electronics industry in malaysia the interview results reveal that the five participating companies established a product returns management program to handle three types of product returns found in their organizations this is not surprising because successful product returns management has a number of internal and external benefits to the firms our interviews also uncover that the abundant amount of product returns is pressing these companies to implement an effective product returns management program based on the primary and secondary data collected in this study three propositions are developed for future research which should be tested with a large empirical data set to strengthen the theoretical contributions and managerial implications of this study

quantifying the uncertainty about the half life of deviations from ppp we propose a bayesian framework in which the uncertainty about the half life of deviations from purchasing power parity can be quantified based on the responses to a survey study we propose a prior probability distribution for the half life under the recent float intended to capture widely held views among economists we derive the posterior probability distribution of the half life under this consensus prior and confirm the presence of substantial uncertainty about the half life we provide for the first time a comprehensive formal evaluation of several nonnested hypotheses of economic interest including rogoff s 1996 claim that the half life is contained in the range of 3 to 5 years we find that no hypothesis receives strong support from the data copyright 2002 john wiley sons ltd

financial fragility and the exchange rate regime abstract we study financial fragility exchange rate crises and monetary policy in a model of an open economy with diamond dybvig banks the banking system the exchange rate regime and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare if the mechanism fails banking crises and speculative attacks on the currency become possible we compare currency boards fixed rates and flexible rates with and without a lender of last resort a currency board cannot implement a social optimum in addition it allows bank runs to occur a fixed exchange rate system may implement the social optimum but is more prone to bank runs and exchange rate crises than a currency board a flexible rate system implements the social optimum and eliminates runs provided that the exchange rate and credit policies of the central bank are appropriately designed journal of economic literature classification numbers f3 e5 g2

were price changes during the great depression anticipated abstract this paper reassesses whether the large swings in prices during the 1930 s were anticipated we argue that uncertainty about monetary fiscal and exchange rate policies induced systematic differences between the rate of price change expected by economic agents at the time and the time series forecasts of inflation our analysis of nominal interest rates and ex post inflation strongly supports this view in fact our results suggest that the deflation of the early depression years and the inflation that followed were both largely unanticipated

coordinating a decentralized supply chain with customer returns and price dependent stochastic demand using a buyback policy abstract we investigate a decentralized supply chain that consists of a manufacturer and a retailer where the retailer simultaneously determines the retail price and order quantity while experiencing customer returns and price dependent stochastic demand we propose an agreement between the manufacturer and the retailer that includes two buyback prices one for unsold inventory and a second for customer returns and show that this type of easy to implement agreement can achieve perfect supply chain coordination and be a win win for both manufacturer and retailer when a complementary profit sharing agreement is included

border region panel evidence on ppp deviations this article examines prices for 32 identical menu items sold by restaurant franchises operating on both sides of the border between el paso in the us and ciudad juarez in mexico from july 1997 to june 2008 the relationship between real exchange rate rer volatility and the degree of price convergence is examined within a panel data context the city pair and goods selected provide a unique experiment in which distance tradability and industry considerations are set aside and the extent of rer volatility is the only factor to influence price convergence we find nonmonotonic relationships between mean reversion and rer volatility very fast adjustments for both low and high volatility panels of goods between 1 and 2 months and slower half lives between 3 and 4 months at moderate levels of uncertainty these figures are however substantially smaller than the 6 or 7 months reported in previous research for general us mexico goods suggesting the very strong price convergence observed along the us m

from drafts to checks the evolution of correspondent banking networks and the formation of the modern u s payments system 1850 1914 checks remained local payments instruments throughout virtually the entire nineteenth century their significant use in interregional transactions dates only to the 1890s we explain their lagged spatial diffusion by the evolution of centralized payments institutions to coordinate transactions among myriad banks not real technological changes to annihilate distance the pivotal institutions were large correspondent banks especially in new york after the civil war new york funds constituted a national settlement medium and the concentration of bankers balances in new york yielded liquidity and other externalities smoothing the flow of check payments

how amsterdam got fiat money abstract a fiat money system was introduced in the seventeenth century by a prominent public bank of the time the bank of amsterdam employing data from the bank s archives we show that bank money became a more attractive transactions medium following a 1683 policy change which unbundled the bank s account balances from a right to redeem these balances in coin balances not matched by a redemption right became fiat this change also stabilized the value of bank money as a unit of account freed the bank from defensive open market operations and promoted seigniorage collection

product quality and return policy in a supply chain under risk aversion of a supplier abstract this study aims to identify the relationship between return policy and product quality decisions in a decentralized system we consider a supply chain situation as in a retail or oem supply chain system where a buyer decides a return policy for consumers and delegates the product quality decision to a supplier we consider the supplier s different risk attitudes whether risk averse or risk neutral a penalty contract is introduced to control the supplier s hidden action conveying external failures due to returns to the supplier we show the conditions for supply chain coordination and demonstrate that product quality enhancement needs to precede a generous return policy setting in view of the prevalent business environment and current supply chain management practices moreover we indicate the optimal conditions for a generous return policy setting without quality enhancement

liquidity and contagion the crisis of 1763 the financial crisis that swept across northern europe in 1763 bears a strong resemblance to more recent episodes of financial distress the combination of the specific contractual arrangements at the time interlocking credit relationships and the high leverage of market participants triggered distress sales of assets leading into a severe liquidity crisis hence the crisis is an early instance of contagion on the asset side of the balance sheet we highlight the salient features of the 1763 crisis and propose a stylized model of the events whilst the financial institutions have changed fundamentally in the intervening two hundred or so years the underlying problems appear to be universal

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

optimal inventory decisions for a risk averse retailer when offering layaway abstract layaway allows economically disadvantaged budget constrained consumers to purchase expensive items through amortized payments and nominal program fees as opposed to using high interest financing options such as credit cards and payday loans we consider a risk averse retailer s ordering decisions when offering a layaway program we use the net loss and total loss functions found in the literature to determine a risk averse retailer s optimal order quantity under conditional value at risk cvar we next analyze the effects of the model parameters retailer s risk aversion the market default rate enrollment fee cancellation fee and so on on the optimal order quantity decisions we show that the optimal order quantity depends on different loss functions and different demand distribution functions further we show that as market default rate increases or the retailer becomes more risk averse then a rational retailer will not offer a layaway program

purchasing power parity and country characteristics evidence from panel data tests abstract we examine long run purchasing power parity ppp using panel data methods to test for unit roots in us dollar real exchange rates of 84 countries we find stronger evidence of ppp in countries more open to trade closer to the united states with lower inflation and moderate nominal exchange rate volatility and with similar economic growth rates as the united states we also show that ppp holds for panels of european and latin american countries but not for african and asian countries our findings demonstrate that country characteristics can help explain both adherence to and deviations from long run ppp

monetary policy theory and practice in respect of the theory of monetary policy i am reminded of the comment that jacob viner made many years ago at a meeting of the american economic association about alfred marshall s economics what is new is highly unlikely at this late date also to be true and significant 1 consequently i shall restrict my remarks on theory to trying to summarize what i regard as the present intellectual position

sources of panics evidence from the weekly data abstract we use weekly data 1867 1933 to investigate the sources of banking and financial panics we find that while a panic s exact starting date is unpredictable one can identify environments conducive to panics a lack of liquidity in financial markets seems to be a key source results also reveal the effectiveness of the aldrich vreeland act inelastizing the money supply and shortening the panic of 1914 and suggest that the panic of 1933 may have been caused by a speculative attack on the gold backed us dollar via the banks as opposed to a run on the banks directly

managing consumer returns in a competitive environment this paper investigates the pricing and restocking fee decisions of two competing firms selling horizontally differentiated products we model a duopoly facing consumers who have heterogeneous tastes for the products and who must experience a product before knowing how well it matches with their preferences the analysis yields several key insights restocking fees not only can be sustained in a competitive environment but also are more severe when consumers are less informed about product fit and when consumers place a greater importance on how well products attributes fit with their preferences we compare the competitive equilibrium prices to a scenario in which consumers are certain about their preferences and find conditions defining when consumer uncertainty results in higher equilibrium prices comparison to a monopoly setting yields a surprising result equilibrium restocking fees in a competitive environment can be higher than those charged by a monopolist this paper was accepted by jagmohan s raju marketing

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

ppp strikes back aggregation and the real exchange rate we show the importance of a dynamic aggregation bias in accounting for the ppp puzzle we prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics established time series and panel methods fail to control for this using eurostat data we find that when heterogeneity is taken into account the estimated persistence of real exchange rates falls dramatically its half life for instance may fall to as low as eleven months significantly below the consensus view of three to five years

money creation and the shadow banking system many explanations for the rapid growth of the shadow banking system in the mid2000s focus on money demand this paper asks whether the short term liabilities of the shadow banking system behave like money we rst present a simple model where households demand money services which are supplied by three types of claims deposits treasury bills and asset backed commercial paper abcp the model provides predictions for the price and quantity dynamics of these claims as well as the behavior of the banking system in terms of issuance and the monetary authority in terms of open market operations consistent with the model the empirical evidence suggests that the shadow banking system does respond to money demand

shadowy banks and financial contagion during the great depression a retrospective on friedman and schwartz this essay assesses whether network linkages within the banking system amplified the real effects of bank failures during the great contraction in 1929 nearly all interbank deposits held by federal reserve member banks belonged to shadowy nonmember banks which were outside the regulatory reach of federal regulators regional banking panics in the early 1930s drained these interbank deposits from central reserve city banks money center banks in chicago and new york responded to volatile and declining interbank deposits by changing their asset composition they reduced their lending to businesses and individuals and increased their holdings of cash and government bonds

the role of the federal reserve as lender of last resort and the seasonal fluctuation of interest rates the federal reserve s role as a lender of last resort may explain why the seasonal fluctuation of interest rates appeared to decline around 1914 the creation of the fed reduced the seasonal fluctuation of both the probability of a bank receiving an emergency loan and the probability of a financial panic the seasonality of real interest rates could therefore have declined regardless of whether the fed conducted seasonal open market operations the evidence is consistent with the lender of last resort model copyright 1991 by ohio state university press

a dynamic model for optimal design quality and return policies abstract a clearly explained and generous return policy has been established as a competitive weapon to enhance sales from the firm s point of view a generous return policy will increase sales revenue but will also increase cost due to increased likelihood of return design quality of the product has been used as a competitive weapon for a long time this paper recognizes the relationship between design quality and price of the product and the firm s return policy quality level in the product would influence the amount of return directly when the product quality is higher the customer satisfaction rate will increase and the probability of return will decrease we develop a profit maximization model to jointly obtain optimal policies for the product quality level price and the return policy over time the model presented in this paper is dynamic in nature and considers the decisions as the product moves through the life cycle we obtain a number of managerial guidelines for using marketing and operational strategy variables to obtain the maximum benefit from the market we mention several future research possibilities

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

a model of commodity money abstract commodity money is modeled as one or two of the capital goods in a one consumption good and one or two capital good overlapping generations model among the topics addressed using versions of the model are i the nature of the inefficiency of commodity money ii the validity of quantity theory predictions for commodity money systems iii the circumstances under which one commodity emerges naturally as the commodity money iv the role of inside money money backed by private debt in commodity money systems and v the circumstances under which a government can choose the commodity to serve as the commodity money

liquidity risk bank networks and the value of joining the federal reserve system reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the federal reserve system existing evidence on the post federal reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission nevertheless less than 8 percent of state chartered banks joined the federal reserve in its first decade some have speculated that nonmembers could avoid higher costs of the federal reserve s reserve requirements while still obtaining access indirectly to the federal reserve discount window through contacts with federal reserve members we find that individual bank attributes related to the extent of banks ability to mitigate seasonal loan demand variation predict banks decisions to join the federal reserve consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers we find that a bank s position within the interbank network as a user or provider of liquidity predicts the timing of its entry into the federal reserve system and the effect of federal reserve membership on its lending behavior we also find that indirect access to the federal reserve was not as good as direct access federal reserve member banks saw a greater increase in lending than nonmember banks

interest rate seasonals and the federal reserve it is widely believed that one of the federal reserve s first important monetary policy achievements was the deseasonalization of interest rates the federal reserve supposedly accomplished this by introducing appropriate seasonal movements into the supplies of currency and high powered money this view implicitly assumes that there was no interaction between american and foreign financial markets two findings are reported that challenge this conventional view first interest rate seasonals disappeared in the united states and other countries at approximately the same time second interest rate seasonal ended approximately 3 years before the seasonal movements of currency and high powered money changed

a prism into the ppp puzzles the micro foundations of big mac real exchange rates we match big mac prices with prices of its ingredients as a unique prism to study real exchange rates rers this approach has several advantages first the levels of the big mac rer can be measured meaningfully second as the exact composition of a big mac is known the contributions of its tradable and non tradable components can be estimated relatively precisely third the dynamics of the rer can be studied in a setting free of several biases inherent in cpi based rers finally a large cross country dimension allows us to overturn the engel result on what drives rers in most economies the exchange rate is the single most important relative price one that potentially feeds back into a large range of transactions obstfeld and rogoff 2000

