Bruce D. Smith's research while affiliated with University of Texas at Austin and other places
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Publications (159)
comments on an earlier version of this paper. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1 Before 1789, the individual colonies that would ultimately make up the United States were free to issue their own currencies, and all of them did. 1 T...
Can eliminating the stock of government bonds reduce welfare? When the government must raise revenue to pay interest on its
bonds, the social value of government debt hinges on whether the benefits from greater portfolio diversification outweigh
the costs of the revenue-raising efforts. A positive stock of debt is optimal only if interest payments...
There is now a substantial theoretical literature arguing that inflation impedes financial deepening. Furthermore, it has been hypothesized that the relationship is a nonlinear one, in that there is a threshold level of inflation below which inflation has a positive effect on financial depth, but above which the effect turns negative. Using a large...
In this paper, we expand previous models with banks and money and explore the consequences of seasonals in the banking system. We find that, when bank failures occur, not all of them have associated large output losses and currency premiums exist. We show that the most important sources of seasonal fluctuations for the banking system are those rela...
It is commonly argued that poorly designed banking system safety nets are largely to blame for the frequency and severity of modern banking crises. For example, “underpriced” deposit insurance and/or low reserve requirements are often viewed as factors that encourage risk-taking by banks. In this paper, we study the effects of three policy variable...
We consider how the industrial organization of the financial system affects an economy's macroeconomic performance. In particular, we compare two otherwise identical monetary economies - one with a competitive and the other with a monopolistic banking system - along the dimensions of bank liquidity provision, asset allocation, savings behavior, lon...
It is commonly argued that poorly designed banking system safety nets are largely to blame for the frequency and severity of modern banking crises. For example, “underpriced” deposit insurance and/or low reserve requirements are often viewed as factors that encourage risk-taking by banks. In this paper, we study the effects of three policy variable...
We study a monetary, general equilibrium economy in which banks exist because they provide inter-temporal insurance to risk-averse depositors. A "banking crisis" is defined as a case in which banks exhaust their reserve assets. This may (but need not) be associated with liquidation of a storage asset. When such liquidation does occur, the result is...
According to the logic of the Friedman rule, the opportunity cost of holding money faced by private agents should equal the social cost of creating additional fiat money. Thus nominal rates of interest should be zero. This logic has been shown to be correct in a number of contexts, with and without various distortions. In practice, however, economi...
We study a monetary, general equilibrium economy in which banks exist because they provide intertemporal insurance to risk-averse depositors. A "banking crisis" is defined as a case in which banks exhaust their reserve assets. Under different model specifications, the banking industry is either a monopoly bank or a competitive banking industry. If...
We study an economy in which intermediaries have incentives to issue circulating liabilities as part of an equilibrium. We show that, with arbitrarily small transactions costs, only the liabilities of intermediaries will circulate, and not those of other private sector agents. Therefore, our model connects intermediation activity with the issuance...
See, for example, Gine (2001), who estimates the magnitude of transactions costs of accessing banks in rural Thailand. Valerie R. Bencivenga is on the faculty of the University of Texas at
Seasonal fluctuations are as large as cyclical fluctuations. Monetary policy in the United States has dealt with seasonality by smoothing nominal rates of interest. The original motivation for this was that seasonality in nominal interest rates put recurring strain on the banking system. We build a model of monetary policy in the presence of season...
We study dynamic economies in which agents may have incentives to hold both privately-issued (a.k.a. inside) and publicly-issued (a.k.a. outside) circulating liabilities as part of an equilibrium. Our analysis emphasizes spatial separation and limited communication as frictions that motivate monetary exchange. We isolate conditions under which a co...
This paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs, the way in which they are priced, and the way in which they fund revenue shortfalls. In our economy, the central issue in analyzing deposit insurance is how the government will make up any FDIC losses. Deposit insurance premia matter only...
