A tale of two financial reforms

Financial institutions ; Financial institutions - Japan

Is competitive banking stable?

Bank competition ; Bank supervision

Monetary Policy, Deflation, and Economic History: Lessons for the Bank of Japan

The paper discusses Bank of Japan policy during the 1990s, especially the late 1990s, in the context of the historical experiences of the United States, Sweden, and Japan in the 1930s. Sharp differences exist between Japan in the 1990s and the 1930s environment; however, this paper takes the position that there are qualitative similarities which cannot be ignored in terms of financial distress, downward price trends, debate over appropriate central bank policy, and how legal independence may constrain appropriate central bank policy. The paper reviews the evolution of views about policy targets from the 1930s to the present to show how price stability reemerged as the primary policy target. Evidence on the success central banks have attained in achieving price stability is reviewed. The evidence shows that claims central banks have overemphasized controlling inflation at the expense of deflation are incorrect with the exception of Japan. The paper reviews the role of the Federal Reserve in the 1930s to show that failure to prevent deflation during the critical 1929?33 period had adverse impacts on the economy and resulted in rendering the Federal Reserve de facto dependent on the government despite its legal independence. The paper then considers the experiences of Japan and Sweden in the 1930s to provide counter-examples of how the U.S. economy might have responded to central bank policy designed to prevent deflation. In both cases, policies explicitly designed to reverse the downward movement in prices reduced the economic and financial distress in those countries compared to the United States. The paper draws implications from the historical record for Bank of Japan policy and suggests that more aggressive action would have been appropriate in the 1990s and that further institutional change toward inflation targeting should be considered.

THE EFFECT OF CHANGES IN RESERVE REQUIREMENTS DURING THE 1930s:

The differential response of cash reserves of member banks and nonmember banks not subject to the 1936-37 increase in reserve requirements is estimated to determine whether the 1937-38 recession was caused by the increase in reserve requirements. We identify 17 states that maintained constant reserve requirements from June 1934 to June 1941. While member banks increased their cash reserve ratios relative to nonmember banks, the magnitude of the adjustment is too small to have contributed to the 1937-38 recession. Shock prices and public reaction to the increase in reserve requirements are consistent with the empirical results. While the Fed was responsible for the Great Contraction, the results are inconsistent with the view the Fed’s reserve requirement increase contributed significantly to the 1937-38 recession.excess reserves, Federal Reserve, Great Depression, reserve requirements, 1937-38

A new direction for Japan

Economic policy - Japan ; Japan ; International trade - Japan

Asian finance and the role of bankruptcy

The degree to which bankruptcy is permitted to play a role in the allocation of capital is a key distinction between the Asian state-directed financial regime and the Western market-directed version. The paper discusses the two approaches to finance and argues that a major problem with the bank finance model used in many Asian countries is its minimization of bankruptcy risks. A three-sector development model (agriculture, manufacturing, and financial sector) is developed and simulated to compare the outcomes of the two approaches separately and then to evaluate the transition costs of switching from a state- to a market-directed financial regime. The simulation results suggest that the market approach results in a higher long-run growth path because it eliminates inefficient firms through bankruptcy. The results also suggest that switching from a state- to a market-directed model can be very costly to the economy, though the transition costs can be lowered somewhat by a delayed and phased-in liberalization. At the same time, a delayed and phased-in approach may induce other difficulties not considered in the model. Several policy implications are drawn from the model and simulation results; for example, development of an infrastructure to provide for orderly bankruptcy and the development of money and capital markets should be given high priority in the liberalization process.Banks and banking - Asia ; Bankruptcy

Forecasting Nevada's economy

Nevada ; Forecasting

Central bank independence in Korea

legal independence of the Bank of Korea, imposing an inflation-target framework, confining the responsibilities of the Bank of Korea to price stability, and transferring the supervisory function to a separate and newly established Financial Services Commission. The objective of the paper is to place the redesign of the Bank of Korea in the context of financial change in Korea, in the context of international developments in central bank institutional design, and in the context of similar changes in central bank institutional redesign in Japan. As part of this review, the paper evaluates the degree to which the Bank of Korea's independence was enhanced by the 1997 revision and evaluates the practical impact of the revision on central bank policy

A vector autoregression model of the Nevada economy

Nevada ; Forecasting