Full text of Research Update : October 2003

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ctober 2003

Federal Reserve Bank of New York

Update
Research and Market Analysis Group

www.newyorkfed.org/rmaghome

The Bid-Ask Spread Offers a Useful Gauge
of Treasury Market Liquidity
he bid-ask spread—the difference
between bid and offer prices—is a
good tool for assessing and tracking
the liquidity of U.S. Treasury securities,
according to a new article in the Economic
Policy Review (vol. 9, no. 3).
In “Measuring Treasury Market Liquidity,” Michael J. Fleming estimates and
evaluates a comprehensive set of liquidity
measures for the U.S. Treasury market.
Recently available high-frequency data, he
observes, now enable researchers to assess
and track liquidity more effectively using
such measures as the bid-ask spread, quote
size, and trade size.
Because of their vast liquidity, Treasuries
are important for a range of market-related
trading and analytical activities. Market
participants, for example, use Treasuries to

hedge positions in other fixed-income
securities and speculate on interest rates
because they can buy and sell Treasuries
quickly and with low transaction costs. The
high volume of trading and narrow bid-ask
spreads also make Treasury rates reliable
reference rates for pricing and analyzing
other securities.
Fleming finds that the commonly used
bid-ask spread serves as a sound measure of
liquidity. The spread is easy to understand,
can be calculated quickly using real-time
data, and correlates with a more sophisticated price impact measure and with
episodes of reported poor market liquidity.
Conversely, quote size and trade size are
only modestly useful tools for measuring
liquidity: they correlate less strongly with
episodes of poor liquidity and with the bidask spread and price impact
measure. Trading volume and
ew Research: July-September 2003
trading frequency—two other
Did structural change contribute to sluggishness
measures—emerge as weak
in the job market?
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proxies for liquidity, as both
New Staff Reports
3
high and low levels of trading
activity are associated with
Papers presented at conferences
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periods of poor liquidity.
Papers recently published by RMAG staff
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October 2003

Structural Change Helps Explain Stalled Growth in Jobs
hile output has grown steadily
during the U.S. expansion that
began in November 2001,
employment has shown no signs of recovery. In a new study (“Has Structural
Change Contributed to a Jobless
Recovery?” Current Issues in Economics
and Finance, vol. 9, no. 8), Erica Groshen
and Simon Potter argue that the failure of
employment to rebound may reflect an
unusually high concentration of structural
changes—permanent shifts in the distribution of workers throughout the economy.

Second, a look at job flows in major U.S.
industries during and after recessions suggests that before 1990, job losses (and
gains) were quickly reversed once the economy began to recover. In 2001-02, by contrast, most industries that lost jobs during
the recession continued to shed them during the recovery, and those industries that
added jobs made further gains. The pattern
that emerges, the authors note, is “one in
which jobs are relocated from some industries to others, not reclaimed by the same
industries that had lost them earlier.”

Noting that all recessions combine structural and cyclical adjustments, the authors
present evidence that structural changes predominated in the 2001 recession while cyclical
changes— “reversible responses to lulls in
demand”—lost importance. First, the
authors’ review of layoff trends during the
last six recessions reveals that temporary layoffs
helped drive the rise and fall of unemployment before 1990 but played only a small
role during the 2001 recession. Permanent
job losses accounted for most of the movement in the unemployment rate in 2001.

According to Groshen and Potter, this
shift toward new positions in different
industries helps explain why the payroll
numbers have been so slow to rise: Firms
require more time to establish and fill new
jobs than to recall workers to their old positions. The authors note, moreover, that in
the current environment of financial market
weakness and economic uncertainty, “firms
may hesitate to create new jobs because of
the risks involved in expanding their businesses or undertaking new ventures.”

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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.
●

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 the Group’s research output.

