Interest-bearing Assets Research Articles

The Wealth Holdings of Married-Couple Households with Children with Disabilities

Abstract Research has shown that households with children with disabilities are at risk of significantly lowered incomes. This paper extends this research by examining the wealth and asset holdings of married-couple households with children. We find that households with children with disabilities are less likely to own a house and to own interest-bearing assets, though the values of these assets, if held, don't vary with the disability status of children. The presence of a child with disabilities does not affect the number of automobiles owned, but does significantly reduce the average value of each vehicle.

Inflation and income inequality: A shopping-time approach

Our work is based on a heterogenous agent shopping-time economy in which economic agents present distinct productivities in the production of the consumption good, and differentiated access to transacting assets. The purpose of the analysis is to investigate whether this setting can lead to a positive correlation between inflation and income inequality. Our main result is to show that, provided the productivity of the interest-bearing asset in the transacting technology is high enough, it is true that a positive link between inflation and income inequality is generated. An example is offered to illustrate the mechanism.

Extensive Margins and the Demand for Money at Low Interest Rates

We argue that relevant monetary decision for majority of U.S. households is not fraction of assets to be held in interest-bearing form, but whether to hold any such assets at all (we call this the decision to adopt financial technology). We show that key variable governing adoption decision is product of interest rate times total amount of assets. This implies that interest elasticityof household money demand at low interest rates can be estimated from variation in asset holdings in a cross section of households rather than historical interest rate variations. We do so with 1989 Survey of Consumer Finances. We find that (a) elasticity of money demand is very small when interest rate is small, (b) probability that a household holds any amount of interest-bearing assets is positively related to level of financial assets, and (c) cost of adopting financial technologies is negatively related to participation in a pension program. The finding that elasticity is very small for interest rates below 5 percent suggests that welfare costs of inflation are small. At interest rates of 5 percent, roughly one-half of elasticity can be attributed to Baumol-Tobin or intensive margin and half to new adopters or extensive margin. The intensive margin is less important at lower interest rates and more important at higher interest rates. Finally, we argue that ignoring extensive margins may lead to an empirically important over estimation of cost of inflation at low interest rates.

Capital Controls and Trade Liberalization in a Monetary Economy

This paper reexamines Aizenman’s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model. Unlike in Aizenman’s model, which is based on the currency substitution model, foreign money is an interest-bearing asset in this paper, and its major role is to smooth intertemporal consumption. With this modification, Aizenman’s results are reversed, thus showing that the effects of capital controls during trade liberalization would vary greatly depending on the role of foreign money in a country. The effects of an anticipated trade liberalization are also studied.

Capital Controls and Trade Liberalization in a Monetary Economy

This paper reexamines Aizenman’s (1985) results on the effects of capital controls during unanticipated trade liberalization using an intertemporal optimizing monetary model. Unlike in Aizenman’s model, which is based on the currency substitution model, foreign money is an interest-bearing asset in this paper, and its major role is to smooth intertemporal consumption. With this modification, Aizenman’s results are reversed, thus showing that the effects of capital controls during trade liberalization would vary greatly depending on the role of foreign money in a country. The effects of an anticipated trade liberalization are also studied.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 1998

The performance of the U.S. commercial banking industry remained strong in 1998, but slipped a bit from the remarkable results of recent years. Both the return on assets and the return on equity edged down last year, although they remained high by historical standards. While supported by growth in fee income, profitability was damped by a large decline in the rates banks earned on their interest-bearing assets relative to the rates they paid on their liabilities, and also by higher noninterest costs, especially merger and restructuring expenses. Profitability was uneven last year across bank sizes: Whereas the largest and the smallest banks posted lower earnings, the profits of medium-sized banks--which account for almost two-thirds of industry assets--improved once again in 1998. Nevertheless, though these figures attest to the profitability of most banks, the share of bank assets at unprofitable institutions increased 2 percentage points, to 2.6 percent, the highest since 1994.

Social Origin as an Interest-bearing Asset: Family Background and Labour-market Rewards among Employees in Sweden

Social Origin as an Interest-bearing Asset: Family Background and Labour-market Rewards among Employees in Sweden

Social Origin as an Interest-bearing Asset: Family Background and Labour-market Rewards among Employees in Sweden

We analysed the effects of social origin on social class and income for a large sample of Swedish employees, aged 25-45, in 1990. The statistical models are particularly strong in handling mediating effects of educational attainment. The results show that, controlling for level and type of education, sons and daughters of higher white-collar origin have substantially greater chances of reaching service class positions than children of unskilled working class origin. We also found origin effects on income. In a model evaluating level, type of education and work experience, the advantage to income of having a white-collar origin is about 3-8 per cent. While origin effects on class position appear at the onset of work life, origin effects on income tend to be more evident throughout people's careers. Hypotheses about four mechanisms behind origin effects- Networks, Favouritism, Productivity, and Aspirations - are discussed on the basis of the results.

