precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

outsourcing corporate governance conflicts of interest within the proxy advisory industry proxy advisory firms wield large influence with voting shareholders however conflicts of interest may arise when an advisor sells services to both investors and issuers using a unique data set o

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

voting power in the proxy process abstract the likelihood that a firm will enact a management sponsored antitakeover charter amendment depends on ownership structure this implies that the adoption of antitakeover amendments may be anticipated then announcement returns provide a biased estimate of wealth effects an estimator that corrects for the bias induced by anticipation indicates that the enactment of an antitakeover amendment is associated with a statistically significant decrease in shareholder wealth the voting power of employee stock ownership plans and the chief executive officer plays a prominent role in determining whether a firm will adopt this type of takeover defense

an analysis of the stability and growth pact we use a stylised model to analyse the stability and growth pact for countries that have formed the european monetary union emu in our model shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully therefore while governments have no incentive to sign a stability pact in the absence of a monetary union they do so with monetary union to restrain this externality with uncertainty a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy with differences in initial conditions conflicts of interest arise we study the nash bargaining solution

domestic banks as lightning rods home bias and information during the eurozone crisis european banks have been criticized for holding excessive domestic government debt during the recent eurozone crisis which may have intensified the diabolic loop between sovereign and bank credit risks by using a novel bank level data set covering the entire timeline of the eurozone crisis i first reconfirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks in contrast to the recent literature focusing only on sovereign debt i show that the banks private sector exposures were at least equally affected by the rise in home bias consistent with this pattern i propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises the effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation

the over the counter theory of the fed funds market a primer we present a dynamic over the counter model of the fed funds market and use it to study the determination of the fed funds rate the volume of loans traded and the intraday evolution of the distribution of reserve balances across banks we also investigate the implications of changes in the market structure as well as the effects of central bank policy instruments such as open market operations the discount window lending rate and the interest rate on bank reserves

monetary policy in a channel system abstract channel systems for conducting monetary policy are becoming increasingly popular despite its popularity the consequences of implementing policy with a channel system are not well understood we develop a general equilibrium framework of a channel system and study the optimal policy a novel aspect of the channel system is that a central bank can tighten or loosen its policy without changing its policy rate this policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest rate rules

efficiency and bargaining power in the interbank loan market using detailed transactions level data on interbank loans we examine the efficiency of an overnight interbank lending market and the bargaining power of its participants our analysis relies on the equilibrium concept of the core which imposes a set of no arbitrage conditions on trades in the market for canada s large value transfer system we show that although the market is fairly efficient systemic inefficiency persists throughout our sample the level of inefficiency matches distinct phases of both the bank of canada s operations as well as phases of the 2007 8 financial crisis we find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and surprisingly toward riskier borrowers

sovereign bond market dependencies and crisis transmission around the eurozone debt crisis a dynamic copula approach abstractwe examine the dependency between the european government bond markets around the recent sovereign debt crisis a dynamic copula approach is used to model the time varying dependence struct

unconventional economic policies and sentiment an international assessment this paper estimates using bayesian and global vars the spillover effects of unconventional fiscal and monetary policies implemented in the united states and in the eurozone during the last decade consumer confidence and investor sentiment indicators are introduced in the models in order to highlight the signalling channel in the responses to economic policy innovations in times of crisis our results reveal that consumer and investor perceptions of innovative economic measures are relevant to study the pass through of economic policies to the real sector in times of crisis and zero lower bound interest rates in particular the signalling channel plays an important role in successful unconventional economic policies moreover if unconventional economic policies have an impact abroad the effects are similar to those measured in the domestic country region consequently coordination and transparency are a prerequisite for ensuring short term growth after a global financial crisis

the structure of ownership and the theory of the firm the separation of ownership from control produces a condition where the interests of owner and of ultimate manager may and often do diverge and where many of the checks which formerly operated to limit the use of power disappear in creating these new relationships the quasi public corporation may fairly be said to work a revolution it has divided ownership into nominal ownership and the power formerly joined to it thereby the corporation has changed the nature of profit seeking enterprise 1

a model of liquidity hoarding and term premia in inter bank markets financial crises are associated with reduced volumes and extreme levels of rates for term inter bank loans reflected in one month and three month libor we explain such stress by modeling leveraged banks precautionary demand for liquidity asset shocks impair a bank s ability to roll over debt because of agency problems associated with high leverage in turn banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan high levels of short term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing in extremis inter bank markets can completely freeze