the federal reserve amendments of 1917 the beginning of a seasonal note issue policy the federal reserve adopted a policy of smoothing the seasonal behavior of interest rates after the amendments of 1917 these amendments reduced the collateral requirements for notes issued and thereby increased note issue capability notes in circulation more than doubled from june to december 1917 these amendments were passed to assist with war related financing as their timing coincided with the entry of the united states into world war i the smoothing of interest rates seasonals between 1914 and 1917 was not due to the founding of the federal reserve system but rather to trade related gold flows copyright 1991 by ohio state university press

public ends private means abstract this paper is an empirical investigation into the practices of the second bank of the united states during the decade preceding andrew jackson s veto of the bank a new monthly data set derived from financial publications and second bank records of the time is employed to investigate whether the bank operated in the public interest as argued by its supporters or to further its own monopolistic interests as argued by its detractors the paper analyzes the role played by this early central bank and provides an intriguing example of one experiment in the private provision of public goods

manufacturer s return policies and retail competition manufacturers returns policies are a common feature in the distribution of many products the obvious rationale for returns policies is insurance practitioners not surprisingly have a different perspective and view returns as a cost of doing business in this paper we study the strategic effect of returns policies on retail competition and highlight its profitability implications for a manufacturer the setting for our research is the distribution of products with uncertain demand limited shelf lives and retail competition our objective is to provide a better understanding of when manufacturers should adopt returns policies the insights are obtained with a model based on the economics of strategy and decision making under uncertainty we show that when retailing is competitive and there is no uncertainty in demand a returns policy subtly induces retailers to compete more intensely the provision of a returns policy reduces retail prices without affecting wholesale prices thereby reducing retailer margins and improving manufacturer profitability the intuition is that with a returns policy cournot like levels of retail stocks cannot be sustained each retailer will order stocks so that it will not be constrained by stocks and so intensifying retail competition when however demand is uncertain and there is a single retailer a returns policy encourages the retailer to over stock and so decreases upstream manufacturer profits while the provision of a returns policy leads to lower retail margins the optimality of returns policy depends on the overall uncertainty and marginal cost a returns policy reduces the dispersion in retail prices between the high and low states of demand and the range of retail prices in the returns case is contained within the range of retail prices for the no returns case in the general setting when there are competing retailers and demand is uncertain there is a trade off for the manufacturer between the benefits more intense retail competition and the costs excessive stocking of a returns policy we find that a manufacturer should accept returns when the marginal production cost is sufficiently low and demand uncertainty is not too great to validate the results of our theory we conduct an empirical test with data from a major u s retailer the tests confirm our prediction that a returns policy intensifies retail competition and reduces retailer margins our theory and empirical test should interest practitioners and researchers in distribution especially those concerned with managing retail competition

origins of the federal reserve system international incentives and the domestic free rider problem from the civil war to 1914 the united states had one of the worst e nancial systems in the world the dominant institutional feature of the system was the absence of a central bank and its most salient performance characteristics were the recurrence of banking panics and severe seasonal interest rate e uctuations these e nancial problems were economically costly panics were accompanied by sharp declines in the money supply reduced economic activity and increased unemployment and business failures in 1913 congress created the federal reserve system to safeguard the nation from panics and smooth out interest rate seasonals in more general terms the federal reserve was established to provide the national public good of e nancial system stability in this study i explain how american society overcame the collective action problems that normally constrain the production of public goods to inadequate levels in other words the article is about the political effort that produced an infrastructural cornerstone of the modern u s economy in the face of incentives that should have left few people with sufficient motivation to pay for the improvement i bring to bear a joint products selective incentives argument to explain the voluntary collective action behind the federal reserveact 1 the lobbying effort was aboutsolving thepanic problem tobe sure but becausethisexpected benee t approximated a societywide public good it did not on its own motivate collective action instead the united states faced a second problem of e nancial organization before 1914 and it was this problem that created a private inducement to lobby for the federal reserve the structure of the domestic e nancial machinery contributed not only to instability at home but also to the near complete absence of the u s dollar in global e nancial affairs indeed the united states was the only major trading country whose currency did not function as an international currency before 1914 the new this article is a revision of a paper delivered at the 1996annual convention of the southern economic association washington d c 23 25 november i thank michael bordo marc busch william r clark benjamin j cohen barry eichengreen jeffry frieden william keech stephen krasner charles lipson jameslivingston louispauly georgeselgin bethsimmons richardtimberlake danielverdier eugene n white and two anonymous reviewers for very helpful comments 1 see olson 1965 and sandler 1992

