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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

2007

ResearchUpdate
Research and Statistics Group

www.newyorkfed.org/research

Economic Policy Review Focuses on a Range of Finance Topics

A

rticles in the new issue of the
Economic Policy Review (vol. 13,
no. 1) offer fresh perspectives on
foreign direct investment, the link
between financial market concentration
and stability, and the Treasury’s debt
management practices.
In “Financial Sector FDI and Host
Countries: New and Old Lessons,” Linda
Goldberg discusses the effect of soaring
foreign direct investment (FDI) in the
financial sectors of developing countries.
She concludes that in several respects,
financial sector FDI—in which banks in
industrialized countries establish branches
and facilities in emerging ones—benefits
the countries receiving the investments.
Goldberg’s analysis also suggests that the

presence of bank branches from nations
with highly developed financial systems
brings with it exposure to best practices
that can result in institutional strengthening of the host country in key areas such
as bank supervision. Accordingly, the
benefits of financial sector FDI can be
substantial enough for a country to
encourage and support entry from wellregulated and healthy banks.
Nicola Cetorelli, Beverly Hirtle, Donald
Morgan, Stavros Peristiani, and João
Santos, in “Trends in Financial Market
Concentration and Their Implications for
Market Stability,” conclude that in the
past decade there has been no pervasive
pattern of high or increasing concentration in financial markets. The authors

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RV oe ls ue ma rec h9 , U Np du amtbee r■ 2N, u2m0b0e6r 1 , 2 0 0 7

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find that most wholesale credit and capital markets in the United States are only
moderately concentrated, and that concentration trends are mixed—rising in
some markets, falling in others. Consistent with past studies, Cetorelli et al.
document an ambiguous relationship
between market concentration and market instability. They argue that the risk of
instability should a large player exit the
market depends not just on concentration, but also on the speed at which other
firms can substitute for the departing firm.
In addition, two separate studies provide insight into the U.S. Treasury securities market.
“An Examination of Treasury Term
Investment Interest Rates,” by Warren
Hrung, studies the Term Investment
Option (TIO) program, through which the
Treasury lends excess cash balances to
banks for a specified number of days at
interest rates determined by single-rate
auctions. Hrung finds that for small auc-

tion sizes, of $2 billion or less, interest
rates received by the Treasury through
TIO are comparable to market rates when
term lengths are five days or more. When
lengths are of shorter durations or the
auction size is large, the Treasury tends to
receive lower relative rates. He also concludes that the Treasury’s announcement
and auctioning of funds on the same day
does not adversely affect rate spreads,
suggesting that banks are indifferent to
more advance notice of TIO auctions.
Kenneth Garbade’s article, “The
Emergence of ‘Regular and Predictable’
as a Treasury Debt Management
Strategy,” observes that the Treasury’s
practice of selling new notes and bonds
on a “tactical,” or offering-by-offering,
basis proved problematic by 1975, when
the Treasury had to finance an unusually
rapid expansion of the federal deficit.
Investors were sometimes unprepared,
and market disruption ensued. These
events, according to Garbade, led

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.

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

Treasury officials to embrace a program
of regular and predictable issuance of
notes and bonds—a program they had
been using for decades to auction bills—
and by 1982, the Treasury had switched
to predictably scheduled government debt

auctions. The move, he says, was widely
credited with reducing market uncertainty,
facilitating investor planning, and lowering
the Treasury’s borrowing costs.
Articles are available at www.newyorkfed
.org/research/epr/index.html.

New Titles in the Current Issues Series
Two Current Issues in Economics and
Finance articles were published in the
first quarter:
No. 1, January 2007
Who Buys Treasury Securities
at Auction?
Michael J. Fleming
The U.S. Treasury Department now releases
fuller information about its auctions than
in the past, including new information on
investor class and bidder category. The
investor class data shed light on the distribution of demand for government securities,
and the bidder category data, released first,
offer an early read on demand. Purchases
by indirect bidders, in particular, are a fairly
good proxy for foreign purchases of
Treasury notes, but not Treasury bills.

No. 2, February 2007
What Has Homeland Security Cost?
An Assessment: 2001-2005
Bart Hobijn and Erick Sager
While homeland security is widely seen as
an important national objective, the costs
of this effort are not well understood. An
analysis of public and private expenditures
on homeland security shows that overall
spending rose by $44 billion between 2001
and 2005—a clear increase but one that
represents a gain of only 1/4 of 1 percent as
a share of U.S. GDP. Private sector expenditures increased very modestly in dollar
terms and remained unchanged as a fraction of the sector’s GDP.
Articles are available at www.newyorkfed
.org/research/current_issues/index.html.