the walking debt crisis abstract this article sheds light on the question whether arising sovereign credit risk in the emu has been triggered by the us subprime crunch by adapting recent econometric methodologies suggested in the related field of speculative bubbles we find clear evidence for fast diverging and even explosive behavior of emu government bond yields of peripheral countries relative to germany during the financial and the european debt crisis this might be caused by flight to quality effects to german government bonds coincident with the collapse of lehman brothers and by a loss of confidence in the fiscal stability of greece ireland italy portugal and spain during the european debt crisis first we find compelling evidence for bubbles in the dow jones equity real estate investment trusts reits index which serves as a weekly measure of economic activity in the north american real estate sector second in our main analysis we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes our findings indicate that this was the case in the course of the financial crisis but not during the emu sovereign debt crisis these results suggest that the severe fiscal problems in peripheral countries are homemade rather than imported from the us

interim news and the role of proxy voting advice this paper examines the information content and consequences of third party voting advice that arrives as news at an interim stage in corporate proxy contests we first document significant stock returns around announcements of proxy vote recommendations we then develop a multiequation empirical procedure for disentangling the price impact of prediction effects changes in contest outcome probabilities from the price impact of certification effects changes in outcome contingent valuations both effects are present in the data voting advice is both predictive about contest outcomes and informative about the ability of dissidents to add value consequently proxy advice plays a dual informational role

another look at momentum crashes momentum in the european monetary union abstractthis article studies the profitability of a selection of prominent momentum based strategies in the european monetary union emu in contrast to past examples documenting the lack of profitability of unconditional price momentum in the most recent decade the current research finds that unconditional price momentum yielded significant positive payoffs there is evidence of option like behaviour for strategies based on intermediate past performance surprisingly there is no such evidence for the momentum strategy based on recent past performance

cheap talk and strategic rounding in libor submissions interbanking rates were until recently based on judgmental estimates of borrowing costs we interpret this as a cheap talk game that allowed banks to communicate nonverifiable information about their opportunity cost to potential counterparties under normal market conditions there is a welfare maximizing equilibrium where banks truthfully disclose their borrowing cost but in times of financial stress only coarse equilibria survive we take this prediction to the data and show that banks round more frequently if the risk of the bank increases rounding is also more frequent for the more liquid short term rates and certain benchmark maturities

bank regulation risk and return evidence from the credit and sovereign debt crises in this paper we analyze whether regulation reduced risk during the credit crisis and the sovereign debt crisis for a cross section of global banks in this regard we examine distance to default laeven and levine 2008 systemic risk acharya et al 2010 idiosyncratic risk and systematic risk we employ world bank survey data on regulations to test our conjectures we find that regulatory restrictions official supervisory power capital stringency along with private monitoring can explain bank risk in both crises additionally we find that deposit insurance schemes enhance moral hazard as this encouraged banks to take on more risk and perform poorly during the sovereign debt crisis finally official supervision and private monitoring explains the returns during both crisis periods

self fulfilling debt crises what can monetary policy do this paper examines the potential for monetary policy to avoid self fulfilling sovereign debt crises we combine a version of the slow moving debt crisis model proposed by lorenzoni and werning 2014 with a standard new keynesian model monetary policy could preclude a debt crisis through raising inflation and output and lowering the real interest rate these reduce the real value of outstanding debt and the cost of new borrowing and increase tax revenues and seigniorage we determine the optimal path of inflation required to avoid a self fulfilling debt crisis stronger price rigidity implies more sustained inflation

the permanent income hypothesis estimation and testing by instrumental variables the permanent income hypothesis with rational expectation is restated estimated and tested by an instrumental variables technique on the postwar u s aggregate time series data the hypothesis is accepted on a consumption series which includes service flows from consumer durables if the consumption series is the one in the national income and product accounts the hypothesis is decisively rejected an explanation is suggested to reconcile the conflicting test results

are european sovereign bonds fairly priced the role of modelling uncertainty abstract this paper examines the extent to which large swings of sovereign yields in euro area countries during the debt crisis can be attributed to fundamentals focusing on the inherent uncertainty in bond yield models we show that the outcomes are strongly affected by modelling choices with regard to i the confidence bands for the model prediction ii the assumption whether the model coefficients are similar across countries or not iii the sample selection iv the inclusion of financial variables and v the choice of time varying coefficients these choices affect the explanatory power of macro fundamentals and the extent of mispricing

a dynamic network model of the unsecured interbank lending market abstract we introduce a dynamic network model of interbank lending and estimate the parameters by indirect inference using network statistics of the dutch interbank market from february 2008 to april 2011 we find that credit risk uncertainty and peer monitoring are significant factors in explaining the sparse core periphery structure of the market and the presence of relationship lending shocks to credit risk uncertainty lead to extended periods of low market activity intensified by reduced peer monitoring moreover changes in the central bank s interest rate corridor have both a direct effect on the market as well as an indirect effect by changing banks monitoring efforts

