Gerald Dwyer - Profile on Academia.edu (original) (raw)

Papers by Gerald Dwyer

Systemic risk in financial markets is the risk or probability of a breakdown in the ability to tr... more Systemic risk in financial markets is the risk or probability of a breakdown in the ability to transact in an economy using customary procedures. Regulation can reduce systemic risk by changing the behavior of financial market participants and by making the financial system more resilient to shocks. Systemic risk to the financial system will be regulated. While it may seem obvious that it should be, an important question is, why? An equally important question is, how? Real and fanciful systemic risk George G. Kaufman and Kenneth E. Scott probably have published the best definition of systemic risk to date, namely Systemic risk refers to the risk or probability of breakdowns in an entire system, as opposed to breakdowns in individual parts or components, and is evidenced by comovements (correlation) among most or all the parts. (Kaufman and Scott 2003, 371) While fine for some purposes, this definition uses one important term that is quite vague: breakdown. Can one tell with any prec...

Macroprudential Regulation of Banks and Financial Institutions

The Oxford Handbook of the Economics of Central Banking, 2019

Regulation of financial institutions to avoid the worst effects of financial crises has become a ... more Regulation of financial institutions to avoid the worst effects of financial crises has become a major topic of research and a focus of regulators’ efforts. Policies designed to reduce crises’ effects on real GDP and employment are called macroprudential. Moral hazard has been introduced by deposit insurance and bailouts of banks and large financial institutions. Too little is known to premise macroprudential regulation on externalities. That said, higher capital at banks and other institutions counteracts one effect of deposit insurance and would make the financial system more resilient. Living wills are likely not to be time-consistent. Regulators will not have an incentive to use them in a financial crisis. Instead, they will bail out firms to avoid adverse effects on the economy. Institutions determining regulators’ choices in a crisis need to be designed to make it equilibrium behavior for regulators to let financial firms fail.

Computers are deterministic devices, and a computer-generated random number is a contradiction in... more Computers are deterministic devices, and a computer-generated random number is a contradiction in terms. As a result, computer-generated pseudorandom numbers are fraught with peril for the unwary. We summarize much that is known about the most well-known pseudorandom number generators: congruential generators. We also provide machine-independent programs to implement the generators in any language that has 32-bit signed integers—for example C, C++, and FORTRAN. Based on an extensive search, we provide parameter values better than those previously available. JEL classification: C15

SSRN Electronic Journal, 2016

The Bitcoin blockchain is the primary innovation in Bitcoin that makes it practical. Blockchains ... more The Bitcoin blockchain is the primary innovation in Bitcoin that makes it practical. Blockchains have applications in many contexts other than cryptocurrencies. This note is an introduction to blockchains that requires no prior knowledge, including of Bitcoin. Blockchains are ledgers of transactions kept by a set of participants, none of which is accorded special status as the "correct one." Instead, agreement is reached by a process of consensus. I show how this works for Bitcoin, discuss applications in many alternative settings and provide some detail about a very different proof-of-concept application of blockchains by the Japan Exchange Group. December 2016 This primer is based on an invited tutorial given at the Financial Association meeting in October 2016. I thank the Spanish Ministry of Economy and Competitiveness for support through the project ECO2013-42849-P at the University of Carlos III, Madrid.

Interest on Reserves and the Federal Reserve's Balance Sheet

The Journal of Economic Asymmetries, 2009

What are the implications for monetary policy of a central bank's payment of interest on rese... more What are the implications for monetary policy of a central bank's payment of interest on reserves? Is the demand for reserves infinitely elastic if interest is paid at the same rate as is available on government securities, or in the United States, at the Federal Funds rate? In general, the answer is no. Reserves and government securities are perfect substitutes when a government central bank pays interest at the same rate as the rate on government securities. This implies that the Federal Reserve cannot ignore the size of its balance sheet in the aftermath of the financial crisis of 2008.