the costs and benefits of moral suasion evidence from the rescue of long term capital management this study examines the level of unsecured borrowing done by the firms that ultimately rescued long term capital management in the days leading up to the hedge fund s rescue although these banks borrowed less at the height of the crisis evidence suggests that this reduction in borrowing was demand driven and did not result from rationing by the market further it is shown that large banks that were not involved with the ltcm rescue saw the rates they pay for unsecured funds decline following the hedge fund s resolution this finding is consistent with an increase in the strength of a too big to fail policy

purchasing power parity and aggregation bias for a developing country the case of mexico abstract this paper investigates long run purchasing power parity ppp between the us and mexico we use a panel of disaggregated price data between the us and mexico with a long time series to look at two types of aggregation bias the first is examined in imbs et al which we refer to as estimator aggregation bias and the second is put forth by broda and weinstein hereafter data aggregation bias the findings indicate substantial estimator aggregation bias and data aggregation bias although estimates using aggregate data and imposing homogeneous coefficients provide little evidence of ppp findings with disaggregated data and heterogeneous coefficient estimators offer strong support the results also suggest the presence of small sample bias as examined in chen and engel but with little effect on the qualitative results tradable goods and non tradable goods show little distinction in convergence rates estimated half lives are lower under flexible than fixed exchange rates and indicate rapid convergence during the mexican peso crisis

the worldwide change in the behavior of interest rates and prices in 1914 abstract this paper evaluates the role of the destruction of the gold standard and the founding of the federal reserve both of which occured in 1914 in contributing to observed changes in the behavior of interest rates and prices after 1914 the paper presents a model of policy coordination in which the introduction of the fed stabilizes interest rates even it the gold standard remains intact and it offers empirical evidence that the dismantling of the gold standard did not play a crucial role in precipitating the changes in interest rate behavior

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

the bank of amsterdam and the leap to central bank money central bank money is the foundation of modern monetary and payment systems central bank money defines a unit of account the price at which this money trades determines monetary policy and most payment systems require the transfer of central bank funds before a transaction is legally final or settled despite its current ubiquity the origins of central bank money have remained obscure and the present day system involves a remarkable conceptual leap from earlier coin based systems in this paper we recount how the critical innovation the creation of a unit of account that could be maintained solely through open market operations took place in the seventeenth century dutch republic for a more detailed examination see quinn and roberds 2005 quinn and roberds 2006 the villain in our story is the incremental debasement that unsettled the quality of new coins and the price of old coins the protagonists are the dutch authorities who contended with debasement by regulating the price of coins and by creating exchange banks the bank of amsterdam in particular to assure the quality of coins the plot is propelled forward because well intentioned regulatory changes exacerbated the debasement problem resolution began when authorities disconnected the bank of amsterdam from the price of circulating coins the solution was conceptually difficult because a coin would have a different price in the bank of amsterdam than it had outside once this dichotomy was accepted however a robust market developed to mediate the relationship between the bank of amsterdam and circulating coins and ledger accounts at the bank become the de facto means of final settlement in the end the final step into the world of fiat money the elimination monetary systems transitions and experiments

economic growth liquidity and bank runs abstract we construct an endogenous growth model in which bank runs occur with positive probability in equilibrium in this setting a bank run has a permanent effect on the levels of the capital stock and of output in addition the possibility of a run changes the portfolio choices of depositors and of banks and thereby affects the long run growth rate these facts imply that both the occurrence of a run and the mere possibility of runs in a given period have a large impact on all future periods a bank run in our model is triggered by sunspots and we consider two different equilibrium selection rules in the first a run occurs with a fixed exogenous probability while in the second the probability of a run is influenced by banks portfolio choices we show that when the choices of an individual bank affect the probability of a run on that bank the economy both grows faster and experiences fewer runs

leverage and beliefs personal experience and risk taking in margin lending what determines risk bearing capacity and the amount of leverage in financial markets using unique archival data on collateralized lending we show that personal experience can affect individual risk taking and aggregate leverage when an investor syndicate speculating in amsterdam in 1772 went bankrupt many lenders were exposed in the end none of them actually lost money nonetheless only those at risk of losing money changed their behavior markedly they lent with much higher haircuts the rest continued as before the differential change is remarkable since the distress was public knowledge overall leverage in the amsterdam stock market declined as a result

