Matthew Conner

English

Research Papers in Economics

Fall 2008 • Region Focus 9
“The Effect of Monetary Tightening on Local Banks.” Rocco
Huang. Federal Reserve Bank of Philadelphia Working Paper
08-20, September 2008.
B
eginning in 1979, the Federal Reserve under Paul
Volcker instituted an anti-inflationary policy that
focused on a drastic tightening of the money supply. At
the time, the banking system in the United States was frag-
mented geographically due to restrictions on local banks
that prohibited them from opening branches across county
lines. Bank holding companies, however, were able to have
subsidiaries in numerous counties. In theory, this should
have made them more resilient in the face of monetary
tightening because they could move capital between regions
with differing demand for loans. 
This paper presents new empirical evidence that suggests
Fed policy did, in fact, affect isolated local banks more
intensely than banks with operations spread across county
lines. The study covers the period between 1977 and 1986, a
time frame that includes tight as well as expansionary mon-
etary policy stances by the Fed. The results of the analysis
were consistent with theory: “Other things being equal,
local banks’ loan supply exhibits stronger sensitivity to mon-
etary policy, compared with that of nonlocal banks.” In a
contractionary environment, the lending of local banks grew
much more slowly relative to bank holding companies with
branches than they did under an expansionary policy. 
Huang reports that this historical experience suggests
that the banking sector’s increasing consolidation and 
multicounty nature, accompanied by a decline in market
share of local banks, might have contributed to the stability
in the financial sector and could, therefore, help the Fed to
better focus on price stability. 
“Can Smart Cards Reduce Payments Fraud and Identity
Theft?” Richard J. Sullivan.  Federal Reserve Bank of Kansas
City Economic Review, Third Quarter, 2008, pp. 35-62.
W
ith the advent of electronic monetary transactions,
the potential for identity theft and payment fraud
has increased. Payments can sometimes be authorized by
asking the purchaser to verify personal information such
as an address or a phone number. But this presents an
obvious flaw as this information can be obtained by a 
criminal who can then impersonate the cardholder. 
Sullivan describes a safer alternative to these payment
systems: “smart cards” that use less personal information 
for purchase verification and don’t require a magnetic 
strip. Smart cards require a user to provide a personal 
identification number (PIN) but they also contain a com-
puter chip that stores a digital signature. After the customer
enters the PIN, the terminal in which the card has been
scanned can verify it against the encrypted information on
the card. 
This sort of smart card has not been deployed in the
United States and Sullivan offers a possible explanation as to
why. In his view, offering differing security standards can 
be seen by vendors as a way to gain advantage over their
competitors. This could reduce the willingness of these 
parties to participate in developing a consistent industry-
wide security standard. “Even if the societal benefits justify
their cost, payment smart cards with strong authorization
security may be adopted slowly,” Sullivan concludes.
“How Economic News Moves Markets.” Leonardo Bartolini,
Linda Goldberg, and Adam Sacarny.  Federal Reserve Bank of
New York Current Issues in Economics and Finance, August
2008, vol. 14, no. 6.  
E
conomic data releases from the U.S. government and
private agencies can have effects on the movements of
the financial markets. The intensity of the response to
these reports, however, seems to vary. The authors of this
study compared the reactions of the markets to the release
of 13 scheduled announcements of data from government
and private sources between 1998 and 2007. Their focus is
on the occasions that actually produce “news,”  which is
defined by the authors as  “the surprise element, or the
difference between the actual value announced for an indi-
cator and market participants’ prior expectations of what
that value would be.” 
The results show that two government releases — the
nonfarm payrolls and advance Gross Domestic Product
reports — and the Institute for Supply Management’s
“Manufacturing Report on Business”  tend to affect prices of
bond yields, equity prices, and exchange rates in significant
and systematic ways. All other releases studied tended to
generate erratic or insignificant effects. 
The most significant effect tends to be on bond yields.
According to the authors’ regression results, a 1 percent sur-
prise increase in nonfarm payrolls, for instance, raises the
yield on two-year Treasuries by 78 basis points on average.
The yield on 10-year Treasuries sees an average basis point
increase of closer to 60 basis points. The authors conclude
that the observations in the data set confirm the intuition
that markets react to surprise news of stronger economic
growth in a way consistent with an expectation that stronger
growth implies higher potential inflation in the future.    RF
AROUNDTHEFED
Lending During the Volcker Disinflation
BY MATTHEW CONNER 
 

Around the Fed : Lending during the Volker disinflation

http://www.richmondfed.org/publications/research/region_focus/2008/fall/pdf/around_the_fed.pdf

Around the Fed : Lending during the Volker disinflation

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