Financial Asset Holdings Research Articles

Unemployment insurance and precautionary saving

Models of precautionary saving imply that households will hold more assets when faced with greater income uncertainty. However, previous empirical studies of income uncertainty have produced somewhat mixed support for the precautionary saving hypothesis. In this paper, we note that differences in the state-contingent income stream available to workers through the unemployment insurance (UI) program provides an excellent source of variation for testing the presence of a precautionary savings motive. Simulations of a stochastic life cycle model suggest that a UI system similar to the type currently in place in the U.S. can lead to a significant reduction in the assets accumulated by a median worker. Moreover, there is considerable variation in the UI benefit schedules for workers living in different states in the U.S., which provides an exogenous source of variation for empirically testing the precautionary saving hypothesis. We carry out this test using data on expected UI benefit replacement rates and financial assets held by households in the Survey of Income and Program Participation. Our empirical results are consistent with the predictions of the model and suggest that reducing the UI benefit replacement rate by 50 percent would increase gross financial asset holdings by 14 percent, or $241, for the average worker. We also find empirical evidence that this “crowd out” effect of UI on household saving is stronger for those facing higher unemployment risk and weaker for older workers, both of which are implications from our precautionary saving model.

Structure of households’ financial wealth in Europe and the United States (1995-1999)

In Europe as well as in the United States, a rapid increase of households’ wealth occurred throughout the 1995 to 1999 period. Important capital gains, resulting both from the end of the real estate crisis, on the property market, and from positive stock markets developments, added up to relatively high savings in Europe and markedly lower savings in the United States. The breakdown of wealth shows similar developments in Europe and in the United States. In both cases, a decrease of bank deposits and government assets, an increase of direct holdings of financial assets and investment funds, a rise of households’ claims on life insurance and pension funds may be observed. Bank intermediation, however, appears to remain more important in Europe than the United States. JEL classifications : E20, M41

Taxation in an Overlapping Generations Model with Human Capital

We examine the impact of flat-rate taxes on intergenerational equity in an overlapping generations model of a small open economy, assuming the intergenerational externality of human capital accumulation. The externality may cause the difference between the growth rates in private human capital and in average human capital of the economy. If the externality is sufficiently small, the introduction of an interest income tax will benefit all future generations. In contrast, if it is sufficiently great, the introduction of a wage tax could harm all generations by raising financial asset holdings and thereby reducing consumption.

Savings-Recycling Public Employment: An Assets-Based Approach to Full Employment and Price Stability

William Vickrey's single-minded commitment to full employment is evident in a series of papers written in the last years of his life. In these works Vickrey formulated an assets-based approach to macroeconomic analysis that has definite implications for budgetary and employment policy. For Vickrey the relation between desired and actual holdings of net financial assets--or net nominal savings--is crucial to understanding macroeconomic processes, and the government budget is the key policy instrument in the necessary recycling of net nominal savings to bring the desired and actual levels into equality at the full employment level of output and income. Vickrey believed that the major task for economists and policymakers was to devise the means whereby the necessary recycling of net nominal savings can take place without unexpected changes in the rate of either inflation or deflation. This paper proposes government deficit-financed, guaranteed public employment as an automatic stabilizing policy instrument capable of serving as just such a means.

Risques financiers : juniors vs seniors

Financial risks : juniors vs. seniors We consider the proportion of risky assets (stocks, bonds,...) among the household portfolios as a function of householder age, using two surveys conducted in 1995 on the holdings of financial assets. Unlike a common idea, older households hold more risky assets than their younger counterparts, both for homeowners and non homeowners and also among all wealth classes. We present the datasets used, the chosen classification of risky and riskless assets and we consider some explanations of the obtained results : learning effects, behaviour towards risk, background risk. We investigate the hypothesis that the volatility of young households earnings is high and thus that they minimize their risky financial investments.

Money Growth and Supply Shock Effects on Consumer Leverage, Consumption and Financial Wealth

In an intertemporal decision framework, borrowing and wealth holding decisions will incorporate information relevant to future income realizations. One channel for monetary and real disturbances to influence real activity is through revised anticipations of future income. In this study, evidence was uncovered for contemporaneous nominal shock effects on changes in household leverage with nominal and real shock effects uncovered for the growth of nondurables and services consumption and real financial wealth holdings. Evidence was found for potential opportunities to use short‐run monetary policy to offset the impact of sectoral production shocks on the growth rate or the volatility of the growth rate in consumption. The monetary shock would have to be opposite in sign to the sectoral production shock. A similar feature was found for the financial asset holdings. Evidence was uncovered for volatility and growth rate trade‐offs.

