Working papers from the Federal Reserve Bank of Dallas are preliminary drafts circulated for professional comment.

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1999 Working Papers

9914
Does the Choice of Nominal Anchor Matter?
Center for Latin American Economics Working Paper 0499
David M. Gould
Abstract: The conventional wisdom on nominal anchors is that exchange rate-based inflation stabilizations lead to economic booms while monetary-based stabilizations lead to recessions. This study finds strong evidence against this view. Rather than determining the path of economic growth, the choice of nominal anchor appears to be endogenously determined by the state of the economy. To peg or manage the exchange rate, a high level of international reserves is important, especially when a government’s credibility is low after a period of high inflation. After controlling for the level of international reserves and the rate of inflation, growth after monetary-based stabilizations does not significantly differ from that following exchange rate-based stabilizations.

9913
Is Foreign-Currency Indexed Debt a Commitment Technology? Some Evidence from Brazil and Mexico
Center for Latin American Economics Working Paper 0299
William C. Gruben and Darryl McLeod
Abstract: We examine the effects of foreign currency-indexed debt upon inflationary expectations in Brazil and Mexico. Conjecturing that markets will view increasing overhangs of foreign currency-indexed debt as a commitment technology that fiscally punishes devaluation, we test whether increasing such overhangs will attenuate the effect of monetary growth upon inflationary expectations. We find some econometric confirmation of these conjectures in both the Brazilian and Mexican cases. Finding that the results are consistent with the notion that increasing the share of dollar indexed debt may also permit some temporary monetary independence even under pegged exchange rate regimes, we present some evidence of independent policy behavior during periods when are model results would suggest it.

9912
Legal Fee Restrictions, Moral Hazard, and Attorney Profits
Published in Journal of Law and Economics, 44(2), Part I, October 2001.
Rudy Santore and Alan D. Viard
Abstract: When attorney effort is unobservable and certain other simplifying assumptions (such as risk neutrality) hold, it is efficient for an attorney to purchase the rights to a client's legal claim. However, the American Bar Association Model Rules of Professional Conduct prohibit this arrangement. We show that this ethical restriction, which is formally equivalent to requiring a minimum fixed fee of zero, can create economic rents for attorneys, even though they continue to compete along the contingent-fee dimension. The contingent fee is not bid down to the zero-profit level, because such a fee does not induce sufficient attorney effort. We thereby provide a political economy explanation for these restrictions.

9911
Oil Price Shocks and the U.S. Economy: Where Does the Asymmetry Originate?
Nathan S. Balke, Stephen P. A. Brown and Mine Yücel
Rising oil prices appear to retard aggregate U.S. economic activity by more than falling oil prices stimulate it. Past research suggests adjustment costs and/or monetary policy may be possible explanations ofthe asymmetric response. This paper uses a quasi-vector autoregressive model of U. S. economy to examine from where the asymmetry might originate. The analysis uses counterfactual impulse response experiments to detennine that monetary policy alone cannot account for the asymmetry. The robustness ofshort-lived asymmetry across the base case and counterfactuals is consistent with the adjustment-cost explanation.

9910
The Role of Family Networks, Coyote Prices and the Rural Economy in Migration from Western Mexico: 1965–1994
Pia M. Orrenius
Abstract: The Mexico–U.S. wage gap alone cannot explain the large increases in migration from Mexico to the United States in the last three decades. This paper explores three alternative migration determinants: family migrant networks, the Mexican migrant-smuggling (coyote) industry and the rural economy. The premise of this paper is that successive cohorts of migrants and an expanding coyote industry have led to declines in the costs of migration partly through the formation of networks, while the long-term decline of the rural economy has led to increases in the gains to U.S. migration. Using unique, source-country data collected by the Mexican Migration Project from both migrant and non-migrant households in western Mexico, this paper estimates how the probability of migrating is influenced by the above determinants in two ways. First, the effect of coyote prices and economic output are estimated using an instrumental variables strategy in which coyote prices are instrumented for using border enforcement hours. Second, family network effects are estimated controlling for individual fixed effects. My findings suggest that sibling networks are by far the most significant determinant of initial migration, although falling coyote prices and worsened economic conditions have also been significant push/pull factors in out migration from western Mexico over this time period.

9909
Central Bank Responsibility, Seigniorage, and Welfare
Joseph H. Haslag and Joydeep Bhattacharya
Abstract: Historically, countries have relied on seigniorage. In this paper, we explore a set of features in which a benevolent government will rely on seigniorage. We use a simple overlapping generations model with return-dominated money. Money is valued because of a reserve requirement. The government has to raise a fixed amount of revenue solely for the purposes of making transfers to the old. It has two revenue-generating options: lump-sum taxes (money creation) under the control of the treasury (central bank). We restrict the amount of seigniorage collected to be nonnegative and require that the government's budget constraint be satisfied on a per-period basis. Our question is, Can we find stationary monetary competitive equilibria that are welfare maxima, given that the money stock cannot contract? Computational experiments reveal, somewhat surprisingly, that the answer is yes. Indeed, in our setup, benevolent governments may require that at least part, if not all, of the revenue be raised via money creation.

