Ben R. Craig |

Senior Economic Advisor

Ben Craig is a senior economic advisor in the Research Department of the Federal Reserve Bank of Cleveland, where he specializes in the economics of banking and international finance.

Before joining the Bank in 1994, Dr. Craig was an assistant professor of economics at Indiana University. He has also taught at Washington State University, Stanford University, and the University of Konstanz, Germany. He was a visiting scholar at the Bundesbank in Germany in 2001.

Dr. Craig earned a bachelor’s degree with honors from Harvard University in 1976 and received a doctorate in economics from Stanford in 1986. He is married and the father of three children.

Fed Publications
Other Publications
Work in Progress

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Date

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Substitution between Net and Gross Settlement Systems:A Concern for Financial Stability?	December, 2011	Federal Reserve Bank of Cleveland, working paper no. 11-32	Ben R Craig; Falko Fecht;	Working Papers
	Abstract: While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments (or financial) system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in the net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through the gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large- volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transaction volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets.
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Public Policy in Support of Small Business: The American Experience	August, 2011	Federal Reserve Bank of Cleveland, working paper no. 11-16	Ben R Craig; William E Jackson III; James B Thomson;	Working Papers
	Abstract: Information problems in small enterprise credit markets can result in a market equilibrium characterized by credit rationing. These information problems are potentially more severe during sharp economic downturns such as the recent Great Recession. Government interventions to alleviate credit constraints on small firms need to be designed to correct the specific market failure resulting in socially suboptimal credit flows. We argue that Small Business Administration loan guarantees are a potentially appropriate intervention and provide a review of empirical research that supports our contention.
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The Importance of Financial Market Development on the Relationship between Loan Guarantees for SMEs and Local Market Employment Rates	November, 2010	Federal Reserve Bank of Cleveland working paper, no. 10-20	Ben R Craig; Craig E Armstrong; William E Jackson III; James B Thomson;	Working Papers
	Abstract: We empirically examine whether a major government intervention in the small-firm credit market yields significantly better results in markets that are less financially developed. The government intervention that we investigate is SBA-guaranteed lending. The literature on financing small and medium size enterprises (SMEs) suggests that small firms may be exposed to a particular type of market failure associated with credit rationing. And SMEs in markets that are less financially developed will likely face a greater degree of this market failure. To test our hypothesis, we use the level of bank deposits per capita as our relative measure of financial market development, and we use local market employment rates as our measure of economic performance. After controlling for the appropriate cross-sectional market characteristics, we find that SBA-guaranteed lending has a significantly more (less) positive impact on the average annual level of employment when the local market is relatively less (more) financially developed. This result has important implications for public policy directives concerning where SBA-guaranteed lending should be directed.
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Interbank Tiering and Money Center Banks	September, 2010	Federal Reserve Bank of Cleveland working paper, no. 1014	Ben R Craig; Goetz von Peter;	Working Papers
	Abstract: This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for tting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
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Reforming the Over-the-Counter Derivatives Market: What's to Be Gained?	July, 2010	Ben R Craig; Kent Cherny;	Economic Commentary
	Abstract: While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This Commentary discusses the advantages of one solution to the transparency proble: moving the settlement or trading of derivatives to exchanges or clearinghouses.
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Lending Patterns in Poor Neighborhoods	June, 2010	Federal Reserve Bank of Cleveland, Working Paper no. 1006	Ben R Craig; Francisca G-C Richter;	Working Papers
	Abstract: Concentrated poverty has been said to impose a double burden on those that confront it. In addition to an individual’s own financial constraints, institutions and social networks of poor neighborhoods can further limit access to quality services and resources for those that live there. This study contributes to the characterization of the relationship between subprime lending and poor neighborhoods by including a spatial dimension to the analysis, in an attempt to capture social effect differences in poor and less poor neighborhoods. The analysis is applied to 2004-2006 census tract level data in Cuyahoga County, home to Cleveland, Ohio, a region that features urban neighborhoods highly segregated by income and race. The patterns found in poor neighborhoods suggest stronger social interaction effects inducing subprime lending in comparison to less poor neighborhoods.
