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This paper utilizes a profit maximizing banking model to analyze sweeping behavior. Comparative statics results indicate that sweeping responds positively to increases in bank loan rates and reserve ratios and negatively to increases in the interest rate on reserves or to exogenous increases in bank deposits or equity. Sweeping generates greater responsiveness in lending to changes in loan rates or the interest rate on reserves and lower responsiveness to exogenous changes in reserve ratios or equity. Empirical analysis of an explicit condition that we derive relating sweeping to the interest rate on reserves suggests with an unchanged reserve requirement, the Fed could eliminate sweeping by setting the interest rate on reserves to no less than 3.67 percentage points below the market loan rate. The range of interest rates on reserves that lead to zero sweeping increases sharply, however, as the required reserve ratio is reduced.

This paper investigates the relationship between firm mark-ups and inflation. In sectors of the economy with industries characterized by flexible prices and sticky wages, mark-ups should respond positively to inflation. Industry mark-ups in sectors with both flexible prices and flexible wages theoretically may rise or fall in response to an increase in the price level. Mark-ups of industries in sectors of the economy in which prices are sticky should respond negatively to inflation, with an absolutely larger negative response occurring in sticky-price industries with flexible wages. Empirical analysis of US industries provides support for nearly all of these theoretical predictions.

This policy brief reviews recent studies that have sought to apply analysis of network externalities and the theory of two-sided markets to card payment networks, and it evaluates the public policy implications of this body of work. Three general conclusions emerge from the bulk of the research to date. First, this industrial-organization focus on the roles of network externalities and market two-sidedness in shaping the card payment industry's pricing structure is likely to prove much more fruitful for analysis of relevant public policy issues than the alternative approach to payment economics offered in the modern monetary economics literature that emphasizes dynamic general equilibrium modeling of payment systems. Second, in light of the complex balancing act entailed in managing competing interests of card issuers, payment acquirers, cardholders, and retailers in the presence of network externalities, governmental regulation of card payment networks' fee structures is unlikely to yield welfare improvements and in fact could yield significant inefficiencies. Third, welfare-improving competition among card payment networks is best promoted by permitting card issuers, payment acquirers, cardholders, and retailers to participate in multiple card payment networks, suggesting that recent antitrust challenges of restrictive rules imposed by some card payment networks have been appropriate.

Building on the literature emphasizing banks' monitoring functions, recent contributions to the literature examining the effects of capital regulation have focused attention on the influences of capital requirements on bank incentives to monitor loans for moral hazard risks. Empirical evidence suggests that this is a potentially important issue to contemplate when judging the usefulness of capital regulation as a means of reducing banking risks. This evidence also suggests, however, that various heterogeneities, which are commonly ignored in studies of the effects of capital regulation on bank monitoring and overall asset risk, are an important feature of real-world banking markets. In theory, bank heterogeneities can affect the manner in which the entire banking system responds to external shocks, such as the imposition of capital requirements. A few recent studies cast light on how diversity relating to loan-monitoring activities of banks affects their decision making and thereby influences market outcomes, which in turn feed back to alter individual bank choices regarding whether or how much to monitor their loans. In this way, the policy implications of capital regulation differ from those forthcoming from standard studies of banking systems populated by identical, representative banks.

In most nations, paths of monetary aggregates and prices consistently depart from stationary trends. This paper shows that this is a fundamental implication when monetary authorities of interdependent countries seek to smooth their home output and prices in the presence of incomplete world output-market integration and structural asymmetries. Using a two-country model with interdependent output supply schedules, we show that this conclusion holds whether the exchange rate floats or is fixed. It also holds if monetary policies are coordinated. Therefore, optimal monetary policy choices by central banks yield stationary paths for money and prices only under very specific conditions.

People, events and happenings in the 1990's.