This paper presents an analysis of a quasi-risk-averse bank facing uncertainty with respect to demand deposit flows and default risk on loans. On the basis of a formal model, testable hypotheses of bank attitude toward risk and the qualitative behavior of the index of relative risk aversion for commercial banks are developed. Through the use of data on the member banks of the Tenth Federal Reserve District, the empirical tests that were conducted indicated that banks are strongly risk-averse and that their index of relative risk aversion is increasing in profits. These results suggest that favorable (unfavorable) environmental changes will generate income effects that will result in proportionately less (more) risk taking by banks.

This paper considers the relationship between the variability of sectoral employment and unexpected inflation. The framework used is a multisector version of Friedman's well-known model of the business cycle. The model suggests that sectoral employment variability is a quadratic function of unexpected inflation and the rate of growth in real GNP. The model is tested using annual U.S. data on sectoral employment in the nonagricultural economy from 1901 to 1978. Inflationary surprises and the rate of real growth are found to explain between 60% and 85% of the variability in relative sectoral employment performance.

This paper presents a partial equilibrium model of the labor market that allows the real wage, the expected real wage, and the level of employment to be expressed as functions of unexpected inflation, inflation uncertainty, and supply shocks. Regression equation estimation using U.S. data from 1948 to 1980 suggests that inflationary surprises and uncertainty cause countercycical movement in real wages. Various supply shock variables are introduced. The findings suggest the importance of oil shocks as compared with measures based on food or imports, but only after 1973.

This study examines the effect of bank concentration on financing constraints of non-financial firms in 14 European countries between 1992 and 2005. Using firm-level data we analyze financial constraints with the Euler equation derived from the dynamic investment model. We find that with a highly concentrated banking sector firms are less financially constrained. This result is robust to consideration of firm opacity, firm size, and business cycle. Relaxation of financial constraint while greater for firms in less opaque industries also accrues for firms in more opaque industries. Greater bank concentration is associated with less tight financial constraint during both expansions and recessions. Results overall are consistent with an information-based hypothesis that more market power increases banks’ incentives to produce information on potential borrowers. Findings are robust to consideration of country specific institutional factors.