Avoiding some costs of inflation and crawling toward hyperinflation: The case of the Brazilian domestic currency substitute

The pattern of a classical hyperinflation is an acute acceleration of the inflation level accompanied by rapid substitution away from domestic currency. Until the Real Plan (1 July 1994), however, Brazil experienced inflation levels well above 1000% a year since 1988 without entering the classical hyperinflation path. Two elements played key roles in differentiating the Brazilian case from the classical hyperinflations: indexation and the provision of a reliable domestic currency substitute, i.e. the provision of liquidity to interest-bearing assets. This paper claims that the existence of this domestic currency substitute was the main source of both the inability of the Brazilian central bank to fight inflation and of the unwillingness of Brazilians to face the costs of such a fight. The provision of the domestic currency substitute through the banking sector is modeled, and the main macroeconomic consequences of this monetary regime are derived. Those are: the lack of a nominal anchor for the price system due to the passive monetary policy, and the non-controllability of seigniorage unlike traditional models of hyperinflations.

Fiscal adjustment, financial liberalization, and the dynamics of inflation: Some evidence from Zambia

The liberalization of foreign exchange and domestic asset markets imposes fiscal costs on governments which are net purchasers of foreign currency from the private sector and net borrowers from the financial system. Fiscal costs increase if liberalization also induces the private sector to reduce domestic money balances in favor of foreign currency and domestic interest-bearing assets. The substitution out of domestic money reduces seigniorage revenue accruing to government and, unless offsetting fiscal adjustment can be made, will often lead to accelerating inflation. This paper presents a model of inflation and financial liberalization applied to recent stabilization experiences in Zambia to illustrate the fiscal and inflationary consequences of financial liberalization implemented prior to the achievement of fiscal balance.

Currency boards: their past, present, and possible future role

The distinctive features of currency boards that were first established in British colonies in the second half of the nineteenth century included their issue of local coin and notes at a fixed exchange rate with a foreign money, usually British sterling. Currency boards held reserves equal to at least 100 percent of their currency liabilities, some in the form of interest-bearing assets denominated in the foreign money, on which they earned seigniorage. The currency-board system was adopted in many colonies and some noncolonial territories during this century until post-World War II decades, when newly independent countries replaced the system with central banks. Hong kong and Singapore were exceptions. This paper offers possible reasons for these developments and discusses the recent interest in establishing currency boards in the former Soviet Union.

Catastrophe Futures: A Better Hedge for Insurers

Roll, Richard, 1984, Orange Juice and Weather, American Economic Review, 74(5): 861-880. Rosenthal, Leslie, 1991a, CBOT's Insurance Futures Open Up Huge Risk-Management Opportunities, Financial Exchange, 10(1): 3-5. Rosenthal, Leslie, 1991b, Insurance Futures, Contingencies, 3(1): 26-28, 48. Rosenthal, Leslie, 1991c, New CBOT Futures Contracts Developed to Help Hedge Insurance Risk, Health Insurance Futures Report, In June 1990, the Chicago Board of Trade (CBOT) submitted for approval with the Commodity Futures Trading Commission two insurance futures contracts, one based on health insurance and one on automobile collision coverage. The proposed contracts would be based on the ratio of paid losses to written premium on policies written in a particular month. Under this proposal, information on a sample of policies would be collected from a group of insurers and disseminated regularly so futures traders could develop expectations of the ultimate settlement value. The final cash settlement on the futures would be based on the figures reported by the insurers as of four months after the policies had expired. In February 1991, the CBOT set a target date of October 1, 1991, to begin trading health insurance futures. However, in September 1991, the CBOT announced a delay in the commencement of trading insurance futures. In January 1992, the CBOT announced that trading would commence in September 1992 on a homeowners insurance futures contract based on data collected by the Insurance Services Office (ISO). In August, 1992, the CBOT announced that trading on the homeowners insurance future, the health insurance future and a catastrophe future modeled on the one proposed in this paper would begin trading early in 1993. This article describes the homeowners, health and auto insurance futures contracts proposed by the CBOT, discusses the possible benefits of a functional insurance futures market, analyzes the problems inherent in the initially proposed contracts, and explains why our alternative contract, based on insured losses from catastrophes, avoids many of the problems that affect the other CBOT insurance futures contracts. Futures and the CBOT Futures contracts are an institutionalized form of forward trading. Forward trading is simply the commitment of two parties to engage in the purchase and sale of a good or another financial transaction at a stated future date. Forward contracting, particularly in agricultural commodities, can be traced back to the Roman empire and classical Greece. Trading in futures developed in the 1860s, initiated by the Chicago Board of Trade. The distinction between futures and forward contracts is based principally on four attributes of futures. First, futures are traded only on an organized exchange; twelve futures exchanges are active in the United States alone. Second, futures contracts are standardized as to the quality of the item to be delivered as well as the date and location of delivery. Next, a clearinghouse is involved in every futures trade, and the commitment of each party to the trade is to the clearinghouse. The clearinghouse thus guarantees performance of the future transaction, reducing (eliminating, as claimed by futures exchanges) default risk. Finally, the major difference between futures and forward contracts is that each day futures contracts are marked to market. Any changes in the value of a position are reflected in the accounts of the traders at the end of every trading day. Futures contracts are now traded on a variety of goods, including the agricultural commodities that gave rise to this type of trading, metals, petroleum, interest-bearing assets, foreign currencies, and financial indices. Futures on financial indices, such as the Standard and Poor's 500 index, unlike more traditional futures contracts, cannot be fulfilled by physical delivery of the underlying commodity at expiration; instead each trader's position is closed out by a reversing trade (e. …