exit strategies for monetary policy abstract in response to the financial crisis of 2007 08 all major central banks decreased interest rates to historically low levels and created large excess reserves central bankers and academics currently discuss how to implement monetary policy going forward we find that paying interest on reserves ior is optimal if the central bank has full fiscal support if the central bank has no fiscal support reducing reserves is optimal this can be achieved by reserve absorbing operations which hold the size of the balance sheet constant or by selling assets which reduces the size of the balance sheet

interest rate corridors and reserves abstract this paper evaluates reserves regimes versus interest rate corridors which have become competing frameworks for monetary policy implementation rate corridors relying on lending and deposit facilities to create ceilings and floors for overnight interest rates evince mixed results on controlling volatility reserve requirements allow period average smoothing of interest rates but even if remunerated are subject to reserve avoidance activities a system of voluntary period average reserve commitments could offer equivalent rate smoothing advantages if central banks created symmetric opportunity costs of meeting or falling short of period average reserve requirements or commitments they could achieve flat reserve demand on settlement day

behind the scenes the corporate governance preferences of institutional investors we survey institutional investors to better understand their role in the corporate governance of firms consistent with a number of theories we document widespread behind the scenes intervention as well as governance motivated exit these governance mechanisms are viewed as complementary devices with intervention typically occurring prior to a potential exit we further find that long term investors and investors that are less concerned about stock liquidity intervene more intensively finally we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions

corridor system and interest rates volatility and asymmetry the corridor system in its current form is believed to reduce the volatility of overnight interest rates and to eliminate any chance of persistent upward or downward bias the model presented here serves to highlight two main findings one is that a central bank can further reduce the volatility of overnight interest rates by allowing banks some flexibility to meet their reserve targets within a small range as observed in the uk data the second is that a seemingly symmetric corridor may be asymmetric in practice due to several distortions as the uk and euro area data suggest

the political economy of the european economic and monetary union political sources of an economic liability emu would be an economic liability a single currency would cause at most small trade and investment gains but would raise average cyclical unemployment and possibly raise inflation perpetuate structural unemployment and increase the risk of protectionism emu is nevertheless being pursued in order to create a political union fundamental disagreements among member states about economic policies foreign and military policies and the sharing of political power are likely to create future intra european conflicts a united europe would be a formidable participant in the twenty first century s global balance of power with uncertain consequences for world stability and peace

the european sovereign debt crisis the origin and propagation of the european sovereign debt crisis can be attributed to the flawed original design of the euro in particular there was an incomplete understanding of the fragility of a monetary union under crisis conditions especially in the absence of banking union and other european level buffer mechanisms moreover the inherent messiness involved in proposing and implementing incremental multicountry crisis management responses on the fly has been an important destabilizing factor throughout the crisis after diagnosing the situation we consider reforms that might improve the resilience of the euro area to future fiscal shocks

day to day monetary policy and the volatility of the federal funds interest rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

the greek financial crisis growing imbalances and sovereign spreads abstract we discuss the origins of the greek financial crisis as manifested in the growing fiscal and current account deficits since euro area entry in 2001 we then extend a model typically used to explain risk premia to assess the extent to which credit ratings captured these premia next we estimate a cointegrating relationship between spreads and their long term fundamental determinants and compare the spreads predicted by this estimated relationship with actual spreads we find that spreads were significantly below what would be predicted by fundamentals from end 2004 up to the middle of 2005 by contrast since may 2010 actual spreads have exceeded predicted spreads by some 400 basis points

internal or external devaluation what does the ec consumer survey tell us about macroeconomic adjustment in the euro area this paper explores the dynamics of national inflation expectations within the euro area during the recent crisis using the european commission s consumer survey we find that the strong anchoring of area wide inflation expectations which is typically found in the literature does not extend to individual member states we also measure the effect of the crisis on national inflation expectations using sovereign bond spreads and find that increases in sovereign risk have a significant negative effect on inflation expectations this suggests that consumers expect their country to adjust through a process of internal devaluation in contrast we find no evidence that tensions in the sovereign bond markets increase national inflation expectations as one would be expect under an exit or breakup scenario

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

bank liquidity interbank markets and monetary policy a major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs this paper studies the efficiency of the interbank lending market in allocating funds we consider two different types of liquidity shocks leading to di erent implications for optimal policy by the central bank we show that when confronted with a distribu tional liquidity shock crisis that causes a large disparity in the liquidity held among banks the central bank should lower the interbank rate this view implies that the traditional tenet prescribing the separation between prudential regulation and mon etary policy should be abandoned in addition we show that during an aggregate liquidity crisis central banks should manage the aggregate volume of liquidity two di erent instruments interest rates and liquidity injection are therefore required to cope with the two di erent types of liquidity shocks finally we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs

definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

comparative institutional advantage in the european sovereign debt crisis excessive fiscal spending is commonly cited as a root of the current european debt crisis this article suggests like others that the rise of competitiveness imbalances contributing to national imbalances in total borrowing is a better explanation for systemic differences toward economic and monetary union emu countries exposure to market speculation we identify one driver of this divergence a country s capacity to limit sheltered sector wage growth relative to wage growth in the manufacturing sector corporatist institutions that linked sectoral wage developments together in the surplus countries provided those with a comparative wage advantage vis a vis emu s debtor nations which helps explain why the emu core has emerged relatively unscathed from market speculation during the crisis despite the poor fiscal performance of some of the core countries during emu s early years using a panel regression analysis we demonstrate that rising differentials between public and manufacturing sector wage growth and wage governance institutions that weakly coordinate exposed and sheltered sectors are significantly correlated with export decline we also find that weak governance institutions are significantly associated with more prominent export decline inside as opposed to outside a monetary union

corporate governance through the proxy contest evidence and implications the current literature concerning proxy contests provides little evidence that shareholders suffer materially from sub par performance prior to a contest furthermore no study has thoroughly examined the long term performance of targeted firms subsequent to a proxy contest using a sample of ninety seven election contests during the period 1968 87 the authors find negative abnormal returns and deteriorating operating performance prior to the announcement of a contest following the contest negative abnormal returns are observed these negative returns are driven by cases in which dissident shareholders successfully acquire board seats the results for accounting based operating performance measures confirm these findings copyright 1993 by university of chicago press

political credit cycles the case of the euro zone we study the mechanisms through which the adoption of the euro delayed rather than advanced economic reforms in the euro zone periphery and led to the deterioration of important institutions in these countries we show that the abandonment of the reform process and the institutional deterioration in turn not only reduced their growth prospects but also fed back into financial conditions prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident we analyze empirically the interrelation between the financial boom and the reform process in greece spain ireland and portugal and by way of contrast in germany a country that did experience a reform process after the creation of the euro

a search based model of the interbank money market and monetary policy implementation we present a search based model of the interbank money market and monetary policy implementation banks are subject to reserve requirements and the central bank tenders reserves interbank payments redistribute holdings and banks trade with each other in a decentralized over the counter market the central bank provides standing facilities where banks can either deposit surpluses or borrow to cover shortfalls of reserves overnight the model provides insights on liquidity trading volume and rate dispersion in the interbank market features largely absent from the canonical models in the tradition of poole 1968 and fits a number of stylized facts for the eurosystem observed during the recent period of unconventional monetary policies moreover it provides insights on the implications of different market structures

proxy contests and the governance of publicly held corporations abstract analysis of 60 proxy contests for seats on the boards of exchange listed firms during 1978 1985 shows that three years after the contest less than one fifth of the sample firms remain independent publicly held corporations run by the same management team proxy contests are typically followed by managerial resignations even when dissidents fail to obtain a majority of board seats and are often followed by sale or liquidation of the firm the average stockholder wealth gains associated with proxy contests are largely attributable to gains by companies in which dissident activity leads to sale or liquidation

the role of proxy advisory firms evidence from a regression discontinuity design proxy advisory firms have become important players in corporate governance but the extent of their influence over shareholder votes is debated we estimate the effect of institutional shareholder services iss recommendations on voting outcomes by exploiting exogenous variation in iss recommendations generated by a cutoff rule in iss voting guidelines using a regression discontinuity design we find that from 2010 to 2011 a negative iss recommendation on a say on pay proposal leads to a 25 percentage point reduction in say on pay voting support suggesting a strong influence over shareholder votes we also use our setting to examine the informational role of iss recommendations received april 13 2015 editorial decision june 13 2016 by editor itay goldstein

the transmission from equity markets to commodity markets in crises periods abstractthis article investigates the transmission from equity markets to commodity markets during two major financial crises namely the subprime mortgage and the sovereign debt crises we perform an analysis on sub stages from 3 january 2003 to 31 october 2013 to capture the price behaviour of both equity and commodity markets two financial crises indicators vix and cds are used to represent fear of a crisis we find that correlations between commodity and equity markets are time varying and highly volatile during a financial crisis while sharing some common features commodities cannot be considered a homogeneous asset class segmentation characteristics of commodity markets disappear in times of financial crises reducing their substitutability as an investment portfolio for asset diversification purposes through our test for granger causality we find the existence of transmission during a financial crisis volatility spillover effect also plays a major role as transmission mechanisms after the

