bank spread with uncertain deposit level and risk aversion abstract this paper derives a model of the banking firm under uncertainty and risk aversion the selection of the bank s optimal spread between loan and deposit rates is emphasized the model s results provide some implications for bank asset quality capital regulation and deposit insurance for example it is shown that increases in the level of equity capital tend to increase the bank s spread under dara this implies an improvement in bank asset quality on the other hand as the deposit supply function becomes more volatile the bank s spread narrows which implies a decline in the quality of the bank s assets

understanding the welfare implications of currency substitution abstract this paper develops a model of endogenous currency substitution where agents decide which purchases will be made with domestic and which with foreign currency in a representative agent economy allowing for this use of alternative means of payments is welfare enhancing the result is an application of ramsey taxation rules by which currency substitution shifts the burden of the inflation tax towards relatively demand inelastic commodities when extending the model to the case in which agents have different productivities we show that inflation has strong income distribution effects with high low income agents benefitting losing when currency substitution is introduced

investigating the cost performance of uk credit unions using radial and non radial efficiency measures abstract this paper examines the relative efficiency of uk credit unions radial and non radial measures of input cost efficiency plus associated scale efficiency measures are computed for a selection of input output specifications both measures highlighted that uk credit unions have considerable scope for efficiency gains it was mooted that the documented high levels of inefficiency may be indicative of the fact that credit unions based on clearly defined and non overlapping common bonds are not in competition with each other for market share credit unions were also highlighted as suffering from a considerable degree of scale inefficiency with the majority of scale inefficient credit unions subject to decreasing returns to scale the latter aspect highlights that the uk government s goal of larger credit unions must be accompanied by greater regulatory freedom if inefficiency is to be avoided one of the advantages of computing non radial measures is that an insight into potential over or under expenditure on specific inputs can be obtained through a comparison of the non radial measure of efficiency with the associated radial measure two interesting findings emerged the first that uk credit unions over spend on dividend payments and the second that they under spend on labour costs

the pricing of deposit insurance considering bankruptcy costs and closure policies the paper aims to study the pricing issue of deposit insurance with explicit consideration of bankruptcy costs and closure policies full coverage from deposit insurance is imposed by many regulators to stabilize the banking system in the current financial crisis despite of the potential moral hazard problems we argue that bankruptcy cost is an important factor in pricing deposit insurance especially when the insured institution is insolvent applying the isomorphic relationship between deposit insurance and put option we first derive a closed form solution for the pricing model with bankruptcy costs and closure policies then we modify the barrier option approach to price the deposit insurance in which the bankruptcy cost is set as a function of asset return volatility and more realistic closure policies considering possible forbearance can be accounted for the properties of the models are supported by numerical simulations and are consistent with the risk based pricing scheme

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

insuring banks against liquidity shocks the role of deposit insurance and lending of last resort it has long been recognized that banks simultaneous provision of monitoring and liquidity services is advantageous but leaves them susceptible to liquidity shocks that may culminate in a system failure because a system failure is costly this provides a rationale for adopting arrangements including a lender of last resort and deposit insurance di to insure banks against liquidity shocks these arrangements have proven themselves very successful but they have also been the source of problems researchers have identified some of the main sources of these problems and have suggested ways to improve the design of these arrangements but there are still many issues that remain unaddressed this paper reviews the literature on the two arrangements that most countries have adopted to insure banks against liquidity shocks a lender of last resort and di and compares the design of these arrangements across countries the paper ends with a brief summary of the key lessons learned about the design of these arrangements and the issues related to them that remain unaddressed copyright blackwell publishers ltd 2006

anticipated foreign military threat arms accumulation and the current account in a small open economy this paper examines the effects of an anticipated foreign military threat on consumption the home weapons stock and net foreign asset position in a small open economy if the utility function is separable between butter and guns the economy decreases both butter and guns when the news arrives accumulates foreign assets prior to the foreign threat realization and increases guns as the foreign threat realizes if the utility function is nonseparable between butter and guns the economy may have two dynamic responses the first is similar to the separable case except that consumption exhibits a discrete jump when the foreign threat realizes the second is that the economy increases both butter and guns on impact decumulates foreign assets prior to the foreign threat implementation but either increases or decreases guns as the foreign threat realizes

money demand in open economies a currency substitution model for venezuela abstract this paper investigates the extent to which domestic money balances in venezuela are influenced by foreign exchange considerations to this end individuals are assumed to choose the levels of foreign and domestic money that minimize the borrowing costs associated with a given level of monetary services the solution to this optimization problem yields a closed form demand function for domestic money that allows for foreign exchange considerations this specification is estimated and the results point to an elasticity of currency substitution in excess of one conditioned on these estimates the paper estimates the risk premium for the period 1981 82 prior to the collapse of the exchange rate system in 1983

