Regulation of an industry often produces unintended consequences. Averch and Johnson (1962) argue that certain regulation of electric utilities provides utilities the incentive to purchase an inefficiently large amount of capital. Another possible and related unintended consequence of electric utility regulation is that regulatory cost disallowances on capital may also increase utilities' incentives to overcapitalize.
The authors consider a transitory demographic shock that affects negatively the financing of retirement pensions"”that is, workers either would have to pay more or retirees would receive less. In contrast to the existing literature, the authors endogenously determine optimal policies rather than explore the implications of exogenous parametric responses.
The current financial turmoil has generated considerable discussion of liquidity. Moreover, it has been widely reported that the Federal Reserve played a major role in supplying liquidity to financial markets during this distressed time. This article describes two ways in which the Fed has supplied liquidity since late 2007.
This article is a modified and updated version of a speech presented at the Regional Economic Summit, Evansville, Indiana, November 20, 2008.