Full text of Research Update : Number 1, 2006

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

Number 1

2006

ResearchUpdate
Research and Statistics Group

www.newyorkfed.org/research

Bank Website Offers Course Readings in Economics and Finance

T

he Research Group recently
launched Course Readings for
University Educators, a new website
that highlights the value of the Bank’s
research publications as teaching tools.
The site’s key element is a directory of
recommended readings organized by
course title and level of mathematical
complexity. Finance and economics professors can select a course and then link
to articles from our principal research
series that might be assigned to students
in that course.
The website also provides links to the
Research Group’s conference and
“theme” volumes. By offering multiple
perspectives on a topic of current
interest—for example, employment
growth in the United States and Canada,

corporate governance, or the effects of
financial innovation on monetary transmission—these collections provide educators with a valuable teaching resource.
The impetus for the creation of the
site came from the Research Group’s
finding that many of its articles are
already in common use in college and
university courses. Articles in Current
Issues in Economics and Finance and
the Economic Policy Review in particular are favored for their clear exposition
and accessibility to a wide range of readers.
Course Readings for University
Educators can be accessed from the
Bank’s home page, under the “Education”
category: www.newyorkfed.org/
education/research/.

An Invitation to AEA Members to Subscribe
Please note that this will be the last issue of Research Update that we automatically
send you each quarter. To continue receiving the publication at no cost, please
subscribe at:
www.newyorkfed.org/research/research_update/index.html
If you prefer to download Research Update from our website, please join our free
e-mail notification service to learn when new issues have been posted:
www.newyorkfed.org/alertservices/

RV oe ls ue ma rec h9 , U Np du amtbee r■ 2N, u2m0b0e5r 1 , 2 0 0 6

New Study Examines the Growth in High-Skill Manufacturing Jobs

T
2

he U.S. manufacturing sector has
shed 5 million jobs since the early
1980s. At the same time that overall
manufacturing employment has declined,
however, employment in high-skill manufacturing jobs has risen sharply. In “A
Leaner, More Skilled U.S. Manufacturing
Workforce” (Current Issues in Economics
and Finance, vol. 12, no. 2), authors
Richard Deitz and James Orr explore the
marked upgrading of skills in the U.S.
manufacturing workforce.
Using the median wage of occupational
groupings as a proxy for skill level, the
authors find that employment in highskill manufacturing occupations climbed
37 percent between 1983 and 2002—an
increase of roughly 1.2 million jobs. By
contrast, low-skill jobs declined 25 percent over the period, and mid-skill positions
dropped almost 18 percent.
The authors show that skill upgrading
has occurred in nearly all manufacturing
industries, even in those where employment declined. But while the upgrading
has been pervasive, its nature and pace
have varied across industries. Thus, the
share of workers in high-skill occupations in the professional equipment and
electrical machinery industries doubled
over the 1983-2002 period, while only
modest skill upgrading occurred in
industries such as transportation equipment and non-electrical machinery.

Interestingly, the authors find some evidence that the industries that saw the
strongest growth in high-skill jobs experienced higher overall manufacturing job
growth.
Deitz and Orr also demonstrate that
upgrading has occurred in all parts of the
country, including those regions where
employment losses have been severe.
Once again, however, the pattern has varied across regions. The Northeastern
states effectively raised their high-skill
shares by shedding large numbers of lowskill jobs, with little or no increase in
high-skill jobs. By contrast, in the
Southwest, a strong expansion in highskill jobs drove the upgrading. A third
pattern is evident in some parts of the
“rust belt” surrounding the Great Lakes:
these areas experienced modest gains in
high-skill jobs at the same time that they
shed low-skill jobs.
The authors observe that trade liberalization and productivity growth are
thought to have contributed significantly
to the changing skill composition of the
workforce. The two forces have been
linked to both reduced demand for lowskilled workers and increased demand for
high-skilled workers.
The article is available at
www.newyorkfed.org/research/
current_issues/ci12-2.html.

