Thomas F. Cosimano

Beware of Emigrants Bearing Gifts; Optimal Fiscal and Monetary Policy in the Presence of Remittances

Remittance flows are quickly surpassing private capital flows and official aid in magnitude and rate of growth, making them the single most important form of income flows into developing and emerging economies. This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

What's different among banks?

Abstract Based on commercial paper being a nearly perfect substitute for certificates of deposits (CDs) and CD reserve requirements creating a higher cost of funds for banks, Fama shows that the banking industry must have some monopoly power relative to other financial institutions. His analysis does not resolve whether this monopoly power is vested in banks collectively, vis-a-vis other financial institutions, or if the monopoly power extends to the level of individual banks. Using an event study framework to examine the elimination of a reserve requirement, we find significant evidence of monopoly power at the level of individual banks.

Bank Behavior in Response to Basel III: A Cross-Country Analysis

This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.

Inflation Variability and Gradualist Monetary Policy

This paper considers the optimal approach to reducing inflation when the cost of inflation is its conditional variability. Inflation is stochastically related to money growth, with unobservable time-varying autonomous and induced components. A sharp reduction in money growth provides information about the responsiveness of inflation to money, but also induces variability as the economy heads into unknown territory. Gradual policy is always optimal and the model explains why moderate-inflation countries adopt a much more gradual money growth reduction than high-inflation countries. Additionally, the analysis sheds light on the more general problem of learning with two unobservable parameters.

The Stock Market Channel of Monetary Policy

This paper argues that the stock market is an important channel of monetary policy. Monetary policy affects real economic activity because inflation levies a property tax on stocks in addition to an income tax on dividend payments. Inflation thus taxes stocks more heavily than it does bonds. Households alter their required rate of return as inflation changes, and firms adjust production in order to satisfy their shareholders’ demands. As the stock market channel grows in importance, the appropriate intermediate target for the central bank is the price level, with price stability being the ultimate goal.

Managing ethical risk: How investing in ethics adds value

Abstract In September 1999, the University of Notre Dame hosted a conference entitled “Measuring and Managing Ethical Risk: How Investing in Ethics Adds Value”. The motivations for hosting the conference and the papers presented there are summarized. Several themes that are present in the papers are discussed. These include the gains from combining the anthropological approach to business ethics with the neoclassical economics approach, the central role of trust in business ethics, the role of ethics in the corporation, and the function of the legal system in setting and enforcing ethical standards for the financial system.

Did the Basel Accord Cause a Credit Slowdown in Latin America

Drawing from a unique data set comprising 2,893 banks and 152 countries over the period 1987 to 2000, we test whether the adoption of the Basel Accord by Latin American and Caribbean countries was responsible for the serious slowdowns in credit growth experienced by these countries. We find that, on average, both bank capitalization and lending activities in Latin America increased after Basel. Consequently, Basel did not seem to lead to an overall credit decline. However, we do find evidence that loan growth became more sensitive to some risk factors. Our study suggests that the upcoming adoption of Basel II might cause greater procyclicality of credit.

DIDMCA and bank market risk: Theory and evidence☆

Abstract This paper examines the theoretical and empirical consequences of the Depository Institutions Deregulation and Monetary Control Act of 1980 on the market risk of the US banking industry. We survey several theoretical arguments linking deregulation of deposit interest rates to market-based measures of bank risk. Capital market data for a sample of large commercial bank holding companies provides evidence that deregulation has accompanied increases in both systematic and nonsystematic measures of bank risk.

The Federal Funds Market under Bank Deregulation

The introduction of competitive interest rates on deposits is shown to effect the optimal decisions of banks by altering their optimal forecast of the federal-funds rate. The movement toward co mpetitive deposit rates increases the size of the monetary base neces sary for the Fed to maintain its deposit targets when deposits and the monetary base are substitutes. In addition there is less uncertainty in the federal-funds market under competitive deposit rates when deposits and the monetary base are substitutes, and the source of uncertainty is not from the supply of deposits. Copyright 1987 by Ohio State University Press.

Dynamic monetary control and interest rate stabilization

Abstract Interest rate stabilization results in an instrument shortage that complicates monetary control by introducing strategic considerations into the Trading Desks decision problem. The paper demonstrates that, when expected future open market operations influence current bank and depositor behavior, an instrument shortage is necessary and sufficient for the Commitment policy to be time-inconsistent and for the Discretionary policy to be suboptimal, i.e., worse than the Commitment policy. The moving average component of the Commitment policy is of higher order than the Discretionary policy. Under either regime, the expected value of the representative bank is increasing in the Trading Desks emphasis on interest rate stability.