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

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

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

macroeconomic forecasting using pooled international data it has long been recognized that national economies are economically interdependent see e g burns and mitchell 1946 for evidence of comovements of business activity in several countries and zarnowitz 1985 for a summary of recent evidence recognition of such interdependence raises the question can such interdependence be exploited econometrically to produce improved forecasts of countries macroeconomic variables such as rates of growth of output and so forth this is the problem that we address in this article using annual and quarterly data for a sample of european economic community eec countries and the united states

a comparison of autoregressive univariate forecasting procedures for macroeconomic time series the actual performance of several automated univariate autoregressive forecasting procedures applied to 150 macroeconomic time series are compared the procedures are the random walk model as a basis for comparison long autoregressions with three alternative rules for lag length selection and a long autoregression estimated by minimizing the sum of absolute deviations the sensitivity of each procedure to preliminary transformations data periodicity forecast horizon loss function employed in parameter estimation and seasonal adjustment procedures is examined the more important conclusions are that akaike s lag length selection criterion works well in a wide variety of situations the modeling of long memory components becomes important for forecast horizons of three or more periods and linear combinations of forecasts do not improve forecast quality appreciably

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

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

forecasting accuracy of alternative techniques a comparison of u s macroeconomic forecasts 1986 forecasting accuracy of alternative techniques a comparison of u s macroeconomic forecasts journal of business economic statistics vol 4 no 1 pp 5 15

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

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

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

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

pooling in dynamic panel data models an application to forecasting gdp growth rates in this article we analyze issues of pooling models for a given set of n individual units observed over t periods of time when the parameters of the models are different but exhibit some similarity pooling may lead to a reduction of the mean squared error of the estimates and forecasts we investigate theoretically and through simulations the conditions that lead to improved performance of forecasts based on pooled estimates we show that the superiority of pooled forecasts in small samples can deteriorate as the sample size grows empirical results for postwar international real gross domestic product growth rates of 18 organization for economic cooperation and development countries using a model put forward by garcia ferrer highfield palm and zellner and hong among others illustrate these findings when allowing for contemporaneous residual correlation across countries pooling restrictions and criteria have to be rejected when formally tested but generalized least squares gls based pooled for

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

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

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

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

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

forecasting economic time series with structural and box jenkins models a case study the basic structural model is a univariate time series model consisting of a slowly changing trend component a slowly changing seasonal component and a random irregular component it is part of a class of models that have a number of advantages over the seasonal arima models adopted by box and jenkins 1976 this article reports the results of an exercise in which the basic structural model was estimated for six u k macroeconomic time series and the forecasting performance compared with that of arima models previously fitted by prothero and wallis 1976

the nairu unemployment and monetary policy this paper examines the precision of conventional estimates of the nairu and the role of the nairu and unemployment in forecasting inflation the authors find that although there is a clear empirical phillips relation the nairu is imprecisely estimated forecasts of inflation are insensitive to the nairu and there are other leading indicators of inflation that are at least as good as unemployment this suggests deemphasizing the nairu in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation