Rate Deregulation Research Articles

Geographic Markets, Causality and Railroad Deregulation

This paper presents an approach to defining a market using the notion of instantaneous causality. The market for which the approach is empirically implemented is the flour market in the United States over the period January 1979 through October 1982. One anomaly over this period was the deregulation of railroad rates in October 1980. The empirical results based on three spatially diffuse cities suggest that the market is national in scope and that after railroad deregulation the price interrelationship between cities was strengthened.

External shocks, financial reforms, and stabilization attempts in Uruguay during 1974–1983

This paper interprets and evaluates Uruguay's reforms emphasizing the outcome of financial reforms and attempts to bring down inflation. It is shown that domestic interest rate deregulation and the removal of prohibition towards holding dollar-denominated assets led to a rise in the ratio of financial assets in GDP and to a shift towards dollar-denominated assets. Causes of the persistent and large spread between peso and dollar interest rates adjusted for the preannounced rate of devaluation ( tablita) are examined. The discussion of the stabilization program during 1979–1982 and its aftermath in 1983 shows that setting the tablita at less than the difference between internal and external inflation led to severe imbalances. Because of remaining redundant protection and price stickness, the real exchange rate appreciated sharply for a prolonged period and the trade balance widened until the stabilization episode ended with capital flight when doubts set in about the sustainability of the tablita.

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

ABSTRACTThe 1980 Depository Institution Deregulation and Monetary Control Act (DIDMCA) mandates that Regulation Q be phased out by 1986. With deregulation of interest rate ceilings, the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets. Thus, value‐maximizing bank managers would need to be concerned not only with the internal risk, but also with the external risk in bank portfolio management decisions. Based upon the cash flow version of the capital asset pricing model, this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm.

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

An analysis of bank risk and deposit rate ceilings: Evidence from the capital markets

The effect of deposit rate regulation on bank solvency is an important and unresolved issue that has received only limited attention. In this paper, capital market data is used to assess changes in both systematic and non-systematic risk of a portfolio of bank stocks at the time of deposit rate deregulation. The evidence indicates that neither measure of capital market risk is significantly affected, leading to the conclusion that bank solvency risk will not be increased by the deregulation of interest rates on deposits.

Consumer deposit demand, interest rate differentials, and public welfare

Empirical estimates of the bank certificate of deposit demand schedule obtained in this study provide the basis for evaluating interest rate deregulation. A Box-Jenkins transfer function estimates bank deposit responses to intraindustry pricing changes and a sensitivity analysis shows microeconomic effects of interest rate differentials. The study concludes that 1) the public substantially subsidizes banks but banks achieve suboptimum deposit levels under thrift differential regulation, 2) removal of deposit rate regulation causes bank deposit demand schedules to shift slowly, not immediately, up with respect to interest rates, and 3) the consumer deposit demand curve is clearly interest elastic.

The congressional-bureaucratic system: a principal agent perspective (with applications to the SEC)

The congressional-bureaucratic system: a principal agent perspective (with applications to the SEC)

Housing Interest Rate Deregulation and the Campbell Report*

It is argued that deregulation of housing interest rates would, under plausible assumptions, substantially increase the cost of housing finance in Australia, contrary to the impression created by the Final Report of the Australian Financial System Inquiry (the Campbell Report). Characteristics of the market for owner‐occupier housing finance, on both the demand and supply sides, suggest that the deregulated market rate will be approximately equal to the uncontrolled rate under regulation. The weighted average interest rate for owner‐occupier housing finance at December 1981 is more than three percentage points below the uncontrolled rate. The authors conclude that while this result does not of itself constitute an argument against deregulation, it does imply that deregulation would have a substantial distributional impact.

Impacts on Agriculture of Deregulating the Transportation System: Comment

Recent legislation, such as the Railroad Revitalization and Regulatory Reform Act of 1976 (4R Act) and the Staggers Act of 1980, has encouraged temporal flexibility in railroad pricing. In particular, the Staggers Act was a major step toward grain rail rate deregulation. The recent trend toward rail rate deregulation has received much attention because of its impacts on the U.S. grain industry. However, empirical research has not been able to evaluate rail rate deregulation based on the Staggers Act because of limited experience with flexible rail rates. Only conceptual studies on grain rail rate deregulation were discussed by Johnson and Fruin. Johnson's discussion based on theory praised grain rail rate deregulation. Johnson focused mostly on the positive effects of rail rate deregulation on the U.S. grain-marketing industry. He argued that regulation has been largely counterproductive for agriculture, concluding that deregulation offers many opportunities for creative marketing and procurement in agricultural industries. Johnson ignored fundamental problems of spatial and temporal flexibility in rail rates with deregulation. Fruin focused on the negative aspects of rail rate deregulation in his discussion of Johnson's paper. Although Fruin agreed with the general conclusion of Johnson's paper, he argued that the Staggers Act will allow railroads to discriminate. Fruin did not