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The Duration of Bank Retail Interest Rates	March, 2010	Federal Reserve Bank of Cleveland, Working Paper no. 1001	Ben R Craig; Valeriya Dinger;	Working Papers
	Abstract: We use bank retail interest rates as price examples in a study of the determinants of price durations. The extraordinary richness of the data allows us to address some major open issues from the price rigidity literature, such as the functional form of the hazard of changing a price, the effect of firm and market characteristics on the duration of prices, and asymmetry in the speed of adjustments to positive and negative cost shocks. We find that the probability of a bank changing its retail rate initially (that is, in roughly the first six months of a spell) increases with time. The most important determinants of the duration of retail interest rates are the cumulated change in the money market interest rates and the policy rate since the last retail rate change. Among bank and market characteristics, the size of the bank, its market share in a given local market, and its geographical scope significantly modify retail rate durations. Retail rates adjust asymmetrically to positive and negative wholesale interest rate changes; the asymmetry of the adjustment is reinforced in part by the bank’s market share. This suggests that monopolistic distortions play a vital role in explaining asymmetric price adjustments. [Note: this paper was originally titled: “A Microeconometric Investigation into Bank Interest Rate Rigidity.”]
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Credit Default Swaps and Their Market Function	September, 2009	Ben R Craig; Kent Cherny;	Economic Commentary
	Abstract: Credit derivative instruments allow default risk to be segregated from debt of all kinds. They have granted investors the ability to hedge their portfolios and provided numerous institutions with a new source of income. However, the market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate.
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Deposit Market Competition, Costs of Funding and Bank Risk	June, 2009	Federal Reserve Bank of Cleveland, Working Paper no. 09-05	Ben R Craig; Valeriya Dinger;	Working Papers
	Abstract: In this paper we revisit the long debate on the risk effects of bank competition and propose a new approach to the empirical estimation of the relation between deposit market competition and bank risk. Our approach accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 U.S. banks. Our results support the notion of a risk-enhancing effect of deposit market competition.
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Bank Mergers and the Dynamics of Deposit Interest Rates	September, 2008	Federal Reserve Bank of Cleveland, Working Paper no. 08-06R	Ben R Craig; Valeriya Dinger;	Working Papers
	Abstract: Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger’s impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 US banks with a monthly frequency for the time period 1997-2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the US. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank, and local market features. An innovation of our work is the introduction of an econometric approach for estimating the change of the deposit rates given their rigidity.
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Does Government Intervention in the Small-Firm Credit Market Help Economic Performance?	August, 2007	Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 22	Ben R Craig; William E Jackson III; James B Thomson;	Policy Discussion Papers
	Abstract: The guaranteed lending programs of the Small Business Administration (SBA) are large and growing rapidly. The SBA's fiscal year 2008 performance budget calls for $25 billion in guaranteed loans for small businesses-a new record for the agency. Some critics of SBA programs suggest they do not help small businesses or overall economic performance. Other critics suggest that these programs unfairly benefit the financial institutions that participate in SBA's guaranteed lending programs. While very little serious empirical evidence exists on whether the net economic impact of the SBA's guaranteed lending programs is positive or negative, a few recent studies provide some insight into the question. In general, they suggest a small positive impact of the SBA's programs on economic performance. However, the results are very tentative and further research is needed to declare a more definitive position. We provide a general overview of the SBA's guaranteed lending programs and summarize the results of these studies.
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On Government Intervention in the Small-Firm Credit Market and Its Effect on Economic Performance	March, 2007	Federal Reserve Bank of Cleveland, Working Paper no. 0702	Ben R Craig; William E Jackson III; James B Thomson;	Working Papers
	Abstract: In this paper we empirically test whether the Small Business Administration's main guaranteed lending program--the 7(a) program--has a greater impact on economic performance in low-income markets than in others. Using local labor market employment rates as our measure of economic performance, we find a quantitatively positive impact of SBA 7(a) guaranteed lending, which is significantly larger in low-income areas.
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Small Firm Credit Market Discrimination, SBA-Guaranteed Lending, and Local Market Economic Performance	November, 2006	Federal Reserve Bank of Cleveland, Working Paper no. 0613	Ben R Craig; William E Jackson III; James B Thomson;	Working Papers
	Abstract: We empirically test whether SBA-guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. This hypothesis is predicated on priors related to three overlapping assumptions. These three assumptions are: (1) The classic type of credit rationing developed in the seminal paper by Stiglitz and Weiss (1981) is more likely to occur in markets with a higher per capita percentage of minority small businesses because such markets are more likely to have more severe information asymmetry problems, (2) SBA-guaranteed lending is likely to reduce these credit rationing problems-thus improving the level of development of the local financial market, and (3) increased local financial market development helps to lubricate the wheels of economic performance (Rajan and Zingales, 1998). Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant impact on the average annual level of employment in a local market of SBA-guaranteed lending in that local market. This impact is 200 percent larger in markets with a high percentage of potential minority small businesses. This result has important implications for public policy in general and SBA-guaranteed lending in particular.
