Full text of Research Update : October 1999

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October 1999

Research
U P D AT E
f r o m t h e 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
RESEARCH AND MARKET ANALYSIS GROUP

w w w. n y. f r b. o r g / r m a g h o m e

New Director of Research Named
In early September, Christine M. Cumming
succeeded Stephen G. Cecchetti as director
of research at the Federal Reserve Bank of
New York.
Prior to being named research director,
Ms. Cumming was senior vice president
responsible for the Bank Analysis and
Advisory and Technical Services areas of the
Bank Supervision Group. From 1992 to 1994,
she served as vice president in the Domestic
Bank Examinations area of Bank Supervision.
While in Bank Supervision, she was active in
the Basle Committee on Banking Supervision,

participating in the development of the
market risk amendment to the 1988 Basle
Accord and co-chairing the committee’s Risk
Management Group. Ms. Cumming has also
worked in the Bank’s International Capital
Markets area and managed Research areas
specializing in industrial countries and international financial markets.
Mr. Cecchetti, who served as the Bank’s
director of research for two years, returns to
Ohio State University, where he is a professor
of economics.

Fed Conference Examines How the Decline in Income
among the Poor Has Affected Their Material Well-Being
Over the past few decades, the nation has
experienced a sharp rise in income inequality.
Although much discussion has centered on
the decline in real incomes among the poor,
relatively little attention has been given to an
important consequence of income inequality:
the impact on broad measures of material
well-being.

In May, that topic was the focus of a conference that was sponsored by the Federal
Reserve Bank of New York, “Unequal Incomes,
Unequal Outcomes? Economic Inequality and
Measures of Well-Being.” The proceedings of
the conference were published in the latest
issue of the Bank’s Economic Policy Review
(vol. 5, no. 3).

Ne w Research: July–September 1999

Federal Reser ve Bank of Ne w York

Leading researchers, academics, and policy
analysts from around the country participated
in the conference. “We asked presenters if the
deterioration in income experienced by the
poor has led to a similar deterioration in outcomes—in such areas as health, housing, and
crime victimization trends,” says James Orr, a
research officer and one of the conference
organizers. “The wide range of papers delivered rose to the challenge, addressing such
timely issues as poverty’s impact on the health
of children, housing affordability for young
and poor families, and the relationship
between income and the likelihood of being a
crime victim.”

In a discussion of public policy responses,
some participants observed that, contrary to
expectations, school finance reform is not necessarily an effective way to reduce income
inequality substantially. Others noted that
economic and social changes have compelled
large cities to scale back policies that promote
income redistribution from the wealthy to the
poor. In addition, new legislation that limits
liability for preexisting environmental damage
has made it easier for businesses to return to the cenThe conference participants
tral cities—bringing with
them new industries, urban
agreed that there have been
renewal, and jobs.

The conference participants agreed that
there have been many improvements in the
material well-being of the poor over the
years—yet problems remain. For instance,
despite advancements in health care, health
problems still disproportionately affect lowincome groups and minority groups. In addition, although housing affordability has
improved across most income groups, the
poorest Americans are the one group yet to
benefit. Furthermore, the rates of crime victimization have fallen nationwide, but the
mortality rates of the inner-city poor still are
unacceptably high.

Looking ahead, the parmany improvements in the
ticipants discussed the
challenges still faced by
material well-being of the
those who study income
inequality’s causes and
poor over the years—
effects. For example, the
limitations of the current
yet problems remain.
data sources remain an
obstacle. However, efforts
are under way to push beyond these limitations and define inequality in more concrete
terms. Efforts such as these will also shed
light on the effect that government policies
have on income inequality’s magnitude and
consequences.