growth opportunities and risk taking by financial intermediaries we show that growth opportunities which cannot be converted to cash under conditions of financial distress gz are a critical determinant of an intermediary s choice of risk financial institutions in which gz is a low proportion of total assets will be much more likely to engage in go for broke behavior the model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums intervening before capital is depleted and restricting investment options the model also has implications about a new approach to the examination of financial intermediaries the insuring agencies are painfully aware that when a bank is at or near insolvency it has an incentive to take greater risks stanley silverberg 1984 p 100 director of research at the federal deposit insurance corporation has observed that under such conditions it is generally in the interest of managers and owners to gamble in an effort to recoup if the bank rolls the dice and loses the fdic typically bears the loss of course bank shareholders like shareholders in other limited liability corporations have an incentive to take larger gambles than if their activities were financed entirely by equity what distinguishes go for broke behavior however is that a firm in go for broke mode will be willing to play with dice loaded against it go for broke behavior occurs when a firm chooses an operating strategy that will lower the expected value of its assets a firm in go for broke mode causes a loss to society since it will allocate resources to uses that have a lower expected return than the opportunity cost of funds in this paper we examine the conditions under which a bank has an incentive to adopt go for broke behavior and the challenge faced by regulators in controlling such behavior we show that weakly capitalized banks with negligible opportunities for profitable growth pose the greatest threat and that traditional supervisory remedies are least effective against such banks

the trade balance and real exchange rate under currency substitution abstract it is demonstrated that the calvo and rodriguez 1977 results hold up in a utility maximizing model contrary to the claim of liviatan 1981 it is argued that liviatan s conclusions are based on a mistaken assumption having rescued calvo rodriguez from liviatan it is then shown that the calvo rodriguez results are dependent on two special assumptions that there is only one foreign asset traded and its real return is zero the paper also shows that there is an avenue for foreign inflation transmission under perfectly floating exchange rates even when goods prices are perfectly flexible however the direction of response of real variables is in general ambiguous

variation in the real exchange rate as a source of currency substitution abstract this paper presents a shopping cost money service model in which it is shown that the real exchange rate influences the desired ratio of domestic to foreign currency bank deposits empirically it is found that if the real exchange rate value of the canadian dollar falls then us dollar deposits of canadians rise relative to canadian m2 this relationship is found to be cointegrated dynamic adjustment analyzed using an error correction model indicates a cyclical adjustment the results provide evidence that variation in the real exchange rate is a source of currency substitution and reinforces the argument that demand side factors influence the money stock jel e41

stabilization with liberalization an evaluation of ten years of chile s experience with free market policies 1973 1983 the recent post 1973 economic experience of chile has attracted considerable attention both from professional economists and from the media most observers have been particularly impressed by the sharp contrasts observed in chile in such a short period of time for example in 1973 chile had one of the highest rates of inflation in the world over 600 whereas in 1981 it experienced one of the lowest rates of inflation 9 5 also in 1975 real gnp declined by 12 9 but during 1977 80 real gnp grew at an average rate of 8 5 per annum in 1982 however the country faced a new recession with real gnp dropping by 14 5 in 1983 the gnp was reduced further by 2 3 the fact that these episodes developed while the military government was actively pursuing free market oriented policies that greatly liberalized the economy adds considerable interest to the chilean case 2 the year 1973 marked an important turning point in chile s economic and political history in september of that year the military took over the government from president salvador allende and a period of dramatic economic changes began chile was transformed from an economy isolated from the rest of the world with strong government intervention into a liberalized world integrated economy where market forces were left free to guide most of the economy s decisions the period 1973 81 was characterized by important achievements inflation was greatly reduced the government deficit was virtually eliminated the economy went through a dramatic liberalization of its foreign sector tariffs were reduced to a uniform 10 level and prices including interest rates were full liberalized probably one of the most interesting aspects of the chilean economy during this period is that major

organizational form and risk taking in the savings and loan industry abstract i hypothesize that risk taking is greater in stock thrifts than in mutual thrifts because the residual and fixed claims are separable i find that stock thrifts exhibit greater profit variability during the 1982 1988 period and that conversions from mutual to stock ownership are associated with increased investment in risky assets and increased profit variability these findings illustrate the relation between the structure of residual claims incentives and firm performance as well as the unintended consequences resulting from changes in thrift regulations

exchange rate determination interest rates and an integrative approach to the demand for money abstract this paper presents a simple framework in which the money in the utility function miuf and the cash in advance cia approaches to the demand for money can be seen as equivalent this integrative approach to money demand is extended to a two country world and the equilibrium relationship between terms of trade exchange rates and interest rates implied by the underlying stochastic structure of the economy is discussed a theory of currency substitution is presented

risk shifting incentives of depository institutions a new perspective on federal deposit insurance reform abstract we characterize the risk shifting incentives of a depository institution as arising fundamentally from the existence of limited liability and the associated convex payoff to equity holders this risk incentive feature is unchanged by deposits being insured and hence excessive risk taking by depository institutions is not solely attributable to the flat rate insurance premium consequently the incentive problem cannot be resolved through a risk based insurance premium contrary to the prevailing view we propose a solution that eliminates risk shifting through an optimal tax structure and specify a corresponding insurance premium that is revenue neutral from the social planner s regulator s standpoint the solution is derived in the context of a social objective function that trades off the benefits of liquidity services by banks and the unique informational role of bank loans with the costs of investment distortions engendered by risk shifting

does health insurance reduce illness related worker absenteeism the objective of this article is to examine whether having health insurance reduces illness related absenteeism among older workers a nationally representative sample of 1780 workers in the united states aged 52 64 are drawn from the 2004 2006 health and retirement study hrs binary logistic regressions and censored tobit models are estimated for workers likelihood of missing work days due to illness and the number of illness related work days missed respectively while explicitly addressing the possibility of insurance selection effects the findings suggest that over a 12 month period older workers without health insurance are as likely as insured workers to miss work days due to illness and there are no differences in the number of days missed between insured and uninsured workers however there is strong evidence that poor baseline health onset of new diseases and longer hospitalization significantly increase an older worker s absenteeism at work these results suggest that having health ins