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FOMC Communications and the Predictability of Near-Term Policy Decisions	June, 2006	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig; John B Carlson; Patrick C Higgins; William R Melick;	Economic Commentary
	Abstract: In February 1994, the FOMC began a new era in transparency, gradually building a communications apparatus that conveys information about the Committee's decisions and expectations. Has the new apparatus improved the public's ability to predict FOMC interest rate decisions? New research based on the prices of fed funds futures shows that over the past decade, it has, especially over horizons of two to three months.
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Gross Loan Flows	January, 2006	Federal Reserve Bank of Cleveland, Working Paper no. 0604	Ben R Craig; Joseph G Haubrich;	Working Papers
	Abstract: Changes in net lending hide the much larger and more variable gross lending flows. We present a series of stylized facts about gross loan flows and how they vary over time, bank size, and the business cycle. We look at both the intensive (increases and decreases) and extensive (entry and exits) margins. We compare these results with the output from a simple stochastic search model.
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Inflation and Welfare: A Search Approach	January, 2006	Federal Reserve Bank of Cleveland, Policy Discussion Paper, no. 12	Ben R Craig; Guillaume Rocheteau;	Policy Discussion Papers
	Abstract: This paper extends recent findings in the search-theoretic literature on monetary exchange regarding the welfare costs of inflation. We present first estimates of the welfare cost of inflation using the "welfare triangle" methodology of Bailey (1958) and Lucas (2000). We then derive a money demand function from the search-theoretic model of Lagos and Wright (2005) and we estimate it from U.S. data over the period 1900-2000. We show that the welfare cost of inflation predicted by the model accords with the welfare-triangle measure when pricing mechanisms are such that buyers appropriate the social marginal benefit of their real balances. For other mechanisms, welfare triangles underestimate the true welfare cost of inflation because of a rent-sharing externality. We also point out other inefficiencies associated with noncompetitive pricing, which matter for estimating the cost of inflation. We then illustrate how endogenous participation decisions can mitigate or exacerbate the cost of inflaion, and we provide calibrated examples in which a deviation from the Friedman rule is optimal. Finally, we discuss distributional effects of inflation.
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Small-Firm Credit Markets, SBA-Guaranteed Lending, and Economic Performance in Low-Income Areas	January, 2006	Federal Reserve Bank of Cleveland, Working Paper no. 0601	Ben R Craig; William E Jackson III; James B Thomson;	Working Papers
	Abstract: SBA guaranteed-lending programs are one of many government-sponsored market interventions aimed at promoting small business. The rationale for providing SBA loan guarantees is often based on the argument that they reduce credit rationing in low-income markets for small business loans. In this paper we empirically test whether SBA-guaranteed lending has a greater impact on economic performance in low-income markets. Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant correlation between the average annual level of employment in a local market and the level of SBA-guaranteed lending in that local market. And the intensity of this correlation is relatively larger in low-income markets. Indeed, one interpretation of our results is that this correlation is positive and significant only in low-income markets. This result has important implications for public policy in general and SBA-guaranteed lending in particular.
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The Role of Relationships in Small-Business Lending	October, 2005	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig; James B Thomson;	Economic Commentary
	Abstract: In the presence of imperfect information, both large and small banks try to find alternative ways to identify creditworthy borrowers. Lending relationships are one way to go about this. Relationships between banks and small businesses tend to be much closer than those between banks and large businesses. This Commentary explains why lending relationships are valuable to both small businesses and banks, how they reduce information-lending problems, and what other solutions exist to help in the reduction
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Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures	July, 2005	Federal Reserve Bank of Cleveland, Working Paper no. 0507	Ben R Craig; John B Carlson; William R Melick;	Working Papers
	Abstract: This paper demonstrates how options on federal funds futures, which began trading in March 2003, can be used to recover the implied probability density function (PDF) for future Federal Open Market Committee (FOMC) interest rate outcomes. The discrete nature of the choices made by the FOMC allows for a very straightforward recovery of the implied PDF using ordinary least squares (OLS) estimation. This simple recovery method stands in contrast to the relatively complicated PDF recovery techniques developed for options written on assets such as equities, foreign exchange, or commodity futures where the underlying prices are most appropriately modeled as being drawn from continuous distributions. The OLS estimation is used to recover PDFs for single FOMC meetings as well as PDFs for joint estimation of multiple FOMC meetings, and allows for the imposition of restrictions on the recovered probabilities, both within and across FOMC meetings. Finally, recovered probabilities are used to assess the impact of data releases and Fed communication on the perceived likelihood of actual policy outcomes.
