A list of articles published by members of the Dallas Fed Research staff.

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2000 Academic Publications

Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks
Review of Economics and Statistics, May 2000
Nathan S. Balke
Abstract: In this paper, we examine empirically whether credit plays a role as a nonlinear propagator of shocks. This propagation takes the form of a threshold vector autoregression in which a regime change occurs if credit conditions cross a critical threshold. Using nonlinear impulse-response functions, we evaluate the dynamics implied by the threshold model. These suggest that shocks have a larger effect on output in the "tight" credit regime than is normally the case, and that contractionary monetary shocks typically have a larger effect than expansionary shocks. Finally, using a nonlinear version of historical decompositions, we attempt to determine the relative contribution to output growth of shocks and the nonlinear structure.

An Equilibrium Analysis of Relative Price Changes and Aggregate Inflation
Journal of Monetary Economics, April 2000
Nathan S. Balke and Mark A. Wynne
Abstract: Inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the cross-section distribution of prices, and also with the third moment (skewness) of the cross-section distribution of prices. The conventional interpretation of these relationships is that they reflect sluggishness in the adjustment of individual prices in response to shocks. In this paper we question this interpretation. First, we show that similar correlations among the moments exist in alternative measures of underlying technology shocks. Second, when these shocks are fed into a general equilibrium model with multiple sectors and flexible prices, the resulting prices also display a positive correlation between aggregate inflation and skewness of the cross-section distribution.

Inequality, Inflation, and Central Bank Independence
Canadian Journal of Economics, February 2000
Jim Dolmas, Gregory W. Huffman and Mark A. Wynne
Abstract: What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to have better inflation outcomes for a given degree of inequality.

Financial Technology Shocks and the Case of the Missing M2
Journal of Money, Credit, and Banking, Part 1 November 2000
John V. Duca
Abstract: M2 growth was unusually weak in the early 1990s when its velocity soared. Although M2 growth subsequently recovered, its velocity plateaued at a high level, giving rise to a case of missing money. These swings in M2 growth have accompanied opposite swings in bond mutual fund inflows. M2 growth is better tracked and the "missing M2" problem is resolved when money models are modified to account for shifts in bond mutual fund costs. This approach avoids the capital gains and portfolio substitution problems posed by adding bond or equity funds to M2, while capturing the substitution effects relevant to money demand.

Has Greater Competition Restrained U.S. Inflation?
Southern Economic Journal, January 2000
John V. Duca and David D. VanHoose
Abstract: This paper shows how increased goods market competition affects the behavior of inflation in a multisector economy. By raising the price elasticity of demand, increased goods market competition theoretically lowers inflation and makes the aggregate price level less sensitive to aggregate demand shocks. We find that proxies for the aggregate degree of goods market competition are statistically and economically significant in short-run Phillips curve models of core inflation. Evidence indicates that heightened goods market competition has flattened the slope of the short-run, expectations-augmented Phillips curve and slightly lowered the nonaccelerating inflation rate of unemployment (NAIRU).

South American Monetary and Exchange Rate Policies: Their Implications for the FTAA
NAFTA: Law and Business Review of the Americas, Summer 2000
William C. Gruben
Abstract: The implications of participating nations' monetary and exchange rate policies for trade relations within the Free Trade Area of the Americas (FTAA) involve: (1) the ability of nations to come to and stay functionally within some formalized agreement; and (2) more directly, the ability of participating nations to trade with each other. However, the channels through which monetary and exchange rate policies operate upon nations' abilities to maintain a formalized and functional agreement are very different from the channels through which these policies may affect trade directly. This paper focuses on monetary and exchange rate policies jointly because in most of the countries in the Western Hemisphere these policies are more explicitly linked than they are in the United States or in most other industrial nations.