The Management of Near-Money in the Miller-Orr Model Is Not Optimal

The most prominent model of the transactions demand for money that incorporates the availability of more than one interest-bearing asset is that of Miller and Orr (1968). This three-asset model is an extension of their simpler two-asset (money, bonds) model in which money is managed as an inventory with the objective of minimizing holding and transactions costs. The extended model is used in graduatelevel textbooks to show that a corporate money manager facing an array of assets will behave much like the manager faced with a choice between money and only one type of security, so that the simple model is an adequate basis for modeling the demand for money. 1 In empirical work a similar belief is reflected in implementations of the transactions model of money demand that utilize a broad definition of money, as though transactions motives will induce a money manager to handle a spectrum of near-money assets in the same way as the medium of exchange. The Miller-Orr model appears to support such interpretations because in its three-asset version the interrnediate interest-bearing asset is managed in a fashion similar to that of non-interest-bearing money. But when Miller and Orr solve this extended version of their model they neglect the corner solution that would allow the manager to hold only the highest yielding asset. In this note I show that when the corner solution is

Empirical predictions of the new monetary economics: Perspectives on velocity

Recent work by Black (1970), Fama (1980), Hall (1983), Wallace (1983), and others has stimulated interest in what Hall (1982a) labels the new monetary economics (henceforth, NME).I Most generally, the NME emphasizes the distinction between the provision of monetary services and the provision of money. More specifically , money's two functions of medium of account and medium of exchange need not be united in a single asset called money . In contrast to current financial institutions , transactions could be conducted by using assets that are traditionally considered nonmonetary , such as equity shares , interest-bearing assets, or bookkeeping entries through a central accounting system. The unit of account could be a commodity basket or even be purely abstract; in either case it could exist separately from the media of exchange . For this reason, NME systems are often described as advanced barter. Furthermore, NME banks would not differ in kind from other financial intermediaries (Cowen and Kroszner , 1989b, forthcoming). Depositors would hold checkable accounts based upon return-bearing assets; some extension of today's Cash Management Account (Merrill Lynch) might become the standard form for transactions deposits . The authors associated with the NME, however , do not adopt any monolithic or even necessarily consistent position on many important issues. Some formulations are strictly cashless, with no physical media of exchange, whereas others contain currency that might be provided

Equilibrium in a Non-Interest Open Economy

This paper analyzes an economy in which there are no interest-bearing assets, only equity shares. Equilibrium conditions are derived for the case of a closed economy, an open economy with trade in goods only, and finally one with trade in both goods and equity shares. It is shown that the rate of return to capital equilibrates savings and investment, that the differential between the domestic and foreign rates of return to equity determines the direction of capital flows, and that under a fixed exchange rate system, adjustments induced by exchange rate changes are channeled through the asset accounts.

A stochastic macroequilibrium approach to a floating exchange rate economy with interest-bearing assets

Ein stochastischer Ansatz des makrookonomischen Gleichgewichts fur eine Volkswirtschaft mit floatenden Wechselkursen und zinstragenden Wertpapieren. — Der Aufsatz enthAlt ein stochastisches Modell des allgemeinen Gleichgewichts fur eine offene Volkswirtschaft mit floatenden Wechselkursen. Analysiert werden die Reaktionen der Volkswirtschaft auf verschiedene dauerhafte und vorubergehende (unerwartete) Schocks. Es wird gezeigt, da\ vorubergehende Storungen grundsAtzlich reale Wirkungen haben konnen, selbst wenn dies fur entsprechende dauerhafte Storungen nicht gilt. Dieser Modellansatz ermoglicht ein Zusammenwirken von realen und monetAren Faktoren bei der Bestimmung des Wechselkurses und ist deshalb eine Verallgemeinerung von fruheren stochastischen Modellen einer offenen Volkswirtschaft mit nur einem Markt.