balance of payments crises in a cash in advance economy the author shows that a flexible prices sidrauski type model with a cash in advance constraint is capable of depicting some of the phenomena associated with a balance of payments crisis like the onesrecently observed in argentina and mexico current accounts deficits and appreciation of the real exchange rat e it is also shown that these phenomena become exacerbated as the rate of devaluation before the crisis occurs becomes smaller copyright 1987 by ohio state university press

absenteeism as a mechanism for approaching an optimal labor market equilibrium an empirical study this research examines absence as a response to a non optimal labor market equilibrium its basic premise is that workers may be using absenteeism to move themselves closer to an optimal equilibrium in situations where due to greater than desiredwork hours the workers marginal rate of substitution of income for leisure mrs is less than the wage rate for the last hour worked this notion is tested for a sample of workers using tobit analysis with individual data from company records on absence and wages and an empirical measure of each worker s mrs the results indicate a significant positive relationship between absence and the difference between a worker s mrs and wage

terms of trade shock and the current account in a monetary economy over the period 1973 81 the terms of trade of non oil developing countries deteriorated at about 2 per cent per annum this was accompanied by an increase in current account deficits in excess of 3 per cent above what they had been in the previous decade see khan and knight 1983 for a discussion these authors find the terms of trade shocks the major cause of the deficits this has led to a renewal of interest in the effects of changes in terms of trade for a small open economy the conventional wisdom first put forward by laursen and metzler 1950 and harberger 1950 emphasized the fact that a terms of trade worsening lowered real income which in turn lowered savings and worsened the current account the laursen metzler effect the recent reappraisal was initiated by obstfeld 1982 he showed in an infinite horizon optimizing framework with perfect capital mobilizing that if the discount rate was a function of the level of utility surpluses and not deficits accompany an unanticipated and permanent terms of trade worsening the long run level of the discount rate is tied down by the given world rate of interest this in turn fixes the long run level of utility the terms of trade shock tends to lower the level of utility and agents save to offset this across steady states there is only a substitution effect on the other hand if the discount rate is fixed and equal to the world interest rate then the economy adjusts to the terms of trade shock by immediately lowering real expenditure by the same amount as the decline in real income so that the current account is always balanced svensson and razin 1983 showed that in a two period framework this does not necessarily happen for the infinite horizon case they showed that if preferences were separable over time and the discount rate was increasing in instantaneous utility then obstfeld s results were indeed obtained in a two period overlapping generations model the results could be modified owing to the fact that human wealth and non human wealth are not perfect substitutes and a terms of trade shock affects these differently see matsuyama 1988 for a discussion but it is still true that an unanticipated permanent terms of trade shock has a one shot effect on the current account unless some ad hoc costs of adjustment are introduced see e g persson and svensson 1985 and matsuyama 1988 the uncertain lifetime model see e g frenkel and razin 1988 and matsuyama 1987 generates non trivial

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

the tobin tax asset accumulation and the real exchange rate abstract we extend a standard model of exchange rate determination in a small open economy to examine the general equilibrium consequences of a tax on foreign assets the model 1 incorporates asset market clearing at a point in time 2 accounts for asset accumulation over time by way of trade imbalances and the government s financing needs and 3 broadens the government s policy options to include a tariff on the traded good and a tax on foreign assets a capital tax results in a transitory trade deficit because agents shift to home assets their decumulation of foreign assets is mirrored in a trade deficit

currency substitution and the real exchange rate the utility maximization approach abstract this paper studies the currency substitution hypothesis with rational expectations in terms of a sidrauski type model where domestic and foreign money enter the utility function it shows that contrary to liviatan 1981 the approach does not necessarily contradict calvo and rodriguez 1977 furthermore the impact of monetary stabilization policy is fully characterized with flexible and pre fixed rates for an extension of dornbusch and mussa 1975 a brief analysis of the optimal quantity of money is also provided

credit rationing concessionary lending and debt maturity abstract a firm raises capital for a two period investment while creditors observe the project status midstream unobservable managerial perks may consume capital each period when the firm is unfortunate early on short term financing results in either concessionary lending or costly liquidation rolling over short term debt may be problematic because the high risk premium creditors demand when asset value is low relative to debt impares managerial motivation precisely when the incentive to defer perk consumption is weakest long term financing may reduce total agency costs be enabling lenders to charge higher initial premia in effect shifting loan repayments to states in which incentive constraints are non binding

currency substitution inflation and welfare abstract currency substitution affects the mapping between social welfare and inflation by altering the underlying money demand function and influencing interest rates in order to explore the essence of this effect i build a model with working capital under which foreign currency is substituted with the less liquid components of domestic money the framework closely mimics the actual pattern of currency substitution across varying rates of inflation and enables the study of an additional channel that works through the impact of currency substitution on interest rates it is found that there is a threshold inflation rate which turns out to be 44 under baseline calibration below which currency substitution decreases welfare and vice versa a practical implication is that at inflation rates lower greater than the threshold the potential welfare gains from disinflation to a near zero inflation rate are higher lower if there is currency substitution than otherwise