Railroad Rates, Profitability, and Welfare under Deregulation

Efforts to reform regulation of the railroad industry are supported by a substantial body of economic research which has described and measured the cost of the present regulatory regime. In focusing on the defects of the status quo, economists have neglected to give sufficient attention to analyzing in detail the likely consequences of alternative regulatory policies, including deregulation. This paper draws on available estimates of the structure of rail demand and technology in an attempt to predict the impact of rate flexibility on rail prices, profitability, and economic welfare. The effects of deregulation are simulated under a variety of alternative assumptions concerning the elasticity of demand for rail services, the degree of interrailroad competition, the presence or absence of truck deregulation, and the magnitude of rail cost reduction attainable with enhanced commercial freedom. The principal object of this exercise is to ascertain whether rate deregulation is likely to restore the rail industry to financial viability by generating a cash flow sufficient to maintain adequately

The Welfare Effects of ICC Rate Regulation Revisited

An analysis is made of the welfare effects of ICC rate regulation for the U. S. surface freight transportation system. An estimate of the deadweight loss under first-best and Ramsey pricing is provided. Various alternatives to current rate regulation are discussed including partial and complete rate reform. The major conclusion regarding piecemeal approaches is that solely deregulating motor freight will increase the amount of traffic misallocation. In the final analysis, the most desirable alternative appears to be deregulation of motor carrier rates accompanied by regulated rate reform in rail.

Deregulation and Gains to Search in the Property Liability Insurance Market

The dispersion of insurance prices offers a payoff to those searching for lower prices. This paper examines the expected gain to search in the insurance market by price conscious buyers both before and after rate deregulation. It shows that the gains to be achieved from search increase as price dispersion increases. Deregulation plausibly will lead to an increase in price dispersion. Evidence presented shows that the expected gain to search increases after deregulation. A reasonable assumption is that buyers of insurance are not perfectly informed about the prices charged by all potential sellers of insurance in the market.' Price dispersion will result and searching in the market will yield lower expected purchase prices. This paper examines the expected benefits of consumer search in the property and liability insurance market both before and after price deregulation. The results indicate that the expected gain from search is greater after deregulation. Consequently, consumers have an incentive to increase their stocks of price information. This observation, in turn, suggests that price deregulation may enhance the competitive character of the market. The next section demonstrates that an increase in the dispersion of prices causes an increase in the expected gain from search. A plausible argument is that rate deregulation will lead to an increase in price dispersion. Empirical data are provided that measure the expected gain to search both L. Dean Hiebert, Ph.D., is assistant professor of economics at Illinois State University. The author is grateful to Michael B. Johnson for supplying the data used in the study and for helpful suggestions of two anonymous Journal reviewers. Professor Hiebert has published previously in The Journal of Risk and Insurance. Joskow [3] persuasively supports this view: Undoubtedly, there is no other product for which consumer ignorance is so prevalent. Many consumers are unaware that there are price differences among insurance companies and that it is not necessary to go through an independent agent to obtain insurance. Comparative price shopping is very difficult since price differences for comparable coverages are not readily available in printed form and because it is difficult to obtain information from friends and neighbors. I can get good information on price differences and price levels for all kinds of products from the fellow in the next office if he has purchased these products and/or shopped around for them. Asking him about his insurance is of little value since he is in a different risk class, lives in a different community, and drives a different kind of car. [3, p. 404]

The Potential Consequences of Deregulation of Transportation

This article discusses the probable results if federal deregulation of rates and entry were to take place in surface transportation in the U.S., as argued by proponents of deregulation in the literature on the subject. Seven aspects of transportation that could be significantly affected were examined and it was found that those in favor of substantial deregulation make the following arguments: (1) Overall transportation rates would decline with deregulation; (2) the railroad industry would be the prime beneficiary of deregulation, particualrly in connection with deregulation of rates; (3) while the transportation industry as a whole would become more competitive and rates would be reduced, the overall effect of deregulation would not be seriously detrimental or destructive to any mode of transportation; (4) deregulation would not result in an increased problem of railroad rate discrimination between water-competitive and other traffic, and truck rates on certain undesirable traffic would not necessarily be increased; (5) many of the restrictions, which cause inefficient operations, that are found in carrier operating authorities would be eliminated with deregulation; (6) deregulation would result in carrier management being more innovative in terms of rates and service; and (7) the common carrier system would be strengthened vis-a-vis private transportation as a result of deregulation. The authors of this article disagree with some of the above conclusions, although they agree that some loosening of regulation of entry and rates is in order. They conclude that the advantages of partial deregulation seem to outweight the disadvantages, and partial deregulation is preferable to maintaining intact the existing economic regulatory system.