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The paper studies the effects of mortgage choices between fixed‐rate mortgages (FRMs) and adjustable‐rate mortgages (ARMs) on labor market efficiency. FRMs provide insurance for risk‐averse borrowers in the sense that they pay the same rate over time and are not subject to uncertain spot market rates. FRMs, however, discourage borrowers from moving to other regions despite better employment opportunities, as they terminate the FRM contracts in order to move and their new loan interests may be higher. As FRM‐borrowers do not move to other regions due to the interest lock‐ins, entrepreneurs in other regions lose the potential surpluses from productive matches that would have occurred between borrowers‐workers and entrepreneurs. Borrowers ignore this negative externality they impose on the entrepreneurs when choosing their mortgages, and too many borrowers choose FRMs relative to the efficient level. If FRMs are eliminated and ARM‐insurance (that protects ARM‐borrowers against uncertain adjustable interest rates) is created, it will improve efficiency. The paper also assesses quantitatively the welfare effects of eliminating FRMs and providing ARM‐insurance.

Data on approximately 280,000 borrowers from the UK Survey of Mortgage Lenders are used to model choices between variable and fixed rate mortgages. The choice is assumed to depend on three factors: risk attitude, interest-rate expectations, and individual discount rate. The ordered probit model is used for estimation, while taking account of a number of econometric issues including missing counterfactuals, selectivity, and endogeneity. A large number of strong effects are found, including: higher income borrowers are less risk averse and have a lower discount rate, and risk aversion rises with the amount borrowed, providing evidence of increasing relative risk aversion.

This paper investigates the level and determinants of retail banking interest rate differences among Spanish banks in the period 1989 2003. We find that interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Different credit risk across banks and loan products is an important source of interest rate dispersion in the short and long run that puts limits to banking integration.

A LIVELY CONTROVERSY HAS PROCBBDBD for some years over the relative merits of rules and discretion in monetary management.l This paper will be largely confined to the question of the eSect on short-term stability of a simple Friedman-type rule which requires the money supply to grow at a fixed rate year after year.2 The paper will be in two parts: in the first part we begin by reviewing critically the theoretical and empirical literature on this issue. We then carry out a simple empirical test for a number of countries to appraise the extent to which the rule might moderate or accentuate the variance of income growth. In the second part, we compare three rules in terms of their eSects on the stability of income growth. The three rules are the simple Friedman rule, a rule which holds the interest rate fixed over the short term and a rule which combines a fixed monetary growth with an arrangement whereby interest rates on all bank deposits are adjusted in line with market

Introduction In recent years mortgage borrowers have been given a wide variety of financing methods from which to choose (e.g., Guttentag 1983; Barnett and McKenzie 1984). Examples include assumptions, adjustable rates, shared appreciation, growing equity, and numerous others. By far, the dominant two have been the standard fixed rate and the adjustable rate mortgage. ' Beginning with regulation changes in 1979, adjustable rate mortgage lending, at first, was fairly restricted, but with the major deregulation change in 1981, the types of adjustable rate mortgages have proliferated.2 Now lenders have the flexibility to use numerous indexes, including inflation and disposable-income indexes, make interest rate changes independent of payment changes, and allow negative amortization. The purpose of this paper is to examine the choice between fixed and adjustable rate mortgages.3 Two views have dominated the theoretical literature: one that emphasizes the irrelevance of borrower characteristics in the mortgage choice decision given the prices and terms of the contract, and one that focuses on the potential impact of borrower characteristics assuming asymmetric information.4 This paper is the first to examine empirically the impact of pricing and borrower characteristics on the choice of mortgage contract.

Recent renewed interest in the microfoundations of money has focused on the significance of transactions costs as the basic reason for the emergence of money in place of barter (see [1, 2; 3, Introduction; 4]). Many aspects of the role of money in facilitating exchange, particularly with respect to transactions costs, are illustrated in microcosm in casino gambling, where the normal medium of exchange is temporarily replaced by a specialized form of money, casino-issued chips. Within the confines of a casino, its chips are convertible on demand into the normal means of payment at a fixed rate of exchange. The use of chips in place of normal money presumably yields benefits sufficient to outweigh the costs-such as the costs involved in frequent exchanges of normal money for chips and vice versa, as well as those incurred in producing chips when a plentiful supply of legal tender is readily available. What those benefits are, relative to costs, should reflect some of the microfoundations of money in society at large. The analysis below pertains to practices and policies at casinos in Las Vegas, Nevada. In casinos elsewhere the general principles are similar but details frequently differ. Furthermore, although there are various forms of casino gambling, this paper considers only two, roulette and dice (also known as craps), both of which typically utilize casino-issued chips as the medium of exchange.

