Search Results
Working Paper
Shadow Bank Runs
Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector---and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how ...
Journal Article
Infrastructure and the wealth of nations
Economies can?t grow without a sufficiently developed infrastructure, but how deep does the infrastructure have to be to make a difference? The authors take a look at some research from the Fraser Institute that examines the relationship between economic growth and economic infrastructure across 123 countries. They find that infrastructure is a bit of an all-or-nothing proposition.
Working Paper
A strategic approach to hedging and contracting
This paper provides a new rationale for hedging that is based partly on noncompetitive behavior in product markets. The authors identify a set of conditions that imply that a firm may want to hedge. Empirically, these conditions are consistent with what is observed in the marketplace. The conditions are: 1) firms have some market power in their product market; 2) firms have limited liability; and 3) firms can contract to sell their output at a specified price before all factors that can affect their profitability are known. For some parameter specifications, however, the model predicts that ...
Working Paper
Cash-in-the-Market Pricing in a Model with Money and Over-the-Counter Financial Markets
Entrepreneurs need cash to finance their real investments. Since cash is costly to hold, entrepreneurs will underinvest. If entrepreneurs can access financial markets prior to learning about an investment opportunity, they can sell some of their less liquid assets for cash and, as a result, invest at a higher level. When financial markets are over-the-counter, the price that the entrepreneur receives for the assets that he sells depends on the amount of liquidity (cash) that is in the OTC market: Greater levels of liquidity lead to higher asset prices. Since asset prices are linked to ...
Working Paper
Private takings
This paper considers the implications associated with a recent Supreme Court ruling that can be interpreted as supporting the use of eminent domain in transferring the property rights of one private agent?a landowner?to another private agent?a developer. Compared to voluntary exchange, when property rights are transferred via eminent domain, landowners? investments in their properties become more inefficient and, as a result, any benefit associated with mitigating the holdout problem between landowners and the developer is reduced. Social welfare can only increase if the holdout problem is ...
Working Paper
Intermediation in Markets for Goods and Markets for Assets
We analyze agents' decisions to act as producers or intermediaries using equilibrium search theory. Extending previous analyses in various ways, we ask when intermediation emerges and study its efficiency. In one version of the framework, meant to resemble retail, middlemen hold goods, which entails (storage) costs; that model always displays uniqueness and simple transition dynamics. In another version, middlemen hold assets, which entails negative costs, that is, positive returns; that model can have multiple equilibria and complicated belief-based dynamics. These results are consistent ...
Journal Article
How well does the federal funds futures rate predict the future federal funds rate?
Contrary to popular belief, federal funds futures rates do not tell us precisely where the market thinks federal funds rates will be in the future. On average, futures rates overpredict future fed funds rates, and, depending on whether fed funds rates are falling or rising, the futures rate may consistently overestimate or underestimate the future fed funds rates. To obtain a reliable estimate of the future fed funds rate, one must adjust the fed funds futures rate appropriately to account for the bias and past movements of the fed funds rate.
Working Paper
How amenities affect job and wage choices over the life cycle
The current wage at a job may not fully reflect the "value" of that job. For example, a job with a low starting wage may be preferred to one with a high starting wage if the growth rate of wages is higher in the former than in the latter. In fact, differences in wage growth can potentially explain why a worker might want to quit a high-paying job for one with a lower starting wage. Job amenities are another important factor that not only influences the value of a job but also provides an independent rationale for why workers change jobs. Including a job's amenities as part of its "value" ...
Discussion Paper
Recent developments in monetary economics: a summary of the 2004 Workshop on Money, Banking, and Payments
We provide a summary and an overview of the papers presented at the Federal Reserve Bank of Clevelands 2004 Workshop on Money, Banking, and Payments, held during the weeks of August 3-7 and August 23-27, 2004.
Working Paper
Moral hazard in the Diamond-Dybvig model of banking
We modify the Diamond-Dybvig model studied in Green and Lin to incorporate a self-interested banker who has a private record-keeping technology. A public record-keeping device does not exist. We find that there is a trade-off between sophisticated contracts that possess relatively good risk-sharing properties but allocate resources inefficiently for incentive reasons, and simple contracts that possess relatively poor risk-sharing properties but economize on the inefficient use of resources. While this trade-off depends on model parameters, we find that simple contracts prevail under a wide ...