This paper is an attempt to address these questions. There are a number of candidates for the causes of banking crises. One simple view is that they are just the inevitable "fallout" of other macroeconomic events. Indeed, it may be that banking crises are often merely reflections of other macroeconomic problems, and that these crises play no causal...
atab 35835 P. Sintim-Aboagy WDR 31393 C. Spooner 32116 P. Sintim-Aboagye P. Sintim-Aboagy'e J. Sharer 85581 25 Stoeckel, Andy and Sandy Cuthbertson. 1987. The Game Plan.' Successful Strategies for Australian Trade. Center for International Economics. Canberra. Valdes, Alberto and Barry Schaeffer. 1993. Domestic Surveillance for Transparency in Agri...
this paper, we have assumed that the aggregate trade balance (FBAL) is fixed for each country, and that the exchange rate (EXR) varies to achieve external balance. Fixed investment and government-consumption shares in GDP (GOVGDP and INVGDP) are also fixed exogenously in equations 39 and 40. To satisfy the government budget constraint in equation 3...
We consider the question how "best" to maintain price-level stability in an open economy, and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed exchange rate; and (c) a policy of explicit commitment to a price-level target. In each case we assume that policy is conducted by injecting reserves into or withdra...
Credit rationing is a common feature of most developing economies. In response to it, the governments of these countries often operate a number of programs intended to expand the supply of credit to the private sector. Expansionary monetary policy is often seen as a way of reducing the extent of credit rationing. We examine the consequences of a co...
This article considers the consequences for a central bank of a declining stock of government debt. The model has a treasury that taxes, spends, and issues debt; a central bank that conducts open market operations in treasury debt; and banks that intermediate private savings. It suggests that a sufficiently small stock of debt can put an economy on...
The monetary character of trade, use of a common medium of ex-change, is shown to be an outcome of economic general equilibrium in the pres-ence of transaction costs and market segmentation (in trading posts with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset...
Recent years have seen major innovations in the nature of monetary, banking, and payment arrangements. These innovations, which are certain to continue into the foreseeable future, will have huge implications for the conduct of monetary policy, for the regulation of banking, and for the design of payment systems. Indeed, central banks now need to t...
I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the wealth-to-income ratio falls, investors demand a highe...
A growing theoretical literature describes mechanisms whereby even predictable increases in the rate of inflation interfere with the ability of the financial sector to allocate resources effectively. This paper empirically assesses these predictions. The evidence indicates that there is a significant, and economically important, negative relationsh...
We consider the following questions: (1) Does the adoption of a common currency either reduce or enhance the scope for endogenously generated volatility to emerge? (2) Does the adoption of a common currency reduce or enhance the scope for indeterminacies to arise? (3) Is there a welfare justification for the adoption of a single currency? (4) What...
The authors study the capital accumulation and welfare implications of ceilings on loan interest rates in a dynamic general equilibrium model. Binding ceilings on loan rates reduce the probability of bankruptcy. Lower bankruptcy rates result in lower bankruptcy and liquidation costs. The authors state conditions under which the resources freed by t...
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...
An endogenous growth model is presented in which production uses a vector of capital inputs. Technologies for creating capital of different types vary by gestation period and productivity. Ownership of gestating capital must be "rolled over" in secondary capital markets in which transactions are costly. We study how reductions in transactions costs...
The Suffolk Bank in Boston is well known as having been the clearinghouse for virtually all the banknotes that circulated in New England between 1836 and 1858. An examination of 19th century bank balance sheets shows that during and after the U.S. banking Panic of 1837, this private commercial bank also provided some services that today are provide...
Legal and technological changes have made private banknote issue, or its electronic equivalent, possible. We construct a model where private liabilities circulate, either by themselves or alongside outside money. We provide results on existence and multiplicity of equilibria and characterize dynamics near steady states. Our results support Friedman...
We consider issues concerning the design of a banking system "safety net" when both a deposit insurer and a lender of last resort are present. In our model both entities have a role to play. Moreover, issues related to deposit insurance pricing are relatively unimportant in this context, whereas issues related to discount window access and pricing...
Until recently, the trend in world capital markets has been toward increasing “globalization.” Recent events in Latin America and Asia have forced a rethinking of the desirability of unrestricted world capital flows. In this paper we ask whether simple restrictions on capital mobility can succeed in reducing the volatility of funds flows, whether s...
This paper considers the implications for monetary policy of a decreasing demand for outside money. It finds that even perpetual declines in the demand for base money pose no threat to the traditional methods employed for conducting monetary policy. The effects of such reductions in the demand for central bank liabilities, however, do depend on how...
