How do banks respond to shocks? A dynamic model of deposit-taking institutions

This paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process. Interbank lending/borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent loan and deposit choices. The bank smooths the impact of interest-rates shocks on its customers to minimize the adjustments over time of the stocks of deposits and loans. It does not, however, provide insurance against negative shocks of real origin that increase its expected default costs. The predictions of the model help to shed light on the available empirical evidence and to analyze some recent developments of the banking industry.     

Measuring the effect of M&A on patenting quantity and quality

I explore the effect of M&A on the patenting quantity and quality of the firms involved in a deal. Three measures of quality are considered: impact, generality, and originality. The impact of a patent denotes its influence on future inventions. Generality refers to a patent's applicability across technological fields. Finally, the originality of a patent indicates the extent to which an invention synthesizes diverse technological inputs. Applying a matching estimator to data from the U.S. ‘medical devices and photographic equipment’ industry from 1988 to 1996, I find that M&A have a positive effect on patenting output, but decrease patent impact, originality, and generality. Copyright © 2011 John Wiley & Sons, Ltd.     

Portfolio separation and the dynamics of bank interest rates

We develop a dynamic model of the interest rates of a monopolistic bank, providing both intermediation and payment services. We obtain testable restrictions on portfolio separation from the dynamic terms of the reduced‐form solutions, and test the model using balance‐sheet data from large banks of 17 OECD countries, over the period 1988–2007. We find strong evidence against the portfolio separation hypothesis. In line with the predictions of the model, interest margins rise with higher market interest rates, lower revenues from fees, and higher industrial costs and loan loss provisions.     

Is Environmental Dumping Greater when Plants are Footloose?

We address concerns that globalisation gives national governments incentives to set weak environmental policies and that these incentives are particularly strong in industries where plants are footloose. Using a simple model of imperfect competition, we compare the environmental policies that would be set by non-cooperative governments for two different move structures—where governments set environmental policies after firms decide where to locate (market share game) and where governments set environmental policies before firms decide where to locate (location game). We show that the extent of environmental dumping in the market share game can be greater than in the location game.
JEL classification F 1; H 4; L 5; Q 2     

Proactive planning and valuation of transmission investments in restructured electricity markets

Traditional methods of evaluating transmission expansions focus on the social impact of the investments based on the current generation stock which may include firm generation expansion plans. In this paper, we evaluate the social welfare implications of transmission investments based on equilibrium models characterizing the competitive interaction among generation firms whose decisions in generation capacity investments and production are affected by both the transmission investments and the congestion management protocols of the transmission system operator. Our analysis shows that both the magnitude of the welfare gains associated with transmission investments and the location of the best transmission expansions may change when the generation expansion response is taken into consideration. We illustrate our results using a 30-bus network example. An erratum to this article can be found at     

Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows

The authors revisit in this article the empirical foundationof the alleged secular decline in the prices of primary commoditiesrelative to those of manufactures. They use a newly constructedindex of commodity prices and two modified indexes of manufacturedgood prices, and find that from 1900 to 1986 the relative pricesof all primary commodities fell on trend by 0.5 percent a yearand those of nonfuel primary commodities by 0.6 percent a year.They thus confirm the sign, but not the magnitude, of the trendimplicit in the work of Prebisch. But even the more limitedsecular decline shown by their relative price indexes may bemagnified by an incomplete account of quality improvements inmanufactures. They then show that the evolution of the termsof trade of nonfuel primary commodities is not the same as thatof the net barter terms of trade of non-oil-exporting developingcountries. Finally, they find that despite the decline thathas probably occurred during the current century in the termsof trade of nonfuel primary commodities, the purchasing powerof total exports of these products has increased considerably.Similarly, the fall that may have occurred after World War IIin the net barter terms of trade of developing countries seemsto have been more than compensated for by the steady improvementin their income terms of trade.     

Social Preferences and Price Cap Regulation

This paper analyzes the allocative properties of price cap regulation under very general hypotheses on the nature of society's preferences. We propose a generalized price cap that ensures the convergence to optimal (second best) prices in the long-run equilibrium for virtually any form of the welfare function. Hence, the result of the convergence to Ramsey prices of Laspeyres-type price cap regulation is a particular instance of our more general result. We also provide an explicit and relatively easy to calculate and implement generalized price cap formula for distributionally weighted utilitarian welfare functions, as suggested by Feldstein (1972a).     

A lemma on relative stability with an application to an economic case study

In the existing literature relative stability of trajectories is obtained under particular assumptions. In this paper a lemma is stated which provides a technique to prove relative stability in most general cases. Such a technique permits to replace the study of the stability of a balanced growth path by the study of the stability of a fixed point for an associated function. The lemma is applied to a case study, which could not be treated by means of usual techniques.