Federal Reserve Bank of New York

www.newyorkfed.org/rmaghome

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

Macroeconomics and Growth
No. 171, August 2003

An Investigation of the Gains from
Commitment in Monetary Policy
Ernst Schaumburg and Andrea Tambalotti
This study proposes a simple framework for
analyzing a continuum of monetary policy rules
characterized by differing degrees of credibility,
in which commitment and discretion become
special cases of what the authors call quasi
commitment. The monetary policy authority
is assumed to formulate optimal commitment
plans, to be tempted to renege on them, and to
succumb to this temptation with a constant
exogenous probability known to the private
sector. By interpreting this probability as a
continuous measure of the (lack of ) credibility
of the monetary policy authority, the authors
investigate the welfare effect of a marginal
increase in credibility. Their main finding is
that in a simple model of the monetary transmission mechanism, most of the gains from
commitment accrue at relatively low levels of
credibility.

International
No. 172, September 2003

Tariffs and the Great Depression Revisited
Mario J. Crucini and James Kahn
Drawing on recent business cycle research on
the Great Depression, the authors return to an
argument they advanced in a 1996 Journal of
Monetary Economics article: Features of the
Hawley-Smoot tariffs could have done more to
decrease economic activity than is customarily
believed, although not enough to account for
the severe decline of the early 1930s. In this

study, the authors reformulate their argument in a business cycle accounting framework
that apportions fluctuations between three
types of “wedges”: (productive) inefficiency,
the consumption-leisure margin, and intertemporal inefficiency. Tariff increases in their
model correspond primarily to productive inefficiency in a prototype one-sector model.
Moreover, the wedge implied by tariffs during
the Depression correlates well with the overall
measure of productive inefficiency. By failing
to produce a labor wedge of any consequence,
their model offers persuasive evidence that factors
other than tariffs also contributed significantly
to the severity of the Depression.

Banking and Finance
No. 170, July 2003

Stock Market Reaction to Financial Statement
Certification by Bank Holding Company CEOs
Beverly J. Hirtle
In 2002, the SEC mandated that CEOs of
large, publicly traded firms certify the accuracy
of their financial statements. This paper investigates whether certification has had a measurable effect on the stock market valuation of the
forty-two BHCs subject to the order. It finds
that the firms had a positive average abnormal
return of 30 to 60 basis points on certification
day—a result driven primarily by BHCs that
certified in advance of the SEC’s deadline.
Characteristics associated with greater opaqueness are systematically associated with these
certification-day abnormal returns. In addition, average abnormal returns for not-yetcertifying BHCs were positive, though not statistically significant, on the day the first two
BHCs certified, lending weak support to the
idea that early certification may have signaled
to investors that other BHCs were likely to certify. These results suggest that the certification
requirement provided relevant information to
investors and was thus an effective public policy
tool, at least in the banking sector.

Research and Market Analysis Group

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Research Update

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October 2003

Papers Presented by
Economists in the
Research and Market
Analysis Group

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“Do Business Cycles Really Have Permanent
Effects?” James Kahn and Robert Rich. NBER
conference, Cambridge, Massachusetts, July 24.
Also presented at a Society for Economic
Dynamics conference, Paris, France, June 6.

“Cross-Country Differences in Monetary
Policy Execution and Money Market Rates’
Volatility,” Leonardo Bartolini. Bank of
Finland, Helsinki, Finland, June 12.

“Monetary Policy and Stock Prices,” Kenneth
Kuttner. NBER conference, Cambridge,
Massachusetts, July 16. Also presented at a
Business Economists conference, Lexington,
Massachusetts, July 17.

“Identifying the Effect of Exchange Rate
Volatility on Trade,” Christian Broda. NBER
conference, Cambridge, Massachusetts,
August 5. With John Romalis.

“The U.S. and Japanese Economies,” Kenneth
Kuttner. Center on Japanese Economy and
Business seminar, Columbia Business School,
New York City, August 1.