We consider risk-neutral firms that must obtain external finance. They have access to two kinds of stochastic investment opportunities. For one, return realizations are costlessly observed by all agents. For the other, return realizations are costlessly observed only by the investing firm. We examine the optimal allocation of investment between the...
Empirical evidence suggests that real activity, the volume of bank lending activity, and the volume of trading in equity markets are strongly positively correlated. At the same time, inflation and financial market activity are strongly negatively correlated (in the long run), as are inflation and the real rate of return on equity. Inflation and rea...
Sustained inflation is detrimental to long-run growth and the financial system. A recent theoretical literature suggests that high inflation implies low real returns on assets. These low returns exacerbate informational frictions, interfering with the functioning of financial markets and the allocation of investment. We investigate the plausibility...
this paper, we use a model in which coins circulate by face value or tale to explain this behavior. Modelling circulation by tale elucidates this `debasement puzzle' (a phrase of Rolnick, Weber, and Velde) as well as various doctrines in monetary economics involving Gresham's Law (or, as we shall see, Laws) and the quantity theory of money. A `smal...
Until recently, the trend in world capital markets has been toward increasing globalization. Recent events in Latin America and Asia have caused many in policy-making circles to question whether this trend should be wholly, or at least partially, reversed. It is commonly argued that—at a minimum—countries should be given the discretion to erect suc...
Many have argued that private provision of close currency substitutes may lead to large scale indeterminacies and excessive economic fluctuations. Others argue that money creation can be "left to the market." Adherents of this viewpoint often point to the Suffolk Banking System as an example of a well-functioning system of private money creation. W...
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...
As noted by Gurley and Shaw, there is a typical pattern of economic development in which the evolution of the financial system is an essential aspect of the growth process. We focus on one component of this evolution: the increasing importance of equity markets as an economy grows. We develop a growth model where capital accumulation is financed ex...
We consider a small open economy with a costly state verification problem and binding reserve requirements. The presence of these frictions leads to the existence of two steady states with credit rationing. An increase in the money growth rate, the world interest rate or reserve requirements raises (lowers) GDP in the high (low) activity steady sta...
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...
We consider a monetary growth model essentially identical to that of Diamond (1965) and Tirole (1985), except that we explicitly model credit markets, a credit market friction, and an allocative function for financial intermediaries. These changes yield substantially different results than those obtained in more standard models. In particular, if a...
We study the problem of a government that wishes to share optimally the burden of deficit finance among agents with differential access to investment opportunities. In the presence of private information, it is Pareto efficient for the government to borrow in a way that amounts to non-linear taxation, and it must treat agents with access to the bes...
We consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs. The insurer wishes to minimize the expected cost of providing these agents a certain expected utility level. We characterize the optimal contract between the insurer and the insured agents. We...
Many claims have been made about the potential benefits, and the potential costs, of adopting a system of universal banking in the United States. The authors evaluate these claims using a model where there is a moral hazard problem between banks and 'borrowers,' a moral hazard problem between banks and a deposit insurer, and a costly state verifica...
A classic example of a privately created interbank payments system was operated by the Suffolk Bank of New England (1825–58). Known as the Suffolk Banking System, it was the nation’s first regionwide net-clearing system for bank notes. While it operated, notes of all New England banks circulated at par throughout the region. Some have concluded fro...
The authors study a one-sector growth model where capital investment is credit financed and there is an adverse selection problem in credit markets. The presence of adverse selection creates an indeterminacy of equilibrium. Many equilibria display permanent fluctuations characterized by transitions between Walrasian regimes and regimes of credit ra...
Before the establishment of federal deposit insurance, the U.S. experienced periodic banking panics, during which banks suspended specie payments and reduced lending. There was often a corresponding economic slowdown. The Panic of 1837 is considered one of the worst banking panics, and it coincided with a slowdown that lasted for almost five years....
This article presents a monetary growth model where spatial separation and limited communication create a role for banks.
Monetary policy interacts with the financial system's liquidity provision to affect the existence, multiplicity, and dynamical
properties of equilibria. Moderate levels of risk aversion and tight monetary policy can lead to mult...
