a perspective on the symptoms and causes of the financial crisis abstract prior to the 2007 2008 financial crisis banking sector profits were very high but the profitability of financial intermediation was poor using a novel model of banking this article argues that the high profits were achieved through balance sheet expansion and growing default liquidity and term risk mismatches between assets and liabilities as a result large banks financial leverage rose as they became less liquid setting the conditions for a systemic banking crisis this article argues that the increase in financial leverage was possible due to misguided changes in the regulatory framework specifically the basel i capital accord and reductions in reserve requirements finally this article overviews and assesses the policy response in the aftermath of the crisis

general equilibrium with price intervention policies a computational approach abstract three alternative formulations of general equilibrium under price intervention policies are presented in a computational framework in the first minimum or ceiling prices are supported by a government marketing agency revenues are recycled to consumers in the minimum price case and losses covered by lump sum taxes in the ceiling case similarities to general equilibrium with taxes are stressed in the second sector specific minimum prices are considered similar to harris todaro equilibria in the third government price supports operate through market interventions existence is discussed numerical examples presented and possible policy applications outlined

interest rate deregulation monetary policy efficacy and rate rigidity abstract this paper examines the effects of interest rate regulation and subsequent deregulation on the efficacy of monetary policy and rigidity of retail bank deposit rates in hong kong using an error correction model we find that interest rate deregulation increases the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long term pass through for retail bank deposit rates our study also shows that the adjustments in retail bank deposit rates are asymmetric and rigid upwards during the regulated period but tend to be rigid downwards during the deregulated period the spreads between retail bank deposit rates and market rates have also tightened sharply after the removal of interest rate controls

rockets and feathers understanding asymmetric pricing prices rise like rockets but fall like feathers this stylized fact of most markets is con rmed by many empirical studies in this paper i develop a model with competitive rms and rational partially informed consumers where such asymmetric response to costs by rms emerges naturally in contrast to public opinion and past work collusion is not necessary to explain such result using a rich dataset of retail gasoline prices i nd the observed price dispersion pattern to be consistent with the model s prediction

understanding the behavior of bank spreads in latin america abstract over the last decade many countries in latin america have eliminated interest rate ceilings reduced reserve requirements and stopped direct credit controls these market oriented reforms have encouraged financial deepening thereby producing considerable economic benefits to the countries nevertheless the persistence of high interest rate spreads has been a disquieting outcome of the reforms this paper explores the determinants of bank spreads in a systematic way for argentina bolivia chile colombia mexico peru and uruguay during the mid 1990s the analysis shows that high operating costs raise spreads as do high levels of non performing loans although the size of these effects differs across the countries in addition reserve requirements in a number of countries still act as a tax on banks that gets translated into a higher spread beyond bank specific variables uncertainty in the macroeconomic environment facing banks appears to increase interest spreads the combination of these microeconomic and macroeconomic factors is a cause for concern in latin america as spreads widen the cost of using the financial system becomes prohibitive to some potential borrowers in addition the results suggest that bank capital requirements may not prevent excessive risk taking by banks when bank spreads are high

risk premium and market power in credit markets abstract the use of credit risk adjusted marginal opportunity cost of funds in the computation of the lerner index for bank loans opens new directions to properly evaluate market power of banks in credit markets beyond disputed concentration measures

tax incidence analysis of developing countries an alternative view misleading conclusions can be drawn from studies of tax incidence that ignore the special features of developing countries incorporating these features can sometimes reverse the incidence pattern of taxes relative to what is often taken to be conventional wisdom even where patterns are not reversed quantitative differences can be substantial the newer views of incidence have implications for tax restructuring options being considered in several developing countries the proposed restructuring may appear to lead only to a more regressive tax system because of improper incidence analysis copyright 1991 by oxford university press