“Exchange Rate Regimes and National Price
Levels,” Christian Broda. International
Monetary Fund conference, Washington,
D.C., September 15. Also presented at
Universidad Di Tella, Buenos Aires, Argentina,
September 19.

“Inventory Dynamics and Business Cycles:
What Has Changed?” Jonathan McCarthy.
Western Economic Association International
conference, Denver, Colorado, July 17. With
Egon Zakrajšek.

“Overview of the International Wage Flexibility Project,” Erica Groshen. Conference on the
Comparative Analysis of Enterprise (Micro)
Data, Cass School of Business and National
Statistics, London, England, September 17.
With William Dickens.
“Tight Clothing: How the Multi-Fiber
Arrangement Affects Asian Apparel Exports,”
James Harrigan. NBER conference, Taipei,
Taiwan, September 5.
“Distance, Time, and Specialization,” James
Harrigan. Bank of Japan, Tokyo, Japan,
September 9.
“How Important Are Technology Shocks for
Business Cycles?” James Kahn. Economics
Department seminar, Johns Hopkins University,
Baltimore, Maryland, September 9.

Federal Reserve Bank of New York

“Capital Overhangs: Has Investment Spending Suffered from a Hangover?” Jonathan
McCarthy. National Association for Business
Economics Annual Meeting, Atlanta, Georgia,
September 15.
“Financial Reporting and Governance,”
Hamid Mehran. London Business School,
London, England, July 4.
“The Simple Geometry of the New OpenEconomy Macroeconomics,” Paolo Pesenti.
Invited lecture at Middle East Technical
University, International Conference in
Economics VII, Ankara, Turkey, September 9.
“Nonlinear Model of the Business Cycle,”
Simon Potter. NBER conference, Cambridge,
Massachusetts, July 16.

www.newyorkfed.org/rmaghome

“Why Firm Access to the Bond Market Varies
over the Business Cycle: A Theory and Some
Evidence,” João Santos. Centre de Recerca en
Economia Internacional, Centre for Economic
Policy Research, and Journal of Financial
Intermediation conference, Barcelona, Spain,
July 11.
“Modeling Regional Interdependencies Using
a Global Vector Error-Correcting Macroeconometric Model,” Til Schuermann. American
Statistical Association and Journal of Business
and Economic Statistics conference, San Francisco,
California, August 5. With M. Hashem
Pesaran and Scott M. Weiner.

“Reassessing the Role of IT in the Production
Function: A Meta-Analysis,” Kevin Stiroh.
NBER and Centre de Recherche en Economie
et Statistique conference, Paris, France,
September 4.
“Optimal Monetary Policy and Productivity
Growth,” Andrea Tambalotti. Eighteenth
Annual Congress of the European Economic
Association, Stockholm, Sweden, August 20.
“A Simple Explanation of the Border Effect,”
Kei-Mu Yi. Dartmouth College seminar,
Hanover, New Hampshire, August 1.

“Playing for Keeps: Pay and Performance in
the NBA,” Kevin Stiroh. NBER Summer Institute, Cambridge, Massachusetts, July 21.

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O ther New Publications
●

“Residential Foreclosures in the City of Buffalo, 1990-2000.” This comprehensive
study by the New York Fed’s Buffalo Branch examines the rise in foreclosures, the
characteristics of the neighborhoods in which foreclosures occurred, and the nature
of foreclosed loans in Buffalo and in a number of the city’s communities.

●

The Regional Economy of Upstate New York. This quarterly newsletter, produced by
the New York Fed’s Buffalo Branch, focuses on issues of importance to upstate New
York. The summer 2003 issue examines the composition of the upstate New York
economy under the new North American Industry Classification System. The system
categorizes industries according to how their products are made, rather than what
goods they produce.
Find both publications at www.newyorkfed.org/aboutthefed/buffalo_branch.html.