liquidity constraints and the substitutability between private and government consumption the role of military and non military spending i introduction using data for a number of economies we investigate i the relationship between private consumption and two types of government spending military and non military and ii the severity of liquidity constraints because of their importance for macroeconomic modeling in theory and practice 1 both issues have been the subjects of considerable theoretical and empirical investigation on the issue of liquidity constraints the most influential research has relied on hall s 1978 euler equation approach to the permanent income hypothesis in an attempt to reconcile hall s and flavin s 1981 methodologies hayashi 1982 modified hall s martingale result to allow for the possibility that a subset of consumers are liquidity constrained and showed that liquidity constraints can result in consumption s excess sensitivity to current income campbell and mankiw 1989 1990 1991 and jappelli and pagano 1989 have applied hayashi s methodology using data from the u s and several other oecd countries on the substitutability issue aschauer 1985 has modified hall s euler equation to allow for substitutability between government spending and private consumption and found that the two are substitutes for the u s karras 1994 however using a similar approach and data for 30 countries concludes that private and government consumption are better described as complementary or unrelated liquidity constraints and substitutability have been combined in studies by graham and himarios 1991 cushing 1992 and graham 1993 using u s data and by evans and karras 1996 for a number of countries a crucial limitation of most of these studies is the use of aggregate government consumption data which counterintuitively imposes a common substitutability parameter on all components of government spending 2 using recently available time series data for a large number of countries the present paper relaxes this restriction by decomposing government consumption into military and non military components enabling us to separately identify their relationship to private consumption the allocation of government consumption between military and non military functions has varied greatly across countries the appendix reports the average size of military and non military government shares in gdp as well as the military non military ratio by country over the 1970 1989 period average military expenditure as a fraction of gdp for example has ranged in our sample from 0 11 in mexico to 12 30 in jordan similarly the fraction of government consumption absorbed by military expenditure has ranged from 1 09 in mauritius to 66 82 in poland this sizable variability is promising in terms of cross sectional identification power but it also suggests that the estimated parameters must not be assumed to be common across countries the estimated model is derived in section ii which combines liquidity constraints and substitutability by nesting the approaches of hayashi 1982 and aschauer 1985 in the same section we discuss data sources and the estimation strategy which permits the estimated parameters to vary by country in a way that helps determine how they are influenced by country specific factors section iii estimates the model for a panel of the 66 countries for which annual data on all series are available for the 1970 1989 period the paper s main conclusions are given in section iv ii methodology and data we assume that consumers in economy i at time t derive utility from effective consumption c sup which we define as 1 mathematical expression omitted where c is private consumption g sup m and g sup nm are the military and non military components of government consumption the parameters theta sup m and theta sup nm measure the degree of substitutability between c and g sup m and c and g sup nm respectively

certainty equivalence and the excess sensitivity of private consumption for a panel of oecd countries we show that the magnitude of the estimate for the excess sensitivity of private consumption to current income cannot be explained by a model based on certainty equivalence

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

liquidity regulation and the implementation of monetary policy in addition to revamping existing rules for bank capital basel iii introduces a new global framework for liquidity regulation one part of this framework is the liquidity coverage ratio lcr which requires banks to hold sufficient high quality liquid assets to survive a 30 day period of market stress as monetary policy typically involves targeting the interest rate on loans of one of these assets central bank reserves it is important to understand how this regulation may impact the efficacy of central banks current operational frameworks we introduce term funding and an lcr requirement into an otherwise standard model of monetary policy implementation our model shows that if banks face the possibility of an lcr shortfall then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented

voluntary reserve targets we study monetary policy implementation through an operating regime involving voluntary reserve targets vrts operating regimes based on reserve requirements may lead to a collapse in interbank trade as they have since the financial crisis we show that no matter the abundance of reserves vrts encourage market activity and support the central bank s control over interest rates we consider i the impact of anticipated and unanticipated liquidity injections by the central bank on market outcomes and ii a comparison with the implementation framework currently adopted by the federal reserve overall a vrt framework may provide several advantages over other frameworks

monetary policy implementation in a negative rate environment monetary policy implementation could in theory be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

do smes benefit from unconventional monetary policy and how microevidence from the eurozone we study the impact of the announcement of the european central bank s ecb s outright monetary transactions program on small firms access to finance using a matched firm bank data set from eight eurozone countries we find that following the announcement credit access improved relatively more for firms borrowing from banks with high balance sheet exposures to impaired sovereign debt with such firms less likely to be refused a loan or to be price rationed loan terms also improved as manifested by lengthening of loan maturities unconventional monetary policy has a positive impact on firms investment and profitability while its effect on firm innovation is weaker

government debt dynamics and the global financial crisis has anything changed in the ea12 this paper seeks to shed light on possible changes in the government debt dynamics for the first 12 euro area countries structural breaks are present around the global financial crisis for most countries but not for germany and france the two core countries in the euro area the properties of the government debt dynamics differ markedly across the countries receiving bailouts

trade dynamics in the market for federal funds we develop a model of the market for federal funds that explicitly accounts for its two distinctive features banks have to search for a suitable counterparty and once they have met both parties negotiate the size of the loan and the repayment the theory is used to answer a number of positive and normative questions what are the determinants of the fed funds rate how does the market reallocate funds is the market able to achieve an efficient reallocation of funds we also use the model for theoretical and quantitative analyses of policy issues facing modern central banks