The effects of debt subsidies on corporate investment behavior: the Korean experience

We argue that credit subsidies are ineffective in stimulating business investment in productive assets. Instead, they will lead to an increase in corporate holdings of financial assets and real estate. For empirical verification we examine corporate investment patterns in Korea between 1984 and 1988. We find a significant positive relation between corporate speculative asset holdings and access to subsidized loans. Our estimates indicate that in the absence of interest rate controls and other forms of subsidies, corporate holdings of speculative assets would have been one-sixth of observed levels. Furthermore, most corporate real estate holdings appear to be unrelated to production activities. In sum, we find little evidence that the Korean government's interest rate controls and credit allocation policy have generated increases in corporate investment; if anything, they are partly to blame for the overheated Korean stock market during the sample period.

Strategically positioning your way into the aging marketplace

S ociety and the marketers who serve it have been fixated on youth. The feeling has been that youth is sexy and glamorous, middle age is dreary, and old age is downright miserable. This may have been acceptable when the 76 million baby boomers themselves were part of the youth culture. But today's social landscape is seeing radical recontouring. In the 1990s the 18-24 age category will shrink by 5 percent; the highly targeted 25-34 age group will drop 14 percent as the baby boomers age. Meanwhile, the 45-54, 55-64, 75-84, and 85-plus age groups will increase 45, 13, 21, and 51 percent over the next ten years. The 85-plus population is the fastest growing segment. And by the year 2000, half of the elderly (those 65 and over) will be 75 or older. In 1988 the median age of the U.S. population was 32.3, up from 30.2 in 1950. By the year 2000, the median age will be 36.3. This phenomenon, referred to as the senior boom, is shifting the marketplace to an older composi t ion--and it will never be overloaded with youth again. At present, 11 percent of the population is 65 years of age or older. By the year 2010, one in every seven Americans will be 65 or over. Those over 65 control 50 percent of the nation's discretionary income and 77 percent of all financial assets. The average financial asset holdings of those aged 65 to 75 is greater than for any other age group. And this group favors dissaving over saving. In general, today's older population is healthier, wealthier, more active, better educated, and generally more satisfied with life than at any other time in history. The aging population represents a gold mine for marketers--yet few have found the right handle to open the door. Marketers have continually been urged to face demographic reality, but in recent years attempts to reach older segments have not been well received by the targeted market. Although sales of Wendy's hamburgers rose, so did the blood pressure of older consumers who heard the crusty grandmother's outraged cry of Where's the beef?. Shown recklessly speeding from one Marketers must take care ,when positioning their products toward the older segment of the consumer market.

The impact of a housing-linked contract savings scheme on households' holdings of financial assets in India

This paper uses a carefully matched sample of Indian renter households who are participants in a savings scheme explicitly linked to obtaining a mortgage and a sample of similar households who are not participants to estimate the impact of participation on the share of assets participants hold in financial form. Participants are found to hold significantly more of their assets in this form; over a standard savings period the incremental holdings in financial assets are equivalent to the amount saved in the contract savings scheme. The estimates support the contention that participants do not merely shift the instruments in which financial assets are held in saving for home purchase but rather make a reallocation in favor of financial assets — monies that are available for investment anywhere in the economy during the savings period.

Arbitrage and the Savings Behavior of State Governments

The federal tax code creates strong incentives for tax arbitrage activity on the part of state governments. This arbitrage activity is illegal and previous research has typically assumed that the constraint against arbitrage activity is binding. This paper explicitly tests this proposition by considering whether financial asset holdings increase as the yield spread between taxable and tax exempt securities rises. Using a data set on 40 state governments over a 7 year period, I find that there is a significant response to changes in the yield spread. One implication of these results is that the Tax Reform Act of 1986 which made even greater efforts to curb arbitrage activity is likely to be ineffective.