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

the sources of financial crises pre and post fed evidence this paper investigates the generation and the propagation mechanism of currency demand and supply shocks before and after world war i the structural determinants of the variability of stock prices and interest rates and the changes introduced by the creation of the fed on the dynamics of the system it is shown that in the pre 1914 era external monetary shocks interacted with a seasonal demand for money to produce financial crises the fed helped to prevent crises by insulating the u s economy from external shocks a structural vector autoregressive model provides evidence for these claims copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

price delegation and salesforce contract design with asymmetric risk aversion coefficient of sales agents abstract an important issue that has attracted the interest of academics and practitioners in both marketing and operations is should pricing decisions be made by the firm or delegated to the salesforce this problem has been addressed in the research literature based on the assumption that the exact risk aversion coefficients of the sales agents are known to the firm which may not be true in most applications in this paper we study this problem but assuming that the risk aversion coefficients of agents are private information of the sales agents for both centralized pricing and delegated pricing settings the optimal compensation and pricing contracts are designed and the sensitivity analyses are conducted an interesting finding is that the risk aversion and effort valuation have substitutable impacts on the pricing policy preference of the firm and the agents either strong risk aversion or high effort valuation can drive the firm and the agents to favor centralized pricing over delegated pricing

reply to do returns policies intensify retail competition returns policies are common in many sectors of retail distribution padmanabhan and png 1997 showed that with demand uncertainty a returns policy could improve manufacturer profitability under certain conditions wang 2004 showed that returns policies do not change manufacturer profitability when demand is certain and retailing is competitive we show that returns policies do increase manufacturer profitability by attenuating retailer price competition when demand is low and intensifying competition when demand is high importantly this effect holds only in the presence of demand uncertainty further the conditions under which a returns policy raises the manufacturer s profit are weaker when retailing is a duopoly than when retailing is a monopoly this suggests that returns policies serve both to manage competition and mitigate demand uncertainty

more on the behavior of interest rates and the founding of the fed abstract the paper addresses the issue of the impact of the foundation of the federal reserve system in 1914 on the behavior of short term interest rates empirical evidence is presented showing that no change of regime can be detected in the process governing short term rates in the years straddling the foundation of the fed since the behavior of this process did change in the decade 1910 1920 the paper discusses some historical events and institutional changes in the new york money market that had an impact on the behavior of short term interest rates between 1908 and 1920

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

banks as monitors of other banks evidence from the overnight federal funds market this study provides evidence that banks are effective monitors of their peers by showing that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers in addition the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing thereby providing insight into the nature of competition in the federal funds market transaction volume and size of transaction effects are uncovered as is evidence of relationship banking between banks these results are made possible by unique data identifying individual federal funds transactions copyright 2001 by university of chicago press

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

nominal exchange rate regimes and the real exchange rate abstract two assumptions about the real exchange rate are common in the literature on international finance 1 the real exchange rate is a random walk 2 the time series properties of the real exchange rate depend on the nominal exchange rate regime this paper presents evidence that indicates that the random walk behavior of the real exchange rate is only a characteristic of the post world war ii period moreover our findings also suggest that what is crucial to the real exchange rate behavior is the particular historical period rather than the nominal exchange rate arrangement

economic integration across latin america evidence from labor markets 1990 2013 combining macroeconomic and microeconomic data and three indicators of international market integration this paper assesses the degree to which latin american labor markets are integrated the results suggest that relative to east asia latin american labor markets are somewhat more integrated but considerable differences across countries persist in addition the evidence indicates that the degree of labor market integration across latin american borders is significantly less than that of labor markets within mexico and within the united states in two of the three indicators these differences may suggest opportunities for efficiency gains from further labor market integration

great crashes in history have they lessons for today crashes in asset markets have been common throughout history while financial crises defined as crises in the banking system have in some countries and periods been as common and in others much more rare this article examines historical attitudes to those events and looks at some of the events themselves it is concluded first that crashes need not inevitably be followed by crises second that crashes without crises do not have serious effects on the economy and third that there is a policy instrument the lender of last resort to prevent financial crises from occurring even should there be a substantial preceding fall in asset markets these lessons from history so it is argued hold for recent events in south east asia and indeed apply generally to any economy the present can still learn from the past copyright 1999 by oxford university press

warranties as signals under consumer moral hazard this article examines the use of prices and warranties as signals of product quality to consumers who choose how to maintain their purchases the seller s incentives are strongly affected by the interaction of quality and maintenance in determining product reliability two different assumptions about this interaction are made a separating equilibrium in which high quality is signalled with a low warranty and low price is shown to be possible in both cases

