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

a theory of interregional tax competition a general equilibrium model is constructed to study tax competition where local governments compete for capital by holding down property tax rates and public expenditure levels an exact definition of tax competition is provided and both the existence and nonexistence of tax competition are shown to be theoretically possible it is argued however that tax competition must occur under empirically reasonable conditions inefficiency in public production is also explicitly modeled the amount of capital used to produce a given level of public service output is shown to be greater than that which is required to minimize costs evaluated at the prices facing private firms

asset allocation with distorted beliefs and transaction costs abstract in this paper we study the problem of the optimal portfolio selection with transaction costs for a decision maker who is faced with knightian uncertainty the decision maker s portfolio consists of one risky and one risk free asset and we assume that the transaction costs are proportional to the traded volume of the risky asset the attitude to uncertainty is modeled by the choquet expected utility we derive optimal strategies and bounds of the no transaction region for both optimistic and pessimistic decision makers the no transaction region of a pessimistic investor is narrower and its bounds lie closer to the origin than that of an optimistic trader moreover under the choquet expected utility the structure of the no transaction region is not necessarily a closed interval as it is under the standard expected utility model

investment strategies under transaction costs the finite horizon case we examine the effect of proportional transaction costs on dynamic portfolio strategies for an agent who maximizes his expected utility of terminal wealth for portfolios composed of a single risky asset and a single riskless asset constantinides 1979 shows that the optimal investment policy is described in terms of a no transaction region where the optimal policy is to refrain from trading if initial portfolio holdings lie within the region and to transact to the nearest boundary of the region if portfolio holdings lie outside the region because the boundaries could not be derived analytically we developed an efficient and tractable algorithm to obtain the boundaries which are expressed as the ratio of the dollar holdings in stocks and bonds we considered two cases the same transaction costs for the two assets and costs incurred on only the risky asset we derived the optimal trading strategies and utility levels for a large set of realistic parameters in particular we show that the no trans

rehabilitation decisions in rental housing an empirical analysis abstract housing policy makers show increased interest in encouraging rehabilitation of the existing housing stock but little is known about what factors influence the decision to invest particularly in rental housing making policy design difficult this paper presents an empirical analysis of individual landlords housing rehabilitation decisions in one housing market the analysis tests hypotheses about the impacts of detailed neighborhood structure and site characteristics on each owner s investment activity findings support the general hypothesis that economic returns to investment have a major effect on rehabilitation decisions identify some other important circumstances and suggest which among many specific policy levers should be effective

the case for restricting fiscal policy discretion this paper studies the effects of discretionary fiscal policy on output volatility and economic growth using data for 91 countries we isolate three empirical regularities 1 governments that use fiscal policy aggressively induce significant macroeconomic instability 2 the volatility of output caused by discretionary fiscal policy lowers economic growth by more than 0 8 percentage points for every percentage point increase in volatility 3 prudent use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables the evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth

aftermath of banking crises effects on real and monetary variables abstract this paper models the effects of a banking crisis and in particular distinguishes between a short term crisis such as a banking panic and a longer term crisis such as a banking insolvency using an optimizing framework it shows that depositors shift from deposits into cash in both types of crises which results in an increase in the interest rates on deposits and loans and a contraction in output and consumption however when the crisis is resolved in a finite time period there is an intertemporal substitution of consumption and consumption is postponed until the crisis is resolved this in turn results in a further decline in the demand for money availability of credit and output

eco dumping capital mobility and international trade a small open economy s optimal environmental policy is studied in a model with international capital mobility and local pollution the country produces traded as well as non traded goods is it in the country s interest to engage in ecological dumping by choosing generous pollution allowances for the traded good sector the answer depends decisively on the policy regime in use dumping is not optimal if the country ensures that the implicit rent on pollution is completely appropriated within the country however if the implicit factor reward on pollution leaves the country because it accrues to foreign owners of mobile capital the local welfare maximizing government tends to discriminate against the traded good sector the opposite of ecological dumping

interest rates income and home improvement decisions abstract the demand for additional housing is modeled demonstrating that higher interest rates make home improvements more attractive relative to moving when homeowners hold fixed rate mortgages technological constraints on home improvements make improving less attractive relative to moving when incomes have risen empirical evidence using cross sectional data is presented suggesting that the probability of making home improvements is positively related to increases in the current interest rate and negatively related to increases in income an explanation is offered for the recent rise in home improvement expenditures in the face of slower economic growth and higher mortgage interest rates

model misspecification and underdiversification in this paper we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification we develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks we find that when the overall ambiguity about the joint distribution of returns is high then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean variance portfolio

taxes and subsidies for pollution intensive industries as trade policy abstract this paper constructs a model of international oligopoly with negative externalities in production in which optimal environmental policy responses to foreign emission tax and subsidy programs can be calculated it is shown that by granting subsidies for abatement efforts or for a heavily taxed polluting input domestic net welfare is improved by capturing a greater share of the world market since the subsidy programs are supposed to improve the quality of the global environment they can be justified on environmental grounds in addition we show that a pigouvion emission tax restores efficiency in natural resource allocation whereas subsidy programs are in principle used as instruments in imperfectly competitive international markets

the impact of banking sector stability on the real economy this article studies the relationship between the degree of banking sector stability and the subsequent evolution of real output growth and in ation adopting a panel var methodology for a sample of 18 oecd countries we flnd a positive link between banking sector stability and real output growth this flnding is predominantly driven by periods of instability rather than by very stable periods in addition we show that an unstable banking sector increases uncertainty about future output growth no clear link between banking sector stability and in ation seems to exist we then argue that the link between banking stability and real output growth can be used to improve output growth forecasts using fed forecast errors we show that banking sector stability instability results in a signiflcant underestimation overestimation of gdp growth in the subsequent quarters

