This paper examines the implications that alternative regulatory structures may have for resolving failed banking institutions. Emphasis on the European Union (EU), which is both economically and financially large and has several features relating to cross-border banking in the form of direct investment that may heighten the problems we consider. To ensure the efficient resolution of bank failures with minimum, if any, credit and liquidity losses a four step program should be followed. This includes prompt legal closure of institutions before they become economically insolvent, prompt identification of claims and assignment of losses, prompt reopening of failed institutions, and prompt re-capitalizing and re-privatization of failed institutions. These policies together with a prompt corrective action system could be voluntarily adopted through the use of deposit insurance premium discounts as an incentive.

In the U.S., as in most countries with well-developed securities markets, derivative securities enjoy special protections under insolvency resolution laws. Most creditors are “stayed” from enforcing their rights while a firm is in bankruptcy. However, many derivatives contracts are exempt from these stays. Furthermore, derivatives enjoy netting and closeout, or termination, privileges which are not always available to most other creditors. The primary argument used to motivate passage of legislation granting these extraordinary protections is that derivatives markets are a major source of systemic risk in financial markets and that netting and closeout reduce this risk. To date, these assertions have not been subjected to rigorous economic scrutiny. This paper critically re-examines this hypothesis. These relationships are more complex than often perceived. We conclude that it is not clear whether netting, collateral, and/or closeout lead to reduced systemic risk, once the impact of these protections on the size and structure of the derivatives market has been taken into account.

Ceteris paribus, investors prefer to purchase municipal bonds selling close to their par value. That is, investors are willing to purchase at the lowest yield a municipal bond alike in all respects to other municipal bonds, but with a coupon that permits it to be sold at or near its par value. Conversely, investors are willing to purchase municipal bonds with coupons that cause them to be sold at prices either greatly above or greatly below par only at penalty or premium yields relative to similar par bonds.

During the past few years several money demand functions have been estimated for the United States. Although these functions may differ on the precise specification of the independent variables, most agree on their crude identity. Thus almost all functions include an income or wealth constraint and an interest rate price. Such functions have been applied exhaustively to data for various periods in United States history, both for the long run and for the short run. With few notable exceptions, the results differ more in degree than in substance. The quantity of money demanded is estimated to be a positive function of the constraint and a negative function of price. The studies have, however, overlooked an important body of possible collaborative evidence–that for other industrial countries. It may be reasonable to assume that the same basic forces underlie the demand for money in all industrial countries, it is of interest to contrast money demand functions for these countries with those obtained for the United States. This paper estimates demand functions for leading industrial countries and evaluates the results. No new theory is developed; rather, existing models are fitted to additional data to test their applicability to other countries.

Our analysis has shown that the allocative branch and the income distribution branch, to use Musgrave's terminology, in conjunction determine a Pareto optimum. It was shown that an insistence on conform solutions with tax prices equal to marginal rates of substitution, will guide us to the proper initial income distribution. The optimum can be found directly. However, in a setting in which all preferences are known and allocations are made according to the market principle, not much is gained by introducing the concept of income before-tax and tax prices. No new insights for the conduct of fiscal policy can be derived from this. We obtain an elegant general solution. In this case the distinction between an Allocation Branch and an Income Distribution Branch becomes blurred, because both branches simultaneously affect allocation and distribution. Another and more realistic possibility is to think of the economy as a computer which finds an optimum in a number of steps. We start out with a given income distribution and some system of tax prices. For the pricing rule to be chosen three criteria should be used, (1) it should induce preference revelation for public goods, (2) it should be effective with respect to adjustments in distribution and (3) it should be possible to approximate it through the political process. The income should be adjusted in line with such a pricing rule. In this process a case can be made for conceptually different branches. To have or not to have a division between the allocation branch and the income distribution branch thus depends on how one believes an economy grinds out an optimal solution. If we assume that all adjustments are simultaneous, smooth and in the right directions, we get a direct solution in an elegant grand manner. In it there is little room for distinct branches. Yet, it is more realistic perhaps to think of the way towards an optimum as a series of consecutive adjustments in distinct allocation and distribution branches. Many of the adjustments are cumbersome, involving trial and error as well as feedback and learning and, to this extent, reflecting the true nature of fiscal decisions.