Commercial Paper Rates Research Articles

The Fisher hypothesis and the forecastability and persistence of inflation

For the period 1860 to 1939, the simple correlation of the U.S. commercial paper rate with the contemporaneous inflation rate is −0.17. The corresponding correlation for the period 1950 to 1979 is 0.71. This paper attributes this apparent change in the Fisher relation to differences in the stochastic process of inflation, rather than a change in any structural relationship between interest rates and expected inflation. Contrary to recent claims in the literature, there is little evidence of inflation non-neutrality in data from the pre-World War I period.

A note on rank transformation discriminant analysis: An alternative procedure for classifying bank holding company commercial paper ratings

Recent studies in the financial literature have developed models to predict the rating assigned to a firm's debt by the rating agencies. Multiple discriminant analysis (MDA) has served as the primary statistical tool; however, the results of MDA can be biased. This study presents a less biased procedure which more closely follows that suggested by the rating agencies. The improved results of the model support such a procedure.

A multiple discriminant analysis of BHC commercial paper ratings: A reply

The high degree of correlation between bank holding company (BHC) commercial paper ratings and the size of the issuing BHC raises a serious question about the raters' recognition of the international exposure confronting many of the large BHCs. Apparently the market realized this problem and as a result devised more detailed BHC rating categories. Recently the raters also responded by making widespread downgrades among the largest BHC commercial paper issuers.

A multiple discriminant analysis of BHC commercial paper ratings

In the Peavy-Edgar (1983) model, the size of the larger issuers appear to overcome significant differences in other variables. It may be that the rating agencies are focusing on the percieved importance of large banks to the financial system. As the claims of large creditors may be reduced in regulatory efforts to maintain the operations of an individual institution, more information about international risk exposure appears needed for bank holding company paper ratings to be valid.

A multiple discriminant analysis of BHC commercial paper ratings

The finance literature contains many examples of attempts to classify bond issuers into agency rating categories and to identify the key variables that contribute to bond rating differences. This study extends the classification literature to include bank holding company (BHC) commercial paper issuers. A multiple discriminant model is developed that effectively classifies paper issuers into their respective Moody's rating groups. An additional discriminant model is derived that classifies these issuers into more detailed ‘market’ rating groups.

Interrelations between the United States and the United Kingdom, 1873–1975

This article is an excerpt from a monograph, Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975, that the University of Chicago Press has scheduled for publication in July 1982. Earlier in the monograph, we estimate a single demand curve for money for the United States and the United Kingdom, and also show that velocity in the two countries had parallel movements and that the rates of change of velocity were nearly identical in the two countries for most of the century we cover. Similar behavior of velocity in the two countries requires in addition to a largely common demand curve similar behavior of the variables affecting the demand for money. Chapter 7 from which this excerpt is taken begins by examining the interrelations between velocity in the two countries. The excerpt though self-contained is clearly incomplete. Note that the basic data are geometric averages of annual data for cycle phases (expansions or contractions) which average 2.0 years in length for the United States, 2.8 years for the United Kingdom. Rates of change ( g with a subscript for the variable) for a phase are the slopes of straight lines fitted to the logarithms of three successive phase averages (the phase in question, the prior phase, and the following phase). Money refers to currency plus adjusted demand and time deposits of commercial banks held by the public. Income refers to net national product. Nominal money ( M) or income ( Y) is income in dollars or pounds at current prices. Prices ( P) refer to the implicit price index obtained by dividing national product in current prices by national product in constant 1929 prices. Velocity ( V) is the ratio of nominal income to nominal money. Short-term interest rates refer to the US commercial paper rate and the UK rate on 3-month bank bills. Demand shift and postwar readjustment effects refer to the values of dummy variables in the demand curves for each country. These effects allow for an upward shift in the demand for money during selected phases of economic uncertainty and for readjustments in the demand for money following World Wars I and II.

Symmetric versus asymmetric interest rate adjustment mechanisms

Abstract Alternative interest rate adjustment mechanisms are considered to explain variation in the spread between the prime rate and the commercial paper rate and the phenomenon of below-prime lending.

