bank forward lending in alternative funding environments this paper examines the effects of loan commitments on bank lending behavior in both deposit funding and liability management environments assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain the bank must choose its supply of commitments given this choice the bank becomes a passive lender to commitment holders our focus on forward credit markets sheds new light on the private bankers assertion that they do not directly determine their level of lending but merely accommodate the credit needs of their customers similarly the central banker s claimed inability to control monetary aggregates in the short run becomes understandable in a new context it is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system it is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments expected bank and banking system size

stale forward guidance quarterly central bank projections regarding future interest rate decisions may become stale when new information enters the market using data from new zealand we find the predicted time varying and state dependent effects of interest rate projections on market expectations and uncertainty

conditional exchange rate volatility and the volume of foreign trade evidence from seven industrialized countries there has long been a concern over the volatility of exchange rates and their impact on the volume of foreign trade however very little attention has been paid to the choice of an appropriate volatility variable as well as the proper specification of the trade equation the sample standard deviation of the exchange rate has been used as a proxy for exchangerate uncertainty in empirical studies that examine the effects of exchange rate uncertainty on the volume of foreign trade see for example akhtar and hilton 1 and gotur 27 these studies have provided conflicting evidence on this issue it has been argued that use of the sample standard deviation is inappropriate because the empirical distribution of exchange rates is not normal 22 10 in this regard subsequent empirical research 12 36 40 41 11 has employed a moving standard deviation of the rate of change of the exchange rate as a proxy for exchange rate uncertainty chowdhury 11 obtained a clear pattern of results that support the hypothesis that the higher volatility of exchange rates led to a reduction in international trade transactions after the breakdown of the bretton woods system in march 1973 other studies have reported ambiguous results 2 the moving standard deviation used in these studies has been criticized in the literature for a ignoring relevant information on the random process generating exchange rates 18 b underestimating the effect of volatility on decisions 52 c distorting the measurement of the volatility variable by smoothing the series 9 and d injecting an element of arbitrariness into the calculation through decisions about the order m of the moving average 43 3

an analysis of bank loan rate indexation this paper examines the economic rationale for the use of bank loan commitments and the effect on the allocation of bank credit of indexing the loan rate offered through the commitment to the prime a simple model of the loan market is constructed and used to examine the effect changes in loan demand and the cost of bank funds have on the allocation of bank credit under indexation it is shown that indexing implies changes in the relative cost of borrowing for certain groups of bank customers for nonprime customers an increase in the cost of bank funds results in a decline in the relative cost of borrowing under commitments the pattern of commitment use is found to be consistent with the predictions of the model recent surveys have found that the majority of commercial and industrial loans are made under pre existing loan commitments these surveys also find that for most commercial and industrial loans the interest rate is tied or indexed to the prime rate although indexing loan rates is widespread there has been little theoretical or empirical work on the effect of this pricing scheme on the allocation of bank credit the paucity of research in this area is surprising considering the frequency with which indexed contracts are used and the current controversy surrounding the use of the prime as an index 2 the purpose of this paper is to provide an analysis of the effect of indexed loan rates on the intertemporal allocation of bank credit a simple model of the loan market is constructed and used to examine the effect changes in the cost of bank funds and changes in loan demand have on the allocation of credit under indexation use of this model demonstrates that indexed contracts do not result in an efficient allocation in the sense that the resulting allocation does not replicate the allocation obtained with complete contingent contracts finally the model is tested empirically using data on commitment use from the quarterly survey of the terms of commercial bank lending it is shown that indexing

timing of investment and financing decisions in imperfectly competitive financial markets the authors present a model in which firms can time their projects they show that financing and investment decisions are interrelated if financial markets are not perfectly competitive resulting in apparent timing of financing decisions the authors obtain the result that the proportion of equity financing relative to debt is higher when economic conditions are improving they also show that the type of financing depends both on current and past economic conditions finally the authors show that there will be relatively more equity financing in industries in which obsolescence is more likely copyright 1993 by university of chicago press