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The Eurosystem Money Market Auctions: A Banking Perspective	May, 2005	Federal Reserve Bank of Cleveland, Working Paper no. 0506	Ben R Craig; Nikolaus Bartzsch; Falko Fecht;	Working Papers
	Abstract: This paper analyzes the individual bidding behavior of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Our approach takes a variety of characteristics of the individual banks into account. In particular, we consider variables that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in the banks' respective bidding behavior to a large extent. Thus our study contributes to a deeper understanding of the way liquidity is managed in the banking sector.
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State-Dependent Pricing, Inflation, and Welfare in Search Econom	May, 2005	Federal Reserve Bank of Cleveland, Working Paper no. 0504	Ben R Craig; Guillaume Rocheteau;	Working Papers
	Abstract: This paper investigates the welfare effects of inflation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which price stability is optimal and a condition under which positive inflation is desirable. We relate these conditions to a standard efficiency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for all our numerical examples. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.
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SBA-Loan Guarantees and Local Economic Growth	April, 2005	Federal Reserve Bank of Cleveland, Working Paper no. 0503	Ben R Craig; William E Jackson III; James B Thomson;	Working Papers
	Abstract: Increasingly policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.
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The Growing Significance of Purchasing Power Parity	April, 2005	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: The principle of purchasing power parity is central to the theoretical underpinnings of the analysis of many trade issues, but up until recently, there was little evidence that PPP held in the long run. Current research has changed that. The key to finding the evidence was realizing how to test for a long-run effect given the fact that exchange rates adjust to their long-run levels in a nonlinear way.
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Too Much Risk?	March, 2005	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig; Joseph G Haubrich;	Economic Commentary
	Abstract: Are asset prices climbing too far too fast? Do they signal the approach of an unsustainable boom that the FOMC should step in and stop before it gathers speed? Bubbles are notoriously hard to spot beforehand, and even if we were better at it, no one is sure what the best monetary policy response would be.
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Rethinking the Welfare Cost of Inflation	March, 2005	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig; Guillaume Rocheteau;	Economic Commentary
	Abstract: New models of monetary economies, developed in the last 15 years, suggest that traditional measures of the welfare cost of inflation may underestimate the true loss that inflation inflicts on society. According to these models, the cost of 10 percent inflation ranges from 1 to 5 percent of real income.
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The Forecast Ability of Risk-Neutral Densities of Foreign Exchange	October, 2004	Federal Reserve Bank of Cleveland, Working Paper no. 0409	Ben R Craig; Joachim Keller;	Working Papers
	Abstract: We estimate the process underlying the pricing of American options by using higher-order lattices combined with a multigrid method. This paper also tests whether the risk-neutral densities given from American options provide a good forecasting tool. We use a nonparametric test of the densities that is based on the inverse probability functions and is modified to account for correlation across time between our random variables, which are uniform under the null hypothesis. We find that the densities based on the American option markets for foreign exchange do quite well for the forecasting period over which the options are thickly traded. Further, simple models that fit the densities do about as well as more sophisticated models.
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Are SBA Loan Guarantees Desirable?	September, 2004	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig; William E Jackson III; James B Thomson;	Economic Commentary
	Abstract: Over the last 10 years, the Small Business Administration has been responsible for well over $100 billion in small business credit extensions, more than any single private lender. This Commentary explores the motivations for such a large investment of taxpayer dollars.
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On SBA-Guaranteed Lending and Economic Growth	April, 2004	Federal Reserve Bank of Cleveland, Working Paper no. 0403	Ben R Craig; William E Jackson III; James B Thomson;	Working Papers
	Abstract: Increasingly, policymakers are looking to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration (SBA) loan-guarantee program. Using a panel data set of SBA-guaranteed loans we assess whether SBA-guaranteed lending has an observable impact on local and regional economic performance.