Research and Statistics Group

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Research Update

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Number 1, 2007

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

MACROECONOMICS
AND GROWTH

4

No. 277, February 2007
A Retrospective Look at the U.S.
Productivity Growth Resurgence
Dale W. Jorgenson, Mun S. Ho,
and Kevin J. Stiroh
It is now widely recognized that information technology (IT) was critical to the dramatic acceleration of U.S. labor productivity
growth in the mid-1990s. This paper traces
the evolution of productivity estimates to
document how and when this perception
emerged. Early studies concluded that IT
was relatively unimportant. It was only
after the massive IT investment boom of
the late 1990s that this investment and
underlying productivity increases in the ITproducing sectors were identified as important sources of growth. Although IT has
diminished in significance since the dotcom crash of 2000, the authors project that
private sector productivity growth will average around 2.5 percent per year for the
next decade, a pace that is only moderately
below the average for the 1995-2005 period.

INTERNATIONAL
No. 278, March 2007
Monetary Policy under Sudden Stops
Vasco Cúrdia
This study proposes a model to investigate
the effects of monetary policy in an emerging market economy that experiences a
sudden stop of capital inflows. Cúrdia
shows that the higher the elasticity of

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

foreign demand, the lower the contraction
in output—leading, at the extreme, to the
possibility of an expansion. A second result
is that the recession is most severe in a
fixed exchange rate regime. A comparison
of alternative rules shows that low commitment to inflation stabilization allows for
less contraction in output and even expansion but at the cost of stronger contraction
in capital inflows and higher interest rates.
Low credibility and the risk of loose policy
imply increased trade-offs, stronger contraction of the economy, and higher
interest rates.
No. 280, March 2007
International Capital Flows
Cédric Tille and Eric van Wincoop
Most theories of international capital flows
are based on one-asset models, which have
implications only for net capital flows, not
for gross flows. Moreover, because there is
no portfolio choice, these models allow no
role for capital flows as a result of assets’
changing expected returns and risk characteristics. This paper develops a method for
solving dynamic stochastic general equilibrium open-economy models with portfolio
choice. After showing why standard solution methods no longer work in the presence of portfolio choice, the authors extend
these methods, giving special treatment to
the optimality conditions for portfolio
choice. They apply their method to a twocountry, two-good, two-asset model. The
approach identifies time-varying portfolio
shares resulting from assets’ time-varying
expected returns and risk characteristics as
a potential key source of international
capital flows.

www.newyorkfed.org/research

MICROECONOMICS
No. 275, February 2007
How Wages Change: Micro Evidence
from the International Wage
Flexibility Project
William T. Dickens, Lorenz Goette, Erica L.
Groshen, Steinar Holden, Julian Messina,
Mark E. Schweitzer, Jarkko Turunen,
and Melanie E. Ward
Drawing on information compiled by the
International Wage Flexibility Project,
Dickens et al. analyze changes in individuals’ earnings in thirty-one different data
sets from sixteen countries. The 360 wage
change distributions they derive from the
data show a remarkable amount of variation in earnings changes across workers.
These changes have a notably non-normal
distribution; they are tightly clustered
around the median and also have many
extreme values. Furthermore, nearly all
countries show asymmetry in their wage
distributions below the median. Indeed, the
authors find evidence of downward nominal and real wage rigidities and determine
that the extent of both rigidities varies substantially across countries. Their results
suggest that the degree of union presence
in the labor market plays a role in explaining the differing degrees of rigidities
among countries.

BANKING AND FINANCE
No. 272, January 2007
Personal Bankruptcy and Credit
Market Competition
Astrid Dick and Andreas Lehnert
This study investigates empirically the relationship between credit market competition, lending to households, and personal
bankruptcy rates in the United States. Dick
and Lehnert exploit the exogenous variation in market contestability brought on by
banking deregulation at the state level:

after deregulation, banks faced the threat
of entry into their state markets. The
authors find that deregulation increased
competition for borrowers, prompting
banks to adopt more sophisticated credit
rating technology. In turn, these developments led previously excluded households
to enter the credit market. The authors
document that, following deregulation,
1) overall lending increased, 2) loss rates
on loans decreased, and 3) bankruptcy
rates rose.
No. 273, January 2007
Defining and Detecting
Predatory Lending
Donald P. Morgan
Morgan defines predatory lending as a welfarereducing provision of credit. Using a textbook model, he shows that lenders profit if
they can tempt households into “debt
traps,” that is, overborrowing and delinquency. The author then tests whether payday lending fits the definition of predatory.
His study finds that in states with higher
payday loan limits, less-educated households and households with uncertain
income are less likely to be denied credit,
but are not more likely to miss a debt payment. Absent higher delinquency, the extra
credit from payday lenders does not fit our
definition of predatory. Nevertheless, it is
expensive. On that point, Morgan finds
somewhat lower payday prices in cities with
more payday stores per capita, consistent
with the hypothesis that competition limits
payday loan prices.
No. 274, January 2007
Commitment and Equilibrium
Bank Runs
Huberto Ennis and Todd Keister
This paper studies the role of commitment
in a version of the Diamond-Dybvig model
with no aggregate uncertainty. As is well
known, the banking authority can eliminate