have increases in federal reserve transparency improved private sector interest rate forecasts yes this paper shows that since the late 1980s u s financial markets and private sector forecasters have become 1 better able to forecast the federal funds rate at horizons out to several months 2 less surprised by federal reserve announcements 3 more certain of their interest rate forecasts ex ante as measured by interest rate options and 4 less diverse in the cross sectional variety of their interest rate forecasts we also present evidence that strongly suggests increases in federal reserve transparency played a role for example private sector forecasts of gdp and inflation have not experienced similar improvements over the same period indicating that the improvement in interest rate forecasts has been special

preference trees preference hierarchies and consumer behavior n a recent article coursey 1985 i considered consumer behavior in a model in which preferences are described by an activity hierarchy using this activity hierarchy description consumers were found to sequentially satisfy higher ranked activities in their preference ordering up to the point that their monetary and time resources were exhausted among the more interesting implications of this behavior were that 1 if a consumer s economic resources are subsequently increased then additional consumption will commence at the point where the consumer s resources were initially exhausted 2 a change in the price of a commodity used in an activity will have a pure substitution effect in the production of that activity and a spillover income effect at the point of resource exhaustion and 3 comparative statics effects of any change are unidirectional and will affect behavior only from the point where the effects enter the consumer s sphere forward to the point of exhaustion of economic resources the results were derived under the assumption that each commodity can be used in the production of only one activity in their follow up article brooks and earl 1987 relaxed this assumption and considered the implications of jointness in consumption in the context of the activity hierarchy model in their extension a commodity may be used as a perfect substitute at different places in the activity hierarchy they concluded that my general results become less clear when commodities can be used in this fashion i fully concur with their motive for this extension and welcome their remarks as a further contribution to the field of choice regarding priorities 2 in this brief article i wish to outline fully how their results should be interpreted one interpretation involves the theoretical relationship between the activity hierarchy model and the more traditional to economists utility maximization model the second interpretation involves the use of the activity hierarchy model and its extensions for empirical analysis

portfolio crowding out empirically estimated this paper tests hypotheses regarding the parameters in investors asset demand functions the hypothesis that federal bonds are closer substitutes for equity than for money implies portfolio crowding out by federal borrowing regression studies of asset demand functions have needed to impose prior beliefs to obtain precise and plausible estimates for the parameters this paper uses a mle technique that dominates regression in that it makes full use of the constraint that the parameters are not determined arbitrarily but rather are determined by mean variance optimization on the part of the investor the striking conclusion is that portfolio effects are close to zero

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

personal taxation pension wealth and portfolio composition this paper emphasizes the roles played by personal taxation and pension wealth in portfolio choice and composition a theoretical discussion of the impacts of taxation and participation in social security and private pension systems on individual wealth allocation is followed by empirical evidence based on u s cross section data both effects prove to be significant anticipated social security and private pension benefits exert a measurable influence on household portfolio allocation their omission from an asset demand model may lead to a misinterpretation of the impact of taxation on portfolio composition

effects of explicit fomc policy rate guidance on interest rate expectations we quantify the impact of explicit fomc policy rate guidance announcements at the zero lower bound on eurodollar interest rate futures we find that they significantly reduced implied interest rates and led to a flattening of the yield curve

non marketable assets and households portfolio choices a case study of italy abstract this paper analyzes the determinants of aggregate households portfolio choices conditional on those components of wealth which can be regarded as highly or totally illiquid because of the existence of substantial transaction costs and or institutional constraints on agents behaviour the empirical analysis broadly confirms the importance of the above mentioned institutional aspects in the allocation of financial wealth and provides the means for addressing some interesting questions regarding the behavior of portfolio holders in financial markets in particular it is shown that the presence of non tradable assets changes the risk premia on marketable assets hence in cases such as the italian one where the state is both the issuer of government securities and the collector of social security funds the positive correlation due to a common default risk between returns on government securities and on non marketable assets could lead to a higher cost of public debt financing

credit rationing and implicit contract theory an empirical study abstract this paper investigate whether or not implicit contract relations predominate in the japanese bank loan market and produce equilibrium credit rationing the empirical evidence suggests that risks are shared between banks and firms through interest rate arrangements this implies that commercial banks in japan operate in a market dominated by implicit contract relations however the evidence does not support the view that japanese commercial banks execute credit rationing in the sense of fried and howitt 1980 furthermore the results show that large banks differ from small banks in the risk consideration of loan contracts these empirical results are completely consistent with the intermarket business group hypothesis such that the group formation aims to share risks and profits among members