FINANCIAL OPERATIONS AND MONETARY STATISTICS: IMPROVED CONCORDANCE IN THE FRENCH NATIONAL ACCOUNTS

National accounts are a powerful means of coordinating different statistical systems. The better their classifications are adapted to the basic statistics or the information blocks one wishes to use, the better the national accounts play their part. This statement explains why, taking the opportunity of revising the whole system, French national accountants tried to improve the concordance between financial operation tables and monetary statistics. Other reasons leading to this attempt can be found in the dissatisfaction of users having to face different and inconsistent financial information such as the monetary statistics on one hand and the financial aggregates of the national accounts on the other; and even more reasons appear in the organizational field since those two statistical systems are issued by two neighbour services of the Banque de France, often depending on the same sources. Further, many propitious factors are converging at the same time: the French financial system is undergoing profound transformations originating as much in the behaviour of economic agents as in the law, and the statistical operations have to adapt to these changes. The national accounts will in the near future include balance sheets in which financial asset holdings are directly comparable to the money supply aggregates. In its first part our paper sets forth the detailed reasons for our attempts, the conditions in which it took place and the present results. We have reached a much better degree of consistency between the two systems, even if the final scheme has not yet been adopted in either the monetary field or in the field of national accounts. But an important question remains open about the durability of the harmonization: we think that it could be relatively uncertain because of the differences in the goals pursued by the two systems and the constraints which they face. That is why in the second part of the paper we tried to review the way such a pragmatic undertaking as ours could call into question the way in which financial operations are described in the system of national accounts. If one agrees with the present boundary between the real and the financial sphere, the articulation must remain somewhat elementary. But if one wants to revise the usual so‐called dichotomy between financial and non financial phenomena, we think that a complete rebuilding of the conceptual framework of the accounts has to be done; this would necessitate a considerable amount of theoretical and practical work.

A time series analysis of financial asset holdings for a developing country: Egypt, 1952–1973

A time series analysis of financial asset holdings for a developing country: Egypt, 1952–1973

Inflation and financial deepening

Financial deepening is defined as increases in the ratio of a country's financial assets to its GDP. Financial asset accumulation simultaneously provides credit to finance real asset accumulation for the development process. The equilibrium long-run ratio of financial assets to GDP may be expressed as a simple relationship of a country's financial savings ratio and its growth rate. The present paper incorporates the effects of inflation on financial deepening. Inflation necessarily entails capital losses on all existing financial asset holdings. It is shown that unless more monetary saving is forthcoming to offset such inflation-induced capital losses, inflation will operate to reduce drastically the degree of financial deepening which a country can obtain. The process is illustrated with respect to the Korean economy.

A Comparison of Savings Account and Financial Asset Holdings of Bank and Savings and Loan Depositors

With the advent of numerous new types of savings accounts, the author conducted a study to determine the consumer usage of these new accounts and the relative ability of banks and savings and loans to retain their current savings account customers. He also investigated the financial asset holdings of savers.

The Structure of Ownership and the Theory of the Firm

The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear.... In creating these new relationships, the quasi-public corporation may fairly be said to work a revolution. It ... has divided ownership into nominal ownership and the power formerly joined to it. Thereby the corporation has changed the nature of profit-seeking enterprise.1

On Testing the Efficacy of Selective Credit Controls: Comment

In recent notes in this journal, Hamburger and Zwick [2] and Maris [3] presented empirical tests that were designed to determine the efficacy of selective credit controls on on consumer durables. The purpose of this comment is to argue that neither one of these tests is well suited to address the issue in question. Hamburger and Zwick estimate a version of the model of consumer durable expenditure developed by Mishkin [4] and argue that theirvresults suggest that i'selective credit policies are unlikely to have a significant effect on the composition of real expenditures [2, p. 107]. A close look at Mishkin's theoretical model indicates that the Hamburger and Zwick adaptation is inappropriate for testing the efficacy of selective credit policies. The empirical results obtained by Hamburger and Zwick are the only ones that are consistent with the theoretical model and should not be interpreted as evidence on selective credit policies. Mishkin specifies consumer durables expenditure as a function of transitory income, permanent income, the lagged stock of durable goods, total household debt, gross financial asset holdings of households,l and the user rental cost of consumer durable capital. The rationale for including debt and financial asset holdings as separate arguments in the expenditure function is that consumer durables are illiquid and the expected cost of holding such an illiquid asset is positively related to the probability of having to make a distress sale. Since a distress sale will take place whenever consumption plus debt service exceeds income plus financial assets, the probability of such a sale and the expected opportunity cost of holding consumer durables will be positively related to debt service and negatively related to financial asset holdings. A ceteris paribus rise in debt holdings will raise debt service and thereby the opportunity cost of holding consumer durables. This will tend to decrease expenditure on consumer durables. What should be stressed here is that the single linkage between household debt and expenditure is debt service.2 The Mishkin equation is reestimated by Hamburger and Zwick with two rather than one household debt explanatory variables. Total debt is decomposed into

