The size of Japanese bank lending operations in the United States enables us to use U.S. banking data to investigate the extent to which the sharp decline in Japanese stock prices was transmitted to the United States via U.S. branches of Japanese parent banks, as well as to identify a supply shock to U.S. bank lending that is independent of U.S. loan demand. We find that binding risk-based capital requirements associated with the Japanese stock market decline resulted in a decrease in lending by Japanese banks in the United States that was both economically and statistically significant.

This article demonstrates why the procedures used in previous studies do not permit inference about the relationship between interestrates and taxes. We present a model that leads to direct estimates of the degree to which interest rates respond to changes in tax rates. The empirical results imply that the adjustment of taxable interest rates has been large enough to render after-tax yields impervious to tax rate changes. Further, tax-exempt yields are unaffected by changes in taxrates. Thus, there is no evidence of fiscal illusion in interest rates.

Most research concerning the Fisher relationship has concentrated on the magnitude and significance of the response of nominal interest rates to anticipated inflation. Recently, attention has shifted to the stability of that response. According to previous estimates, the impact of anticipated inflation on interest rates varies substantially over time. By extending a standard model to include tax and aggregate supply shock effects, we are able to reduce such instability considerably. Our results also reveal that increased foreign demand for bonds lowers the interest rate.

ABSTRACT Most research concerning the Fisher relationship has concentrated on the magnitude and significance of the response of nominal interest rates to anticipated inflation. Recently, attention has shifted to the stability of that response. According to previous estimates, the impact of anticipated inflation on interest rates varies substantially over time. By extending a standard model to include tax and aggregate supply shock effects, we are able to reduce such instability considerably. Our results also reveal that increased foreign demand for bonds lowers the interest rate.

We examine the stock market reaction to announcements of formal supervisory actions. We find that the variation in the quality and timeliness of disclosure by U.S. banks explains much of the variation in the market's reactions. We also find that these announcements can cause spillover effects. However, rather than representing contagion, these spillover effects are consistent with enhanced transparency. Only banks in the same region as the announcing bank, with similar exposures, are affected. Thus, enhanced disclosure can improve the allocation of resources in the banking system. Journal of Economic Literature Classification Numbers: G21, G28.

We examine foreign acquisitions of United States banks around the time of the ownership change to determine whether the observed poor performance of foreign subsidiaries is the result of changes in business strategy or the preexisting characteristics of the target bank. We find that many of the problems were already present at the time of acquisition. However, changes in business strategy by the foreign owners were generally not successful in raising the bank’s performance level to that of its domestic peers.

This study investigates the relationship between credit availability and household consumption using a novel approach to separate credit demand and supply. We find that a deterioration in local-bank health reduces household consumption, with the strongest effects occurring for households that are more likely to need credit—especially those experiencing a negative income shock and having limited liquid assets. The main contributions of the study are the use of an arguably exogenous measure of local-bank health and multifaceted indicators of constrained households. Our findings contribute to the discussion of the linkages between the financial sector and real economic activity.

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States.