CURRENCY SUBSTITUTION, U.S. MONEY DEMAND, AND INTERNATIONAL INTERDEPENDENCE

A number of writers have argued in recent years that massive international currency substitution has been a major cause of exchange rate volatility and monetary instability in the United States and other major countries. Such analysis is frequently coupled with recommendations for a return to pegged exchange rates. This paper critically examines the evidence presented for this currency substitution view. It argues that the weight of latest research suggests that direct international currency substitution has not been of major quantitative importance for the U.S. However, empirical evidence supports traditional views that international capital mobility can generate substantial short-run monetary interdependence even under flexible exchange rates. Thus, even though international currency substitution is of little importance to U.S. monetary conditions, a broader range of international considerations may be of considerable importance for the U.S. economy.     

The Impact of Supervision on Bank Performance

We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors' time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.     

UNDERSTANDING MEASURES OF NONMARITAL FERTILITY: THE ROLES OF MARRIAGE AND ACCESS TO HUMAN CAPITAL

This paper proposes an explanation for several decades of rising U.S. nonmarital birth rates and shares, and for cross‐sectional differences in black‐white fertility. Significantly, the explanation does not rely on changes over time or differences across races in individual fertility behavior. It is consistent with the rising nonmarital fertility measures observed in the United States since the mid‐1970s, higher measured fertility for unmarried blacks than whites, and differences across races in the timing of childbearing, despite nearly constant total fertility rates and increasingly similar target family sizes for blacks and whites. The explanation relies on a selection effect associated with changes in the marriage rate and on racial differences in access to human capital investment opportunities. We find strong support for the explanation using U.S. data over the period 1957–2002. Our findings suggest caution in interpreting the results of empirical studies of childbearing that examine marital and nonmarital fertility rates separately, as these studies typically ignore the selection effect of marriage. (JEL J12, J13, I38)     

THE DETERMINANTS OF HAZARDOUS WASTE DISPOSAL CHOICE: AN EMPIRICAL ANALYSIS OF HALOGENATED SOLVENT WASTE SHIPMENTS

Disposal of hazardous waste is more complex than simply choosing the option with the lowest price: Legislation may hold a waste generator responsible for cleaning up a badly contaminated waste disposal site if the operator of that site goes bankrupt. This paper estimates conditional logit models of a generator's choice of waste management facility (TSDF) for shipments of halogenated solvent waste originating in California in 1995. The probability that a facility is selected as the destination of a shipment depends on the cost of shipping to and disposal at the facility, on existing contamination at the site, and on the track record of the facility, suggesting that generators do seem to balance current disposal costs with the likelihood of future liability. There is no evidence that generators prefer facilities owned by publicly traded firms, but when generators do choose TSDFs belonging to a publicly traded company, they prefer wealthier companies. (JEL Q21)     

International Spillover Effects and Monetary Policy Activism

This paper examines how the preferences of a large economy’s central bank affect the trade‐off between output and inflation volatility faced by the central bank of a small open economy by analyzing the impact of a global cost‐push shock. We demonstrate that under the assumption of producer currency pricing, the trade‐off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilization relative to inflation stabilization; but the opposite is true in the case of local currency pricing.     

A Welfare-Based Analysis of International Monetary Policy Spillovers at the Zero Lower Bound

We study the welfare effects of international monetary policy spillovers at the zero lower bound, focusing on the effects of forward guidance in a large economy (“foreign”) on its smaller trading partner (“home”) in scenarios motivated by the global financial crisis. We find that foreign forward guidance has an overall prosper-thy-neighbor effect on the home economy as long as it increases foreign welfare. This finding holds under alternative assumptions about exchange rate pass-through or the degree of international financial integration. However, foreign forward guidance may worsen the trade-off between the stabilization objectives of home monetary policy.     

Inflation Targeting,Recursive Inattentiveness,and Heterogeneous Beliefs

We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine‐tuned to correct agents' biased beliefs.     

A Model of Financialization of Commodities

We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect commodity prices. Institutional investors care about their performance relative to a commodity index. We find that all commodity futures prices, volatilities, and correlations go up with financialization, but more so for index futures than for nonindex futures. The equity‐commodity correlations also increase. We demonstrate how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Spot prices go up with financialization, and shocks to any index commodity spill over to all storable commodity prices.     

Institutional Differences and International Private Debt Markets: A Test Using Mandatory IFRS Adoption

Institutional differences between countries result in additional information risks between borrowers and lenders in cross‐border private loans. This study examines the effect of these information risks on the structure of optimal debt contracts in international (cross‐border) versus domestic private debt markets. Using mandatory IFRS adoption as an indicator for institutional changes that reduced differences between countries, I compare attributes of international versus domestic loans before and after IFRS adoption. I find that, in the pre‐IFRS period, international loans are associated with a higher credit spread, a weaker relationship between the bank and the borrower, a more diffuse loan syndicate, and less reliance on accounting‐based covenants than domestic loans. These results are consistent with incremental information risks in international debt markets that make it more costly for lenders to screen and monitor borrower credit quality, resulting in a more arm's‐length relationship between borrowers and lenders. Many of these associations attenuate after IFRS adoption, suggesting that the pre‐IFRS differences in contract terms are driven by incremental information risks related to institutional differences between countries. My findings imply that incremental information risks result in a different optimal contract in international debt contracts compared to domestic debt contracts.