Banks Continue to Be Critical Providers of Liquidity
As more corporations look to the securities
markets to meet their funding needs, the role
of banks as providers of credit to large businesses has steadily declined. Nevertheless,
there is fresh evidence that banks continue to
be a key source of liquidity
for corporations at times of
Has the decline in the economic stress.
In “Are Banks Still
Important for Financing
in financing large firms Large Businesses?” (Current
Issues in Economics and
Finance, vol. 5, no. 12),
been overstated? Marc Saidenberg and Philip
Strahan analyze the effects
of last fall’s turmoil in the securities markets
on the borrowing practices of large corporations. The authors explain that beginning in
August 1998, when the Russian government
announced its intention to default on its
bonds, a wave of volatility overtook foreign
financial markets and eventually spilled over
into U.S. markets. Borrowing in the U.S.

importance of banks

commercial paper market—the primary
source of short-term funding for large corporations—grew extremely expensive, with the
yield spread between commercial paper rates
and short-term Treasury rates doubling in the
space of a month. In response, large numbers
of firms, under pressure to refinance their
commercial paper as it matured, turned to
their backup lines of credit with banks.
The authors find evidence of these developments by tracking changes in the volume
of commercial paper issued by nonfinancial
firms and changes in the volume of banks’
commercial and industrial lending in the fall
of 1998. They show that commercial paper
outstanding dropped more than $16 billion
from mid-September to year-end. By contrast, from September to the beginning of
November, commercial and industrial lending by large commercial banks rose more
than $20 billion—a growth rate twice that
observed earlier in the year.

Publications and Papers
The Research and Market Analysis Group produces a wide range of publications:
• The Economic Policy Review—a policy-oriented research journal focusing
on macroeconomic, banking, and financial market topics.
• 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 System’s Second District.
• Staff Reports—technical papers intended for publication in leading economic
and finance journals. Staff Reports are available only in electronic form.
• Publications & Other Research—an annual brochure spotlighting the Group’s
research output.

www.ny.f rb.org/r maghome

3

Federal Reser ve Bank of Ne w York

The striking increase in firms’ reliance on
bank loans during this period—and the
accompanying decline in firms’ use of commercial paper—suggest that banks are still
important players in corporate financing,
particularly at times of economic difficulty.
“By providing a backup source of liquidity,”
Saidenberg and Strahan note, “banks
helped insulate many large corporations
from market shocks.”

The authors go on to examine why banks
are so well equipped to provide this kind of
liquidity insurance. An analysis of bank funding practices reveals that banks have an
advantage over competing financial institutions because they tend to experience deposit
inflows when liquidity elsewhere dries up.

Web Site News
• Members of the Federal Reserve Bank of New York’s Research and Market Analysis
Group can be reached via e-mail at firstname.lastname@ny.frb.org.
• Papers in our Staff Reports series are available only in electronic form. Earlier this year,
we ceased distributing hard copies of individual papers and directed all readers to our
web site, where you can download most new and back issues.
• Back issues of many of our publications and papers are available at our web site. There,
you can also find links to other Federal Reserve System research offerings and to Federal
Reserve Bank of New York information and announcements.
• The Regional Economy page of our web site offers important information on the
Federal Reserve System’s Second District. For example, you can find links to graphs
profiling current regional and local economic trends, the Federal Reserve System’s
“Beige Book” (a periodic report on regional economic trends), the Bank’s regional jobgrowth projections, and approximate release dates for major regional indicators.
The Regional Economy page also provides links to the New York State and New Jersey
Departments of Labor, the Bureau of Labor Statistics, the Census Bureau, and other
government sites.

www.ny.frb.org/rmaghome

New Titles in the Staff Reports Series
The following new Staff Reports are available electronically at the Research and Market Analysis
Group’s web site: www.ny.frb.org/rmaghome.

No. 84
A General Equilibrium Analysis
of Check Float
James McAndrews and William Roberds

Macroeconomics and Growth

McAndrews and Roberds’ analysis of check “float”—
the time lag between the receipt and clearing of a
check—supports the view that float is a significant
factor behind the continued popularity of check payment. Their analysis confirms recent data indicating
that the average value of float per check is small.

No. 83
What Was behind the M2 Breakdown?
Cara S. Lown, Stavros Peristiani,
and Kenneth J. Robinson

The authors contend that capital constraints on
depository institutions largely explain the unusual
pattern of M2 growth in the early 1990s. Their work
suggests that M2 may contain useful information
about economic growth during periods when depository institutions experience no major disturbances.
No. 87
Nonlinear Time Series Modelling:
An Introduction
Simon M. Potter

Potter reviews recent developments in three major
types of nonlinear models: Markov Switching,
Threshold Autoregression, and Smooth Transition
Autoregression. In addition to describing Classical
and Bayesian estimation techniques, he reviews
parametric tests for nonlinearity in each model.