9908
Autocracy, Democracy, Bureaucracy, or Monopoly: Can You Judge a Government by Its Size?
Stephen P.A. Brown and Jason L. Saving
Abstract: We develop a simple theoretical framework to examine on an integrated basis how the form of government affects its power and size. The analytical framework abstracts from distortions that arise from the means ofgovernment finance and separates government power into two dimensions-pure coercive power and pure monopoly power. A government can exert its coercive power to shift the demand for its services outward and/or its monopoly power to restrict the output along a given demand curve to earn rents. Among the implications drawn from the analysis are that government officials have an incentive to provide a non-optimal combination of taxes and services, and that neither size nor rents alone are reliable indicators ofthe extent to which government fails to achieve optimality in its provision of services.

9907
Bank Structure, Capital Accumulation and Growth: A Simple Macroeconomic Model
Revised March 2000, published in Economic Theory, Vol 16, 2000, pp. 421–455
Mark G. Guzman
Abstract: This paper analyzes the equilibrium growth paths of two economies that are identical in all respects, except for the organization of their financial systems: in particular, one has a competitive banking system and the other has a monopolistic banking system. In addition, the sources of inefficiencies, as a result of monopoly banking, and their relationship to the existence of credit rationing are explored. Monopoly in banking tends to depress the equilibrium law of motion for the capital stock for either of two reasons. When credit rationing exists, monopoly banks ration credit more heavily than competitive banks. When credit is not rationed, the existence of monopoly banking leads to excessive monitoring of credit financed investment. Both of these have adverse consequences for capital accumulation. In addition, monopoly banking is more likely to lead to credit rationing than is competitive banking. Finally, the scope for development trap phenomena to arise is considered under both a competitive and a monopolistic banking system.

9906
Has Monetary Policy Become Less Effective?
Joseph H. Haslag
Abstract: High-powered money has been declining relative to nominal GDP in the United States. Does the ability of monetary policy to affect aggregate activity decline as the money-income ratio falls? In this paper, I specify simple model economy, examining the effects that monetary policy actions and financial innovation would have on the equilibrium money-income ratio. The downward trend in the money-income ratio can be accounted for by increasing inflation, falling reserve requirements, or steady financial development. Whereas higher inflation and falling reserve requirements would reduce the potency of monetary policy, monetary policy's effects are invariant to financial innovation.

9905
When Does Financial Liberalization Make Banks Risky? An Empirical Examination of Argentina, Canada and Mexico
Center for Latin American Economics Working Paper 0399
William C. Gruben, Jahyeong Koo and Robert R. Moore
Abstract: In the literature on systemic banking crises, two common themes are: (1) lack of market discipline encourages risky lending and (2) financial liberalization or privatization lead to risky lending. However, there is evidence to suggest that neither financial liberalization nor weak market discipline always precedes risky lending. We test for depositor discipline and, separately for post-liberalization or post-privatization risky lending in Argentina, Canada, and Mexico. In the countries without market discipline, lending risk increases significantly in the wake of liberalization. Where depositors discipline banks, banks neither behave riskily nor does their risk increase in the wake of privatization.

9904
Privatization, Competition, and Supercompetition in the Mexican Commercial Banking System
Center for Latin American Economics Working Paper 0199
William C. Gruben and Robert P. McComb

9903
Core Inflation: A Review of Some Conceptual Issues
Mark A. Wynne
Abstract: This paper reviews various approaches to the measurement of core inflation that have been proposed in recent years. The objective is to determine whether the European Central Bank (ECB) should pay special attention to one or other of these measures in assessing inflation developments in the euro area. I put particular emphasis on the conceptual and practical problems that arise in the measurement of core inflation, and propose some criteria that could be used by the ECB to choose a core inflation measure.

9902
Financial Repression, Financial Development and Economic Growth
Joseph H. Haslag and Jahyeong Koo
Abstract: In this paper, we examine the empirical relationship between financial repression, financial development, and growth. Theory has developed in which financial repression and growth are linked. The main contribution of this paper is to look at two parts. First, what, if any, is the empirical link between financial repression and growth, controlling for the level of financial development. Second, is there an empirical link between financial repression and financial development?

9901
Seigniorage in a Neoclassical Economy: Some Computational Results
Joydeep Bhattacharya and Joseph H. Haslag
Abstract: In this paper, we consider a government that executes a permanent open market sale. The government is forced to eventually use money creation to pay for the debt's expenses, choosing between changing either the money growth rate (the inflation-tax rate) or the reserve requirement ratio (the inflation-tax base). We first derive conditions under which each of the two second-best alternative policies are feasible in an economy with neoclassical production. Armed with these conditions, we ask the following question: Which monetary policy action is better in a welfare sense? With neoclassical production, monetary policy potentially has long-run effects on the capital stock and the marginal product of capital. The curvature of the production function is crucial. The computational experiments show, somewhat surprisingly, that a permanent increase in government bonds is financed by either lower reserve requirements or faster money growth. Accordingly, steady-state welfare for all generations is higher under the reserve-requirement policy.