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

the legal environment banks and long run economic growth this paper examines the relationship between the legal system and banlding development and traces this connection through to long run rates of per capita gdp growth capital stock growth and productivity growth the data indicate that countries where the legal system 1 emphasizes creditor rights and 2 rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax furtherrnore the exogenous component of banking development the component defined by the legal environment is positively and robustly associated with per capita growth physical capital accumulation and productivity growth this paper addresses two questions first do crosscountry differences in the legal rights of creditors the efficiency of contract enforcement and the origin of the legal system explain cross country differences in the level of banking development second do better developed banks cause faster economic development that is is the component of banking development defined by the legal environment positively associated with long run rates of economic growth capital accumulation and productivity growth examining the relationship between the legal system and banking development is valuable irrespective of issues associated with long run growth first banks may influence the level of income per capita and the magnitude of cyclical fluctuations bernanke and gertler 1989 1990 second many economists stress that understanding the evolution of legal and financial systems is essential for understanding economic development north 1981 engerman and sokoloff 1996 consequently quantitative information on the relationship between the legal environment and banks will improve our understanding of business cycles and the process of economic development furthermore examining the causal links between banks and economic growth has both conceptual and policy implications on the conceptual front a long literature debates the importance of banks in economic development starting as early as bagehot 1873 economists have argued that better banks banks that are better at identifying creditworthy firms mobilizing savings pooling risks and facilitating transactions

the real output losses associated with modern banking crises this study investigates the real output losses associated with modern banking crises we find a remarkable diversity of experience in a number of instances banking crises have not been associated with any significant reduction in the growth of real per capita gdp often this has been the case in mature and developed economies on the other hand estimated output losses are extremely large for some other countriesnamounting to several years of lost gdp interestingly such large losses can be associated with banking crises that were designated as non systemic our sample mean and median output loss estimates are also big for the average sample country the estimated present discounted value of crisis related output losses is bounded between 63 and 302 of real per capita gdp in the last year before the crisis onset average loss estimates are this large primarily because we find evidence that post crisis economic slowdowns often persist long after the crisis is officially over such delayed costs have been largely overlooked in previous empirical work and resultantly our loss estimates are much larger than those that have appeared elsewhere

understanding gentrification an empirical analysis of the determinants of urban housing renovation abstract the back to the city phenomenon presented an unpredicted countercurrent in the prevalent tide of suburbanization and this process of upper income resettlement in the inner city has been thoroughly analyzed in the urban economic literature housing renovation a process that always accompanies gentrification and constitutes a significant portion of residential housing investment has been studied much less contrary to the expectation that location matters the existing empirical studies have concluded that most neighborhood amenities and structural attributes are insignificant as determinants of renovation using a detailed parcel level data set that documents all residential renovation activity in chicago between 1995 and 2000 this paper establishes that the characteristics of a building and its neighborhood do indeed influence the likelihood that it will be renovated

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

costs of banking system instability some empirical evidence abstract this paper assesses the cross country stylised facts on empirical measures of the losses incurred during periods of banking crises we first consider the direct resolution costs to the government and then the broader costs to the welfare of the economy proxied by losses in gdp we find that the cumulative output losses incurred during crisis periods are large roughly 15 20 on average of annual gdp in contrast to previous research we also find that output losses incurred during crises in developed countries are as high or higher on average than those in emerging market economies moreover output losses during crisis periods in developed countries also appear to be significantly larger 10 15 than in neighbouring countries that did not at the time experience severe banking problems in emerging market economies by contrast banking crises appear to be costly only when accompanied by a currency crisis these results seem robust to allowing for macroeconomic conditions at the outset of crisis in particular low and declining output growth that have also contributed to future output losses during crises episodes

an exact solution to a dynamic portfolio choice problem under transactions costs the presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor it requires one to either act or do nothing an issue which of course does not arise in frictionless situations the investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all his objective is to maximize the expected utility derived from that terminal consumption we postpone the terminal point far into the future to obtain a stationary portfolio rule the portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate we show how to calculate them