capital regulation and deposit insurance abstract a model of deposit insurance in which the bank closure rule can systematically deviate from the economic insolvency condition used in earlier models is developed simulation of that model for plausible parameter values suggests that the failure to close banks on a timely basis has a profound effect in increasing the insurer s liability the implications of these results for capital regulation are discussed

dynamic implications of absence behaviour this paper analyses the absence behaviour of workers in the context of a two period model the theoretical results that emerge highlight the potential benefits of analysing absenteeism within a multi time period model as opposed to a single time period model which has generally been adopted by the theoretical models of absenteeism to date workers are employed under a two period contract which is characterized by an experience rated sick pay scheme the theoretical results of the model indicate that if a worker faces such a sick pay scheme the theoretical results of the model indicate that if a worker faces such a sick pay scheme then the probability of absence in the current period is reduced the empirical analysis explores the absence rates observed from a set of workers who face an experience rated sick pay scheme the empirical results present some support in favour of the predictions which arise from the theoretical model

women and absenteeism health or economics full time workers in the united states lost 3 5 percent of scheduled work time due to unscheduled work absences in 1978 nearly 7 out of 100 workers experience at least one spell of absence a week however u s absentee rates have remained fairly constant over the past several years and are generally well below the rates of western europe for example west germany lost 11 percent of scheduled work time to unscheduled work absences holland lost 10 percent and italy lost 15 percent in 1972 73 part of the higher absentee rates in western europe is thought to be caused by the high prevalence of sick leave availability in these countries work loss from unscheduled absences is substantially higher among female workers than among male workers in the united states in may 1978 women lost 4 3 percent of scheduled work time compared to 3 1 percent for men absence incidence rates are also higher for women 8 6 percent of women workers experience a spell of absence during a typical work week compared to 5 4 percent of men workers the large majority of unscheduled work absences are due to illness and injury the average female worker lost 5 4 days from work for health reasons compared to 4 7 days for the average male worker in 1979 there have been several recent research efforts on the causes and consequences of worker absenteeism steve allen 1981 found evidence that observed differences in absentee rates between the sexes could be accounted for by differences in marginal earnings and the flexibility of the work schedule my 1978 study found that women generally lost fewer days from work than men for most common illnesses there has been little research to date on gender differences in work loss due to illness that takes into account differences in the occupational distribution of workers and differences in marginal earnings as well as variations in health status this paper reports on an empirical investigation of the determinants of gender differences in illness related absentee rates in this investigation labor market characteristics such as differences in earnings and occupational mix between men and women differences in health status and the impact of family are analyzed using a regression framework

the commercial banking firm a simple model a commercial bank must decide its volume of illiquid loans and investments without full knowledge of its deposits in case withdrawals exceed its defensive position in liquid assets the bank incurs extra costs in meeting reserve requirements penalties in borrowing or losses in disposing of illiquid assets in case of good luck on deposits an unnecessarily large defensive position sacrifices profits from more remunerative but less liquid assets the paper presents a simple model of this precautionary portfolio decision by a profit maximizing bank the effects of variations in monetary policy banking regulations and competitive structure are traced reserve requirements access to central bank credit deposit interest rate ceilings monopolistic power in loan and deposit markets relative importance of capital and time deposit liabilities size and nature of illiquidity penalties and degree of deposit uncertainty commercial banks are the most important kind of financial intermediary their liabilities are the closest privately issued substitutes for government currency demand deposits serve as means of payment generally acceptable for most transactions for several reasons depositors bear very little of the risks of the loans the banks make there are economies of scale in pooling of default risks specific to borrowers and in specialized administration and appraisal of the loans the banks shareholders assume the residual risk only after their equity is wiped out would depositors claims be jeopardized finally the government stands behind bank deposit liabilities both as lender of last resort to tide banks over crises of illiquidity and as insurer of deposits against the contingency of insolvency government monetary and credit policy operates mainly through the commercial banking system and this is the main reason today to give special attention to commercial banks historically the first reason for government intervention in the banking business was to protect depositors or in older times bank note holders against the risks of bank illiquidity and insolvency but the public regulations and institutions established for this purpose can also be used to regulate credit markets in the interests of economic stabilization maintenance of the value of the currency or other government objectives as the protective purpose of government intervenscand j of economics 1982 this content downloaded from 207 46 13 172 on fri 07 oct 2016 06 13 42 utc all use subject to http about jstor org terms

the economics of workout lending lenders are forced to consider a workout loan when a borrower loses access to financial markets and must seek loans from existing creditors to continue servicing outstanding loans a model of the loan decision is developed that distinguishes socially useful from socially wasteful workout loans the analysis is extended to examine two collective action problems that may arise when many lenders have claims on a troubled borrower the paper concludes with a consideration of the implications of the model for the establishment of prudential lending limits and of policies to stimulate new lending to troubled debtor countries copyright 1989 by ohio state university press

a multinomial logit analysis of problem loan resolution choices in banking this paper presents a conceptual framework of problem loan resolution choices that is a function of the combined borrower and lender decisions a bank will choose a workout option if its expected value is greater than the outcome under a no workout plan for the borrower if the reputational penalty due to a default is less than the opportunity cost of the best new alternative the borrower will have an incentive to default if the reverse holds then the borrower will be better off with a loan workout using a unique data set composed of borrower lender and economic factors we empirically examine the problem loan resolution choices the results provide support for our conceptual framework that problem loan choices are based on combined borrower lender variables copyright 1995 by ohio state university press

