Research Database

This paper describes an algorithm that takes advantage of parallel computing to solve discrete-time recursive systems that have an endogenous state variable.

During the 1882–1914 period, U.S. national banks could issue circulating notes backed by specified government securities. Earlier attempts to explain yields on those securities by costs of note issue discovered a paradox: yields were too high. We point out two previously ignored sources of costs: idle notes and note redemptions that were highly variable, thereby exacerbating the problem of managing reserves. We present data on idle notes and estimate, from partial data on redemptions, the uncertainty due to redemptions. We also present a semiannual time series of an upper bound on the average additional return on equity a national bank would earn by fully using its note issue privilege. Since the median of this series is 0.5 percent and since this upper bound does not include the average costs stemming from the exacerbated reserve management problem, we conclude that the specified government securities did not have paradoxically high yields.

During 1870–1913, Canada had a well-diversified branch banking system while banks in the U.S. unit-banking system were less diversified. Canadian banks could issue large-denomination notes with no restrictions on their backing, while all U.S. currency was essentially an obligation of the U.S. government. Also, experience in the two countries with regard to bank failures and panics was quite different. A general equilibrium business cycle model with endogenous financial intermediation is constructed that captures these historical Canadian and American monetary and banking arrangements as special cases. The model's predictions contradict conventional wisdom about the cyclical effects of banking panics. Support for these predictions is found in aggregate annual time series data for Canada and the United States.

This paper argues that the reporting of facts in light of theory fosters the development of theory. Dynamic neoclassical macro theory guided the selection of facts to report. The hope is that these facts will foster the further development of this theory. A finding is that the price level is countercyclical in the post-Korean War period. This finding debunks the myths that the price level is procyclical, with the postwar period being no exception.

A version of the permanent income model is developed in which the bliss point of the agent is stochastic. The bliss point depends on realizations of the stochastic process generating labor income and a random shock. The model predicts consumption and labor income share a common trend and that a linear combination of current consumption, current labor income, and once lagged consumption is stationary. Empirically, consumption appears more serially correlated than the model is capable of supporting. Further, the volatility of consumption appears sensitive to time variation in real interest rates.