Money and Money Substitutes: Reply

The central question of our earlier paper [2] is whether there are or are not significant differences in portfolio substitutability between money and each of several interest-bearing assets. Our tentative conclusion is that there are not. Professor Brox [1] notes that the wealth maximand we proposed is inconsistent with the sign of the interest-rate variable in our regression equations. Specifically, he shows that the sign of the coefficient of ln [1/(1 + ri(t))] in our equation (6) is positive rather than negative, when (6) is properly derived using our equations (1) and (3). In order to deduce our original equation (6) with a negative sign for ln [1/(1 + ri(t))], the wealth maximand must be written as equation (1) in Brox's comment, rather than in the way we originally proposed (see Brox's equation (2)). Brox has correctly pinpointed an algebraic slip; but neither the analysis nor our original conclusions should thereby be affected. For as we emphasized in the earlier analysis [2, p. 187], the coefficient of ln [1/(1 + rit))] must be negative to yield negatively sloped asset demand curves. It bears emphasizing that the duality principle stated in our paper remains applicable, with a minor empirical modification. Whereas Chetty assumed utility maximization subject to a budget constraint [given by Brox's equation (1)], we adopted the hypothesis of wealth maximization subject to a transactions technology constraint. With the wealth maximand suitably defined, these alternative hypotheses yield equivalent derived demand equations, except that Xi(t) in our model should correctly be dated (t + 1). This change should make practically no difference in the estimates obtained when the model is applied to quarterly data. It seems that a more substantive issue is the structure of the derived asset demand equations. Wealth-maximizing behavior requires that the term ln [1/(1 + ri(t))] bear a negative sign in equation (6). This term is inversely related to the opportunity cost of holding money. Clearly, an increase in the opportunity cost of holding current assets as money, given by an increase in ri(t) must induce a portfolio substitution of Xi for money. The original interpretation of our statistical findings is grounded in this reasoning, and it is not a terec 3y Brox's comment.

Demand for Money and Other Liquid Assets in Thailand, 1946-1967

The process of monetization and financial development has proceeded rapidly in Thailand in the period since World War II. The public's holdings of liquid financial assets rose more than tenfold between 1947 and 1967. In the process, the ratio of liquid assets to GNP rose from about one-sixth to about one-third. Growth was accompanied by important changes in asset composition. Deposits with commercial banks gained in proportional importance relative to liabilities of the central bank, and interest-bearing assets generally gained at the expense of currency and demand deposits. This paper surveys the facts of Thai financial development. Analysis of the data indicates that there have existed relatively stable demand functions by the public for financial assets, particularly in relation to real nonagricultural income. These functions have been subject to periodic shifts, but those can generally be explained by developments relating to interest rates and other characteristics of financial assets, branch banking, and the availability of nonmonetary gold. An important general conclusion is that, in an atmosphere of relatively stable prices and stable government, the income elasticity of the public's demand for liquid financial assets has been substantially higher than unity. Further, since 1955 the gross marginal propensity to hold liquid financial assets has averaged about two-fifths relative to GNP in current prices. This condition has contributed importantly to the institutionalization of saving and investment. The demand for government securities, by the public and the banking system combined, has displayed a particularly high income elasticity. Consequently, the

Consistency and Consolidation in the Theory of Interest

This paper is concerned with the stock approach to the theory of interest, i.e., the theory of asset prices. Its purpose is to show how theoretical and statistical treatments of the demand for assets may be judged in respect of whether or not they make allowance for all relevant variables.' A simple example will show what this means. Suppose that a particular owner of wealth can hold his wealth in the form of any of four assets, A, B, C and D. In order to explain his holding of any one of them, say A, it is necessary to know five besides their prices: the attractiveness of each of the four and the total amount of wealth (his initial holdings) which he can allocate between them. A statement that his holding of A is determined only by its price and attractiveness and the attractiveness and prices of B and C would, in general, be inadequate since it takes no account of the attractiveness of D, the fourth alternative, or of his total wealth. Thus the statement must either be abandoned or treated as being a ceteris paribus statement. In the latter case it is preferable that the ceteris paribus reservation be made explicitly rather than implicitly. The point here is not that one can always know what the other things held equal are, but merely that when it is possible, these other should be clearly listed. Theoretical statements can therefore be examined to see whether this has been done, and econometric results to see whether their derivation implicity assumed the constancy of other things that did not in fact remain unchanged. Let us consider the simple Liquidity Preference theory of interest. This is couched in terms of the quantity of money, the liquidity preference schedule and the rate of interest, so evidently presupposes that there is only a single group of wealth-owners who have a single liquidity preference schedule and that there is only one interest-bearing asset.2 If we call the group of wealth-owners the Public and the asset Bonds , the monetary system to which the theory applies may therefore be described as in Table I, where L stands for liability and A for asset.