deposit insurance regulation and moral hazard in the thrift industry evidence from the 1930 s this paper compares risk taking of insured and uninsured thrifts operating under strict and less strict regulatory regimes during the 1930 s analysis of balance sheet data indicates that while newly insured thrifts undertook less risk than their uninsured counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively premissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts given the current system of deposit insurance the results suggest that effective regulation and supervision will play a key role in maintaining thrift stability in the 1990s copyright 1992 by american economic association

considerations of cost trade offs in insurance solvency surveillance policy abstract we propose a process for identifying potentially insolvent insurers on a cost effective basis a loss cost function is developed such that the effectiveness of monitoring is maximized relative to a cost constraint the loss cost function is supported by a model that provides a rank ordering of financial institutions according to their probability of insolvency when tested against a full sample of property liability insurance companies the procedure provides information critical to maximizing the effectiveness of regulatory resources available for solvency surveillance and performs well as a predictor of insolvency likewise the rank ordering of insurers overcomes an estimation problem critical to establishing risk adjusted guaranty assessments

corruption soundness of the banking sector and economic growth a cross country study abstract this paper explores the impact of corruption on both the banking sector and economic growth we determine the impact using 76 macroeconomic data from various countries over the period 2002 2004 the results of various cross sectional regressions provide substantial evidence that corruption significantly aggravates the problems with bad loans in the banking sector in this study we also find some evidence of a new channel through which corruption lowers economic growth corruption distorts the allocation of bank funds from normal projects to bad projects which decreases the quality of private investments hence it decreases economic growth

absenteeism efficiency wages and shirking we investigate the absence behaviour of workers when there is asymmetric information regarding worker health an individual s health is assumed to be private information to that individual and only observable to a third party at cost our aim is to complement the existing largely empirical studies of absence behaviour which have tended to treat the phenomenon exclusively as a labour supply decision on the part of workers cf allen 1981 barmby and treble 1991 barmby orme and treble 1991 and dunn and youngblood 1986 our approach is to draw out the interactive aspects of the employment relationship we assume that workers are ex ante uncertain as to their state of health and supply labour on the basis of an all or nothing utility maximising decision taken once a realisation of this state has been received utility is a function of income leisure and health and workers value leisure more the sicker they are firms are able to exert some control over individual behaviour by monitoring workers and threatening to fire shirkers that is workers absenting themselves with unacceptable sickness our model highlights an efficiency wage effect through which wages may be used as a method of absence control in particular the optimal response of the firm to an increase in the cost of monitoring is to discourage shirking by raising wages furthermore to the extent that

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

crawling peg inflation hedges and exchange rate dynamics this paper stresses the effects of currency substitution and speculation on inflation hedges on the relative price of home goods in the two sector general equilibrium portfolio balance model examining the overshooting hypothesis of exchange rates in association with the overshooting phenomenon of price of inflation hedges it has shown that exchange rate undershooting is plausible with the significant overshooting of the price of inflation hedges when domestic residents hold only domestic money and inflation hedges however the impact of currency substitution is strong enough to lead to exchange rate overshooting if the domestic residents have access to foreign currency

government spending and the real exchange rate i study the effect of government spending on the real exchange rate in an open economy version of the sidrauski model with a time varying rate of time preference that introduces complementarity between consumption at different points in time i show that a balanced budget fiscal expansion causes a real depreciation and a current account surplus if the expansion falls on traded goods if the increase falls instead on nontraded goods both the stylized results of a real appreciation and a current account deficit and the perverse result of an appreciation and a surplus can occur

devaluation levels versus rates abstract in a context of infinitely lived families a la sidrauski where consumers are lump sum compensated for the inflation tax and there is no capital mobility it is shown that a devaluation improves while an increase in the rate of devaluation deteriorates the balance of payments

federal deposit insurance regulatory policy and optimal bank capital this paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the fdic essentially the fdic sells two products insurance and regulation to span the product space it must and does set two prices we argue that the need to establish regulatory disincentives to bank risk taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value i e the value of their right to continue in business stands at the center of these disincentives and in front of the fdic s insurance reserves just as a book shouldn t be judged by its cover a government agency shouldn t be judged by the words behind its initials with the fdic federal deposit insurance corporation the agency s name describes only part of its formal operations the fdic is quasi governmental has a regional structure and sells deposit insurance however the initials fail to convey the fdic s critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state chartered commercial banks that have chosen not to belong the federal reserve system reflecting the federal reserve s membership problem the number of these banks is growing year by year besides selling deposit insurance at bargain explicit rates the fdic performs four regulatory functions 1 entry regulation it passes on new banks applications for deposit insurance and on branch and merger proposals as well thereby protecting the value of existing bank charters 2 examination two thirds of fdic employees are concerned with inspecting bank records and supervising managerial activity 3 regulation of deposit rates and conditions for withdrawal by tradition fdic policies on these matters conform entirely with regulations applicable to federal reserve member banks and 4 disposition of failed banks when an insured bank fails the fdic usually chooses not to liquidate it 2

