Fear and loathing in executive pay

A look at how U.S. corporations choose to motivate their top officers and a presentation of evidence showing that linking executive compensation too closely to firm performance may be a mistake.Executives - Salaries

Sharing with a risk-neutral agent

A study that demonstrates multiple equilibria in a class of principal-agent models and that examines the convergence properties of contracts as risk aversion approaches zero.Risk

Bank diversification: laws and fallacies of large numbers

A clarification of the distinction between risk and failure in assessing bank diversification, showing how increasing bank size may increase bank risk even though it lessens the probability of failure and lowers the expected loss.Bank failures ; Nonbank activities

Productivity and the term structure

The recent record-setting economic expansion and the accompanying record-setting bull market in stocks are often attributed to Federal Reserve interest rate policy and increased productivity. But if interest rates behave differently when productivity changes, interest rate policy may need to change as well. This article examines how productivity changes affect the entire term structure-from short-term interest rates like the federal funds rate, to long-term rates like mortgages, car loans, and corporate bonds.Productivity ; Interest rates

Term structure economics from A to B

The interest rates for bonds of different maturities are related, but the interplay of factors that influence these rates is not easy to tease apart. The author leads the reader through the development of a model of the term structure of interest rates, then works with the model to provide some insights into the interplay of factors, especially the effect of uncertainty on interest rates. His analysis shows how a common simplification known as the expectations hypothesis obscures the significant contribution that uncertainty can make to the determination of interest rates.Interest rates

Expensing stock options

Many market commentators argue that companies should expense the stock options they give their employees. Will expensing give investors better information about what companies earn and spend?Stock options ; Corporations - Finance ; Accounting

Bank diversification: laws and fallacies of large numbers

Conventional wisdom on bank diversification confuses risk with failure. This article clarifies the distinction and shows how increasing bank size may increase bank risk, even though it lessens the probability of failure and lowers the expected loss. The key result is an application of Samuelson's "fallacy of large numbers."Bank size ; Bank failures ; Risk

Do excess reserves reveal credit crunches?

The author finds that because the level of excess reserves depends directly on the Federal Reserve's monetary policy stance, this measure is generally a poor indicator of credit availability.Credit ; Bank reserves ; Monetary policy

The future of inflation

According to consumer price measures like the CPI, inflation has recently jumped up a notch. What those measures don’t tell us is whether the increase will persist. In this Commentary, we look at a measure that does. The measure incorporates data on past inflation rates, surveys of expected inflation, inflation swaps, and a variety of interest rates. It provides estimates of inflation, along with expected inflation and real interest rates. A look at the measure’s estimates suggests that the recent increases in inflation are likely to be temporary.Inflation targeting ; Consumer price indexes

Financial efficiency and aggregate fluctuations: an exploration

An exploration of the link between changes in the efficiency of the financial system and business cycle fluctuations.Business cycles ; Banks and banking ; Macroeconomics