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

the impacts of lending race and ownership on rental housing rehabilitation abstract this paper presents an empirical analysis of landlords rehabilitation investment decisions in a large sample of buildings in one city focusing on impacts of lending patterns race and ownership the study finds that availability of loans from major institutional lenders banks and savings and loans in a neighborhood has a substantial independent impact on repair decisions after controlling for a multitude of other neighborhood and building variables for all landlords taken together loan availability problems rather than owners discriminatory attitudes seem to discourage some otherwise profitable repairs in black neighborhoods but significant differences appear between owner occupant landlords and others after detailing these findings the paper summarizes several policy directions they suggest

optimal property taxation in the presence of interregional capital mobility abstract a single region s optimal property tax policy is examined in a model with interregional capital mobility in this model property taxation is used to finance local public expenditures different tax rates may be imposed on property used to produce goods which are traded between regions and property used to produce nontraded goods e g residential property the key determinants of the difference between the optimal tax rates are identified and it is argued that there exists a bias towards relatively low tax rates on property used to produce traded goods the role of labor mobility is also investigated

does the federal reserve possess an exploitable informational advantage abstract this paper provides evidence that the federal reserve has an informational advantage over the public that can be exploited to improve activist monetary policy the informational superiority does not result from the fed having earlier access to publicly released financial data instead this advantage is generated by confidential supervisory knowledge about troubled non publicly traded institutions as a result this information can remain confidential for an extended period since these banks have neither the desire to fully disclose the extent of their financial troubles nor the requirement to do so the informational advantage is both statistically significant and economically important providing a potential justification for activist monetary policy

portfolio rebalancing model with transaction costs based on fuzzy decision theory the fuzzy set is one of the powerful tools used to describe an uncertain environment as well as quantifying any potential return and risk portfolio liquidity is taken into account and a linear programming model for portfolio rebalancing with transaction costs is proposed the level of return that an investor might aspire to the risk and the liquidity of portfolio are vague in an uncertain financial environment considering them as fuzzy numbers we propose a portfolio rebalancing model with transaction costs based on fuzzy decision theory an example is given to illustrate the behavior of the proposed model using real data from the shanghai stock exchange

the social and private micro level consequences of homeownership abstract this paper reviews the literature that describes the micro level economic and social consequences of homeownership we adopt an interdisciplinary approach and include studies from economics sociology geography political science psychology and other disciplines our focus is on the set of consequences of homeownership in developed countries our list of potential outcomes of homeownership includes the impact on household wealth and portfolio choice mobility labor force participation urban structure and segregation home maintenance political and social activities health demographics self esteem and child outcomes there is substantial evidence that homeownership has important effects on some household behaviors and outcomes however we find that much of the past 30 year s literature on consequences of homeowning is deficient from a theoretical or econometric perspective we suggest solutions and identify research gaps present in the literature

measuring income elasticity for swiss money demand what do the cantons say about financial innovation abstract recent time series evidence has re confirmed the forecasting ability of swiss broad money the same money demand studies and others however find that the income elasticity is greater than one such parameter estimates are difficult to reconcile with transactions demand theory this study re examines the estimates for income elasticity in money demand based on cross regional evidence for switzerland particular attention is given to the influence of regional financial sophistication the cross cantonal results find that the income elasticity lies between 0 4 and 0 6 this discrepancy between the two empirical methodologies has important consequences for the conduct of swiss monetary policy

the impact of rental properties on the value of single family residences abstract this study examines the effects that single family rental properties in a residential neighborhood have on the value of single family residences in that area the analysis blends real estate valuation concepts with evidence found in the housing maintenance literature and urban succession theory to develop testable hypotheses regarding the property specific proximity related and neighborhood wide impacts of rental properties on property values the data used to test the hypotheses include the tenure status of 23 119 single family residences and 1 162 single family sales regression results support all three hypotheses although numerous studies on the value impacts of other externalities have been published this is the first study to examine the separation of property rights the results of this study provide additional insights into housing maintenance and also have implications for neighborhood zoning regulations

financial market participation and the apparent instability of money demand abstract this paper uses multi period cross sectional data on financial assets holdings to shed light on the postwar stability of money demand in the united states i first present a new measure of the evolution of financial market participation by relating participation to the extensive margins of money demand and quantify the influence of wealth on participation decisions i then relate the increase in participation to the period of missing money and to the subsequent higher interest rate elasticity of monetary aggregates the paper indicates that time series estimations of money demand relationships are inherently flawed and tend to inappropriately suggest instability

is bank supervision central to central banking whether central banks should play an active role in bank supervision and regulation is being debated both in the united states and abroad while the bank of england has recently been stripped of its supervisory responsibilities and several proposals in the united states have advocated removing bank supervision from the federal reserve system other countries are considering enhancing central bank involvement in this area many of the arguments for and against these proposals hinge on the effect this change would have on the ability of the central bank to conduct monetary policy we find that confidential supervisory information on bank ratings significantly improves

larger crises cost more impact of banking sector instability on output growth we propose a method for calculating the macroeconomic costs of banking crises that controls for the downward impact of recessions on banking activity in contrast to earlier research we estimate the cost of crises based on the size of banking crises the extent of a crisis is measured using banking sector aggregates the results based on our method and data from over 100 banking crises suggest that the size of a crisis matters for economic growth lower credit deposit and money growth during crises cause gdp growth to decline

house extensions and housing market adjustment a case study of wokingham this paper identifies possible explanations of house extension based on the literature relating to house improvement and the decision to move house extension both as a form of housing market adj

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association