market based risk adjusted examination schedules for depository institutions abstract among deposit insurance reforms considered by economists and policymakers have been prompt resolution of problem institutions risk adjusted deposit insurance premiums and risk adjusted capital requirements some economists have further suggested that risk adjusted deposit insurance premiums or capital ratios be calculated by applying option pricing models to stock market data alternatively the option methodology could be used to establish a risk based examination schedule whereby riskier banks would be examined on a more frequent basis such an examination schedule would be consistent with prompt resolution strategies since it would relate the frequency of examination and closeness of supervision to banks riskness this paper demonstrates how a risk adjusted examination schedule could be derived the paper also considers alternatives to the assumptions regarding examination policies made in standard applications of the option model which may not be valid for the sample periods previously used it discusses potential resulting biases and ways to mitigate their effects

bank capital regulation in a barrier option framework abstract the barrier options theory of corporate security valuation is applied to the contingent claims of a regulated bank the regulator insurer of a bank owns a down and in call option on the bank assets which can be balanced against the expected coverage cost raising the regulatory barrier critical asset level triggering bank closure leads to a transfer of wealth from stockholders to the insurer and reduces stockholder incentives to increase asset risk empirical tests on a sample of 152 one bank holding companies show that regulatory barriers are priced in the stock market and are inversely related to tier 1 leverage ratios

absenteeism in a medium sized manufacturing plant 1991 absenteeism in a medium sized manufacturing plant applied economics vol 23 no 1 pp 161 166

the valuation of fdic deposit insurance using option pricing estimates when congress set the premium rate for fdic deposit insurance in the banking act of 1935 which authorized a permanent federal insurance system neither experience nor theory could offer much guidance regarding an appropriate fee structure although rates have since been periodically revised the fdic has yet to attempt to set the insurance rate at a ifair level that is a level equal to administrative costs plus the ex ante value of the insurance such a premium is the rate that would be charged by competitive private insurers however7 the garn st germain act of 1982 directed the fdic to consider the feasibility of a risk based premium structure in response the fdic has suggested a trial system in which each insured bank will be placed in one of three risk classes based on credit and interest rate risk relative to capital and a premium rate will be assigned to each group those rates will be determined in part by the loss experience of the entire banking system fdic 1983 another approach to the determination of the appropriate insurance premium has been offered by merton 1977 who suggested using the analogous relationship between deposit guarantees and put options to value fdic insurance in this paper we follow merton s suggestion and calculate bank specific estimates of the proper premium for deposit insurance for the banks in our sample we find that fdic rates greatly exceed estimates of the fair value of the insurance derived from the blackscholes 1972 option pricing model

absenteeism predictors least squares rank regression and model selection results this paper examines the determinants of absenteeism using ols rank based re gressions and a model selection procedure the results show that personal attributes are the most important determinants of long term absences for total working days lost the penalty factors are the most significant predictors the results also show that absenteeism tends to be lower among firms with more part time workers unionization on the other hand increases the total days lost due to absenteeism

limited capital markets and the real effects of monetary stabilization policies under alternative exchange rate regimes abstract a common argument against monetary stabilization policies in developing countries is that they lead to short run output contractions this paper argues that in economies facing severely limited capital markets such contractionary effects may hold only under a fixed exchange rate system especially if the policy lacks credibility however if currency substition is an additional feature of the economy monetary deceleration may be expansionary even under fixed exchange rates jel e52 e63

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

the pricing of manufactured goods during trade liberalization evidence from chile israel and korea this paper is an investigation of price setting behavior in chile israel and korea when each of these countries moved from a fairly closed to a more open international trade regime in some cases the intensification of the opening resulted from real appreciation rather than from a formal adjustment in tariff rates as in chile 1980 82 and israel 1983 84 the central thesis of this paper is that the structural price equation for import competing manufactured goods changes with the degree of openness to trade when the economy is fairly closed the main weight is commanded by domestic cost variables and excess demand and foreign prices only affect pricing through their effects on imported material prices during trade liberalization the rate of change of prices of an increasing proportion of manufacturing goods begins to be influenced by the landed cost of similar imports but domestic variables still have a role because selected domestic manufactured goods are considered imperfect substitutes for internationally traded products empirical results from time varying parameter estimation show that domestic currency prices of imports become progressively more important during the liberalization processes in the three countries

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

correlated default risks and bank regulations bank regulatory design relies critically on bank risk modeling traditionally the bank s aggregate value is assumed to obey an exogenously specified process e g a lognormal diffusion we demonstrate that this assumption is generally invalid given the truncated and correlated payoff structure of individual bank loans instead the bank s aggregate terminal payoff is significantly left fat tailed this skewness remains even when the bank holds an infinitely large number of loans in its portfolio unless they are uncorrelated by ignoring skewness in bank payoffs deposit insurance premia and capital requirements have traditionally been significantly mis calculated

a framework for assessing credit risk in depository institutions toward regulatory reform abstract this paper develops and illustrates a new method for evaluating the credit risk borne by depository institutions that may prove to be an important element in a regulatory mechanism sensitive to risk in our framework depository institutions are forced to bear the costs of their risk exposure and hence to internalize this cost when extending loans using various loan portfolios and alternative macroeconomic scenarios we present numerical calculations demonstrating the ability of our framework to capture variations in risk exposure and highlighting the significance of portfolio concentrations these calculations are based on an important new source of information that permits an econometric analysis of loan losses by industry