Research and Market Analysis Group

Research Update

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October 2003

Recently Published
Arturo Estrella and Anthony Rodrigues. 2003.
“How Stable Is the Predictive Power of the
Yield Curve? Evidence from Germany and the
United States,” with Sebastian Schich. Review
of Economics and Statistics 85, no. 3 (August).
James Harrigan. 2003. “Specialization and the
Volume of Trade: Do the Data Obey the
Laws?” In E. Kwan Choi and James Harrigan,
eds., Handbook of International Trade.
Oxford: Blackwell.
Bart Hobijn. 2003. “Another View of Investment: Forty Years Later,” with Jess Benhabib.
In Philippe Aghion, Roman Frydman, Joseph
Stiglitz, and Michael Woodford, eds., Knowledge, Information, and Expectations in
Modern Macroeconomics: In Honor of
Edmund S. Phelps. Princeton, N.J.: Princeton
University Press.

Paolo Pesenti. 2003. “Monetary Rules for
Small, Open, Emerging Economies,” with
Douglas Laxton. Journal of Monetary
Economics 50, no. 5 (July): 1109-46.
Asani Sarkar. 2003. “A Comparison of Trading
Costs in U.S. Corporate, Municipal, and Treasury Bond Markets,” with Sugato Chakravarty.
Journal of Fixed Income 13, no. 1 (June): 3948.
Til Schuermann. 2003. “Credit Risk and
Macroeconomic Dynamics,” with M. Hashem
Pesaran. Medium for Economic Applications 11,
no. 1: 27-32.
Kevin Stiroh. 2003. “Lessons from the U.S.
Growth Resurgence,” with Dale W. Jorgenson
and Mun S. Ho. Journal of Policy Modeling
25: 453-70.

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Simply visit www.newyorkfed.org/rmaghome and click on “E-mail alerts.”

Federal Reserve Bank of New York

www.newyorkfed.org/rmaghome

Current Issues in Economics and
Finance, Vol. 9

Publications and Papers:
July-September 2003

No. 7, July 2003
Job Declines in New York–New Jersey Region
to Slow in 2003; Modest Growth Seen for 2004
James Orr and Rae Rosen
Second District Highlights

Publications are available at
www.newyorkfed.org/rmaghome.

Economic Policy Review, Vol. 9
No. 3, September 2003
Part 1
“Economic Statistics: New Needs for the
Twenty-First Century.” Selected papers from a
conference cosponsored by the Federal Reserve
Bank of New York, the Conference on
Research in Income and Wealth, and the
National Association for Business Economics,
July 11, 2002.

No. 8, August 2003
Has Structural Change Contributed
to a Jobless Recovery?
Erica L. Groshen and Simon Potter
No. 9, September 2003
What Moves Sovereign Bond Markets?
The Effects of Economic News on U.S.
and German Yields
Linda Goldberg and Deborah Leonard

Opening Remarks
Jamie B. Stewart, Jr.
Price Hedonics: A Critical Review
Charles R. Hulten
Remarks on the Measurement, Valuation,
and Reporting of Intangible Assets
Baruch Lev
Productivity Measurement Issues in Services
Industries: “Baumol’s Disease” Has Been Cured
Jack E. Triplett and Barry P. Bosworth

Staff Reports

Part 2

No. 172, September 2003
Tariffs and the Great Depression Revisited
Mario J. Crucini and James Kahn

Available only online.
No. 170, July 2003
Stock Market Reaction to Financial Statement
Certification by Bank Holding Company CEOs
Beverly J. Hirtle
No. 171, August 2003
An Investigation of the Gains from
Commitment in Monetary Policy
Ernst Schaumburg and Andrea Tambalotti

Articles
What Market Risk Capital Reporting
Tells Us about Bank Risk
Beverly J. Hirtle
Formulating the Imputed Cost of Equity Capital
for Priced Services at Federal Reserve Banks
Edward J. Green, Jose A. Lopez, and Zhenyu Wang
Measuring Treasury Market Liquidity
Michael J. Fleming

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

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