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The Empirical Performance of Option-Based Densities of Foreign Exchange	November, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0313	Ben R Craig; Joachim Keller;	Working Papers
	Abstract: In this paper, the authors calculate risk-neutral densities (RND) by estimating the daily diffusion process of the underlying futures contract for foreign exchange, based on the price of the American puts and calls reported on the Chicago Mercantile Exchange for the end of the day. Their quick and accurate method of calculating the prices of the American options uses higher-order lattices and smoothing of the option's value function at the boundaries to mitigate the nondifferentiability of the payoff boundary at expiration and the early exercise boundary. The authors estimate the diffusion process by minimizing the squared distance between the calculated prices and the observed prices in the data. They also test whether the densities provided from American options provide a good forecasting tool. They use a nonparametric test of the densities that depends on inverse probabilities. They modify the test to compensate for an inherent problem that arises from the time-series nature of the transformed variables when the forecasting windows overlap. They find that the densities based on the American option prices for foreign exchange do considerably well for the longer time horizons.
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The Forecasting Performance of German Stock Option Densities	November, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0312	Ben R Craig; Ernst Glatzer; Joachim Keller; Martin Scheicher;	Working Papers
	Abstract: In this paper the authors estimate risk-neutral densities (RND) for the largest euro-area stock market (the index of which is the German DAX), reporting their statistical properties, and evaluating their forecasting performance. The authors have applied an innovative test procedure to a new, rich, and accurate data set. They have two main results. First, They have recorded strong negative skewness in the densities. Second, they find evidence for a significant difference between the actual density and the risk-neutral density, leading to the conclusion that market participants were surprised by the extent of both the rise and the fall of the DAX.
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Currency Competition in a Fundamental Model of Money	November, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0311	Ben R Craig; Gabriele Camera; Christopher J Waller;	Working Papers
	Abstract: The authors study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The equilibrium value of the two currencies, their transaction velocities and agents' spending patterns are endogenously determined. The authors derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. They also examine when the reverse spending pattern is optimal. Traders generally favor dealing in the safe currency, unless trade frictions and the currency risk is low. As risk increases or trading becomes more difficult, the transaction velocity and value of the safe money increases.
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Boil, Toil, and Trouble?	October, 2003	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: Not everyone believes bubbles occur in stock markets. Many economists do, but others think something else is happening during periods of rapidly rising and plummeting stock prices. This Commentary explains the two schools of thought and shows how both can describe a famous historical episode known as the Mississippi bubble.
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Pricing Kernels, Inflation, and the Term Structure of Interest Rates	October, 2003	Federal Reserve Bank of Cleveland, Working Paper no. 0308	Ben R Craig; Joseph G Haubrich;	Working Papers
	Abstract: The authors estimate a discrete-time, multivariate pricing kernel for the term structure of interest rates, using both yields and inflation rates. This gives a separate estimate of the real kernel and the nominal kernel, taking into account a relatively sophisticated dynamical structure and mutual interaction between the real and nominal side of the economy. Along with obtaining an estimate of the real term structure, they use the estimates to obtain a new perspective on how real and nominal influences interact to produce the observed term structure.
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Why Are TIIS Yields So High? The Case of the Missing Inflation-Risk Premium	March, 2003	Federal Reserve Bank of Cleveland Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: Treasury inflation-indexed securities are just like nominal Treasuries except that their coupon and principal payments are indexed to inflation. The yield spread between the two types of securities should serve as a daily measurement of the market’s perception of expected inflation, modified to reflect the cost of inflationary risk. But TIIS yields are about 60 basis points higher than expected. This Commentary examines several factors other than inflation that might raise TIIS yields relative to nominal Treasuries.
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Options and the Future: What Do Markets Think?	October, 2002	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: We’re used to hearing analysts make predictions about where the economy is headed based on changes in the prices people are paying for stocks, futures, or other assets. Now, recent research is showing how we can analyze the prices of sophisticated new investment products, like options, to also gauge the probability assigned by the markets to possible future events. In short, we can calculate how likely market participants feel it is that an event will take place in the future.
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Federal Home Loan Bank Lending to Community Banks. Are Targeted Subsidies Necessary?	January, 2001	Federal Reserve Bank of Cleveland, Working Paper no. 0112	Ben R Craig; James B Thomson;	Working Papers
	Abstract: The Gramm-Leach-Bliley Act of 1999 amended the lending authority of the Federal Home Loan Banks to include advances secured by small enterprise loans of community financial institutions. Three possible reasons for the extension of this selective credit subsidy to community banks and thrifts are examined, including the need to subsidize community depository institutions, stabilize the Federal Home Loan Banks, and address a market failure in rural markets for small enterprise loans. We empirically investigate whether funding constraints impact the small-business lending decision by rural community banks. Specifically, we estimate two empirical models of small-business lending by community banks. The data reject the hypothesis that access to increased funds will increase the amount of small-business loans made by community banks.