Adverse Selection and Competing Deposit Insurance Systems in Pre-Depression Texas
Journal of Financial Services Research, September 2000
Jeffery W. Gunther, Linda M. Hooks and Kenneth J. Robinson
Abstract: In 1910, Texas instituted a unique deposit insurance program for its state chartered banks by providing a choice between two separate plans: the depositors guaranty fund, similar to insurance schemes in several other states, and the depositors bond security system, which required the procurement of a privately issued guarantee of indemnity. While, under most deposit insurance schemes, the incentive to monitor the financial condition of individual banks simply devolves from depositors to regulators, the bond security system established in Texas distinguished itself by attempting to reintroduce market discipline through the indemnity requirement. Using a probit model with heteroscedasticity, we find evidence that the choice of insurance coverage led to risk-sorting among the banks, with relatively conservative and financially secure institutions opting for the comparatively rigorous bond security system. In addition, the bank failure record indicates the risk differentials between banks in the two plans persisted over time and even possibly grew, suggesting the bond security system at least partially avoided the moral hazard incentives associated with the fixed-rate depositors guaranty plan. These findings support the general view that market discipline is effective in banking.

Bank Structure, Capital Accumulation and Growth: A Simple Macroeconomic Model
Economic Theory, September 2000
Mark G. Guzman
Abstract: This paper analyzes the equilibrium growth paths of two economies that are identical in all respects, except for the organization of their financial systems: in particular, one has a competitive banking system and the other has a monopolistic banking system. In addition, the sources of inefficiencies, as a result of monopoly banking, and their relationship to the existence of credit rationing are explored. Monopoly in banking tends to depress the equilibrium law of motion for the capital stock for either of two reasons. When credit rationing exists, monopoly banks ration credit more heavily than competitive banks. When credit is not rationed, the existence of monopoly banking leads to excessive monitoring of credit financed investment. Both of these have adverse consequences for capital accumulation. In addition, monopoly banking is more likely to lead to credit rationing than is competitive banking. Finally, the scope for development trap phenomena to arise is considered under both a competitive and a monopolistic banking system.

Measuring Regional Cost of Living
Journal of Business & Economic Statistics, January 2000
Jahyeong Koo, Keith R. Phillips and Fiona Sigalla
Abstract: Accurate measures of regional cost of living are vital to businesses and individuals. We compare a commonly used regional cost-of-living index, produced by the American Chamber of Commerce Research Association (ACCRA), to an index we calculate using Consumer Price Index data and research from Kokoski, Cardiff, and Moulton. We find significant differences between the ACCRA and the new indexes that are likely due to theoretical design, data collection, and sampling design. The comparison of these indexes highlights sources of differences in regional cost-of-living measures and suggests caution in the use of ACCRA indexes.

The Composite Index of Leading Economic Indicators: A Comparison of Approaches
Journal of Economic and Social Measurement, Vol. 25, Issue 3-4, 1998-99
Keith R. Phillips
Abstract: I compare the real-time recession predicting performance of the Conference Board Leading Index, the Stock and Watson Leading Index, and the yield curve in the period since 1988. I first calculate the real-time probability of recession for the yield curve and Conference Board Leading Index using a simple nonlinear regime-switching model. I then compare these estimates to the probability of recession published by Stock and Watson. The Conference Board Leading Index gave the strongest signal of recession in the six months prior to the 1990-91 recession and gave no false signals in the 1990s. The Stock and Watson Leading Index failed to give recession signals in the first half of 1990 and the yield curve may have given a false signal in early 1999. The results show that the traditional leading index is still a useful tool for monitoring the ebb and flow of regional and national economies.

Dynamic Asset Pricing Effects and Incidence of Realization-Based Capital Gains Taxes
Journal of Monetary Economics, October 2000
Alan D. Viard
Abstract: Many analyses of capital gains taxation assume that realization-based taxes are economically similar to accrual-based taxes. In equilibrium, however, the distinctive implications of realization taxes for asset trading through the lock-in effect are associated with distinctive dynamic asset pricing effects. Asset prices are increased by the current realization tax, to partly offset the sale disincentive that the tax would otherwise impose. The resulting division of the tax burden between buyers and sellers of assets is similar to traditional public finance models of excise-tax incidence in product markets.

Business Cycles under Monetary Union: A Comparison of the EU and US
Economica, August 2000
Mark A. Wynne and Jahyeong Koo
Abstract: This paper documents business cycle similarities and differences among the 12 Federal Reserve districts in the USA and the 15 countries that make up the EU. The comparison is suggestive of what might be expected to emerge in the way of business cycle synchronization from a monetary union between the member states of the EU.