An Examination of the Financing of Federal Home Loan Bank Advances: A Comment

In a recent note in this Review,' Jene K. Kwon and Richard Thornton argue that their empirical research . . supports the implication of our model; to wit, that Federal Home Loan Bank (FHLB) bonds are a substitute for Savings and Loan (S and L) (p. 98). It is the contention of this note that no such distinctive implication can be drawn. Rather, what Kwon and Thornton have shown is that credit market instruments are substitutes for S and L deposits and that FHLB bonds are viewed by the market as one category of credit market instruments. This is not a new finding and is not a sufficient basis on which their policy recommendations can stand. Kwon and Thornton use two measures of savings flows to FSLIC-insured S and L's, net new savings (NNS) and changes in gross savings (AS). They conclude that NNS performs better on the basis of the R2 S2 (SE ?), Durbin-Watson and t statistics (p. 98). We will therefore confine our comments to this form of their model. Kwon and Thornton use a linear version of a stock adjustment model to compare various interest rate S and L deposit rate differentials in a model containing disposable income, lagged NNS and seasonal dummy variables. In all, six equations are estimated (p. 98). Their results indicate that when changes in the rate of return on FHLB bonds minus the rate on S and L deposits is estimated (equation 1.1, p. 98) the regression coefficient is significant at the 1 per cent level using the t test. However, it is also the case that when the commercial paper rate minus the rate on S and L deposits is estimated in the next equation, the regression coefficient is also significant at the 1 per cent level (equation 1.2, p. 98). Furthermore, the three-month bill-S and L differential (equation 1.3, p. 98) and the nineto twelve-month bill-S and L differential (equation 1.4, p. 98) are statistically significant at the 5 per cent level. Aaa corporate S and L rate differential (equation 1.5, p. 98) and the time deposit S and L rate differential (equation 1.6, p. 98) are the only interest rate differentials which are not statistically significant. Examining those equations in which the interest rate differentials are statistically significant, the implications of the analysis seem clear. There is no distinctive implication that FHLB bonds are substitutes for S and L deposits, rather the implication is that open market instruments are substitutes for S and L deposits and that as the rate spread between instruments and S and L deposits increase, the net new savings to S and L's decrease. This is certainly not a new finding and while interesting, this hardly shows that FHLB bonds are materially different from any other open market instrument in their effect on S and L deposits. This is to be expected as it is to be doubted that FHLB bonds are somehow special when viewed by the market along with other market instruments. This note has demonstrated that the implications drawn by Kwon and Thornton from their work are too strong. important unanswered questions that need to be addressed are: (1) how important an effect does the competition of FHLB bonds have on S and L deposit flows?, and the related question, (2) given that FHLB bonds do compete in the market with deposits at S and L's, what is the actual net impact on S and L's of an increase in FHLB bond flotations for the purpose of making advances to S and L's? 2 That the Kwon-Thornton work does not allow us to draw any conclusion about either of these questions is clear from regressing NNS on NNS lagged one period (one of the independent variables in their regression equations) and the seasonal dummy variables. In their equation 1.1 which contains the FHLB bond S and L rate differential, disposable income, and the seasonal dummy variables in addition to the lagged NNS variable, the adjusted coefficient of determination (R2) is 0.630. When only the lagged value of the dependent variReceived for publication May 4, 1972. Revision accepted for publication October 18, 1972. * opinions expressed in this note do not necessarily reflect those of the Federal National Mortgage Association. I wish to thank Harry S. Schwartz, Raymond Lombra and Richard Marcis for making useful comments on an earlier draft of this note. 1Jene K. Kwon and Richard M. Thornton, The Federal Home Loan Bank and Savings and Loan Associations: Examination of the Financing of Federal Home Loan Bank Advances, this REVIEW, LIV (Feb. 1972), 97-100. 2Kwon and Thornton make a somewhat similar statement in An Evaluation of the Competitive Effect of FHLB Advances by Savings and Loan Associations, Journal of Finance, XXVI (June 1971), 699-712.

The Relation between Long-Term and Short-Term Interest Rates in the United States

THE MORE ACTIVE MONETARY POLICY that has been pursued in the United States in recent years has resulted not only in fluctuations in the general level of interest rates but also in sharp changes in the relation between long-term and short-term rates. The spread between long-term and short-term rates was greatly narrowed during the period of rising interest rates which extended from the second half of 1954 to late 1957. Whereas for many years the yield on long-term bonds had usually exceeded rates for treasury bills and commercial paper by a considerable margin, the spread between the average yield on high-grade corporate bonds (Moody's Aaa) and the average rate for prime commercial paper (4-6 months) diminished to only 0.05 percentage point in 1956 and 0.08 percentage point in the first ten months of 1957. With several reductions in the Federal Reserve Banks' discount rates in November 1957 and the early months of 1958, interest rates fell rapidly. As usual, the decrease was greater for short-term rates than for long-term rates, and by June 1958 the spread between the yields on corporate bonds and commercial paper widened to 1.03 percentage points. Thereafter interest rates rose. Yields on longterm bonds soon approached their 1957 highs, but commercial paper rates remained well below their 1957 level. In the first quarter of 1959, the spread was 0.83 percentage point. The differential between yields on long-term and short-term government securities showed similar but even wider fluctuations.