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Sterilized intervention, nonsterilized intervention, and monetary policy	January, 2001	Federal Reserve Bank of Cleveland, Working Paper no. 0110	Ben R Craig; Owen F Humpage;	Working Papers
	Abstract: Sterilized intervention is generally ineffective. Countries that conduct monetary policy using an overnight, interbank rate as an intermediate target automatically sterilize their interventions. Nonsterilized interventions can influence nominal exchange rates, but they conflict with price stability unless the underlying shocks prompting them are domestic in origin and monetary in nature. Nonsterilized interventions, however, are unnecessary since standard open-market operations can achieve the same result.
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Gross loan flows	January, 2000	Federal Reserve Bank of Cleveland, Working Paper no. 0014	Ben R Craig; Joseph G Haubrich;	Working Papers
	Abstract: We present a series of stylized facts about gross loan flows and how they vary over time, bank size, and region. We define loan creation as the sum of the change in bank loans at all banks that increased loans since last quarter. Loan destruction is similarly defined as the absolute value of the change in loans at all banks that decreased loans. The gross flow (akin to what the labor literature calls reallocation) is the sum of creation and destruction.
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Dual-Currency Economies as Multiple-Payment Systems	January, 2000	Economic Review	Ben R Craig; Christopher J Waller;	Economic Review
	Abstract: Monetary search models are valuable for studying how a second currency'acceptability arises endogenously in an economy that lacks a stable domestic currency and other more sophisticated payment systems. Search models'basic assumptions (absence of credit, lack of smoothly functioning banking systems, reliance on currency as the sole medium of exchange, and primitive trading environments) are not necessarily consistent with modern financial systems. They do, however, provide good descriptions of transitional and developing economies, particularly in the countries of the former Soviet Union, and may yield helpful policy prescriptions.
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Resisting Electronic Payment Systems: Burning Down the House?	July, 1999	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: This commentary explains the phenomena of path dependence, hysteresis, and network economies using lively historical and contemporary examples. The author shows how the path dependence and network economies can interact to produce a variety of undesirable ends—inefficient payment systems, the adoption of inferior technology, or disasters like the 1834 fire that destroyed the British House of Lords.
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Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy	January, 1999	Federal Reserve Bank of Cleveland, Working Paper no. 9916	Ben R Craig; Christopher J Waller;	Working Papers
	Abstract: We analyze a dual currency search model in which agents are allowed to hold multiple units of both currencies. Hence, agents hold portfolios of currency. We study equilibria in which the two currencies are identical and equilibria in which the two currencies differ according to the magnitude of the 'inflation tax' risk associated with each currency. The inflation tax is modeled by having government agents randomly confiscate the two currencies at different rates. We are able to obtain analytical results in a very special case but in general we must rely on numerical methods to solve for the steady-state distributions of currency portfolios, prices and value functions. We find that when one of the currencies has the right amount of 'risk', equilibria exist in which the safe currency trades for multiple units of the risky currency (pure currency exchange). As a result, the steady state has a distribution of nominal exchange rates. The mean and variance of the nominal exchange rate distribution is based on the fundamentals of the model such as the risk of confiscation, risk preferences, matching probabilities and relative money supplies. The mean and variance of this distribution typically change in predictable ways when the fundamentals change. While the ability to trade currencies improves average welfare, in general, the benefits of currency exchange are small.
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Global ATM banking: casting the net	August, 1998	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig; John D Hueter;	Economic Commentary
	Abstract: ACH and ATM systems are examples of networks, where the benefits of one participant enhance the structure's value for the other participants. Some recent results from economic theory suggest that competitive networks are preferable in a social sense to monopoly networks.
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The long-run demand for labor in the banking industry	September, 1997	Federal Reserve Bank of Cleveland, Economic Review, vol. 33, no. 3, pp. 2-12	Ben R Craig;	Economic Review
	Abstract: An examination of the decline in banking employment over the last decade, finding that technological changes explain the downturn only for large banks, and that acquisition accounts for very little of the overall employment shift.
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The risk effects of bank acquisitions	June, 1997	Federal Reserve Bank of Cleveland, Economic Review, vol. 33, no. 2, pp. 2-12	Ben R Craig; Joao Cabral dos Santos;	Economic Review
	Abstract: An examination of the risk effects of bank acquisitions that occurred between the first quarter of 1984 and the last quarter of 1993. Its findings -- that banks are not using acquisitions to increase their risk exposure and that acquisitions increase profitability over time -- cast doubt on the importance of risk diversification as a motive for bank acquisitions.
