St. Louis Fed's Review: The Determinants of Aid in the Post-Cold War Era; The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?; Measuring Commercial Bank Profitability: Proceed with Caution; Open Market Operations and the Federal Funds Rate

ST. LOUIS — The November/December issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available on the St. Louis Fed's web site: https://research.stlouisfed.org/publications/review/.

• "The Determinants of Aid in the Post-Cold War Era." Why is development aid given to other countries? Using data from the World Bank, economists Subhayu Bandyopadhyay and Howard J. Wall estimate the responsiveness of aid to recipient countries' economic and physical needs, civil and political rights, and government effectiveness. Looking exclusively at the post-Cold War era, they find that the level of aid given to a country tends to increase along with the country's infant mortality rate, civil and political rights and government effectiveness. At the same time, they find that aid decreases with a recipient country's rise in per capita GDP.
• "The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?" Recent stories in the media have raised alarms that Americans' rate of saving is at its lowest level since 1933—the bleakest year of the Great Depression. In addition, data on households' debt service payments as a percent of personal income have reached all-time highs. Economist Massimo Guidolin and researcher Elizabeth A. La Jeunesse examine the measurement problems surrounding two of the standard definitions of the personal saving rate. Despite these problems, they find that the recent decline in the U.S. personal saving rate seems to be a real economic phenomenon and may be a cause for concern. After examining several possible explanations for this from other research for this trend, Guidolin and La Jeunesse conclude that none of them provides a compelling explanation for the steep decline and negative levels of the U.S. personal saving rate.
• "Measuring Commercial Bank Profitability: Proceed with Caution." The federal tax code creates challenges for comparing the profit rates of different banks on a consistent basis. The earnings of banks that elect to operate under sub-chapter "S" of the federal tax code, for example, are not subject to federal corporate income tax, but shareholders of these S-banks are taxed on their pro rata share of the entire earnings of the bank. The number of banks electing sub-chapter S tax treatment has increased rapidly, especially among small banks. Economists R. Alton Gilbert and David C. Wheelock use estimates of the federal corporate income tax that S-banks would pay if they were subject to the tax to show that the difference in tax treatment of S-banks and other banks has a large impact on measures of profitability of the U.S. banking system. In addition, Gilbert and Wheelock's research indicates that adjustment of S-bank earnings for federal income taxes to make them comparable to the earnings of earnings of other banks can markedly affect conclusions of studies that use income as a measure of performance. They conclude that S-banks—even after their earnings are reduced by estimated federal taxes—tend to out-earn their peers and tend to have higher earnings rates than their peers in the year before they elect S-bank status.
• "Open Market Operations and the Federal Funds Rate." It's commonly believed that the Federal Reserve's ability to control the federal funds rate derives from its ability to alter the supply of liquidity in the overnight market through open market operations at the Fed's Trading Desk at the New York Fed. Using daily data from the Desk from March 1, 1984, through Dec. 31, 1996, economist Daniel L. Thornton analyzes the use of the Desk's operating procedure in implementing monetary policy and the extent to which open market operations affect the fed funds rate—in other words, the liquidity effect. While he finds that the operating procedure was used to guide daily open market operations, there is little evidence of a liquidity effect at the daily frequency and even less evidence at lower frequencies.

# # #