Research and Statistics Group

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Research Update

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Number 1, 2007

the possibility of a bank run by committing
to suspend payments to depositors if a run
were to start. The authors show, however,
that in an environment without commitment, the banking authority will choose to
only partially suspend payments during a
run. In some cases, the reduction in early
payouts under this partial suspension is
insufficient to dissuade depositors from participating in the run. Bank runs can then
occur with positive probability in equilibrium.
The fraction of depositors participating in
such a run is stochastic and can be arbitrarily close to one.

6

No. 276, February 2007
Credit Derivatives and Bank
Credit Supply
Beverly Hirtle
The key question addressed in this paper
is whether purchase of credit protection
through credit derivatives is associated with
an increase in bank credit supply. Hirtle
examines a micro data set of individual
loans made by a sample of banks between
1997 and 2005. She finds evidence suggesting that greater use of credit derivatives is
associated with greater supply of bank credit
for large term loans—that is, newly negotiated
loan extensions to large corporate borrowers—
though not for (previously negotiated)
commitment lending. On-balance-sheet
amounts of commercial and industrial loans
also appear to increase as the protection
afforded by credit derivatives increases.

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. 279, March 2007
The Bankruptcy Abuse Prevention
and Consumer Protection Act:
Means-Testing or Mean Spirited?
Adam B. Ashcraft, Astrid A. Dick,
and Donald P. Morgan

Thousands of U.S. households filed for
bankruptcy just before the bankruptcy
law changed in 2005. That rush-to-file
was more pronounced, this study finds,
in states with more generous bankruptcy
exemptions and lower credit scores. The
authors take that finding as evidence
that the new law effectively reduces
exemptions, which in turn should
reduce the “demand” for bankruptcy
and the resulting losses to suppliers of
consumer credit. Predictably, the savings
to suppliers will be shared with borrowers by way of lower credit card rates,
although credit card spreads have not
yet fallen. If cheaper credit is the upside
of the new law, the downside is reduced
bankruptcy “insurance” against bad
luck. The overall impact of the new law
on the average household depends on
how one weighs those two sides. ■

www.newyorkfed.org/research

Recently Published
Mary Amiti. 2007. “Economic Geography
and Wages,” with Lisa Cameron. Review
of Economics and Statistics 89, no. 1
(February): 15-29.

Asani Sarkar. 2007. “Derivatives.” In
Kaushik Basu, ed., Oxford Companion
to Economics in India. London: Oxford
University Press.

Roc Armenter. 2007. “Time-Consistent
Fiscal Policy and Heterogeneous Agents.”
Review of Economic Dynamics 10, no. 1
(January): 31-54.

Kevin Stiroh. 2007. “Playing for Keeps:
Pay and Performance in the NBA.”
Economic Inquiry 45, no. 1 (January):
145-61.

Thomas Klitgaard and Cédric Tille. 2007.
“Borrowing without Debt? Understanding the U.S. International Investment Position,” with Matthew Higgins.
Business Economics 42, no. 1 (January): 17-27.

Wilbert van der Klaauw. 2007. “The Socioeconomic Consequences of ‘In-Work’
Benefit Reform for British Lone Mothers,”
with Marco Francesconi. Journal of Human
Resources 42, no. 1 (winter): 1-31. ■

João Santos. 2007. “Institutional
Allocation of Bank Regulation: A Review,”
with Charles Kahn. In D. G. Mayes and
G. E. Wood, eds., The Structure of Financial
Regulation, 185-204. London: Routledge.

Call for Papers on Financial Intermediation
On November 16, New York University will host the third New York Fed/NYU Stern
Conference on Financial Intermediation. The sessions, cosponsored by the Bank and the
Salomon Center at NYU’s Leonard N. Stern School of Business, are designed to enhance
the interaction among researchers interested in this important topic.
Authors are welcome to submit for consideration papers on all areas of financial
intermediation, by July 31, 2007.
Please send a PDF version of your paper along with a separate title page and abstract
to rvanterp@stern.nyu.edu and nyfed_nyustern.conference@ny.frb.org, specifying
“NY Fed/NYU Conference” in the subject line. Authors of accepted papers will be
notified in early September.
For more information: www.newyorkfed.org/research/conference/2007/fin_interm.html.

