Third Quarter 1995
Federal Reserve Bank of Dallas

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Measuring the Policy Effects of Changes in Reserve Requirement Ratios
Joseph H. Haslag and Scott E. Hein

The monetary base is the sum of high-powered money and an adjustment factor that measures changes in reserve requirement ratios. This adjustment factor is calculated so that it responds to changes in deposit levels in addition to changes in reserve requirements. Consequently, researchers and policymakers using the monetary base are seeing a mixture of changes implemented through open market operations, discount window borrowings, and reserve requirements, together with nonpolicy actions acting on deposit flows.

Joseph Haslag and Scott Hein calculate the reserve step index (RSI) to separate changes in one of the available adjustment factors-the St. Louis Federal Reserve Bank's Reserve Adjustment Measure (RAM)-into pure reserve-requirement effects and deposit-flow effects. RSI would give analysts a measure that responds only to changes in reserve requirement ratios. Haslag and Hein also provide statistical evidence suggesting that combining RSI and the deposit-flow effect, as RAM does, is not justifiable in simple reduced-form models of nominal GNP growth, output growth, or inflation.

A New Quarterly Output Measure for Texas
Franklin D. Berger and Keith R. Phillips

Real gross domestic product is one of the most watched indicators of the U.S. business cycle. Yet at the state level, output measures are rarely used to track business conditions. Although the Bureau of Economic Analysis estimates real gross state product (RGSP), the long release lag (usually about two and one-half years after the reporting year) and the annual periodicity of the data severely limit its usefulness.

In this article, Frank Berger and Keith Phillips find that movements in quarterly personal income and various price measures can accurately explain movements in total Texas RGSP and in eleven broad industry groupings. Based on these findings, Berger and Phillips create quarterly measures of total and industry-specific Texas RGSP that will be available about four months after the reporting quarter. The new series represents a comprehensive measure of economic activity in the state that can be used along with other timely indicators, such as nonfarm employment and the unemployment rate, to gauge current business conditions.

Alternative Methods of Corporate Control in Commercial Banks
Stephen D. Prowse

In this article, Stephen Prowse investigates how owners of commercial banks encourage management to follow value-maximizing policies. While the "corporate control mechanism" in nonfinancial firms is well documented, for the banking industry much less evidence is available. Moreover, unique factors in the operating environment of commercial banks may mean that their corporate control mechanism operates differently from that of nonfinancial firms.

Prowse analyzes a sample of bank holding companies (BHCs) from 1987 to 1992 to determine how many underwent a change in corporate control by hostile takeover, friendly merger, action by the board of directors, or intervention by regulators. Prowse finds that the primary market-based corporate control mechanism among BHCs is action by the board, although bank boards appear to be much less assertive than boards of nonfinancial firms. Overall, the market-based corporate control mechanisms in banks do not appear as efficient at disciplining managers as they are in other firms. By default, this has given a primary role to regulators to provide a "last resort" control mechanism. Prowse analyzes reasons for this and evaluates how proposed banking legislation might affect corporate governance.