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

asymmetric fuel price responses under heterogeneity we explore the effect of cross sectional aggregation of data on estimation and test of asymmetric retail fuel price responses to wholesale price shocks the analysis is performed on data collected daily from individual fuel stations in the spanish metropolitan areas of madrid and barcelona while the standard ols estimator is applied to an error correction model in the case of the aggregated time series we use the mean group approaches developed by pesaran and smith 1995 and pesaran 2006 to estimate the short and long run micro relations under heterogeneity we found remarkable differences between the results of estimations using aggregated and disaggregated data which are highly robust to both datasets considered our findings could help to explain many of the results in the literature on this research topic on the one hand they suggest that the typical estimation with aggregated data clearly tends to overestimate the persistence of shocks on the other hand we show that aggregation may generate a loss of efficiency in econometric estimates that is sufficiently large to hide the existence of the rockets and feathers phenomenon

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

financial panics the seasonality of the nominal interest rate and the founding of the fed after the founding of the fed in 1914 the frequency of financial panics and the size of the seasonal movements in nominal interest ratesboth declined substantially this paper establishes that the fed by carrying out the seasonal open market policy that eliminated the seasonal in nominal interest rates caused the decrease in the frequency of panics since seasonal movements are anticipated and financial panics are probably real events the results show that an anticipated monetary policy had real effects on the economy copyright 1986 by american economic association

were financial crises predictable this paper empirically investigates the nature of financial crises in the united states before 1914 it attempts to determine whether crises were statistically similar predictable and had a common generating mechanism using probit and hazard models and out of sample criteria it is shown there are variables that explain movements in the probability of crises and that the probability of crises is seasonal two crises were predictable but in the other six episodes every forecasting model examined failed these results suggest that financial crises were not all statistically alike and that their generation mechanisms differed copyright 1994 by ohio state university press

channel coordination using product returns for a supply chain with stochastic salvage capacity abstract we examine returns policy in a newsboy framework unlike the prior literature however we assume that both supplier and retailer have limited and stochastic salvage capacities we first analyze the case of integrated supply chain in which the agents decisions are fully coordinated for the joint profits the result prescribes a partial returns policy in which the retailer returns a part of the leftovers to the supplier and liquidates the remainder through its clearance sale in a decentralized system the supplier should motivate the retailer to duplicate the outcome of the integrated system in choosing order and returns quantities we propose three coordination contracts of which each uses two benefit transfer schemes as an incentive to the retailer instead of using a single benefit scheme as in the prior literature all three effectively coordinate the supply chain the supplier as a stakelberg leader chooses the most profitable one since each contract yields the different shares of the agents profits

responding to a shadow banking crisis the lessons of 1763 in august 1763 northern europe experienced a financial crisis with numerous parallels to the 2008 lehman brothers episode the 1763 crisis was sparked by the failure of a major provider of acceptance loans a form of securitized credit resembling modern asset backed commercial paper the central bank at the hub of the crisis the bank of amsterdam responded by broadening the range of acceptable collateral for its repo transactions analysis of archival data shows that this emergency source of liquidity helped to contain the effects of the crisis by preventing the collapse of at least two other major securitizers while the underlying themes seem to have changed little in 250 years the modest scope of the 1763 liquidity intervention together with the lightly regulated nature of the eighteenth century financial landscape provide some informative contrasts with events of late 2008

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

a positive model of reserve requirements and interest on reserves a clearinghouse interpretation of the federal reserve system this paper develops a positive model of reserve requirements and interest on reserves based on the observation that congress exempted the fed from a legal restriction that had prevented private clearinghouses from issuing their own currency eliminating the restriction provided the fed with a source of revenue that could be used to finance general government outlays and to pay implicit interest on reserves the model implies that the government s financing requirements help explain reserve requirement movements and that interest rates on reserves vary with market loan rates cointegration error correction and granger causality tests provide supporting evidence