Table of Contents

Banking and Public Policy: Too Big to Fail

George G. Kaufman, Loyola University Chicago

Real Option Component of Cash Holdings, Business Cycle, and Stock Returns

Jiun-Lin Chen, University of Adelaide
Zi Jia, University of Arkansas at Little Rock
Ping-Wen Sun, Jiangxi University of Finance and Economics

Understanding Differences in Growth Performance in Latin America and Developing Countries between the Asian and Global Financial Crises

Roberto Alvarez, University of Chile - Department of Economics
Jose de Gregorio, Central Bank of Chile, Universidad de Chile, National Bureau of Economic Research (NBER)

The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound

Richard C. Sutch, University of California, Riverside (UCR) - Department of Economics, National Bureau of Economic Research (NBER)

A Dove to Hawk Ranking of the Martin to Yellen Federal Reserves

Linus Wilson, University of Louisiana at Lafayette - College of Business Administration

Tax-Minded Executives and Corporate Tax Strategies: Evidence from the 2013 Tax Hikes

Gerardo Perez Cavazos, University of Chicago - Booth School of Business
Andreya Marie Silva, Independent


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Banking and Public Policy: Too Big to Fail" Fee Download
Economic Inquiry, Vol. 53, Issue 1, pp. 1-8, 2015

GEORGE G. KAUFMAN, Loyola University Chicago
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“Too big to fail� (TBTF) is a major policy issue in banking. Large bank failures may impose losses on depositors and creditors that may impose large collateral damage on other financial institutions and beyond. Regulators are frequently incentivized either to delay recognizing a bank's insolvency or fail the bank but protect its creditors against loss. This paper argues that, while there is wide agreement that the cost of protecting creditors in the resolution of large financial institutions is excessively high, it is difficult to prevent this practice for a number of reasons. Until these disagreements are settled, TBTF will survive.

"Real Option Component of Cash Holdings, Business Cycle, and Stock Returns" Free Download

JIUN-LIN CHEN, University of Adelaide
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ZI JIA, University of Arkansas at Little Rock
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PING-WEN SUN, Jiangxi University of Finance and Economics
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Corporate managers tend to preserve cash with an expectation of a worse economy while spend cash to exercise growth opportunities with a favorable economic condition. We hypothesize that there exists a real option component of aggregate corporate cash holdings, serving both functions of precautionary saving and exercising growth options. Consistent with our hypothesis, the empirical results show that this component increases when the real GDP declines while decreasing when the real GDP increases. Stocks with returns declining more to a shock to the real option component of aggregate cash holdings earn higher future returns. Moreover, our results show that stock returns of firms with higher cash holdings positively comove with the shock to the real option component of aggregate cash holdings, suggesting investors prefer to hold firms with higher cash holdings when the economy is bad.

"Understanding Differences in Growth Performance in Latin America and Developing Countries between the Asian and Global Financial Crises" Free Download
Peterson Institute for International Economics Working Paper No. 14-11

ROBERTO ALVAREZ, University of Chile - Department of Economics
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JOSE DE GREGORIO, Central Bank of Chile, Universidad de Chile, National Bureau of Economic Research (NBER)
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Latin American performance during the global financial crisis was unprecedented. Many developing and emerging countries successfully weathered the worst crisis since the Great Depression. Was it good luck? Was it good policies? In this paper we compare growth during the Asian and global financial crises and find that a looser monetary policy played an important role in mitigating crisis. We also find that higher private credit, more financial openness, less trade openness, and greater exchange rate intervention worsened economic performance. Our analysis of Latin American countries confirms that effective macroeconomic management was key to good economic performance. Finally, we present evidence from a sample of 31 emerging markets that high terms of trade had a positive impact on resilience.

"The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound" Free Download

RICHARD C. SUTCH, University of California, Riverside (UCR) - Department of Economics, National Bureau of Economic Research (NBER)
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The developed economies of Japan, the United States, and the Eurozone are currently experiencing very low short-term rates, so low that they are considered to be at the “zero lower bound� of possibility. This effectively paralyzes conventional monetary policy. As a consequence, monetary authorities have turned to unconventional and controversial policies such as “Quantitative Easing,� “Maturity Extension,� and “Low for Long Forward Guidance.� John Maynard Keynes in The General Theory offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned in the current discussions because the subsequent simplifications and the bowdlerization of his model obliterated this detail. It was only later that his characterization of a lower bound to interest rates would be dubbed a “Liquidity Trap.� This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.

"A Dove to Hawk Ranking of the Martin to Yellen Federal Reserves" Free Download

LINUS WILSON, University of Louisiana at Lafayette - College of Business Administration
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This note ranks the Federal Reserves based on the tenure of their chairs from William McChesney Martin, Jr. to Janet L. Yellen, using data from 1958 through Q3 2014. Inflation “doves� are willing to tolerate more inflation than inflation “hawks.� Comparing the Taylor (1993) rule and core inflation to the effective fed funds rates, it is found that the Yellen Fed is the most dovish Fed since 1958.

"Tax-Minded Executives and Corporate Tax Strategies: Evidence from the 2013 Tax Hikes" Free Download

GERARDO PEREZ CAVAZOS, University of Chicago - Booth School of Business
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ANDREYA MARIE SILVA, Independent
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Exploiting the increase in personal tax rates due to the American Taxpayer Relief Act and Healthcare Act, we identify tax-minded executives who exhibit a preference for personal tax savings. We find that 2,281 top executives strategically realized their built in capital gains prior to the tax hikes to save nearly $741 million in personal taxes in 2012. These executives also save their shareholders taxes and save their firms cash taxes. Specifically, their firms distributed $8 billion in special and accelerated dividends in 2012, which saved shareholders nearly $700 million in taxes. Further, each tax-minded executive reduces a firm’s cash effective tax rate by 0.28%.

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MACROECONOMICS EJOURNALS

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Advisory Board

Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

JOHN Y. CAMPBELL
Morton L. and Carole S. Olshan Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

STEPHEN G. CECCHETTI
Professor of International Economics, Brandeis International Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)

BENJAMIN M. FRIEDMAN
William Joseph Maier Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

ROBERT E. HALL
Stanford University - The Hoover Institution on War, Revolution and Peace, National Bureau of Economic Research (NBER)

ROBERT E. LUCAS
John Dewey Distinguished Service Professor, University of Chicago - Department of Economics, National Bureau of Economic Research (NBER)

BENNETT T. MCCALLUM
Professor, Carnegie Mellon University - David A. Tepper School of Business, National Bureau of Economic Research (NBER)

ALLAN H. MELTZER
University Professor of Political Economics, Carnegie Mellon University - David A. Tepper School of Business

FREDERIC S. MISHKIN
Alfred Lerner Professor of Banking and Financial Institutions, Columbia Business School - Finance and Economics, National Bureau of Economic Research (NBER)

PAUL M. ROMER
National Bureau of Economic Research (NBER)

JULIO J. ROTEMBERG
Harvard University - Business, Government and the International Economy Unit, National Bureau of Economic Research (NBER)

MATTHEW D. SHAPIRO
Professor, University of Michigan at Ann Arbor - Department of Economics, Professor, National Bureau of Economic Research (NBER)

ROBERT J. SHILLER
Yale University - Cowles Foundation, National Bureau of Economic Research (NBER), Yale University - International Center for Finance

CHRISTOPHER A. SIMS
Princeton University - Department of Economics, National Bureau of Economic Research (NBER)

JOHN B. TAYLOR
Stanford University