Banking and Finance
No. 82
Heat Waves, Meteor Showers, and Trading
Volume: An Analysis of Volatility Spillovers
in the U.S. Treasury Market
Michael J. Fleming and Jose A. Lopez

No. 85
Payment Intermediation and the Origins
of Banking
James McAndrews and William Roberds

Like banks today, the medieval banks of continental
Europe facilitated trade by serving as payment intermediaries. McAndrews and Roberds show that early
banks—by standing between the buyer and seller on
a centralized basis—could enforce future contracts
and effectively internalize the offsetting nature of an
economy’s universe of trades.
No. 86
Settlement Risk under Gross
and Net Settlement
Charles M. Kahn, James McAndrews,
and William Roberds

By modeling how the trading economy generates
demand for payment services, the authors discover
advantages of net settlement that have not been
widely explored. In particular, net settlement systems avert certain gridlock situations and can
economize on collateral requirements and minimize
trading delays.

Fleming and Lopez examine the U.S. Treasury securities market for volatility spillovers across the
three main trading centers of Tokyo, London, and
New York. They find that volatility spills over into
Tokyo and London from New York but not into
New York from Tokyo or London. In addition, they
find that lagged trading volume significantly affects
volatility in the London and Tokyo markets.

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5

Federal Reser ve Bank of Ne w York

Papers Presented by Economists in the Research
and Market Analysis Group
“The Mechanisms for Exchange Rate and Wage
Interaction,” Linda Goldberg and Joseph Tracy.
National Bureau of Economic Research Summer
Institute (for the International Trade and
Investment Group and the International Finance
and Macro Group), Cambridge, Massachusetts,
August 4.
The authors explore the sensitivity to dollar
movements shown by the wages of workers in
different industries and different categories of
educational attainment, and document whether
the measured wage responsiveness for workers
who remain at their jobs differs from that for
workers who change jobs.
“The Information in the High-Yield Bond Spread
for the Business Cycle: Evidence and Some
Implications,” Cara Lown. Oxford University
Conference on Financial Instability, Oxford,
England, July 9-10. With Mark Gertler.
The authors show that the interest-rate spread
between high-yield and AAA-rated corporate
bonds has significant explanatory power for the
business cycle and outperforms other leading
financial indicators; they interpret these findings
as being symptomatic of financial factors at work
in the business cycle.
Stability, Asymmetry, and Discontinuity:
The Outset of European Monetary Union,”
Paolo Pesenti. Brookings Panel on Economic
Activity, Washington, D.C., September 2-3. With
Giancarlo Corsetti.
European Monetary Union is performing
well above expectations in terms of its impact
on financial markets and the effectiveness of

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the new institutions in coping with cyclical
contingencies, but persistent asymmetries may
undermine further integration in Europe.
“Competition in Shifting Product and
Geographic Markets,” Lawrence Radecki. 1999
Western Economics Association Meetings,
San Diego, California, July 6-10.
The forces that have transformed the structure
of the banking industry are also causing shifts in
the nature and location of competition in banking services.
Individual copies of these papers can be
obtained by e-mailing the Research and
Market Analysis Group authors at
firstname.lastname@ny.frb.org.

New York Fed to Hold Conference on Fiscal Policy
On December 3, the Federal Reserve Bank of
New York will sponsor the conference “Fiscal
Policy in an Era of Surpluses: Economic and
Financial Implications.”
The conference will examine how the formation of fiscal policy has evolved over time
and will address such issues as the measurement of the stance of fiscal policy. Presenters
and discussants will also focus on the shrink-

ing supply of U.S. Treasury securities debt and
its implications for financial markets.
More than 150 policymakers, market participants, and academics are expected to
attend the conference, which is being organized by the Bank’s Business Conditions area.
The conference proceedings will be published
in an upcoming issue of the Bank’s Economic
Policy Review.