Bubbles, or Neither Determine Stock Prices? Some International Evidence

ICPSR Data Holdings

In This Issue. .. 3 R ules and D iscretion in M onetary P olicy Gerald P. D w yer Jr. Should mone... more In This Issue. .. 3 R ules and D iscretion in M onetary P olicy Gerald P. D w yer Jr. Should monetary policy be determined by a legislated rule or by a mone tary authority's discretion? Henry Simons first raised this issue in 1936 as a choice between rules and authorities, terms little different from those used in recent discussions. Proposed rules would restrict the Federal Reserve's discretion in various ways. Simons argued that the Federal Reserve should be required to keep the price level constant. Some other proposed rules embody far more radical changes in the U.S. monetary system. This article provides an overview of the debate on rules vs. discretion. Dwyer focuses on the following basic issue: Even if policy actions would usually be the same with or without a rule, what are the benefits and costs of a rule that commits policy? On the benefit side, rules make it possible to have policies that are otherwise impossible. On the cost side, rules can limit a monetary authority's responses to the economy's recent performance. As Dwyer indicates, though, such responses can actually be destabilizing, and evidence that such responses have been stabilizing is lacking. 15 Can N om inal GD P T argetin g R ules Stabilize the Economy? Michael J. Dueker Because the Federal Reserve has shown interest in making price stability an explicit goal of monetary policy, examination of potential nominal an chors has become particularly relevant. A target path for nominal gross domestic product (GDP) growth is a possible nominal anchor that has received considerable attention since Bennett McCallum proposed an implementable nominal GDP targeting rule. Numerous researchers have run simulations of McCallum's rule and have generally concluded that ruleguided manipulation of the monetary base could greatly stabilize the growth of nominal spending and could, by implication, be used to foster price stability. Unfortunately, virtually all of these studies regarding the stability of the velocity relationship between the monetary base and nominal income have been too optimistic. In this article, Michael Dueker tests and rejects the hypothesis that the income velocity of the monetary base has been stable. He then estimates a velocity model that has time-varying parameters to account for struc tural change. Subsequent simulations of McCallum's rule use a calibrated version of the velocity model to generate data. In the simulations, McCal lum's rule is still able to stabilize nominal GDP growth, but less stringent-M AY/JUNE 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ly than simulations using fixed-coefficient models have suggested. This finding suggests that a nominal GDP target can serve as a long-run nomi nal anchor so that prices might be predictable in the long run, but shortrun variability will persist. 31 The FOMC in 1992: A M onetary C o n u n d ru m Joseph A. Ritter The Federal Open Market Committee (FOMC) holds the primary responsi bility for monetary policy. This article argues that in 1992, mixed signals sent by M l, which grew rapidly, and M2, which grew slowly, were the source of an important tension in monetary policymaking. In this article, Joseph Ritter surveys hypotheses about the causes of slow M2 growth and concludes that although the FOMC found none of them wholly per suasive, the Committee gave less weight to movements in this aggregate than in recent years. All non-confidential data and program s for the articles published in Review are now available to our read ers. This inform ation can be ob tained fro m th re e sources: 1. FRED (Federal Reserve Economic Data), an electronic bulletin board service. You can access FRED by dialing 314-621-1824 throu gh you r modem-equipped PC. P aram eters should b e set to: no parity, w ord length = 8 bits, 1 stop bit and the fastest baud rate you r modem supports, up to 14,400 bps. Inform ation will be in d irectory 11 u n d er file nam e ST. LOUIS REVIEW DATA. For a fre e b ro ch u re on FRED, please call 314-444-8809. 2. T h e F ed eral R e se rv e B an k o f St. L ou is You can req u est data and program s on eith er disk o r hard copy by w riting to:

Behavioural Processes, 1985

This paper tests two competing hypotheses concerning the motivational forces underlying concurren... more This paper tests two competing hypotheses concerning the motivational forces underlying concurrent choice behavior: a generalized version of Staddon's minimum-distance hypothesis, which characterizes behavior in terms of minimizing the distance to a "bliss" point, and a generalized minimum-needs hypothesis, which emphasizes meeting minimum survival requirements first, after which the organism is free to allocate behavior in any fashion desired. The models specify distinctly different preference structures. The generalized minimum-needs hypothesis is shown to provide a superior fit to molar choice data from experiments involving food and fluid consumption.