simple tests of distributional effects on macroeconomic equations the presence of distributional effects in macroeconomic equations is shown to coincide with nonlinearity in micro behavioral relationships parameters estimated with aggregate data as in representative agent models contain distributional biases that are not measurable using aggregate data alone tests for distributional effects and other measures of the extent of aggregation problems are derived using distributional data observed over time significant distributional effects are noted for a model of annual aggregate u s commodity expenditure data a static model that accommodates individual heterogeneity is found to be statistically equivalent to a simply dynamic model that accommodates first order autocorrelation

fixed versus variable rate loans this paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each the results indicate that the payoff functions are quite different and dependent upon the project financed the appropriate conditions for the allocation of loan terms to a set of borrowers are then developed finally the analysis derives the optimal portfolio frontier and risk return trade off for the banking firm here it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk

loan commitments investment decisions and the signalling equilibrium abstract this paper analyzes the use of loan commitments to finance future risky investment projects when the capital market is informed of a firm s project quality having a loan commitment would lead the firm to overinvest if banks are competitively rational the cost of this overinvestment would be borne by the firm making the loan commitment contract unattractive when the project quality is private information firms will signal their project qualities through purchasing loan commitments this signal is credible because purchasing a loan commitment poses overinvestment cost to the firm this paper establishes and characterizes this dissipative signalling equilibrium

optimal borrowing and bank lending policies an interactive approach abstract in recent years the literature on bank lending has greatly expanded to cover such issues as the role of different lending systems alternative funding environments and interest rate polities in this paper we consider these issues from an interactive borrower bank perspective the borrower makes his borrowing decisions as a function of interest rates given his credit requirements which are assumed to vary over time and the available lending systems the bank determines its funding lending and investment polities which are dynamic determined over time and assuming optimal behavior on behalf of its borrowers determines interest rates on loans credit balances and other deposits the analysis of the bank s model provides interesting insights into lending and funding policies and shows that fixed term lending arrangements may generate additional costs to the financial system while the overdraft system does not and therefore is more efficient in this environment

interrelated factor demands for manufacturing a dynamic translog cost function approach abstract in this paper we report the results of estimating a joint model for labour capital and energy using the transcendental logarithmic cost function of christensen jorgenson and lau 1973 this allows us to determine both the own price and cross elasticities of substitution between labour capital and energy we combine a model of factor shares with a dynamic adjustment process for each factor we also impose on the cross equation restrictions necessary to provide additivity homogeneity and symmetry since the covariance matrix in systems of share relationships is singular we follow the suggestions of anderson and blundell 1982 and employ a mullivariate error corrrection model the results suggest that additivity symmetry and homogeneity restrictions do hold and that there are short run increasing returns to scale

a general theory of controllability and expectations anchoring for small open economies abstract rational expectations are often used as an argument against policy activism as they may undermine or neutralize the policymaker s actions although this sometimes happens rational expectations do not always imply policy invariance or ineffectiveness in fact in certain circumstances rational expectations can enhance our power to control an economy over time in those cases policy announcements can be used to extend the impact of conventional policy instruments we present a general forward looking policy framework and use it to provide a formal rationale for testing when policymakers can and cannot expect to be able to manage expectations to describe the relevance of our results applications are shown for policy design in small open economies those are the cases where domestic policies are at their weakest and our ability to influence expectations most constrained

tests of restrictions in large demand systems abstract this paper compares some asymptotic tests of linear restrictions using exact results and monte carlo methods in systems which contain the same regressors in each equation it is found that under a variety of conditions a statistic suggested by deaton provides a better approximation to the true distribution in small sample situations than the wald likelihood ratio or lagrange multiplier tests

bank loan commitments and interest rate volatility bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained the partial takedown phenomenon which is both distinctive and vexatious is considered in detail finally estimates of the value of u s bank loan commitments and their sensitivity to interest rate changes are provided