Credit rationing is a common feature of most developing economies. In response to it, the governments of these countries often operate extensive credit programs and lend, either directly or indirectly, to the private sector. We analyze the macroeconomic consequences of a typical government credit program in a small open economy. We show that such p...
Does monetizing a deficit always result in a higher rate of inflation than bond financing the same deficit? T. J. Sargent and N. Wallace (1981) produced conditions under which the answer was negative ('unpleasant monetarist arithmetic'). Subsequent authors have challenged the empirical validity of these conditions. The authors develop a model simil...
Violations of the absolute priority rule (APR) are commonplace in private workouts, formal business reorganizations, and personal bankruptcies. While some theorists suggest they may arise endogenously, they are clearly magnified by the institutional structure of the bankruptcy code. This paper shows that APR violations exacerbate credit rationing p...
We consider the question of how to "best" maintain price level stability in the open economy and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed rate: and (c) a policy of explicit commitment to a price lavel target. In each case we assume that policy is conducted by injecting or withdrawing reserves from t...
We consider an otherwise conventional monetary growth model in which spatial separation and limited communication create a transactions role for currency, and stochastic relocation gives rise to financial intermediaries. In this framework, we consider how changes in fiscal and monetary policy, and in reserve requirements, affect inflation, capital...
this paper we investigate the empirical association between inflation and the functioning of an economy's financial system. We find substantial evidence that inflation is negatively correlated with financial market performance, and, in addition, we find that the relationship between inflation and financial development exhibits significant nonlinear...
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except...
Economic development is typically accompanied by migration from rural to urban employment. This migration is often associated with significant urban underemployment. Both factors are important in the development process. The authors consider a neoclassical growth model with rural-urban migration and urban underemployment, which arises from an adver...
The classic example of a privately created and well-functioning interbank payments system is the Suffolk Banking System that existed in New England between 1825 and 1858. This System, operated by the Suffolk Bank, was the first regionwide net-clearing system for bank notes in the United States. While it operated, notes of all New England banks circ...
We consider a monetary growth model in which banks arise to provide liquidity. In addition, there is a government that issues not only money, but interest-bearing bonds; these bonds compete with capital in private portfolios. When the government fixes a constant growth rate for the money stock, we show that there can exist multiple nontrivial monet...
The authors consider a model where spatial separation, limited communication, and stochastic relocation create a role for banks and country-specific currencies. The same factors also permit a deviation from the law of one price. The authors examine how monetary policies influence real and nominal rates of exchange and real and nominal rates of inte...
This paper formulates a model of commodity money that circulates by tale, and applies it to a variety of situations, some of which seem to confirm, and others to contradict, `Gresham's Law'. We analyze how debasements could prompt decisions of citizens voluntarily to participate in recoinages that subjected them to seigniorage taxes.
A model of credit markets in which there is a costly-state-verification problem is integrated into a neoclassical growth model. The presence of a credit market friction gives rise to credit rationing, which in turn impacts on the growth path of an economy. The model delivers predictions about the co-movements between per capita income, credit ratio...
The role of debt and equity changes over time and with the level of development. What are these changes, and why should they systematically occur across different countries and time periods? This article characterizes financial innovation as a dynamic process that both influences and is influenced by the development of the real sector. It focuses o...
Existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not. A monetary model is constructed, where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics. These panics occur when there are restrictio...
Using firm-level data we investigate the relationship between trade credit and suppliers' market structure and find a [intersection]-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This "big jump" arises because monopolists are more likely to not offer any tra...
We introduce an informational asymmetry into an otherwise standard monetary growth model and examine its implications for the determinacy of equilibrium, for endogenous economic volatility, and for the relationship between steady-state output and the rate of money growth. Some empirical evidence suggests that, for economies with low initial inflati...
An exploration of the cross-sectional relationship between inflation and an array of indicators of financial market conditions, using time-averaged data covering several decades and a large number of countries.
Poorly developed equity markets inhibit the transfer of capital ownership. Moreover, the costs of transacting in equity markets
affect not just the level of investment, but the kinds of investments that are undertaken. Once equity markets allow the ownership
of capital to be transferred economically, reductions in costs tend to favor the use of lon...
Most monetary growth models have a relatively simple structure. There are two assets, money and capital, and money is held either because it earns the same real return as capital, or because it is ascribed an advantage in transacting that is not explicitly modelled. Financial market institutions are not present, nor are the financial market frictio...
Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking
industries. A first step in a systematic study of these financial mutuals is to examine the reasons for their formation. Doing
so provides empirical support for the view that these mutuals arose as an efficient means of addressi...
What is the relationship between markets and development? It is argued that markets promote growth, and that growth in turn encourages the formation of markets. Two models with endogenous market formation are presented to analyze this issue. The first examines the role that financial markets — banks and stock markets — play in allocating funds to t...
Citations
... The first point of view is concentration-stability, which indicates that increasing the market share of the bank leads to an increase in its opportunity to improve profitability rates. Thus, the bank's financial fragility decreases due to larger capital reserves (Boyd, De Nicolo, & Smith, 2004). As opposed to that, the other view is concentration-fragility, indicating that banks with large capital tend to take risks. ...
![[object Object]](https://i1.rgstatic.net/ii/profile.image/272759347478535-1442042304245_Q64/Gianni-De-Nicolo.jpg)
... In addition, Table 3 shows that under low inflation, the promotion effect of consumer price index(CPI) upon total tax is not significant, our empirical result is in line with Khan et al. (2006) argument. Table 4 are derived from the data of DGBAS,Taiwan ...
... 192-193, 197). The Suffolk system, lasting from the mid-1820s to the late 1850s was the first, if not most (in)famous, example of such an arrangement (Bodenhorn 2002;Rolnick et al. 1998;Calomiris and Kahn 1996). It maintained par bank note redemption and clearing operations which covered virtually all of New England. ...
... In the model of Boyd-Chang-Smith (2004), even though project return is safe because of a large number of borrowers, he assumes possibility for banks to fail. ...
Reference: The Bank Capital Regulation (BCR) Model
... The results described above are obtained under the assumption that the degree of relative risk aversion is below one, as in Bhattacharya et al. (1997) and Schreft and Smith (2002). The later part of this study makes an alternative assumption that the degree of relative risk aversion is above one, and shows that the equilibrium is unique. ...
![[object Object]](https://i1.rgstatic.net/ii/profile.image/277584572108802-1443192727457_Q64/Joydeep-Bhattacharya-3.jpg)
... In parts of the country, this second suspension lasted until 1842. 7 seeRolnick, Smith, and Weber (2003). 8 Although Rhode Island banks technically were not part of the SBS, many of them cleared notes of New England banks with the Merchant's Bank, which in turn cleared these notes through the SBS. ...
... As discussed in Wallace (1980) Haslag, and Martin (2005) and the references therein). More specifically, our paper complements the work by Paal and Smith (2004) who study suboptimality of the Friedman rule in an environment with endogenous growth that shares many similarities with ours. In a money-in-the-utility-function overlapping generations economy with production, Weiss (1980) finds that the optimal policy produces positive inflation. ...
Reference: Optimal Monetary Policy and Economic Growth
... 13In addition to problems in financial intermediation, see Smith (1998) and the papers therein for recent applications of the CSV model to problems in growth, development, and exchange rates (e.g., Antinolfi and Huybens (1998)) and real business cycle models (e.g., Cooley and Nam (1998)). APPENDIX PROOF OF PROPOSITION 1: Assume by way of contradiction that there exists a v in Problem 1 such that the optimal initial contract entails stochastic enforcement (O < o(2 < 1). ...
... This leads to a reduction in credit and thus in financial development (Moore, 1986;Choi et al., 1996;Azariadis & Smith, 1996;Bittencourt, 2011 andZermeño et al., 2018). Moreover, high rates of inflation are usually followed by an increase in interest rates which can lead to less efficient financial markets and unsteady state in the economy, causing a negative impact on financial develpment (Boyd & Smith, 1998;Huybens & Smith, 1999). The nature of the relationship between trade openness and financial development is unclear. ...
... In this case, high rates of inflation lower yields on assets and investment, which significantly damages capital accumulation and EG. Schreft and Smith (1997) develop a monetary growth model inspired by Diamond (1965) while introducing the role of financial institutions (banks) as the provider of liquidity. Under their model, sustained high inflation inhibits an economy's ability to reach higher steady state where capital stock is high. ...