Research and Statistics Group

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Research Update

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Number 1, 2007

Papers Presented by Economists in the Research and Statistics Group
“An Anatomy of China’s Trade Growth,”
Mary Amiti. Keio University, conference on
Empirical Investigations in Trade and
Investment, Tokyo, Japan, February 8.
With Caroline Freund.
“Intraday Liquidity Management: A Tale
of Games that Banks Play,” Morten Bech.
Danmarks Nationalbank seminar,
Copenhagen, Denmark, February 1.

8

“Systemic Risk in the Interbank
Payment System,” Morten Bech. Seminar
sponsored by the Riksbank, Stockholm,
Sweden, January 3. With Rod Garratt.
“Transmission of Liquidity Shocks by
Globally Active U.S. Banks,” Nicola
Cetorelli. Allied Social Science Associations
annual meeting, Chicago, Illinois, January 6.
With Linda Goldberg.
“Are Charter Schools Perceived to Be
Better than Regular Public Schools?
Evidence from a New Approach Using
Private School Enrollment Patterns,”
Rajashri Chakrabarti. American Education
Finance Association conference, Baltimore,
Maryland, March 23. With Joydeep Roy.
“The Intended and Unintended
Consequences of No Child Left Behind:
Evidence from Wisconsin,” Rajashri
Chakrabarti. American Economic
Association annual meeting, Chicago,
Illinois, January 6. Also presented at the
American Education Finance Association
conference, Baltimore, Maryland, March 24.
“Monetary Policy Tick-by-Tick,” Michael
Fleming. Allied Social Science Associations
annual meeting, Chicago, Illinois, January 5.
With Monika Piazzesi.

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

“A Framework for Identifying the Sources
of Local-Currency Price Stability with
an Empirical Application,” Rebecca
Hellerstein. Allied Social Science
Associations annual meeting, Chicago,
Illinois, January 7. With Pinelopi Goldberg.
“Commitment and Equilibrium Bank
Runs,” Todd Keister. University of
Kentucky Department of Economics
seminar, Lexington, Kentucky, March 3.
With Huberto Ennis.
“Does Capital Hurt the Value of the
Bank?” Hamid Mehran. American
Economic Association annual meeting,
Chicago, Illinois, January 6.
“ESOP Fables: The Impact of Employee
Stock Ownership Plans on Labor
Disputes,” Hamid Mehran and Joseph
Tracy. MIT Organization and Economics
Seminar, Cambridge, Massachusetts, March 1.
With Peter Cramton.
“Varieties and the Transfer Problem:
The Extensive Margin of Current
Account Adjustment,” Paolo Pesenti.
Second Annual Workshop on Global
Interdependence, cosponsored by the
Centre for Economic Policy Research and
Trinity College, Dublin, Ireland, March 2.
With Giancarlo Corsetti and Philippe Martin.
“Would Protectionism Defuse Global
Imbalances and Spur Economic
Activity? A Scenario Analysis,” Paolo
Pesenti. Conference on Advances in OpenEconomy Macroeconomics, cosponsored by
the Indira Gandhi Institute of Development
Research and Northwestern University,
Mumbai, India, March 18. With Hamid
Faruqee, Douglas Laxton, and Dirk Muir.

www.newyorkfed.org/research

“The Information Content of FOMC
Minutes,” Joshua Rosenberg. Allied Social
Science Associations annual meeting,
Chicago, Illinois, January 5. With Ellyn
Boukus.
“Do Firms Benefit with Banks’
Corporate Control?” João Santos.
American Finance Association annual
meeting, Chicago, Illinois, January 6.
With Kristin Wilson.
“Dark Liquidity: An Empirical Analysis,”
Asani Sarkar. Financial Markets World
Market Structure Conference: Sourcing and
Managing Liquidity, New York City, January 16.
With Robert Schwartz. Also presented at
the World Research Group’s Liquidity 2007
conference, New York City, February 1.
“Market Sidedness: Insights into Motives
for Trade Initiation,” Asani Sarkar.
Baruch College Finance Department
seminar, New York City, February 20.
With Robert Schwartz.
“Recent Trends in the High-Yield
Corporate Bond Markets,” Asani Sarkar.
World Research Group’s Distressed
Investing 2007 conference, New York City,
February 28.
“What We Know, Don’t Know, and
Can’t Know about Bank Risk,” Til
Schuermann. Fitch/Algo Credit and
Capital Forum, New York City, February 16.
With Andrew Kuritzkes.
“Money and Modern Banking without
Bank Runs,” David Skeie. American
Economic Association annual meeting,
Chicago, Illinois, January 6.

