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uly 2003

Federal Reserve Bank of New York

Research and Market Analysis Group

EPR Volumes Focus on Corporate Governance,
Affordable Housing
wo distinct but vital themes—corporate governance and affordable
housing—are the subjects of two
recent volumes of the Bank’s Economic
Policy Review.


“Corporate Governance: What Do We
Know, and What Is Different about
Banks?” (April 2003) aims to broaden
understanding of corporate governance
issues while identifying areas of future
research. The papers—by specialists in law,
financial accounting, and financial economics—offer insight into corporate governance generally and as it applies to banking.

gating conflicts of interest between managers
and shareholders. The second half sheds
light on why banks differ from unregulated
firms with regard to governance issues and
describes the challenges that the differences
present for regulators, bank managers,
investors, and depositors.
“Policies to Promote Affordable Housing”
(June 2003) examines public and private
sector strategies to ease the housing problems of low- and moderate-income families.

The contributors to the volume—
academics, practitioners, and policy specialists—analyze affordable housing from a
The first half of the volume reviews the
national perspective as well as focus on the
literature on governance by considering the
unique conditions of the New York City
role of the board of directors, compensaarea. Key themes include the cost burdens
tion, monitoring by holders of large blocks
that housing places on low- and moderateof stock, and corporate disclosure in mitiincome families, the policies designed to
lower housing costs for these
ew Research: April-June 2003
families, and the policies that
may have exacerbated the
Current Issues examines the effects of reindexing
shortage of affordable housing.
social security benefits


New Staff Reports
Papers recently published by RMAG staff
Papers presented at conferences


All papers are available at
w w w. n e w y o r k f e d . o r g /

Research Update


July 2003

Basing Social Security Benefits on a CPI for Seniors
Suggests an Important Policy Trade-Off
ach year, social security benefits are
automatically adjusted for inflation
to prevent a decline in the purchasing power of benefits. The adjustments are
based on the CPI-W, a Bureau of Labor
Statistics (BLS) measure of price changes in
the average set of goods purchased by
workers. Yet the spending habits of the typical worker differ from those of the typical
retiree. For example, medical care represents
a much larger share of seniors’ income.



In “Social Security and the Consumer
Price Index for the Elderly” (Current Issues
in Economics and Finance, vol. 9, no. 5),
Bart Hobijn and David Lagakos consider
how the use of a different price index to
adjust social security benefits—one reflecting the spending patterns of seniors—
could affect the level of benefits paid and
the future resources of the social security
trust fund.

The authors note that since the early
1980s, the BLS has calculated an experimental price index for elderly consumers:
the CPI-E. Significantly, between 1984 and
2001, inflation as measured by the CPI-E
has been consistently higher than CPI-W
inflation, with a 0.38 percent average
annual difference. Accordingly, they estimate
that if the CPI-E had been adopted in
1984, the average social security benefit in
2001 would be 3.84 percent higher, or
roughly $408 more per year per recipient.
However, the authors also estimate that
introduction of the CPI-E now could
accelerate the trust fund’s insolvency by as
many as five years relative to the currently
projected 2043. “The trade-off facing policymakers, therefore, is between prolonging
the solvency of the social security trust
fund and maintaining the purchasing
power of seniors over time,” conclude
Hobijn and Lagakos.

P ublications and Papers
The Research and Market Analysis Group produces a wide range of publications:

The Economic Policy Review—a policy-oriented journal focusing on economic
and financial market issues.


EPR Executive Summaries—online versions of selected Economic Policy Review
articles, in abridged form.


Current Issues in Economics and Finance—a newsletter-style publication offering
concise and timely analyses of economic and financial topics.


Second District Highlights—a regional supplement to Current Issues covering
financial and economic developments in the Federal Reserve’s Second District.


Staff Reports—technical papers intended for publication in leading economic and
finance journals, available only online.


Publications and Other Research—an annual catalogue of the Group’s research output.

