R. Todd Smith

Fixed-Income Markets in the United States, Europe, and Japan-Some Lessons for Emerging Markets

This paper identifies factors that contributed to the development and effectiveness of debt securities markets in the major advanced economies. Government securities markets have benefited from their international orientation—debt management is most effective when it is independent of monetary and exchange rate policies; and financial infrastructures should be patterned on the standards of liquidity, transparency, issuing and trading efficiency, and tax treatment. The same degree of consensus does not exist for corporate debt securities markets. The paper identifies six regulatory and market-created factors that help explain why the U.S. corporate debt market has flourished, while corporate debt securities markets elsewhere have only recently begun to develop.

The Cyclical Behavior of Prices

Much empirical work has documented a procyclical general price level for many countries. Since there is much in the recent theoretical literature and academic debates that runs counter to a procyclical price level, a comprehensive reexamination of the empirical evidence for the cyclical behavior of prices is worthwhile. It is found that the price levels for ten countries generally are procyclical from the late nineteenth century until the Second World War with the exception of a period around World War I and they are countercyclical for the post-Depression period with the exception of a period in the 1950s or 1960s. Copyright 1992 by Ohio State University Press.

Banking Competition and Macroeconomic Performance

This paper uses an equilibrium model to study the costs, in terms of macroeconomic performance, of imperfect competition in banking. The social welfare effects of increased bank competition are complicated and ambiguous in general, but measuring the consequences of increased bank competition with standard gauges of macroeconomic performance provides a clear conclusion: increased bank competition raises the level of income and reduces the severity of business cycles. The quantitative effect on macroeconomic performance of less competition in banking can be large; for instance, an imperfectly competitive banking system can produce a worse macroeconomic outcome than if the economy had no banks.

Stochastic Process Switching and the Return to Gold, 1925

The authors analyze and estimate the effect on the dollar/sterling exchange rate in the early 1920s of anticipations of the return to the gold standard at prewar parity in the United Kingdom. These measures are consistent with a class of models of the exchange rate that includes a version of the monetary model and with any fundamentals that follow a random walk with drift. Contrary to some contemporary views, the appreciation of sterling prior to April 1925 appears to have been due to fundamentals (such as restrictive monetary policy) rather than to the expectation of a change in regime. Copyright 1990 by Royal Economic Society.

Greenback-Gold Returns and Expectations of Resumption, 1862-1879

We propose a unified framework for studying the greenback-gold price during the U.S. suspension of convertibility from 1862 to 1879. The gold price is viewed as a floating exchange rate, with a fixed destination given by gold standard parity because of the prospect of resumption. We test this perspective using daily data for the entire period, and measure the effect of news during and after the Civil War. New evidence of a decline in the volatility of gold returns after the Resumption Act of 1875 provides statistical support for the importance of expectations of resumption.

Financial Implications of the Shrinking Supply of U.S. Treasury Securities

Recent improvements in fiscal positions in advanced countries have sharply curtailed the issuance of government securities and created the possibility that government securities could disappear in some countries. The possibility that this might occur in the United States has attracted the most attention, in large part because of the international role of the U.S. dollar and the widespread perception that U.S. treasury securities have the lowest total financial risk (the combination of credit, market, and liquidity risks) among U.S. dollar assets. This paper analyzes the unique features of government securities and links them to the important roles that government securities, in particular U.S. treasury securities, have come to play in national and international financial markets. The paper then identifies and examines financial market-oriented public policy questions raised by the shrinking supply of U.S. treasuries.

Interest Rate Smoothing and Financial Stability

Central banks smooth fluctuations in interest rates based on a belief that this policy promotes financial stability. This belief is based on a presumption that the direct effect of less interest rate volatility on a banks likelihood of insolvency is the predominant effect of this policy. The main point of this paper is that these policies also give rise to indirect effects that lower financial stability. These indirect effects occur because the policy itself alters bank behavior. In effect, if the central bank provides (liquidity) insurance (at zero premia), it may introduce a classic moral hazard problem that encourages risk-taking by banks. As a result, to maintain a given degree of financial stability, a bank regulator may, in fact, need to impose a higher prudential capital requirement when an interest rate smoothing policy is in place. The paper concludes that the link between interest rate smoothing policy and financial stability may be more complicated than is generally recognized.

Markets for Corporate Debt Securities

This paper surveys markets for corporate debt securities in the major industrial countries and the international markets. The discussion includes a comparison of the sizes of the markets for various products, as well as the key operational, institutional, and legal features of primary and secondary markets. Although there are some signs that debt markets may be emphasized in the future by some countries, it remains true that North American debt markets are the most active and liquid in the world. The international debt markets are, however, growing in importance. The paper also investigates some of the reasons for the underdevelopment of domestic bond markets and the consequences of firms shifting their debt financing needs from banks to securities markets.

Market risk and asset prices

Abstract This paper examines the implications for the properties of asset prices of stochastic shifts in market demand which are not attributable to news about asset fundamentals. This introduces an additional component of uncertainty into asset price movements and alters the trading motives of agents. Market risk is shown to contribute to the risk premium on assets and exacerbates asset-price volatility.

Money, taxes, and endogenous growth

Abstract This paper studies the positive and normative consequences of distortionary taxation in a monetary endogenous growth model with technological externalities. It is shown that the policy implications obtained from non-monetary growth models may significantly understate the actual effects. In addition, some policies that are optimal in non-monetary models may not be sustainable when money has a role in the economy.