“A Retrospective Look at the U.S.
Productivity Growth Resurgence,” Kevin
Stiroh. American Economic Association
annual meeting, Chicago, Illinois, January 7.
With Dale W. Jorgenson and Mun S. Ho.
Also presented at an NBER Productivity
Program Meeting, Cambridge, Massachusetts,
March 9.
“Intertemporal Disturbances,”
Andrea Tambalotti. American Economic
Association annual meeting, Chicago,
Illinois, January 5. With Giorgio Primiceri
and Ernst Schaumburg.
“International Capital Flows,” Cédric
Tille. University of Connecticut seminar,
Storrs, Connecticut, February 8. With
Eric van Wincoop. Also presented at a
Georgetown University seminar,
Washington, D.C., February 26.
“Macroeconomic Interdependence and
the International Role of the Dollar,”
Cédric Tille. Graduate Institute of International Economics, Geneva, Switzerland,
January 16. With Linda Goldberg. Also
presented at a University of Connecticut
seminar, Storrs, Connecticut, February 9.
“Two Puzzles in the U.S. External
Transactions: The Role of Leverage,”
Cédric Tille. Graduate Institute of International Economics, Geneva, Switzerland,
January 17.
“The Long-Term Effects of Economics
Coursework on College Graduates’
Behaviors and Outcomes in the Labor
Market,” Wilbert van der Klaauw. Allied
Social Science Associations annual meeting,
Chicago, Illinois, January 5. With Sam
Allgood, William Bosshardt, and Michael
Watts.

Research and Statistics Group

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Research Update

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Number 1, 2007

“Maternal Employment, Migration, and
Child Development,” Wilbert van der
Klaauw. Allied Social Science Associations
annual meeting, Chicago, Illinois, January 7.
With Haiyong Liu and Thomas Mroz.

“Interest Rates and Consumer Choice in
the Residential Mortgage Market,” James
Vickery. American Economic Association
annual meeting, Chicago, Illinois,
January 7. ■

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www.newyorkfed.org/research

Research and Statistics Group
Publications and Papers:
January-March 2007
Publications are available at
www.newyorkfed.org/research/
publication_annuals/index.html.

ECONOMIC POLICY REVIEW,
VOL. 13
No. 1, March 2007
Financial Sector FDI and Host
Countries: New and Old Lessons
Linda S. Goldberg

An Examination of Treasury Term
Investment Interest Rates
Warren B. Hrung
Trends in Financial Market
Concentration and Their Implications
for Market Stability
Nicola Cetorelli, Beverly Hirtle, Donald
Morgan, Stavros Peristiani, and João Santos
The Emergence of “Regular and
Predictable” as a Treasury Debt
Management Strategy
Kenneth D. Garbade

CURRENT ISSUES IN ECONOMICS
AND FINANCE, VOL. 13
No. 1, January 2007
Who Buys Treasury Securities
at Auction?
Michael J. Fleming
No. 2, February 2007
What Has Homeland Security Cost?
An Assessment: 2001-2005
Bart Hobijn and Erick Sager

STAFF REPORTS
No. 272, January 2007
Personal Bankruptcy and Credit
Market Competition
Astrid Dick and Andreas Lehnert
No. 273, January 2007
Defining and Detecting
Predatory Lending
Donald P. Morgan
No. 274, January 2007
Commitment and Equilibrium
Bank Runs
Huberto Ennis and Todd Keister
No. 275, February 2007
How Wages Change: Micro Evidence
from the International Wage
Flexibility Project
William T. Dickens, Lorenz Goette, Erica L.
Groshen, Steinar Holden, Julian Messina,
Mark E. Schweitzer, Jarkko Turunen,
and Melanie E. Ward
No. 276, February 2007
Credit Derivatives and Bank
Credit Supply
Beverly Hirtle
No. 277, February 2007
A Retrospective Look at the U.S.
Productivity Growth Resurgence
Dale W. Jorgenson, Mun S. Ho,
and Kevin J. Stiroh
No. 278, March 2007
Monetary Policy under Sudden Stops
Vasco Cúrdia
No. 279, March 2007
The Bankruptcy Abuse Prevention
and Consumer Protection Act:
Means-Testing or Mean Spirited?
Adam B. Ashcraft, Astrid A. Dick,
and Donald P. Morgan
No. 280, March 2007
International Capital Flows
Cédric Tille and Eric van Wincoop

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