Ellis W. Tallman

Human capital and endogenous growth evidence from Taiwan

Abstract We examine the empirical implications of models that display perpetual growth through human capital accumulation in a case study of Taiwan. Our results show that incorporating a labor quality index into the labor input improves the performance of the growth model in Taiwan over the 1965–1989 period. The results are robust to alternative enhancements to raw labor input measures and to the inclusion of additional relevant variables often correlated with economic growth in developing countries. The evidence supports the theoretical suggestion that labor skill is a useful augmentation of the raw labor measure commonly used in empirical growth studies.

The Bank Panic of 1907: The Role of Trust Companies

The Bank Panic of 1907 was one of the most severe financial crises in the United States before the Great Depression. Although contemporaries realized that the panic in New York City was centered at trust companies, subsequent research has relied heavily on national bank data. Balance sheet data for trust companies and state banks as well as call reports of national banks indicate that the contraction of loans and deposits in New York City during the panic was confined to the trust companies.

Clearinghouse Membership and Deposit Contraction during the Panic of 1907

Was clearinghouse membership a key factor mitigating withdrawls from intermediaries during the Panic of 1907? Analyzing balnace-sheet information on institutions in New York and Chicago, we find ecidence that clearinghouse memebers had institutions in New York and Chicago, we find evidence that clearinghouse members had smaller contractions in demand deposits than did nonmembers. New York City trusts, isolated from the clearinghouse, were subject to heightened perceptions of risk, and suffered large-scale withdrawals because they were outside of the clearinghouse and therefore much less prepared to withstand large-scale depositor runs. We suggest that this aspect of the Panic of 1907 helped to forge support for the creation of a U.S. central bank.

Improving Federal-Funds Rate Forecasts in VAR Models Used for Policy Analysis

Federal-funds rate-forecast errors from vector autoregressive (VAR) models used for monetary policy analysis and fitted by ordinary least squares (OLS) are large relative to those from the futures market. Using three different structural VAR models, we show that forecasts based on a shrinkage estimator dominate the OLS-based forecasts—even after restricting the lag length and/or imposing exact unit-root restrictions—and are broadly comparable to the futures-market forecasts. Our results refute the perception that VAR models forecast the funds rate poorly in general and suggest that using stochastic prior restrictions can provide an effective way of improving forecast accuracy without sacrificing structural interpretation.

Banking and Financial Crises in United States History: What Guidance can History Offer Policymakers?

This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, precursor to the modern investment bank. During the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which had only indirect access to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises of the Great Depression as relevant comparisons to the recent crisis. This paper argues that such an analogy is inaccurate. The previous banking crises in U.S. history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears and large counterparty exposures among large complex financial intermediaries. In historical incidents, monitoring counterparty exposures was standard banking practice and the exposures were smaller. From this perspective, the lessons from the past appear less directly relevant for the current crisis.

Money demand and the relative price of capital goods in hyperinflations

Abstract We investigate dynamic interactions between relative price movements and money demand behaviors during hyperinflations, viewing relative price changes as resulting primarily from real disturbances. We develop a general equilibrium model with heterogeneous consumption and capital goods to illustrate how monetary shocks may produce real effects through the relative price channel. This motivates the design of long-run restrictions to identify a structural vector autoregression, employing data from the post-WWI Germany and the post-WWII Chinese hyperinflationary episodes. The empirical results support the contention that both real and nominal shocks have important effects on the relative price and money demand during hyperinflations.

Nominal and Real Disturbances and Money Demand in the Chinese Hyperinflation

This paper reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects interactions between the real and monetary sectors. The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post-World War II Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and, hence, underestimate the welfare costs of hyperinflation.

New York and the Politics of Central Banks, 1781 to the Federal Reserve Act

The paper provides a brief history of central banking institutions in the United States. Specifically, the authors highlight the role of New York banking interests in the legislations affecting the creation or expiration of central banking institutions. In our previous research we have detected that New York City banking entities usually exert substantial influence on legislation, greater than their large proportion of United States’ banking resources. The authors describe how this influence affected the success or failure of central banking movements in the United States, and the authors use this evidence to support their arguments regarding the influence of New York City bankers on the legislative efforts that culminated in the creation of the Federal Reserve System. The paper argues that successful central banking movements in the United States owed much to the influence of New York City banking interests.

Combining Survey Long-Run Forecasts and Nowcasts with BVAR Forecasts Using Relative Entropy

We gratefully acknowledge comments from Gary Koop, Michele Modugno, Aubrey Poon, our discussant Sharada Davidson, the participants at the 11th International Conference on Computational and Financial Econometrics, Post-Graduate Research Away Day at the University of Strathclyde, and the International Institute of Forecasters 38th International Symposium on Forecasting. The views expressed herein are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System. Contact information: ellis.tallman@clev.frb.org and saeed.zaman@clev.frb.org. Federal Reserve Bank of Cleveland Federal Reserve Bank of Cleveland and University of Strathclyde

Monetary Policy with a Large Balance Sheet: Lessons from the Financial History of the United States

This paper examines how monetary policy implementation with a large balance sheet relies upon interest on excess reserves. The paper then examines the Federal Reserve System balance sheet from its inception in 1914 until the end of 2015. Noting periods when it either increased rapidly or was large relative to activity measures, we focus on the onset of the U.S. participation in World War One (WWI), the Great Depression, and the World War Two (WWII) experience. The rapid reduction in the Fed balance sheet following WWI was associated with a sharp real contraction, whereas the more gradual decline that followed WWII was associated with better real outcomes. The current Federal Reserve balance sheet will likely contract by between