Federal Reserve Bank of New York

New Titles in the Staff
Reports Series
The following new Staff Reports are available at

Macroeconomics and Growth
No. 169, June 2003

Cross-Country Technology Adoption: Making
the Theories Face the Facts
Diego Comin and Bart Hobijn
The authors document the common patterns
observed in the diffusion of more than twenty
technologies across twenty-three of the world’s
leading industrial economies from 1788 to
2001. Their results suggest a pattern of trickledown diffusion that is remarkably robust
across technologies. Most of the technologies
considered originate in advanced economies
and are adopted there first; they then trickle
down to countries that lag economically. The
study also shows that the most important
determinants of a country’s speed in adopting
technologies are its human capital endowment,
type of government, degree of openness to
trade, and adoption of predecessor technologies. The overall rate of diffusion has increased
markedly since World War II because of the
convergence of these variables across countries.

No. 168, May 2003

Using Home Maintenance and Repairs
to Smooth Variable Earnings
Joseph Gyourko and Joseph Tracy
Recent research indicates that the marked
increase in U.S. income inequality over the
past twenty-five years has not been matched by
a similar increase in consumption inequality.
This paper examines the role of saving/dissaving
in a house as a vehicle for consumption
smoothing. Data from the American Housing
Survey show that expenditures on home maintenance and repairs are economically significant,

amounting to roughly $1,750 per household
each year. This figure is comparable to the
labor literature estimates that put households’
average annual transitory income variance at
about $2,200. The authors show a significant
elasticity of maintenance and repair expenditures to transitory income shocks. The elasticities
are higher for less well educated households,
which are more likely to be liquidity constrained than their better educated counterparts.

Banking and Finance
No. 165, April 2003

The Execution of Monetary Policy:
A Tale of Two Central Banks
Leonardo Bartolini and Alessandro Prati
The Eurosystem and the Federal Reserve follow
different approaches to the execution of monetary policy. The Eurosystem largely delegates to
depository institutions the task of stabilizing
their liquidity at high frequency, while the
Federal Reserve intervenes daily to fine-tune
banking system liquidity. The authors review
the effect of these approaches on the highfrequency behavior of very short-term interest
rates. They also examine interest rate behavior
after the Y2K date change and September 11—
events requiring the two central banks to deviate from their styles of liquidity management.
They find that, despite differences in operational frameworks, certain elements of the
central banks’ daily intervention have caused
very short-term interest rates to behave similarly in the euro area and the United States.
Significantly, during periods of anticipated or
actual crisis, the two banks have acted very
much alike in managing interbank market
liquidity in response to shocks.
No. 166, May 2003

The Impact of CEO Turnover
on Equity Volatility
Matthew J. Clayton, Jay C. Hartzell,
and Joshua V. Rosenberg
The authors develop three hypotheses about
how changes in CEOs affect stock price volatility and test them using a sample of 872

Research and Market Analysis Group


Research Update


July 2003

turnovers over the 1979-95 period. They find
that volatility increases following turnover,
even when the CEO leaves voluntarily and is
replaced internally. In addition, forced
turnovers increase volatility more than voluntary turnovers do, a finding consistent with the
view that forced departures imply a higher
probability of large strategy changes. For voluntary departures, external successions
increase volatility more than internal successions do. The authors attribute this volatility
difference to increased uncertainty over the
successor CEO’s managerial skills. They also
document a greater stock price response to
earnings announcements following chief
executive officer turnover, consistent with more
informative signals of value driving the
increased volatility.

The author employs two approaches to investigate the post-issuance riskiness of IPOs over
the 1980-2000 period. First, he compares the
stock price volatility for issuing and nonissuing
firms. Second, he uses a qualitative model to
estimate the likelihood that new issues will survive in the aftermarket. Both methodologies
show that the riskiness of IPOs relative to a
nonissuing peer group has increased roughly
30 percent in the 1990s. Although the proliferation of Internet companies in this period
helps account for the increased risk, the study
reveals a more gradual shift in risk that cannot
be fully explained by the high-tech bubble.
Specifically, companies taken public by toptier underwriters or funded by venture capital
exhibit higher relative volatility and a lower
likelihood of survival.

No. 167, May 2003


Evaluating the Riskiness of Initial Public
Offerings: 1980-2000
Stavros Peristiani
This paper considers whether IPOs have
become more perilous to investors over time.

