Voting on social security: evidence from OECD countries
An examination of the subset of public choice models for Social Security that have empirical implications. The data, collected from OECD countries for the years 1960, 1970, 1980 and 1990, show that higher median voter age, greater income heterogeneity, similarity in family size, and variables that make a public pension program profitable are all associated with a larger program.
Centrality-based Capital Allocations
This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.
Global ATM banking: casting the net
ACH and ATM systems are examples of networks, where the benefits of one participant enhance the structure's value for the other participants. Some recent results from economic theory suggest that competitive networks are preferable in a social sense to monopoly networks.
Interbank Lending and Distress: Observables, Unobservables, and Network Structure
We provide empirical evidence on the relevance of systemic risk through the interbank lending channel. We adapt a spatial probit model that allows for correlated error terms in the cross-sectional variation that depend on the measured network connections of the banks. The latter are in our application observed interbank exposures among German bank holding companies during 2001 and 2006. The results clearly indicate significant spillover effects between banks? probabilities of distress and the financial profiles of connected peers. Better capitalized and managed connections reduce the banks ...
State-dependent pricing, inflation, and welfare in search economies
This paper investigates the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which price stability is optimal and a condition under which positive inflation is desirable. We relate these conditions to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of ...
Reforming the over-the-counter derivatives market: what’s to be gained?
While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This Commentary discusses the advantages of one solution to the transparency proble: moving the settlement or trading of derivatives to exchanges or clearinghouses.
The Effect of Possible EU Diversification Requirements on the Risk of Banks’ Sovereign Bond Portfolios
Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries? sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyze the risk and diversification in the sovereign bond portfolios of the largest European banks ...
Bubble, toil, and trouble
When people call the dot-com boom a bubble, they imply that investors based their decisions on something other than a good estimate of the future value of the assets theywere buying. But some economists say that is not likely because episodes like the dot-com bust show future value is not always easy to predict, especially when the asset is a new technology. This Commentary shows how both explanations can describe a famous historical bubble that occurred after the introduction of a technology that was new at the beginning of the eighteenth century?a novel macroeconomic theory.
Currency portfolios and nominal exchange rates in a dual currency search economy
The authors analyze a dual-currency search model in which agents may hold multiple units of both currencies. They study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to the magnitude of the "inflation tax" risk associated with each. When one currency has the right amount of risk, equilibria exist in which the safe currency trades for multiple units of the risky one (pure currency exchange). As a result, the steady state has a distribution of nominal exchange rates. The mean and variance of this distribution typically change ...
Where have all the tellers gone?
An examination of why, in the face of record earnings and ever-increasing demand for their products and services, banks are trimming their payrolls. The article also examines the fate of the job losers, as well as the banking industry's tremendous ability to weather major technological and structural changes.