F Feeddeer raal l RRees seer rvvee BBaannkk oof f NNeeww YYoor rkk

www.newyorkfed.org/research

Interest Rate Swap Spread Offers Insight into the Destabilizing
Role of Trading Risk

T

rading activity is typically considered to be a stabilizing force in
markets. The risks in trading, however, can sometimes produce the opposite
effect, according to a study forthcoming
in the Economic Policy Review.
In “Trading Risk, Market Liquidity,
and Convergence Trading in the Interest
Rate Swap Spread,” John Kambhu considers how the risk associated with convergence trading affects market liquidity
and asset price volatility in the interest
rate swap market. In a convergence trade,
speculators trade on the expectation that
asset prices will converge to their fundamental, or normal, levels. These trades,
explains the author, usually stabilize
markets. By countering and smoothing
price shocks, the trades can enhance
market liquidity. But if convergence
traders close out their positions prema-

turely, asset prices will tend to diverge
further from their fundamental levels.
Kambhu examines these effects in
terms of the behavior of the interest rate
swap spread—the spread between the
interest rate swap and Treasury interest
rates—and the volume of repurchase
contracts. He uncovers stabilizing as well
as destabilizing forces at work.
The study finds that the swap spread
tends to converge to its fundamental
level, but it does so more slowly when
traders are weakened by losses, while
heightened trading risk can cause the
spread to diverge from that level.
Furthermore, although convergence trading
generally absorbs shocks, an unusually
large disruption can be amplified when
traders close out their positions too soon.
Destabilizing shocks in the swap
spread are associated with a fall in repo

Publications and Papers
The Research and Statistics 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—concise studies of topical economic
and financial issues.

■

Second District Highlights—a regional supplement to Current Issues.

■

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

■

Publications and Other Research—an annual catalogue of our research output.

Research and Statistics Group

3

Research Update

■

Number 1, 2006

volume consistent with the early closing
out of convergence trading positions.
Repo volume, too, is found to fall in
response to convergence trading losses.
In particular, “the behavior of repo volume suggests how risk in trading activity
can affect market liquidity and asset
price volatility,” observes Kambhu.

The author adds that taken together,
his results are consistent with the argument that trading risk, as reflected in
fluctuations in repo volume, can occasionally destabilize the swap spread.
The article is available at
www.newyorkfed.org/research/
epr/forthcoming/0507kamb.html.

4

New Titles in the Staff Reports Series
The following new Staff Reports are
available at www.newyorkfed.org/
research/staff_reports/.

MACROECONOMICS
AND GROWTH
No. 241, March 2006
Fiscal Multipliers and Policy
Coordination
Gauti B. Eggertsson
This paper addresses the effectiveness of
fiscal policy at zero nominal interest rates.
Eggertsson analyzes a stochastic general
equilibrium model with sticky prices and
rational expectations and assumes that the

government cannot commit to future policy.
The author derives fiscal spending multipliers that calculate how much output
increases for each dollar of government
spending (real or deficit). Under monetary
and fiscal policy coordination, the real
spending multiplier is 3.4 and the deficit
spending multiplier is 3.8. However, when
there is no policy coordination, that is,
when the central bank is “goal independent,” the real spending multiplier is
unchanged but the deficit spending multiplier is zero. Coordination failure may
explain why fiscal policy in Japan has been
relatively less effective recently than during
the Great Depression.

Website News
■

The Research Group recently added a web page featuring the most popular
research on its site. Visitors to the “Most Downloaded Articles and Papers” page
will find the top five Economic Policy Review articles, Current Issues in
Economics and Finance articles, and Staff Reports. The page, updated quarterly
and annually, offers insight into the topics of most interest to readers.
www.newyorkfed.org/research/most_downloaded/index.html

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

www.newyorkfed.org/research

INTERNATIONAL
No. 237, January 2006
Could Capital Gains Smooth a Current
Account Rebalancing?
Michele Cavallo and Cédric Tille
A narrowing of the U.S. current account
deficit through exchange rate movements is
likely to entail a substantial depreciation of
the dollar, as stressed in research by
Obstfeld and Rogoff. Cavallo and Tille
assess how the adjustment is affected by the
high degree of financial integration in the
world economy. They consider an adjustment scenario in which the U.S. net external debt is held constant and find that as
the current account moves into balance, the
pace of adjustment is smooth. Intuitively,
the valuation gains from the depreciation of
the dollar allow the United States to finance
ongoing, albeit shrinking, current account
deficits. The authors find that the smooth
pattern of adjustment is robust to alternative scenarios, although the ultimate movements in exchange rates will vary under different conditions.