day to day monetary policy and the volatility of the federal funds rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

measuring income tax evasion using bank credit evidence from greece we document that in semiformal economies banks lend to tax evading individuals based on the bank s assessment of the individual s true income this observation leads to a novel approach to estimate tax evasion we use microdata on household credit from a greek bank and replicate the bank underwriting model to infer the banks estimate of individuals true income we estimate that 43 45 of self employed income goes unreported and thus untaxed for 2009 this implies 28 2 billion of unreported income implying forgone tax revenues of over 11 billion or 30 of the deficit our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods primary tax evading industries are professional services medicine law engineering education and media we conclude with evidence that contemplates the importance of institutions paper trail and political willpower for the persistence of tax evasion jel codes g21 h22 h24 h26 p37

the great retrenchment international capital flows during the global financial crisis the current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization we identify the stylized facts and main drivers of this development the retrenchment in international capital flows is a highly heterogeneous phenomenon first across time being especially dramatic in the wake of the lehman brothers failure secondly across types of flows with banking flows being the hardest hit due to their sensitivity of risk perception and thirdly across regions with emerging economies experiencing a shorter lived retrenchment than developed economies our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration its specific nature with countries relying on bank flows being the hardest hit as well as domestic macroeconomic conditions and their connection to world trade flows gian maria milesi ferretti and cedric tille

europe and global imbalances although europe in the aggregate is not a major contributor to global current account imbalances its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses we assess the macroeconomic impact on europe of global current account adjustment under alternative scenarios emphasizing both trade and financial channels finally we consider heterogeneous exposure across individual european economies to external adjustment shocks philip r lane and gian maria milesi ferretti

linking pay to performance compensation proposals in the s p 500 we study the proposal of manager sponsored compensation plans linking pay to performance by sp g34 j33

the eurozone crisis how banks and sovereigns came to be joined at the hip the eurozone sovereign and banking crisis evolved in three phases following the onset of the subprime tremors in july 2007 the risk premia spreads on bonds issued by eurozone sovereigns rose from historically low levels but they rose largely in tandem across the eurozone membership along with global banking stresses the rescue of the us investment bank bear stearns in march 2008 oddly enough marked the start of a distinctively european banking crisis accompanied by increased differentiation of countries within the eurozone with the greater expectation of public support for distressed banks the spreads that a sovereign paid tended to rise following evidence of stress in its domestic financial sector this was especially so in countries with lower growth prospects and higher debt burdens but there was as yet no feedback from banks to sovereigns finally as the limits of fiscal support for domestic banks became clearer and coinciding with the nationalization of anglo irish in january 2009 but gathering steam with evidence of the greek sovereign s distress in may 2010 sovereign weaknesses also came to be quickly transmitted to a more pessimistic assessment of the financial sector s prospects creating the potential of mutual destabilization ashoka mody and damiano sandri

multiple equilibrium overnight rates in a dynamic interbank market game abstract we analyse a two period model of the interbank market i e the market where banks trade liquidity we assume that banks do not take the interbank interest rate as given but instead negotiate on interest rates and transaction volumes with each other the solution concept applied is the shapley value we show that there are a multiplicity of average equilibrium interest rates of the first period so that the average interest rate in this period does not convey any information on the expected liquidity situation on the interbank market as the banks control not only the transaction volumes but also the interest rates they can leave the interest rates constant and adjust the transaction volumes when for example a liquidity deficit becomes more likely

when ownership structure matters a review of the effects of investor horizon on corporate policies this paper surveys the literature on the impact of investor horizon on corporate policies while the desire to encourage long term investor ownership is shared among managers boards and policy makers how greater long term investor ownership benefits corporate decisions and ultimately firm performance is still under academic investigation the contribution of this paper is twofold the paper s first contribution is providing an up to date review of theoretical and empirical findings this paper introduces the groups of long term and short term investors and the related classification methodologies and investor horizon proxies used to form them it further reviews the determinants of an investor s horizon then this paper organizes the literature on the impact of investor horizon on corporate policies around three main channels the short term pressure hypothesis the monitoring hypothesis and the catering hypothesis the paper s second contribution is identifying six major challenges ahead that need to be addressed to improve the understanding of the impact of long term short term investor ownership on corporates policies these challenges represent opportunities for further research