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

an asymmetry generator for error coorection mechanisms with application to bank mortgage rate dynamics empirical evidence supports asymmetries in the adjustment of prices interest rates and other economic variables the asymmetry hypothesis however is often procedurally difficult to set up and test this article shows that a wide variety of such mechanisms can be nested within an asymmetry generator which represents the interactions between the disequilibrium term of an error correction mechanism and an ancillary driver process the asymmetry hypothesis can then be tested in a straightforward extension of linear statistical methods the methods are applied to 10 years of monthly new zealand mortgage rate data

retail gasoline price dynamics and local market power using monthly data from the 48 contiguous states except nevada for the 1988 2002 period it is shown that retail gasoline prices respond faster to wholesale price increases than to equivalent wholesale price decreases moreover markets with high average retail wholesale margins experience a slower adjustment and a more asymmetric response since gasoline is the only variable input average margins in a state likely reflect the degree of retail market power this suggests that sticky prices and response asymmetries in the gasoline market are at least partially a consequence of retail market power

cronyism a cross cultural analysis the devastating economic effects of the asian financial crisis and us corporate scandals have underscored the need to strengthen corporate governance provisions although cronyism has been suggested as a leading cause of the two crises it has received little attention from scholars in this paper we analyze the concept of cronyism and argue that it comes in various guises arising from different motivational bases and power dependence relations we distinguish cronyism from related constructs and posit that it is a form of corruption with different dynamics from other forms we advance propositions on its likelihood of occurrence across cultures and develop a typology of cronyist exchanges

deposit spreads and the welfare cost of inflation abstract high nominal interest rates are associated with high deposit spreads which is consistent with a model where banks have monopoly power and currency and deposits are substitutes therefore higher interest rates raise the implicit price of banking services increase bank profits and attract entry into the banking sector taking these effects into account a one percentage point increase in inflation has a welfare cost of 0 083 of gdp 6 7 times higher than traditional estimates

business cycles and monetary regimes in emerging economies a role for a monopolistic banking sector abstract this study shows that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle strategic limit pricing aimed at protecting retail niches from potential competitors generates countercyclical bank markups markup increments during recessions directly increase borrowing costs for firms and indirectly damage the financial position of firms balance sheets increasing the risk perception of lenders i use bayesian techniques and data from argentina to show that the inclusion of monopolistic banking improves the fit of the new keynesian small open economy model

corporate income tax incidence in the presence of sector specific unemployment abstract this paper explores the implications of sector specific unemployment in the analysis of the corporate income tax incidence the analysis builds on a modified harris todaro framework in which the corporate wage is indexed to commodity prices while the noncorporate wage is flexible we present the sufficient conditions under which a tax burden falls more heavily upon capital and contrast them with the original harberger results also examined in this paper is the incidence of unemployment benefits and their effects on the unemployment rate

political economy of the 2014 farm bill this article assesses the political economy of the 2014 u s farm bill with a focus on the farm support safety net the farm bill secured substantial bipartisan majorities in a politically contentious congress planned outlays are predominately for nutrition assistance programs directed toward a traditional nonfarm constituency in the farm bill coalition while annual fixed direct payments to farmers are eliminated but replaced with enhanced downside risk protection against low prices or revenue the new support programs may prove more or less costly than the foregone fixed payments with farmers offered a choice between a price countercyclical program with increased reference prices and a revised moving average revenue guarantee program the role of insurance is enhanced notably by replacing past support programs with a new upland cotton revenue insurance program and dairy milk to feed margin protection program open policy issues that are highlighted include the costs and distortionary effects of moving average revenue benchmarks versus fixed reference prices the overall level of insurance premium subsidies the potential for overlap between commodity and insurance programs and lastly food environmental and biofuels concerns that reflect the diverse portfolio of products demanded from agriculture in an international context we conclude that the 2014 farm safety net likely would not have been enacted had multilateral agreement been reached on the 2008 doha round world trade organization negotiating documents conversely the 2014 farm bill makes achieving those limits more difficult research is discussed that can elucidate the ongoing political economy of u s farm policy and help shape future program design

incidence analysis of a sector specific minimum wage in a two sector harris todaro model in this paper we explore the incidence of a sector specific minimum wage in a two sector harris todaro model with intersectorally mobile capital in addition to the output and substitution effects in harberger s tax incidence analysis an additional effect reflecting the endogenously generated unemployment arises in the harris todaro case we also explore the functional incidence issue numerically for mexico by using general equilibrium computational techniques in a number of the calculations reported capital more than bears the income loss from unemployment caused by the sector specific minimum wage