MICROECONOMICS
No. 238, February 2006
Turbulent Firms, Turbulent Wages?
Diego Comin, Erica L. Groshen,
and Bess Rabin
Earlier research by Gottschalk and Moffitt
shows that rising earnings instability was
responsible for one-third to one-half of the
rise in wage inequality during the 1980s.
These growing transitory fluctuations
remain largely unexplained. To help fill this
gap, this paper further documents the
recent rise in transitory fluctuations in
compensation and investigates its linkage to
the concurrent rise in volatility of firm performance documented in research by
Comin and Mulani and others. Comin,

Groshen, and Rabin investigate the relationship between firm and wage volatility in
three complementary panel data sets. They
find support for the hypothesis in all three
data sets and conclude that the rise in firm
turbulence explains about 60 percent of the
recent rise in high-frequency (five-year)
wage volatility.

BANKING AND FINANCE
No. 239, March 2006
Illiquidity in the Interbank Payment
System following Wide-Scale
Disruptions
Morten L. Bech and Rod Garratt
Bech and Garratt show how the interbank
payment system can become illiquid following wide-scale disruptions. Two forces are
at play in such disruptions—operational
problems and changes in participants’
behavior. The authors model the interbank
payment system as an n-player game and
utilize the concept of a potential function to
describe the process by which one of multiple equilibria emerges after a wide-scale
disruption. If the disruption is large
enough, hits a key geographic area, or hits
a “too-big-to-fail” participant, then the
coordination of payment processing can
break down, and central bank intervention
might be required to reestablish the socially
efficient equilibrium. The authors also
explore how the network topology of the
underlying payment flow among banks
affects the resiliency of coordination.

Research and Statistics Group

5

Research Update

■

Number 1, 2006

No. 240, March 2006
Risks in U.S. Bank International
Exposures
Nicola Cetorelli and Linda Goldberg

6

U.S. banks have substantial exposure to
foreign markets. The authors show how the
amounts and forms of these exposures
have evolved over time and note the
changes in embodied risks taken through
banks’ cross-border activity, local claims,
and derivative positions. Their findings
vary with the type of U.S. bank. Compared
with other banks, money-center banks tend
to have a greater share of their assets in
foreign exposures. Some of money-center
banks’ exposure to riskier countries is
achieved through the activities of local
branches and subsidiaries that take on
liabilities as well as assets, a strategy that
reduces their bank transfer risk accordingly.
As a share of total international exposures,
the transfer risk assumed by money-center
banks tends to be significantly lower than
that of other banks.
No. 242, March 2006
Money and Modern Banking without
Bank Runs
David R. Skeie
In the literature, bank runs take the form
of withdrawals of real demand deposits
that deplete a fixed reserve of goods in the
banking system. However, in a modern
banking system, large withdrawals take the
form of electronic payments that shift balances among banks within a clearinghouse
system, with no analog of a depletion of a
scarce reserve. In a model of nominal
demand deposits repayable in money within
a clearinghouse, the author shows that
interbank lending and monetary prices
imply that traditional bank runs do not
occur. This finding suggests that deposit
insurance may not be needed to prevent
bank runs in a modern economy.

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

No. 243, March 2006
The Topology of Interbank
Payment Flows
Kimmo Soramäki, Morten L. Bech, Jeffrey
Arnold, Robert J. Glass, and Walter E. Beyeler
The authors explore the network topology
of the interbank payments transferred
between commercial banks over the
Fedwire Funds Service. They find that the
network is compact despite low connectivity.
The network includes a tightly connected
core of money-center banks to which all
other banks connect. The degree distribution is scale-free over a substantial range.
The authors find that the properties of the
network changed considerably in the immediate aftermath of the attacks of
September 11, 2001.
No. 244, March 2006
Does the Market Discipline Banks?
New Evidence from the Regulatory
Capital Mix
Adam B. Ashcraft
Ashcraft documents that since the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA)
reduced the ability of the FDIC to absorb
losses of subordinated debt investors, the
mix of debt has had a positive effect on
the future outcomes of distressed banks, as
if the presence of debt investors has
worked to limit moral hazard. To mitigate
concerns about selection, the author uses
the variation across banks in the mix of
debt in capital generated by cross-state
variation in state corporate income tax rates.
Interestingly, instrumental-variables estimates
document that selection problems are
indeed important, but suggest that the
benefits of subordinated debt are even
larger. Ashcraft concludes that the market
may play a useful direct role in regulating
banks. ■

www.newyorkfed.org/research

Recently Published
Nicola Cetorelli. 2006. “Finance as a
Barrier to Entry: Bank Competition
and Industry Structure in Local U.S.
Markets,” with Philip E. Strahan. Journal
of Finance 61, no. 1 (February): 437-61.

Andrea Moro. 2006. “Persistent
Distortionary Policies with Asymmetric
Information,” with Matthew F. Mitchell.
American Economic Review 96, no. 1
(March): 387-93.