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Where Have All the Tellers Gone?	April, 1997	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: An examination of why, in the face of record earnings and ever-increasing demand for their products and services, banks are trimming their payrolls. The article also examines the fate of the job losers, as well as the banking industry’s tremendous ability to weather major technological and structural changes.
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Competing Currencies: Back to the Future?	October, 1996	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
	Abstract: A look at how episodes of competing currencies can provide insight on 1) the qualities of a commodity that lead to its becoming a dominant currency, 2) the route by which a nationally mandated paper currency becomes acceptable as a medium of exchange, and 3) the way in which competition between currencies sustains the exchange value of a fiat currency by restricting the actions available to the monetary authority.
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The reduced form as an empirical tool: a cautionary tale from the financial veil	March, 1996	Federal Reserve Bank of Cleveland, Economic Review, vol. 32, no. 1, pp. 16-25	Ben R Craig; Christopher A Richardson;	Economic Review
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Performance and asset management effects of bank acquisitions	January, 1996	Federal Reserve Bank of Cleveland, Working Paper no. 9619	Ben R Craig; Joao Cabral dos Santos;	Working Papers
	Abstract: This paper studies the effects of acquisitions on both acquired and acquiring banks. Through the us of overlap, von Mises, and other distance statistics, we confirm that, prior to the acquisition, the acquirer generally performs better than the bank it acquired. Following the acquisition, the performance of the two banks starts to converge, mainly due to improvements in the acquired institution. During this process, the acquired is transformed in such a way that it becomes a replica of its acquirer, a result that confirms a strong policy integration among banks that are part of a bank holding company. These post-acquisition effects hint at an explanation for the abnormal returns usually observed at the time of the acquisition announcement, and provide some insight on the dominant motivations for the consolidation taking place in the banking industry.
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Are Wages Inflexible?	April, 1995	Federal Reserve Bank of Cleveland, Economic Commentary	Ben R Craig;	Economic Commentary
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Some Monte Carlo results on nonparametric changepoint tests	January, 1995	Federal Reserve Bank of Cleveland, Working Paper no. 9517	Ben R Craig; Edward J Bryden; John B Carlson;	Working Papers
	Abstract: For long periods since 1982, core inflation has behaved as if it were generated by a process with a fixed mean and serially independent error term. Nonparametric changepoint tests proposed by Pettitt (1979) and Lombard (1987) suggest that since 1982, changes in core inflation have been infrequent and rather abrupt. However, little is known about the small-sample properties, the power of the tests, or the robustness of changepoint tests when a series is not i.i.d. This paper uses Monte Carlo analysis to investigate the probabilities of false positive tests under alternative assumptions about the time-series properties of the underlying process.
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Voting on social security: evidence from OECD countries	January, 1995	Federal Reserve Bank of Cleveland, Working Paper no. 9511	Ben R Craig; Friedrich Breyer;	Working Papers
	Abstract: This article tests the subset of public choice models for social security that have empirical implications. The data, collected from OECD countries for the years 1960, 1970, 1980, and 1990, provide some support for each of the theories. Higher median voter age, more income heterogeneity, greater similarity in family size, and variables that make a public pension program more profitable are all associated with a larger program. However, none of the theories explains why the shape of the age distribution and the time trend are so important. The results are robust under both fixed-effects and random-effects estimation.
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Inflation and Welfare: A Search Approach	April, 2007	Journal of Money, Credit, and Banking	Ben R Craig; Guillaume Rocheteau;	Journal Article
	Abstract: This paper uses a search model of monetary exchange to provide new insights for evaluating the welfare costs of inflation. We first show that the search model of money can rationalize the estimates of the welfare cost of inflation based on the "welfare triangle" methodology of Bailey (1956) and Lucas (2000) provided that buyers appropriate the social marginal benefit of their real balances. For other mechanisms, the measure given by the welfare triangle has to be scaled up by a factor that increases with sellers' market power. We introduce capital and endogenous participation decisions and study how the cost of inflation is affected. We provide calibrated examples in which a deviation from the Friedman rule is optimal.