asymmetric adjustment of commercial bank interest rates evidence from malaysia and singapore abstract this paper examines the rigidity of commercial bank interest rates using evidence from singapore and malaysia an asymmetric error correction technique is used to test whether mean adjustment lags are different when retail rates are above or below their equilibrium levels it is concluded in both countries that the mean adjustment lag is shorter when the deposit rate is above its equilibrium than when it is below its equilibrium using the framework of hannan and berger 1991 this finding implies that the hypothesis of collusion cannot be rejected

the copula garch model of conditional dependencies an international stock market application abstract modeling the dependency between stock market returns is a difficult task when returns follow a complicated dynamics when returns are non normal it is often simply impossible to specify the multivariate distribution relating two or more return series in this context we propose a new methodology based on copula functions which consists in estimating first the univariate distributions and then the joining distribution in such a context the dependency parameter can easily be rendered conditional and time varying we apply this methodology to the daily returns of four major stock markets our results suggest that conditional dependency depends on past realizations for european market pairs only for these markets dependency is found to be more widely affected when returns move in the same direction than when they move in opposite directions modeling the dynamics of the dependency parameter also suggests that dependency is higher and more persistent between european stock markets

incidence analysis of financing unemployment benefits in a partially unionized economy the incidence of unemployment benefits are analysed under alternative financing modes in a two sector general equilibrium model with a segmented labour market where one sector is unionized and queue unemployment exists specific tax incidence as well as balanced budget incidence are analysed the main results are i the distributional effects are identical irrespective of which factor is taxed in the union sector ii the distributional effects are also identical irrespective of which factor is taxed in the non union sector and iii labour gains by a uniform ui tax on capital in both sectors and may or may not gain from a uniform labour tax while capital owners lose in both cases thus what matters for the incidence outcome is which sector and not which factor that is taxed

the deposits channel of monetary policy we propose and test a new channel for the transmission of monetary policy we show that when the fed funds rate increases banks widen the interest spreads they charge on deposits and deposits ow out of the banking system we present a model in which imperfect competition among banks gives rise to these relationships an increase in the nominal interest rate increases banks market power inducing them to increase deposit spreads and hence restrict deposit supply households respond to the increase in deposit prices by substituting from deposits into less liquid but higheryielding assets consequently changes in the nominal interest rate aect banks cost of capital and lending using branch level data on the universe of u s banks we show that following an increase in the fed funds rate deposit spreads increase by more and supply falls more in areas with less deposit competition we control for changes in banks lending opportunities by comparing branches of the same bank we control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change and even if this change is fully anticipated our results imply that monetary policy has a signicant impact on how the nancial system is funded on the quantity of safe and liquid assets it produces and on its provision of loans to the real economy

stock market cycles financial liberalization and volatility in this paper we analyze the cycles of the stock markets in four latin american and two asian countries and we compare their characteristics we divide our sample in two subperiods in order to account for differences induced by the financial liberalization processes of the early 1990s we find that cycles in emerging countries tend to have shorter duration and larger amplitude and volatility than in developed countries however after financial liberalization latin american stock markets have behaved more similarly to stock markets in developed countries whereas asian countries have become more dissimilar concordance of cycles across markets has increased significantly over time especially for latin american countries after liberalization

bank asset quality monetary policy pass through the funding mix of european firms is weighted heavily towards bank credit which underscores the importance of efficient pass through of monetary policy actions to lending rates faced by firms euro area pass through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis distressed loan books are a crisis hangover with direct implications for profitability hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate this paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass through using bank level data over the period 2008 2014 we empirically test the implications of the model we show that a one percentage point increase in the impairment ratio lowering short run pass through by 3 we find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all