the implied reserves of the bank insurance fund abstract option models of deposit insurance pricing view assessment rates as put option premiums however such models ignore the risk of guaranty fund default this paper attempts to link risk based premiums with guaranty fund reserves in a partial equilibrium setting by employing a methodology based on options with credit risk the value of full insurance per coverage period is expressed as a standard options premium and is decomposed into two parts the explicit part is due to the available assets reserves of the guaranty fund while the implicit part comes from federal support contingent on the adequacy of reserves at the end of the coverage period implied reserves are derived under an exogenous insurance coverage rate as a policy parameter the method is illustrated on a sample of 40 large bank holding companies and an extension to the case of several insured banks is provided

monetary expansion and real exchange rate dynamics this paper examines the effect of a change in the rate of monetary expansion on the dynamics of the real exchange rate under fully flexible domestic prices and a floating exchange rate the model is similar in structure to an ealier paper by calvo and rodriguez the main difference being that in our model consumers have an infinite planning horizon and long run perfect foresight one of the main findings is that an increase in the rate of monetary expansion has the impact effect of creating a real appreciation of the exchange rate and a deterioration of the balance of payments contrary to the results of calvo and rodriguez

reprint of the pros and cons of sick pay schemes testing for contagious presenteeism and noncontagious absenteeism behavior abstract this paper provides an analytical framework and uses data from the u s and germany to test for the existence of contagious presenteeism and negative externalities in sick leave insurance the first part exploits high frequency google flu data and the staggered implementation of u s sick pay mandates to show using a reduced form framework that population level influenza like disease rates decrease after employees gain access to paid sick leave next a simple theoretical framework provides evidence on the underlying behavioral labor supply mechanisms the model theoretically decomposes overall labor supply adjustments moral hazard into contagious presenteeism and noncontagious absenteeism behavior and derives testable conditions the last part illustrates how to implement the model exploiting a german sick pay reform and administrative industry level data on certified sick leave by diagnosis the empirical test finds that the labor supply elasticity for contagious diseases is significantly smaller than for noncontagious diseases under the identifying assumptions of the model this finding provides additional indirect evidence for the existence of contagious presenteeism

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

bad banking in thailand an empirical analysis of macro indicators it appears to be common wisdom that the basic cause of thailand s crisis is its extraordinarily weak financial institutions the article questions this proposition from an empirical viewpoint it is well established that the long term performance of thailand s financial system is favourable the insight from moral hazard indicators is unexpected regarding the bad banking proposition although not compelling finally the liberalisation process produced inadequately addressed risks however this also applies to experienced and well regulated foreign banks it is argued that the facts provided can be better explained in a framework of system change than by bad banking in thailand

the pros and cons of sick pay schemes testing for contagious presenteeism and noncontagious absenteeism behavior abstract this paper provides an analytical framework and uses data from the u s and germany to test for the existence of contagious presenteeism and negative externalities in sick leave insurance the first part exploits high frequency google flu data and the staggered implementation of u s sick pay mandates to show using a reduced form framework that population level influenza like disease rates decrease after employees gain access to paid sick leave next a simple theoretical framework provides evidence on the underlying behavioral labor supply mechanisms the model theoretically decomposes overall labor supply adjustments moral hazard into contagious presenteeism and noncontagious absenteeism behavior and derives testable conditions the last part illustrates how to implement the model exploiting a german sick pay reform and administrative industry level data on certified sick leave by diagnosis the empirical test finds that the labor supply elasticity for contagious diseases is significantly smaller than for noncontagious diseases under the identifying assumptions of the model this finding provides additional indirect evidence for the existence of contagious presenteeism

heterogeneous creditors and the market value of bank ldc loan portfolios abstract a standard proposition used in many empirical studies is that the value of an ldc loan does not depend on the identity of the lender i test this proposition using bank securities prices and prices for ldc loans trading in the secondary market i find significant cross sectional differences in the sensitivity of bank stocks to changes in the price of ldc loans differences in sensitivity appear to be related to changes in bank exposure to ldcs i also find evidence consistent with the hypothesis that cds are implicitly insured

bank bailouts and moral hazard evidence from germany we use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking to identify the moral hazard effect of bailout expectations on bank risk we exploit the fact that regional political factors explain bank bailouts but not bank risk the sample includes all observed capital preservation measures and distressed exits in the german banking industry during 1995 2006 a change of bailout expectations by two standard deviations increases the probability of official distress from 6 6 to 9 4 which is economically significant

currency substitution under nonexpected utility some empirical evidence this paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for israel from 1978 to 1988 we find that the elasticity of intertemporal substitution is less than one the elasticity of currency substitution is greater than one relative risk aversion is about seven and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services in most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent s objective function the methodology of this paper can be applied to other interesting cases of currency substitution copyright 1993 by ohio state university press

deposit insurance pricing and social welfare abstract recent literature has established that financial disruption has real costs which justify government intervention in the financial sector one form of government intervention is deposit insurance in this paper we determine the optimal pricing and subsidy of deposit insurance in a social welfare context the main conclusion is that optimal deposit insurance need not be actuarially fair in an economy with a real and a financial sector we consider the effects of taxation and social political weights of the sectors we analyze two policy tools government supervision and deposit insurance pricing

smoothness of the policy function in continuous time economic models the one dimensional case abstract infinite horizon continuous time optimization is often encountered in economic models herein we prove the c1 differentiability of the policy function when the objective is strongly concave and the state is unidimensional