Commercial-Paper Rates and Bond Yields

W E are reproducing the chart of bond yields NV 7 and money rates, monthly, beginning with the decade of the nineties, last published in this REVIEW for July 1923, pp. 2I4, 2I5. The curve for money rates shows commercial paper, seasonally adjusted for the years i890-94; without seasonal adjustment for the years I9I5-22; and adjusted tentatively, on the basis of one-half the pre-war seasonal movements, for the years I923 to date. The bond-yield index is based on ten railroad bonds. For the years I890-I9I0, the index computed by Wesley C. Mitchell is presented; for the years I9Ii-i8, that index adjusted to conform to the level of our ten railroad bond index during the period I9I9-22; and, for the years I919 to date, our own index. For both commercial-paper rates and bond yields, the changes in the series are indicated by the use of slightly different legends on the chart. It will be noted that, at the end of I930, the adjusted monthly figure for commercial-paper rates was lower than at any time since the decade of the nineties; a rate appreciably lower is shown only once on the chart, namely, in the second half of i894.1 Another striking fact evident from the chart is that the peak reached in I929 is substantially below that of I920. The differing commercial credit situations of the two years are reflected in this contrast, since the stringency of the earlier period arose from business inflation to a greater degree than that of a later period. Federal reserve operations also tended to moderate the stringency in commercial rates. Despite the large cydical swings evident, moreover, a downward trend is discernible in this class of rates, especially since the establishment of the federal reserve system in I9I4. It may be mentioned in passing that time rates on collateral loans, as quoted on the New York Stock Exchange, have not shown such a trend, though present quotations are very low. Unlike commercial-paper rates, bond yields have not reached conspicuously low levels. They are still above 4 per cent, whereas they were below this figure during much of the first decade of the century. The sharp fluctuations in the bond market since last September are clearly shown by the movements of the yield index. The rise in yields toward the close of last year now appears merely as an interruption of the decline beginning late in I929, but it has not yet brought bond yields below the post-war low of this index, reached at the end of I927. The maximum divergence between the level of bond yields and ' The rise in January I93I was due entirely to the seasonal correction (shortly to be revised) which allows for a decline in this month greater than is justified by post-war experience.

The Construction Industry: Outlook for 1930

W HEN the economist of the future compiles the business annals of the past decade, he will find the key to our prolonged and unprecedented prosperity in the stimulus provided by two great industries building construction and automobile manufacturing. Originally gaining momentum because of a long pent-up demand and then feeding upon the demand caused by the new wealth for which their own activities were primarily responsible, creating a market for the products of the iron and steel and other basic industries and providing employment directly or indirectlyin everyhamlet throughout the country, these two industries have constituted both the prime mover and the chief support of our recent prosperity. For the time being, however, this fruitful partnership in prosperity seems to have been dissolved. During 1929, while the building industry lost ground, slackening its pace some 12 or 13 per cent as compared with 1928, the automobile industry put on an astonishing burst of speed and left all its old records far behind. Today the overproduced condition in the motor industry is regarded by many as perhaps the sorest spot in the entire business situation, whereas the construction industry is now looked upon as the industry which will save us from business collapse, cushioning the decline in business activity and stimulating the forces of recovery. Will construction be able to play this role effectively? This is the crucial question which any forecaster of the new year's business must answer. In this brief summary we can only touch upon the three important favorable factors, (i) the readjustment which has already taken place in the building industry, (2) the stimulus of easy money, and (3) the prompt and aggressive mobilization, under the inspiration of President Hoover, of the campaign to use construction as a balance wheel of industry. The stimulating effect of these three forces will be somewhat retarded by (i) the loss of savings and paper profits in the stock market debacle, (2) the present condition of the savings banks, the building and loan associations and certain other lending institutions, and (3) the fact that supply and demand conditions in some branches of the building industry have not been entirely readjusted. The industry will be affected also of course by the general business situation, being retarded by continuing recession or stimulated by sustained activity, whichever may develop. The level of building costs will be a comparatively unimportant factor, though such influence as it exerts should be favorable, as lower prices for certain building materials, probable increased efficiency of labor in a depressed labor market, and lower money rates should tend toward lower construction costs. In the first place, it is clear that the substantial decline in building volume which took place during 1929 and which, in so far as residential building is concerned, extended over a much longer period has been extremely fortunate. This slowing down has enabled the industry to correct many of the excesses which had developed in the last six or seven years of unprecedented construction activity, but, coinciding as it did with unusual activity in the automobile and many other industries, its depressing effect upon general business was largely counteracted. The readjustment whichwe are nowexperiencing in general business, may be sharp enough; it would be more acute and more protracted had it not been for the year's start gained by the construction industry. However, though it has already made much progress, the building industry has by no means completed its readjustment process. In certain localities there still exists an overproduction of certain kinds of building facilities which must be largely absorbed before these types of construction can resume their usual activity. The extent to which the various classes of building activity will be affected during 1930 by existing surpluses of space will be discussed in a later section of this paper. The second favorable factor, easy money, will undoubtedly exert a powerful influence making for the resumption of normal activities in the industry. Comparison of building volume with bond yields, commercial paper rates, or other indexes of the cost of money over the past ten years reveals a high inverse correlation. Cheap