Recently Published
Morten Bech. 2003. “The Intraday Liquidity
Management Game,” with Rod Garratt.
Journal of Economic Theory 109, no. 2
(April): 198-219.
Arturo Estrella. 2003. “Monetary Policy Shifts
and the Stability of Monetary Policy Models,”
with Jeffrey Fuhrer. Review of Economics and
Statistics 85, no. 1 (February): 94-104.
Paolo Pesenti. 2003. “The Global Economy
Model,” with Tamim Bayoumi. In World
Economic Outlook: Growth and Institutions.
Washington, D.C.: International Monetary
João Santos. 2003. “Alternative Forms of Mixing Banking with Commerce: Evidence from
American History,” with Joseph Haubrich.
Financial Markets, Institutions, and
Instruments 12, no. 2 (May): 121-64.

Federal Reserve Bank of New York

João Santos. 2003. “The Paradox of Priority,”
with Stanley Longhofer. Financial Management
32, no. 1 (spring): 69-81.
Asani Sarkar. 2003. “Assessing the Impact of
Short-Sale Constraints on the Gains from
International Diversification,” with Zhenyu
Wang and Kai Li. Journal of Empirical
Finance 10, no. 1-2 (February): 57-80.
Kevin Stiroh. 2003. “Lessons for Canada from
the U.S. Growth Resurgence,” with Dale
Jorgenson and Mun Ho. International
Productivity Monitor 6 (spring): 3-18.
George Zanjani. 2003. “The Production and
Regulation of Insurance: Limiting Opportunism in Proprietary and Nonproprietary
Organizations,” with Tomas Philipson. In
Bjorn Lindgren, ed., Individual Decisions for
Health. London: Routledge.

“Has September 11 Affected New York City’s
Growth Potential?” Andrew Haughwout.
Russell Sage Foundation, New York City, May 9.

Papers Presented by
Economists in the
Research and Market
Analysis Group
“Board Structure and Banking Firm Performance,” Renée Adams and Hamid Mehran.
Princeton University Economics Department
seminar, Princeton, New Jersey, April 16.
“The Volatility of Short-Term Interest Rates,”
Leonardo Bartolini. University of Piraeus
Banking and Finance Department seminar,
Athens, Greece, April 9. Also presented at the
Helsinki School of Economics, Helsinki,
Finland, June 12.
“The Execution of Monetary Policy: A Tale of
Two Central Banks,” Leonardo Bartolini.
Centre for Economic Policy Research, Athens,
Greece, April 10.
“Diffusion of Technology within Central
Banking: The Case of Real Time Gross Settlement,” Morten Bech. Danmarks Nationalbank
seminar, Copenhagen, Denmark, May 21.
“Liquidity, Gridlock, and Bank Failures in
Large Value Payment Systems,” Morten Bech.
Bank of Finland seminar, Helsinki, Finland,
May 28. With Kimmo Soramaki.

“The Difficulty of Discerning What’s Too Tight:
Taylor Rules and Japanese Monetary Policy,”
Kenneth Kuttner. Claremont McKenna College,
Lowe Institute of Political Economy Workshop
on the Macroeconomics of Low Inflation and the
Prospects for Global Deflation, Claremont,
California, April 25. With Adam Posen.
“Measuring Housing Costs in the CPI,”
Jonathan McCarthy and Richard Peach.
Brookings Institution Workshop on Economic
Measurement, Washington, D.C., May 23.
“Monetary Rules for Small, Open, Emerging
Economies,” Paolo Pesenti. Princeton University
International Economics Department seminar,
Princeton, New Jersey, April 16.
“Three Lectures on Monetary Models in an
Open Economy,” Paolo Pesenti. Bank of
Finland Macro Models Workshop, Helsinki,
Finland, June 9-11.
“The Cost of Large Equity Trades,” Asani Sarkar.
Baruch College conference, New York City,
April 29. With Robert Schwartz and Avner Wolf.

“The Intraday Liquidity Management Game,”
Morten Bech. European Central Bank conference,
Frankfurt, Germany, June 10. With Rod Garratt.

“Capital Regulation for Position Risk in
Banks, Securities Firms, and Insurance Companies,” Til Schuermann. Harvard Law School,
Program on International Financial Systems
Conference, Cambridge, Massachusetts, June 10.
With Richard Herring.

“Decomposing the Exchange Rate Disconnect
Puzzle,” Linda Goldberg. American Economic
Association 2003 Annual Meeting, Washington,
D.C., January 5. With José Campa.

“A Simple Explanation of the Border Effect,”
Kei-Mu Yi. University of Pittsburgh Department
of Economics seminar, Pittsburgh, Pennsylvania,
April 14.