Systematic and Liqudity Risk in Sub-prime Mortgage-backed Assets

ABSTRACT The subprime mortgage backed securities market declined dramati-cally before and during ... more ABSTRACT The subprime mortgage backed securities market declined dramati-cally before and during the Financial Crisis of 2008. To understand the factors driving its demise we utilise a latent factor model representing common effects, asset rating effects, vintage of issuance effects and idio-syncratic effects -extending the recent representation of CDO pricing in Longstaff and Rajan (2008). The common factor is shown to have an increasing influence on the performance of the ABX-HE indices, with the role of vintage factors changing dramatically from January 2006 to April 2009. Consistent with other evidence, risk from systematic factors has transferred risk to more highly rated tranches of these structured finance products. The common shock is found to be related to conditions in the real estate sector, liquidity and counterparty risk as well as general financial market volatility.

We survey the theories on why banks promise to pay par on demand and examine evidence on the cond... more We survey the theories on why banks promise to pay par on demand and examine evidence on the conditions under which banks have promised to pay the par value of deposits and banknotes on demand when holding only fractional reserves. The theoretical literature can be broadly divided into four strands: liquidity provision; asymmetric information; regulatory restrictions and a medium of exchange. One strand of the literature argues that banks offer to pay par on demand in order to provide liquidity insurance services to consumers who are uncertain about their future time preferences and who have investment opportunities inconsistent with some of their preferred consumption paths. A second strand of the literature argues that banks offer to pay at par because of asymmetric information about banks ’ assets. The demand deposit contract can keep the bank from dissipating depositors ’ wealth by exploiting information available to the banker but not to depositors. The deposit is then on deman...

Journal of Financial Stability, 2018

Using international listed banks from the United States, Europe, Japan and China from 2004 to 201... more Using international listed banks from the United States, Europe, Japan and China from 2004 to 2014, we analyse the implied effect on the realized volatility of banks´ daily stock returns of some of the most relevant new elements of the prudential regulatory framework proposed after the Financial Crisis and yet to be fully implemented. Hence, prudential regulatory requirements are implied with the exception of G SIBs classification. Our analysis also takes into consideration government's capital support received by banks in the recent crisis. We use the individual bank stock return realized volatility as a measure of bank's' ex post risk. In general we find that regulators´ approach to safety and sound ratios seem consistent with the ex post market perception of banks' overall risks. Regulation aimed at increasing banks´ capital and at imposing limits on securities trading (e.g. proprietary trading) is consistent with prudential regulators´ overall objective of limiting banks´ ex post idiosyncratic risk. In the aftermath of the crisis, government capitalization of individual banks enhances ex post risk perception probably due to a signalling effect: it might reveal partially unknown problems penalizing the recipient bank.. We find support for a connection between the classification as G-SIB and market ex post risk perception.

Surety Bonds and Moral Hazard in Banking

SSRN Electronic Journal

Using international listed banks from the United States, Europe, Japan and China from 2004 to 201... more Using international listed banks from the United States, Europe, Japan and China from 2004 to 2014, we analyse the effect on bank risk of some of the most relevant new elements of the prudential regulatory framework proposed in the wake of the Great Financial Crisis. We measure risk by a market measure, namely the volatility of banks' stock returns. We also examine the effect of government support during the financial crisis and of designation as a G-SIB. We find little support for an association with government support and none for a negative relationship. We find support for a positive effect of designation as a G-SIB on risk. We find a positive association with securities trading and a negative association with capital. Banks' chosen liquidity is unimportant for this measure of risk.