stock versus mutual ownership structures the risk implications this article provides empirical tests of the risk differences between two types of ownership structure in the property liability insurance industry empirical evidence is provided that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio further evidence suggests that stock insurers write relatively more business than do mutuals in lines and states having higher risk copyright 1993 by university of chicago press

deposit insurance and risk taking behavior in the credit union industry abstract this paper examines the relationship between deposit insurance and risk taking behavior within the credit union industry time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk taking hypothesis although federal credit union capital declined immediately following the adoption of deposit insurance this was most likely the result of reduced capital requirements not deposit insurance liquidity and loan delinquency ratios had a negative time trend coefficient implying a decline in risk taking behavior during the post insurance period cross sectional test results employing iowa state chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts overall there was no evidence that the adoption of deposit insurance increased the risk taking behavior of credit unions

financial institution structures in a developing two tier banking system an empirical perspective from eastern europe abstract an empirical analysis of the structure of hungarian financial institutions reveals them to be very profitable across all groupings although capital and liquidity ratios are on average low in comparison to west german standards the capital adequacy problems appear to be concentrated in the former affiliates of the central bank the thinness and underdevelopment of the hungarian securities market may hinder the capacity of the institutions to raise liquidity and capital ratios as well as inhibit the emergence of competitors seeking high levels of profitability

deposit insurance and bank failures new evidence from the 1920s this paper examines the contribution of deposit insurance to bank failures during the 1920s using individual bank data from kansas where membership in the state insurance system was voluntary i find that the balance sheets of insured banks reflected greater risk taking and probit model estimates indicate that insured banks were more likely to fail than non insured banks insurance had an especially strong impact the closer a bank was to failure because regulation was comparatively strict in kansas the findings suggest that deposit insurance had an even greater impact in other states and in the recent u s experience

inflation and welfare in the steady state this is a paper on expected inflation and welfare in steady state equilibrium the demand for money is an inventory demand with an endogenous payment period the clower constraint is not imposed higher inflation reduces welfare by reducing consumption as people devote more of their real income to maintaining lower average money holdings high inflation does not necessarily promote an increase in the capital stock the mundell tobin effect is absent the policy conclusion is standard deflate at the rate of time preference because capital is held socially optimal consumption falls short of its golden rule level if inside money is allowed it drives out fiat money and welfare is again at a maximum

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

optimal bank interest margin under capital regulation and deposit insurance this paper examines the relationships among capital regulation deposit insurance and the optimal bank interest margin in a model where loan losses are the source of uncertainty changes in capital regulation or deposit insurance premiums have direct effects on the bank s interest margin an increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion comparative static analysis also explores the relation between asset quality and interest margin it is shown that a mean preserving spread of the distribution of loan losses results in a reduced margin

capital regulation and insured banks choice of individual loan default risks abstract how bankers choose the riskiness of their individual assets is an important question it is well known that fixed premium deposit insurance leads a bank to prefer a high variance asset portfolio but its effect on individual asset choice has not been carefully evaluated this paper demonstrates how bank examination procedures and capital adequacy standards can make the value of a bank s deposit insurance contract concave in individual asset risks insured bankers may therefore have a rational preference ceteris paribus for relatively safe individual loans even while they prefer risky portfolio returns the model s implications for loan securitization and the federal regulators new risk based capital standards are discussed

the effects of parent company business on occupational credit union behaviour 1986 the effects of parent company business on occupational credit union behaviour applied economics vol 18 no 12 pp 1311 1321

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously

an empirical test of the incentive effects of deposit insurance the case of junk bonds at savings and loan associations this paper analyzes how financial markets reacted to s l diversification into junk bonds the authors report that junk bond holdings are positively correlated with both the volatility of s l equity returns and the interest rates paid on large cds next they examine the impact of junk bonds on equity returns for poorly capitalized s ls greater risk taking increases the value of deposit insurance and should lead to higher stock returns however a well capitalized institution that increases junk bond holdings should not experience stock price gains the authors find that this is the case for the sample of s ls they studied copyright 1994 by ohio state university press

the federal deposit insurance fund that didn t put a bite on u s tax payers abstract unlike the federal savings and loan insurance corporation and the bank insurance fund the national credit union share insurance fund ncusif survived the 1980s without falling into a state of accounting insolvency this paper analyzes how differences in incentive structure constrain the attractiveness of interest rate speculation and other risk taking opportunities to managers and regulators of credit unions despite these better incentives robust present value calculations establish that ncusif fell into economic insolvency during the mid 1980s besides calculating the extent of this insolvency the paper also seeks to explain why after ncusif became insolvent it could rebuild its reserves without an explicit or implicit taxpayer bailout our explanation turns on cross industry coinsurance responsibilities and the shallowness of the fund s observed insolvency relative to industry net worth we identify forces in the decisionmaking environment tending to limit the depth and duration of unresolved insolvencies at individual credit unions managerial opportunities to benefit personally from taking risks that would flow through to ncusif are constrained by difficulties in converting a credit union to stockholder form and by the intensity of proactive monitoring of troubled credit unions by sister institutions and other private coinsurers we conjecture that expanded use of coinsurance and private monitoring could reduce taxpayer loss exposure elsewhere in government deposit insurance systems