Banks and the stability of the international financial system

Summary Does today's banking scene pose a potential threat to the stability of the international financial system? The article discusses three possible sources of vulnerability of the international banking system: a major bank failure causing a general banking crisis via the extensive interbank linkages; the systemic risks allegedly inherent in certain new (as well as traditional) financial products; and the impact of external events such as debt crises, violent swings in exchange or interest rates, deregulation and recession. The author's conclusion is twofold: systemic risks clearly exist, but the probability of a major banking crisis tends to be greatly exaggerated. Banks not only survived the various crises of the seventies and eighties; they also learned in the process. Capital and reserves have been strengthened, provisions for country risk and for general contingencies have increased, supervision has been tightened and it is exercised on a comprehensive as well as a world-wide consolidated basis (i.e. including all contingent and off-balance liabilities, and all offshore activities). Assuming reasonably intelligent policies on the part of the monetary authorities and adequate international coordination, a general banking crisis can be avoided. Official rescue operations do, however, raise difficult questions of an ethical, political and economic nature.     

On the theory of macroeconomic policy

Summary Jan Tinbergen originated the theory of policy in the 1950s. Here I apply it to contemporary macroeconomics. The two standard instruments of short-run demand management cannot achieve the two usual targets, full employment and price stability. With respect to those goals, these two instruments are collinear, except for small and transient effects on foreign exchange rates. But the mix of fiscal and monetary policies, relative to one another, does have important effects on the composition of national output, as between investment and consumption.I point out that policy-makers, like portfolio managers, should diversify the instruments they use when they are uncertain of their effects. I discuss some pitfalls in the empirical estimation of policy effects, especially possible misinterpretations of simple correlations, and I note that policy rules cannot be invariant to changes in macroeconomic structure. I argue that policy rules should involve responses to new information and in practice allow discretion. Finally, I suggest that Tinbergen's theory of policy needs to be extended to policy coordination among nations.Third Tinbergen Lecture delivered on October 20, 1989, in Utrecht for the Royal Netherlands Economic Association.     

Life insurance for endowment--great concept or a booby trap?

Life insurance as a charitable gift is an attractive alternative. But first the fund raiser must check out the companies and the different types of policies available.     

Discriminating Among Alternative Theories of the Multinational Enterprise

Recent theoretical developments have incorporated endogenous multinational firms into the general–equilibrium model of trade. One simple taxonomy separates the theory into "vertical" models, in which firms geographically separate activities by stages of production, and "horizontal" models, in which multiplant firms duplicate roughly the same activities in many countries. The authors nest a horizontal and a vertical model within a hybrid (unrestricted) "knowledge–capital model" and estimate the specifications with data on US foreign direct investment activity. In the nested econometric tests, the data sample cannot distinguish statistically between the unrestricted model and the restricted horizontal model, indicating that the latter captures virtually all of the determinants of FDI. The tests overwhelmingly reject the vertical model.     

Deficit financing,liquidity, and the government budget constraint

This article presents a macroeconomic model in which government deficits are bond financed and the stock of bonds may affect both expected income and liquidity. If either of these effects exists, then comparative statics analysis requires the government budget to be balanced. Temporary divergences from a balanced budget and changes in the maturity structure of the government debt may be analyzed in terms of changes in the stock of bonds. It is shown that traditional fiscal and monetary policies may have a perverse effect; that to ensure effective policy, deficit financing and open market operations should be avoided; and that only policies involving a balanced budget or the financing of deficits or surpluses through changes in the stock of money should be undertaken.     

WEALTH AND THE DISTRIBUTION OF INCOME, CANADA 1969–70

This paper explores the sensitivity of the size distribution of family income in Canada to alternative definitions of income. These alternative definitions examine both wealth generally in the form of an annuity equivalent, and home ownership in the form of imputed rent. An adjustment for family size differences is also made. The impact of these adjustments is assessed for average incomes, inequality, and the incidence of low income for different age groups. The adjustments do have significant effects that vary by age; in particular, the economic position of the elderly seems understated by the usual data. Also, methodological considerations, such as the direct use of micro data and the choice of inequality indicator are shown to be significant.