discretionary monetary and fiscal policy with endogenous sovereign risk abstract how does the presence of sovereign risk affect the conduct of public policy to answer this question this paper studies optimal monetary and fiscal policy without commitment for a model economy with nominal public debt and strategic sovereign default compared to an economy without the possibility of default economies with sovereign risk experience more volatile interest rates which impedes the government s ability to smooth tax rates across states risk of default also limits public debt accumulation reducing the government s incentive to use surprise inflation on average when calibrated to the united states the model predicts that a counterfactual increase in the average annual default probability from 0 to 1 lowers average inflation by 33 raises the standard deviation of inflation by 18 and increases the standard deviation of the labor income tax by 73 the transmission of exogenous shocks to real aggregate quantities is however almost unaffected by the possibility of default for example the presence of sovereign risk would increase the standard deviation of log real gdp by less than 1 in the experiment above similarly the welfare consequences of sovereign risk are found to be of negligible size as well

sovereign stress and smes access to finance evidence from the ecb s safe survey abstract we study the effect of sovereign stress on smes capital structure using restricted access data from the european central bank we find that during the sovereign debt crisis and controlling for borrowers quality firms in stressed countries became more likely to be denied credit to be credit rationed and to face higher loan rates less creditworthy firms were not more likely to become credit constrained suggesting no flight to quality in lending we also find that in order to make up for the decline in bank credit firms in stressed countries began relying considerably more on retained earnings and government subsidies

the political economy of the euro crisis this article introduces the special issue on the political economy of the euro crisis which aims to improve our understanding of the causes consequences and implications of the highly unusual nature of this crisis a financial crisis among developed countries within a supranational monetary union the article provides a brief chronology of the crisis discusses its underlying causes and reviews the ways in which comparative and international political economy can help us understand the crisis the article then discusses the individual and collective contributions of the articles in the special issue and discusses possible future research paths on the political economy of the euro crisis we conclude with a brief discussion of how a political economy perspective informs our understanding of the long term prospects for the eurozone and european integration

repatriation of debt in the euro crisis with the beginning of the euro crisis the long standing trend of european financial integration reversed investors unwound cross border positions of debt obligations and increased holdings of locally issued debt in other words debt obligations were repatriated we use data on bank portfolios to document three new empirical regularities of the financial disintegration i repatriation affected mainly debt of crisis countries ii repatriation affected mainly public debt iii the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the euro area we read these results in light of standard theories of cross border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt

monetary policy transmission with interbank market fragmentation this paper shows how interbank market fragmentation disrupts the transmission of monetary policy fragmentation is the fact that banks depending on their country of location have different probabilities of default on their interbank borrowings once fragmentation is introduced into standard theoretical models of monetary policy implementation excess liquidity arises endogenously this leads short term interest rates to depart from the central bank policy rates using data on monetary policy operations i show that this mechanism has been at work in the euro area since 2008 the model is used to analyze conventional and unconventional monetary policy measures

sovereign spreads in the eurozone which prospects for a eurobond in this paper we provide new evidence on the determinants of sovereign yield spreads and market sentiment effects in the eurozone in order to evaluate the rationale for a common eurobond jointly guaranteed by eurozone member states we find that default risk is the main driver of yield spreads suggesting small gains from greater liquidity fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries yield spreads that is with the global risk that the market perceives more importantly the impact of this global risk variable is not constant over time a clear sign of contagion driven by shifts in market sentiment this evidence points to a discontinuity in the disciplinary role of financial markets if markets can stay irrational longer than a country can stay solvent then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened and issuing eurobonds can be economically justified carlo favero and alessandro missale

fixed costs and the behavior of the federal funds rate abstract this paper presents an equilibrium model of the federal funds market that ties movements in the funds rate to changes in the supply of reserves and to a fixed cost facing banks that borrow at the discount window it is found that the existence of the fixed cost is capable of explaining a number of features of the funds market in particular it is critical for explaining occasional instances of extremely high funds rates it also provides an explanation for heterogeneous behavior across banks towards the discount window and for higher average funds rates at the end of maintenance periods

business ties and proxy voting by mutual funds abstract the magnitude of mutual funds business ties with their portfolio firms is documented and is linked to funds proxy votes at specific firms and to overall voting practices aggregate votes at the fund family level indicate a positive relation between business ties and the propensity to vote with management votes at specific firms however reveal that funds are no more likely to vote with management of client firms than of non clients because the votes took place when funds knew their votes would be publicly scrutinized fund families with a larger client base may have adopted voting policies that led to less frequent opposition to management at all firms

excessive deficits sense and nonsense in the treaty of maastricht maastricht s fiscal rules willem buiter giancarlo corsetti and nouriel roubini the maastricht treaty on economic and monetary union in the ec has specified limits on both government debt and fiscal deficits satisfying these criteria is necessary for getting into emu once inside violating these limits will also incur penalties the fiscal requirements especially the debt criterion are much tougher than is required to ensure public sector solvency trying to attain these targets will force the ec initially into substantial deflation and recession failure to correct for real growth inflation and the business cycle makes the nominal deficit a poor basis for any policy or target ambiguity about how fiscal targets will in fact be interpreted might provide a way out but cannot today be relied upon to do so supranational fiscal rules are sometimes claimed to be justified by externalities in national fiscal policies we find this justification wanting both in theory and empirically a better case might be built on the imposition of external commitments to offset domestic political distortions that systematically induce excessive deficits even so we conclude that the fiscal convergence criteria on balance are harmful and should be disregarded or applied very loosely to avoid the risk of serious fiscal overkill

