Optimal Futures Positions for Large Banking Firms

In this paper, we extend earlier work on hedging models so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and CD's. Our model suggests that the optimal forward position is the sum of three ratios that should be estimated simultaneously. Using bank-specific data, the optimal hedge ratios are estimated in both the pre-deregulation and deregulation subperiods. Our results show that previous studies of bank hedging with interest rate futures have greatly overstated (a) the volume of short futures positions that banks should take and (b) the degree of homogeneity of optimal hedge ratios across the banking system. Similarly, deregulation has not uniformly affected the interest rate risk borne by different institutions.     

A Reconsideration of Keynes' Finance Motive*

Keynes' finance motive is a much neglected part of monetary theory. This paper reassesses the meaning and importance of the finance motive and examines the distinction between it and the transactions motive. A specification of the demand function for money is proposed that takes account of the finance motive. The advantages of this specification for analytical and empirical purposes are explained. Finally, it is shown that this specification provides a satisfactory theoretical explanation for the evidence on timing between the real and monetary sectors; evidence thought by some to be inconsistent with Keynes' theory of liquidity preference.     

Factors that Influence Adolescents to Smoke

Predictor variables previously examined in separate studies (prior beliefs, peer pressure, family smoking, advertising, and antismoking information) were combined in a single study, surveying 246 adolescents. The variables were found to be significant predictors of smoking level, but the importance of each predictor varied by grade level, gender, and ethnicity. Overall, family smoking behavior, peer pressure, and prior beliefs were more important in predicting smoking level than were advertising and antismoking information. Public policy implications are discussed.     

Trends and Cycles in GDP

The recent experience in the UK of substantial growth in GDP following the recession of the early 1980s has led to renewed interest in the measurement and explanation of business cycles. Development of economic as well as econometric theory has improved our ability both to measure the cycle more accurately and to offer a better explanation of its behaviour. In this Briefing Paper we present an analysis of these two developments.     

A Theoretical Analysis of Real Estate Returns

In this paper, we consider two hypotheses for the recent performance of real estate returns. The first is the random event argument that real estate is positively correlated with unanticipated inflation but that structural change in expected returns due to a change in the perceived sensitivity of returns to unanticipated inflation has not taken place. The second is the hedge demand argument that formulates the structural shift hypothesis. The paucity of real estate and other expectations data as well as the general identification problem make it extremely difficult to distinguish between these hypothesis. Our tests consist of estimates of inflation betas for various asset categories overtime as well as estimates of the hedge vector, $S^{-1}C$. Although some support for the hedge argument is found, the results are not strong enough to reject the random event argument and conclude that a decline in the required return on real estate due to a relative increase in inflation beta drove returns during the 1970's.     

Interwar Inflation,Unexpected Inflation,and Output Growth

Interwar macroeconomic history is a natural place to look for evidence on the correlation between output growth and inflation or unexpected inflation. We apply time‐series methods to measure unexpected inflation for more than 20 countries using both retail and wholesale prices. There is a significant, positive correlation between output growth and inflation for the entire period. There is little evidence that this correlation is caused by an underlying role for unexpected inflation. For wholesale price inflation in particular, the output declines associated with deflations were larger than the output increases associated with inflations of the same scale.     

FINANCE AND GROWTH: NEW EVIDENCE ON THE ROLE OF INSURANCE

This paper provides new evidence that sheds light on the impact of insurance sector development on output growth, capital accumulation and productivity improvement, using data from 51 countries (developed and developing) during 1981‐2005. The dynamic panel data analysis results demonstrate that insurance sector development affects growth predominantly through productivity improvement in developed countries, while in developing countries it promotes capital accumulation.