“Lending Cycles of Banks in Emerging
Markets,” Linda Goldberg. North American
Economics and Finance Association 2003
Annual Meeting, Washington, D.C., May 16.

“The Chinese Juggernaut: How Has It Affected
the World Economy?” Kei-Mu Yi. World Trade
Center Buffalo Niagara conference, Buffalo,
New York, May 21. With Hunter Clark and
Matthew Higgins.

“Exchange Rates and Prices,” Linda Goldberg.
Syracuse University Graduate School of Business
seminar, Syracruse, New York, May 28.

Research and Market Analysis Group


Research Update


July 2003

Publications and Papers:
April-June 2003

No. 2, June 2003

Publications are available at

Contents include:

Economic Policy Review, Vol. 9
No. 1, April 2003

State of New York City’s Housing
and Neighborhoods: An Overview
of Recent Trends
Michael H. Schill and Glynis Daniels

Special issue, “Corporate Governance:
What Do We Know, and What Is Different
about Banks?”

The Impact of Building Restrictions
on Housing Affordability
Edward L. Glaeser and Joseph Gyourko

Boards of Directors as an Endogenously
Determined Institution: A Survey of the
Economic Literature
Benjamin E. Hermalin
and Michael S. Weisbach

Government Regulation and Changes
in the Affordable Housing Stock
C. Tsuriel Somerville and Christopher J. Mayer

Executive Equity Compensation and
Incentives: A Survey
John E. Core, Wayne R. Guay,
and David F. Larcker


Special issue, “Policies to Promote
Affordable Housing”

A Survey of Blockholders and
Corporate Control
Clifford G. Holderness
Transparency, Financial Accounting
Information, and Corporate
Robert M. Bushman and Abbie J. Smith
The Corporate Governance of Banks
Jonathan R. Macey and Maureen O’Hara
Incentive Features in CEO Compensation
in the Banking Industry
Kose John and Yiming Qian
Is Corporate Governance Different for Bank
Holding Companies?
Renée Adams and Hamid Mehran

Federal Reserve Bank of New York

Housing Production Subsidies and
Neighborhood Revitalization: New York City’s
Ten-Year Capital Plan for Housing
Ingrid Gould Ellen, Michael H. Schill,
Amy Ellen Schwartz, and Ioan Voicu
Effects of Homeownership on Children:
The Role of Neighborhood Characteristics
and Family Income
Joseph M. Harkness and Sandra J. Newman
The Impacts of New Neighborhoods on Poor
Families: Evaluating the Policy Implications of
the Moving to Opportunity Demonstration
John Goering
Comparing the Costs of Federal Housing
Assistance Programs
Denise DiPasquale, Dennis Fricke,
and Daniel Garcia-Diaz
The Twenty-Fifth Anniversary of the Community
Reinvestment Act: Past Accomplishments and
Future Regulatory Challenges
William C. Apgar and Mark Duda

Current Issues in Economics and
Finance, Vol. 9

No. 166, May 2003

The Impact of CEO Turnover on Equity Volatility
Matthew J. Clayton, Jay C. Hartzell,
and Joshua V. Rosenberg

No. 4, April 2003

Now and Then: The Evolution of Loan
Quality for U.S. Banks
Kevin J. Stiroh and Christopher Metli

No. 167, May 2003

No. 5, May 2003

Social Security and the Consumer Price Index
for the Elderly
Bart Hobijn and David Lagakos
No. 6, June 2003

The Repurchase Agreement Refined:
GCF Repo
Michael J. Fleming and Kenneth D. Garbade

Staff Reports

Evaluating the Riskiness of Initial Public
Offerings: 1980-2000
Stavros Peristiani
No. 168, May 2003

Using Home Maintenance and Repairs
to Smooth Variable Earnings
Joseph Gyourko and Joseph Tracy
No. 169, June 2003

Cross-Country Technology Adoption:
Making the Theories Face the Facts
Diego Comin and Bart Hobijn

Available only online.
No. 165, April 2003

The Execution of Monetary Policy:
A Tale of Two Central Banks
Leonardo Bartolini and Alessandro Prati


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The views expressed in the publications and papers summarized in Research Update are those
of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York
or the Federal Reserve System.
Research and Market Analysis Group