U.S. Monetary Policy Surprises: Identification with Shifts and Rotations in the Term Structure

We develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve. The model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks. A latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks. The approach offers informational advantages over event studies. Results from the U.S. term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock, rather than differing reactions to the same policy shock.     

Works Councils and Separations: Voice,Monopoly, and Insurance Effects

Using a large linked employer–employee data set for Germany, we find that the existence of a works council is associated with a lower separation rate to employment, in particular for workers with low tenure. While works council monopoly effects show up in all specifications, clear voice effects are only visible for low tenured workers. Works councils also reduce separations to nonemployment, and this impact is more pronounced for men. Insurance effects only show up for workers with tenure of more than 2 years. Our results indicate that works councils to some extent represent the interests of a specific clientele.     

Options in Compensation: Promises and Pitfalls

We derive the optimal compensation contract in a principal–agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment, optimal compensation entails rewards for high as well as low outcomes, and it is increasing at the mean outcome to motivate effort. If rewarding low outcomes is infeasible, compensation consisting of stocks and options is a near‐efficient means of overcoming the manager's induced aversion to undertaking risky investments, whereas stock compensation is not. However, stock plus option compensation may induce excessively risky investments, and capping pay can be important in curbing such behavior.     

Worker Directors: A German Product that Did Not Export?

Despite its seeming lack of attractiveness to other countries, the German system of quasi‐parity codetermination at company level has held up fairly well. We recount the theoretical arguments for and against this form of codetermination, and survey the evolving empirical evidence on its economic impact. On both counts, employee representation on company boards might form part of the apparatus of good corporate governance, even if the extent of representation and the composition of the worker side are unsettled issues. Whatever the particular past merits of the case, however, the bottom line is that the recent availability of alternative forms of corporate governance will increasingly shape the German institution.     

Bank Bonuses and Bailouts

This paper shows that bonus contracts may arise endogenously as a response to agency problems within banks, and analyzes how compensation schemes change in reaction to anticipated bailouts. If there is a risk‐shifting problem, bailout expectations lead to steeper bonus schemes and even more risk taking. If there is an effort problem, the compensation scheme becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bailout perceptions makes it optimal for a welfare‐maximizing regulator to impose caps on bank bonuses. In contrast, raising managers' liability can be counterproductive.     

Are Banks Finally Resolvable? A Perspective from Europe

After the global financial crisis, policymakers in many countries promised that banks should never again be bailed out using taxpayers’ money. Therefore, new regulatory measures were introduced, most importantly new bank resolution regimes like the Single Resolution Mechanism in the euro area. This paper shows that these measures contributed to a reduction in bail-out expectations and a return of market discipline in Europe. But European banks are still far from being truly resolvable. More remains to be done.     

CAN NO CHILD LEFT BEHIND CLOSE THE GAPS IN PASS RATES ON STANDARDIZED TESTS?

No Child Left Behind is the most recent federal legislation aimed at eliminating perceived achievement gaps across sociodemographic groups of students in the United States. This article quantifies the degree to which the worst-performing schools can be expected to narrow these gaps by increasing spending to purchase inputs according to better-performing schools. Using data on elementary schools in Illinois, the authors find that 30–50% of the gap is due to uncontrollable school characteristics, such as the racial composition of students. Characteristics that schools can control, such as hiring more teachers, account for 10–25% of the gap. (JEL I21 , I22 , I23 )     

The Effects of Bank Lending in an Open Economy

This article assesses the effects of bank lending in a small open economy with a floating exchange rate and sticky prices. A theoretical model with costly financial intermediation is developed for New Zealand. The results show that the long-run and business cycle effects of bank lending are small. Whether firms borrow from financial intermediaries or public debt markets is unlikely to affect economic activity. In other words, the financial structure, or degree to which a country's financial system is intermediary based or market based, does not matter.