Rebecca Hellerstein. 2006. “Identification
of Supply Models of Retailer and
Manufacturer Oligopoly Pricing,” with
Sofia Villas-Boas. Economics Letters 90,
no. 1 (January): 132-40.

Joshua Rosenberg and Til Schuermann.
2006. “A General Approach to
Integrated Risk Management with
Skewed, Fat-Tailed Risks.” Journal of
Financial Economics 79, no. 3 (March):
569-614.

Todd Keister. 2006. “Bank Runs and
Investment Decisions Revisited,” with
Huberto M. Ennis. Journal of Monetary
Economics 53, no. 2 (March): 217-32.
Todd Keister. 2006. “Discount Window
Policy, Banking Crises, and
Indeterminacy of Equilibrium,”
with Gaetano Antinolfi. Macroeconomic
Dynamics 10, no. 1 (February): 1-19.
Antoine Martin. 2006. “Contracts and
Money Revisited,” with Cyril Monnet.
B.E. Journals in Macroeconomics—
Topics in Macroeconomics 6, no. 1.
Antoine Martin. 2006. “Endogenous
Multiple Currencies.” Journal of Money,
Credit, and Banking 38, no. 1 (February):
245-62.
Antoine Martin. 2006. “Liquidity
Provision versus Deposit Insurance:
Preventing Bank Panics without Moral
Hazard.” Economic Theory 28, no. 1
(May): 197-211.

Charles Steindel. 2006. “Owners’
Equivalent Rent and the Cost of
Living.” Business Economics 41, no. 1
(January): 66-8.
Kevin Stiroh. 2006. “Potential Growth
of the U.S. Economy: Will the
Productivity Resurgence Continue?”
with Dale W. Jorgenson and Mun S. Ho.
Business Economics 41, no. 1 (January):
7-16.
Giorgio Topa. 2006. “Dynamic Properties
of Local Interaction Models,” with
Timothy G. Conley. In Lawrence E. Blume
and Steven N. Durlauf, eds., The Economy
as an Evolving Complex System III:
Current Perspectives and Future Directions,
283-308. Santa Fe Institute Studies on the
Sciences of Complexity series. New York:
Oxford University Press. ■

Research and Statistics Group

7

Research Update

■

Number 1, 2006

Papers Presented by Economists
in the Research and Statistics
Group
“Stock Returns and Volatility: Pricing
the Short-Run and Long-Run
Components of Market Risk,” Tobias
Adrian. University of North Carolina at
Chapel Hill seminar, Chapel Hill, North
Carolina, January 20. Also presented at a
Princeton University seminar, Princeton,
New Jersey, March 8.

8

“Multiple Equilibria and Optimal TimeConsistent Policy,” Gauti Eggertsson.
Allied Social Sciences Association and
Econometrics Society meeting, Boston,
Massachusetts, January 6. With Eric
Swanson.

“The Interaction of Labor Markets and
Inflation: Analysis of Micro Data from
the International Wage Flexibility
Project,” Erica Groshen. Allied Social
Sciences Association and Econometrics
Society meeting, Boston, Massachusetts,
January 8. With William Dickens, Lorenz
Goette, Steinar Holden, Julian Messina,
Mark Schweitzer, Jarkko Turunen, and
Melanie Ward.
“Turbulent Firms, Turbulent Wages?”
Erica Groshen. Cornell University seminar,
Ithaca, New York, February 20. With Diego
Comin and Bess Rabin.
“Is There a Bubble in the U.S. Housing
Market Now?” Jonathan McCarthy and
Richard Peach. EFG Eurobank Ergasias
conference, Athens, Greece, January 20.

“Monetary Policy Tick-by-Tick,” Michael
Fleming. Dauphine Workshop on Financial
Market Quality, sponsored by DRMCEREG (Paris-Dauphine University) and
Euronext Paris, Paris, France, March 9.
With Monika Piazzesi.

“Is There a Bubble in the U.S. Housing
Market Now?” Richard Peach. U.S.
Treasury Department, Washington, D.C.,
March 15. With Jonathan McCarthy. Also
presented at the Washington Association of
Money Managers, Washington, D.C., March 15.

“Distribution Margins, Imported Inputs,
and the Sensitivity of the CPI to
Exchange Rates,” Linda Goldberg.
The New School for Social Research,
Department of Economics seminar,
New York, New York, March 1.