The Revised Index of General Business Conditions

W pi THEN, in i919, the post-war Index Chart IV Vof General Business Conditions was constructed, the following statements were made: In order to interpret current data it was found necessary to estimate the level of prices.... The trend thus found is, frankly, a forecast which will be revised as new data become available. 1 . . . the readjustments from the extraordinary war period continue, it is necessary to repeat the cautionthat the conclusions to which the index points, rest upon a narrower basis than those for pre-war years, and are provisional and subject to revision. 2 The index constructed in July i919 was published in the Harvard Economic Service until May i9, I923. Since that date a revised index has been published currently, instead of the index constructed four years ago. The revised index chart, printed on page I79, is constructed according to the same principles as those used in the chart it displaces. Identical or similar statistical series are utilized; the same sequence of movements obtains; and the same methods of interpretation are applicable. The changes in the base lines, or lines of trend of the constituent series, and the use of units of measurement depending upon post-war fluctuations have resulted in a more convenient arrangement of the curves. The amplitude of the fluctuation for all three revised curves is approximately between -2 and +2 units of standard deviation. This. facilitates comparison of the direction and extent of movements of the curves a comparison which is of primary importance in making forecasts of business conditions.3 The data which have become available since the end of the war make it possible to determine base lines or lines of secular trend of the constituent statistical series with more confidence than was possible in i919. Especially in the cases of commodity prices and money rates, new data and a novel and effective device for eliminating secular trend (and yet preserving the cyclical fluctuations) give us confidence in our results. Further, the influence of income tax paymentsa non-business element which augments bank clearings and bank debits four times a year can now be appraised and allowed for.4 The statistical series utilized in our revised index chart include only bank debits, stock prices, commodity prices, and money rates. Curve A, speculation, is based upon New York bank debitsand industrial stock prices; 6 curve B, business, upon outside bank debits and commodity prices; and curve C, upon commercial paper rates. The constituent curves of each group are given in Chart i. Other loans (chiefly commercial) of reporting member banks of the federal reserve system are presented in that chart with money rates, but this series does not enter the average because it has become available only since i919, and there is not, as yet, sufficient evidence of the persistent similarity of its fluctuations with those of money rates to warrant its inclusion in curve C. Chart 2 shows the three volume-series plotted together and, in the lower section, the three priceand money-rate series. Asummary statement of the data and methods used appears in Table 2, page I93, and the adjusted items may be found in the Supplement for June I923, page i67. The revised index for i900-I4 constructed in the same manner as that for I919-23 is given in

Rediscount Rates, Bank Rates and Business Activity

THE problem of greatest interest and importance now confronting the Federal Reserve Banks, the commercial banks and the business world, is the rediscount rate and its effect on or relation to business activity. The simple answer to the question whether the rediscount rate of the Reserve Banks should be higher or lower than the rate charged by commercial banks-whether this means the line-of-credit rate, over-the-counter rate or commercial paper rate is not clearly defined-is that the rediscount rate should be higher. This answer seems to flow readily from British practice and recent American experience. But the economic situation, at home and abroad, is not so simple as to permit this offhand and categorical answer. American experience under the Reserve System has not been sufficient for the dogmatic statement of a formula for the future. The Reserve System has not functioned to any extent under conditions it was designed to meet; it has faced chiefly the very unusual conditions which attended the prosecution of war and the uncertainties and abnormalities that followed. At this time it seems impossible to do much more than state the problem as it is made out of and affected by a great variety of elements. The ascertainment of these elements involves investigation of business customs, bank habits, government operations and, perhaps, the psychological influence of public sentiment.