Holdings of financial assets: A Markov chain analysis

This paper introduces the Markov chain model as a simple tool for analyzing the pattern of financial asset holdings over time. The model is based on transition probabilities which give the probability of switching $1 of wealth from one asset to another. An illustrative application is provided.

The Determinants of Holdings of Financial Assets in Australia

The growth in building societies in Australia over the 1970s mirrors the relative decline in the savings banks. The growth in deposits with building societies is shown to be due mainly to increased total wealth, rather than changes in interest rates. The responsiveness of holdings of four important financial assets to changes in interest rates and wealth is also discussed.

A New Approach to the Joint Consumption-Portfolio Problem

OVER THE PAST TWO DECADES, extensive research has been directed at solving, for an individual economic agent, the problems of (1 ) selecting an optimal portfolio of financial securities in a risky one-period setting (e.g., the pioneering contributions of Markowitz and Tobin) and (2) determining an optimal multiperiod consumption plan in a world of perfect certainty (e.g., the early work of Brumberg, Modigliani, and Friedman). These two very important kernels of modern financial economics developed in virtual isolation from one another until the recent contributions of Dreze and Modigliani [6], Sandmo [29], Samuelson [28], Merton [19], Hakansson [12], and Fama [7]. It is now well accepted that one cannot ordinarily determine his optimal financial asset holdings independently of his optimal multiperiod consumption plan, and vice versa. Focusing on the two-period case, one will discover that virtually all efforts at simultaneously solving these two decision problems employ the TPC (two-period cardinal) expected utility hypothesis. We present in this article a new formulation of the joint consumption-portfolio problem which enables us to (1) distinguish between the roles played by risk preferences and preferences in determining optimal consumption and asset demand; (2) generalize to an uncertain setting the classic Fisherian two-period diagrammatics and notion of the marginal rate of time preference; and (3) expand substantially the set of consumption-portfolio optima consistent with utility maximi-

ILLIQUIDITY, THE DEMAND FOR RESIDENTIAL HOUSING, AND MONETARY POLICY

IN ANALYZING THE EFFECTS of monetary policy on the demand for tangible consumer assets, such as consumer durables and residential housing, primary attention has been focused on interest rate and credit rationing effects. Recent work (Mishkin (21)) takes a different approach by studying the previously neglected illiquid aspect of consumer durable asset. The following results are derived: the consumer durable is a less desireable portfolio asset if (a) the consumer's debt holdings are high, (b) gross financial asset holdings are low, (c) income variance is high, or (d) expected income is low. These results stem from the illiquidity of the consumer durable asset which causes a rise in the effective opportunity cost of holding the consumer durable as the consumer's probability of encountering financial distress increases. As a result, the balance sheet position of households plays an important role in the demand for durables, and as monetary policy affects the balance sheet it also affects the demand for durables. The results of this were tested in a standard stock-adjustment model of consumer durable expenditure on postwar quarterly data; and the empirical results were quite favorable to the hypothesis.' Residential housing is also an illiquid consumer tangible asset, differing from consumer durables in that its illiquidity stems from slightly different sources. The liquidity hypothesis should thus apply to the housing asset as well. This paper adapts the liquidity theory to the housing asset and tests the hypothesis on postwar quarterly U.S. data with a model of residential housing demand. The empirical results do indeed support this hypothesis. In previous studies of the demand for residential housing, monetary policy has its major impact either through the availability of credit or the cost of financing the housing purchase.2 In addition, two novel potent channels of monetary influence