Recently Published
Paul Bennett. 1999. “Portfolio Theory and Bank Lending: Avoiding Concentrations of Credit
Risk through Strategic Diversification.” Journal of Lending and Credit Risk Management 81,
no. 11: 64-7.
Michael J. Fleming and Eli M. Remolona. 1999. “What Moves Bond Prices?” Journal of
Portfolio Management 25, no. 4: 28-38.
Sydney Ludvigson. 1999. “Consumption and Credit: A Model of Time-Varying Credit
Constraints.” Review of Economics and Statistics 81, no. 3: 434-47.
James M. Mahoney. 1999. “The Performance of Investment Newsletters,” with Jeffrey F. Jaffe.
Journal of Financial Economics 53, no. 2: 289-307.
Sangkyun Park. 1999. “Effects of Risk-Based Capital Requirements and Asymmetric
Information on Banks’ Portfolio Decisions.” Journal of Regulatory Economics 16, no. 2:
135-50.
Paolo Pesenti. 1999. “What Caused the Asian Currency and Financial Crisis?” with Giancarlo
Corsetti and Nouriel Roubini. Japan and the World Economy 11, no. 3: 305-73.
Simon Potter. 1999. “Dynamic Asymmetries in U.S. Unemployment,” with Gary Koop.
Journal of Business and Economic Statistics 17, no. 3: 298-312.
Kevin Stiroh. 1999. “Is There a New Economy?” Challenge 42, no. 4: 82-101.
Joseph Tracy. 1999. “The Effect of Collective Bargaining Legislation on Strikes and Wages.”
Review of Economics and Statistics 81, no. 3: 475-87.

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7

Federal Reser ve Bank of Ne w York

RESEARCH AND MARKET ANALYSIS GROUP
PUBLICATIONS AND PAPERS:
July–September 1999
Economic Policy Review,
Vol. 5, No. 3

Current Issues in Economics
and Finance, Vol. 5

“Unequal Incomes, Unequal Outcomes? Economic
Inequality and Measures of Well-Being”
Proceedings of a Conference Held
at the Federal Reserve Bank of New York

No. 11
Can New York City Bank on Wall Street?
Jason Bram and James Orr
Second District Highlights series

Papers include:

No. 12
Are Banks Still Important for Financing Large
Businesses?
Marc R. Saidenberg and Philip E. Strahan

Poverty, Children’s Health, and Health Care
Utilization
Barbara L. Wolfe
Economic Inequality and Social Differentials
in Mortality
Arline T. Geronimus
Public Health and the Public Agenda
Kevin Thurm
Housing Outcomes: An Assessment
of Long-Term Trends
James A. Orr and Richard W. Peach
A Look at Real Housing Prices and Incomes:
Some Implications for Housing Affordability
and Quality
Joseph Gyourko and Joseph Tracy

No. 13
A Decomposition of the Increased Stability
of GDP Growth
Margaret M. McConnell, Patricia C. Mosser,
and Gabriel Perez Quiros

Staff Reports
No. 82
Heat Waves, Meteor Showers, and Trading Volume:
An Analysis of Volatility Spillovers in the
U.S. Treasury Market
Michael J. Fleming and Jose A. Lopez

The Changing Relationship between Income
and Crime Victimization
Steven D. Levitt

No. 83
What Was behind the M2 Breakdown?
Cara S. Lown, Stavros Peristiani,
and Kenneth J. Robinson

Economic Inequality and the Provision
of Schooling
Thomas A. Downes and David N. Figlio

No. 84
A General Equilibrium Analysis of Check Float
James McAndrews and William Roberds

From John Lindsay to Rudy Giuliani: The Decline
of the Local Safety Net?
Edward L. Glaeser and Matthew E. Kahn

No. 85
Payment Intermediation and the Origins
of Banking
James McAndrews and William Roberds

Earnings Inequality and Central-City
Development
Edwin S. Mills
Social Indicators and the Study of Inequality
Marcia K. Meyers and Irwin Garfinkel

No. 86
Settlement Risk under Gross and Net Settlement
Charles M. Kahn, James McAndrews,
and William Roberds
No. 87
Nonlinear Time Series Modelling: An Introduction
Simon M. Potter

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.