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State-Dependent Pricing, Inflation, and Welfare in Search Economies	April, 2007	European Economic Review	Ben R Craig; Guillaume Rocheteau;	Journal Article
	Abstract: We investigate the welfare effects of in?ation in economies with search frictions and menu costs. We first analyze an economy where there is no transaction demand for money balances: Money is a mere unit of account. We determine a condition under which strictly positive inflation is desirable. We relate this condition to a standard e¢ ciency condition for search economies. Second, we consider a related economy in which there is a transaction role for money. In the absence of menu costs, the Friedman rule is optimal. In the presence of menu costs, the optimal inflation rate is negative for our numerical examples provided menu costs are small. A deviation from the Friedman rule can be optimal depending on the extent of the search externalities.
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Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures	December, 2005	The Journal of Futures Markets, vol. 25, no. 12, pp. 1203-44	Ben R Craig; John B Carlson; William R Melick;	Journal Article
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Currrency Competition in a Fundamental Model of Money	December, 2004	Journal of International Economy, v. 64, no. 2, pp. 521-44	Ben R Craig; Gabriele Camera; Christopher J Waller;	Journal Article
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Dollarization and Currency Exchange	May, 2004	Journal of Monetary Economics, v. 41, no. 4, pp. 671-89	Ben R Craig; Christopher J Waller;	Journal Article
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The Myth of a Strong Dollar Policy	December, 2003	Cato Journal, v. 22, no. 3., pp. 417-29	Ben R Craig; Owen F Humpage;	Journal Article
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Federal Home Loan Bank Lending To Community Banks: Are Targeted Subsidies Desirable?	January, 2003	Journal of Financial Services Research, vol. 23, no. 1, pp. 5-28	Ben R Craig; James B Thomson;	Journal Article
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Structural Uncertainty and Breakpoint Tests: An Application to Equilibrium Velocity	January, 2000	Journal of Economics and Business, vol. 52, no. 1-2, Jan.-April 2000, pp. 101-15	Ben R Craig; John B Carlson; Jeffrey C Schwarz;	Journal Article
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The Behavior of Worker Cooperatives: The Plywood Companies of the Pacific Northwest	January, 1996	In: Producer Cooperatives and Labor-Managed Systems, vol. 2. Case studies, 1996, pp. 237-59 Elgar Reference Collection. International Library of Critical Writings in Economics, vol. 62. Cheltenham, U.K.: Elgar; distributed by Ashgate, Brookfield, Vt.,	Ben R Craig; John Pencavel;	Article in Book
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Participation and Productivity: A Comparison of Worker Cooperatives and Conventional Firms in the Plywood Industry	January, 1995	Brookings Papers on Economic Activity, vol. 0, no. 0, 1995, Microeconomics, pp. 121-60	Ben R Craig; John Pencavel;	Article in Book
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The Empirical Performance of Orthodox Models of the Firm: Conventional Firms and Worker Cooperatives	August, 1994	Journal of Political Economy, vol. 102, no. 4, August 1994, pp. 718-44	Ben R Craig; John Pencavel;	Journal Article
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The Objectives of Worker Cooperatives	May, 1993	Journal of Comparative Economics, vol. 17, no. 2, June 1993, pp. 288-308	Ben R Craig; John Pencavel;	Journal Article
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The Behavior of Worker Cooperatives: The Plywood Companies of the Pacific Northwest	January, 1992	American Economic Review, vol. 82, no. 5, December 1992, pp. 1083-105	Ben R Craig; John Pencavel;	Journal Article
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The Effects of Social Security in a Life Cycle Family Labor Supply Simulation Model	November, 1991	Journal of Public Economics, vol. 46, no. 2, November 1991, pp. 199-226	Ben R Craig; Raymond G Batina;	Journal Article
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Large Risks and the Decision to Incorporate	August, 1990	Journal of Economics and Business, vol. 42, no. 3, August 1990, pp. 185-94	Ben R Craig; Stuart E Thiel;	Journal Article
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The Impact of Cramdowns on Mortgage Markets: Lessons from the Farm Credit Crisis	October, 2011		Ben R Craig; Thomas J Fitzpatrick IV; James B Thomson;	Unpublished manuscript
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U.S. Intervention and the Risk Neutral Distribution of Exchange Rate Expectation as Revealed in Option Prices	January, 2002	Forthcoming book by Central Banking Publications	Ben R Craig; Owen F Humpage;	Article in Book
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Sterilized Intervention, Nonsterilized Intervention and Monetary Policy	January, 2002	for a forthcoming book on intervention, accepted January 2001. Central Bank Journal	Ben R Craig; Owen F Humpage;	Article in Book
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