Unstable Inflation Targets

This paper studies long‐run inflation targets and stability in an imperfect information environment. When central banks set an inflation target that is not fully communicated, agents draw inferences about inflation from recent data and remain alert to structural change by forming expectations from a forecasting model that is estimated via discounted least squares. Inflation targets can lead agents' beliefs to depart from rational expectations through two channels. First, implementing a higher inflation target can lead to overshooting. Second, there can be nearly self‐fulfilling inflation, disinflation, or deflation that arises as an endogenous response to shocks. Policy implications for implementing a higher target without deanchoring expectations are discussed.     

THE EFFECT OF ACCESS TO IMPROVED WATER SOURCES AND SANITATION ON ECONOMIC EFFICIENCY: THE CASE OF SUB‐SAHARAN AFRICAN COUNTRIES

This paper evaluates the effect of access to improved water sources and sanitation on 41 sub‐Saharan African (SSA) countries' economic efficiency and growth. For this reason data envelopment analysis (DEA), bootstrap techniques and probabilistic approaches are used. The empirical results indicate that SSA countries' economic efficiency is positively influenced by the access of population both on improved water sources and sanitation. Finally, when the provision of access to improved water sources is provided to more than 50% of the population, the positive effect on countries' economic efficiency is much greater compared with the effect of providing sustainable access to improved sanitation to the same proportion of population.     

Diagnostic Screener for Compulsive Buying: Applications to the USA and South Korea

Compulsive behavior is an important topic for social scientists. One form of this behavior is compulsive buying. Using data sets from two countries, the USA and South Korea, the Diagnostic Screener for Compulsive Buying (DSCB) (Faber and O'Guinn 1992) is tested with specific emphasis on the scale's cross‐cultural transferability. We find evidence that the DSCB is unidimensional in the USA and bi‐dimensional in South Korea, suggesting a lack of transferability. Potential cultural reasons for the findings are discussed in detail as well as the implications for public policy and future research.     

Interest Rates and the Market for New Light Vehicles

We study the impact of interest rate changes on the demand and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. Interest rate changes impact the auto market through both households and manufacturers. For the impact of rate changes on price and output growth, the household channel is quantitatively more important. A 100 basis‐point increase in both interest rates causes annual growth rates of production to fall from 1.0% to ?11.0% and sales to fall from 1.0% to ?2.9% in the short run.     

Lending Policies of Financial Intermediaries Facing Credit and Funding Risk

This paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure. All intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk-adjusted rate of return; loan demand is therefore uncertain in both quantity and quality. The intermediaries differ in terms of their risk exposure because of disparate funding practices. Intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized, whereas those behaving as asset-transformers borrow in advance of realizing loan demand, thereby maintaining a loanable funds inventory and sustaining the related exposure. The optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary's planning horizon and the volume of loans outstanding. Most importantly, it is shown that brokers adopt stricter credit standards than asset-transformers and therby reduce their volume of lending.     

Loan Sales and the Cost of Bank Capital

This paper considers a model where banks may improve the returns on loans by monitoring borrowers. Bank regulation, together with competitive deposit and equity financing, can give banks an incentive to sell loans, but the extent of their loan selling is limited by a moral-hazard problem. A solution is given for the optimal design of the bank-loan buyer contract that alleviates this moral-hazard problem. An explanation is also given as to why some banks might buy loans and why loan sales volume has recently increased.     

ARE SOME BANKS TOO LARGE TO FAIL? MYTH AND REALITY

At the time of the Continental Illinois National Bank insolvency, bank regulators considered some commercial banks "too large to fail" (TLTF) and were reluctant both to legally fail such banks and to impose pro rata losses on any of the uninsured creditors of these insolvent banks and their parent holding companies. This policy was introduced due to widespread fears that large bank failures would set off a domino effect bringing down other banks and possibly even the macroeconomy as it did during the 1930s. Also, because these banks are considered special in that they provide money and credit to their communities, many feared that their failure could reduce greatly the availability of these services.
This paper analyzes the validity of these fears by examining both theory and the historical record. It concludes that neither theory nor history provides strong support for either fear. In addition, the paper finds that the costs of regulatory forbearance granted to insolvent banks and their creditors greatly exceed the alleged benefits. It also reviews how policy makers apply the TLTF principle in practice. The paper concludes that the policy has been modified progressively over time so that some large banks now are declared legally insolvent and all creditors of bank holding companies—and some uninsured creditors of the banks themselves—incur losses. One may reasonably expect that TLTF will be modified further as the large societal costs become more evident to the public and regulators alike.     

How Friedman and Schwartz Became Monetarists

During the early‐1940s, both Milton Friedman and Anna Schwartz downplayed the role of money in the economy. By the mid‐1950s, they had not only become what later were called monetarists, but the findings from their joint work defined monetarism. The key factor underlying the change in their views was what they learned from their study of U.S. historical experience, especially their empirical confirmation of the Fed's role in the Great Depression. Here, the influence of Clark Warburton on Friedman's thinking loomed large. We document Friedman's advocacy of the constant‐money‐growth rule as an outgrowth of his and Schwartz's empirical research.