Economic Review, 1996

rom 1837 to 1865, banks in the United States issued currency with no oversight of any kind by the... more rom 1837 to 1865, banks in the United States issued currency with no oversight of any kind by the federal government. Many of these banks were part of "free banking" systems in which there was no discretionary approval of entry into banking. 1 A note received in a transaction might indicate that it was issued by, say, the Atlanta Bank. This banknote was used for payments in transactions and was redeemable on demand at the Atlanta Bank for a specified quantity of specie, gold or silver. These notes were used in transactions just as checks are today. In important respects, though, they were quite different from today's checks. Notes were passed from one person to another and yet another before being returned to the bank. They were the bank's obligations, not bank customers' obligations. Because there was no central bank and no government insurance, the ultimate guarantee of a banknote's value was the value of the bank's assets. Free banking in the United States sometimes has been equated with "wildcat banking," a name that suggests that opening a bank has much in common with drilling for oil. Drilling for oil is not an obvious analogy for a sound banking system. Use of the word wildcat to mean "reckless" or "financially unsound" apparently arose in Michigan in the 1830s, when bankers supposedly established free banks in inaccessible locations "where the wildcats roamed." 2 In the free banking period such locations benefited banks because they hampered noteholders' attempts to redeem notes, and banks with fewer notes redeemed could hold less specie and generate higher net revenue for their owners. More generally, when banks issue notes, a major issue for banking laws and holders of banknotes is enforcement of banks' contracts to redeem the notes. If a bank issues notes in good faith that they can be redeemed as promised, the issue is simply contract enforcement. If a bank issues notes Federal Reserve Bank of Atlanta Economic Review

• "Too big to fail" is a policy that results from authorities' choices that shield creditors of f... more • "Too big to fail" is a policy that results from authorities' choices that shield creditors of failed banks from losses in the failed bank. • Too big to fail creates a situation in which banks' creditors expect to receive funds from others, such as taxpayers, when banks are unable to pay their obligations.

The mis-evaluation of risk in securitized financial products is central to understanding the glob... more The mis-evaluation of risk in securitized financial products is central to understanding the global financial crisis. This paper characterizes the evolution of risk factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime mortgage-backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of common factors on more senior tranches during the crisis. An innovation of the paper is that we use the unbalanced panel structure of the data to identify the vintage, credit, common and idiosyncratic effects from a state-space specification.

Suspension of payments and bank failures

The Cash and Futures Markets for Crude Oil

Macroprudential Regulation of Banks and Financial Institutions

The Oxford Handbook of the Economics of Central Banking, 2019

SSRN Electronic Journal, 2016

Interest on Reserves and the Federal Reserve's Balance Sheet

The Journal of Economic Asymmetries, 2009

Bubbles, or Neither Determine Stock Prices? Some International Evidence

ICPSR Data Holdings

Behavioural Processes, 1985

Systematic and Liqudity Risk in Sub-prime Mortgage-backed Assets

Journal of Financial Stability, 2018

Surety Bonds and Moral Hazard in Banking

SSRN Electronic Journal

Using international listed banks from the United States, Europe, Japan and China from 2004 to 201... more Using international listed banks from the United States, Europe, Japan and China from 2004 to 2014, we analyse the effect on bank risk of some of the most relevant new elements of the prudential regulatory framework proposed in the wake of the Great Financial Crisis. We measure risk by a market measure, namely the volatility of banks' stock returns. We also examine the effect of government support during the financial crisis and of designation as a G-SIB. We find little support for an association with government support and none for a negative relationship. We find support for a positive effect of designation as a G-SIB on risk. We find a positive association with securities trading and a negative association with capital. Banks' chosen liquidity is unimportant for this measure of risk.

Economic Review, 1996

Suspension of payments and bank failures

The Cash and Futures Markets for Crude Oil