This paper develops a theoretical model in which collateral is a mechanism for enforcing loan contracts. Collateral functions in two ways in the model. First, default on a loan triggers the loss of collateral value to the borrower, where this value is stochastic at the time when the loan is negotiated. The assignment of collateral provides incentive for the borrower to repay the loan. Second, default implies that the property nght to the collateral is transferred to the lender. The lender valuation of collateral, which may diverge from the borrower valuation, is also stochastic at the time of loan negotiation. The relation of lender to borrower valuation plays an important role in the loan process. If, because of costs of collection and marketing, moral hazard problems, or other types of "transaction costs," the lender valuation is much below the borrower valuation, then the process of default will entail dead-weight losses. Interest rates charged on loans will reflect these losses-appropriately weighted by the probability of default-and the expected interest charge paid by the borrower will be correspondingly above the underlying, transaction-cost-free rate of return. The more important these costs associated with default, the greater would be the dead-weight losses incurred and the amount of (otherwise) profitable loan opportunities foregone. Section 1 sets out the basic model and discusses the expected interest costs from the viewpoint of the borrower. Section 2 introduces transaction costs associated with default, discusses the expected interest return from the viewpoint of the lender, and analyzes the maximum size loan that would be issued by lenders on the basis of a given "quantity" of collateral. Section 3 uses the assumption that the lending industry yields a competitive rate of return to analyze the determination of

Three main types of mortgages are fixed interest contracts which automatically fall due on the sale of a dwelling, fixed rate loans which are assumable by a buyer, and floating rate instruments. When interest rates rise, the fall in the economic value of these assets in savings and loan associations' portfolios varies from one form of mortgage to another. For either of the fixed interest rate contracts, the cash flow from the mortgage is constant as long as it has not been prepaid. If the interest rate rises,the homeowner has a nominal capital gain, since his loan is then at a below market interest rate. He would therefore be less likely to prepay. The fall in the savings and loans' net worth arises from two factors: (1) the interest rate differential for mortgages of a fixed duration, and (2) the endogenous lengthening of the duration.This paper is an attempt to measure the dependence of the duration of mortgages on the implicit unrealized capital gain of mortgage holders resulting from interest rate changes. Our estimate is based on a sample of 4,000 mortgages issued in California which were active in 1975. We follow their payment history from 1975 to 1982. Using a Proportional Hazards Model, we estimate the percentage reduction in prepayment probability associated with interest rate changes. Our results indicate that for due-on-sale fixed interest rate mortgages, a sudden increase in the interest rate from 10 to 15 percent would induce a 23 percent loss in the economic value of the mortgage. If the mortgage were assumable,this loss would be 28 percent. Correspondingly, the 6-year average time to repayment of mortgages at a constant interest rate would be lengthened to nine years for due-on-sale mortgages, and 13-1/2 years for assumable ones.

THE QUESTION OF THE STRICT EFFICIENCY of the treasury bill market and markets in other fixed interest financial instruments remains in dispute. Roll [17] provided the first test of market efficiency. More recently Fama [5], taking a different approach, added his support to Roll's findings of a market conforming "closely to the efficient market model." Related contemporaneous work by Fama tested efficiency indirectly through the implicit estimate of inflation derivable from term structure relationships [3, 4, 6]. It is this work that has been attacked by Nelson and Schwert [13], Carlson, [2], and Joines [10], who have argued that Fama's approach, when suitably corrected, does not support market efficiency as Fama has defined it. In this paper we will consider only short-term interest rates, determined in a market not previously examined by earlier authors, where sums are lent and borrowed for periods of one or two days. The main thrust of the paper is the analysis of the differences between implicit forward rates and future realized spot rates. The problem we attempt to resolve is whether forward rates can be used to predict future spot values, and the implications this has for market efficiency. If it should prove possible to construct forecasts of the future spot rate more accurate than those implicit in the term structure relationships, then such a finding would undermine the view that fixed interest markets are efficient. To carry out this test, as earlier authors have shown, it is necessary to develop models of how expectations are

Mundell [S] demonstrated that the dynamic properties of an open economy depend upon the fixity of the exchange rate and the degree of capital mobility. However, his treatment of the demand for assets as representing a flow-instead of a stock-demand has come under sharp criticism (e.g., [2] ). In particular, it is argued that asset demands represent demands for stocks, whereas asset flows are transitory in that they represent attempts to equilibrate actual and desired asset holdings. Using a portfolio model, Mathieson [4]-in direct contrast to Mundell-found that a flexible exchange rate ensures a direct approach towards equilibrium, whereas the approach with a fixed rate can be cyclical or direct. Mathieson's results were based on a model1 incorporating the standard small country assumptions: (a) the country in question cannot alter income in the rest of the world; and (b) if there is capital mobility and there are no governmental restrictions, the small country cannot alter the world interest rate. This paper shows that both the static and dynamic properties of the McKinnonJones model (hence Mathieson's results) are not applicable to large countries. Large countries can produce large changes in the stocks of assets that determine the interest rate, thereby gaining control of their money supply. A H1xed exchange rate system is unambiguously stable in a two-country model, but flexible exchange rates may be unstable if residents of one country hold assets denominated in the currency unit of tlle other country.