Search Results
Showing results 1 to 10 of approximately 29.
(refine search)
Working Paper
Bank capital standards for market risk: a welfare analysis
We develop a model of commodity money and use it to analyze the following two questions motivated by issues in monetary history: What are the conditions under which Gresham's Law holds? And, what are the mechanics of a debasement (lowering the metallic content of coins)? The model contains light and heavy coins, imperfect information, and prices determined via bilateral bargaining. There are equilibria with neither, both, or only one type of coin in circulation. When both circulate, coins may trade by weight or by tale. We discuss the extent to which Gresham's Law holds in the various cases. ...
Newsletter
Whither the stock market?
Journal Article
Monetary policy shocks and long-term interest rates
Exogenous shocks to monetary policy strongly affect short-term interest rates, but have little or no effect on longer-term interest rates.
Working Paper
Economic determinants of the nominal treasury yield curve
We study the effect of different types of macroeconomic impulses on the nominal yield curve. We employ two distinct approaches to identifying economic shocks in VARs. Our first approach uses a structural VAR due to Gal (1992). Our second strategy identifies fundamental impulses from alternative empirical measures of economic shocks proposed in the literature. We find that most of the long-run variability of interest rates of all maturities is driven by macroeconomic impulses. Shocks to preferences for current consumption consistently induce large, persistent, and statistically significant ...
Working Paper
Bank capital regulation with and without state-contingent penalties
A moral hazard model with exogenous bank franchise value is used to analyze bank capital regulation. Banks choose their capital structure as well as the riskiness and mean of their portfolio. The portfolio mean is determined by the level of costly screening. Screening and portfolio risk are private information, so there are two dimensions to the moral hazard problem. Deposit insurance gives banks an incentive to hold less capital, and to choose a higher-risk, lower-mean portfolio. To mitigate these incentives, capital requirements with and without ex post fines are studied. We find an ...
Working Paper
State-contingent bank regulation with unobserved action and unobserved characteristics
This paper studies bank capital regulation under deposit insurance when bank attributes and actions are private information. Banks are heterogeneous in quality and choose both the mean and variance of their investment strategy. Regulatory tools include capital regulation and state-contingent fines. We use numerical methods to study the properties of the model with two different bank types. Without fines, capital requirements only have limited ability to separate bank types. When fines are added, separation is much easier. Fine schedules and capital requirements are tailored to bank type. ...
Working Paper
On biases in tests of the expectations hypothesis of the term structure of interest rates
We document extreme bias and dispersion in the small sample distributions of five standard regression tests of the expectations hypothesis of the term structure of interest rates. These biases derive from the extreme persistence in short interest rates. We derive approximate analytic expressions for these biases, and we characterize the small-sample distributions of these test statistics under a simple first-order autoregressive data generating process for the short rate. The biases are also present when the short rate is modeled with a more realistic regime-switching process. The differences ...
Working Paper
The equity premium puzzle and the risk-free rate puzzle at long horizons
The failure of consumption based asset pricing models to match the stochastic properties of the equity premium and the risk-free rate has been attributed by some authors to frictions, transaction costs or durability. However, such frictions would primarily affect the higher frequency data components: consumption-based pricing models that concentrate on long-horizon returns should be more successful. ; We consider three consumption-based models of the asset-pricing kernel: time-separable utility, and the models of Abel (1990) and Constantinides (1990). We estimate a vector ARCH model that ...
Newsletter
Explaining the decline in the auction rate securities market
Auction rate securities are an example of a relatively obscure financial market instrument that has been caught up in the recent negative sentiment affecting the financial markets. This article examines these securities and sheds some light on recent events.