interest rate indexation and the pricing of loan commitment contracts abstract the central question addressed in this paper is why most loan pricing agreements between banks and their commercial customers involve additive rather than multiplicative markups over the base lending rate it is argued that banks generally prefer additive pricing because the real value of the premiums moves inversely with inflation therefore this pricing formula provides an automatic partial inflation hedge for banks most borrowers who hold long positions in nominal assets also prefer this formula for the same reason however some borrowers who hold net short positions in nominal assets prefer multiplicative pricing banks provide them with such a form of pricing in exchange for appropriate compensation supporting empirical evidence is provided

advertising in demand systems testing a galbraithian hypothesis in this paper we argue that the influence of advertising upon the inter product distribution of demand is a system wide phenomenon which is investigated better through a demand equation system rather than through single equation methods attention is focused upon a dynamic version of deaton muellbauer s aids model modified to include advertising terms within this framework using data on consumer s non durable expenditure in the uk we carry out a preliminary test of galbraith hypothesis that advertising may affect the composition of aggregate consumer demand

a monthly dynamic consumer expenditure system for germany with different kinds of households a dynamic monthly consumer expenditure system is estimated for an aggregate household and three household types using recent german data the results tend to support the long run restrictions of homogeneity and symmetry for the aggregate household but only when short run dynamics are modelled following the method of anderson and blundell the required lags are short however the results for the partiallydisaggregated data are markedly different in particular the integrability restrictions can be rejected for the sample of high income workers therefore contrary to the usual presumption the less aggregated data seem more at variance with the restrictions of utility maximization

testing restrictions in a flexible dynamic demand system an application to consumers expenditure in canada traditionally restrictions on systems of demand equations have been tested using static models whilst being estimated with time series data this paper develops a vector time series model of expenditure shares in the context of a singular dynamic demand system the model allows for non symmetric and non homogeneous short run behaviour the homogeneity and symmetry restrictions are only examined in the long run structure results based on canadian time series data are presented and reject the current practise of static modelling while restrictions suggested by economic theory are not rejected when imposed on the long run structure

communication about future policy rates in theory and practice a survey we discuss the theoretical rationale for central bank communication about future policy rates either as part of inflation targeting or in the form of forward guidance we also summarize both actual central bank communication about future policy rates and empirical evidence on the effectiveness of these types of communication we argue that there is a disconnect between the theory and practice of forward guidance as theory assumes commitment on the part of the central bank while in practice central banks generally do not commit future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account

fixed rate loan commitments take down risk and the dynamics of hedging with futures this paper develops a normative model to analyze the hedging and fee pricing decisions of a financial institution supplying fixed rate loan commitments to its customers in supplying fixed rate loan commitments the financial institution hereafter referred to as bank is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts while most pre vious loan commitment models have analyzed the interest rate or price risk the bank faces in supplying fixed rate loan commitments they either have ignored or assumed away the loan take down or quantity risk l in general by making a formal fixed rate loan commitment the bank exposes itself to both a price and a quantity risk specifically a formal loan com mitment prespecifies the maximum size of the loan the purpose of the loan of ten project specific as well as the interest rate and fee to be paid by the borrower 14 15 however while a formal loan commitment imposes a contractual re quirement on the bank to supply funds up to a maximum amount at an agreed rate of interest the expected size of the loan to be taken down is often uncertain the reason is that for project specific lines of credit the amount taken down will depend on the future state s of the world that are revealed to the borrower at the end of the commitment period as well as on the limitations and constraints im posed on the use of funds in the loan commitment contract for example construction delays and other market imperfections that hamper a planned invest

is consumption too smooth the case of the united kingdom this study consider whether for the uk the restrictions of the rational expectations permanent income repi model of consumption are consistent with the data and whether consumption is too smooth given innovations in labour income some of the findings confirm those for the usa the repi restrictions are rejected however in marked contrast to the result of campbell and deaton 1989 little is found to support the view that consumption is too smooth indeed there is some support for the view that consumption is too volatile some insight is given as to how such results can arise

consumption and capital market imperfections an international comparison the excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less low levels of consumer debt can result either from capital market imperfections or from a low demand for loans the evidence suggests that the former view is more appropriate than the latter and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints rather than to other factors copyright 1989 by american economic association