“Intra-Day Trade Clustering and TwoSided Markets,” Asani Sarkar. American
Finance Association annual meeting,
Boston, Massachusetts, January 8. With
Robert A. Schwartz.
“Macroeconomic Dynamics and Credit
Risk: A Global Perspective,” Til
Schuermann. International Monetary Fund
seminar, Washington D.C., February 14.
With M. Hashem Pesaran, Björn-Jakob
Treutler, and Scott M. Weiner.

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

www.newyorkfed.org/research

“Current Account Adjustment with High
Financial Integration: A Scenario
Analysis,” Cédric Tille. Graduate Institute
of International Economics, University of
Geneva, Geneva, Switzerland, December 20,
2005. With Michele Cavallo. Also presented
at the University of Geneva, Geneva,
Switzerland, January 30; the University of
Tübingen, Tübingen, Germany, February 3;
the Swiss National Bank, Zurich,
Switzerland, February 13; the Bank for
International Settlements, Basel,
Switzerland, February 14; and the Centre
for Economic Policy Research, Study
Center Gerzensee, Gerzensee, Switzerland,
March 3.

“Fannie and Freddie’s Excellent
Adventure: GSEs, Consumer Choice, and
Pricing in the Residential Mortgage
Market,” James Vickery. Bendheim Center
for Finance, Princeton University,
Princeton, New Jersey, March 15.
“Catastrophe Bonds, Reinsurance, and
the Optimal Collateralization of Risk
Transfer,” George Zanjani. NBER conference, Boston, Massachusetts, February 10.
With Darius Lakdawalla. ■

9

Other New Publications
■

Publications and Other Research. The 2005 edition of our catalogue lists all of
the papers published in our research series as well as many papers published by
our economists in economic and finance journals, conference volumes, and
scholarly books.
www.newyorkfed.org/research/publication_annuals/por2005.pdf

Research and Statistics Group

Research Update

■

Number 1, 2006

Join Our Free E-Alert Service
Readers interested in learning of our new research quickly and conveniently are
encouraged to join our free Electronic Alert notification service.
As a subscriber to Electronic Alert, you receive an e-mail as soon as new research
publications are posted on our website—enabling you to download research well
before print copies are available.
The e-mails also offer you:

10
■

full abstracts of the new publications,

■

links to the publications, their press releases, author home pages, and research
on similar topics,

■

access to a range of data and charts on economic and financial conditions, and

■

information on upcoming conferences and calls for papers.
Visit www.newyorkfed.org/alertservices/and select “Research Alert.”

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

www.newyorkfed.org/research

Research and Statistics Group
Publications and Papers:
January-March 2006

STAFF REPORTS

Publications are available at
www.newyorkfed.org/research/
publication_annuals/index.html.

No. 237, January 2006
Could Capital Gains Smooth a Current
Account Rebalancing?
Michele Cavallo and Cédric Tille

ECONOMIC POLICY REVIEW

No. 238, February 2006
Turbulent Firms, Turbulent Wages?
Diego Comin, Erica L. Groshen,
and Bess Rabin

Forthcoming
Trading Risk, Market Liquidity, and
Convergence Trading in the Interest
Rate Swap Spread
John Kambhu

Local or State? Evidence on Bank
Market Size Using Branch Prices
Paul Edelstein and Donald P. Morgan
The Evolution of Repo Contracting
Conventions in the 1980s
Kenneth D. Garbade

CURRENT ISSUES IN ECONOMICS
AND FINANCE, VOL. 12
No. 1, January 2006
Challenges Facing the New York
Metropolitan Area Economy
James Orr and Giorgio Topa
Second District Highlights
No. 2, February/March 2006
A Leaner, More Skilled U.S.
Manufacturing Workforce
Richard Deitz and James Orr

No. 239, March 2006
Illiquidity in the Interbank Payment
System following Wide-Scale
Disruptions
Morten L. Bech and Rod Garratt
No. 240, March 2006
Risks in U.S. Bank International
Exposures
Nicola Cetorelli and Linda Goldberg
No. 241, March 2006
Fiscal Multipliers and Policy
Coordination
Gauti B. Eggertsson
No. 242, March 2006
Money and Modern Banking without
Bank Runs
David R. Skeie
No. 243, March 2006
The Topology of Interbank
Payment Flows
Kimmo Soramäki, Morten L. Bech, Jeffrey
Arnold, Robert J. Glass, and Walter E. Beyeler
No. 244, March 2006
Does the Market Discipline Banks?
New Evidence from the Regulatory
Capital Mix
Adam B. Ashcraft

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 Statistics Group

11