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

payment obligations reserve requirements and the demand for central bank balances we develop a model in which a bank s demand for reserves depends on the joint distribution of transactions reserve requirements and the interest rate by devoting resources to its liquidity management a bank can save on costly reserves required to settle its payments on time we test the model with data from the largest banks in the swiss interbank clearing system we find that the turnover ratio the speed with which a bank turns over its reserves in the payment system depends largely on the aggregate value of its payments we also find that reserve requirements impose a highly uneven burden on the banks

how effective is fiscal policy in raising national saving while fiscal adjustment is commonly viewed as the cornerstone of macroeconomic stabilization the effectiveness of alternative fiscal instruments in raising national saving is still poorly understood this paper enters the debate by estimating a private consumption function that allows for two types of agents finite horizons and liquidity constraints and nests three different consumption hypotheses using a large panel data set that includes both industrial and developing countries we reject full ricardian equivalence we also find substantial differences between industrial and developing countries regarding both the extent of ricardian offsetting and the degree to which the government budget constraint is internalized

the fiscal cost implications of an accommodating approach to banking crises abstract in recent decades a majority of countries have experienced a systemic banking crisis requiring a major and expensive overhaul of their banking system budgetary outlays whether immediate or deferred have exceeded 50 of gdp in some cases this paper uses cross country econometric evidence to examine whether the design of crisis containment and resolution policies can systematically influence the overall magnitude of fiscal costs we find that accommodating policies such as blanket deposit guarantees open ended liquidity support repeated partial recapitalizations debtor bail outs and regulatory forbearance all tend to add significantly and sizably to fiscal costs

the impact of return on collateral in a channel system we empirically investigate the relationship between the return on collateral and monetary policy implementation in the channel system recent developments in monetary theory suggest that the return on government assets which measures the opportunity cost of holding collateral should have negative impacts on the interest rate spread and the interbank market rate the central bank should set a higher spread when the return on collateral is below a cutoff but implements a lower spread when the return on collateral is higher than the cutoff the interbank market rate tends to lie above the policy target rate when the return on collateral is low and vice versa we use data from eurozone area and six industrialized countries to test these theoretical implications we propose two econometric models one is more structural and closely related to the monetary model to test the negative relationships and the other is based on the threshold autoregression model to detect the potential cutoffs our findings provide conditional support for the negative impact of return on collateral jel e40 e52 e58

monetary policy implementation and overnight rate persistence overnight money market rates are the predominant operational target of monetary policy as a consequence central banks have redesigned the implementation of monetary policy to keep the deviations of the overnight rate from the key policy rate small and short lived this paper uses fractional integration techniques to explore how the operational framework of four major central banks afiects the persistence of overnight rates our results suggest that a well communicated and transparent interest rate target of the central bank is a particularly important condition for a low degree of overnight rate persistence

banks demand for reserves when future monetary policy is uncertain abstract the extensive use of revolving securities repurchase agreements has increased the flexibility of the money market management of many european central banks using an extended reserve management model this paper shows that a flexible central bank can influence money market conditions just by being more or less vague or determined about its future course of monetary policy employing arch in mean models for german money market rates confirms that more uncertainty reduces banks demand for borrowed reserves and thereby leads to decreasing interest rates in the interbank money market

a theory of money and marketplaces this article considers an infinitely repeated economy with divisible fiat money the economy has many marketplaces that agents choose to visit in each marketplace agents are randomly matched to trade goods there exist a variety of stationary equilibria in some equilibrium each good is traded at a single price whereas in another every good is traded at two different prices there is a continuum of such equilibria which differ from each other in price and welfare levels however it is shown that only the efficient single price equilibrium is evolutionarily stable

open mouth operations abstract this paper explains how central bank statements rather than open market operations can be used to implement monetary policy in the extreme policy instruments can be held constant and yet interest rates will evolve along the path desired by the central bank we show how the recent implementation of monetary policy in new zealand works in this way using announcement data from new zealand we find that open mouth operations lead to large changes in interest rates across all maturities and these changes cannot be explained by open market operations implications are drawn for monetary policy in other jurisdictions

fiscal cyclicality and emu abstract for the set of emu member countries we examine cyclical patterns in fiscal outcomes we find that there is significant time variation in fiscal cyclicality with an improvement in the wake of the maastricht treaty but a deterioration after the creation of emu furthermore we show that the fiscal cycle is affected by the financial cycle in addition to the output cycle the lessons for the current reforms of european economic and fiscal governance are manifest