credit cronyism and control evidence from the americas abstract i examine the effects of corruption and government control of the banking system for 18 western hemisphere countries on the sensitivity of commercial lending rates to changes in international financial conditions and find that most countries lending rates are insensitive to these conditions only the least corrupt nations exhibit a significant positive relation between lending rates and international financial conditions the responsiveness of these lending rates is nonlinearly related to corruption and government control of the banking sector the findings suggest that both corruption and government control of banks need to be considered when analyzing international credit markets

fairly priced deposit insurance and bank charter policy the thrust of current deposit insurance reform risk based insurance premiums and capital requirements is an effort to price deposit insurance more fairly fairly pricing deposit insurance eliminates inequitable wealth transfers but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy results in an efflcient separating equilibrium this article analyzes the effect of alternative charter policies when deposit insurance is fairly priced the thrust of current deposit insurance reformrisk based capital requirements 1988 and risk based insurance premiums 1994 is an effort to price deposit insurance more fairly chan greenbaum and thakor s 1992 seminal paper dramatically illustrated that fairly pricing deposit insurance is not enough to solve the deposit insurance problem in their model when banks hold nontraded private information assets no equilibrium exists with fairly priced deposit insurance unless banks earn rent or are subsidized fairly pricing deposit insurance eliminates inequitable transfers of wealth but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy gives an efficient separating equilibrium the separating equilibrium segregates the market for insured transactions deposits from private information financial intermediation the analysis in this article provides support for the deposit insurance reform proposal in the recent 1993 national commission on financial institution reform recovery and enforcement ncfirre report to the president and congress and for merton and bodie s 1993 proposal both proposals impose a separating equilibrium that isolates insured transactions accounts and the public information traded assets that secure them from private information assets in the bank s portfolio the formal model developed here is designed to demonstrate the effect of charter policy on the efficiency of market equilibrium in an uncomplicated setting but the main result that a separating equilibrium is more efficient is extremely robust with respect to the model specification the model has two types of financial intermediaries intermediaries that hold nontraded private

competition and pricing in the credit card market many credit card issuers charge fixed rates that remain the same for three to five years while the rest charge variable rates that are indexed to market rates the presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously variable rates move one for one with the index while fixed rates stay constant empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous yet seemingly contradictory existence of high rate cost margins and aggressive non price competition for new customers a phenomenon that existed in the credit card market in the early 1990s

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

price response asymmetric information and competition we compare predictions from a theoretical model based on the structure of the main outdoor retail market in jerusalem with the results of an empirical analysis of price response to changes in cost we find that firms without adjacent competition exhibit both upward and downward price rigidity an outcome we ascribe to asymmetric information between the consumer and the firm given that previous studies have focused on downward price rigidities of firms with market power our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity

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

who bears interest rate risk we study the allocation of interest rate risk within the european banking sector using novel data banks exposure to interest rate risk is small on aggregate but heterogeneous in the cross section contrary to conventional wisdom net worth is increasing in interest rates for approximately half of the institutions in our sample cross sectional variation in banks exposures is driven by cross country differences in loan rate fixation conventions for mortgages banks use derivatives to partially hedge on balance sheet exposures residual exposures imply that changes in interest rates have redistributive effects within the banking sector received october 31 2017 editorial decision august 30 2018 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

retail bank deposit pricing an intertemporal asset pricing approach fundamentally spreads between market and deposit interest rates increase when interest rates rise and decline when rates fall recent empirical studies have found this phenomenon to be related to market concentration static equilibrium models are poorly equipped to explain this behavior in this paper the author applies an intertemporal asset pricing model incorporating bank deposits as a form of money in order to analyze the pricing behavior of a banking sector exercising market power his results extend the theoretical literature on deposit pricing and provide some insights into the behavior of interest rate spreads through time copyright 1995 by ohio state university press

multimarket contact competition and pricing in banking abstract in this paper we assess the impact of multimarket contact of banks on their market power by means of a simultaneous equation model in which the divergence of price from marginal cost is a function of multimarket linkages the model is estimated using aggregate data from the italian regions for the years 1997 2009 our results show that multimarket contact is positively and significantly correlated to the market power index and is also connected to both home and non home market concentration the evidence is robust to changes in model specification and multimarket contact measures and supports the idea that firms which have a greater amount of contact are more likely to collude

the cyclicality of price cost margins in banking an empirical analysis of its determinants i introduction in this paper we study the cyclical behavior of price cost margins in banking calculated as the difference between the interest rate on loans and deposits using time series quarterly data for the period 1979 2005 in the united states this cyclical behavior of banks price cost margins a key fact about business fluctuations has received little attention before dueker and thornton 1997 find evidence that in cyclical downturns banks opt for a relatively high price cost margin however they focus exclusively on the markup of the bank prime lending rate over the marginal cost of funds for banks mandelman 2006 presents evidence on the cyclicality of margins for a large sample of countries and uses foreign bank penetration to explain the behavior of margins 1 in olivero 2005 aliaga diaz 2006 and aliaga diaz and olivero 2010a we document the countercyclicality of banks price cost margins in the united states in that paper we do so using an atheoretical methodology based on var forecast errors to measure comovement between variables 2 in this paper we build on this atheoretical evidence and take a step further by constructing an empirical model of the determinants of the cyclical behavior of margins here we take a theory based approach to decide on the inclusion of the relevant regressors that belong to this model doing so allows us to contribute to the literature by providing potential explanations for the previously documented countercyclical nature of margins monetary policy and credit risk could be suggested as the main and potentially the only determinants of the cyclical behavior of margins on the one hand the bank lending channel of monetary transmission predicts that the federal funds rate as a monetary policy indicator and margins are directly related therefore if policy rates exhibit a particular cyclical behavior not controlling for monetary policy could bias the estimations on the cyclical behavior of margins on the other hand credit risk is expected to be countercyclical and to raise margins so that default should help explain the countercyclicality of the latter based on these two observations our empirical methodology consists of two steps in a first step we test whether the negative and significant contemporaneous sample correlations between margins and a business cycle indicator are robust to the inclusion of controls related to monetary policy default risk and banking regulation results show it is so that there seems to be other channels through which fluctuations in the economy give rise to the observed countercyclicality of margins in a second step we look for these channels and offer several potential explanations for the observed behavior interest rate risk the economy s financial depth banks liquidity and capitalization and the share of total assets held by large banks all exert a significant impact on the behavior of margins over the business cycle these conclusions are consistent across alternative definitions of the margins and the business cycle indicator our work is linked to two strands of research in macroeconomics first our countercyclicality results are linked to the large literature on countercyclical markups in goods markets and its effects on aggregate demand started by rotemberg and saloner 1986 and rotemberg and woodford 1992 second price cost margins that vary endogenously and countercyclically in response to the state of the economy are a necessary condition for the existence of a financial accelerator as an amplifier of business fluctuations see for example bernanke and gertler 1989 and bernanke gertler and gilchrist 1998 therefore the countercyclical nature of price cost margins that we study here provides empirical support to the large body of literature in macroeconomic theory on this financial accelerator with price cost margins in the market for credit being countercyclical credit becomes more expensive in bad times firms may delay investment and production as a result and recessions may be exacerbated

land resilience and tail dependence among crop yield distributions we propose and empirically test a simple model to shed light on the nature of interactions between weather land quality and yield the conceptual model posits substitution relations between water stress metrics and soil quality as well as a soil conditioned threshold water stress level beyond which soil cannot buffer crop yields the model implies that yield yield dependence should vary as growing conditions vary in comparison with intermediate growing conditions yield yield dependence should strengthen when growing conditions are either very good or very poor county yield data strongly support substitution between soil and benign water availability levels but complementarity between soil and beneficial heat variables our estimated model provides qualified support for the hypothesis that better land is more resilient to water stress we estimate a pseudo copula that nests the gaussian copula finding strong evidence of left tail dependence among yields our formal model and empirical findings corroborate others concerns about the appropriateness of current usda rate setting methodologies which posit constant state conditional rank correlations implicitly assumed by use of the gaussian copula an application to aggregate crop yield rate setting suggests that current methods underprice area yield and whole farm premiums applying our empirical model to medium range weather projections under a climate change scenario for the northern great plains we infer that systemic yield correlations will increase in future years

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press